Document of The World Bank FOR OFFICIAL USE ONLY Report Number: 81647-AM INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIP STRATEGY FOR THE REPUBLIC OF ARMENIA FY2014 - FY2017 October 9, 2013 South Caucasus Country Department Europe and Central Asia Region International Finance Corporation Europe and Central Asia Department This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank's Policy on Access to Information. GOVERNMENT FISCAL YEAR January 1 - December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of October 9, 2013 Currency Unit Armenian Dram US$1.00 AMD 411 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities IDF Institutional Development Fund ADB Asian Development Bank IFC International Finance Corporation ADS Armenia Development Strategy IMF International Monetary Fund ARD Agriculture and Rural Development ILCS Integrated Living Conditions Survey CARMAC Community Agriculture Resource Management IPSAS International Public Sector Accounting and Competitiveness Standards CIS Commonwealth of Independent States JICA Japan International Development Agency CPRR Country Program Results Review KfW Kreditanstaltfir Wiederaujbau CPS Country Partnership Strategy MDG Millennium Development Goal CPSPR Country Partnership Strategy Progress Report MTEF Medium-Term Expenditure Framework DCFTA Deep and Comprehensive Free Trade Agreement MOF Ministry of Finance DPL Development Policy Lending NSS National Statistical Service EBRD European Bank for Reconstruction and OSCE Organization for Security and Co-operation in Development Europe ESW Economic and Sector Work PER Public Expenditure Review EU European Union PFB Poverty Family Benefit FBP Family Benefits Program PFM Public Finance Management FDI Foreign Direct Investment PPP Public Private Partnership FSAP Financial Sector Advisory Program SDP Sustainable Development Program GCI Global Competitiveness Index SME Small and Medium-sized Enterprise GDP Gross Domestic Product SNCO State Non-Commercial Organization GEF Global Environment Facility TF Trust Fund IBRD International Bank for Reconstruction and TSA Targeted Social Assistance Development UNDP United Nations Development Program ICT Information and Communications Technology USAID United States Agency for International IDA International Development Association Development The World Bank Group Team IB3RD/IDA IFC Vice President: Laura Tuck Vice President: Dimitris Tsitsiragos Country Director: Henry G. R. Kerali Regional Director: Tomasz Telma Team Leaders: Jean-Michel Happi Team Leaders: Thomas Lubeck Naira Melkumyan Hester Marie DeCasper REPUBLIC OF ARMENIA COUNTRY PARTNERSHIP STRATEGY (2014-2017) Table of Contents EXECUTIVE SUMMARY ................................................ m I. COUNTRY CONTEXT ...............................................1 A. Political Context....................1.... ................1 B. Recent Economic Developments ...............2.... ............2 C. Macroeconomic Outlook ..................4..... .............4 D. Poverty, Inequality, and Shared Prosperity. ......................... 6 E. Development Challenges ......................................... 8 II. GOVERNMENT'S VISION........................................12 A. Armenia Development Strategy................................. 12 B. Key Structural and Sectoral Issues . .............................. 14 III. WORLD BANK GROUP PARTNERSHIP STRATEGY.....................17 A. Lessons Learned from Previous CPS and Stakeholder Feedback . ........ 17 B. Current World Bank Group Program. .................... ........ 18 C. Indicative Program of Support FY2014-2017 ........................ 19 D. Development Partner Coordination ..................... ........ 33 E. Monitoring and Evaluation .......................... ......... 33 F. Consultations..................................... ......... 34 IV. MANAGING RISKS ...................... ............... 35 List of Figures Figure 1. Real GDP and its Components ..........................................2 Figure 2. Key Fiscal Indicators, 2008-2012 .............4......... .............4 Figure 3. Poverty Incidence (%o), 2008-2011 ...........6.......... .............6 Figure 4. Poverty Rates at ECA Regional Poverty Line of $2.50 per day........ .............7 Figure 5. Shared Prosperity in Armenia, 2006-2011 ........................7 Figure 6. Impact of Social Transfers on Headcount Poverty ......................... 11 Figure 7. Growth Rate Projections - ADS vs. Baseline ........................ ..... 14 Figure 8. WBG Strategic Response to Government's Vision...............l.......21 List of Boxes Box 1. Key Gender Issues ................................................. 10 Box 2. Climate Change Vulnerabilities...................................... 12 Box 3. DPL Indicative Reform Areas .................................... ..... 22 I List of Tables Table 1. Macroeconomic Trends and Projections ....................................3 Table 2. Progress towards the MDGs. .............................................8 Table 3. Selected Outcome Indicators of the ADS ............................ 13 Table 4. Public Administration Main Target Indicators. ................... ............ 16 Country Strategy Annexes Annex 1. Results Framework for Armenia CPS FY2014-201 7.......................36 Annex 2. Completion Report for Armenia CPS FY2009-2013......................42 Annex 3. Matrix ofDevelopment Partners Activities and Collaboration ..................77 Annex 4. Armenia: List ofActive Trust Fund Operations............. ................. 81 Standard Annex Tables Annex A. 1. Armenia at a Glance.................................................83 Annex A. 2. Progress toward Millennium Development Goals .....................84 Annex A. 3. Key Socio-Economic Indicators ................................. ......85 Annex B. 1. Selected Indicators of Bank Portfolio Performance and Management ...........87 Annex B.2. Operations Portfolio (IBRD/IDA and Grants) ............ .................88 Annex B.3. IFC-Committed and Disbursed Outstanding Investment Portfolio ..............89 Annex B. 4. Summary ofPlanned Lending and AAA ..................................90 Annex B. 5. Summary ofNon-Lending Services (IFC) ...................................... 91 MaW. Map ofArmenia .............................................................92 The Country Partnership Strategy was prepared by a joint World Bank Group team led by Jean- Michel Happi, Naira Melkumyan, Hester Marie DeCasper, and Thomas Lubeck, and consisting of: Adriana Damianova, Ahmed Eiweda, Aleksan Hovhannisyan, Alexander Astvatsatryan, Angela Prigozhina, Anush Shahverdyan, Ara Grigorian, Arman Barkhudaryan, Arman Vatyan, Arsen Nazaryan, Arthur Kochnakyan, Arusyak Alaverdan, Carla Pittalis, Cristian Aedo, Davit Melikyan, Eavan O'Halloran, Edgar Karapetyan, Gohar Gyulumyan, Meskerem Mulatu, Nicolas Ahouissoussi, Nistha Sinha, Nvard Manasian, Rashmi Shankar, Sandra Sargent, Sirarpi Haykazyan, Susanna Hayrapetyan, Tigran Kostanyan, Ulrich Bartsch, Vigen Sargsyan, Vickram Cuttaree, Zaruhi Tokhmakhian, with a much appreciated support from Irina Tevosyan and Satik Nairian. The team is grateful for the overall guidance provided by Aurora Ferrari, Carolina Sanchez-Paramo, Henry Kerali, Ivailo Izvorski, Tomasz Telma and Yvonne Tsikata. The team also acknowledges the excellent collaboration of the Armenian authorities, development partners, private sector representatives and civil society organizations consulted throughout the CPS preparation. II Republic of Armenia Country Partnership Strategy (2014-2017) EXECUTIVE SUMMARY 1. This Country Partnership Strategy (CPS) for Armenia aims to support the Government's vision for boosting shared prosperity and reducing poverty through accelerated economic growth and job creation. The CPS sets out how the World Bank Group (WBG) will support Armenia in implementing the Armenia Development Strategy 2025 (ADS), which aims at tripling per capita income to $10,000 by 2025 with the goals of lifting over 800,000 people net out of poverty, thereby reducing poverty incidence from 35 percent of the population in 2011 to 13 percent in 2025; and eradicating extreme poverty which affected 3.7 percent of the population in 2011. 2. Before the 2009 global financial crisis, the Armenian economy grew by about 12 percent per annum. This high growth performance resulted in improvement of the per capita income from $680 in 2001 to $3,340 in 2008.1 However, this was generated through an unsustainable economic model narrowly based on expansion of residential construction, domestic services, and foreign exchange inflows. Fueled by remittances, the construction sector expanded 5.2 times between 2001 and 2008 and dominated the economy with 25 percent share in GDP. During the same period, the share of manufacturing declined from 17 percent to 9 percent of GDP; large remittance inflows and appreciation of the national currency rendered domestic tradables uncompetitive and left the economy highly vulnerable to external shocks. As the global economy went into recession and external financing of the domestic construction sector was interrupted, the sector collapsed by 48 percent, contributing to almost 11 percentage points of the total 14.1 percent economic contraction in 2009. The Armenian economy started recovering in 2010. Real GDP expanded by 2.4 percent in 2010, 4.7 percent in 2011 and 7.2 percent in 2012 buoyed by high prices for base metals and high agricultural output. 3. Armenia also had an impressive success in bringing down poverty and ensuring that the less well-off benefitted from economic expansion. Between 2001 and 2008, the share of population living below the national poverty line dropped from over 50 percent to 27.8 percent, as a result of impressive job creation in the construction industry and effective social protection programs. At the same time, the growth rate of consumption per capita of the bottom 40 percent - an indicator of shared prosperity - outpaced that for the overall population, demonstrating that economic growth benefited the poor and vulnerable more than proportionally. However, just two years after the crisis, about a third of poverty reduction achieved in the preceding decade (1999 to 2008) was reversed. Poverty incidence rose again to 35.8 percent in 2010 and declined slightly to 35 percent in 2011; the rate of extreme poverty as measured by the percentage of the population living below the food poverty line doubled to 3.7 percent. 4. To date, as the economy recovers, the Government's goal is to create favorable conditions for a different, more sustainable pattern of economic growth and poverty reduction. The ADS projects a strong economic growth in excess of 6.4 percent per year, assuming high investment inflows and substantial productivity increase. It also forecasts a steady decline of the poverty rate by 0.8 percentage points every year. These goals are ambitious but feasible taking into account Armenia's track record. To achieve them, the ADS mainstreams employment expansion as the key engine for improving living standards and reducing poverty, and sets this as the main priority for the next five years. The ADS also emphasizes enhancing human capital, improving social protection, and modernizing public administration and governance. 1 Based on Atlas method calculations. III 5. Recent analytical work carried out by the WBG suggests that Armenia's new drivers of growth will have to be industry (especially manufacturing) and modern services competing in international markets where high quality, decently paid jobs can be created. But as Armenia transits to this new model, likewise, agriculture needs continued support as the main livelihood of the 36 percent of the population residing in rural areas, and the source of employment to more than 40 percent of the country's active population, including 75 percent in rural areas. Higher productivity in these sectors means higher growth, shared prosperity, and faster poverty reduction in both urban and rural areas. Employment and wage increases in Armenia played a central role in bringing about poverty reduction as well as stimulating growth during the past decade. However, Armenia still suffers from high unemployment and low labor force participation, especially among women and youth. At 53 percent, its employment-to-population ratio is below the European average of 60 percent. Simulations suggest that increasing employment of Armenians to the European average could lift GDP by about 8 percent and significantly contribute to poverty reduction. 6. Low levels of employment result from low job creation, low supply of workers with the needed skills, and a mismatch of workers and jobs. Job creation is low because Armenia lacks a critical mass of small, dynamic and job creating enterprises. On the demand side, many firms report that inadequate skills constitute an important obstacle to hiring workers. This is particularly true among enterprises that are more modem and innovative-that is, firms that invest in research and development, introducing new products, or upgrading existing products. Creating employment in the modem economy requires lower impediments to firm entry and business start-ups, improved business environment, more robust competition, and an educational system that provides the skills required by employers. 7. Against this background, the CPS places private sector-led job creation at the center of the WBG's response. Within this framework, there are two clusters of outcomes targeted (Figure 8), based on where there is a clear line of sight between the Bank's support and its contribution to boosting shared prosperity and reducing poverty: (i) Supporting competitiveness and job creation. The CPS focus is on removing the most binding constraints to private sector led sustainable growth through strengthening competitiveness which in turn supports job creation and is expected to foster income growth of the bottom 40 percent of the population. This is where the greatest leverage will come from the World Bank Group given the key role that IFC plays in supporting private sector-led growth; and (ii) Improving efficiency and targeting of social services. The CPS aims to consolidate development progress achieved to date in areas where outcomes and results have been achieved in reducing poverty and improving the impact of social services. These areas are social protection, education and health where ownership and implementation capacity are already strong. The Bank will build on its current portfolio with the focus on improving access by the bottom 40 percent of the population. 8. Improving governance and anti-corruption (GAC) measures in public services is a cross cutting theme. In Armenia, governance challenges deter private investment and hamper job creation, while at the same time weaken the impact of public services. The focus area of the Bank's future work is to consolidate public administration modernization through e-govemance application which would reduce opportunities for corruption and improve access to services by the population. This would contribute to creating an environment where public services can have greater impact, through being delivered in a more efficient, cost-effective and sustainable manner. In addition, based on the findings of the gender diagnostics, selected activities under the first two clusters include a focus on gender dimensions with the goal of promoting women's economic and public participation. iv 9. The IFC will continue to seek investment opportunities in the real and financial sectors, building upon its portfolio across industries, and to deepen its advisory services operations in order to improve the investment climate with a focus on the agribusiness sector, strengthen the financial sector, and develop the market for investment in sustainable energy. 10. The 2013 World Development Report on Jobs and the 2013 IFC Jobs Study provided valuable insights for this CPS. The principles for designing policies through the job lens, proposed by these reports, are relevant for Armenia: (i) ensuring the policy fundamentals that are essential for both growth and job creation, including macroeconomic stability, an enabling business environment, investments in human capital, and the rule of law; (ii) designing sound labor policies that help translate growth into employment opportunities and that are complemented by a broader approach to job creation that looks beyond the labor market; and (iii) strategically identifying which jobs would do the most for development, given the country context, and removing the obstacles that prevent the private sector from creating more of those jobs. The CPS encompasses these principles. 11. The CPS has been prepared jointly by the IBRD and the IFC in an effort to work as one World Bank to draw out synergies and catalyze higher volumes of private resources aimed at supporting Armenia's development. Its implementation will include a new series of development policy lending (DPL) and selected investment lending in areas where there is a clear line of sight between the Bank's support and its impact on boosting shared prosperity and reducing poverty. The Bank's financial support will comprise the remaining IDA-16 envelope for FY14 (projected at $84.5 million) and IBRD lending of $599 million over FY14-17. Actual lending will depend on how government demand and performance evolve in the course of the CPS period, and on IBRD's lending capacity and demand from other borrowers. In addition, the IFC projects new commitments in the range of $160-190 million during this period. This assistance will be supported by a far-reaching program of advisory services and trust fund support. The CPS's four-year span takes into account the country's election cycle in order to provide a mid-term opportunity to address potential government and policy changes that will be reflected in the CPS Progress Report. 12. Overall, the outlook for Armenia is positive. The fiscal policy has switched from stimulus in the aftermath of the 2009 crisis to consolidation in line with the recovery of the economy and the IMF recommendations, while protecting and extending pro-poor spending. Monetary policy has adopted a neutral stance in a low-inflation environment, and the Central Bank of Armenia is following its inflation targeting regime, including through a flexible exchange rate policy. Low fiscal deficits and robust growth would help reduce public debt, keeping the risk of debt distress low. Various risks could affect the implementation of the CPS or reduce its impact. These include: (i) downside macroeconomic risks in case of a new global economic downturn, which may have ripple effects on the demand for Armenia's exports and the reduction of remittances and foreign investment flows; (ii) regional security risks relating to the dispute with Azerbaijan over Nagorno-Karabakh and the stand-off between the international community and Iran; (iii) potential policy slippages in implementing structural reforms if opposition to key measures gains political support; and (iv) the risks of natural disasters and climate change, given Armenia's high exposure to natural disasters and increased climate extremes. Without implementation of key macroeconomic and sectoral reforms, fiscal consolidation would be difficult and could negatively affect the new DPL series. Furthermore, in the event or occurrence of risks pertaining to natural disaster or regional security, the CPS would exercise flexibility and adjust Bank lending to respond to emerging priorities, shifting needs and policy changes. V I. COUNTRY CONTEXT A. Political Context 1. The last CPS period (FYO9-13) was characterized by relative political stability, which is likely to continue during the next CPS period (FY14-17), albeit with some risks. This stability is reflected in both the continuity in office of the President of the Republic, who was reelected in the February 2013 presidential elections, and the landslide victory of his Republican Party in the June 2012 parliamentary elections. Both elections were declared peaceful and in accordance with international standards, as the Govermment strived to improve credibility of the electoral process, strengthen mechanisms of voice and accountability, and improve governance. 2. However, the elections did not fully resolve the protracted tensions with the opposition. Since 2002, Armenia had been governed by coalitions of the parties with the most votes in the parliamentary elections. However, after the June 2012 elections, Prosperous Armenia, the second largest political party did not take part in the formation of the new government, thereby aligning with the parliamentary opposition. Moreover, the opposition rejected the official results of the presidential elections, claiming irregularities, and staged mass protests across the country. This situation may weaken the Government's ability to build the political consensus needed to back up its reformist agenda laid out in the ADS. The ADS sets ambitious targets for eradicating extreme poverty, creating jobs to improve living standards, deepening human capital, improving access to basic services, and modernizing public administration and governance. The ADS was prepared through extensive social participation and stakeholder consultations, which has enhanced its ownership base. However, its implementation will require hard choices in public expenditures, governance reforms, and other policy trade-offs; and thus there will be significant demands on the Government to develop a broad consensus on these choices. 3. The Regional security risks remain high due to the latent conflict over Nagorno-Karabakh and closed borders with Azerbaijan and Turkey. The perception of risk in the South Caucasus remains high, negatively impacting private and foreign investments. Closed borders continue to impose lost economic opportunities for all sides and increase transport-related costs, which seriously limit already landlocked Armenia's external connectivity, undermining its competitiveness. Moreover, the need to maintain sizable defense expenditures imposes high opportunity costs in foregone investments in social services and essential infrastructure. The Government is engaged with the Minsk Group of countries under the Organization for Security and Co-operation in Europe (OSCE) in their efforts to assist the parties in finding a peaceful solution to the Nagorno-Karabakh conflict. However, repeated violations of the cease-fire along the "Lines of contact" and the Armenian-Azerbaijani border raise the risks of conflict escalation. Resolution of this conflict would ease Armenia's transit links, lower costs to trade, and enable possible participation in regional transit and energy corridor developments. The geo-political stability of the South Caucasus would also be greatly improved and the perception of investment risks reduced. 4. Deepening of relations with Russia, the European Union (EU) and its member states provide Armenia with a political anchor, thereby countervailing the threats and tensions with its neighboring countries. In September 2013, President Sargsyan announced that Armenia will join the Russian-led Eurasian Customs Union (ECU). Prior to this announcement, the Govermment was engaged in negotiating an Association Agreement (AA) and a Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU. These agreements provide Armenia with a framework to raise standards, strengthen competition, modernize across a wide range of activities, and access European markets. The decision to join the ECU has put aside the possibility of signing the EU-DCFTA, thus adding a degree of policy uncertainty, pending the establishment of a new legal framework of relations with the EU. 1 B. Recent Economic Developments 5. Armenia's remarkable growth in the 2000s was followed by a severe downturn during the 2009 global financial crisis and a moderate recovery since then. The crisis revealed weaknesses in the growth model. Before the crisis, the Armenian economy grew by about 12 percent per annum on the basis of an unsustainable economic model. Construction became the dominant sector of the economy with 25 percent share in GDP as a result of 5.2 times expansion in real terms between 2000 and 2008. The high level of informality (40 percent of the sector's turnover and two-thirds of employment), high degree of dependence on external financing, and inadequate taxation of the sector deepened the structural imbalances and fueled pro-cyclical developments in the economy. 6. During the same period, the share of manufacturing declined from 17 percent to 9 percent of GDP, and large remittance inflows and appreciation of the national currency rendered domestic tradables uncompetitive and left the economy highly vulnerable to external shocks. As the global economy went into recession in 2009, external financing of the domestic construction sector was interrupted and the sector collapsed by 48 percent. It contributed to almost 11 percentage points of the total 14.1 percent economic contraction in 2009. A sudden reduction of remittances and drop of external demand for metallic minerals led to a deepening of the current account deficit from 6.4 percent of GDP in 2007 to about 16 percent of GDP in 2009. During the same period the fiscal deficit jumped from less than 2 percent of GDP to 7.6 percent resulting in a sharp increase of the external public debt - from 16 percent to around 40 percent of GDP. The ongoing fiscal consolidation program brought the fiscal deficit back to around 1.5 percent of GDP in 2012. However, the pace of current account adjustment is still slow. 7. The economy recovered after the 2009 contraction but started losing steam in the first half of 2013. The GDP grew by 2.2 percent in 2010, picking up to 4.7 percent in 2011 and 7.2 percent in 2012. Growth was driven by the mining sector with continuous double-digit growth rates (22.5 percent in 2011 and 14.5 percent in 2012) supported by high prices for base metals, and a strong recovery of agriculture (after a 16 percent slump in 2010, it grew at 14 percent in 2011 and 8 percent in 2012) and a stabilization of the construction sector, which grew by 0.5 percent in 2012 after declining by 12.5 percent in 2011 (Figure 1). However, preliminary data shows that growth is now expected to moderate around 4.2 percent in 2013, with agriculture, trade, and services showing lower growth than in the previous year and construction again declining. Growth of industrial production and exports remain relatively strong. Figure 1. Real GDP and its Components (year-on-year change in percent) 40.0 - 30.0 - 20.0 - 10.0 - 0.0 . -20.0 - -20.0 - 0 000 0 0 0 0 0 0 0 0 -30.0 -40.0 - -50.0 - -60.0 - -GDP -Agriculture Industry -Services Sources: NSS data and Bank staff calculations. 2 8. Recent inflation dynamics followed developments in agricultural production. When agriculture contracted by 16.2 percent in real terms in 2010, inflation increased to double-digits in early 2011. Recovery of agriculture gradually brought prices down and inflation returned to the Central Bank of Armenia's (CBA) target band (year-on-year CPI inflation of 4 percent ± 1.5 percent) in August of 2011. Another good harvest in 2012 contributed to further downwards adjustment of prices, with CPI inflation (year-on-year change of the monthly indicator) in negative terms throughout much of the year and reaching 3.2 percent in December 2012. However, higher food, domestic gas, and electricity prices drove headline inflation to 8.5 percent in July 2013 (Table 1.). Table 1. Macroeconomic Trends and Projections (in percent of GDP unless otherwise specified) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Actuals Projections National income and prices Real GDP (percent change) 6.9 -14.1 2.2 4.7 7.2 4.5 5.0 5.0 5.0 5.5 Gross domestic product (in millions of U.S. dollars) 11,662 8,648 9,260 10,142 9,951 10,731 11,509 12,654 13,712 14,935 Gross national income per capita, Atlas method (in U.S. dollars) 3,460 3,170 3,310 3,470 3,760 3,850 4,020 4,360 4,730 5,170 Consumer price index (percent change) 9.0 3.4 8.1 7.5 2.5 6.4 6.2 4.0 4.0 4.0 Investment and saving Investment 40.9 34.7 32.9 27.3 23.8 23.8 23.8 23.8 23.8 23.8 Public 5.1 7.0 5.5 4.7 3.3 5.1 5.0 5.0 5.0 5.0 Private 35.8 27.6 27.3 22.6 20.4 18.8 18.8 18.8 18.8 18.8 National savings 29.1 18.5 18.1 16.3 12.6 12.8 14.1 15.8 16.9 17.9 Domestic savings 15.3 7.1 8.4 3.7 -1.0 1.2 2.4 4.1 5.1 6.2 Government operations Revenue and grants 22.0 21.5 21.9 22.7 23.1 24.2 23.9 23.9 24.5 24.9 Of which: tax revenue 19.7 19.4 19.5 20.0 21.4 22.6 23.0 23.3 24.0 24.3 Grants 0.4 0.7 0.9 1.6 0.5 0.5 0.5 0.2 0.2 0.3 Expenditures 22.7 29.1 26.9 25.5 24.6 27.0 26.2 25.9 26.6 26.4 Current expenditures 20.1 22.4 21.4 20.9 21.3 21.9 22.9 22.4 22.7 23.7 Of which: interest payments 0.3 0.5 0.9 0.9 1.0 1.2 0.9 0.8 0.7 0.6 Capital expenditures 2.6 7.0 5.5 4.7 3.3 5.1 5.0 5.0 5.0 5.0 Overall balance -0.7 -7.6 -5.0 -2.8 -1.5 -2.8 -2.3 -2.0 -2.1 -1.5 Primary balance -0.4 -7.1 -4.1 -1.9 -0.5 -1.6 -1.5 -1.3 -1.3 -0.9 External sector Exports of goods and services 15.1 15.5 20.9 23.7 24.5 24.0 23.7 22.9 21.9 21.0 Imports of goods and services -40.7 -42.6 -45.5 -47.3 -49.3 -46.6 -45.1 -42.6 -40.6 -38.6 Net remittances 15.6 14.8 13.5 15.9 17.6 14.0 14.0 13.9 13.7 13.6 Current account -11.8 -15.8 -14.8 -10.9 -11.2 -11.1 -9.7 -8.0 -6.9 -5.9 Foreign direct investments, net 7.9 8.4 6.1 4.4 4.8 4.3 4.3 4.4 4.4 4.5 Change in gross international reserves (in millions of US dollars) 233.5 -600.3 111.5 -132.9 48.3 ... ... ... ... ... Gross international reserves (in months of imports) 3.6 6.5 5.3 4.8 4.2 4.0 4.0 4.0 4.0 4.0 Public debt 16.4 39.1 40.9 40.9 43.9 41.1 39.4 37.0 34.3 32.3 Sources: Armenian authorities and Bank staff calculations 9. Strong growth of exports contributed to improving external balances. The average growth rate of merchandise exports was 29 percent in US$ terms during 2010-2012, while imports grew by only 3 10 percent. The high growth of exports helped narrow the trade deficit from 24.1 percent of GDP in 2009 to 21.4 percent in 2012. After shrinking by 30 percent during the crisis, the remittances revived quickly to a level about 10 percent above the 2009 level. Remittances helped ease pressures on the current account which is gradually narrowing after reaching 15.8 percent of GDP in 2009. The strong growth of exports and continuing recovery of remittances contributed to further improvement of the current account deficit, which was reduced to 11.2 percent of GDP in 2012. 10. After pursuing a significant fiscal expansion during the crisis, the Government is focusing on consolidating its fiscal accounts. The Government's crisis response policies substantially expanded the fiscal deficit from 0.4 percent of GDP in 2008 to 7.6 percent of GDP in 2009. As a result, in just three years, the public-debt-to-GDP ratio drastically increased. In 2012 it peaked at 43.9 percent, up from 16.4 percent at the end of 2008. To restore a sustainable fiscal path, the Government has embarked on a significant consolidation effort, which helped reduce the overall fiscal deficit to 1.5 percent of GDP in 2012 (Figure 2). The authorities plan to further maintain this ratio near the debt-stabilizing level of 2 percent of GDP in the medium term. The fiscal consolidation was achieved mainly through expenditure compression of 4.3 percent of GDP during 2010-12, by under-spending on capital, while priority social spending was largely protected. Lending from multilateral and bilateral donors remained the key source of deficit financing. Figure 2. Key Fiscal Indicators, 2008-2012 (in percent of GDP) 35.0 - 30.0 - 25.0 - 20.0 - 15.0 - 10.0 - 5.0 - 0.0 - -5.0 - 2008 2009 2010 2011 2012 -10.0 - m Revenue and grants 0 Tax revenue w Expenditures a Overall balance Source: MOF, NSS and Bank staff calculations 11. Public debt was only about 16 percent of GDP at end-2008, but reached 43.9 percent of GDP at end-2012. It is expected to decline if fiscal consolidation is successful and economic growth remains buoyant. The projected debt-to-GDP ratios remain higher than prior to the crisis, pointing to a permanently lower resilience of the Armenian economy to exogenous shocks. 12. Monetary policy has followed the inflation targeting regime of the CBA. With inflation decelerating to below the CBA's target band (year-on-year CPI inflation of 4 percent + 1.5 percent), the policy interest rate was lowered by 50 basis points to 8 percent in September 2011. The rate remained unchanged until August 2013, when the CBA increased it by 50 basis points to 8.5 percent, in order to mitigate second round inflationary effects associated with the increase of gas and electricity prices. C. Macroeconomic Outlook 13. GDP Growth is expected to converge to 5 percent from 2015 onward. Economic activity slowed down in 2013, reflecting tighter fiscal policy and a softening in construction, agriculture, and services. Higher utility prices will depress growth further, along with slower growth in the EU and 4 Russia. The medium-term recovery is predicated on strong reforms and pick-up of investment that would boost industry and modern services. Manufacturing could be the major growth driver as the government's industrial development strategy focuses on developing several manufacturing sectors for better export performance. Over the medium term, the fiscal envelope is expected to expand by a return to trend of capital spending, which could support growth and crowd in private investment. 14. The current account deficit is expected to improve by around 4 percentage points during 2013-2016, reaching its estimated sustainable position. This improvement is predicated on the industrial development and export promotion policies which would lead to faster growth of tradable sectors, continuing growth in remittance inflows, and higher FDI in the medium term linked to further structural reforms. Growth of exports, particularly mining and food products should continue to be strong, with support from a more flexible dram, gains in the Russian markets, greater air connectivity, and infrastructure improvements. Imports are projected to increase more moderately. 15. Inflation is likely to remain around 6.3 percent in 2013-2014, reflecting the recent increase in food and energy prices. However, moderation in growth and food prices will ease domestic pressures on inflation which is expected to stabilize around the CBA's target band of 4 percent + 1.5 percent in 2015 onward as a result of a narrowing current account deficit. In this case, the CBA will bring down its interest rate to adopt a neutral policy stance. 16. Fiscal consolidation, which was largely a result of reducing capital expenditure to a rather low level, is not sustainable. Protection of social spending is important to alleviate poverty, but continuous overlooking of capital spending may undermine growth prospects. It would also put additional pressures on the state budget, when underfunding of rehabilitation of infrastructure leads to higher maintenance costs. To balance the need for adequate capital funding with fiscal consolidation and pro- poor stance, the government needs to continue reforms in public finance management to ensure efficiency and higher value for money. In this connection, the government intends to introduce a new Public Investment Appraisal System and to further extend the program budgeting principles through developing a system of output indicators to the allocations for capital spending. For the first time since 2008, the government envisages increasing public sector wages in 2014, together with reforms to wages scales and performance pay. This would be a phased wage increase in line with fiscal sustainability and overall macroeconomic stability. 