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# 52013SC0090

**JOINT STAFF WORKING DOCUMENT Implementation of the European Neighbourhood Policy in Georgia Progress in 2012 and recommendations for action Accompanying the document JOINT COMMUNICATION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS European Neighbourhood Policy: Working towards a Stronger Partnership /\* SWD/2013/090 final \*/**

  

1.         OVERALL ASSESSMENT AND RECOMMENDATIONS

This
document reports on progress made in implementing of the EU-Georgia European Neighbourhood
Policy (ENP) Action Plan between 1 January and 31 December 2012. Developments
outside this period are also considered when relevant. It is not intended to be
a general review of the political and economic situation in Georgia. For information on regional and multilateral sector processes, please refer to the Eastern
Partnership implementation report.

There
was intense political dialogue with the Georgian Government in 2012, including
a number of high-level meetings: Prime Minister Ivanishvili chose Brussels for his first foreign visit in November, President Saakashvili visited Brussels on several occasions, and a number of high-level EU visits to Georgia took place. These included visits by President of the European Council Herman Van Rompuy in
July, Commissioner Štefan Füle in October and High Representative Foreign Affairs and Security Policy/Vice-President
(HR/VP) Catherine Ashton in November. Finally, the Second Informal Eastern
Partnership Dialogue was held in Tbilisi on 12-13 February 2013.

The
October parliamentary elections marked the first democratic transfer of power
in the country’s history. The elections were widely recognised by election
observation organisations as the most free and fair ever in Georgia. Their outcome brought with it the challenge new to Georgia of cohabitation between the new
parliamentary majority and the Government it supports on the one hand and the
President on the other. So far, cohabitation has been particularly tense and no
agreement has been found yet between the majority and the opposition in the
Parliament on basic constitutional changes or partial amnesty for former
officials proposed by the former. The elections themselves were held against
the backdrop of a very tense, polarised pre-electoral environment with some
instances of violence.  Complaints were made during the campaign about the
illegal use of government administrative resources and private financial assets. 
The complaints tended to overshadow discussion on political platforms and
programmes. These shortcomings need to be addressed before the presidential
elections of 2013.

The EU
remained committed to and continued to fully support Georgia’s territorial integrity
and sovereignty and the peaceful resolution of the conflicts in Georgia through the work of the EU’s Special Representative (EUSR) for the South Caucasus and the Crisis
in Georgia, and the EU Monitoring Mission (EUMM) in Georgia. Georgia continued to implement its strategy for engagement without, however, reviewing restrictive
aspects of the law on occupied territories. Following the change of government,
there are some encouraging signs of possibly more effective engagement with the
breakaway territories, and a more relaxed implementation of the Law on Occupied Territories.

Negotiations on an
EU-Georgia Association Agreement, including a Deep and Comprehensive Free Trade
Area (DCFTA), made significant headway during the year. As a result of progress
on reforms for deep democracy and respect of human rights, Georgia benefitted from an additional allocation of EUR 22 million under the Eastern Partnership
Integration and Cooperation Programme (EaPIC) in 2012. In December, the EU and Georgia
launched negotiations on a protocol to the Partnership and Cooperation
Agreement on the general principles for the participation of Georgia in EU programmes.

Georgia also made significant progress in implementing the visa facilitation
and readmission agreements, and continued to implement reforms in the areas
related to mobility in a secure environment.  The EU launched a visa dialogue
with Georgia in June, and started preparing a Visa Liberalisation Action Plan,
which was formally handed over to Georgia by Commissioner Malmström on 25
February 2013.

While Georgia continued to make progress in fighting corruption, more still needs to be done to
prevent, detect and tackle elite corruption. There was an improvement in terms
of the freedom of association and assembly, with a step back when protesters
assaulted opposition lawmakers on 8 February 2013 outside the venue for the
President’s annual address to the Parliament. Media access was improved under
“must-carry/must offer” provisions during the pre-election period, although
media sector continued to suffer from undue political interference.

The
executive remained the dominant governing force. Parliamentary oversight
remained weak and concerns persisted about insufficient independence of the
judiciary, though the new government has voiced the intention to improve the
institutional checks and balances as a priority. The security and law
enforcement system came under intense criticism following the release in
September of videos showing prison inmates being tortured and humiliated. The national
preventive mechanism under the Optional Protocol to the UN Convention against
Torture should be further strengthened. Previous cases of the excessive use of
force by law enforcement agencies were not brought to court. Although the large
prison population started to decrease by the end of the year[1], the excessive use of
administrative detention and plea bargaining remained a concern. After the
change in government, a number of initiatives were launched to address these
issues.

Georgia’s economic growth was strong in the first three quarters of 2012,
benefiting from a generally favourable investment climate, improving consumer
confidence and an expanding tourist sector. Growing foreign exchange reserves, donor
financing and an IMF precautionary programme should mitigate some external
risks. The level of economic growth contrasts with high structural unemployment
however.

Georgia acted on most of the key
recommendations in the last year's ENP progress report. It ensured broadly free
and fair parliamentary elections. It also strengthened the freedom of
expression and opinion; continued to reform the justice system and advanced
sectoral reforms and regulatory approximation to the EU acquis. It actively
participated in the Geneva discussions and took measures to improve the living
conditions of internally displaced persons (IDPs), with the support of the EU;
it also renwewed its commitment to a genuine engagement with the breakaway
regions.  Progress also needs to be made on the remaining key recommendations. On
the basis of this year’s report and with a view to sustained implementation of
the ENP Action Plan in 2013[2],
Georgia is invited to:

·
Address shortcomings in the electoral law as identified
by the OSCE Office for Democratic Institutions and Human Rights (ODIHR).ahead
of the 2013 Presidential election and 2014 local elections.

