Following Georgia’s independence in 1991, poverty levels increased and finance for investment in municipal infrastructure declined. With IDA assistance, the Government established the Municipal Development Fund (MDF) in 1997 as a sustainable financial intermediary to help finance municipal needs and rebuild capacity. With consistent support to MDF, the World Bank helped to reverse the collapse in municipal infrastructure and gradually supported its development.

The World Bank’s Municipal Development and Decentralization Projects (MDDPs) are aimed at helping local governments improve the quality, coverage and maintenance of basic urban services, such as water supply, sewerage, local roads and solid waste services. MDDP I (1997-2002) helped set up the MDF to prevent a total break-down in basic infrastructure and municipal services in 12 cities. MDDP II (2003-2007) built on the results of MDDP I with two objectives: (a) to further develop the legal framework for decentralization and municipal development, and (b) increase financing for investments in local infrastructure and municipal services. The project financed road, water, wastewater, and street lighting subprojects, and provided technical assistance to central and local governments to support key municipal development and the framework of decentralization, including the adoption of a new Law on Local Budget with a formula based equalization grant system.

The project activities made substantial positive impact on the ground in improving the living conditions of citizens in nine cities where almost 50 per cent of Georgia’s total population and up to 80 per cent of the country’s urban population lives. A post-project Beneficiary Survey conducted by a consulting firm showed that all investments made addressed high demands in all localities and received citizen’s satisfaction. Post-project economic monitoring and analysis showed high economic rates of return on: a) the rehabilitated road sections through motor vehicle operating cost savings, b) energy savings in water supply schemes due to the shift from pumping to gravity-based systems, and c) energy savings by means of using more energy efficient fixtures, bulbs and cables for street lighting.

In 2006, the World Bank and the U. S. Millennium Challenge Corporation (MCC) entered into a new and innovative partnership around the MDF, providing $60 million for municipal infrastructure development over the period 2006-2010. The World Bank provides quality assurance and supervises the subprojects MCC finances, on a fee-for-service basis. In this way, the MCC is able to leverage the impact of their funding with the accumulated knowledge and expertise of the World Bank. Now, the European Bank for Reconstruction and Development, the Asian Development Bank and the Government of Japan also provide financing through MDF.

"Before the road reconstruction, it took us a long time to travel. I’d go to the market to purchase some stuff for my shop, and my car often broke down on damaged roads. It affected my family budget a lot. Now my car is not breaking down so often and a thirty minute trip has been reduced to ten minutes." — Grigol Berishvili, Shop Owner, Tbilisi

"The MDDP II created a financing mechanism for municipal investments which, to date, operates efficiently and has reasonable prospects of sustainability. The credit was fully disbursed. 40 Investment Projects have been completed. The cost of these projects amounts GEL 58 million. The Institutional Development Component of the project also achieved concrete results in further advancing the municipal development and decentralization agenda." — Lasha Gotsiridze, Executive Director, MDF/Municipal Development Fund

• Forty infrastructure projects in nine cities have improved services for 50 per cent of Georgia’s population.
• 100,000 inhabitants in Gori, Ozurgeti and Tbilisi have improved access to water. Safe water supply was restored to 130,000 inhabitants in Tbilisi after the flood of 2005.
• Roads were improved and their capacity was increased, resulting in reduced travel time. Street lighting has made conditions safer for pedestrians and traffic.
• Energy-efficient water supply and street lighting resulted in cost savings for local utilities.
• The Law on Local Budgets was adopted and inter-governmental fiscal relationships were strengthened.
• MDF’s institutional and fiscal capacity was strengthened.
• Municipal capacity improved in budget preparation and financial reporting.

• Where finance for municipal infrastructure is limited, intermediaries such as MDF can provide financing and capacity building to municipalities.
• Municipal lending should be linked to municipal creditworthiness and political will to prioritize investments in consultation with local councils. Where credit capacity is weak, concessional financing or grants should be considered.
• Project design should be realistic in defining cost recovery goals. Where full recovery is difficult to attain, savings through energy efficiency should also be considered as valid aims.
• Partnership among donors leverages the impact of external funding.

• Municipal Development Fund of Georgia

• Municipal Development and Decentralization Project II
• Municipal Development Fund of Georgia
• Millennium Challenge Georgia Fund