17. The 2012 debt sustainability analysis (DSA) conducted jointly with the IMF identified a low level of debt distress, even after taking into account the private sector debt burden. Armenia's public sector debt is sustainable in light of the current size of the debt stock. Nevertheless, the rapid accumulation of public debt since the onset of the global crisis calls for the pursuit of fiscal consolidation over the medium term. Public external debt was only about 14 percent of GDP at the end of 2008, but reached 39.5 percent of GDP in 2012, and is expected to decline if fiscal consolidation is successful and economic growth remains buoyant. In September 2013, Armenia used the global demand for emerging- market assets to sell its first-ever bonds worth $700 million. The seven-year debt offering sold at a yield of 6.25 percent and carries a coupon of 6 percent. It marked Armenia's access to international capital markets as an alternative source of financing, in view of its upcoming graduation from IDA and other sources of concessional financing from IFIs. 18. The implications from Armenia's recent decision to join the Eurasian Customs Union (ECU) are not yet fully clear. It has put aside the possibility that Armenia can sign the Association Agreement and the DCFTA with the EU which had been envisaged for November 2013. Preparing for Association Agreements with the EU provides countries with a strong anchor for policy and institutional reforms and capacity building, through twining arrangements, legal approximation, regulatory convergence, and market liberalization. It remains unclear how the ECU framework would impact 5 Armenia's reform momentum, external trade, and capital flows in the short to medium term. In any case, joining the ECU will still have an emphasis on technical assistance and convergence in standards, and will bring additional benefits. Most notably, Russia is making natural gas available to Armenia on the basis of its domestic gas price adjusted for transport cost for a period of at least 5 years. D. Poverty, Inequality, and Shared Prosperity 19. Poverty and inequality increased in the aftermath of the 2008/09 crisis. Using the national poverty lines, poverty incidence rose from 27.6 percent of the population in 2008 to 34.1 percent in 2009, 35.8 percent in 2010, and moderated at 35 percent in 2011 (Figure 3).2 The situation worsened in the rural areas where poverty increased from 27.5 percent in 2008 to 36 percent two years later, before decreasing to 34.5 percent in 2011. The share of those living in extreme poverty (that is, below the food poverty line) grew from 1.6 percent in 2008 to 3.7 percent in 2011. Poverty also became deeper and more severe, with a poverty gap of 7.9 percent in 2011 (versus 5.1 percent in 2008) and poverty severity of 2.4 percent (versus 1.4 percent in 2008). Inequality as measured by the Gini coefficient increased on the basis of both consumption (from 0.24 to 0.27) and income aggregates (from 0.34 to 0.37). 20. Female-headed households which represent 24 percent of total households also became more vulnerable to poverty than male-headed households, in particular if they include young children. In the aftermath of the crisis, 35.2 percent of female-headed and 34.3 percent of male headed households were poor (compared with 30.4 percent and 26.6 percent in 2008, respectively). Poverty incidence reached 47 percent among female headed households with at least one child under 6. Figure 3. Poverty Incidence (%), 2008-2011 E 2008 E 2009 02010 E 2011 34-1 35.8 35 3-7 35.7 35.2 34.9 3 34.5 27.6 27.6 27.5 Armenia Urban Rural Source: "Social Snapshot and Poverty in Armenia", 2012, National Statistical Service (NSS). 21. Cross country comparisons using the international poverty line of US$ 2.50 PPP per day shows that Armenia has performed relatively well. Between 1998 and 2011, Armenia's poverty at the international poverty line fell sharply from 70 percent to 30 percent in 2008 and then rose to close to 35 percent in the aftermath of the crisis (Figure 4). Comparing this performance with other CIS countries shows that although Armenia performed better than Georgia and Tajikistan, poverty rates are still quite high as compared to Belarus, Moldova, Ukraine, and Uzbekistan. 2 Based on analysis in the 2012 Social Snapshot and Poverty in Armenia produced by the NSS: In 2011, the general and the extreme poverty lines per adult equivalent per month were estimated at AMD 36,158 (US$ 97.1) and AMD 21,306 (US$ 57.2), respectively. The general poverty line represents the amount of expenditure required to purchase the typical food basket that provides 2,232 calories per day per capita and a minimal amount of non-food items. 6 Figure 4. Poverty Rates at ECA Regional Poverty Line of $2.50 per day 100.0 - 90.0 - 80.0 - 70.0 - 60.0- 50.0- 40.0 - 30.0 - 20.0 - 10.0 - 0.0- 1998-9 2001-3 2005 2006 2007 2008 2009 2010 2011 i Armenia - Georgia -Moldova - Tajikistan - Uzbekistan -Belarus - Ukraine Source: World Bank Staff calculations and NSS data 22. Sharing prosperity, the bottom 40 percent in the distribution income of the population enjoyed strong consumption growth, but were affected by the 2008 global crisis. The Bank's indicator of shared prosperity, i.e., the growth rate of consumption per capita of the bottom 40 percent, demonstrates that economic growth in Armenia benefitted the poor and vulnerable more than the overall population (Figure 5). During 2006-2008, mean real consumption per capita of the bottom 40 percent outpaced that of the population as a whole (6.5 percent versus 5.2 percent). The 2008 crisis eroded the growth in average consumption enjoyed by the bottom 40 percent and the population overall. As a result, cumulatively between 2006 and 2011, the consumption per capita of the bottom 40 percent grew at 0.4 percent per year while that of the population as a whole stagnated overall. Figure 5. Shared Prosperity in Armenia, 2006-20113 8.O% 66.5% 4.0%- M ALL 2.0% O.4% E Bottorn 40 2006--2008 2006--2011 -2-0% - Source: World Bank Staff calculations. 23. Unemployment and low education prevail among the poor and the bottom 40 percent more generally. Those in the bottom 40 percent are more likely: (i) to be out of the labor force or unemployed; 3 This Figure shows annualized average growth in consumption expenditure of the total population (blue bars) and among those in the bottom 40 percent (red bars). 7 (ii) to have less education; (iii) to live in urban areas outside the capital; (iv) to have larger households with more children; and/or (v) to live in households headed by women. Their poverty profile shows a similar pattern. In 2011, poverty incidence among households with no employed members was 41 percent, i.e. 21 percent higher than the national average. Households headed by individuals holding university degrees had, on average, consumption levels that were 24 percent above the consumption levels of households headed by individuals with lower education. Female-headed households are more likely to be poor as compared to male-headed households (35.2 percent versus 34.3 percent). Households with members who had migrated and returned from abroad enjoyed 18-23 percent higher consumption than households with no migrants. Women are also more likely to be unemployed than men, with unemployment rates of 22.3 percent and 17.5 percent in 2011, respectively. Only 55 percent of women aged 15+ participate in the labor market, a figure 24 percentage points lower than for men in Armenia. 24. Armenia is on track to achieve most of its Millennium Development Goals (MDGs) by 2015 (Table 2). The Government's 2012 progress report on meeting the MDGs showed significant gains in eradicating extreme poverty; rapid fall of infant and maternal mortality; virtually full enrolment in primary education, with higher ratio of girls to boys in primary and secondary education; and increased proportion of population with access to safe water sources. However, sustained efforts will be necessary in reducing the number of people living below the poverty line down to the pre-crisis levels, promoting gender equality, and ensuring environmental sustainability. Achieving these targets by 2015 is at the core of the Government's development strategy but might prove challenging in the current global economic environment. Ahead of the post-2015 Global Development Goals, Armenia has adopted new national development goals to be achieved under the ADS by 2025. Table 2. Progress towards the MDGs Current 2015 Attainment Status (2011) Targets by 2015 1. Eradicate extreme poverty and hunger Poverty headcount (below national poverty line) 35 <27 Attainable Prevalence of malnutrition (% of children under 5) 4.7 <1.5 Not likely 2. Achieve universal primary education Primary school enrolment (gross, %) 99 >99 Attainable Primary completion rate (% of relevant age group) 93.1 >99 Attainable 3. Eliminate education gender disparity and empower women Share of women in wage employment in non-agricultural sector (%) 45 >50 Not likely Ratio of girls to boys in primary and secondary education (%) 103 >99 Attainable 4. Reduce child mortality by two-thirds Under five mortality rate (per 1,000 live births) 13.7 <10 Attainable 5. Reduce maternal mortality by three-fourths Maternal mortality ratio (per 100,000 live births) 14 <10 Attainable 6. Halt/reverse HIV/AIDS and other diseases HIV prevalence (% of population ages 15-49) 0.1 <0.1 Attainable Tuberculosis prevalence (per 100,000 people) 3.5 <3.8 Attainable 7. Ensure environmental sustainability Access to improved water sources (% of population) 97.5 >94 Attainable Access to improved sanitation facilities (% of population) 69.6 >82 Not likely Sources: NSS data and Bank staff calculations E. Development Challenges 25. The overarching objective of this CPS is to support the Government's vision for boosting shared prosperity and reducing poverty through accelerated economic growth and job creation. The main binding constraints to achieving these goals are poor labor market outcomes, notably high 8 unemployment and low-paid employment, insufficient coverage and targeting of the social protection systems, and insufficient investment and firm creation that would spur competitiveness and growth. The severe underutilization of labor translates into lack of opportunities, notably for the bottom 40 percent of the population, whose households has fewer people employed and lower earnings. Reversing this trend requires policies that promote equality of opportunities and create an enabling environment for private sector-led job creation. 26. Low labor force participation, which disproportionally affects women, results from few jobs, a skills mismatch, and an underdeveloped job matching system. Relatively few persons of working age are employed, and many of those who are employed have low-productivity jobs. At 53 percent, Armenia's employment-to-population ratio is below the European average of 60 percent. Increasing employment to European average would require creating an additional 166,000 jobs; which in turn could lift GDP by about 8 percent.4 27. Low-productivity employments do not pay enough to lift people out of poverty. Women are particularly affected, given that they earn on average approximately 40 percent less than men. Agriculture employs over nearly 40 percent of workers but accounts for only 17 percent of GDP. Agricultural jobs are of low-productivity. One in five agricultural workers is poor. Although, the poverty rate among workers employed in industry is only marginally lower (18.5 percent), industry is, in general, more productive than agriculture and thus generates higher earnings. Improvements in agricultural productivity and the gradual reallocation of jobs from agriculture to higher value-added activities, notably in manufacturing and modem services, are key to reducing poverty and improving the living standards of the bottom 40 percent of the population. 28. Many of the unemployed have low skills, lacking the technical, occupation-specific skills demanded by employers. Many firms report that inadequate skills constitute an important obstacle to doing business. Individuals with general secondary education - with no technical skills - represent the largest fraction of unemployed workers. But many unemployed do possess technical, occupation-specific skills. For these workers, the challenge then is securing jobs that match their skills. Highly educated workers face a lower risk of unemployment, earn higher wages, and thus, are less likely to be poor. The challenge for the educational system is to identify skills that are required by employers. Moreover, few unemployed use public employment services, but still fewer employers post job vacancies. 29. High unemployment significantly reduces social welfare, impeding poverty reduction and shared prosperity goals. In 2011, poverty incidence among households with no employed members was 41 percent, i.e. 21 percent higher than the national average. Unemployment is pervasive. The augmented unemployment rate, which takes into account persons of working age who are available for work, but are not actively looking for jobs, is about 30 percent. Unemployment is particularly high among youth; it affects over 38 percent of persons aged 20-24, and the augmented unemployment rate in this category reaches 49 percent. According to international experience, the youth unemployment rate is about twice as high as the total unemployment rate, and Armenia is no exception. The high youth unemployment rate reflects the difficulty of school-to-work transition and of entry into the labor market, and the likelihood that young workers change jobs more frequently than older workers. Gender differences in labor force participation and unemployment represent a broader set of gender inequalities on other dimensions (Box 1). 4 This estimate assumes that the labor's share of national income is 60 percent and that the productivity of newly created jobs is the same as that of existing jobs. As such, it is likely to provide a lower-bound estimate of the income gain because newly created jobs tend to be more productive than existing ones. 9 Box 1. Key Gender Issues Over the past decade Armenia has made progress in many gender-related aspects, notably in ensuring equal access to basic social services. Overall education and health outcomes show little or no gender gaps. Gender disparities remain, however, in endowments, access to economic opportunities, and women's voice and representation. The labor market displays the most notable gender inequalities. Only 55 percent of working age women are in the labor force, compared to nearly 80 percent of working age men in the labor force. The overall high unemployment rate in Armenia also masks a gender difference, with 17.5 percent of men and 22 percent of women unemployed. Among those working for pay, women's average monthly earnings are only 60 percent of men's. More effort remains to be made to improve women participation in the labor force and thereby raising their economic levels. Demographic patterns also reflect gender inequalities. In the population as a whole there are more women than men, reflecting higher female life expectancy and greater outmigration by working age men. Reflecting these patterns, nearly 40 percent of households are headed by women. Among children, unlike adults, boys outnumber girls. Between 2006 and 2012, about 115 boys were born against 100 girls. This is unusual since in most parts of the world roughly equal numbers of boys and girls are bom keeping the sex ratio at birth close to 100. Research suggests that this unbalanced sex ratio at birth reflects a preference for sons over daughters. Institutional structures supporting gender equality exist but need further strengthening. In February 2010, the Government adopted a Gender Policy Strategic Action Plan for 2011-15 which aims to promote gender equality; safeguard equal conditions and opportunities for men and women; ensure their equal participation in all aspects of social life; eliminate gender-based discrimination; and protect against gender-based violence. Implementation of this policy remains the challenge. In 2012, the Government introduced gender councils in all regional and municipal administrations, and the Ministry of Labor and Social Affairs developed criteria and guidelines for introducing gender-disaggregated monitoring system in the public sector. A more comprehensive system to advance gender equality will be instituted and a wider dialogue will emerge about gender equality in all spheres, including education, health, labor markets and institutions. In addition, a recent study highlights the need for strengthening civil society organizations working on gender equality and women's rights. Sources: "Armenia Country Gender Diagnostic", 2013, World Bank; and "Country Gender Assessment", 2010, USAID. 30. Armenia needs to foster job creation, particularly in the formal sector of the economy. However, the pace of job creation in the formal sector is slow and has not kept pace with the growth of the working age population, leading to growing unemployment and a decline in the already low employment rate. Sustained economic growth prior to the global financial crisis did not produce a sufficient number of new jobs; instead, gains in labor productivity led to rising wages. The construction boom prior to the crisis translated into employment growth, but proved unsustainable. To date, Armenia lacks a critical mass of small, dynamic and job creating enterprises. New, small firms led job-creation in the years ahead of the crisis, according to the Business Environment and Enterprise Performance Survey (BEEPS) data. As new business registration fell in 2008 and 2009, job creation in Armenia has become more challenging. 31. The model that produced growth and poverty reduction prior to the 2009 crisis was unsustainable. Looking ahead, growth must be broader based and led by tradable sectors capable of creating jobs for the large number of-mostly young-unemployed Armenians. New drivers of growth will have to be industry and modem services competing in international markets, coupled with productivity increase in agriculture. Within industry, manufacturing is the most likely sector to create employment. Labor productivity is significantly higher in manufacturing than in, for example, agriculture, and its production technology is much more labor intensive than that of heavy industry and modem services. Manufacturing is therefore rightly targeted in the ADS as the sector in which high quality, decently paid jobs will be created. Likewise, agriculture is targeted as a means for improving living conditions in rural areas. With 36 percent of the population residing in rural areas, agriculture is the main livelihood of rural communities. It provided employment to more than 40 percent of the country's active population, including 75 percent in rural areas. Higher productivity in this context means higher growth 10 and faster poverty reduction in both urban and rural areas. While manufacturing and services will strive to absorb the excess labor in rural areas, agricultural will need continued support to increase productivity. Across these sectors, a tremendous amount of mobility needs to take place to transit workers from low- pay and low-productivity jobs to high-pay and high-productivity ones. 32. Fighting corruption in public administration is another development challenge. This battle entails tackling the lax practices in tax and customs administrations and the inadequate enforcement of conflict of interest regulations. The challenge also is to address issues of market dominance and its abuse in all markets, including those in which oligopolistic structures might prevail. This undermines the capacity to share prosperity. For Armenia to tap its significant investment and growth potential, breaking the nexus among oligopolistic control, low tax collection, and lack of competition is central. Conflicts of interest also hinder competition. Close connections between large firm groups and elected officials pose challenges to the management of conflicts of interest. 33. The 2013 Country Economic Memorandum on Growth (Armenia: Accumulation, Competition, and Connectivity) suggested a combination of four factors to boost job creation. First, higher investment and better financial intermediation between savers and investors. Second, better utilization of the labor force, including women, the youth and the largely untapped resource of Armenians abroad. Third, stronger competitive pressures in the markets for goods and services, which will improve incentives for companies to innovate, adopt new technologies, and become more efficient. Fourth, enhanced connections of the landlocked Armenian economy with world markets, including through land, air, and through internet and communication technologies. 34. Fiscal space will be more limited going forward; but social programs need to be protected and strengthened. The Government responded to the economic crisis by a large fiscal stimulus, which increased nominal public spending by 13 percent in 2009 to stimulate the domestic economy and to protect the poor. Despite reduced fiscal revenues, the Government succeeded in protecting its priority social spending programs such as pensions, the Family Benefit Program (FBP), education and health expenditures. The protection of public spending on these programs, as well as improved targeting of FBP, helped avoid worse poverty outcomes. The programs proved to be effective instruments to address poverty and played a more enhanced role in the aftermath of the crisis (Figure 6). This is evident from what the levels of poverty would have been in the simulated absence of these transfers before and during the crisis. In 2008, before the impact of the crisis was felt, poverty incidence would have been 43 percent without both FBP and pensions, as opposed to the actual 27.6 percent. In 2011, on the other hand, poverty would have gone from the actual 35 percent to over 53.2 percent in the absence of these social protection transfers. Figure 6. Impact of Social Transfers on Headcount Poverty (Poverty incidence under different circumstances, %) GO - 9651.7 51.9 51.2 40 -3.T3 3 0 -0 9 20 - 10 a 2008 2009 2010 2011 m With SP m Without Social Assistance Without Pensions N Without SP Source: "Social Snapshot and Poverty in Armenia", 2010, 2011, 2012, NSS 11 35. Despite the positive steps taken to protect environmental and natural resources over the past decade, environmental management remains a concern in Armenia. Multiple problems with respect to air, water, soil pollution, and threatened ecosystems have kept the environment in a critical state, thus impeding economic growth, increasing the threats to livelihoods, and contributing to the vulnerability of the population. Despite efforts to strengthen the institutional response to environmental issues and build capacity through the Ministry of Environment, there remain legislative and policy gaps, poor or nonexistent enforcement systems, and major investment needs in the sector. 36. Climate change poses great development challenges to Armenia because it is inextricably linked to economic growth, poverty reduction, and environmental sustainability (Box 2). Over recent decades, Armenia's climate has changed with average higher temperatures and lower precipitation, as well as more frequent extreme events including droughts, floods, and cyclones. The Government's strategy is to improve and strengthen climate resiliency of the sectors most affected by climate change. In this connection, the Authorities assessed the socioeconomic impacts of climate change with regard to agriculture, energy, and forestry; and developed policy recommendations and measures with UNDP support. Major challenges remain, however, to promote the best available climate adaptation and mitigation policy measures, and build institutional capacity for their implementation. Box 2. Climate Change Vulnerabilities The adverse impacts of climate change are expected to worsen in the future. As a result, the challenges to agriculture will become more acute. According to the national climate scenarios forecast, over the next century, Armenia's average annual temperature will increase by 4.5' C in the lowlands and 7' C in the highlands. Average annual precipitation is expected to decrease by as much as 9 percent. The biggest reductions are predicted for Yerevan and the Ararat Valley, which can expect 30 percent less precipitation by 2100. Higher temperatures will lead to more evaporation, which means less soil moisture and drops in rivers flow by as much as 24 percent. These losses will reduce the availability of water for agriculture and power generation. In turn, most crop yields will be lower; livestock will experience increased heat stress; and conflicts over increasingly limited water resources will increase. Given their limited ability to adapt to climate changes and the existing adaptation deficit, the rural poor will be the most vulnerable. Climate change impacts thus threaten to undermine the progress that has been made in reducing poverty by aggravating food insecurity and slowing economic growth in vulnerable areas. II. GOVERNMENT'S VISION A. Armenia Development Strategy 37. Armenia's long-term development vision is articulated in the Armenia Development Strategy 2025. This vision sees Armenia as a middle-income country achieving a per capita income in excess of US$10,000 by 2025 (i.e. three times higher than its 2012 level). It projects an ambitious annual GDP growth rate of 6.4 percent and mainstreams employment creation as the key engine for improving living standard and reducing poverty, and the main priority for the next five years. 38. The ADS is built around four pillars: creating jobs, developing human capital, strengthening social protection system, and modernizing public administration and governance. The priorities for each pillar are as follows: * Employment expansion through high-productivity and decently paid jobs. * Enhancement of human capital through better access to quality services, including healthcare, education, culture, and basic infrastructure. * Improvement of social protection through higher efficiency, including improved targeting, of existing systems to ensure financial sustainability. 12 * Modernization of public administration and governance, through increased efficiency of the state, improved quality of and access to public services, increased transparency of decision-making and accountability of public spending, and fight against corruption. 39. The ADS specifies a set of policies to achieve the overarching objectives. Different instruments of monetary, fiscal and social policies will be channeled to address the employment expansion objective. This will be achieved through ongoing structural reforms with the following main priorities: * Stepping up both productivity increase and employment growth, specifically in export-oriented activities, as the main drivers of economic growth. * Increasing external competitiveness, by improving the business climate, ensuring fair competition and economic diversification. * Improving access to credit, notably for SMEs, to diversify options for reducing unemployment. * Making strategic reallocations in the structure of public spending aimed at enhancing human capital creation and improving Armenia's skills base. * Ensuring fiscal, social, and environmental sustainability through fiscal consolidation, infrastructure maintenance, maintaining pro-poor spending and improving targeting of social assistance, and environmental safeguards. 40. The Strategy is operational. It provides an annual breakdown of macro-fiscal projections for the next five years (2013-2017) and more aggregated targets for main economic parameters up to 2025. To further operationalize it, the Government prepared a more detailed Medium Term Expenditure Framework (MTEF) for the first five-year phase, which aims at maintaining the debt-reducing level of fiscal deficit below 2 percent of GDP and lowering the current account balance to 4.6 percent of GDP by 2017 (Table 3). Table 3. Selected Outcome Indicators of the ADS Baseline 2017 2021 2025 2011 Real GDP (annual percent change) 4.7 6.4 6.4 6.5 Per capita GDP (US$) 3,363 4,326 6,486 10,064 Fiscal deficit (% of GDP) 3.1 2.1 2.1 1.9 Current account balance (% of GDP) -11.0 -4.6 -5.8 -0.6 Job creation in non-agriculture sectors (4 years) 100,000 100,000 101,000 157,000 Formality in non-agriculture (% of total jobs) 73 78 81 83 Poverty headcount (% of population) 35 23 18 14 Source: Armenia Development Strategy 2025 41. The ADS aims to develop a new and more sustainable growth path for the economy after the setback of 2009. To meet its new growth targets, Armenia needs to enact policies to restore headroom for macroeconomic policy maneuvering and, at the same time, to engineer a shift in the economy toward tradable sectors. Fiscal policies aim to reduce the fiscal imbalance and anchor the public debt around 37 percent of GDP from 2014 and thereafter; monetary policy to ensure low inflation; public financial management reform to increase revenue collection, strengthen macroeconomic stability, and improve public sector performance and service delivery; and financial sector reform to increase national savings and access to finance. External sector policy focuses on increasing capital inflows to finance growth and foreign reserve accumulation to buffer potential vulnerabilities. These measures would also strengthen Armenia's capacity to access capital markets and diversify its sources of financing, given its upcoming graduation from concessional financing from IDA and other international financial institutions. 13 42. Aggressive implementation of productivity enhancing structural reforms that help promote private investment, SME development, competition and economic diversification would reinforce macroeconomic measures, such as the needed fiscal consolidation. These policies would help maintain investment around 28 percent of GDP over the medium-term, of which 15 percent would come from Government and 85 percent from private investment. Such level of investment is necessary to achieve the ADS's ambitious GDP growth targets which are projected 1.3 percentage points above the baseline trend. The Government agreed that the path is challenging, but argues that setting such ambitious goals is necessary to trigger more aggressive reforms in order to meet the country's development objectives (Figure 7). Figure 7. Growth Rate Projections - ADS vs. Baseline (Real GDP growth, %) 20 15 10- 5 0 2007 200 20 01 2011 2012 2013 2014 2015 -5- -10 -15 -20- - Actual / baseline - Armenia Development Strategy 43. The Strategy forecasts critical risks with the potential to change the projections at the basis of the macro-economic scenario. These risks pertain to the global economic environment; the private sector supply response to the improvements in Armenia's investment climate; the optimism of the growth projections, which require pursuing a strong agenda of structural and sectoral reforms, the implementation of which could be constrained by Armenia's weak institutional capacity and governance systems; and the elasticity of poverty reduction to the proposed export-led growth strategy. The fiscal headroom will remain low and this would limit the possibility of further counter-cyclical policies in case of new external shocks. B. Key Structural and Sectoral Issues 44. The ADS acknowledges that higher growth would require increased investment and total factor productivity which, in turn, could only be achieved through structural reform. Accordingly, the Strategy examines the constraints to growth and employment creation sector by sector; identifies policy, legal, and institutional reforms for completion in the medium to long run; and proposes entry points for short-term actions. It also identifies cross-cutting governance issues that adversely affect growth and labor market outcomes, noting the need to fight corruption and improve the business climate. (i) Fostering Competitiveness and Job Creation 45. To promote sustainable employment, the ADS identifies three cross-cutting issues and five specific sectors to be targeted for direct policy interventions. The former includes macroeconomic stability, international competitiveness, and business and investment climate. The latter consists of industry and export promotion, tourism development, information and communication technology (ICT), agriculture and rural development, SME development and access to finance. The Government's employment strategy also contains measures that focus on labor market policies, institutions, and regulations; education and skill development; and social protection. These reforms address constraints to job creation and bottlenecks in skills formation and in the enabling regulatory environment. They are 14 expected to boost private sector-led growth and job creation. To complement these structural measures, major investments are also required to upgrade Armenia's key infrastructure and transport networks. 46. SMEs are the main engine of growth and employment creation in Armenia. During 2008- 2011, they created over 100,000 jobs and accounted for about 40 percent of GDP. Under the ADS, the Government plans to increase their value added to 60 percent of GDP by 2025. This will require pursuing an ambitious reform agenda focusing on the improvement of the business environment, rules-based regulatory and governance institutions, fair competition, improved legal and court systems, better access to finance and skilled labor, and a range of reforms in specific sectors such as agriculture, utilities, logistics, transport, and ICT. Support to women entrepreneurs will also be key. (ii) Developing Human Capital 47. The ADS sets out appropriate goals for the health and education sectors. Improving efficiency, equitable access, and quality of these services remain a priority and go well beyond the objective of supporting growth. These are essential to equalize opportunities among various parts of the population, reduce the potential of conflict and, ultimately, maintain an equitable society. 48. The ADS health objectives are threefold: (a) to improve health outcomes by reducing mortality and morbidity, with a focus on the poorest segment of the population; (b) to protect households against high out-of-pocket payments for health care, by ensuring that people do not face medical expenditures that are either "impoverishing" to drive them below the poverty line, or unaffordable as a result of an episode of ill health; and (c) to ensure efficient and fiscally sustainable service delivery. In addition, the government will continue improving the financing mechanisms of medical care. In particular, the system of co-payment financing introduced in 2011 will be further developed and deepened; the compensation mechanisms for hospitals will be improved to make a gradual transition to more effective disease management and financing; and their governance and accountability systems strengthened. 49. In education, the ADS objectives aim at developing relevant skills needed for economic growth and job creation. The five-year sector development strategy adopted in July 2011 support improvement in all levels of education. However, during the ADS's first-phase (2013-2017), efforts will be focused on vocational training and higher education, which will be enhanced in accordance with the provisions of Bologna and Turin Treaties which Armenia joined in 2005 and 2010, respectively. This will help address the existing gaps between the education outcomes and skills requirement of Armenia's evolving labor market. (iii) Strengthening Social Protection System 50. Public spending on social protection and improved coverage and targeting of social safety net programs will continue to play a key role in mitigating poverty and inequalities. In response to widespread vulnerability as a result of the global economic crisis, coverage and targeting for the Family Benefit Program (FBP), Armenia's flagship social assistance program, and other social safety net programs, as well as the implementation of the mandatory funded pension system introduced in 2012 will remain the focus of Government's interventions under the ADS. 51. A key feature of these programs will be a gradual transition from the provision of predominantly monetary assistance to the delivery of more comprehensive social services packages based on beneficiaries' needs, designed to target better the bottom 40 percent, expand their capacities and opportunities while promoting greater inclusion in the labor market. In addition, given the multiplicity of social protection services offered, the government aims to provide integrated delivery of 15 services by introducing new social case management practices. Independently operating public employment, pension, and social assistance agencies will be integrated and underpinned by one-stop-shop approach. The government began piloting three integrated social services (ISS) centers in 2013. By 2017, all of the country's 54 social services access points are expected to operate as integrated centers. (iv) Modernizing Public Administration and Governance 52. Under the ADS, the Government plans to modernize and enhance productivity of public services through reforms on three tracks: (a) fighting corruption and conflict of interest in the public sector; (b) reforming and rightsizing the civil service, introducing merit-based systems of recruitment and promotion, increasing salaries and incentives, streamlining the redundant regulations of the public administration through the regulatory "guillotine" exercise; and (c) modernizing the custom and tax administration, the financial inspection/supervision system, the Public Finance Management (PFM) system, and the judiciary system. Progress will be monitored through a cluster of six indicators for assessing public administration developed by the World Bank and widely used for international comparisons. The targeted values under the first phase of the ADS, to be met by 2017, are equal to the average indicators for Eastern European and Baltic States in 2010 (Table 4). Table 4. Public Administration Main Target Indicators (Percentile Rank 0-100) Voice and Political Government Regulatory Rule of Control of Accountability Stability Effectiveness Quality Law Corruption Baseline 2010 26.1 47.2 49.8 58.4 39.8 30.6 2017 64 57 62 69 60 58 Targets 2021 75 70 75 80 70 70 2025 90 80 90 90 80 80 Source: Armenia Development Strategy 2025 53. The Government is committed to revamp its anti-corruption policy and institutional framework which has been in place since 2003 and was updated in 2009. This update intended to build on the results and organizational framework established under the 2003-2007 strategy and action plan, which comprised an Anti-Corruption Council and an Anti-Corruption Strategy Implementation Monitoring Commission. However, engagement of civil society was very limited. Sufficient resources were not allocated to support the new action plan; and, without clearly defined responsibilities and functions, it was not fully owned across ministries, and by lawmakers and the public at large. As a result, there has been poor accountability of its implementation and lack of clearly defined responsibility for results. 