·
Ensure respect for the roles of the Prime
Minister and President under the constitution; ensure that constitutional
amendments, if contemplated, are subject to comprehensive consultation
domestically and with the Council of Europe’s Venice Commission to ensure that
they stand the test of time.

·
Reform the justice system to ensure the full
independence of the judiciary, bringing criminal justice policies and practices
into line with Council of Europe standards; revise rules on administrative
detention in compliance with fair trial norms; and take the recommendations of
the Public Defender’s Office into account in policy-making.

·
Ensure that criminal prosecutions are conducted
in a transparent and impartial manner, free of political motivation, in order
to avoid any perception of selective justice.

·
Increase the accountability and democratic
oversight of law enforcement agencies.

·
Conduct a thorough, transparent, independent investigation
into the use of torture and ill treatment in the penitentiary system; implement
structural reforms to prevent future abuse; ensure effective internal and
external monitoring of the penitentiary system for the early detection and
prevention of abuse and ill-treatment.

·
Maintain
and improve Georgia’s constructive participation in the Geneva International
Discussions.

·
Enhance
Georgia’s engagement policy towards the breakaway regions and improve reconciliation/conflict
resolution by finding ways to cooperate with the de facto authorities providing
financial resources for engagement; take pragmatic and constructive steps (less
focused on form and more on content) to encourage trade, travel and investment across the administrative
boundary line; review the law on occupied territories.

·
Continue to strengthen media pluralism and
independence, and the freedom of expression and opinion; implement the law on transparency
of media ownership; formally extend the duration of the 'must-carry/must-offer'
principle.

·
Continue and intensify dialogue and partnership with
the International Labour Organisation (ILO), and build on specific co-operation
with the ILO, the business community and trade unions in preparing amendments
to the labour code, leading to improvements in labour rights and enhanced
social dialogue.

·
Adopt comprehensive anti-discrimination
legislation; ensure that the rights of minorities, including religious
minorities, are respected.

·
Continue to advance sectoral reforms and ensure
good quality approximation to the EU acquis communitaire in order to
pave the way for finalisation of the Association Agreement, including the
DCFTA.

2.         Political dialogue and reform

Towards deep and sustainable democracy

A new election code
was adopted in January, incorporating a number of recommendations made by the
OSCE/ODIHR and the Council of Europe Venice Commission.  In June, further
amendments were made reflecting changes to constitution regarding citizenship
requirements for electoral participation, as well as reductions in age limits
for candidates. These amendments also included 'must-carry/must-offer' provisions
that gave at least an additional 180,000 households, or almost one million people
more, extended access to news. While generally welcomed as an important step in
providing greater access to different points of view, the amendment attracted
criticism for not extending the provision beyond the election period.

In March, the law on political
unions of citizens, or party financing was amended. The
amendments reduced the number of entities affected by the law, and the amount
of potential fines. However, between March and July, a large number of fines
were imposed on the main opposition parties, giving rise to criticism for
selectivity, for the perceived lack of proportionality in the size of the fines
and for the lack of due process, from the Public Defender in May.

The EU helped bolster the
electoral process for the parliamentary elections with three specific
capacity-building projects for the electoral authority and for civil society.
The ODIHR International Election Observation Mission including the
representatives of the European Parliament, considered that the elections were
competitive with active citizen participation; and that freedoms of
association, assembly and expression were respected overall. Nevertheless, it
observed that certain key issues remain to be addressed, including the
polarised pre-electoral environment with some instances of violence; the use of
administrative resources and private financial assets in the campaign; the
inequality of the vote; ambiguities, disproportionate sanctions and the biased
application of the party financing law; the potential for post-election
disqualifications; pressure on district election commissions as they tallied
votes, and insufficient independence of the judiciary.

While there have been some
improvements due to the implementation of legislation on media transparency,
the media sector still suffers from political and economic interference,
pressure on journalists and self-censorship. Throughout the year, the Georgian
authorities have faced criticism from media rights organisations for not doing
enough to protect journalists from violence and obstruction. The main
priorities in improving the media environment are better access to public
information and strengthened media pluralism, improved financial transparency
and de-monopolisation of the advertising market.

The situation improved
with regard to the freedom of association and the freedom of assembly.
This was partly due to amendments to the law on assembly and demonstrations. 
Most demonstrations took place in an orderly atmosphere, including very large
demonstrations during the tense and polarised election campaign. Unfortunately,
on 8 February 2013, when the President was to deliver an address to the
Parliament, protesters verbally and physically assaulted opposition lawmakers
and politicians in front of the National Library, forcing the speech to be
delivered from the presidential palace instead.

Judicial independence remains a problem. The strongly hierarchical structure of the
judiciary; the potential for inappropriate influence by the executive; the
prosecution service’s lack of independence, combined with insufficient judicial
control over its activities; insufficient transparency in the justice system:
all these hamper the effective administration of justice. The Government is
tackling these problems with proposed legislative amendments. The main problem
is the high conviction rate, despite an increase in the number of acquittals compared
with 2011. The high likelihood of being convicted if a case goes to trial has
led to the excessive use of plea bargaining. In the first nine months of 2012, 88%
of all criminal cases were resolved through plea bargaining. Severe punishments
for petty crimes and consecutive sentencing are other reasons for the frequent
use of plea bargaining. Polls show that the public sees plea bargaining as an
unjust way of getting additional money for the budget. This is an area in which
the new Government is likely to implement reforms

Shortly after the
parliamentary elections, a number of local electoral commissions came under
pressure from supporters of the winning party. A number of local assemblies
around the country have since bowed to pressure to elect new heads of city
councils and local government and to change the composition of local
administrations. The new Government also began to implement its campaign
promise to “restore justice” by launching a number of criminal prosecutions
targeting members and officials of the previous Government.