54. The Government is determined to improve its revenue performance. At approximately 22 percent (including social security payments), Armenia's tax-to-GDP ratio in 2012 was lower than those of most ECA countries at comparable income levels. Armenia's tax productivity-defined as the ratio of tax collected to GDP divided by the statutory rates- has been below regional averages even during periods of high growth. This lower ratio is the result of narrow tax bases with numerous tax exemptions and weak capacity to detect and penalize tax frauds. Moreover, compliance costs for taxpayers remain high which have negative implications on private sector development in the formal sector. Under the ADS, the Government plans to improve tax administration and step up revenue collection by 0.3-0.4 percentage points of GDP annually in order to raise the tax/GDP ratio up to 23.7 percent by 2017, 25 percent by 2021, and 25.3 percent by 2025. 55. The Government will accelerate the implementation of its 2010-2015 PFM reform strategy. This strategy identified three major phases for advancing PFM reforms in the medium term. During the 16 first phase, the strategy prioritized acceleration of reforms in the lagging areas of the downstream PFM elements: internal control, internal audit, and fiduciary control. The strategy then envisaged further deepening the policy orientation of budgeting and advancing public sector accounting reforms. It further suggested integrated management of the PFM system under the Government Financial Management Information System (GFMIS) umbrella. Implementation of the strategy will be accelerated in line with identified priorities and sequence. A separate strategic development plan is currently being implemented by the Chamber of Control with a view to transform it into a modem and professional external audit body of the public sector. III. WORLD BANK GROUP PARTNERSHIP STRATEGY A. Lessons Learned from Previous CPS and Stakeholder Feedback Lessons from the CPS Completion Report5 56. Overall, the WBG was successful in helping Armenia weather the impact of the 2009 global crisis and position itself for sustained growth. Robust growth in 2012, prudent monetary policies, subdued inflation, ongoing fiscal consolidation, and a sustainable public debt allow a cautiously optimistic medium-term outlook. The impact of the crisis on the poor was well managed. The poverty level would have been much higher had the government not sustained the targeted social spending in the scarce state budget. CPS-supported measures strengthened governance and PFM, enhanced the transparency and accountability of the public sector, and improved the performance of the judicial system. Significant progress was made towards four other key goals of the CPS program: (i) fostering the e- economy and technological progress; (ii) supporting competition and private sector development; (iii) improving road, energy, irrigation, and water infrastructure; and (iv) human capital development. 57. The CPS design should be flexible enough to enable timely adjustments to evolving country needs and changing economic environment. Indeed, the design of the CPS FYO9-13 reflected country reality at the time it was written in the midst of the 2009 global economic crisis. Appropriately, the CPS focused on addressing vulnerability and mitigating the adverse poverty effects of the crisis, and strengthening the foundations for medium-term competitiveness and growth. Over the course of its implementation, the country and global economic environment changed and the program adequately adapted to those changes. The mid-term CPS Progress Report extended by one year the original FYO9-12 CPS duration to align with Armenia's political cycle; updated the outcome targets on the basis of progress made so far, evolving country circumstances, and feedback from the Government and other stakeholders; and increased proposed WBG financing and advisory services. The Progress Report also dropped 31 of the 65 original CPS result indicators and added 15 new ones for a total of 49. 58. Well focused projects enable more efficient implementation and more effective delivery of results. Virtually all the investment projects financed by the Bank had a well-defined focus geared to specific results on the ground. This helped overcome inherent coordination problems among line ministries and increased flexibility when responding to needs and implementation constraints. The use of additional financing helped scale up engagement in success areas. Ten Additional Financings represented 38.5 percent of the 26 operations approved by the Board during FY09-13. This lesson will be applied in the new CPS, which would consider additional financing or follow-up of successful projects that are aligned with its priorities. 5 The draft Completion Report on the CPS FY09-13 is provided in Annex 2. 17 59. A strengthened focus on institutional capacity building and a better selectivity of performance indicators will drive the new partnership with Armenia. Capacity constraints are identified more clearly and will be mainstreamed in the country program. Informed by upfront institutional assessments, extensive recourse to IDF/TF support for capacity building and technical assistance, and just-in-time AAA will help accelerate the implementation of the program and achievement of results. The new CPS also benefitted from more realistic assessment of outcome indicators, excluding indicators not entirely attributable to the Bank-supported program which may otherwise prove difficult to achieve and may overstate the role and impact of the Bank on progress towards country goals. 60. Learning from experience, the Bank should step-up its role in fostering consensus on reforms. Inevitable political tensions and distrust of Government can be mitigated by information and communication with stakeholders. The use of policy seminars with senior government officials, public workshops, dissemination of analytical work through Internet and the media, consultation of project beneficiaries, information of the Parliament, disclosure of Bank operations are some of the tools used effectively in Armenia to mitigate in part political and program implementation risks. Feedback from the Stakeholder Survey 61. A Stakeholder Survey was carried out in November 2012 to complement the WBG's self- assessed Completion Report on the CPS FY09-13. This survey captured the view of 213 respondents. Its findings support several conclusions from the CPS Completion Report. Respondents noted that economic growth and education were the country's foremost development priorities, and the Bank's role had been determinant in these areas. Governance and anti-corruption, private sector development, and job creation were also considered important; however respondents noted that the WBG track record in these areas had been below expectations. Lending, technical assistance, and knowledge services were seen as the WBG's greatest strength, but the speed of processing its operations as its greatest weakness. More than a quarter of respondents believed that the Bank should offer more innovative knowledge services. This was as important to respondents as reducing the complexity of lending procedures. Nearly a third of respondents reported that one of the main reasons for policy failure or slippages were due to inadequate level of citizen participation. They indicated a need for listening to citizens, increasing stakeholder participation and outreach, and providing knowledge and advice, as being central to doing development better. B. Current World Bank Group Program 62. The World Bank's active portfolio in Armenia consists of 14 operations with a total commitment of US$ 445.4 million, of which US$ 210.9 were undisbursed as of September 3, 2013. Disbursement remains satisfactory with a disbursement ratio at 32 percent as of end FY2013. Annex B.2 provides an overview of the current portfolio. It includes five investment lending operations in infrastructure (transport, electricity, water, and irrigation), four in social sectors (health, education, social protection, and social investment fund), three in public sector (judicial reform, public sector modernization, and tax administration), and two in sources of growth (ICT and agriculture). Implementation of all Bank projects is satisfactory and there is no project at risk. A Country Portfolio Performance Review (CPPR) was carried out in June 2013 to assess the portfolio performance and identify cross-cutting and project-specific issues affecting implementation. 63. Knowledge services will continue to inform investments and policy dialogue and provide the analytical underpinning of future lending under the CPS. Ongoing programmatic works support the policy dialogue on debt and fiscal consolidation, poverty and gender, social protection, and financial sector stability. The 2012 Joint Bank-IMF Financial Sector Assessment Program (FSAP) underpins the 18 ongoing financial sector development strategy. Strategic works are also in progress on education sector, with a view to defining the priorities for public policy to support innovation and skill development; and on environment, with a focus on mainstreaming environmental sustainability in the mining sector. In addition, an approach to gender-informed projects is mainstreamed through Portfolio Gender Reviews. Moreover, an active program of TF operations totaling US$ 18.2 million is co-financing ongoing projects as well as providing sector diagnoses and strategies that underpin the Bank's dialogue and possible interventions (Annex 4). 64. Building on the successful expansion of IFC's investment activities during the previous CPS period, the IFC's committed investment portfolio as of the end of FY13 stood at US$ 146.5 million in 29 projects with 12 clients. IFC operations in the financial sector include provision of short-term liquidity (such as trade finance), risk management products, and advisory services to help banks better manage portfolios and non-performing loans. IFC provides financial and advisory support to banks to extend access to finance to micro, small and medium-sized businesses and for investment in sustainable energy. IFC is engaged in the development of housing finance in the longer term through advisory and investment services. IFC supports creditworthy and transparent investment clients in sectors that can contribute to sustainable long term growth and economic diversification, for example in mining, agribusiness, and real estate. IFC also contributes to the country's economic competitiveness through advisory work to improve the investment climate and decrease the costs of doing business, with a particular focus on the agribusiness sector C. Indicative Program of Support FY2014-2017 65. In line with the WBG's twin goals, the new CPS for Armenia supports the Government's over-arching objective of job creation. Within this framework, there are two clusters of outcomes targeted (Figure 8), based on where there is a clear line of sight between the Bank's support and its contribution towards boosting shared prosperity and reducing poverty: (i) Supporting competitiveness and job creation. The CPS focus is on removing the most binding constraints to private sector led sustainable growth through strengthening competitiveness which in turn supports job creation. In Armenia, employment creation is expected to foster income growth of the bottom 40 percent of the population. This is where the greatest leverage will come from the World Bank Group given the key role that IFC plays in supporting private sector-led growth; and (ii) Improving efficiency and targeting of social services. The CPS aims to consolidate development progress to date in areas where outcomes and results have been achieved in reducing poverty and improving the impact of social services. These areas are social protection, education and health where ownership and implementation capacity are already strong. The Bank will build on its current portfolio with the focus on improving access by the bottom 40 percent of the population. 66. Improving governance and anti-corruption (GAC) measures in public services is a cross cutting theme. In Armenia, governance challenges deter private investment and hamper job creation, while at the same time weaken the impact of public services. The focus area of the Bank's future work is to consolidate public administration modernization through e-governance applications which would reduce opportunities for corruption and improve access to services by the population. This would contribute to creating an environment where public services can have greater impact, through being delivered in a more efficient, cost-effective and sustainable manner. In addition, based on the findings of the gender diagnostics, selected activities under the first two clusters include a focus on gender dimensions with the goal of promoting women's economic and public participation. 19 67. The CPS exercises selectivity in three fundamental ways: (i) Concentrating the focus and prioritizing resources of the new lending program on the first cluster of outcomes - supporting competitiveness and job creation - which will also maximize the synergies between the Bank and IFC. The line-of-sight objective is to address the most binding constraints to private sector-led growth through strengthening competitiveness, facilitating investment and the creation of new firms, which in turn will increase economic opportunities and foster income growth of the bottom 40 percent of the population. Over 83 percent of the WBG indicative new lending program will target these outcomes. (ii) Consolidating the progress achieved to date by the Bank's program on the second cluster of outcomes - improving the impact of social services. The line-of-sight objective is to continue targeting the well-being of the bottom 40 percent through improving health and education outcomes and continue strengthening the social protection system which has played an important role in mitigating poverty. (iii) Eight out of 12 operations are either additional financing or repeaters of ongoing projects which have achieved good results to date and where ownership and capacity are strong. These operations are encompassed in the two clusters where the Bank will continue to implement on-going projects during the time-frame of this CPS and where it will provide further selective support to the proven strong implementation of the programs where there is good absorptive and management capacity. From FY15 onwards, the Bank's program will become significantly more focused with 4 operations planned for FY15 and just 3 planned annually for FY16 and FY17. 68. To provide flexible support, the CPS mid-term review will provide an opportunity to consolidate the focus further and revisit the mix of instruments if necessary. Moreover, whenever appropriate, the WBG will continue to leverage support from other donors and private sector financing. Lastly, the CPS is aligned with Armenia's political cycle and overlaps with the first phase of the ADS launched by the newly-elected Government. Instruments of Engagement 69. IBRD/IDA support for the CPS period FY14-17 is estimated at $683.5 million. Armenia has the potential for graduation from IDA by the end of the IDA16 Replenishment period, depending on continuing per capita performance and growth. Therefore, no assumption is made for FYl5-17 as this is part of IDA17 and will be decided in that context. IBRD lending will depend on how government demand and performance evolve in the course of the CPS period, and on IBRD's lending capacity and demand from other borrowers. Actual resource allocations will be determined on the basis of annual programming exercises carried out jointly with Government. Subject to these considerations, indicative IBRD commitments would be $599 million over FY14-17. The proposed instruments will include budget support, investment lending, analytical work, just-in-time policy advice, trust funds, as well as advisory and investment support to the private sector. Knowledge services will underpin investments and policy dialogue and will provide the analytical building blocks for future lending under the CPS (Annex B-4). 6 Armenia has access to unused IDA16 resources estimated to SDR1O.6 million and an indicative IDA allocation of SDR 35.3million for FY14. The final FY14 allocation may vary depending on: (i) total IDA resources available, (ii) the country's performance rating, GNI per capita, and population; (iii) the terms of IDA assistance and the allocation deductions associated with MDRI annual debt service foregone; (iv) the performance, other allocation parameters, and IDA assistance terms for other IDA borrowers; and (v) the number of IDA-eligible countries. Also, IDA allocations are made in SDRs based on performance. While the US dollar equivalent amount is provided at the exchange rate of US$1.50233/SDR, the final exchange rate for each operation depends on the applicable prevailing rate at the time of approval. 20 Figure 8. WBG Strategic Response to Government's Vision OVERALL GOAL Accelerating Growth, Reducing Poverty, and Boosting Shared Prosperity Cluster of Outcomes I: Cluster of Outcomes II: Supporting Competitiveness and Job Improving Efficiency and Targeting of Creation Social Services Lending Program (IBRD/IDA $542m; IFC Lending Program (IBRD/IDA $121.5m): $160m) * Education Quality and Relevance II * Development Policy Loan * Social Protection Administration II * Agriculture Resources & Supply Chain II * Disease Prevention and Control II * Long Term Export Finance * Social Investment Fund II * Electricity Supply Reliability AF * Trade Promotion & Quality Infrastructure * Road Network Improvement AF * Tourism Economy & Infrastructure Dev't * IFC Projects with Private Sector Cross-cutting Theme: Improving Governance and Anti-corruption Measures in Public Services Lending Program (IBRD $20m): * Public Sector Modernization 70. IFC plans to maintain a strong investment program of around $40 million per year plus additional trade finance volume of up to $30 million, subject to market demand and the availability of viable investments. In addition to ongoing financial sector support, IFC will aim to grow its real sector portfolio through investments in competitive sectors such as mining and agribusiness, and will continue to seek opportunities to promote investment in sustainable energy, mobilizing additional investment from partners where possible. Implementation of existing advisory programs will continue; new programs may be developed during the CPS period depending on demand. 21 Box 3. DPL Indicative Reform Areas 71. A Development Policy Lending Strengthening Competitiveness (DPL) series will help the government 9 Improve the business environment and enhance competition reduce poverty and promote shared 0 Promote industrial development, trade facilitation, and exports prosperity through private sector-led 9 Develop the financial sector and increase SME access to credit job creation. The DPL will support Enhnncing Socinl nnd Environmental Sustninnbility institutional and policy reforms aimed at 0 Strengthen social protection systems, especially coverage, strengthening competitiveness; targeting, and integrated service delivery enhancing fiscal, social and * Improve financial and technical sustainability of drinking water, environmental sustainability; and irrigation, and road asset management improving efficiency and transparency of * Improve the legal framework for social and environmental public administration. These measures impact assessments in the mining sector are aligned with the CPS and reflect the Improving Efficiency and Trnnspnrency of Public Administrntion Government's comprehensive reform * Fight corruption and conflict of interest in public sector agenda and its aim to use development " Mobilize tax revenue policy lending to drive change (Box 3) * Reform the civil service * Promote e-gove vcance 72. The DPL has been prepared in coordination with the tMF and is central to help maintain macroeconomic stability. The new series builds on the previous DPL series (2009-2012) which supported measures aimed at mitigating the effects of the global crisis and lay the foundations for post- crisis growth. In addition, the ongoing Tax Administration Modernization Project (TAMP), a planned PFM support, and a strong AAA program will contribute to the achievement of this outcome. Key AAA include the ongoing programmatic works on debt and fiscal consolidation, public expenditure reviews, governent policy notes, institutional and governance review, and a growth study to inform resources reallocation from non-tradable and less productive sectors to tradable and high productive sectors of the economy. IFC's ongoing Investment Climate Reform Project complements these initiatives by streamlining and increasing the effectiveness of regulation in the area of tax administration, specifically in terms of reporting, filing and payment procedures, and through the development of a specific tax regime for SMEs. 73. In addition, the Bank will support macroeconomic monitoring and analysis, particularly on policies to restore the Government's fiscal headroom by balancing the fiscal deficit as the economy recovers, and by prudently managing sovereign debt. Key advice would focus on both expenditure efficiency and equity gains and on strengthening the revenue base through improvements in tax policy and administration. Given the need to enhance productivity, a greater part of public spending needs to be devoted to pro-growth activities. To this end, the Bank would help introduce a sound system of project appraisal, prioritization, execution, and evaluation to ensure that money goes to projects with the highest economic rate of return. In view of Armenia's access to capital markets aimed at diversifying its sources of financing, the Bank will provide assistance on related risk mitigation and debt management practices. First Strategic Cluster: Supporting Competitiveness and job Creation 74. The CPS will support private sector-led growth and job creation given the evidence-based importance that job creation has on poverty reduction. As previously mentioned, the bulk of the financing program will be directed at this cluster, encompassing the following three engagement areas: (i) improving the business environment and investment climate to remove impediments to strong growth; (ii) improving the rural economy in a sustainable way, thus targeting a significant proportion of the poor and the bottom 40 percent; and (iii) upgrading key economic infrastructure services that are identified as significant to spurring growth. These areas maximize the synergies between the World Bank and IFC, particularly as regards providing a basis for stronger private sector investment through PPPs. 22 Engagement Area 1.1: Improved business environment and investment climate for SME creation, growth, and innovations Line of sight: The CPS objective will facilitate investment and the creation of new firms and jobs, which in turn will increase economic opportunities and foster income growth of the bottom 40 percent of the population. 75. Support to improve the environment for SME development will target appropriate macroeconomic policy, including flexible exchange rate policy, as well as business climate reform, export and investment promotion, corporate financial information and access to finance. Building upon their complementary in clients and services, the Bank and IFC will seek additional opportunities to further strengthen joint work in these areas. Developing SMEs is critical to ensuring a broader growth base, especially as regards improving access to finance for parts of the population who were previously not served by the financial system. 76. The WBG will continue supporting the Government's Action Plan for Improving Armenia's Business Environment based on the Memorandum of Reforms on Doing Business in Armenia. The 2013-2015 Action Plan focuses on areas where Armenia performs relatively poorly according the Doing Business Indicators (e.g., paying taxes, getting electricity, trading across borders, protecting investors). In addition, the Bank will help strengthen the legal framework for enterprise exit and restructuring. This agenda is supported by policy advice under the DPL series, an ongoing IDF grant for capacity building for automation and one-stop-shop for construction permits procedures, and another IDF grant for Guillotine regulatory reform capacity strengthening. IFC's advisory services Investment Climate Reform Project plays a key role here as it aims to streamline and increase the effectiveness of regulation in the areas of tax administration, trade across borders, and inspections, with a cross-cutting focus on food safety and the agribusiness sector. 77. The Bank will help strengthen the competition framework, building upon the momentum of reform adopted in 2012, which empowered the State Committee for the Protection of Economic Competition to address the abuse of market dominance under its enhanced legal framework. To date, actions have focused on retail trade, aviation, fuel sector and pharmaceutical supplies within public procurement, but now efforts need to be expanded to other economic activities. Additional changes to the legal framework are needed to strengthen the definition and assessment of dominance, anticompetitive agreements, and price-related practices; and to increase the number of fines and introduce sanctions on individuals. This will be achieved through TA and policy advice under the DPL and would be supported by programmatic analytical work on the sources and drivers of growth. 78. An active promotion of exports and investments will be necessary to encourage new exporters, facilitate trade for established exporters, and promote FDI in tradable sectors, in addition to efforts aimed at enhancing market access and establishing a business environment that enhances firms' competitiveness. These are areas of high potential employment growth that can contribute to sustainable poverty reduction and shared prosperity enhancement in the country. Armenia has taken an important step in this regard by preparing an Export Promotion Strategy, which needs strong implementation. The proposed Trade Promotion and Quality Infrastructure Project (FY15) would support the achievement of these objectives. Together with IFC's work, this project would further strengthen the supply and quality of analytical and advisory services to businesses for export promotion. 79. Incoming tourism is Armenia's second export after mining and metal industry, and covers more than half of services export. About 20,000 people are employed in the hospitality industry, and it is estimated that the number of directly tourism-related jobs will increase by 9.400 over the next decade. The proposed Tourism Economy and Infrastructure Development Project (FY16) will support these 23 outcomes by promoting an integrated approach to regional development focusing on tourism infrastructure, urban regeneration, cultural heritage restoration, and attracting private investors through PPP arrangements. The World Bank and IFC will capitalize their global knowledge and be a catalyst to leverage additional finances from other partners, especially the USAID-funded Enterprise Development and Market Competitiveness Project, and the private sector. In addition, under the DPL, the Government plans to introduce an integrated border management system with a view to establish joint border crossing points with Georgia, and to assess, rationalize, and streamline the institutions supporting competitiveness, export and SME development. 80. Competitiveness and innovations are key to achieve the ADS vision of transforming Armenia from a factor-driven to a knowledge-based economy. Limited innovation in the private sector hinders economic diversification, industrial upgrading and access to global markets. Weak enabling environment, lack of sufficient skills, poor vocational training programs, and limited public support for innovation constitute barriers to innovation, technology transfer, and knowledge-based enterprise growth in Armenia. The World Bank support will be designed with the ultimate goal of increasing productivity in most competitive industries and fostering skills development by improving relations between educational, R&D and scientific institutions and the private sector. Specifically, the Bank though the proposed Trade Promotion and Quality Infrastructure Project (FY15) will help improve transfer and diffusion of knowledge and technology through modernization of the framework for intellectual property right, support ICT-based innovation building upon the ongoing E-Society Project, and enhance technology transfer and R&D in the private sector. 81. Poor financial intermediation and access to financial services are major constraints to enterprise creation and growth in Armenia. Private sector credit remains low at about 27 percent of GDP in 2010, compared to the ECA median of 42 percent. The Bank will support increasing financial intermediation, notably SME access to finance through the planned Long-term Export Finance Project (FY14). The DPL will also support measures aimed at improving SME access to credit. Additional technical assistance will be mobilized to strengthen the currently under-developed non-banking financial institutions and markets, including the insurance and mortgage markets, improve the legal and regulatory framework as well as the underlying financial infrastructure of other non-banking financial instruments, such as factoring, leasing, and postal banking. The Bank will continue with policy advice to the Central Bank, in close coordination with the IMF, on financial sector policy and institutional changes to enhance financial stability, increase transparency in line with EU directives and Basle core principles, and strengthen the financial markets. In this connection, an FSAP was completed in 2012 and an update of this report is on the agenda for the latter period of the CPS. Moreover, ongoing IDF grants will support the rollout of the country strategy and action plan in corporate financial reporting. Further Trust Fund operations will help to: (a) enhance literacy in financial services and further strengthen the institutional arrangements for financial consumer protection to build confidence in banks and encourage deposits; (b) strengthen the institutional basis for the ongoing pension, life insurance, and capital market reforms; and (c) improve corporate financial reporting, accounting, auditing, and disclosure standards as part of the above agenda. IFC's current focus on the financial sector will continue, with various instruments targeting micro and SME finance, trade, agribusiness, and sustainable energy finance, and possible capitalization support with equity or quasi-equity instruments. Banking sector consolidation is likely in the medium term, and IFC could support this process. IFC will also provide advisory services to develop knowledge and capacity within the banking sector, manage risks, serve SME clientele, and promote sustainable energy finance, including residential energy efficiency. 24 Engagement Area 1.2: Rural economy sustainably improved Line of sight: The focus of the program is on boosting incomes of the poorest segments of the rural population through strengthening agricultural productivity and the social and environmental sustainability of mining, and improving infrastructure linkages ofpoor rural areas with markets. 82. The Bank will support the implementation of the Government's strategy for agriculture and rural development. Given the importance of the agriculture sector for employment and livelihoods in the rural areas, it will be a priority for the Bank's investment support with a focus on targeting the poorest 40 percent (often female-headed rural households). The ongoing Community Agriculture Resource Management and Competitiveness (CARMAC) Project, a follow-up CARMAC-2 project (FY14), and the proposed Agriculture Supply Chain operation (FY17) are all instruments that focus on strengthening agricultural productivity and improving the welfare of the rural population. These projects are complemented by the IFC Food Safety Improvement Project that supports competitiveness and market access. In view of the severe climate vulnerabilities, the Bank will support climate-smart agriculture and agricultural risk management. Key measures to cope with climate change include: (a) improving farmer access to agronomic technology and information; (ii) investigating options for crop insurance, particularly for drought; (iii) improving the quality, capacity, and reach of extension services, both generally and for adapting to climate change; (iv) improving capacity of hydro-meteorological institutions; and (v) improving farmers' access to rural finance to enable them to access new technologies. 83. Through IDFs and other Trust Funds, the Bank will support four core diagnoses to fill in the sector knowledge gap: (i) an agricultural census to collect data on demographic structure, gender- disaggregated, and other socioeconomic characteristics of farmers, which are essential for a sound diagnostic of the sector and effective policy responses; (ii) an economic analysis of the investment needs for water resource management, including reservoir and irrigation structures; (iii) a public expenditure review to enhance efficiency of public spending, reform the existing agricultural subsidy system, and identify ways to improve the sector's contribution to fiscal revenues; and (iv) an integrated agricultural risk management assessment to help design mitigation-transfer-coping strategies and prioritize interventions to reduce short term volatility and to build long-term resilience of agricultural systems. 84. IFC made its first direct investment in the agribusiness sector in FY13 and will seek further opportunities to support competitive businesses along the agriculture supply chain, including regional investments by Armenian companies seeking growth opportunities in Georgia and other markets. IFC's Armenia Food Safety Improvement Project aims to increase the competitiveness and market access of food producers by increasing their awareness of food safety issues, and helping them implement food safety management systems. IFC may also consider advisory services to address the lack of transparency in Armenia's food processing sector, which remains a significant barrier to investment, and will work with interested companies to improve reporting practices. 85. Mining is Armenia's main source of export revenues. To improve this sector's contribution to fiscal revenues, the Bank helped prepare a new mining code in 2012 and will continue supporting regulatory reforms and capacity strengthening aimed at enhancing the sector's social and environmental sustainability. This will be achieved through the ongoing IDF grant on environmental governance, inclusion and transparency in the mining sector, and related advisory services. In addition, the Extractive Industries Technical Advisory Facility will support essential building blocks for investment to occur, such as detailed mining regulations underpinning the mining law, support for the one-stop-shop on evaluating and processing mining license applications, multi-stakeholder workshops to better understand the sector issues, upgrading of mining cadaster, and progress towards accession to the Extractive Industries Transparency Initiative (EITI). Moreover, under the DPL series, the Bank will help improve the draft law on environmental impact assessment and expert examination, by addressing 25 specific issues related to the mining sector such as proper handling of waste, protection of water courses from industrial residue, prevention of land erosion and polluted floods in order to improve the livelihoods of mining communities in the medium term. Already, the new mining legislative framework supported by the Bank has paved the way for growing foreign investment. In this connection, IFC has supported a major mining company listed on the Toronto Stock Exchange, by financing its initial gold mining exploration works in Armenia through equity investment; and further plans to develop additional equity investment, with plans to develop additional investments. 86. Infrastructure projects will further contribute to the sustainable development of the rural economy. In this connection, the ongoing irrigation projects will be instrumental in restoring irrigation systems, enhancing their sustainability, and strengthening the participatory management of the networks through Water Users Associations, including greater representation of women. The ongoing lifeline/rural road improvement projects and a follow-up operation (FY16) will promote greater connectivity of rural areas and facilitate the commercialization of agriculture by increasing access to markets and improving the delivery of extension services. Connecting farmers to markets in a more effective way is expected to boost incomes both at the farm and non-farm rural level of some of the poorest segments of the population, thus bringing about better poverty reduction. Engagement Area 1.3: Improved access, quality, and sustainability of key infrastructures Line of sight: The CPS objective is to enhance the effectiveness and impact of infrastructure by selectively investing in roads and energy as these are areas which are identified as constraints to growth. WBG work on improving transport, energy and water infrastructure will support effective targeting of the benefits to the bottom 40 percent of the population. 87. In transport, the focus will be on effective implementation of the ongoing Lifeline Road Network Improvement Projects because of their importance for poverty reduction. The Bank's focus on the lifeline road network is fully targeted at the bottom 40 percent which are those who rely on the secondary (lifeline) roads for their economic opportunity (mainly farmers) who would have improved access to markets, services, and reduced travel time and risk. Improving the quality of key regional and rural roads is part of a wider strategy to improve both domestic and external connectivity and overall economic competitiveness. The main highway network is not covered by the Bank's support because the Asian Development Bank and European Investment Bank are the main donors. The Bank's projects will also strengthen the capacity of the Ministry of Transport and Communication to manage the road network. The ongoing operation builds on the previous project, particularly in improving the use of efficient contracts and the sustainability of the road sector. 88. In addition, the CPS will support reforms aimed at addressing regulatory weaknesses in air transport to improve Armenia's air connectivity. As a land-locked country, air transport is particularly important for Armenia's trade and global connectivity. Given that only one of Armenia's four land borders is open (the border with Georgia), air transport is the only other gateway for trade. This is why air transport issues are being addressed through the DPL, because of its importance to growth and competitiveness. Flying to and from Yerevan is relatively expensive, and there are limited options for routes and timings. Costs are often significantly higher than to neighboring Tbilisi. Higher prices are partially explained by the lack of competition between airlines. A reduction in concentration-an indication of the market power that can be exerted by companies on a given route-by half, could lead to a drop in ticket prices in the range of 20 to 30 percent. Under the proposed DPL, the government will increase transparency, investigate possible non-competitive practices, define its air transport policy, and assess capacity building needs. 26 89. Energy security and supply reliability are identified by the private sector as major constraints to growth. The Bank will support the Government's plan aiming at promoting energy security and efficiency by introducing new least-cost generation capacity, investing in renewable energy supply and energy efficiency, and improving the electricity pricing system. The urgent investment needs for a transmission network (including rehabilitation of more than 300 km of transmission lines) are estimated at $80 million - $120 million. The ongoing Electricity Supply Reliability Project is financing the replacement of approximately 230 km of the transmission network: additional financing will be provided in FY14 which will increase power supply reliability by increasing line capacity and reducing outages. In addition, a second energy project would aim at leveraging up to $40 million from other partners, including grant financing, from the Scaling-up Renewable Energy Program (SREP), to support a priority renewable energy project that will be included in the Renewable Energy Investment Plan currently developed by the Govermment and to be submitted to SREP for funding approval. With regard to energy efficiency, the ongoing Government-funded program supported by the Global Environment Facility (GEF) will continue financing the reduction of energy consumption of public facilities and removing barriers to the implementation of energy efficiency investments in the public sector. The Bank's ESW will help inform the Government's policies to safeguard the sector's financial viability, ensure affordable supply, optimize the transmission network, and improve its safety, helping at improving the livelihood of the Armenian population. On the private sector side, IFC's Sustainable Energy Finance Project seeks to establish a market for energy efficiency and renewable energy investments in Armenia. The project aims to develop sustainable energy financing through local financial intermediaries by improving the regulatory framework for renewable energy, increasing awareness and expertise of project developers and local design companies, and building awareness and market demand for sustainable energy finance. In energy, the IFC Sustainable Energy Finance Project supports common program goals on energy efficiency and renewable energy generation; 90. In water, the focus will be put on assisting the Government to allow equitable access by the poorest households, achieve sustainability of the sector through regulatory reforms and increase operational efficiency. Technical assistance will help: (a) revisit the sector structure, including the rationale for geographic cross-subsidies and, as a consequence, for operating several utility companies; (b) design tariff policies needed to safeguard the financial viability of the water utilities while allowing equitable access by the poorest households; (c) develop a viable financing strategy through an affordable mix of cash generation, long-term debt, Govermment transfers, and donor funds; and (d) deepen the current PPP schemes from management to lease contract, and from lease to concession. Efficiency measures should be taken to reduce excessive non-revenue water (NRW) from its current level-a whopping 83.5 percent of water production to date-to about 70 percent. The ongoing water sector projects will support the above activities, with strong leverage from other donors' programs and the private sector. Second Strategic Cluster of Engagement: Improving Efficiency and Targeting of Social Services 91. The CPS will support selected elements of the Government's program that particularly focus on eliminating extreme poverty and mitigating poverty of the poorest 40 percent of the population through further strengthening the social protection system, and ensuring access of all, especially women, to quality social services. The Bank's program is built on the results of good experience to date whereby projects have been implemented well with documented good impact. The implementation of on-going operations will be complemented by additional financing or follow-on operations in three selected areas - health, education and social protection. 27 Engagement Area 2.1: Improved efficiency and equity of health services Line of sight: The CPS will target improving health outcomes by reducing mortality and morbidity, with a focus on the poorest segment of the population. A key objective is on protecting households against high out-of-pocket payments for health care, by ensuring that people do not face medical expenditures that are either "impoverishing" to drive them below the poverty line, or unaffordable as a result of an episode of ill health. 92. Armenia still faces the dual challenge of the unfinished MDG agenda that affect disproportionally the bottom 40 percent (notably on maternal and child health) and a record increase in Non-Communicable Diseases (NCDs). No major progress has been achieved in improving health outcomes in terms of mortality and morbidity. The greatest burden of disease in Armenia, as in most European countries, comes from NCDs, a group of conditions that includes cardiovascular disease, cancer, mental health, diabetes mellitus, chronic respiratory disease and musculoskeletal conditions. Age- standardized death rates indicate that more men than women die from NCDs. The CPS will build on the major sector reforms carried out in recent years, which helped develop primary healthcare, improve health financing, optimize and modernize public hospitals across the country, and strengthen the Government institutional capacities. The ongoing Disease Prevention and Control Project (FY13) is the key instrument for further addressing this agenda. This project has a particular gender focus as it aims to improve maternal and child health services, as well as the prevention, early detection, and management of selected NCDs at the primary health care level; and the efficiency and quality of selected hospitals in Armenia. Within that framework, the Bank and IFC have joined efforts to advise the Government on approaches to improve the delivery of oncology services, with the Bank providing funding and policy advice to the Government and IFC helping carry out feasibility studies formulating advisory proposal to structure the transaction as a PPP. 93. Through sector policy dialogue and AAA, the Bank will assist the Government in better targeting Armenia's limited health budget to the poor and vulnerable groups. Armenia has the second highest rate of inequality in the utilization of health care between rich and poor in the ECA region, due in large part to the high levels of out-of-pocket payments currently required for accessing care. The Bank will contribute to the discussion of fiscal space for the health sector, including analysis of the appropriate funding for the sector and strategies for moving towards universal health coverage. Furthermore, as Armenia has moved away from centralized management and given more autonomy to health facilities, there is an emerging need to define coherent governance models for hospitals to produce the expected results. A proposed ESW will aim at ensuring proper accountability and supervision arrangements for performance of public hospitals, adherence to norms in all institutions; ensuring transparency in planning and use of public health care finances; and strengthening monitoring and evaluation of policy implementation and outcomes. Engagement Area 2.2: Improved efficiency, equitable access, and quality of education services Line ofsight: The CPS objectives aim at developing relevant skills needed for economic growth and job creation by addressing gaps between education outcomes and the skills needs of the labor market. Furthermore, the high school actions are linked to the shared prosperity goal as continuing education to high school level is linked to socio-economic status. The pre-school component will benefit directly the poorest communities in the country where such schools are usually lacking 94. The CPS will build on the first and second Education Quality and Relevance Projects (EQRP, 2004 to date) which helped, inter alia: develop and implement new curriculum, standards and syllabi; improve student learning; strengthen teachers' training and evaluation, expand e-access by all schools, and reform the per capita financing mechanism, resulting in substantial efficiency gains, 28 increased student-teacher ratios, and enhanced school autonomy. The on-going second EQRP extended the scope of the previous project to preschool, secondary education and higher education. The CPS proposes a new Education Quality Project (FY14) to improve school readiness of children entering primary education, improve the learning environment in general education, including integration of ICT into teaching and learning processes and enriching education in high schools, and increase partnerships between higher education institutions and the private sector established under the ongoing EQRP-funded Competitive Innovation Fund with the aim of developing and modernizing the higher education sector in Armenia. This project will include approaches to attract women to non-traditional fields of study and hence address gender segregation in the labor market, while building the skills required for Armenia's knowledge-based economy and with it opportunities. The assessment of student learning and achievement will be further supported by the Russia Aid for Education Development (READ) Trust Fund. Engagement Area 2.3: Improved coverage and targeting of the FBP and efficiency of social services delivery Line of sight: Public spending on social protection and improved coverage and targeting of social safety net programs will continue to play a key role in mitigating poverty, addressing vulnerability and inequalities. 95. The Bank will assist the government in improving the coverage and targeting of the Family Benefits Program (FBP) flagship program to better benefit the poor and vulnerable. This social assistance program has a good targeting accuracy but its coverage of the poor is low, and has gone down in recent years along with the total number of beneficiaries despite the increase in poverty incidence after the crisis. The proposed reforms will extend the program's coverage while maintaining its targeting efficiency. In addition, the government plans to extend health benefits to a larger share of social assistance beneficiaries. Under current arrangements, vulnerable families are exempt from health co- payments. However, coverage of this health benefit is lower than the coverage of the FBP, due to a more stringent eligibility threshold. With a modest increase in social protection allocations envisaged in the 2013-2015 MTEF, the government intends to make this benefit available to families with the same eligibility threshold as the FBP. Achievement of these outcomes will be underpinned by the DPL series and the programmatic analytical work on poverty and vulnerability. 96. The Bank will support the Government's efforts aimed at providing integrated delivery of social services, especially to the poor, through one-stop-shops. This will help streamline social welfare provision, increase more equitable coverage, and use resources more efficiently to address the needs of poor and vulnerable families. These integrated centres will also promote employment intermediation and match-making, thereby increasing labour market efficiency and promoting job opportunities for poor and vulnerable beneficiaries of various social assistance programs. The government piloted three integrated access points for social service delivery in 2013. By 2017, all 54 access points across the country are expected to be functional. The roll-out of the integrated social services across the country will be supported by the upcoming Social Protection Administration Support Project (FY14). The existing DPL will track progress based on the share of households below the poverty line covered by FBP (overall and disaggregated by female- and male-headed households given the association between poverty and gender of household head), the share of FBP benefits paid to poor households (targeting accuracy), and the number of consolidated service centers. The Government intends to maintain its focus on pro-poor spending in the MTEF, and therefore protect the share of such spending in the budget. This will be also monitored under the DPL. 97. Over 175,000 persons are officially registered as People with Disabilities (PWDs) in Armenia. They suffer from insufficient care and protection due to government's limited capacity, and have unemployment rates four times higher than the rest of the population. To help communities address 29 their needs, the government supports community-driven approaches for social service delivery. The World Bank and other partners have provided technical and financial support to help NGOs pilot these approaches at the community level. In that context, the World Bank supported Mission Armenia, a local NGO, to implement a grant from the Japan Social Development Fund (JSDF) to improve self-reliant livelihood generating opportunities and vital services for the extremely vulnerable and disabled persons in Armenia, through ensuring access to social services, care and promoting self-employment opportunities. The approaches and the models to be implemented by the Project can be scaled up and effectively used in other parts of country for poverty reduction and addressing need of people with disabilities. 98. A community-driven development (CDD) approach to basic infrastructure services delivery will be promoted through the ongoing Social Investment Fund and a follow-up operation (FY15). These operations would focus on the bottom 40 percent through specifically targeting interventions that will improve people's lives in the poorest rural and urban areas through rehabilitation and creation of social infrastructure aimed at improving social welfare in poor communities and mitigating regional disparities; contribute to job creation; and strengthen efficiency in community governance. 99. The Bank will support Armenia in developing catastrophe risk financing and weather risk hedging instruments, to reduce the financial vulnerability of the government, businesses, and households to the adverse impacts of geo-hazards and climate change, through market-based risk transfer mechanisms. The poor are the most affected by these events and thus this intervention would benefit them. Major investments into prevention activities are needed, given Armenia's high exposure to disaster. Yerevan, home to 40 percent of the population, is in one of the highest seismic risk areas. A recent analysis of its building stock revealed that an earthquake with a magnitude of 7 or above would destroy most buildings, potentially killing 60,000 people. Desertification now threatens some 80 percent of the country and severe desertification is a threat in 50 percent of the country.7 Disaster mitigation could include flood control, retrofitting of buildings, bridges, lifelines and other key infrastructure to resist seismic shocks. Since not all risks can be mitigated, adaptation becomes essential to ensure that development activities take into consideration the current risks. The Bank will support prevention activities which will include reinforcement of key public facilities, such as schools and government buildings, and will seek grants from the Global Fund for Disaster Risk Reduction to fund related advisory and advocacy services. The Govermment developed criteria for selection of at-risk key public facilities requiring retrofitting, which with Bank's support are currently being finalized for retrofitting. Cross-Cutting Cluster of Engagement: Improving Governance and Anti- corruption Measures in Public Services 100. Selected strategic CPS interventions will support key elements of the Government's governance and anti-corruption agenda, including revamping the anti-corruption framework, improving efficiency of the public administration, and deepening PFM reforms. The focus areas of the Bank's work are to improve overall public administration management which would allow for a better business framework necessary for enterprise growth and job creation, and to create an environment where public services can have greater impact, through being delivered in a more efficient, cost-effective and sustainable manner. Reference is made to GLASOD/LADA land/aridity classifications ensuring a distinction between land degradation induced by human/livestock pressure and process of desertification driven by aridity. 30 Engagement Area 3.1: Improved framework for fighting corruption in public services Line of sight: Corruption hurts the poor and vulnerable, deters private investments, and hampers job creation. The goal of the Bank's program is to strengthen good governance and anti-corruption through, on the demand side, developing social accountability tools for the population and, on the supply side, strengthening anti-corruption bodies 101. The Bank will work closely with the EU and other partners to advise Government on its new GAC strategy, following the expiration of the 2009-12 strategy and action plan which produced little results. In this connection, Trust Fund resources will be sought to: (a) promote improved access to information on Government activities, notably through the ongoing electronic procurement program which would allow disclosure of procurement outcomes, effective contract management to ensure compliance with deliverables, and public reporting to enhance accountability over results; (b) strengthen the core anti-corruption bodies, including the Ethics Commission for High-Ranked Officials, as well as the Chamber of Control's auditing capacity and professionalism; and the Central Bank's capacity to combat money laundering; (c) roll-out legal and judicial reforms to capture demand-side institutions, including advocacy and pre-court investigative functions and documentation; and (d) design and implement a capacity development and anticorruption training and awareness program for employees across all levels of the civil service. 102. Through social accountability tools, the Bank will promote demand-driven initiatives for good governance. The CPS addresses social accountability through ongoing support to Parliament oversight committees, works with and strengthens all tiers of government, and emphasizes broadly shared benefits of growth. Further actions to be considered include (a) strengthening the capacity of media in investigative journalism; (b) formalizing the participation of private sector and nongovernmental actors in public policy deliberations, public discussions on the efficacy of the Government's anti-corruption strategy, and monitoring and evaluation of development programs; (c) improving civil society monitoring of the mining code implementation, and transparency/EITI related issues; and (d) mainstreaming tools such as client/user satisfaction surveys to collect feedback on public services delivery, including their quality and integrity, and strengthening grievance redress mechanisms. These tools will help increase the trust in government and ensure that services that are delivered are tailored to the needs of beneficiaries. Social accountability activities would thus be mainstreamed in the portfolio, notably in projects supporting service delivery to local communities, with the aim of both improving the quality and reach of public services, and involving and empowering citizens, notably women, in making decisions about issues that affect them. Engagement Area 3.2: Improved efficiency of public administration and service delivery Line of sight: The CPS objective is to help create an environment where public services can be delivered in a more efficient, cost-effective and sustainable manner, which in turn will make it possible to foster income growth for the bottom 40 percent of the population in a manner that is sustainable over the medium-term. 103. Under the DPL series, the Bank will support the Government's strategy to increase efficiency of the civil services through changes in legislation designed to enhance flexibility of recruitment and promotion of professional staff, introduce merit-based systems, and discontinue the system of periodical attestation of civil servants, which has become obsolete with the development of modem performance evaluation tools. Armenia's civil service is hampered by the low level of public pay and cumbersome procedures. Both affect its capacity for policy formulation and support to government systems. Low pay and stringent requirements for years of professional experience discourage applications from many qualified candidates for positions for specialists. A centralized human resources management 31 system further reduces the flexibility with which open positions can be filled (except for decentralized recruitment of Junior Staff). Regular mandatory attestations, which bear little relation with actual job requirements, further contribute to low staff morale. 104. Moving from physical to electronic transactions can greatly increase efficiency both in the public and private sectors. Necessary conditions for the new electronic business model to thrive are secure access to electronic services and interoperability of systems. The government therefore plans to introduce regulation and standards for cyber security and interoperability. It will start with costing and planning necessary investments, before adoption of an Electronic Transactions Act which will include key regulations pertaining to electronic transactions within the government, between government and citizens, and government and businesses. A special institutional framework will be established to govern electronic government. The inter-operability of databases will also help anti-corruption efforts. Effective data exchange and inter-operability of public administration databases with the planned Electronic Disclosure System managed by the Ethics Commission for High Ranking Officials will facilitate enforcement of ethics rules. Policy, legislative, and institutional reforms to achieve the above outcomes would be underpinned by the DPL series and supported by the public sector modernization project (FY15). Engagement Area 3.3: Management of public resources strengthened Line of sight: Improving public resource management will entail setting up a fairer tax administration system which allows for a better business environment necessary for enterprise growth and job creation and, at the same time, allows Government to improve revenues for financing social programs. 105. In Armenia's resource constrained environment, effective use of public resources is critical for achieving its ambitious growth, job creation, and poverty reduction agenda. Particular attention will be paid to strengthening public finance management (PFM). Increasing transparency and accountability should be at the core of the next generation of PFM reforms which, together with program budgeting, place even greater emphasis on performance accountability. 106. The upcoming Public Expenditure and Financial Accountability (PEFA) assessment will update the PFM diagnostic, identify weak spots, and inform future reforms. The previous PEFA assessment played a key role in setting the agenda for recent reforms which resulted in some progress in Public Internal Financial Control (PIFC) and internal audit. The next assessment currently underway and scheduled to be concluded later in 2013 will help identify PFM priorities to be reflected in an updated reform strategy. The national PEFA assessment will be complemented by a comprehensive Business Process Re-engineering (BPR) carried out by the Ministry of Finance with support from a Russian Trust Fund. The BPR will focus on the current needs and assess each existing function to determine the scope of future activities, including budgeting, treasury system, payroll, etc. In addition, a new framework for enhanced monitoring and control of State Non-Commercial Organizations (SNCOs) will need to be implemented to provide better transparency and accountability of their activities; improve the existing legal system; and reduce these organizations' overall fiscal risks. The Armenian Chamber of Control will need to be strengthened to conduct sound external audit and thereby improve transparency and accountability leading to better management of public resources. 107. Other PFM policy issues require priority attention. These include the need to, inter alia: produce a medium-term policy document to set new policy priorities/targets and guide the budgeting process; enhance public debt management capacity to inform fiscal policy; introduce a public investment appraisal system to improve efficiency of capital expenditure management; set up a fiscal risks management system, advance Treasury reforms to facilitate the program-based budgeting system; and enhance the internal control and internal audit institutions in the overall governance environment to enable greater managerial accountability for results. PFM support will be provided primarily through an 32 investment loan (FY15) and Trust Fund operations, building upon the extensive Bank support already provided by a series of trust funds in the areas of fiscal management, government information management systems, accounting, internal control, fiduciary control over SNCOs, external audit, and others. The ongoing multi-year public expenditure review will also be an important vehicle for support. D. Development Partner Coordination 108. Partnership, financial and policy coordination is central to the CPS. The WBG will increasingly rely upon leveraging other development partners. The Bank will continue engaging with the IMF, especially on issues affecting Armenia's macroeconomic stability and competitiveness. The Bank leads the policy dialogue on structural and institutional reforms while the IMF assists with macroeconomic policy advice. The WBG will also coordinate closely with the European Commission, given the EU's rapidly expanding program in Armenia. Annex 3 provides further details on other donors' activities and areas of collaboration and cross-support with the WBG. 109. The Government has taken the lead in promoting an efficient division of labor among development partners. Donor meetings chaired by the Prime Minister are held periodically to discuss key strategic and resource mobilization issues. Sectoral coordination meetings are hosted by the Minister of Finance and/or the Minister of Economy. These meetings provide a platform for aligning donors' programs with Government priorities, ensuring complementarity of approaches, and minimizing duplication. The meetings are often ad hoc and would therefore benefit from a more structured government-led coordination mechanism, in line with the Paris Declaration on Aid Effectiveness. 110. Most donors provide the government with budget estimates for disbursement of project aid at stages consistent with the government's budget calendar. There is a need, however, to ensure that donor-funded investment projects, which are currently managed according to the individual procedures of the donors, are fully incorporated into the public investment process and clearly linked to sectoral policies and the MTEF. UNDP and other partners helped develop an e-database on donor projects, administered by the Ministry of Economy, and comprising inter alia, disbursement plans, budget breakdown consistent with the budget classification. Efforts to strengthen the Country Systems (including procurement, financial management, and safeguards) are in progress to align with international standards and promote their use in donor-funded projects, in accordance with the Paris Declaration on Aid Effectiveness. E. Monitoring and Evaluation 111. Given the results focus of the CPS, strong emphasis is placed on the results monitoring and evaluation framework. The results focus will be implemented at three levels: (i) at the national level through support to the development of an effective ADS results monitoring system; (ii) at the WBG portfolio level through the establishment of a robust CPS results framework; and (iii) at the project level through strengthened results evaluation of individual Bank operations. 112. The Bank and other partners are currently supporting the Government to put in place the appropriate tools and processes to ensure effective monitoring and evaluation of the ADS. Results and policy matrices linking the ADS results measurements and policy actions for all key sectors will be developed. A Monitoring Unit responsible for producing annual progress reports will be established in the Ministry of Economy and/or Ministry of Finance. Capacity gaps have been identified in poverty measurement, data collection and analysis, notably in aligning statistical production with the ADS, the MTEF, the sector monitoring requirements in line ministries and the NSS. These shortcomings will be addressed through advisory services, training, and Trust funded technical assistance from the World Bank, the EU Twining Facility, UNDP and other partners. 33 113. The CPS will support the ADS objectives aiming at lifting over 400,000 people net out of poverty and, thereby, reducing poverty incidence from 35 percent of the population in 2011 to 23 percent in 2017. The Bank will continue to strengthen the NSS's capacity to measure growth in both consumption and real income per capita of the poor and bottom 40 percent, track the patterns of inequality, and better inform related policy-making on the pathways for sharing prosperity and reducing poverty in Armenia. 114. The CPS Results Matrix is aligned to the ADS monitoring and evaluation system, by linking where possible the indicators, data sources, and result tracking system of the Bank operations to the ones of the Govermment. The Matrix is focused where the Bank is expected to be able to influence over the CPS period. The outcomes have been formulated bearing in mind that results during this period will come mainly from the implementation of the on-going program, as well as proposed AAA, ongoing portfolio, and quick-disbursing operations included in the lending program. The CPS Progress Report will provide an opportunity to update the results framework if necessary, in the light of developments. To the extent possible, the impact of Bank operations on gender issues will be monitored as part of the results indicators of individual projects and analytical works; and a stock-taking will be carried out at the time of the CPS Progress Report. CPS results will be further monitored via regular project implementation support missions, annual reviews of programmatic knowledge and convening services, annual Country Portfolio Performance Reviews, client demand and feedback, Bank internal independent evaluations, the mid-term CPS Progress Report and the final CPS Completion Report. F. Consultations 115. The CPS preparation benefited from extensive stakeholder consultations. The process started with a High Level Policy Forum chaired by the Prime Minister in December 2012. This Forum discussed the Bank report titled "Policy Notes for the New Government", which helped inform the Government's reform agenda and the CPS. A series of stakeholder consultations were held in May/June 2013, including meetings with central and local government representatives, members of parliament, donors, the business community, academia, youth and students, think tanks, civil society organizations, women associations, and media outlets. The main objectives of the consultations were to solicit views on the WBG's role in Armenia and discuss key development challenges of the country as well as the WBG's response and results framework. The analysis and consultations served as the basis for the proposed CPS's strategic framework and engagement areas. 