Reform of the criminal
justice system continued- though slowed down in an electoral year-, with substantial
EU financial support, covering the liberalisation of criminal policies, the
promotion of non-custodial measures and the rehabilitation of offenders,
particularly juveniles. In March, the parliament adopted legislative amendments
addressing the temporary assignment of judges, disciplinary procedures, and the
transparency of disciplinary proceedings. 2012 saw a positive evolution in the
relief of prison congestion. This was considerably boosted by the Amnesty bill
passed in January 2013 which led to the release of around 10,000 inmates, and
significant reductions of prison terms for most of the rest. January 2013 also
saw the release of 190 individuals following their controversial recognition as
political prisoners.

Georgia continued to make progress in fighting corruption. The EU
has been supporting anti-corruption measures in Georgia for many years,
including through an ongoing programme to reform public finance management.
Transparency International ranked Georgia 51st of 176 countries on
its corruption index in 2012. A 2012 crime, security and corruption survey put Georgia at the same level as the Nordic countries. However, measures to prevent, detect and
address elite corruption still need to be taken.

Other human rights and fundamental freedoms

The
security and law enforcement system came under intense criticism following the
release of videos in September showing prison inmates including juveniles being
tortured. The videos triggered mass demonstrations and had an immediate and
possibly decisive impact on the parliamentary elections. Prison abuse had been
documented by the Public Defender and the issue raised by international organisations
and the EU over an extended period, without a substantial official response.
After the prisoner abuse scandal, the previous Government acted swifty: the
Corrections and Interior Ministers resigned, the Public Defender was appointed
new Minister of Corrections, members of prison staff were dismissed and 19
people were prosecuted. A thorough, transparent, independent and effective
investigation and long- term structural reforms including a sound mechanism for
internally and externally monitoring of prisons, are still needed, to ensure
that ill treatment is fully eradicated. It is encouraging that the new
Government has expressed its readiness to tackle this as a priority.

In November, the parliament
launched a process of identifying political prisoners in Georgia. A draft amnesty law, including a list of political prisoners, was adopted on 21 December
and was subsequently vetoed by the President. The President’s veto was
overturned by parliament and, on 13 January 2013, 190 individualswere released having
been identified as political prisoners. This process suffered from a number of
flaws: the parliament did not involve the judiciary, which might normally have
been entrusted with the role of establishing whether the individuals concerned
were political prisoners according to objective criteria and international
norms. In addition, the Council of Europe’s Venice Commission was not consulted
prior to the adoption of the amnesty law, despite its opinion being sought by
the Parliamentary Assembly of the Council of Europe. The
Venice Commission’s opinion states that the amnesty law failed to comply with
certain fundamental principles of the rule of law, namely legality (including
transparency), the prohibition of arbitrariness, non-discrimination and
equality before the law.

Concerns remain over the
excessive use of administrative detention of up to 90 days for minor
breaches of the law, such as defying police orders. Legal guarantees for administrative
detainees are lower than for pre-trial detainees under criminal charges.

After a law giving
political parties financial incentives to improve their gender balance was
brought in, the number of women on party lists increased in 2012. Women
remain generally under-represented in public life. With the exception of some activities that benefitted from the
support of international organizations, the State Anti-Domestic Violence
Council has not delivered significant results in 2012.

The Children's Action
Plan (2012-15) is being implemented, with the mandatory licensing of child-care
institutions and with child-care standards being revised with UNICEF support.
The reduction of the number of children in institutions over the last five
years, and the increase of the number in foster care, is an important
achievement for Georgia. The pace of child-care reforms should be maintained.
Significant gaps remain in the state’s identification and proper monitoring of
child abuse cases, although the EU is supporting a pilot project in this area.
More attention should also be paid to early childhood development. Since September 2012, all children up to the age of five benefit
from a state medical insurance scheme that gives them better access to
affordable healthcare.

Labour rights have been identified as one of the principal challenges faced by the
new Government. Previous reports have noted the absence of substantive social
dialogue, and the perception that the authorities were obstructing the
activities of trade unions and putting pressure on trade unionists. In December
2011, the Supreme Court had ruled that trade union activists are not protected
by the current labour code. Despite this, amendments to labour laws in June
2012 did not address this issue, nor did they address the right to collective
bargaining. Following the change of power, numerous work-related conflicts
across the country erupted into strikes. However, the new Government has made a
commitment to bringing labour legislation into line with international and
European standards and to working closely with the ILO and other partners to
this end. ILO was closely involved in preparing revisions of the labour code,
which is a significant positive development. Amendments on individual and
collective labour relationships, and dispute settlement are being prepared with
a view to their adoption in Parliament during the spring 2013 session. The
quality of social dialogue has also been enhanced; in December 2012, the
Parliament adopted a law institutionalising the Tripartite Social Commission
under the chairmanship of the Prime Minister.

All major political actors
acknowledge the importance of civic integration in Georgia. Minority religious
groups benefited from amendments to the civil code allowing them to register as
legal entities of public law. Some cases of religious intolerance were reported
after the change of government.

Ethnic minorities remain under-represented in state administration. Georgia has not yet signed the European Charter for Regional or Minority Languages and the abolition
of linguistically-segregated schools is progressing slowly. Some progress was
made on the development of infrastructure in minority populated areas.

Some progress was made
concerning discrimination on the basis of sexual orientation. The criminal
code was amended to make homophobic motives for violent crimes an aggravating
circumstance. The Constitutional Court ruled that the constitutional ban on
discrimination covers discrimination based on gender identity. However, social
acceptance remains limited. the lesbian, gay, bisexual and transgender (LGBT)
demonstration on May 17 was physically attacked by a far larger
counter-demonstration.