116. The Bank also supported the participatory and consultative process of the ADS organized by the Government in March-June 2013 with other partners. This process was structured in two phases: (a) discussions of the ADS's macroeconomic framework and scenario held in Yerevan, which assessed the growth projections, resource mobilization prospects, and costing under the MTEF; and (b) a series of public consultations in the provinces (marzes) focusing on sector policy reforms, priority public investment programs, expected results, and the monitoring and evaluation system. The consultations were attended by diverse stakeholders and helped enhance the broad ownership base of the Strategy and its alignment with the CPS in fine. 117. Stakeholder consultation and public outreach are mainstreamed in the CPS. The Bank will continue working closely with the Government to consistently reach out to project beneficiaries, local govermment officials, and other stakeholders. Various workshops and consultative events will be organized on key policy issues, including investment climate reforms, fight against corruption, social protection, climate change, agriculture, mining, etc. The Bank also stepped up its engagement with academic institutions, think tanks, and students through the conduct of policy seminars. With support from an IDF Grant, the Bank is helping strengthen the Parliament's capacity for policy formulation and 34 public dialogue. The CPS proposes to track the impact of these communications, including quality and strategic outreach, to strengthen the dialogue and dissemination on institutional and policy reforms, as part of the results monitoring. IV. MANAGING RISKS 118. The macroeconomic risks are significant. Although the economy has recovered, the downside risks remain high. A new global economic downturn could have ripple effects on the demand of Armenia's exports and the reduction of remittances and foreign investment flows. As the Government has less than before fiscal space for further counter-cyclical and social support policies this could result in another contraction of economy. Social tensions could increase, exacerbated by rising food prices, unabated poverty, and reduced job opportunities, notably for the youth and women. Such external shocks could impact the Bank program by shifting priorities towards greater budget support to help Government sustain its pro-poor spending in case of an emerging crisis. By strengthening Armenia's economic and social agenda, the World Bank Group helps mitigate the external risks arising from the global economic environment and increase the economy's resilience to a possible shock. 119. The regional security risks remain high with regard to the conflict with Azerbaijan over Nagorno-Karabakh and the stand-off between the international community and Iran. The Govermment of Armenia is engaged with the Minsk Group of countries under the OSCE in their efforts to assist the parties in finding a peaceful solution to the Nagorno-Karabakh conflict. The Armenian economy has reduced its links to the Iranian economy over the past years, but a closure of the Iranian border would nevertheless hit exports to Eastern markets, which otherwise provide promising opportunities for diversification of Armenian exports. An escalated conflict with Azerbaijan could reduce the Bank Group's ability to deploy its programs across the country due to heightened security concerns. The portfolio could be restructured accordingly, depending on the evolving security situation. 120. Domestic political developments could lead to policy slippages in implementing structural reforms. The recent elections did not fully resolve the protracted crisis between the ruling and opposition parties. In this connection, the government commitment to continue implementing transformational reforms may falter if opposition to key measures gains political support. To mitigate the risk of vested interests undermining reform implementation, the authorities have increased outreach efforts to build consensus and broaden the political support for the reforms, particularly among the beneficiaries. The Bank is supporting these efforts and the CPS will be implemented in a manner that widens dialogue and knowledge dissemination, and so works to build broad support for institutional and policy reforms. The CPS also retains flexibility to adjust Bank lending to respond to shifting needs and policy slippages. 121. The risks of natural disasters and climate change remain high. Armenia is a high risk country in terms of exposure to natural disasters and severity of potential human and economic losses from earthquakes that are the principal risk. Armenia has the highest potential of economic loss due to catastrophic events among ECA countries. It is also highly exposed to increased climate extremes which undermine its sustainable development. The poor are particularly vulnerable to these events. A Bank report financed under the GFDRR has recommended actions for short, medium and long term interventions directed toward reduction of risks of natural disasters. Integrate disaster risk management into development is a priority. This includes proper land planning, enforcement of disaster resilience building codes, and investments into prevention such as retrofitting of critical infrastructure and reinforcement of key public buildings, such as schools, hospitals and government buildings. Depending on their magnitude, natural disasters could impact the Bank programs. The CPS would exercise flexibility and adjust Bank lending to respond to emerging priorities, social support, and reconstruction needs. 35 Annex 1. Results Framework for Armenia CPS FY2014-2017 Country Issues and obstacles Results/Outcomes directly influenced by CPS interventions WBG program and Development Goals Milestones and outputs Partners CLUSTER I. SUPPORTING COMPETITIVENESS AND JOB CREATION Engagement Area 1. Improved business environment and investment climate for SME creation, growth, and innovations Business Environment Relatively poor 1. Enabling environment for business operations improved as indicated by: Ongoing: improved performance in areas 0 Tax compliance cost DPL series; TAM related to running and Baseline: 380 hours (Doing Business Report, 2013) Project; E-Society, closing a business. Target: 190 hours (OECD average, 2012) Innovation, and 0 Optimization of inspection agencies Competitiveness Project; Excessive levels of Baseline:18 Target 9 and IDF Guillotine inspections undermine * Risk based inspection introduced IFC: (a) Investment businesses and create Baseline. 1 (Tax Administration services) Climate Reform Project; opportunities for Target 7 (in line with the Govemment program) and (b) investment in corruption and rent-seeking 0 Insolvency procedures streamlined. Time to resolve insolvency in export-oriented firms by inspection agencies. Doing Business report: AAA: Growth study, and Baseline: 1.9 years Target 1.5 years (20 percent less time) Country Economic Memorandum Institutional framework for 2. Institutional framework for export development improved as indicated by: the export development is 0 Export and investment promotion infrastructure streamlined Planned: weak. Baseline. Fragmented activities on export and investment promotion 9 DPL series FlyingTarget Export and investment promotion activities consolidated Trade Promotion and Yerevan to advfro under one Govement Agency Quality Infrastructure expensive,atie a Border management streamlined (TPQI) Project limited nd tr re Baseline. Fragmented functioning of border management Export Development and tions f Target Introduction of integrated border management system Strategy Implementation an tmigs Air services liberalized. Number of destinations served from Yerevan: 9 Innovate Armenia InsttutinalframworkforBaseline: 33 Target: 40 or adoption of a Common Aviation Area Institutional framework (CAA) agreement with the European Union. Partners: entrepreneurshipa * IMF, USAID, EU, GIZ, 3. Entrepreneurship and innovation enhanced as indicated by: EBRD, UNIDO * Number of ICT start-ups increased Baseline (2012). 8 Target (2017): 15 * Enhanced modemization of enterprises as measured by the number of QI laboratories obtaining interational certification/accreditation: Baseline (2012): 0 Target (2017): at least 2 36 Increased access to Access to finance remains 4. Access to Finance for enterprises enhanced as indicated by: Ongoing: finance and limited * Credit to GDP ratio increased: * FIRST TA on CPFL, investment Baseline (2012): 38% Target (2017): 45% (ECA median, 2012) Capital Markets, Pension opportunities * Average annual growth of bank lending to SMEs & Insurance Baseline (2012): 20 percent Target: 25 percent * IDF grants on: (i) * Increased volume of securities trading in the Armenian securities Financial Reporting; and market for investment operations (ii) CB for MoF Baseline (2012): 5.1% of GDP Target (2017): 10% of GDP * IFC: (a) guarantees and credit lines to financial institutions; (b) Sustainable Energy Finance Project; and (c) ECA SME Banking Project Planned: * DPL, and Long Term Export Finance Project * IFC support for capital markets development Partners: * USAID, EBRD, ADB, EB, EDB Favorable Lack of strategy and 5. Expansion of tourism activities as indicated by: Planned: environment for effective policy framework * Improved tourism inflows, including proportion of leisure travelers: * Tourism Economy and regional socio- for successful growth and Baseline (2012): 0.84 million tourists, including 13% leisure travelers Infrastructure economic development development in regions. Target (2017): 1.0 million tourists, including 30% leisure travelers. Development Project Insufficient development * Increased number of tourism-related jobs * IFC: Possible of tourism. Baseline (2012): 22,000 Target (2017): 31,000 investments in Note: The Bank's planned Tourism Economy & Infrastructure project infrastructure. will support and monitor gender-related job creation: it is expected Partners: that 65% of newly-created jobs under the project will be for women * USAID, EU (this will be confirmed during project preparation). Engagement Area 2: Rural economy sustainably improved Increased efficiency of Irrigation systems are still 6. Reduced energy costs and water losses as a result of targeted investments On-going: irrigation water use in great need of investment and informed decision making as indicated by: * Irrigation System to reduce water losses and * Areas with more efficient irrigation systems: Enhancement Project energy use. There is lack of Baseline: 11,000 ha Target: 13,000 ha Planned: reliable information on * Number of KWT/hour energy saved annually: * DPL 37 O&M costs of the Baseline: 0 Target: 38.9 million KWT/hour * Water Resource irrigation systems * Million cubic/meters of water saved annually: Management Note Baseline: 0 Target: 20.7 million cubic meters Partners: JICA, EDB (ACF), AFD, KfW Improved Land desertification is 7. Improved efficiency and sustainability of land and pasture use by: On-going: management of land affecting 60% of the arable * Annual assessment of Pasture Management Effectiveness (scoring * CARMAC; GEF grant and pastures in the lands; about 15% of the system) carried out: Baseline: 0 Target: 60 * Environment Sector Note agricultural sector pastures are degraded. Planned: * CARMAC-2 Engagement Area 3. Improved access, quality and sustainability of key infrastructures Improved reliability Power transmission 8. Increased reliability of transmission network as indicated by: Ongoing: of power transmission network reliability * Plant and equipment failures reduced in target transmission facilities * Electricity Supply network increasingly an obstacle to Baseline: 25% Target: 10% Reliability Project ensuring adequate and (ESRP) reliable supply to end-users . Power Sector Policy note Planned: * ESRP Additional Financing Improved access of The majority of Armenia's 9. Selected rural roads improved as part of a wider strategy to improve both Ongoing: rural communities to lifeline road network domestic and external connectivity as indicated by: * Lifeline Road Projects; markets and services remains in poor condition. * Share of rural population with access to an all-season road and DPL (addressing through upgrading of There is still an important Baseline: 51% Target: 62% institutional aspects of selected lifeline roads investment backlog for . Travel time reduced on 200 km of lifeline roads that are rehabilitated road sector reform) lifeline roads. Road safety * Adoption of a Road Asset Management System to enhance road Planned: is a major problem. maintenance and sustainable management. * Lifeline Road Project AF Partners: * ADB, EIB, EDB-ACF CLUSTER II. IMPROVING EFFICIENCY AND EQUITY IN SOCIAL SERVICES Engagement Area 1. Improved efficiency and equity of health services Improving quality of Major gap exists in quality 10. Improving quality of care in MCH and NCD as indicated by: Ongoing: care in MCH and of health service delivery. Clinical vignettes improved *Disease Prevention and NCD. Better targeting Low coverage of poor Baseline: Maternal: 57%; NCD: 60% Control Project (DPCP) and reducing with state guaranteed Target: Maternal: 63%; NCD: 66% Planned inequalities in health services and high * DPCP-2 38 utilization of health inequality in the utilization 11. Coverage of poor population by state guaranteed health services expanded * ESW on health financing services. of health care and utilization of health services by poor quintile improved as indicated by: Partners: * Eligibility score to qualify for exemption from co-payment * USAID, WHO Baseline: 36 Target: 32 * Rate of utilization of in-patient and out-patient health services by poorest quintile of population Baseline 2011: 3.8% for out-patient, and 5.1% for in-patient services. Target: 5.5 % for out-patient services and 10% for in-patient services Engagement Area 2. Improved efficiency, equitable access, and quality of education services Improving the quality Inadequate quality of 12. Teaching and Learning environment in High Schools is enhanced as Ongoing: of general education education in upper measured by: 9 Education Quality and and accessibility of secondary schools with Percentage of students obtaining a passing rate in mathematics in the Relevance Project 2009 - preschool education inadequate and poorly unified entrance ex 2014 equipped facilities; and Baseline (2012): 76percent (both genders) Target (2017): 80percent Planned: limited access to quality 13. Improved school readiness among those having access to newly created . Education Quality and pre-school education, preschool education as measured by: patclryfrpo Higher Educational Development Index scores of students enrolled in Reevne0rjet204 particularly for poor 21 12.seTeachinewly created kindergartens and preschools with regard to a control n : group conformed by students without one year of preschool education E Baseline (2012): No diference Target (201 7): 50ppercent. Note: While no specific targets for gender have been set, the results for this engagement area will be monitored by gender. Engagement Area 3. Improved coverage and targeting of the FBP and efficiency of social services delivery Enhanced coverage The FBP's coverage of the 14. Further improvement of targeting and coverage of social assistance Ongoing: and targeting of the poor is low and has gone programs as indicated by: a SCPPA(TA) Family Benefit down in recent years along 0 Improvement of means tested formula for enhanced targeting 9 SPAP Program (FBP), and with the total number of accuracy of FBP (i.e. proportion of beneficiary families that are Planned: of social services beneficiaries despite the poor): Baseline (2012): 73% Target (201 7): 85% 9 SPAP-2 delivery increase in poverty R Share of poor households covered by the FBP: Baseline (2012): 2 1% Vulnerability incidence after the crisis. Target (201 7): 27%; including women-headed households (from 27% Assessment Targeting accuracy is good to 30%) and men-headed households (from 18% to 22%). Partners: but can be improved. Number of fully functional integrated social services (ISS) centers: * UNICEF, IMF Baseline (2012): 3 Target (20177): 30. 39 CROSS-CUTTING CLUSTER: IMPROVING GOVERNANCE AND ANTI-CORRUPTION MEASURES IN PUBLIC SERVICES Engagement Area 1. Improved framework for fighting corruption in public services Reduced corruption in Corruption and conflict of 15. Institutional framework for fight against corruption and conflict of Ongoing: public administration interest in public sector interest improved as indicated by: * DPL; PSMP-2; TAMP affects policy formulation * Global Competitiveness Indicators (GCI) on Favoritism in decisions Planned: and implementation of government officials: Baseline: 2.99 Target: 3.5 (EU27) * DPL; PSM/PFM; and Weak COC with limited * Improved accountability of the public sector spending /External IDF on COC capacity and no scrutiny and audit improved * AAA: Programmatic compliance with ISSAI. Baseline: PEFA PI 26 D+ Target: PEFA PI 26 B LJR-GAC Assessment * Social Accountability Rural Services * Judicial & Political Economy Assessment Engagement Area 2. Improved efficiency of public administration and service delivery Regulatory Redundant, complex and 16. Improved legal and regulatory framework as indicated by: Ongoing: framework and discretionary rules and Number of legal norms affecting business and citizens 9 DPL Series, PSMP-2 quality improved procedures undermine Baseline: Over 25,000 norms regulating 24 areas (tax and custom project, TAMP; IDF on businesses and services to administrations, transportation, public utilities, construction permits, Regulatory Guillotine citizens, and create health, education, etc.) 9 AAA: Programmatic opportunities for Target: Eliminate at least 30 percent of current regulations, simplify LJR-GAC assessment corruption. at least 20 percent others, and reduce the cost of regulatory Planned: compliance by at least 50 percent in each sector reviewed. * PSM/PFM project Partners: * OSCE, EU, UNDP, IMF, USAID, GIZ, ADA. 40 Engagement Area 3. Management of public resources strengthened The basic elements of Lack of sound public 17. Internal control system in government improved as indicated by: Ongoing: the PFM system as per sector accounting and * Quality and timeliness of annual financial statements (PEFA PI-25) * IDF on COC; and IDF on the Government PFM extemal auditing standards Baseline: D+ Target: B Public Sector Accounting Strategy are in place. and practices. Weak 0 Extemal Scrutiny and Audit (PEFA PI-26): Baseline: D+ Target: B Planned: internal control system 0 Oversight of aggregate fiscal risk from other public sector entities 0 PSM/PFM project over SNCOs, and financial (PEFA PI-9): Baseline. D+ Target: B 9 AAA: PEFA follow-up statements are not prepared 0 Effectiveness of intemal audit (PEFA PI-2 1): 9 Programmatic fiscal at sub-national and central Baseline. D± Target B work govemment level. Partners: * IMF, EU, GIZ Improved domestic Insufficient and 18. Increased efficiency of tax administration as indicated by: Ongoing: revenue mobilization unsustainable domestic * New Tax code developed and adopted * TAMP; and IDF on revenue mobilization * Increase in the ratio of budget revenue collected by SRC to its Mining Taxation operating costs: Baseline: 74 (2012) Target: 84 (2016) * IFC Investment Climate * Increase in the number of active VAT taxpayers Project Baseline: 12,000 (2012) Target: 14,000 (2016) Partners: * IMF, EU, USAID, GIZ 41 Annex 2. Completion Report for Armenia CPS FY2009-2013 CPS Board Discussion: June 11, 2009 CPS Progress Report (Board non-objection): June 3, 2011 Period covered by CPS Completion Report: July 1, 2008 - June 30, 2013 I. Context and Overall Assessment 1. This Country Partnership Strategy Completion Report (CPSCR) evaluates the effectiveness of the World Bank Group's assistance to Armenia during FY09-13 and draws lessons for the preparation of the forthcoming Country Partnership Strategy FY14-17. Initially the CPS was envisaged for FY09-12, however at the mid-term review the Progress Report (CPSPR) extended the CPS period by one year in order to align with Armenia's political cycle and provided additional financing. The evaluation of the CPS program is based on the alignment of the Bank Group's assistance program with the strategic objectives of the Government's Sustainable Development Program and related progress towards Armenia's longer-term development objectives, the outcomes of the implementation of Bank-financed operations, the role of IFC investment and advisory operations, the capacity building activities, and the impact of analytical and advisory activities (AAA). The CPSCR evaluation of results is based on the updated FY09-13 Results Matrix of the CPSPR. The CPSCR benefitted from feedback and advice provided by the Bank's and IFC's operational staff in general and the Country Offices in particular. Its findings and proposed lessons have been discussed with relevant Government interlocutors, other Armenian stakeholders and donor representatives. 2. The CPS was built around two strategic pillars: addressing vulnerabilities and strengthening competitiveness for post-crisis growth. The CPSPR confirmed these pillars and the underlying results areas and outcomes: * The first pillar included measures to mitigate risks in three areas: (i) macroeconomic stabilization and positioning of Armenia for post-crisis growth through counter-cyclical and prudent macroeconomic policies, reform of tax regime and administration, and increased financial intermediation to foster private sector output and employment; (ii) poverty alleviation through employment generation, higher and better targeted social protection spending, better access of the poor to basic health services, and increased use of safe gas heating for schools and apartment dwellers; and (iii) reduced rural and environmental risks through increased irrigated areas and livestock productivity, fiscally, environmentally and socially sound mining legislation, and preparedness for managing natural disasters. * The second pillar aimed at strengthening competitiveness for medium-term economic growth by: (i) improving governance to boost public sector efficiency through reduced conflict of interest among public officials, fair market competition rules, consistent and predictable rule- bound judicial decisions, more efficient tax and customs administration, improved transparency, effectiveness and accountability of public expenditure, a more functional and rule-bound judiciary, and improved performance and financial management of corporate entities; and (ii) strengthening knowledge and competitiveness through development of the knowledge economy infrastructure, easier access to internet, improved roads, improved energy efficiency, lower transmission losses and development of renewable energy generation, improved access to safe water, SME's access to credit, improved food safety practices, direct investment in competitive private sector entities and education reforms to improve access and quality. 42 3. The overall performance of the CPS FYO9-13 program was rated Satisfactory with 90 percent of the 20 outcomes and of the 48 CPSPR results indicators achieved fully or substantially. As discussed in detail in Section III, four of the five results areas were evaluated by the team as achieved overall, and a fifth one (rural and environmental risks) as partly achieved (see Annex A). Out of the 20 CPS/CPSPR outcomes 18 were achieved, and only two (support to rural output and natural disasters prevention) were not achieved. Bank program performance was rated by the team as Satisfactory, for both quality at entry and for Bank support to CPS implementation. Section IV documents the implementation of the proposed lending and non-lending operations and activities. The findings and recommendations of this Completion Report were taken into account for the preparation of the new CPS for FY14-17. II. Armenia's Progress Towards Sustainable Development Goals 4. Armenia's Development Strategy. The latest development strategy, the Sustainable Development Program (SDP)8 of Armenia was issued in October 2008. The SDP provided an adequate policy framework for the FY09-13 country assistance program even though it had not anticipated the onset of the economic crisis and macroeconomic projections were overtaken by events. The SDP comprehensive policy agenda included: (i) general economic policies; (ii) employment generation to mitigate poverty; (iii) agriculture and rural development; (iv) infrastructure development; (v) family and child benefits as mainstay of social protection; (vi) health; (vii) education; (viii) public administration effectiveness, governance and accountability, e-government, public financial management; (ix) judicial system reform; and (x) anti-corruption policies. Most of these themes were retained by the CPS program, while taking into account the short- and medium- term impact of the global economic and financial crisis. 5. Economic policy updates. The Government's Letters of Development Policies (LDP) and Letters of Intent (Lol) underpinning the budget and balance of payments support programs concluded by Armenia with the Bank and the IMF9 validated the SDP strategy and reflected the changed economic and social environment due to the crisis by emphasizing short- and medium-term policy measures, spelling out the expected outcomes, and defining monitoring arrangements. 6. Armenia made good progress towards the implementation of the SDP. While Armenia's economy was severely hit by the financial and economic crisis, it was not anticipated and therefore not considered at the time of SDP preparation. Due to the severe impact of the crisis, Government's priorities shifted quickly away from the SDP agenda towards emergency crisis responses. The SDP thus became irrelevant as a development strategy and was not further implemented nor monitored. In the absence of Government reports on SDP implementation, progress assessment is largely based on the evaluation of the CPS-supported program, which is congruent with most of the SDP objectives. The next section will provide a more detailed description. Competitiveness gains critical to sustainable economic growth and outstanding challenges were confirmed by the latest Doing Business surveylo, which documents Armenia's progress made during 2005-2013 towards the performance frontier in the areas of starting a business, dealing with construction permits, facilitating access to credit, protecting investors and paying taxes. The report ranked Armenia 32d out of the 185 countries from 39th in 2008. At the same time, the survey noted that Armenia still ranks poorly with respect to paying taxes, and that it made less or no progress in the areas of registering property, trading across borders, enforcing contracts and resolving insolvency). The Global Competitiveness report ranked 8 Republic of Armenia, Sustainable Development Program (October 2008). 9 Program Documents for the First and Second Development Policy Operations (June 2009 and June 2010); IMF Article IV Consultations Staff Reports (2009-2011). 10 Economy Profile: Armenia, Doing Business 2013 (The World Bank and IFC, Report No.73 850). 43 Armenia 82d out of 144 countries in 2012-13, compared with the 97th rank among 134 countries surveyed in 2008-09." 7. Armenia weathered the impact of the global crisis and is well positioned for sustained growth: * Macroeconomic stabilization. Robust growth, prudent monetary policies, subdued inflation, fiscal consolidation and a sustainable public debt allow a cautiously optimistic medium-term outlook. Prudent macroeconomic management and counter-cyclical fiscal policies helped reverse the sharp 14.1 percent GDP contraction of 2009: growth resumed in 2010, accelerated to 4.7 percent in 2011 and 7.2 percent in 2012, and is projected to continue in 2013-15 at a steady rate of over 5 percent. The cash fiscal deficit, which had reached 7.6 percent of GDP in 2009, was sharply reduced to 1.7 percent in 2012 and is projected to stabilize at 2 percent of GDP through 2015. Inflation declined to 3.2 percent by end-2012 and is projected around 4 percent in the medium-term. The current account deficit of the balance of payments was reduced from 15.8 percent of GDP in 2009 to 10.8 percent in 2012 and would further decline in the medium term. After reaching in 2013 at 38 percent of GDP (well under the legally- mandated ceiling of 50 percent), public debt would remain broadly stable and sustainable in the medium-term. * Poverty Mitigation. The high growth performance of the pre-crisis period was translated into poverty reduction gains but was eroded during the 2009 crisis and remained stagnant in 2010. In just four years of high growth between 2004 and 2008, Armenia's absolute poverty rate, measured using the national poverty line, fell from 53.5 percent to 27.6 percent. This drop in poverty by half would have led to further improvements in the country's social indicators had the economic crisis not hit Armenia in 2009. As a result of the crisis, poverty rate increased from 27.6 percent in 2008 to 34 percent in 2009 and remained at 35 percent (2011) since then despite the growth recovery since 2010. The poverty differences by gender are insignificant. Poverty incidence among women was 34.5 percent in 2011, while for men it was 35.5 percent. The impact of the economic crisis on the poor was well managed. The share of social protection and pensions spending in total government expenditure increased from 24.8 percent in 2008 to 29.4 percent in 2012, thus protecting the coverage of the poorest households despite the increase in the number of poor by 270,000. Targeting of social protection improved, and households in the bottom quintile received 74.5 percent of benefits in 2011 compared with 67 percent in 2008. The average benefit paid to social programs beneficiaries was maintained during 2008-12 at about 17 percent of the consumption basket of the poor. Government spending for health increased from 1.4 percent of GDP in 2008 to 1.7 percent in 2011 and 1.6 percent in 2012, and 95 percent of population had access to qualified medicine practices by end-2012. * Rural and Environmental Issues. Rehabilitation of irrigation canals in 2009-12 made irrigation feasible on 8,000 ha by end-2012 and another 6,500 ha by end-2013. Actual use of this irrigation potential hinges on farmers' willingness and ability to invest, especially when establishing vineyards or orchards that carry high investment costs. The Government is implementing measures to increase rural output and mitigate poverty through better control of livestock disease prevalence, pasture management and increased livestock productivity, but results will take a few years to materialize. Bank-financed projects generated by November 2012 about 73,000 person/months of temporary jobs, mostly in the rural areas. Environmental risks were addressed through the adoption of a new Mining Code and subsidiary legislation compliant with best international practice, though implementation of disaster management 'The Global Competitiveness Reports 2008-2009 and 2012-2013 (World Economic Forum, Geneva, Switzerland, 2009 and 2012). 44 measures, including a program to retrofit schools and other key public facilities at risk from earthquakes, is proceeding slower than anticipated. * Public Sector Efficiency. Certain steps have been taken towards strengthening of the governance and public financial management, enhancing the transparency and accountability of the public sector, and improving the performance of the judicial system. The Authorities enacted legislation to contain conflict of interest in the public sector, introduced risk-based custom clearance and a modem information system and transparency tools at courts, introduced performance-based public financial management, and strengthened fiduciary controls on public financial management and corporate entities. Improved access of courts to modem information systems envisaged speeding up of judicial decisions and enhancing consistency. The 2012-13 Global Competitiveness Report indicates a significant gain in Armenia's ranking on "Transparency of Government Policy Making" (from 103th to 16th) compared to 2008-09, and noticeable gains on the "Wastefulness of Government Spending" (from 77th to 45th), "Diversion of Public Funds" (from 110th to 81th), and "Judicial Independence" (from 123th to 110th) * Knowledge Economy and Competitiveness. Progress was made towards four key goals: (i) fostering the e-economy and technological progress through improved access to computers and internet, e-services in the public sector, business incubators, techno-parks and technology transfer centers attached to universities; (ii) fostering private sector competitiveness and development, including improved PPP framework, corporate and SME financial reporting standards, access to finance, streamlining of regulatory requirements in tax administration, customs, permits, inspections, and business registration, legal framework for competition and proper enforcement; (iii) modernizing infrastructure, with a focus on road improvement, energy efficiency, renewable energy generation, access to and safety of drinking water; and (iv) better access to and quality of public education in general and higher education in particular. III. Evaluation of CPS Program Performance 8. This section evaluates the implementation of outcomes and progress made towards the proposed results indicators. The evolution of the results indicators, milestone progress indicators and achievement of targets are detailed in Annex 1.A, including the rationale for the CPSPR omitting some of the initial results indicators, while Annex 1.B summarizes the status of the CPS program implementation. Results indicators are assessed as Achieved (A), Partly Achieved (PA) or Not Achieved (NA); pending evaluation is noted as PE. Additional results germane to the respective outcomes are also presented. Strategic Objective 1: Addressing Vulnerabilities Results Area 1: A post-crisis Armenia that regains macro-stability and is poised for high growth 9. The CPS program proposed three outcomes monitored by six results indicators, to: (i) address macroeconomic stresses induced by the crisis and restore sustainable medium-term macroeconomic stability, (ii) increase public resource mobilization essential to sustainable growth through tax regime and administration reforms, (iii) manage financial sector risks and vulnerabilities while increasing its contribution to financing economic growth. All three outcomes were achieved. 10. Macro-stability was restored. Armenia met and exceeded CPS targets. Economic growth picked up steadily in 2010-12 and recouped the sharp GDP drop of over 14 percent in 2009. Growth averaged 4.7 percent per annum, reached 7.2 percent in 2012, and is expected to continue at around 5 percent per annum over the medium-term. Growth was fueled by tradable sectors, mainly food 45 products, beverages, mining, and manufacturing. The slowdown in food prices due to agricultural output growth helped bring inflation to 3.2 percent at end-2012 reversing the 2010-11 inflationary pressures due to rising prices for imported staples (e.g., sugar), pharmaceuticals, and medical services. 2012 exports were about 47 percent higher than in 2008 in spite of the 24 percent slump recorded in 2009, reducing the current account deficit to an estimated 10.8 percent, below the 11.8 percent level of 2008. The cash fiscal deficit was brought at 1.7 percent of GDP in 2012, below the historical level of around 2 percent of GDP, after reaching 7.6 percent of GDP in 2009. Public debt is significantly higher than before the crisis at about 44 percent of GDP in 2012 compared with 16.4 percent in 2008; however, its growth has stabilized and its level is deemed by the IFIs to be sustainable. 