Cooperation on Foreign and Security Policy, conflict prevention and
confidence building

In
2012, Georgia aligned itself with 35 out of 62 EU CFSP declarations it was
invited to support (42 out of 82 in 2011). The EU remained committed to and continued to fully support Georgia’s territorial integrity and sovereignty and the peaceful resolution of the
conflicts there. The EUSR for the South Caucasus and the Crisis in Georgia co-chaired the Geneva Discussions and took the lead in other conflict resolution
and confidence-building efforts. The EUMM played a key role in stabilising the
situation along the administrative boundary line for the conflict-affected
communities during the tense pre-electoral period and the Kavkaz 2012 military
exercises.

Since April 2012, the
Incident Prevention and Response Mechanism (IPRM) for Abkhazia has been
blocked, after the Abkhaz de facto authorities declared the Head of the
EUMM to be persona non-grata. Following the change of government, there
are some encouraging signs that the new authorities might do more to engage with
the breakaway territories. Several EU projects promote conflict prevention and
confidence-building measures, especially in Abkhazia.

The number of countries
that accept the Status-Neutral Travel Documents (SNTD) continues to
increase, although only very few from Abkhazia and South Ossetia have shown interest
in these documents. Some of them are also willing to admit persons residing in
the breakaway regions of Abkhazia and South Ossetia travelling on any other
legal travel document.

In a
surprise move of which the international community only learned some months
later, on 23 December 2011, the parliament adopted amendments to the law on internally
displaced persons (IDP) law, A recent report by the UN Secretary-General
welcomed certain changes but levelled a criticism that terminology and definitions were introduced with the amendments
which are governed by political considerations, and as a result, not all
internally displaced persons as defined in international law and practice can
enjoy benefits".

On 13 June 2012, the
Government formally adopted the 2012-14 IDP Action Plan for implementing the state
strategy on internally displaced persons. The plan received continued support
from an EU-financed reform programme. The Action Plan was brought into line
with donors' suggestions, with timing and costing introduced.
Nonetheless, a more strategic approach, more national ownership and more
financing will be needed, if the Georgian Government is to effectively tackle
the persisting problem of socio-economic integration and the development of IDP
communities.

The reporting period saw
the rapid resettlement of IDP families in new durable
housing solutions (DUSO) and a dramatic upsurge in
handing over private ownership of DUSO to IDPs. While
international standards were generally adhered to during resettlements, more forward planning and the transparent selection
of beneficiaries would increase efficiency and legitimacy.

3.         ECONOMIC AND SOCIAL REFORM

Macroeconomic framework and functioning market economy[3]

Georgia retained its strong economic performance in 2012 despite the
worsening global environment. GDP growth was at preliminary 6.1%,
moderating from a 7.0% expansion in 2011. Economic performance in 2012 was
supported by surging investment and growing domestic demand, rising remittances
and robust credit activity as well as a booming tourist sector. However,
activity weakened significantly in the final quarter of 2012 due to
uncertainties associated with the political transition following the October
elections that weighed on investments and consumer spending. The worsening
global economic environment also contributed to the moderation.

In contrast with the high
inflation in the previous two years, there was a slowdown in 2012,
mainly due to lower global food prices, but due to the of appreciation of the local
currency in the first half of the year. As a result, the annual consumer prices
fell by 0.9% in the year. In the absence of inflation pressures, the central
bank continued gradually softening its monetary stance throughout the year,
lowering the key policy rate, to 5.25%. However, the effectiveness of domestic monetary
policy remains limited by the high – albeit declining – dollarization ratio.
The intention of the new government to seek the replacement of the Governor of
the National Bank of Georgia well ahead of the expiration of his mandate raises
concerns about the central bank's independence.

The sound economic
performance in 2012 keeps the 3.5%-of-GDP budget deficit target for the
year within reach. This will be only a slight improvement from the 3.6% deficit
in 2011 as the strong fiscal consolidation of the last two years came to a halt
ahead of the October elections. The high current account deficit remains
a source of vulnerability at 11.8% of GDP in the first three quarters due to
growing imports of investment goods. Net FDI declined by a third in the period,
but this was offset by rising debt capital inflows to several big local
entities. Growing foreign exchange reserves, donor financing and an IMF
precautionary programme agreed in April mitigate external risks in the short
term.

Social situation, employment and poverty reduction

The improvement of labour
indicators in 2011 continued in 2012, with a decrease in the unemployment
rate to 14.4% expected for 2012. However, the Georgian labour market continues
to experience a number of difficulties: high structural unemployment, a high
urban unemployment rate, a high youth unemployment rate, and a rising
unemployment rate among the population with higher education suggesting serious
mismatches between the labour supply and demand.

In this context a State Ministry of Employment was established in July, with a
six-point plan including the creation of an employment data-base and the
introduction of the 'legal status of unemployed'. The new Government
announced plans to integrate the State Ministry of Employment into the Ministry
of Labour, Health and Social Affairs.

In December the Parliament
adopted a law institutionalising the Tripartite Social Commission under the
chairmanship of the Prime Minister.

During the
first half of 2012, poverty reduction and pressing social issues, mainly
employment and social assistance, was a focus of the parliamentary elections. All
political parties made affordable free health care, a pension increase and
other social support for vulnerable groups central to their major statements
and programmes. Besides targeted social assistance, the authorities declared
vocational education and training for improved employability a priority,
although a coherent programme or strategy is not in place yet. It is hoped that
the improved atmosphere of social dialogue will contribute to progress in these
areas.

4.         Trade-related issues,
market and regulatory reform

The EU is
Georgia's main trading partner accounting for 26.8% of its trade volume in
2011[4]. Bilateral trade flows increased
and during the first eleven months of 2012 amounted to EUR 2.4 billion. However,
the growth of total trade reflects dynamics of EU exports to Georgia which increased to EUR 1.85 billion during the same period. EU exports consisted mainly of mineral
fuels and related materials, machinery, mechanical appliances and transport
equipment, chemicals, pharmaceutical products and other manufactured goods. EU
imports from Georgia slightly decreased to EUR 558 million during the first
eleven months of 2012. EU imported from Georgia mainly crude materials and
mineral/mining products, chemical products (fertilisers), food products (edible
fruit and nuts), and mineral water and wine. The structure of Georgia’s export portfolio has not changed in the past year, and continues to be dominated
by base products and displays limited diversification.

Georgia
continued to benefit from the GSP+ unilateral preferences for processed goods
(mainly agricultural) to enter the EU market. It remains bound by the GSP+
obligation to respect and implement a number of international conventions
related to social, environmental, human rights and good governance issues. Georgia made some modest progress by amending its Labour Code to address limitations on duration
of strike and the minimum threshold for the composition of trade unions. The
Government also somewhat improved its dialogue with social partners. Other
important recommendations reiterated by the ILO Committee of Experts in its
2012 report remain to be acted on as a matter of priority. The new Government,
following the October parliamentary elections, pledged to enhance its
cooperation with ILO and social partners and to address recommendations issued
to Georgia by ILO in this area. Implementation of these commitments continues
to be vital for Georgia’s GSP+ beneficiary status.

The bilateral Agreement on the protection of geographical
indications entered into force in April. A comprehensive EU-financed reform
programme on agriculture and rural development also provides support in this
regard. Following the progress made
in preparatory reforms, the EU launched negotiations on a DCFTA with Georgia in February. The DCFTA will provide a framework for improving trade and the
trade-related environment in Georgia and further attracting investment to the
country to strengthen its economic competitiveness and diversify its export
base. It is essential that Georgia continues to implement reforms in all
trade-related areas in parallel to the DCFTA negotiations. Diversifying the
economy and trade remains key to boosting Georgia's trade flows, not only with
the EU but also with its partners in the region.

Georgia continued to approximate with EU sanitary and phyto-sanitary
(SPS) standards. In May, it adopted a new Food Safety, Veterinary and Plant
Protection Code; the EU communicated to Georgia the shortcomings in this code
that remain to be addressed in preparing for the future free trade area. The
National Food Agency (NFA) continued to carry out food safety inspections in
establishments. For the first time ever an animal registration programme is being
introduced and state-funded vaccination campaigns on foot and mouth disease and
anthrax have been run.  In July, the EU and the NFA agreed to support capacity
building of the agency through the Comprehensive Institution Building programme. With EU twinning support, Georgia progressed in developing secondary SPS legislation
and in building capacity on SPS border controls carried out by the Revenue
service. In parallel to the DCFTA negotiations, Georgia should continue to
implement SPS related reforms on the basis of its food safety strategy.
Particular attention is needed to ensure quality of legislation and
consultations with stakeholders during the legislative process.

Georgia
continued to implement a modern customs policy and further
capacity-building measures (i.e. to create the right conditions for livestock
in transit, veterinary border inspections) in this regard. Since the
implementation of tax and customs reforms, clearance times and costs have
decreased. The overall level of satisfaction with customs procedures among
domestic stakeholders remained very high.

In the area of the free movement of goods and technical
regulations, Georgia adopted a Code on product safety and free movement of
goods in May. It aims to approximate Georgian law to two EU directives
(Consumer Product Safety Directive and the Defective Products Liability
Directive) with regard to horizontal rules on the marketing of industrial
products. The Georgian Accreditation Center (GAC) became an associated member
of the European Cooperation for Accreditation (ECA). The EU continued to
provide technical assistance in this sector through the Comprehensive Institution Building programme. Two twinning projects, one on standardisation and metrology and
one on accreditation, continued to support the GAC and Georgian National Agency
for Standards and Metrology. A Technical and Construction Inspection Agency
became a legal entity of public law under the Ministry of Economy and
Sustainable development in September. This agency may play a market
surveillance role, but more details on its envisaged role and strategy are not
available at present.

Georgia
continued to improve its business climate and moved up to 9th place (out of 185)
in the ease of doing business ranking in the World Bank’s ‘Doing Business 2013’
annual report. Despite major
improvements so far, aimed mostly at reducing red tape and accelerating
administrative procedures for businesses, some barriers remain. More needs to
be done, especially in areas closely linked to law enforcement: the protection
of property rights, access to the courts, the impartiality of judiciary
authorities, appeal procedures, the protection of creditors and taxation
issues.

The financial services sector continued to expand.
Capitalisation in the banking sector remained high, with the capital adequacy
ratio exceeding the minimum Basel requirements. A significant feature of the
financial system is the high dollarisation level, which hinders the
effectiveness of monetary policy. In the non-banking sector, the National Bank
of Georgia focused on continuing to improve its legal and regulatory framework,
including strengthening of the securities market. The Parliament amended the
Law on Activities of Commercial Banks, authorising them to engage in additional
types of banking activities, namely providing payment services, operating
payment systems and acting as a settlement agent.

A new Law on Payment Systems and Payment Services
entered into force in July. Its purpose is to facilitate the functioning of the
payment system, including securities clearing and settlement systems.
The law also introduced the concept of financial collateral, entitling a
creditor to preferential satisfaction of his claim before other secured and
unsecured creditors.

No development is noted in the area of company law.

Other key areas

The alternative tax audits introduced in 2011
allowed the recruitment of private auditors for tax audits. However, Ministry
of Finance is considering repealing this modality in 2013 in line with the
position of the IMF. Georgia made it easier to pay taxes by improving the use
of electronic systems and providing more services to taxpayers. The Mediation
Council handled an increasing number of disputes between taxpayers and the
relevant departments of the Revenue Service.