11. Tax revenue increased. Tax revenue (including social contributions and deducting VAT refunds) would meet the 2013 target of 22 percent of GDP, reaching 21.5 percent of GDP in 2012 and a projected 22.2 percent of GDP in 2013. Substantive tax regime changes included a new mining royalty, increased income and payroll taxes on high-income earners, higher excise and presumptive taxes for alcohol, tobacco, luxury vehicles and other goods, higher presumptive taxes on casinos and restaurants, and more stringent transfer pricing and capitalization provisions. In partnership with the State Revenue Committee, IFC prepared a comprehensive Tax Compliance Cost Survey (TCCS) under the Armenia Regulatory Simplification and Doing Business Reform Project (2008-11). 12. Recommendations from the TCCS formed the basis for tax administration reforms, including risk-based management in tax and customs departments, tax e-filing, and creation of tax- payers service centers and a tax appeals committee. The impact of these measures on tax revenues has been slower than anticipated, due mainly to capacity constraints which the FY10 IDF Grant for Improving Fiscal Management and Tax Compliance Capacity could alleviate only in part. Tax collection remains 4-6 percent below regional and international comparators. Another important issue is the intentional under-reporting of taxable income by companies in the real sector, many of which allegedly have links to politically exposed individuals. Ambiguous and opaque procedures applied at Armenian customs often result in failure to honor genuine invoices for assessment of customs duties and taxes and application of controversial reference-price based system for customs clearance creates systemic corruption risks and favors economic agents who abuse political and administrative powers. Armenia needs to step-up efforts to enhance fiscal revenue mobilization in order to finance development and prevent higher fiscal gaps as of 2014. The Bank-financed Tax Administration Modernization Project approved in FY13 builds in part on a number of recommendations from the TCCS and will contribute to this goal. 13. Credit to the economy in general and SMEs in particular increased. The CPS target was met and exceeded. Proactive steps to tighten the supervision of the banking sector and manage interest and exchange rates addressed effectively financial vulnerabilities. Credit to the economy increased by 257 percent in nominal terms between December 2008 and December 2012. The ratio of loans to GDP (excluding mortgage and consumer loans) increased to 41.2 percent at end-2012, compared with 10.1 percent in December 2010. The SMEs' demand for credit exceeded expectations. The Bank-financed project Access to Finance for SMEs extended credits to SMEs totaling US$100 million between April 2009 and December 2012, 66.7 percent more than the CPSPR target of US$60 million for 2012. 14. For its own account, IFC invested a total of US$224 million in Armenia's private sector through direct lending and equity investment and via wholesale financing to financial institutions, exceeding the upper range of the investment targets set at $160 million in the CPS. IFC provided US$206 million in credit lines, guarantees and risk management products to banks and non-bank financial institutions serving an MSME clientele seeking access to traditional loans, as well as trade, 46 residential and industrial energy efficiency, renewable energy, and agri-finance products. At end- 2011, IFC's portfolio clients in the banking sector held outstanding MSME portfolio of US$475 million in 58,735 loans. IFC's Armenia Microfinance Program (2009-12) increased access to finance for micro-entrepreneurs and small business owners. Over three years, Inecobank, the participating financial institution, originated 101,160 micro loans of which 84% (84,486 loans) were originated in rural parts of Armenia, 15. IFC worked with the Central Bank of Armenia to establish the National Mortgage Company (Armenia Banking Market Development Project, 2009-12), which has refinanced more than US$55 million in mortgage loans for 3280 borrowers. At the onset of the crisis, IFC refocused work under the project to improve risk and distressed asset management frameworks and practices in the financial sector. The Project worked with ASHIB, Anelik and Ameriabank, which control roughly 25% of the total assets of the sector. The Project banks granted about 600,000 loans with a total volume of about US$ 1.4 billion during the project period, which resulted in a 76% portfolio increase. The project also initiated a certification program for risk professionals with the Global Association of Risk Professionals (GARP). Public outreach activities related to loan resolution strategies and risk management complemented these initiatives and were carried out under IFC's regional ECA FM Crisis Management Program (2009-13). Results Area 2: Adverse poverty impact limited amidst assured health and social protection 16. The CPS program proposed three outcomes monitored through six results indicators to: (i) mitigate the crisis-induced poverty impact through job creation and social assistance benefits; (ii) improve the access of the poor to health services; and (iii) provide safe gas-based heating in schools and for households in multi-apartment buildings. From the three outcomes two were partly achieved and one was fully achieved. 17. Poverty was mitigated by job-creation programs and improved poverty targeting. The CPS targets were partially achieved. Job generation by road rehabilitation, community development and rural sector projects, intended to forestall the erosion of poverty reduction gains achieved by Armenia before the crisis, was significant. IDA fast track operations for Lifeline Roads Improvement, the Social Investment Fund, Irrigation Rehabilitation Emergency, and Rural Enterprise and Small Scale Agriculture generated about 73,000 person/months of temporary jobs by March 2013, against a CPSPR end-target of 60,000 person/months. The Government aimed to improve the targeting of social assistance through elimination of ineligible recipients of family benefits and by increasing the share of transfers benefitting the poorest quintile. Progress notwithstanding, the proposed target of reducing ineligible beneficiaries to 20 percent has not been fully met. While 58.8 percent of transfers go to the poorest quintile, according to the June 2012 Poverty Update the coverage of the poor remains low at 25.6 percent in 2011. Expenditure for social protection increased from 6 percent of GDP in 2008 to 7.3 percent in 2012, after peaking at 7.8 percent in the 2009 crisis year. Family benefits increased from 1 percent of GDP in 2008 to 1.2 percent of GDP in 2012. 18. Better access of the poor to health care. The CPS targets were partly achieved. The Development Policy Operations (DPO2 and DPO3) supported the introduction of performance-based contracting for primary health care and a co-payment system. Increased hospital reimbursement helped reduce OOPs from almost 51 percent in 2008 to 38.4 percent in 2011, and access to qualified family practices for basic health care services increased from 85 percent of population in 2010 to 95 percent as of April 2013. In-patient services for the poorest income quintile increased from 3.5 percent in 2008 to 3.8 percent in 2011; financing constraints will prevent Armenia from reaching the CPS target of 5.5 percent in 2013. The Government approved in 2011 a national framework strategy for prevention and control of non-communicable diseases (NCDs), and sub-strategies for 47 cardiovascular diseases, diabetes, and cancer. The implementation of this strategy will be supported by the FY13 Disease Prevention and Control Project. 19. Safer gas-based heating in schools and multi-apartment buildings was expanded. The CPS targets were met. By end-2011 the Bank-financed Urban Heating Project had rehabilitated safe gas-based heating of 120 schools (of which 7 special schools for children with disabilities), extended loans to 7,225 urban households to purchase safe gas-based heaters or boilers for their apartments, and provided capital grants to 8,265 poor urban households to give them access to the gas network or/and verify safe gas-based heating. As of 2009/10 around 70 percent of households in urban multi- apartments buildings had access to safe gas-based or hot water-based heating, compared with 45 percent in 2007. Safety improved, with incidence of carbon monoxide poisoning reduced from 37 per 10,000 connections in 2005 to 10 in 2011. Client surveys indicated that all schools benefitting from rehabilitation of their heating systems and 91 percent of the urban poor who received grants for connection to the gas network were satisfied with the outcome. Results Area 3: Rural and environmental risks decrease 20. The CPS program proposed four outcomes monitored through nine results indicators, to: (i) rehabilitate irrigation systems; (ii) increase rural productivity and output; (iii) update mining legislation; and (iv) enhance preparedness for handling natural disasters. Two outcomes were achieved and two were partly achieved. 21. Irrigation infrastructure was rehabilitated. The CPS target of a 7,300 ha increase in irrigable area (from 128,750 ha in 2009 to 136,050 ha in 2012) was exceeded. Between October 2009 and June 2011 the Bank-financed Irrigation Rehabilitation Emergency Project restored irrigation potential on about 8,000 ha; an additional 6,500 ha were restored by end-FY13 with support from the Irrigation Additional Financing operation. Actual use of the irrigation potential hinges on the farmers' ability to carry out productive investments. Water losses were cut by about two-thirds, from 22.5 percent in 2009 to an estimated 6-7 percent in 2013. 22. Rural productivity gains were pursued. CPS targets on increased milk productivity and effectiveness of communal pasture management have been partly met. The Bank-financed CARMAC project supports productivity gains for cattle and sheep through reduced livestock disease prevalence and improved effectiveness of communal pasture management. Progress to date is expressed in a score of 34.5 compared to zero in 2008.12 Milk productivity gains cannot be assessed in the short- term, but are projected by CARMAC at 20 percent over the medium-term. IFC's Armenia Food Safety Project (2011-2014) introduces risk based inspections of food producers and helps them implement food safety management systems in order to increase competitiveness, attract investment and broaden market access. Results to date include increased awareness about food safety through training more than 400 market participants, improved local consulting capacity through training, and implementation of food safety management systems with food processors to encourage replication. 23. Mining legislation was updated in compliance with international standards. The CPS targets were met. A new Mining Code and Amendments to the Natural Resource User Fee were adopted by the National Assembly in December 2011 and promulgated by the President. The Government also adopted the subsidiary legislation needed for the implementation of the Code. The new legislation is expected to attract private investment, streamline the management of environmental and social impact assessments, and enhance public disclosure. The Bank's efforts on the mining law were complemented by IFC investments in mining. Over the CPS period, IFC has made equity 12 The scoring index for pasture management has a range from zero to 85. 48 investments in Lydian International, financing its initial exploration works in Armenia. Lydian has made the first new discovery of gold in Armenia since independence and IFC has provided the company with assistance to develop the mine in accordance with IFC Environmental and Social Standards. 24. Improved emergency preparedness, management of disasters and retrofitting of public buildings. This CPS outcome was only partly achieved. The GFDRR-financed report on Disaster Risk Reduction and Emergency Management in Armenia recommended short-, medium- and long- term actions towards reducing the risk of and mitigating the impact of natural disasters. Armenia postponed a decision to join the South-Eastern European Countries Catastrophe Risk Insurance Facility (SEEC CRIF), a catastrophe and weather-risk re-insurance facility, pending an assessment of the performance of this facility. The Government took a major step towards developing selection criteria for retrofitting key public buildings at risk with support from the GFDRR-financed Institutional Arrangements for Disaster Risk Management in Armenia operation. However, no financial sources were identified for the retrofitting program. Another GFDRR-financed technical assistance operation has been approved to undertake vulnerability assessment of schools with the aim to catalyzing contributions from other development partners and preparing a potential Bank project. A. Strategic Objective 2: Strengthening Competitiveness for Post-Crisis Growth Results Area 4: Strengthening governance with resulting rise in public sector efficiency 25. The CPS program proposed three outcomes monitored through seven results indicators to: (i) improve governance by reducing conflict of interest and fostering fair competition; (ii) facilitate taxpayers' tax compliance; and (iii) strengthen the functioning of courts, civil service performance, and public financial management. These objectives were partially achieved, reflecting satisfactory outputs, on the one hand, but unmet desired outcomes, on the other hand. 26. Legislation on conflict of interest and competition was updated. The CPS targets were nominally met, though important challenges remain in actual implementation. First, Armenia enacted in 2011 a Law on Public Service that clarified the interpretation of the conflicts of interest for public officials and established in January 2012 an Ethics Commission for High Level Public Officials. The 2011 income and asset declarations of 698 out of the 700 officials requested by Law to submit such declarations were filed and posted on the Ethics Commission website - a 99.7 percent compliance rate compared to the CPS target of 100 percent for 2013. However, the Law has several drawbacks: (i) it does not specify penalties to apply for false declarations or failure to file a declaration; (ii) it leaves at the Government's discretion the publication of financial disclosures; and (iii) it has a limited coverage. Moreover, the quality and reliability of the declarations submitted is at times questionable. Second, in 2009 the Government approved an Anti-Corruption Strategy for 2009-12. The Strategy was not updated or extended beyond 2012. And third, a new Competition Law promulgated in April 2011 gave a clearer mandate to address discriminatory treatment by government officials and potential distortions stemming from state aid to enterprises. Implementation of the new legislation is hampered, however, by the assessment of market dominance, the structure of fines, mergers and concentrations, and excessive focus on price levels rather than anti-competitive conduct. Challenges notwithstanding, Armenia made progress towards better rule of law towards business conflict resolution. Armenia's Global Competitiveness Index (GCI) increased from 3.7 to 4.0 between 2008/09 and 2011/12, and its ranking improved from the 8th decile to the 6th decile of the 144 countries surveyed. The rating of the efficiency of the legal framework in settling disputes and in challenging regulations improved from 78.9 percent of the GCI mean value in 2008/09 to 94.7 49 percent in 2011/12.13 Bank instruments such as DPO series and PSMP contributed to the above results. 27. Taxpayer access to revenue administration was improved. The CPSPR updated the results indicators to focus on increased use of risk-based management for customs declarations, e-filing of tax returns, and use of risk-based inspections, objectives pursued jointly by the Bank's DPO and IFC's Armenia Regulatory Simplification and Doing Business Project (2009-11) and its successor project, the Armenia Investment Climate Reform Project (2011-14). * IFC helped the Customs Service and Ministry of Economy prepare an Import/Export Process Map which identified ways to simplify customs and technical control procedures and reduce related costs for businesses. Reforms included an August 2010 Decree which provided the needed legislative framework for the Customs Green Channel operation, including the incorporation of the signature module in the Trade World Manager software. In 2011, the Customs Service introduced electronic self-declarations desks and the risk management system. The capacity of Customs to enforce compliance was strengthened through adoption of amendments to the Customs Code in January 2011. In 2012, the Green Channel was fully functional and operated clearance by default, backed by post-release verification, controls, audits and investigations, clearing 70.1 percent of the customs declarations. * The introduction of e-filing of tax returns was facilitated by amendments to the Tax Law in 2009. As of end-2012 7,367 VAT payers e-filed returns (24.3 percent of the total number of legal entities active taxpayers), compared with none in 2008 and with a CPSPR target of 3,000 e-returns. The amendments adopted in June 2011 to the Law on Organizing and Conducting Inspections have curtailed discretionary practices and improved business perception about the behavior of revenue agencies. The State Revenue Agency is posting its annual plan of tax inspections on the Web. * The 2013 Doing Business survey provides additional indicators on progress: (i) Armenia's overall ranking in the "paying taxes" area improved from 152 in 2012 to 107; (ii) the annual number of tax payments was drastically reduced from 50 to 13 and the annual time needed to pay taxes was shorten from 581 to 380 hours in 2006-11, following a Government decision in 2012 to reduce the number of tax payments for social security contributions, corporate income, property and land taxes, and other major taxes. The DPO series contributed to the above results. 28. The functioning of Courts, civil service management, and public financial management (PFM) were strengthened. The majority of the eight original CPS targets on public financial management and civil service performance were fully or substantially met by mid-2011, and the CPSPR focused more on the functioning of the judiciary and corporate financial management. Progress on PFM was based on a Decree on a Public Financial Management Strategy, and included: (i) increased capacity of public administration for strategic planning, policy formulation and performance management; (ii) introduction of a performance management system in the Government Office and six pilot ministries, subsequently rolled out in the Civil Service system, comprised of around 45 public entities; (iii) enactment of legislation on auditing and accounting standards consistent with best international practice, including a new Law on Internal Auditing, and piloting of redesigned fiduciary controls over non-commercial entities; (iv) design and introduction of an e- procurement system piloted in 2012 with the support of the Bank-financed Public Sector Modernization Project. Additional efforts are needed to address the limitations observed during 13 World Economic Forum, The Global Competitiveness Reports 2008-2009 and 2012-2013. 50 piloting; (v) preparation of the Budget in programmatic format as of 2010. Every December the Ministry of Finance (MoF) puts online the program for tax returns to be audited. Civil service performance was enhanced by merit-based appointments. The CPSPR proposed targets on improved functioning of the judiciary were met: (i) all 48 Courts are connected to the Judicial Decision Database - Court Automation and Skills Transfer (JDD/CAST) system and equipped with the DataLex kiosks, and 38 courts are equipped with Case Recording Systems (CRS); (ii) the DataLex kiosks disseminate the legal decisions of the higher courts and facilitate the practice of judicial precedent. Results Area 5: Strengthening knowledge and competitiveness. 29. The CPS program proposed seven outcomes monitored through 21 results indicators, to: (i) foster the knowledge economy; (ii) encourage Public-Private Partnership (PPP); (iii) improve roads; (iv) increase renewable energy generation and energy efficiency, and reduce transmission losses; (v) improve access to and quality of drinking water; (vi) enhance the access of the private sector to finance; and (vii) improve access to and quality of education. All seven outcomes were achieved. 30. The knowledge economy was fostered by measures to enhance e-government and infrastructure, and modernize accounting and auditing practices. Internet access improved markedly, from 18 percent in 2008 to 52 percent at end-2012. In November 2012 35 percent of households had home computers, compared with 25 percent in 2008. E-services provided by public entities increased: 531,007 tax returns were e-filed in 2012 compared with none in 2008; registration of new firms has been facilitated by electronic linking of the one-stop Yerevan shop for business registration to other municipalities, reducing registration time from 20 to 2 days; and e-kiosks and e- portals improved efficiency of customs declarations, as well as access to information in government and the judiciary. The Bank-financed E-Society and Innovation for Competitiveness project and DPOs encouraged broadband infrastructure development, strengthening of the regulatory framework and institutions for public services, and supporting development of Gyumri Techno Park. Quality standards for accounting were improved through introduction of International Financial Reporting Standards (IFRS) and International Standards of Auditing (ISA) starting in 2009 in the banking sector and gradually instituted in other sectors. Implementation is hampered by capacity constraints. The IT workforce increased from 5,000 in 2008 to 9,354 as of end-2012. The Global Competitiveness Report noted significant gains between 2008/09 and 2012/13 with regard to technological readiness, including e-access, FDI technology transfer, firm-level technology absorption, and availability of the latest technologies. 31. The PPP framework of the knowledge economy was strengthened. Following the Government's decision in September 2011 to lease free bandwidth of public fixed-line telephone network to private operators, the number of wireless Internet providers increased by about 19 times and the monthly cost of broadband access reduced by 60.2 percent compared to 2008 as of end-2012. By January 2010 an additional 85,000 households gained access to basic telephone service. One Techno-park, one Business Incubator and one university-based Technology Transfer Center were established as of end-2012.14 32. Secondary roads were rehabilitated. Since 2009, 433 km of secondary roads were rehabilitated with the support of the Bank-financed Lifeline Roads Improvement Project (LRIP) and two additional financing operations. The objective of the LRIP was to stimulate economic growth and contribute to poverty reduction by helping improve 430 km priority roads from the 4,000 km lifeline 14 PPPs in operation include the Bank-financed municipal water projects, the Yerevan airport, and the Tatev Revival Project. 51 roads network identified by the Government, which ensures access to all 960 communities in Armenia. The LRIP fostered local employment and reduced journey time for road users: between 2009 and 2012 the LRIP created 33,647 person-months of temporary jobs and reduced the journey time by 36.8 percent. 33. Renewable energy generation and energy efficiency increased. The CPS objectives of improved generation of renewable energy and increased efficiency of energy transmission were partly met. In 2012 the 220 MW capacity of renewable energy generation was 64.2 percent higher than in 2008, but transmission losses of 1.9 percent were actually higher than in 2008 (1.5 percent) as transmission lines got older and line rehabilitation works underway have yet to be completed. The rehabilitation of gas heating systems for schools together with other energy efficiency measures led to energy savings estimated at 30-40 percent in 13 schools. In the private sector, IFC's Sustainable Energy Finance Project worked with HSBC Armenia to build capacity to finance energy efficiency investments by SMEs. IFC also provided a US$22 million senior loan, augmented by US$8 million in co-financing from the Canada Climate Change Program, which helped to finance seven energy efficiency projects with expected energy savings of 8,339 MWh/y and greenhouse gas (GHG) emissions avoidance of 1,245 tCO2e annually. The project also provided advice and a US$10 million senior loan to Byblos Bank Armenia to support residential energy efficiency financing and general mortgage lending. IFC's Sustainable Energy Finance Project also helped Ameriabank CJSC build capacity to finance renewable energy projects and provided a US$15 million senior loan to the bank, financing twelve small hydropower plants with installed capacity of 40.1 MW, generation of 124.9 GWh of electric energy and expected GHG emissions avoidance of 49,964 tCO2e annually. 34. Supply, quality and cost recovery of water supply improved. The quality, reliability, and efficiency of water supply services improved for Yerevan and AWSC service areas with the support of several Bank-financed water supply projects. Over 332,000 households in Yerevan and 264,000 households in other towns benefitted from improvements in the duration of water supply and water quality. As of end-2011 88.8 percent of the Yerevan consumers had 21.3 hours/day of water supply, compared with 75.5 percent of consumers receiving 18.1 hours/day of water supply in 2008. Considerable progress was made in delivery of water services in small and medium-size towns of Armenia, where 62.6 percent of consumers had 15 hours/day of water supply as of end-February 2012, compared to 12 hours/day in 2008. Water bacteriological safety exceeded targeted standards, reaching 99.5 percent in Yerevan and 98.2 percent in the AWSC service area as of end-201 1. Revenue collection in the AWSC service area increased from 48 percent in 2008 to 100.8 percent as of end-February 2012. The public/private approach piloted on water and sanitation has been innovative and has delivered substantial results. The Bank-financed water projects are among the pioneer projects in Europe and Central Asia (ECA) in terms of successful public-private partnership (PPP). It is a success story of evolving from management contract to lease contract through well- grounded sector reform agenda and continued improvement in service delivery. 35. Access to education is improving, and quality standards in higher education were enhanced. Armenia achieved virtually all the targets set under the CPS program: (i) enrollment of preschool-age children increased from 31 percent in 2008/09 to 75 percent in 2012/13. With the support of the Bank-financed Second Education Quality and Relevance (APL2) Project implemented during 2010-12 6,000 children were enrolled in 193 preschools. 1,500 more children are expected to enroll in 2013/14 as 70 new schools would be created; (ii) a Student Financial Support Program regulation was approved by the Government and 1,000 needy university students are expected to qualify for assistance in the 2013/14 academic year. Their number would gradually increase to 2,500 by 2015; (iii) a student loan program had been envisaged under the Bank-financed APL2. At the Government's request, this initiative was replaced by an agreement reached by the Authorities with the Armenian Banks Association on extension of student loans partly subsidized by the State, starting 52 in the academic year 2013-14; (iv) public funding for competitive innovation in higher education will be provided under the APL2 project; (v) progress was made in improving the quality assurance standards of universities through legislation approved in 2012 on their accreditation, evaluation against the new standards, and support for the establishment or improvement of internal quality assurance units. IV. Bank Performance 36. The World Bank Group's overall performance has been rated Satisfactory. The CPS design was consistent with Armenia's development goals, provided an adequate framework for the WBG's operations and advisory activities, had a clear architecture and explicit monitorable targets, took into account the country's capacity for implementation, and proved resilient to the challenge of a global crisis that was more pervasive and longer than originally expected. The CPS was effectively managed through budget support, financing of critical investment projects, and provision of just-in- time capacity building and technical advice. The WBG carried out a constructive and effective dialogue with the Authorities, responded promptly to evolving circumstances and country demands, and coordinated well with other IFIs and bilateral partners. 37. CPS quality at entry was adequate: * The CPS design responded to the country priorities. It was fully aligned with the SDP and its comprehensive policy agenda which covered over 10 themes. Retaining all these themes in the CPS program was justified by the state of development of the Armenian economy, its fragile governance and policy-making process, its weak institutional capacity, and the Government's request for Bank's hand-holding support across sectors as a means to build sustainable capacity. The Authorities also valued the Bank's convening role among development partners as a further justification of its involvement in many areas. While keeping the CPS's two strategic objectives, the CPSPR promoted greater selectivity by deepening engagement (including through additional financing and repeater projects) and increasing the average size of operations in order to achieve greater impact. * The selection of areas and instruments for Bank assistance built on past lending and comparative advantage. The CPS built on the four policy-based Poverty Reduction Support Credits (PRSC) operations, the investment project portfolio and AAA activities implemented in FY05-0815, and complemented the IMF-supported and other donors' assistance programs. * The Results Framework was well aligned with the two key objectives and five results areas of the CPS. The expected outcomes and results proved to be realistic, as evidenced by the proportion achieved or on track by May 2013: 90 percent of the 20 outcomes and of the 48 CPSPR results indicators were achieved fully or substantially. These substantial achievements reflected the Government's strong commitment to reforms and its track record of implementation. They corroborated Armenia's consistent ranking among the top IDA performers as measured by the CPIA. However, the Results Framework would have benefited from a more realistic assessment of outcome indicators, excluding higher SDP goals and indicators not entirely attributable to the WBG-supported program which may otherwise overstate the role and impact of the Bank on progress towards country goals. * Critical risks were clearly identified at entry and were mitigated in part by: the Government's counter-cyclical fiscal, monetary and borrowing policies; progress on economic and institutional reforms; and financial and advisory support extended by the Bank Group in close collaboration with other partners. 15 See CASCR for FYO5-08 (CPS FYO9-12, Annex 1). 53 38. Implementation of the CPS program was efficient. The Bank Group deployed its mix of instruments of engagement in a timely fashion, with effective synergy between the Bank and IFC: * Financial support to Armenia's macroeconomic stabilization and development agenda. Respondents in the November 2012 Country Survey ranked financial assistance as the most important contribution of the Bank to Armenia. IBRD/IDA exceeded planned new commitments to Armenia over the FYO9-13 period by 7.3 percent, totaling US$686.6 million. (Table 3). During this period the Board approved 16 new projects and 10 additional financings for ongoing projects (the CPS and CPSPR had proposed 27 operations). Lending included three DPOs for US$165 million in budget support. Ten of the 23 investment operations consisted of additional financing of ongoing projects, to address the need for faster response to Armenia's financial constraints. * Financial support to the private sector. IFC investment over the five year CPS period was greater than in the preceding 14 years. IFC invested US$224 million during FYO9-13 through 34 operations in the banking sector and in the leasing, mining, real estate, agriculture and energy sectors. Investment operations were complemented by advisory focused on business climate reform (including permits and inspections related to food safety), risk and NPL management in the banking sector, capacity building in the microfnance sector, and development of the market for sustainable energy. Advisory activities were supported by donor funding equivalent to US$5.48 million over the CPS period, plus IFC contribution of US$1.39 million. IFC investment in the financial sector leveraged credit extension to SMEs and farmers: as of end-201 1 IFC portfolio clients in the banking sector held outstanding SME loans totaling US$392 million and micro-finance loans totaling US$83 million. IFC invested US$47 million to finance renewable energy generation (primarily small hydro-power) and energy efficiency renovations of residential buildings, supported development of the mining sector, and invested in business infrastructure by financing completion of high quality commercial real estate. The IFC Global Trade Finance Program provided US$85 million in guarantees, of which US$75 million to import energy efficient machinery and materials. Table 3: Bank Group Commitments FYO9-FY13 (US$ million) IBRD/IDA IFC IDFTF Bank Group Fiscal Years Planned Actual Actual Actual Actual FY09 130.0 130.0 5.8 0.9 136.7 FY10 190.0 147.6 36.3 1.5 185.4 FY11 163.0 163.0 69.7 -- 232.7 FY12 65.0 124.0 79.4 2.2 205.6 FY13 95.0 122.0 33.1 1.3 156.4 FYO9-13 640.0 686.6 224.3 5.9 916.8 * Capacity building and technical assistance. The CPS did not discuss explicitly capacity implementation constraints. However, analytical and advisory work provided by both IBRD and IFC was supplemented by an extensive capacity building program. During FY09-13 the Bank implemented 16 IDF/TF operations totaling US$7.7 million, which complemented the technical assistance provided under investment projects. IFC implemented seven country- specific advisory projects and programs, supported by US$4.9 million in donor funding, plus IFC contribution of US$1.38 million. IFC's advisory programs in Armenia are closely linked with investment operations. 