In line
with its Competition Strategy, Georgia adopted
in May a framework-law on Free Trade and Competition. The law addresses the
core principles of antitrust and state aid. Georgia continued to strengthen
the capacity of the Agency for Free Trade and Competition, which since January
2012, is merged with the State Procurement Agency. This single Agency is
receiving EU support.

The effective protection of intellectual property rights
remains a key issue in Georgia. A law on border measures related to
intellectual property rights enforcement was amended in December 2011. Since
2012, a single registration at Sakpatenti is enough to obtain border protection
without having to also register at the Revenue Service. The EU provided support
through TAIEX instrument and ad hoc assistance in order to increase the
capacity building of the Georgian Copyright Association (collective management
society).

The State Procurement Agency was merged with the
Free Trade and Competition Agency in January. The facility for framework
agreements was introduced in the electronic procurement system. It still lacks
support for other modes that are obligatory under the EU acquis, such as the
restricted procedure and the negotiated procedure.

Georgia
continued to implement its mid-term strategy (adopted in December 2011) to
develop and improve national statistics. New methodologies were applied
in the computation of the Consumer Price Index. Major changes concerned the
revision of weights, including the use of national accounts data, and the
composition of the consumption basket. The methodology for the Producer Price
Index was changed to focus on products. In April Geostat submitted the plan for
implementing the population census to the Government Working Group. Georgia is encouraged to conduct its population census in 2014 at the latest and to follow
international recommendations in this regard. Georgia developed an online data
collection system for businesses that will reduce the response burden and
improve the quality of the data. A global Assessment of the Georgian
statistical system was carried out.

Georgia’s enterprise
policy aims to create favourable conditions for all enterprises and the
business climate was steadily improved. There is no specific policy for small
and medium-sized enterprises (SMEs) and they have little role in policy-making,
(as opposed to larger companies) although there are signs of emerging dialogue
and co-operation with the SME. Economic initiatives are taken in the context of
regional development, a reform area which receives continued EU support. The
State Strategy for Regional Development encourages entrepreneurship and
innovation, emphasizing competitiveness. The Partnership Fund, set up in mid
2011 with the aim to contribute to the financing of private sector projects,
continues to be operational under the new government and focuses on filing the
gap for long-term capital in the country.

The Parliament amended the “Law on Public Internal
Financial Control” in December 2011. It requires that Internal Audit Units,
to be set up in all Ministries and other State bodies, function according to
internal audit standards. The Heads of the Internal Audit Unit are authorised
to determine the type of audit, scope of activities, their frequency and the
number of internal auditors. The
requirements of the law are met by most of the line ministries; law enforcement
ministries have to establish internal audit units from 2013.

In the area of external audit, the State
Audit Office (SAO) conducted financial audits according to the new Financial
Audit Manual, in the ministries of Finance, Energy, Culture and Education and
Science. A comprehensive EU-financed programme supports these public finance
reforms. The Quality Control department, created during 2012, conducted quality
control of already conducted financial audits and issued a report according to
ISSAI 1220 standard. However, since January the SAO monitors political party
financing and has the right to investigate and to impose fines on political
parties and affiliated groups. Types of cases treated by SAO and the methods
used have raised numerous questions among NGOs and opposition parties.

5. Cooperation on justice, freedom and security

The EU-Georgia Mobility
Partnership continued to be implemented smoothly.

Georgia prepared a
draft 2013-15 Migration Strategy that should soon be approved by the Government.
The draft, which takes account of national interests and international
practice, deals with legal migration; combating illegal migration; asylum
policy and humanitarian status; the return and reintegration of Georgian
citizens, and migration and development.

The
EU-Georgia visa facilitation and readmission agreements that entered
into force in March 2011 were satisfactorily implemented. The EU
therefore started a dialogue on visa liberalisation with Georgia in June 2012, with the aim to discuss the conditions for visa-free travel to the EU
for Georgian citizens. It agreed the terms of reference of the visa dialogue
with Georgia in August and preparations for a Visa Liberalisation Action Plan
(VLAP) were subsequently made. The VLAP was formally handed to Georgia on 25 February 2013 by Commissioner Malmström.

A
Border Police Order was issued in April on establishing competent persons for
carrying out the investigation of crimes in the maritime space of Georgia under the jurisdiction of MIA border police. Georgia updated its border management
strategy and the associated Action Plan. It signed and implemented bilateral
agreements on border police cooperation with Turkey, Latvia, Moldova, Estonia, Bulgaria and Germany.

The 2010-12 cooperation
plan between the Ministry of Internal Affairs (MIA) and FRONTEX continued to be
implemented. The MIA participated with observer status in joint FRONTEX operations
at the land, sea and air borders. A joint statement of cooperation between the
MIA and the European Union Border Assistance Mission was drafted. Under the EU-funded
South Caucasus Integrated Border Management Programme (SCIBM), the MIA and the
State Border Guard Service of Azerbaijan prepared an agreement on the activities
of border representatives.

To facilitate the flow of
people at border-crossing points, Georgia installed e-gates for Georgian biometric
passport holders at Tbilisi and Batumi international airports The Sadakhlo and Red Bridge border-crossing points were re-build and refurbished.

Georgia continued drafting an anti-drug strategy. In the
context of the international border police conference, a meeting was held in
April on cooperation between border and other relevant units in the fight
against drugs smuggling. The MIA concluded bilateral international agreements
on drugs cooperation with Bulgaria, Estonia, the Slovak Republic and Turkey. An EU dialogue on drugs with Azerbaijan, Georgia, Moldova and Ukraine was held in Brussels in April.

With regard to judicial
cooperation in civil matters, a number of international conventions on
legal cooperation and family law drawn up by the Hague Conference on Private
International Law remain unsigned.