54 * Knowledge-based activities. Policy dialogue with the Authorities was underpinned by tasks initiated before FY09 (at least 11 studies and reviews), as well as by some 22 tasks initiated in FYO9-13 (Annex 3d). Knowledge-based AAA activities were particularly intensive during the first part of the cycle (FYO9-1 1), as the Bank responded to Armenia's demand for policy advice on urgent reforms. The tasks were germane to Armenia's priorities (and implicitly to the CPS program), and provided analysis and policy recommendations on poverty alleviation, economic growth, financial intermediation, public financial management, development of key sectors, environmental management, governance, and other areas. Programmatic assessments were carried out annually for poverty, public expenditure and the financial sector. Policy notes and a high level policy forum addressed the new government's need for information and advice. The Country Survey ranked capacity building, technical assistance and knowledge transfer as the second most important contribution of the Bank. * Synergy of Bank and IFC programs. Bank synergy and complementarity with IFC was strong: in mining, Bank work on legislation (including environmental management) paved the way for IFC investment in mining; in energy, the IFC Sustainable Energy Finance Project supports common program goals on energy efficiency and renewable energy generation; in agriculture, the Bank-financed CARMAC project for structural transformation of subsistence farming is complemented by the IFC Food Safety Improvement Project that supports competitiveness and market access; in health, the Bank and IFC are jointly advising the Government on improving delivery of oncology services and exploring PPP opportunities; in the financial sector, the two institutions joined forces to help Armenia mitigate the effects of the financial crisis and provide financing for MSMEs; in the area of the investment climate, Bank support for tax and customs reform and business climate improvement are closely linked to IFC advisory programs described above. * Support for project implementation. The annual Reviews of Portfolio Performance gave Armenia consistent high marks on portfolio implementation, disbursements, and results on the ground. Procurement and financial management of the portfolio is satisfactory overall. The portfolio disbursement ratio averaged 53.6 percent in FYO9-13, compared to the ECA average ratio of 20.3 percent. There are no projects at risk. The realism index of the portfolio is 100 percent, and the average project age is 3.4 years. While the Country Survey noted stakeholders' perception of the Bank's slow, complex and bureaucratic policies, procedures and processes, these issues are generic and not specific to Armenia's program. IFC's investment portfolio was US$146.5 million committed (of which US$126.5 million were disbursed and outstanding) in 28 projects with 11 clients. IFC's investment portfolio has grown 235% over the CPS period, maintaining strong performance with no non-performing loans, realized net equity gains of US$16.8 million and total unrealized gains on equity investments of US$8.2 million. * Effectiveness of the dialogue with Authorities and other stakeholders. The WBG has maintained an open and constructive dialogue with the Authorities and other stakeholders. The Bank dialogue with government counterparts has been effective and included regular joint supervision of projects and joint reviews of portfolio implementation. Policy seminars and via round table discussions, dissemination of AAA via workshops and seminars, and public dissemination of Bank reports both through publication and media have been useful for awareness arising and knowledge building. The 2012 Country Survey rated highly the contribution of knowledge transfers through Internet, television, and Bank-organized seminars, workshops and conferences. Donor coordination was good but could be enhanced through instituting financing of joint projects. A joint FSAP was conducted with IMF in 2012. Water sector and transport sector reforms were coordinated with ADB and EBRD. Judicial and civil service reforms were coordinated with the EU. Regulatory reforms related 55 to business inspections implemented with support from IFC's Investment Climate Reform Program were closely coordinated with the EBRD; tax reforms were coordinated with the IMF; customs reforms were coordinated with the EU. USAID is a key partner in supporting Government's broader health reforms agenda and a partner for the Regulatory Guillotine Reform Project supported by a Donor Consortium. * Mitigation of risks. The WBG addressed proactively risks to the implementation of the country strategy. Political risks were partly mitigated through activities such as the High Level Policy Forum organized for the new Government that took office in 2010 dialogue with senior Government officials. Capacity constraints were mitigated by capacity building IDFs and TFs, advisory work delivered through ESW, IFC advisory, workshops and seminars, and TA and capacity building components of Bank-financed projects. Portfolio implementation risks were addressed by the Country Program and Results Review which assessed the contribution of Bank-financed projects to the achievement of CPS goals and results indicators, and helped identify and address proactively portfolio generic and project specific issues. Mid-term portfolio reviews complemented close project monitoring through regular joint supervision and emphasized issues of quality and sustainability. IFC carried out quarterly portfolio reviews complemented by close project supervision. Fiduciary risks were partly mitigated by CPAR and CFAA activities, the initiation of joint fiduciary (procurement and financial management) reviews in most of the projects, and regular project support missions carried out by Bank teams. * Independent assessment of project design and implementation performance. The Independent Evaluation Group (IEG) evaluated four projects (Social Investment Fund, Public Sector Modernization, Urban Heating and Avian Influenza Preparedness). IEG ratings highlighted concerns with the quality of entry, quality of supervision, achievement of outcomes and monitoring and evaluation. The Urban Heating project was the only one of the four to receive satisfactory ratings across the board. * Recognition of IDA Replenishment Guidelines. The IDA16 Replenishment approved in February 2011 retained the four "special themes" of crises response, gender, climate change, and fragile and conflict affected countries within the overarching development results theme. The approval of IDA16 practically coincided with the mid-term review of the CPS. Retrofitting the country program to reflect the "special themes" was not feasible. However, it should be noted that the CPS program addressed well the "crises response" theme through emergency projects, additional financings with an accelerated processing schedule, and an overall increase in lending; the "climate resilient development" theme was partly addressed through support for energy savings, renewable energy generation, and increased use of gas heating in schools and apartment buildings; and the "fragile and conflict affected countries" theme was not applicable to Armenia; the "gender mainstreaming" theme was not specifically addressed. The new CPS for FY14-17 will address these themes and the IDA17 guidelines more explicitly. V. Key Lessons and Suggestions 39. The November 2012 Stakeholder Survey acknowledged the Bank's contribution and provided constructive criticism and suggestions. The Survey confirmed the Bank Group's important role in supporting economic growth and education, but noted the need for increased contributions to governance and anti-corruption, private sector development, and job creation. Lending, technical assistance, and knowledge services were seen as the WBG's greatest strengths, while cumbersome and slow lending procedures and not sufficiently innovative knowledge services 56 were considered its greatest weaknesses. Respondents noted the need for increasing stakeholder participation and outreach (see Annex G for a summary of the Survey). 40. The key lessons stemming from the review of the FYO9-13 Bank program and from feedback provided by Armenian counterparts and external partners include: * Continued support from the World Bank Group and other development partners remains critical. Armenia made significant progress during FYO9-13, but faces important challenges. Many of the results achieved under the FYO9-13 CPS are enabling steps for future results on the ground. Legislative and institutional initiatives, enabling investment, piloting of reforms, capacity building activities and other similar measures are opening the way for competitiveness gains, growth and poverty reduction, but will require further strong Government action and financial and technical support from the World Bank Group and other partners. * Fostering consensus on reforms and overcoming resistance from vested interests were key ingredients of the CPS implementation success. The WBG used a multiples channels of communication and knowledge sharing to reach out to different stakeholders, including senior-level policy seminars, public workshops, donor meetings, dissemination of analytical work through publications, discussions, internet and the media, and consultation of project beneficiaries. This was effective to mitigate political and program implementation risks, notably within government. Looking forward, the WBG should step-up these efforts and further reach out to lawmakers, local government officials, and other domestic stakeholders. * The CPS success also owed to efficient collaboration and synergy with other development partners. Donor dialogue is good. During the CPS period stronger partnerships were built and led to joint-programs which are likely to expand further under the new CPS. To succeed however, it is important to devise more predictable arrangements for burden- sharing and effective division of labor among partners, and to strengthen the Government's capacity and role in donor coordination. * Armenia's capacity for strategic planning, coordination of sector initiatives, dialogue with external partners and domestic stakeholders, and monitoring of outcomes needs to be reinforced. The Government's development strategy has yet to be expressed in operational terms that would both guide public expenditure policies, and provide donors with explicit guidance on Armenia's investment priorities to avoid duplication of efforts and ensure better synergy of external assistance. This may help increase co-financing of projects and complementary analytical and advisory activities. The recent decision to transfer to the Ministry of Finance the responsibility for articulating the national development strategy is a step in the right direction. However, the capacity of the Government needs to be reinforced in the areas of inter-sector coordination, coordination of external partners, results monitoring, and outreach activities. * Upfront identification of capacity constraints and prompt mitigation are essential. Capacity building constraints must be identified more clearly by the CPS and mainstreamed in the country program. An upfront Institutional Assessment would be useful. Just-in-time recourse to IDF TF support for capacity building, technical assistance, and analytical and advisory activities can accelerate the implementation of the program and achievement of results. * Outcome indicators must be realistic and monitorable. Outcome indicators not directly attributable to the Bank-supported program may be difficult to evaluate and may overstate the role and impact of the Bank on progress towards country goals. Monitoring of results by the Government needs to be strengthened. Interim results including legislative and regulatory 57 initiatives or institutional changes could be identified as milestones rather than results indicators. * Harmonization of generic project activities. Project-supported capacity building, IT, outreach and similar generic activities would benefit from common platforms using existing operations. * Harmonization of complementary activities supported by multiple projects. In the rural sector in particular, projects supporting infrastructure (roads, irrigations) are not always well integrated with parallel agricultural, education or health projects, sometimes because of differing rates of economic return in select areas. One option would be upfront integrated economic analysis of complementary operations. * Advisory and TA activities could associate more national counterparts and continue during implementation. Interviews with Government counterparts highlighted the need to integrate Bank consultants with local teams and follow the impact of their recommendations during implementation. 58 Annex A: Summary Self-Evaluation of Country Program Outcomes Results Areas - Outcomes Baseline Original Target New or Revised Target Milestone (Progress Status Self- - Outcome Indicators CPS CPSPR Indicators) Most Recent Results Evaluatio (Targets) Comments n 1. Strategic Objective 1 - Addressing Vulnerabilities Results Area 1: A post-crisis Armenia that regains macro-stability and is poised for high growth Outcome I - Macro-stability maintained through appropriate external and domestic fiscal adjustment A GDP growth (%) -14.2% in 2009 Growth in 2011-12 Average 4% growth in 2011- 7.2% in 2012 A 13 Share of tradable sectors 60% in 2009 Higher share in 2012 Higher share in 2013 76% in 2012 A in GDP (%) Fiscal deficit as 7.8% in 2009 Less than 5% in 2012 Below 5% in 2013 1.5% in 2012 A percentage of GDP Inflation (end-of-period) 6.6% in 2009 Less than 5% in 2012 Below 5% in 2013 CPI 3.2% in December 2012 A Outcome 2 - Tax regime and administration reformed A Tax/GDP ratio including 19.6% in 2009 17% in 2012 (standard 22% in 2013 Redefined tax revenue of 21.5% in 2012 social contributions and definition) and projected 22.2% in 2013. A deducting VAT refunds(%) Outcome 3 - Financial intermediation rises, with growth in SME credit lines to rise as a share of total credit A SME share of total 41% in 2007 50% in 2012 Omitted employment I I Credits granted by PFIs to None in early 2009 None $60 million by 2012 $100 million lent to SMEs by end-2012. A SMEs New indicator Target exceeded by 66.7%. Results Area 2: Adverse poverty impact limited amidst assured health and social protection Outcome 4 - Income poverty impacts are muffled through employment generation from job-creating programs and through improved poverty targeting A Reduction in poverty 24.9% in 2007 Reduction by 2012 Jobs generated by job- None in 2009 None 60,000 person/month of 47,874 person/month of 72,933 person/month of temporary jobs by creating program temporary jobs by 2013 temporary jobs by March March 2013 A New indicator 2011 Targeting of Poverty 28.8% share of None 20% share of ineligible In 2010 76% of benefits 22% share of ineligible beneficiaries. A Family Benefit program ineligible families beneficiaries went to the poor 58.8% of transfers go to poorest quintile, New indicator compared with 66% in but coverage of the poor is still low (25.6% 2008 (DPO3) in 2011) Outcome 5- Increased utilization of basic health services by the poor, with a decline in out-of-pocket payments A Access to primary health 3.5% for poorest Increased (not quantified) 5.5% for poorest quintile 3.8% in 2011. Target constrained by PA 59 Results Areas - Outcomes Baseline Original Target New or Revised Target Milestone (Progress Status Self- - Outcome Indicators CPS CPSPR Indicators) Most Recent Results Evaluatio (Targets) Comments n care quintile in 2008 financing. 95% of population has access to qualified family medicine practices as of April 2013. Incidence of non- Rising Preventive measures Omitted Achieved in 2011 National NCD Prevention and Control communicable diseases framework strategy and sub-strategies for (NCDs) cardiovascular diseases, diabetes and A cancer approved in 2011. The strategy included the objective of containing the incidence of NCDs Out-of-pocket (OOP) 50.9% in 2008 None 46% in 2011 Co-payment system 38.4% in 2011 (ILSMS data). payments for essential New indicator introduced in 2010. The DPCP use of performance-based A health services financing (PBF) to support the delivery of NCD-related primary health care services (screenings and timely referral) will help reduce informal payments by increasing performance bonuses to health workers and increasing their accountability for results Outcome 6 - Urban households and schools employ safe gas-based heating A Number of schools with 96 in 2007 104 in 2012 119 in 2012 120 schools o/w 7 special schools for safe gas-based heating children with disabilities rehabilitated by A end-2011 Percentage of households 45% in 2007 At least 50% in 2012 No target. 70% in 2009. 8,265 poor households in 44 in apartment buildings municipalities received capital grants for A with gas-based heating installation or verification of gas-based heating Results Area 3: Rural and environmental risks decrease Outcome 7 - Area returned to irrigation rises as institutions for water management develop A Irrigated area 128,750 ha in 2009 134,000 ha in 2011 Actual 136,050 ha by 2012 Irrigation services on the land (irrigation A potential) restored on 8,000 ha between 2009-12. Another 6,500 ha to be added by end-FY13 Outcome 8 - Rural output and employment is supported NA Agricultural and food Limited exports of Improved export Omitted Proposed outcome exceeded the Bank's exports processed and opportunities to EU, Russia scope of work. Armenia is making slow NA high-value agri- and CIS progress in this area. food Livestock disease Brucellosis Implementation of national Implementation of disease TA provided under CARMAC is assessing prevalence prevalence 1.32% comprehensive control control strategies progress. PE in cattle, sheep program for brucellosis and 60 Results Areas - Outcomes Baseline Original Target New or Revised Target Milestone (Progress Status Self- - Outcome Indicators CPS CPSPR Indicators) Most Recent Results Evaluatio (Targets) Comments n and goats. Village other zoonotic diseases prevalence 36.3% Food safety certification Not quantified Omitted Food and feed safety legislation not compliance for exports to approximated with EU legislation and NA Russia and EU international standards. IDF supports implementation Livestock productivity None Milk productivity increase of Too early to assess progress. CARMAC 7% for cattle and 5% for projects 20% increase in milk productivity NA sheep for cattle by 2016. New indicator Effectiveness of Zero index None 25 mid-term value Index of 34.5 in January 2013. A communal pasture New indicator management Outcome 9 - International best practice compliant mining code under implementation A Mining code Deficient mining Fiscally, environmentally Fiscally, environmentally New Mining Code The National Assembly adopted the new code in 2008-09, and socially sound mining and socially sound mining submitted to Parliament in Mining Code and the amendments to the hindering private code adopted and enforced code adopted and enforced October 2010 Natural Resource User Fee on December 5, A investment by 2012 by 2012 2011 and the President ratified them on December 17, 2011. Secondary legislation for None None Secondary legislation for Legislation on royalties and requirements implementation of the implementation of the for mine closure and environmental impact Mining Code Mining Code in place assessments adopted. Decree on New indicator "Procedure for calculation of royalty on earnings from sales" adopted on Dec. 29, A 2011. Order issued Dec. 30, 2011 on "requirements for the mine closure plan and nature and environmental impact assessment as attachment to the application requesting the mineral extraction right". Outcome 10 - Preparedness for handling natural disasters is developed NA GoA develops a prioritized None None GoA develops and launches GFDRR pending approval plan to retrofit at-risk key program on retrofitting of NA public facilities/buildings schools and other key public facilities New indicator Development of Weak institutional Institutional framework for Omitted GFDRR pending approval. institutional framework framework for disaster risk management for establishment of disaster risk strengthened NA catastrophe insurance management and facility duplication of responsibilities 61 Results Areas - Outcomes Baseline Original Target New or Revised Target Milestone (Progress Status Self- - Outcome Indicators CPS CPSPR Indicators) Most Recent Results Evaluatio (Targets) Comments n Disaster risk management No strategy Strategy developed A comprehensive disaster DRR National Platform Armenia's DRR strategy included in strategy risk management strategy established as NGO in National Security Strategy and the SDP. PA developed December 2010. Adequate financing for Inadequate None None 2009 GFDRR-financed Govt. postponed decision o joining regional NA short and medium term financing New indicator study on "Disaster Risk project on catastrophic risk insurance actions on disaster risk Reduction and Emergency (South-Eastern European Countries management and Management in Armenia" Catastrophic Risk Insurance Facility). emergency preparedness recommended actions to Financing not secured. strengthen disaster risk prevention and mitigation. Strategic Objective 2 - Strengthening Competitiveness for Post-Crisis Growth Results Area 4: Strengthening governance with resulting rise in public sector efficiency Outcome 11 - Conflict of interest among public officials is substantially diminished and fair competition in commerce is established. A Conflict of interest in the Pervasive Sound progress towards None Conflict of interest Ethics Commission for High Level officials public sector elimination of ministerial, regulation set forth by the established in January 2012. parliamentarian and civil Law on Public Service A servants' involvement in adopted in 2011. business Anti-corruption strategy Weak and None None 2009-12 Anti-Corruption ineffective Strategy was approved in PA 2009, but not updated or extended beyond 2012 Corporate governance Enforcement of corporate Replaced by Action Plan for Corporate rules governance rules Accounting and Auditing (outcome Implementation of laws 47.7% At least 60% of firms agree Omitted About 80% improvements according to (2005) that implementation of laws businesses (47% according to regular A is consistent and predictable citizens). Alternative The original baseline BEEPS indicator estimate: 25.3% in (47.7% in 2005) was discontinued. The 2008. same question included in 2013 court user survey documented 81% improvement over the five year period, i.e. 46% in early 2013 compared to 2008 baseline of 25.3%. The extrapolation of BEEPS baseline for five years would return about 86% general business satisfaction in 2013. The progress is also captured by Global Competitiveness Indicators. The average rating of efficiency of Legal Framework in Settling Disputes and in Challenging 62 Results Areas - Outcomes Baseline Original Target New or Revised Target Milestone (Progress Status Self- - Outcome Indicators CPS CPSPR Indicators) Most Recent Results Evaluatio (Targets) Comments n Regulations improved in 2011/12 to 3.55 from 3.0 in 2008/09 (World Economic Forum's GCls 2012-2013) Competition Commission Commission exercises new Omitted The original target was not consistent with functioning powers without hindrance the attributions of the Commission, which and certifies de- are to enforce regulations on abusive NA monopolization in key behavior of monopolistic players, rather markets than de-monopolization Proportion of individuals Not available None 100% by 2013 99.7% (698 of the 700 high officials (high public officials) New indicator covered by Law mandate) submitted A submitting income and declarations for 2011, posted on website of asset statements Ethics Commission. Need to strengthen capacity for verification and validation of statements. Outcome 12 - Business surveys show near-elimination of complaints about revenue agency behavior A Information base and Discretionary Integration of information Omitted Following integration of management across practices base and management in Tax and Customs customs and tax customs and tax Departments at end-2009 A departments the information database and management were integrated. Customs border reforms Non-transparent Reforms leading to Omitted The Bank facilitated the dialogue of practices, falling negotiation of EU FTA Armenia with the EU on the FTA through NA short of EU norms GDLN, but could not assume responsibility for this target. Complaints about Discretionary Business surveys show near- Omitted The National Assembly Implementation of risk based audits in behavior of revenue behavior elimination of complaints adopted amendments to 2012. agency the Law on "Organizing The process of developing the risk criteria A and Conducting and determining the check-list is underway. Inspections in the Republic The tax agency introduced risk based of Armenia" on June 23, audits. 2011 to introduce risk based approaches, reduce discretionary powers and increase transparency. Self-assessment of taxes Increased Omitted Introduction of self- A declarations desks and risk management system at customs in 2011 (green channel) 63 Results Areas - Outcomes Baseline Original Target New or Revised Target Milestone (Progress Status Self- - Outcome Indicators CPS CPSPR Indicators) Most Recent Results Evaluatio (Targets) Comments n Share of green channel in None Increased 30% Decree of August 26, 2010 The green channel cleared 70.1% of custom total customs clearance to improve functioning of declarations in 2012. A declarations Green Channel, including inclusion of e-signature module in trade world manager software. Customs Code amended in January 2011 to strengthen enforcement capacity. E-tax returns in absolute None None 3,000 returns 7,367 e-returns as of end-2012. numbers and as 15% of total A proportion of total New indicator Outcome 13 - Program budgeting leads to efficient expenditure allocations; and civil service performance appraisal is introduced. Judicial decisions are rule-bound. Strengthened A accountability, transparency and efficiency in the use of public funds Information system in Judicial Decision Database, Reformulated. In 2011 all 48 courts Judicial Decision Database, Case judicial system Case Management and All 48 courts by 2013 connected to JDD/CAST, Management and Recording Systems used A Recording Systems used in New indicator 20 courts equipped with in all courts nationwide all rehabilitated courts DataLex kiosks, 30 courts (CRS in 38 courts out of 48) Number of courts 5 courts in 2008 None equipped with CRS (CPSPR connected to JDD/CAST RM) and equipped with DataLex kiosk and CRS Decisions of the Cassation Judicial precedent Use of precedent in judicial Application of judicial Judicial decisions made Introduction of DataLex in 2009 enabled Court serve as a concept practice. Implementation of precedent makes courts available to all courts access to court information nationwide and PA precedent for the lower introduced by the new judicial code. more rule bound and through DataLex (2011) enabled increased use of judicial precedent instance courts Constitutional consistent in interpretation in new court cases. Amendment in of Law 2005 not applied Capacity for strategic Lack of capacity Transition to program Omitted Government Decree on a Hierarchic work planning in-line with planning, policy budgeting. Amendment of Public Financial national strategies introduced. Capacity for formulation and Law to incorporate program Management (PFM) M&E, policy analysis and formulation and performance budgeting. 2011 budget is Reform Strategy. decision-making in MoTED. management in public prepared in programmatic Performance management A administration and format. system piloted in the expenditure management Government Office and six ministries, and rolled out in all Government. Budget prepared in programmatic format as of 2010. 64 Results Areas - Outcomes Baseline Original Target New or Revised Target Milestone (Progress Status Self- - Outcome Indicators CPS CPSPR Indicators) Most Recent Results Evaluatio (Targets) Comments n Civil service performance A performance appraisal Omitted Civil service performance appraisal and and performance based pay performance based pay system effective A system is effective across and supported by special module of the civil service Electronic Document Management System. Public procurement Outdated Phased implementation of Omitted E-tendering system piloted as of 2012. e-procurement reforms. Need to address technical issues before PA Public e-tendering system roll-out. operational Public financial decisions Reliance on Strengthened system of Omitted Measure replaced by PFM Reform Strategy, command- accountability and increased but implementation is slow. oriented transparency and efficiency management and in the management of financial controls public funds and undeveloped audit systems Consolidated Government Absence of Government financial Omitted The general government budget execution financial statements complete and position and performance is reported in consolidated format. consolidated reliably reported in the government consolidated financial financial statements statements Fiduciary controls Public internal financial Omitted Government Decree on Fully operational system of risk based control and audit system operational risk-based audits. Every December the Ministry of based on EU model is audits enacted . Finance makes public the percent of tax A established. returns that need to be audited. Adoption of accrual The government has translated full IPSAS standards in line with IPSAS and developed a chart of account and accounting manual. After piloting was conducted, it was apparent for the need to develop Armenian Public Sector Accounting Standards based on IPSAS (APSAS). The MOF will develop APSAS and adopt action plan on its phased implementation in the public sector. . MoF will consolidate database integrating all internal audit work by April 2013. Fiduciary controls over Weak fiduciary Introduction of fiduciary Omitted Development of fiduciary control non-commercial entities controls over NCOs control methodology for framework, risk assessment and mitigation (NCOs) NCOs measures, guidelines for NCO reports A consolidation, and preparation of draft legislation. 17/ Redesigned fiduciary controls piloted by 65 Results Areas - Outcomes Baseline Original Target New or Revised Target Milestone (Progress Status Self- - Outcome Indicators CPS CPSPR Indicators) Most Recent Results Evaluatio (Targets) Comments n NCOs. Improved performance The corporate None Action Plan for Corporate and financial management sector accounting Accounting and Auditing is of corporate entities and auditing adopted and enforced framework is weak resulting in improved and outdated performance and reporting of the corporate entities New indicator Results Area 5: Strengthening knowledge and competitiveness Outcome 14 - In support of a knowledge-based economy with the necessary infrastructure, strategy being implemented for increased internet penetration, amidst the laying of a A national ICT broadband backbone network Home Computer 25% 18/ 35% by 2012 35% by 2012 35% as of end-2012. A penetration Population internet 18% 40% 40% 52% as of end-2012 19/ A penetration Share of e-services Low Increased Increased All companies registered in 2012 through provided by state entities the one-stop shop for business registry in Yerevan with online linkages in other A municipalities. Online connection allows tax registry offices outside Yerevan to act as one-stop shop and issue unique tax registration number. IFRS and ISAs supporting Absent Introduced Introduced Mandatory IFRS reporting for banks since accounting and auditing January 2009, for other financial methodologies institutions since January 2010, and for A non-financial entities with revenue in excess of AMD 100 million since January 2011. Companies with revenue in excess of AMD 1 billion must publish audited financial statements. Reliability constrained by capacity of accountants and auditors. IT workforce 5,000 10,000 10,000 9,354 as of end-2012. A Outcome 15 - PPP framework in operation; commercially valuable spectrum available for private sector use; operational Universal Services Fund; and civil aviation fully liberalized. A Commercially available Partially not Increased availability by Replaced by monthly cost of Reformulated (see next indicator) spectrum available in 2008 2012 broadband access following opening of spectrum Monthly cost of US$98 in 2008 None US$49 by 2012 Allocation of spectrum for US$39/month as of end-2012. A broadband internet access New indicator 27/ commercial use led to increase in number of 66 Results Areas - Outcomes Baseline Original Target New or Revised Target Milestone (Progress Status Self- - Outcome Indicators CPS CPSPR Indicators) Most Recent Results Evaluatio (Targets) Comments n wireless Internet providers Access to basic telephone 100,000 people Improved access by 2012 Omitted 85,000 new connections A services w/out service 2006 by January 2010. Competition in civil Constraints in Fully liberal regime by 2012 Omitted In March 2013 the national carrier Armavia aviation 2008 declared bankruptcy. The new DPO1 A includes prior action on not extending new exclusivity contracts. Outcome 16 - In transport management, road network is improved and analysis and regulatory capacity strengthened A Length of primary roads Some sections 150 km rehabilitated by Indicators consolidated into rehabilitated need rehabilitation 2012 single target of 400 km by 433 km end-November 2012 A in 2008-10 2013 Length of secondary roads Significant share of 100 km rehabilitated by rehabilitated secondary roads 2012 need rehabilitation in 2008-10 Outcome 17- In energy, financing for new renewable energy based generation capacity; improved energy efficiency and transmission losses reduced A Installed capacity of 134 MW in 2008 Increased capacity by 2012 Increased by 2013 220 MW of installed capacity in 2012 A renewable based generation Transmission losses 1.5% in 2008 Reduced losses 2012 Transmission network Transmission losses 1.9% in 2012. capacity increased by 60 Investment underway in transmission PA MW (reformulated) capacity but not yet completed. Energy consumption of Public buildings Reduced consumption 2012 Reduction of energy In the 13 schools in which additional public buildings are energy consumption of public energy efficiency measures were A Inefficient in 2008 buildings by 2013 implemented energy consumption was reduced by 30-40%. Outcome 18 - In water, improved service reliability and water quality, greater operating efficiency. Closer alignment of service tariffs with costs A Share of consumers with 75.5% with 82.5% 89% by 2013 88.8% as of end-December, 2011 (21.3 A continuous water supply average 18.1 hours/day) in Yerevan hours/day supply Share of consumers with 50% supplied 12 70% Omitted Jan. 2011 55% with 14 62.6% as of end-February 2012 (15.02 A continuous water supply hours/day on the hours/day hours/day) in AWSC service area average Water bacteriological In 2009 Yerevan None 98% compliance by 2011 Yerevan 98%, AWSC 99% 99.5 % in Yerevan service area and 98.2 % A safety compliance in 97.8%, and AWSC New indicator compliance January 2011 in AWSC service area as of December 2011. Yerevan and AWSC service range of 88-100% area 22/ New indicator 67 Results Areas - Outcomes Baseline Original Target New or Revised Target Milestone (Progress Status Self- - Outcome Indicators CPS CPSPR Indicators) Most Recent Results Evaluatio (Targets) Comments n Water metering in 89.6% in 2006 None 96% by 2011 Water meters installed for 96.8 % of A Yerevan Yerevan consumers as of December 2011. New indicator Cost recovery in AWSC Budget subsidies in Increased, and budget Omitted Revenue collection Revenue collection increased to 100.8 % as service area 2008 subsidies phased out by increased from 48% in of end-February 2012 A 2012 November 2008 to 95% in January 2011 Outcome 19 - A growing private sector faces more open competition and access to finance A Corporate financial Weak Enhanced quality and public Omitted As of 2011 all companies reporting standards availability of full financial with revenue exceeding statements for public AMD 100 million must use A entities IFRS reporting. All companies with annual turnover and/or total assets over AMD 1 billion must publish audited financial statements. SME financial reporting Absent Introduction of financial Omitted IFRS for SMEs A standards reporting standards for implemented. SMEs Corporate access to Restricted Improved Omitted Loans to GDP ratio (excluding consumer A finance Loans to GDP Ratio and mortgage loans) 41.2% as of December other than 2012. consumer and Credit to economy increased 257% end- mortgage loans 2012 compared to end-2008. 10.1% in Dec. 2008 SME access to finance At risk SME credit rises as a share Cumulative medium term Cumulative credits of US$100 million No credit line of total bank credit credit under the AFSME extended to SMEs by end-2012 through facility for SMEs project is up to US$60 AFSME revolving credit line. SME portfolio A million (reformulated) of the AFSME Project PFIs more than 2.4 times higher in June 2012 than in 2008. Re-intermediation (ratio Bank Deposits to Rising Omitted Bank deposits to GDP Ratio 30.5% as of A of deposits to GDP) GDP ratio 18.7% as end-2012. of Dec. 2008 Enforcement capacity of Weak Strengthened Omitted SCPEC enforcement capacity severely NA Competition Commission limited by legislation gaps. Legal framework for Weak Improved Omitted New Competition Law approved in April A competition 2011. 