The new Georgian data
protection law entered into force in May 2012, with provisions related to
administrative responsibility for violation of its provisions entering into
force in January 2013, and with its part applying to the private sector
entering into force in January 2016.

6.         Transport, energy, environment,
the information society, research and innovation

Georgia made progress in harmonising its transport legislation with that
of the EU. Georgia made serious efforts in implementation of the EU-Georgia Common
Aviation Area Agreement signed in 2010. The first meeting of the EU-Georgia
Joint Committee overseeing the implementation of this agreement took place in
September 2012 in Tbilisi. In December, Georgia took another step towards
deeper integration with the EU’s aviation system by signing the instrument of
accession to Eurocontrol. Georgia is encouraged to continue all
aviation-related reforms with the same high-level commitment, in particular the
implementation of the agreement of 2010. The EU is ready to support this work
with technical assistance.

The inspection mission to Georgia to verify compliance with the international maritime training and certification
requirements of the International Convention on Standards of Training,
Certification and Watchkeeping for Seafarers took place in October 2012. Georgia has made considerable efforts to comply with the requirements of the Convention.
Depending on the readiness of the Georgian authorities to resolve the remaining
issues, the Commission could put forward a positive proposal by the end of 2013
so that certificates of the Georgian seafarers could be recognised again by EU
Member States.

Georgia became a Contracting State to the Convention concerning
International Carriage by Rail (COTIF) and Member of the Intergovernmental
Organisation for International Carriage by Rail (OTIF) in May. This is an
important step for its integration with the EU and international rail
structures, facilitating the transport of freight by rail. Georgia continued to develop its potential as a transit country by investing in infrastructure. The
EU supported this work through a EUR 20 million grant from the Neighbourhood
Investment Facility to reconstruct a section of the East-West motorway. The
development of the Baku-Tbilisi-Kars railway that will help connect the Central
Asian and European markets advanced in 2012.

Georgia remained a reliable energy partner for the EU in developing
the Southern Corridor. Georgia and Ukraine are working on a new multilateral
inter-governmental agreement to develop the Euro-Asian Oil Transportation
Corridor (EAOTC). In the electricity sector, work on the Georgian side of the Black
Sea Energy Transmission Network (Azerbaijan-Georgia-Turkey) is progressing
well. The construction of an electricity interconnection with Azerbaijan and related infrastructure were completed. Renovation of the large Enguri hydro power
plant progressed. In January, Georgia and Turkey signed a cross-border agreement
on electricity trade across new interconnections between them. Georgia remained an active observer in the Energy
Community. In January 2013 it submitted an application to become a full member.
Georgia is encouraged to
strengthen the energy regulator’s independence
and capacity and to continue working on gas market reform, including
unbundling. It is also encouraged to step up efforts on renewable energy and
energy efficiency including by adopting legislation in these areas.

In the field of climate
change, the draft third National
Communication for the implementation of the United Nations Framework Convention
on Climate Change (UNFCCC) is focussing on the territory of the Autonomous
Republic of Adjara. Georgia participated in
preparations for the forthcoming regional EU Clima East Project (EUR 18
million) that will be implemented in the period 2013-2016. The Regional
Environmental Centre for the Caucasus (REC-C) continued
implementing an EU funded project on adaptation to climate change. Georgia is encouraged to build capacity and engage in the new carbon market
mechanism to be developed following the 17th and 18th the
sessions of the UNFCCC Conference of the Parties. Georgia is also encouraged to
make additional efforts to fully implement the Cancun and Durban agreements and in particular devise a low-carbon development strategy.

In the
field of environment, Georgia adopted the second National Environmental Action
Plan for 2012 to 2016 and made a new report on the state of the environment
available. It also adopted a national strategy and
2012-2014 Action plan on environmental education for sustainable development. Following the amendment to the environmental framework law, the
revision of the forest code and the facilitation of hunting red list species, Georgia is encouraged to strengthen its environmental legislation and administrative
capacity, to apply procedures for environmental impact assessment consistently
and to pay particular attention to public participation. Georgia is also encouraged to ratify the Espoo Convention. Georgia committed to implementing a
country study on TEEB (The Economics of Ecosystems and Biodiversity) aiming to
improve knowledge of and recognize the value of the country's natural capital. Under
the new Government, several areas of responsibility transferred to other
Ministries will be re-integrated into the renamed Ministry of Environment and
Natural Resources which is preparing to strengthen its capacity.

The
REC-C continued its activities. Its financial and institutional sustainability
still need strengthening.

In the area of civil
protection, Georgia continued to participate in the EaP flagship programme
on prevention, preparedness and response to natural and man-made disasters
(PPRD East). As a part of the programme Georgia is contributing to the
development of Electronic Regional Risk Atlas. The National Environmental
Agency (covering all natural hazards) is involved from the beginning in the
establishment of the atlas and the development phase is close to completing in
the country. Georgia is encouraged to take advantage of the guiding document on
Risk Assessment Policy for the EaP region produced under the PPRD East
programme.

Georgia is among the 168 governments that
adopted the "Hyogo Framework for Action: Building the Resilience of
Nations and Communities to Disasters", but work on Disaster Risk Reduction
is still only at the beginning and it will require considerable further effort
to develop capacities and processes.

With regard to the information
society, the Georgian telecoms market developed very rapidly over the last few
years. Market growth in 2012 was stable in all areas (mobile, broadband, fixed
wireless telephony, etc.). Georgia introduced mobile number portability across
all four mobile operators. Mobile penetration reached 112% by September. Georgia made progress in developing e-government. The country is a
regional leader in this area (ranking 72 out of 190 in the 2012 UNPAN e-government
development survey, compared to 100 in 2010). The creation of the data.gov.ge portal
made it easier to access public e-services. An EU twinning project, begun in
November, aims to further improve the e-government and inter-operability
frameworks, strengthen cyber security capacity and contribute to the
preparation of an overall e-strategy for the country.

In the area of audiovisual
policy, Georgia amended its broadcasting law and abolished the license
requirement for transit broadcasting in May. With this amendment, transit
broadcasters will only need to receive authorisation to provide their service.

Georgia ranked 71 out of 141 countries on the Global Innovation Index in terms of its innovation capabilities and results. Its expenditure
for research and innovation over the last few years remained
below 1% of GDP. Besides some light tower initiatives with limited prospects
for sustainability, like the Batumi Institute of Technology, internal research
funding increased the dependence on external research funding such as EU’s Seventh
Framework Programme (FP7). Since 2008, Georgia has become increasingly involved
in the FP7 through 31 projects covering infrastructural and networking measures
and to a lesser degree, pure research, in the areas of health, information
technology and communication, the environment, social sciences and humanities. A
total EU contribution to these projects amounts to EUR 156 million, more than
EUR 3 million of which is given to the 26 Georgian public and private
institutions participating in these projects.

7.         people
to people contacts, education and health

The new Government
announced its intention to 'de-politicise' the education and youth sectors and
to improve the autonomy of schools and universities and the quality of
education. Since the beginning of 2012, Georgia has encouraged the setting up
of adult education centres in the suburbs of Tbilisi in the context of
its 2010 'Adult Education Strategy'. The strategy was developed in close
cooperation with the Adult Education Association of Georgia and the European
Training Foundation as a way of encouraging a more coherent and structured
approach to life-long learning. Georgia started preparing to participate
in the EU's e-twinning programme for secondary schools.

In the area of higher education,
it made considerable progress in implementing the Bologna principles on legislative
and regulatory terms. However, the affordability of university studies for
Georgian students remained a problem.

The new Government
recognised vocational education and training (VET) as a key priority.
Work on the VET follow-up strategy for the period after 2012 was accelerated.
The new leadership took steps to increase the involvement of social partners in
the governance and management of the VET sector and plans to increase financing
for this purpose in the revised state budget for 2013. With a substantial
increase in the budget for VET student vouchers, better curricula and the
resulting better quality of several public VET and community colleges, the
number of students admitted more than doubled in 2012. The Ministry of
Education and Science and the National Centre for Educational Quality
Enhancement started systematically reviewing occupational standards. The
development of the national system for the validation of non-formal and
informal learning continued with the setting up of an operational mechanism and
methodology. These VET reforms receive support from an EU-financed reform
programme. They also complement the EU-Georgia Mobility Partnership and
policies for the integration of returning migrants willing to have professional
skills acquired during their employment abroad formally attested.

Georgia participated in EU higher education cooperation programmes.
Twelve projects were selected under the Tempus IV programme. It
benefitted from 12 new scholarships for Erasmus Mundus joint Masters Courses
and one scholarship for an Erasmus Mundus Joint Doctorate. It was also given
another 298 grants for short-term mobility organised within a university
consortium. The first ever pre-departure orientation event for Georgia took place in July. The participation of Georgian universities in the Jean
Monnet programme still needs to be improved. European Studies are currently
taught at only two Tbilisi-based universities. The Marie Curie programme still
needs to be advertised more among Georgian scholars and higher education
institutions. To this end, and to further integrate the Georgian scientific
community into the European Research Area, two projects focused on Georgia were selected under the ERA-WIDE initiative of FP7. Marie Curie actions to
support researchers’ training, mobility and career development, funded nine institutions
and six individual researchers from Georgia.

Young people and youth
organisations continued to benefit from the Youth in Action programme. The
European Neighbourhood Policy Instrument (ENPI) provides additional funds to
the Youth in Action programme for 2012 and 2013 to increase cooperation among
young people, youth workers and youth organisations from the European Union and
the Eastern Partnership neighbouring countries. In 2012, the setting up of the
Eastern Partnership Youth Window within the Youth in Action programme led to a
significant increase in the number of young Georgian participants. Their number
more than doubled compared to 2011. In 2012 462 projects were selected involving 1439
young Georgians. Georgia also hosted the EU-Council of Europe youth partnership
symposium 'Well-Being of Young People in Eastern Europe and Caucasus' on 11-12
June in Tbilisi, in which all Eastern Partnership countries took part.

Cooperation
between the EU and Georgia on culture as an economic resource for
tourism is intensifying. A twinning project supporting the Georgian National Museum was finalised in September and another twinning project with the
Georgian National Agency for the Protection of Cultural Heritage started in November.
During the reconstruction of the Bagrat Cathedral in Kutaisi the UNESCO Office
issued a warning that it might have to renounce its status of World Cultural
Heritage if the work was not carried out according to UNESCO principles. Art
historians and civil society activists repeatedly complained about the primacy
of economic aspects over securing the authenticity of immovable cultural
heritage.

Georgia is implementing its 2011-15 Healthcare Strategy by focusing
on patient’s rights and improving the quality of services, primary healthcare
including regional primary healthcare, the development of hospitals and health
insurance coverage. The new Government announced an update of the strategy.
From September, state medical insurance was extended to all pensioners and
people with disabilities. Georgia implements programmes on HIV/AIDS, mental
health and the promotion of healthy lifestyles.

[1] A decrease of over 15% from December 2011 to December 2012.

[2] The Action Plan should be replaced by the Association Agenda in the
course of 2013.

[3] Figures on GDP, inflation, trade and
employment are generally from Eurostat based on data supplied by the
national statistical offices; or IMF or Commission Staff estimates, as indicated in the Statistical Annex.
When other data sources are used these are then indicated.

[4] Data for 2012 was not available at the time of writing.

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