68 Outcome 20 - In education, increase of net preschool (5 years old) enrollment rate. Tertiary education financing expands through higher education financing reform and introduction of competitive innovation fund and student loan scheme. The national Quality Assurance system in line with European Higher Education Area is fully functional Access to preschool 31% 37% of 5-years old enrolled 37% of 5-years old enrolled Govt. decree issued 74.8% of preschool-age children enrolled in education 70 new classrooms 70 new classrooms September 2010 adopting preschool in 2012/13 academic year. A financing mechanisms to 193 Preschool Micro-Projects implemented cover recurrent costs for during 2010-12 with APL2 support in 10 one year school readiness marzes, with about 6,000 children enrolled. program for 4.5-5.5 year In 2013 projected 70 more schools old children. enrolling 1,500 children. Publicly-funded Only merit-based Introduction of need-based Introduction of need-based In 2012 MoES developed criteria for scholarships in higher scholarships scholarships Assessment of the Students' Financial education Capacity and Student Financial Support Program. The Student Financial Support Program regulation was approved by the A Government on October 10, 2012 (Decree N: 1323-N). Starting with academic year 2013-2014, 1000 students will receive financial assistance and their number will increase to 2500 by 2015. Student loan scheme None New scheme designed and New scheme designed and Respective action under APL2 canceled at piloted for needy students piloted for needy students, the Government's express request. including education quality Joint statement by the Minister of PA assurance standards, Education and Science and the President of criteria, procedures and Armenian Banks Association on February 6, guidelines 2013, confirming the start of a student loan program. 13 banks (from 22) would extend 10-year student loans to students. Interest rate of 12% would be subsidized by the Government, with 2% for all students, and 3% for students with excellent marks for the last year. Public funding for quality None Competitive innovation Competitive innovation Operational Manual for Competitive improvements and funds are developed funds are developed innovation Fund (CIF) approved by the innovation in higher Government; CIF Steering Committee education established; areas for CIF first cycle approved by CIF SC; call for proposals published in October 2012. Higher Education Institutions submitted A grant proposals and CIF Proposal Review Panel is reviewing them. The Government signed amendment of APL2 to finance CIF implementation on pilot basis. National Quality System just System fully functional and System fully functional and Decree 978/2012 on Two public universities evaluated In April Assurance System in line established in line with requirements of in line with requirements of Status of Accreditation of 2012 against new QA standards. Additional with European Higher European Higher Education European Higher Education Tertiary Level Institutions contracts financed by APL2 for pilot Education Area Area Area and Academic Programs accreditation: (i) contract approved for one 69 public and two private universities November 2012; (ii) contract drafted for 5 A more public universities February 2013; (iii) projected contracts for 5 more private universities. Internal Quality Assurance None Units established and Units established and 18 public and 3 private universities units in public universities functioning in accordance functioning in accordance received grants through API2 for A with national Quality with national Quality establishment and improvement of Internal Assurance standards Assurance standards Quality Assurance units. Source: World Bank Implementation Completion Reports, Implementation Supervision Reports, Aide-memoires, Program Documents, Sector Studies (FYO9-13), country team feedback. 70 Annex B: Implementation Status of Outcomes and Results Indicators Strategic Objectives, Results Areas and Outcomes Outcomes Results Indicators A PA NA PE Total Overall CPS Program Implementation 38 5 3 2 48 Strategic Objective 1: Addressing Vulnerabilities 14 3 3 1 21 Results Area 1 - Post-crisis macro-stability, priming for high A 5 1 6 economic growth 1. Macroeconomic stability A 4 - - - 4 2. Reform of tax regime and administration A 1 - 1 3. Increased financial intermediation and SME credit access A 1 - 1 Results Area 2 - Poverty Mitigation - social protection and health A 4 1 1 6 services 4. Mitigation of income poverty impact through job creation and improved social protection targeting A 2 - - - 2 5. Access to health services for the poor and lower out-of-pocket payments A 1 1 - - 2 6. Safe gas heating for schools and urban households A 2 - - - 2 Results Area 3- Lower rural and environmental risks PA 3 2 2 2 9 7. Return of area to irrigation A 1 - - - 1 8. Support to rural output and employment NA 1 - 1 1 3 9. Mining sector compliance with international best practice A 2 - - - 2 10. Preparedness for handling natural disasters NA - 1 2 - 3 Strategic Objective 2: Competitiveness for Post-Crisis Growth 24 2 - 1 27 Results Area 4-Governance for public sector efficiency A 5 - - 2 7 11. Reduced conflict of interest for public officials and fair competition A 2 - - - 2 12. Improved behavior of revenue collection agencies A 2 - - - 2 13. Efficient allocation and management of public funds, civil service performance appraisal, rule-bound judicial decisions A 2 - - 1 3 Results Area 5- Strengthening knowledge and competitiveness A 17 3 - - 20 14. Infrastructure of knowledge economy, internet access A 5 - - 5 15. PPP framework, competition in civil aviation A 1 - 1 16. Improved road network A 1 - - 1 17. Renewable energy generation, energy efficiency, reduced losses A 2 1 3 18. Access to and quality of water A 3 - - 3 19. Private sector competition and access to finance A 1 - - 1 20. Access to and quality of education A 5 1 - 6 Source: Annex A 16 A=Achieved; PA-Partially Achieved; NA=Not Achieved; PE=Pendg Evaluation 71 Annex C: IBRD/IDA Portfolio - Evolution and Implementation FY CPS CPSPR Actual 2009 ASIF AF ASIF Ill AF RESCAD AF RESCAD AF SME LINE OF CREDIT ACCESS TO FINANCE FOR SME MUNICIPAL WATER AF MUNICIPAL WATER AF LIFELINE ROADS LIFELINE ROADS IMPROVEMENT EDUCATION QUALITY & RELEVANCE EDUCATION QUALITY & RELEVANCE 2010 SOCIAL ASSISTANCE AF SOCIAL ASSISTANCE (3rd Additional Finance) IRRIGATION IRRIGATION REHABILITATION RURAL ROADS LIFELINE ROADS AF DPC-1 DPO-1 ROADS-1 E-SOCIETY PROJECT PUBLIC SECTOR MANAGEMENT PUBLIC SECTORMODERNIZATION-2 2011 DPC-2 DPC-2 DPO-2 DPC-3 AGRICULTURE COMMUNITY AGRICULTURE (CARMAC) ROADS-2 LIFELINE ROADS AF-2 LIFELINE ROADS AF-2 PUBLIC FINANCIAL MANAGEMENT17 ENERGY TRANSMISSION ELECTRICITY SUPPLY RELIABILITY ENERGY EFFICIENCY & TRANSMISSION E-SOCIETY PROJECT E-SOCIETY & INNOVATION HEALTH HEALTH SECTOR MANAGEMENT-2 AF 2012 PFM AND TAX IRRIGATION IRRIGATION REHABILITATION AF DPC-3 DPO-3 MUNICIPAL WATER MUNICIPAL WATER ASIF III AF-3 2013 HEALTH APL HEALTH APL3 (PLANNED) LIFELINE ROADS LIFELINE ROAD NETWORK TAX ADMINISTRATION MODERNIZATION ENERGY FINANCING (PLANNED) Source: IBRD 17 The PFM project initially scheduled in FY10 under the CPS was intended to cover both tax administration and PFM reforms. However, during project preparation, the Bank and Government agreed to: (a) process the Tax Administration Modernization Project separately; it was subsequently approved in FY13; and (b) continue the diagnostic of PFM issues supported by Trust Fund resources to further inform the preparation of a new PFM project. In fact, this new PFM project is now scheduled in Fy15 under the new CPS FY14-17. 72 Annex D: WBG Planned and Actual Lending and Investment, FYO9-13 (US$ Million) Fiscal IBRD/IDA Planned Operations IBRD/IDA Approved Operations Year IFC TOTAL Operations IDA IBRD Total Operations IDA IBRD Total FY09 ASIF AF 8.0 ASIF III AF 8.0 RESCAD AF 2.0 RESCAD AF 2.0 SME Line of Credit 50.0 Access to Finance for SME 50.0 Water AF 20.0 Municipal Water AF 20.0 Lifeline Roads 25.0 Lifeline Roads 25.0 Education Quality 25.0 Education Quality 25.0 TOTAL 80.0 50.0 130.0 80.0 50.0 130.0 5.8 135.8 FY10 ASIF AF 7.0 ASIF AF2 7.0 Social Assistance AF 5.0 Social Protection AF 5.0 Rural Roads 36.0 -- - Irrigation 30.0 Irrigation Rehab 30.0 DPC 1 60.0 DPO 1 60.0 Public Sector Reform 9.0 PSMP II 9.0 Road Improvement 43.0 Lifeline Roads AF 36.6 TOTAL 60.0 130.0 190.0 60 87.6 147.6 36.3 183.9 FY11 Agriculture 16.0 CARMAC 16.0 DPC 2 25.0 DPO 2 21.0 4.0 Lifeline Roads AF2 40.0 Lifeline Roads AF2 40.0 Energy Transmission 39.0 Electricity Supply 39.0 E-Armenia 24.0 E-Society & Innovation 24.0 Health AF2 19.0 HSMP AF 19.0 TOTAL -- 163.0 163.0 37.0 126.0 163.0 69.7 232.7 FY12 PFM & Tax 20.0 -- -- DPC 3 30.0 DPO 3 50.0 30.0 Municipal Water & 15.0 Municipal Water 15.0 Wastewater -- -- Irrigation Rehabilitation AF 18.0 -- -- ASIF III AF3 11.0 TOTAL 50.0 15.0 65.0 61.0 63.0 124.0 79.4 203.4 FY13 DPC 25.0 -- -- Health APL 25.0 5.0 Health APL 3 35.0 Road Improvement 40.0 Lifeline Road Improvement 45.0 -- -- Tax Administration 12.0 -- -- Irrigation 30.0 TOTAL 50.0 45.0 95.0 47.0 75.0 122.0 33.13 135.13 FY09- GRANDTOTAL 240.0 403.0 643.0 GRAND TOTAL 285.0 401.6 686.6 224.33 912.93 13 73 Annex E: IDF and TF Operations Implemented During FYO9-13 Fiscal Year Operation Amount Closing Fiscal Approval (US$1,000) Year FY08 - Public Debt Management 500 FY11 - Piloting Fiduciary Controls for Non-Commercial 425 FY12 Organizations - Strengthening Forest Monitoring 395 FY12 - Ministry of Trade and Economic Development Capacity 390 FY12 Building TOTAL FY08 1,710 FY09 - Strengthening Public Sector Internal Audit 484 FY13 - Building Government Capacity for Better Monitoring of 460 FY12 Results TOTAL FY09 944 FY10 - Strengthening National Assembly's Capacity for Policy 490 FY14 Formulation and Public Dialogue - Implementation of International Public Sector Accounting 497 FY14 Standards Strategy (IPSAS) - Improving Fiscal Management and Tax Compliance Capacity 500 FY14 TOTAL FY10 1,487 FY11 TOTAL FY11 FY12 - Electronic Processing and One-Stop Shop for Construction 500 FY16 Permits - Food Safety Capacity Building 450 FY16 - Strengthening Capacity of Regulatory Reform Unit 484 FY16 - Ministry of Finance Capacity Building 317 FY16 - Capacity Building for Public Sector Auditing 478 FY16 TOTAL FY12 2,229 FY13 - Pension Public Awareness and Literacy IDF Grant Project 430 -- - Environmental Governance, Inclusion & Transparency in 385 -- Mining Sector - Strengthening Training Capacity of the School of Advocates 468 -- TOTAL FY13 1,293 TOTAL FYO9-13 5,943 Source: IBRD 74 Annex F: Planned and Implemented AAA, FYO9-13 FY CPS CPSPR ACTUAL 2006-08 -Poverty Programmatic -Poverty Programmatic -PER Programmatic -PER Programmatic -Financial Sector -Financial Sector Assessment -Country Environmental Study -PPIAF Railway Concession -PPIAF Railway Concession -CPAR/CFAA Update -CPAR/CFAA -Rural Infrastructure Strategy -Regulatory Simplification (IFC) -Labor Market Dynamics 2009 -Poverty Programmatic -Poverty Programmatic -PPIAF on Railways Restructuring -PER Programmatic -CPAR Update -PPIAF on Railways Concessioning -Financial Sector -Financial Sector Advisory -Policy Notes for new Government -Microfinance (IFC) - Microfinance (IFC) -Country Environmental Study -Banking Market -Banking Market Development (IFC) -Regulatory Simplification FY08-11 (IFC) Development (IFC) -Microfinance FY09-12 (IFC) -Banking Market Development FY09-12 (I FC) 2010 -Poverty Programmatic -Poverty Programmatic -Poverty Assessment Programmatic -PER Programmatic -PEFA follow-up -CPAR Update -Financial Sector -Designing Sustainable Institutional -Financial Sector Advisory -Sustainable Energy (IFC) Arrangements for Disaster Risk -PEFA Follow-up Management - Designing Sustainable Institutional -Sustainable Energy (IFC) Arrangements for Disaster Risk Management __________-Sustainable Energy FYIO-14 (IFC) 2011 -Poverty Programmatic -Poverty Programmatic annual -Programmatic Poverty -PER Programmatic -Programmatic Fiscal Work -Country Environmental Analysis -Financial Sector -PER -Water Sector Note -CEM -Country Environmental -PER -Energy Sector -Water Sector Note -Financial Sector Advisory -Natural Disaster -High Level Policy Forum -High Level Policy Forum Management -Financial Sector Advisory -Designing Sustainable Institutional Investment Climate Reform (IFC) Arrangements for Road Maintenance -Food Safety (IFC) Investment Climate ReformFY-14 (IFC) lFood Safety FY-14 (IFC) 2012 -Poverty Programmatic -Financial Sector Assessment (FSAP) -Programmatic Fiscal Work -Financial Sector -Agriculture Sector Note -Institutional and Governance Review -PER Programmatic -Trade & Export Promotion -FSAP Update -Health Financing -C FAA -Social Protection/Pension 2013 -Job Creation, Labor Market -Policy Notes for Accelerating Growth -Higher Education Strategy -MTDS Baseline -Investment, Growth & Employment -Power Sector Tariff Study -Agriculture & Irrigation Sector Report -Education Sector Policy Report -Sources of Growth Source: IBRD 75 Annex G: Client Survey Evaluation of Armenia's Priorities and the WBG's Contribution, Performance and Effectiveness Rank of Answers Top Five Responses of Client Survey Respondents 1st 2d3d 4th t Indicators d3d4t General Issues Facing Armenia Armenia's development priorities Education Anti-corruption Job Law and justice Economic creation/employment growth What would contribute most for Job creation/employment Domestic private sector Economic growth Anti-corruption Education poverty reduction development What would contribute most to Domestic private sector Trade and exports Agricultural Job Anti-corruption economic growth development development creation/employment Overall Attitudes toward the World Bank Where should the Bank focus its Economic growth, exports, Agriculture & rural Education Governance Water and resources employment generation development sanitation What is the Bank's most important Financial resources Technical assistance, capacity Mobilization of third Policy advice Donor contribution building, knowledge transfer party financing coordination What are the Bank's greatest Slow, complex and Unwillingness to criticize Not sensitive enough to Not collaborating Not enough weaknesses bureaucratic policies, Armenia's policies and Armenia's political and enough with non- public work procedures and processes reform efforts social realities state actors disclosure What are the main reasons for failed or Insufficient consideration Inadequate participation of Government Poor donor Insufficient slow reforms of political and social citizens and the civil society inefficiency coordination Government realities capacity World Bank Knowledge and Instruments Where should the Bank focus research Agricultural and rural Economic growth Education Equality of Domestic and knowledge development opportunity private sector development Bank instruments most effective in Investment lending Capacity building Policy-based lending Technical assistance Knowledge reducing poverty and budget support products and services Bank instruments least effective in Knowledge products and Policy-based lending and Technical assistance Trust Fund Capacity reducing poverty services budget support management building The Future Role of the World Bank in Armenia What should the Bank do to enhance Reduce the complexity of Offer more innovative Improve the quality of Offer more innovative Ensure its value to Armenia obtaining Bank financing knowledge services its experts on Armenia's financial products selectivity specific challenges Working more closely with Private sector Local Government Academia, think tanks NGOs Beneficiaries stakeholders and research institutes Communication and Openness Information sources Internet Local television Periodicals Local newspapers International television Sources of information on economic World Bank website World Bank seminars, e-newsletters Direct contact with the WBG and social development issues workshops and conferences Bank publications and reports Source: Armenia - The World Bank Country Survey FY2013 - Report of Findings (November 2012). 76 Annex 3. Matrix ofDevelopment Partners Activities and Collaboration International Monetary Fund (IMF) Activities: The EFF/ECF-supported program aims to achieve strong growth and poverty reduction, fiscal and external sustainability, and financial sector stability, with a focus on reducing the fiscal deficit, implementing reforms to improve the tax system, ensuring greater exchange rate flexibility and strengthening of the monetary framework; further strengthening financial sector supervision to maintain robust confidence in the banking system and improve its resilience to shocks; and improving the business environment, enhancing competitiveness, and reducing poverty. In addition to financial support, the IMF has a wide-ranging program of technical assistance with Armenia, focused in particular on tax policy and revenue administration, management of public finances, macroeconomic modeling and the inflation targeting framework, contingency planning in the banking sector, and statistics Collaboration Areas: - Overall macroeconomic monitoring activities. - Financial sector reform (FSAP), monetary policy, and macro-fiscal issues. - Tax administration and policy reform. - PFM reforms, ranging from down-stream measures (treasury reforms, GFMIS, fiduciary control and NCO reporting) to multi-year budgeting and fiscal risk management. - SNCO fiscal risk assessment. European Union (EU) Activities: The EU program of financial and technical cooperation supports Armenia's ambitious reform agenda. A significant number of projects are currently being carried out across a wide-range of sectors, regions and cities in Armenia. EU assistance focuses in particular on support for democratic development and good governance, regulatory reform and administrative capacity building, nuclear safety, civil society, as well as Vocational Educational Training. EU funding for projects in Armenia is provided in the form of grants, contracts and increasingly budget support. The high-level EU Advisory Group launched in Armenia in April 2009 also actively assists Armenian authorities in their reform efforts. Collaboration Areas: - Trade-related reforms - Judicial Reform through Access to Justice and Budget Support Projects - Public sector modernization and civil service reform. - Strengthening national statistical capacity - Social protection - PEFA assessment - Co-chairing of Donor Consultative Meeting on Armenia - Water Partnership Program Eurasian Development Bank - Anti-Crisis Fund (EDB-ACF) Activities: Armenia became a full-fledged member of EDB in April 2009. It considers transportation infrastructure, electric power industry, agriculture and financial markets development to be priority lines of the Bank's activities. Improvements in these sectors will promote sustainable economic growth of Armenia's economy and allow expanding trade relations with other Bank's members. 77 Collaboration Areas: - Irrigation. - Road improvement. - Agriculture and rural development. - In addition, the EDB entered into a Memorandum of Agreement for reimbursable advisory services with the World Bank to support capacity building in macroeconomic modeling, project appraisal techniques, selected ESW, project design and implementation, portfolio management, etc. Asian Development Bank (ADB) Activities: ADB's Armenia Sustainable Development Program, approved by the government in October 2008, has three key goals for 2009-2021: reduce poverty, including eliminating extreme poverty and ensuring human development; deepen economic growth; and accelerate the development of lagging regions. In line with the government's development priorities, urban development, regional cooperation, and private sector development have been identified as potential broad goals for ADB's operational strategy in the country. Collaboration Areas: - Water sector reforms (AWSC service area). - Transport sector reforms (road rehabilitation; institutional reforms; urban transport). - Solid waste management. - Poverty reduction through supporting female entrepreneurship. - Addressing Gender equity. United States Agency for International Development (USAID) Activities: USAID program helps to improve governmental functions - especially tax and customs administration, social protection, the judiciary, public sector accounting, management of healthcare, and ensuring secure and sustained access to energy and water resources. It also helps private sector development by improving access to finance and capacity of small and medium size enterprises. Collaboration Areas: - Private and financial sector development - Water sector reforms (community supply; TA activities) - Judicial reform - Health sector reform - Tax administration modernization Project, with the Bank funding the IT solutions of the tax agency and USAID providing technical assistance and related advisory services - Local government and decentralization; and tax administration modernization. - Guillotine regulatory reforms. European Bank for Reconstruction and Development (EBRD) Activities: EBRD focuses on providing its traditional SME and micro-finance lines targeting areas outside the capital city and facilitating access to credit for SMEs in the rural areas. It supports enhanced private sector participation in the water and waste water sectors to support the introduction of cost-reflective tariff structures, improve service availability and reduce losses. It helps address challenges in the industrial sectors through support for improvements to the business environment, strengthening corporate governance and increasing access to finance for local micro, small and medium sized enterprises. EBRD 78 supports investments in financially viable renewable energy projects and, through partner banks, finances energy efficiency credit lines for industrial and residential users. Collaboration Areas: - Water sector reform (wastewater management and treatment, Yerevan Djur service area) - Transport sector reform (urban transport, notably metro and parking) - E-procurement reform - Pension reform. United Nations Development Program (UNDP) and other UN Agencies Activities: UNDP Armenia Program for 2010-2015 was developed under the leadership of the Government of Armenia and in close consultation with civil society and development partners. During the preparation of the country's United Nations Development Assistance Framework (UNDAF), six working groups, each co-chaired by a Government official and UN representative, and including a broad range of partners, met to develop strategies for each of the areas of cooperation. Following the completion of the UNDAF, these groups continued to meet to develop the UNDP country program and ensure synchronicity between the UNDAF and UNDP activities. In line with the UNDAF, UNDP will help to support the four UNDAF Outcomes by focusing on four national priorities: ensuring access to enhanced economic opportunities; increasing the capacity of citizens to participate and exercise their rights and responsibilities, and of government institutions to comply with their obligations; ensuring access to quality social services; and improving effective management of natural resources. UNDP implements its program through three Portfolios: Socio- economic Governance, Democratic Governance, and Environmental Governance. Other specialized UN agencies with active programs in Armenia include UNICEF, UNHCR, UNFPA WHO, and UNIDO. Collaboration Areas: - With UNDP: Regulatory Guillotine Reform Project, disaster risk adaptation and mitigation, support to ADS design and implementation, donor coordination. - With UN Agencies: Reforms in social protection systems (ISSs), strengthening national statistical capacity, Health Sector Strategy Development Deutsche Gesellschaft fir Internationale Zusammenarbeit GmbH (GIZ) Activities: GIZ programs are focused on sustainable economic development, environmental protection, democracy, rule of law and community development priority areas. For instance, it helps private sector development by assisting in enhancement of competition in Armenia's market for goods and services, capacity building of small and medium size enterprises to expend their international trade relations, access of employers to skilled and qualified workforce. Besides, it assists in increasing of effectiveness, efficiency, accountability and transparency in public finance management, as well as to the decrease of disparities on a regional level. GIZ assists also in development and/or review to a range of substantial legal frameworks, reforms and overall capacity building in judicial system, as well as in development of fundamentals for sustainable management of natural resources and protection of biodiversity. Collaboration Areas: - Private Sector Development - Legal and Judicial Reform - Local Government and Decentralization 79 - Public Financial Management - Sustainable Management of Biodiversity Organization for Security and Co-operation in Europe (OSCE) Activities: OSCE program contributes to the development of democratic institutions in the country, strengthening civil society and promoting OSCE standards and principles. Priority areas include 1legislative reform, such as elections, freedom of assembly, media and so on, fight against corruption, capacity building of the National Assembly, Yerevan Municipality staff, implementing international conventions on economic and environmental security, promoting economic development of Armenia's remote provinces issues, including gender education, labor migration,. Collaboration Area: - Guillotine regulatory reform - Governance and public sector modernization 80 Annex 4. Armenia: List ofActive Trust Fund Operations TrustFundNameApproved Available Program Signing Closing ($.000) ($.000) Source Date Date Bank Executed TFs Food Safety Improvement project 427.79 231.15 IFC 12/19/2011 9/30/2014 Regulatory Improvement Project 916.70 374.99 IFC 12/19/2011 9/30/2014 Strengthening Consumer Protection 254.91 88.41 FIRST 1/9/2012 12/31/2013 Strengthening PFM in Armenia 110.00 74.45 EPFM 6/1/2012 12/31/2014 Supervision READ Armenia 1,400.00 1,068.96 READ 5/11/2012 10/28/2014 Power Sector Policy Note 100.00 82.84 ESMAP 11/15/2012 11/30/2013 PEFA Assessment (Sub National) 170.00 13.94 SAFE 11/5/2012 10/31/2013 MDB Programming Funds 120.00 86.58 CSCFIA 1/28/2013 6/30/2014 Supporting Capital Market 273.85 169.71 FIRST 2/4/2013 1/31/2014 Development Regulatory and Supervisory Framework 383.32 291.16 FIRST 2/8/2013 5/30/2014 for Funded Pensions and Life Insurance Enhancing Corporate Financial 233.05 233.05 FIRST 2/14/2013 2/28/2014 Reporting Strengthening the Livelihoods and Voice of Vulnerable and Disabled 200.00 191.55 JSDF 3/4/2013 2/28/2016 Persons in Armenia HRITF Impact Evaluation 75.00 58.63 HRBF 4/16/2013 10/31/2013 Vulnerability Assessment of Public 220.00 110.00 GFDRR 6/17/2013 12/31/2014 Facilities (GFDRR) HRITF Supervision-Bank Executed 530.00 170.00 HRBF 6/7/2013 12/15/2018 Financial Strengthening of Operating 125.00 62.50 PPIAF 7/15/2013 12/1/2014 Water Concessions Sustainable Energy Finance 953.18 270.50 IFC 7/28/2010 12/31/2014 Recipient Executed TFs Capacity Building for Public Sector 478.00 378.00 IDF 9/18/2012 11/9/2015 Auditing Armenia: Ministry of Finance Capacity 317.00 217.00 IDF 7/27/2012 10/4/2015 Building Strengthening Capacity of Regulatory Reform Unit of the Armenian 484.00 384.00 IDF 7/27/2012 10/2/2015 Government Project Energy Efficiency Project 1,820.00 1,457.97 GEFIA 4/20/2012 6/30/2015 81 Food Safety Capacity Building Project 450.00 377.40 IDF 8/24/2012 10/30/2015 Strengthening Public Financial 867.00 867.00 EPFM 4/2/2013 10/10/2014 Management in Armenia Electronic Processing and One-Stop 500.00 500.00 IDF 12/13/2012 2/11/2016 Shop for Construction Permits Preparation of the Health Performance Based Financing Program of the 400.00 400.00 HRBF 5/11/2013 5/11/2016 Armenia Disease Prevention and Control Project Harmonization of National Action Plan to combat desertification & Preparation 150.00 150.00 GEFSIA 3/14/2013 9/30/2014 of National Report National Biodiversity Strategy and Action Plan and Preparation of the Fifth 242.00 242.00 GEFSIA 3/14/2013 9/14/2015 National Report to the Convention on Biological Diversity in Armenia Pension public Awareness and Literacy 430.00 430.00 IDF 4/15/2013 6/6/2016 Strengthening Training Capacity of the 468.00 468.00 IDF 5/7/2013 5/31/2016 School of Advocates Environmental Governance, Inclusion 385.00 385.00 IDF 5/29/2013 5/29/2016 & Transparency in Mining Sector Grant for Community Agricultural Resource Management and 900.00 900.00 GEFIA 4/18/2013 12/11/2016 Competitiveness Project Strengthening the Livelihoods and Voice of Vulnerable and Disabled 2,669.40 2,569.40 JSDF 3/1/2013 3/1/2016 Persons Scale-up renewable Energy program 300.00 215.00 CSCFIA 5/2/2013 6/30/2014 Project Preparation Grant Preparation Grant for the General 360.00 360.00 ECACDF 7/4/2013 3/30/2014 Education Improvement Project Strengthening National Assembly's Capacity for Policy Formulation and 490.00 170.36 IDF 8/19/2010 10/4/2013 Public Dialogue Project Total 18,203.20 14,049.55 82 Annex A. 1. Armenia at a Glance Armenia at a glance 5/14/13 Europe& Lower Key Development Indicators Central middle Armenia Asia income Age distribution, 2010 (2011) Male Fernale Population, mid-year(millions) 3.0 405 2,519 7579 Surface area (thousand sq. km) 30 23,614 23,579 Populationgrowth(%) 0.0 0.4 15 Urban population (%of total population) 64 64 39 45-49 30-34 GNI (Atlas method, US$ billions) 10.3 2,947 4,078 GNI per capita (Atlas method, US$) 3,490 7,272 1,619 GNI per capita (PPP,international $) 5,660 13,396 3,632 0-4 10 5 0 10 GDP growth (%) 4.7 5.7 6.9 percent of total populaton GDP per capita growth (%) 4.7 5.3 5.3 (most recent estimate, 2005-2011) Povertyheadcount ratio at$1.25aday(PPP,%) <2 0 .. Povertyheadcount ratio at $2.00 a day (PPP, %) 12 2 Under-5mortalityrate(perl,000) Life expectancy at birth (years) 74 71 65 Infant mortality (per 1,000 live births) 12 19 50 60 Child malnutrition (%of children under 5) 4 2 25 so - 40 Adult literacy, male (%of ages 15 and older) 10 99 80 Adult literacy, female (%of ages 15 and older) 99 97 62 30 Gross primary enrollment, male (%of age group) 101 99 110 20 Gross primary enrollment, female (%of age group) 104 98 104 10 10 Access to an improved water source (%of population) 96 96 87 190 1995 2000 2010 Access to improved sanitation facilities (%of population) 90 84 47 DNmenia D rpeac1l Net Aid Flows 1980 1990 2000 2011 a (US$ millions) Net ODA and official aid .. 3 216 340 Growth of GDP and GDP per capita (%) Top 3 donors (in 20,10): United States .. O 1D3 92 so Japan .. 0 9 77 40 European Union Institutions .. 12 33 0 10 Aid(%ofGNI) .. 0.1 11.0 3.5 0 -10 Aid per capita (US$) .. 1 70 115 -20 -30 -40 Long-Term Economic Trends -50 95 05 Consumerprices (annual %change) .. 7.7 -0.8 7.7 GDP implicit deflator(annual %change) .. 79.4 -17.4 4.3 GDP - oncP Exchange rate (annual average, local per US$) .. 0.0 539.5 372.5 Terms of trade index (2000 = 100) .. .. 10 72 1980-90 1990-2000 2000-11 (average annual gro wth %) Population, mid-year(millions) 3.1 3.5 3.1 3.0 1.4 -1.4 -0.3 GDP (US$ millions) .. 2,257 1,912 10,142 .. -1.1 10.1 (%ofGDP) Agriculture .. 17.4 25.5 22.7 .. 0.3 7.3 Industry .. 52.0 39.0 33.1 .. -4.6 8.7 Manufacturing .. 32.8 1B.5 112 .. -4.3 4.1 Services .. 30.7 35.5 43.3 .. 6.5 15.0 Householdfinalconsumptionexpenditure .. 45.9 96.7 83.4 .. -0.3 6.8 Generalgov'tfinalconsumptionexpenditure .. 18.3 11.8 12.9 .. -1.5 7.4 Gross capital formation .. 47.1 14.6 27.3 .. -1.9 13.5 Exports of goods and services .. 35.0 23.4 23.8 .. -18.4 5.4 Imports of goods and services .. 46.3 50.5 47.4 .. -12.7 6.7 Gross savings .. .. 4.1 16.3 Note: Figures in italics are foryears otherthan those specified. 2011data are preliminary. indicates data are not available. a.Aid data arefor2010. Development Economics, Development Data Group (DECDG). 83 Armenia Balance of Payments and Trade 2000 2011 Governance indicators, 2000 and 2010 (US$ millions) Total merchandise exports (fob) 300 1,334 Total merchandise imports (cif) 885 4,145 Voice and accountability Net trade in goods and services -519 -2,390 Polical stabilty and absence of violene Current account balance -278 -1,108 Regulatory quality asa%ofGDP -14.6 - 10.9 Rule at law Workers' remittances and compensation of employees (receipts) 87 996 Control of corruption Reserves, including gold 314 1,799 O 25 50 75 10D Central Government Finance 2. C0untr S percentile rank (0-100) higher val- irrply bafter mtk7gs (%of GDP) Current revenue (including grants) 16.7 23.3 Sauce: Worldwide Govemance indicators (www.govindicatr.org) Taxrevenue 14.8 20.6 Current expenditure 16.3 21.5 Technology and Infrastructure 2000 2010 Overall surplus/deficit -4.9 -2.8 Paved roads (%of total) 96.8 93.6 Highest marginal tax rate (%) Fixed line and mobile phone Individual 20 20 subscribers (per 100 people) 13 144 Corporate 20 20 Hightechnologyexports (%of manufactured exports) 4.7 1.8 External Debt and Resource Flows Environment (US$ millions) Total debt outstanding and disbursed 918 6,896 Agricultural land (%of land area) 46 62 Total debt service 46 714 Forest area (%of land area) 10.8 9.3 Debt relief (HIPC, M DRI) - - Terrestrial protected areas (%of land area) 6.9 8.0 Total debt (%of GDP) 47.9 68.0 Freshwater resources percapita (cu. meters) 2,241 2,223 Total debt service (%of exports) 8.2 19.0 Freshwater withdrawal (billion cubic meters) Foreign direct investment (net inflows) 104 935 C02 emissions per capita (mt) 1.1 18 Portfolio equity(net inflows) 0 -1 GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) 3.5 5.7 Composition of total external debt, 2011 Energy use per capita (kg of oil equivalent) 651 843 Short-termn, 618 IBRID 4184 World Bank Group portfolio 2000 2010 Pnvate, 1,627 (US$ millions) ,834 IBRD Total debt outstanding and disbursed 8 106 Disbursements 0 53 Otermulti- Principal repayments 0 1 ateral, 1,161 Interest payments 0 1 US$ millions IDA Total debt outstanding and disbursed 388 1161 Disbursements 54 36 Private Sector Development 2000 2011 Total debt service 3 24 Time required to start a business (days) - 8 IFC (fiscalyear) Cost to start a business (%of GNI per capita) - 3.1 Total disbursed and outstanding portfolio 0 47 Time required to register property(days) - 7 of which IFC own account 0 47 Disbursements for IFC own account 0 13 Ranked as a majorconstraint to business 2000 2010 Portfolio sales, prepayments and (%of managers surveyed who agreed) repayments for IFC own account 0 7 Taxadministration .. 43.8 Taxrates .. 37.8 MIGA Gross exposure 3 4 Stockmarketcapitalization(%ofGDP) 0.1 0.3 Newguarantees 3 4 Bank capital to asset ratio (%) 14.3 20.4 Note: Figures in italics are for years other than those specified. 2011data are preliminary. 5/14/13 ..indicates data are not available. - indicates observation is not applicable. Development Economics, Development Data Group (DECDG). 84 Annex A.2. Progress toward Millennium Development Goals Millennium Development Goals Armenia With selected targets to achieve between 1990 and 2015 (estimate closest to date shown, +1-2 years) Armenia Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2010 Poverty headcount ratio at $1.25 a day (PPP, %of population) .. 17.5 19.8 <2 Poverty headcount ratio at national poverty line (%of population) .. .. 50.9 35.0 Share of income or consumption to the poorest qunitile (%) .. 5.4 7.6 0.3 Prevalence of malnutrition (%of children under 5) .. .. 2.6 4.2 Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) 91 84 Primarycompletion rate (%of relevant age group) .. 105 93 01 Secondaryschoo I enrollment (gross, %) .. 90 90 92 Youth literacyrate (%of people ages 15-24) 10 .. 10 100 Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primaryand secondary education (%) 104 103 Women employed in the nonagricultural sector (%of nonagricultural employment) .. 51 47 54 Proportion of seats held bywomen in national parliament (%) 36 6 3 9 Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 56 48 36 14 Infant mortality rate (per 1,000 live births) 48 42 32 12 Measles immunization (proportion ofone-yearolds immunized,%) 93 96 92 96 Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) 34 9 Births attended byskilled health staff (%of total) .. 96 97 100 Contraceptive prevalence (%of women ages 15-49) 61 53 Goal 6: halt and begin to reverse the spread of HIVIAIDS and other major diseases Prevalence of HIV (%of population ages 15-49) 0.1 0.1 0.1 0.1 Incidence of tuberculosis (per 10,000 people) 33 47 71 73 Tuberculosis case detection rate (%, all forms) 50 77 61 62 Goal 7: halve the proportion of people without sustainable access to basic needs Accessto an improved water source (%of population) .. 92 93 96 Access to improved sanitation facilities (%of population) .. 88 89 90 Forest area (%of land area) 12.0 11.5 10.8 9.3 Terrestrial protected areas (%of land area) 6.9 6.9 6.9 8.0 C02 emissions (metric tons per capita) 11 1.1 1.1 1.8 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 14 3.4 3.5 5.7 Goal 8: develop a global partnership for development Telephone mainlines (per 100 people) 15.8 18.1 17.3 19.2 Mobile phone subscribers (per 1Opeople) 0.0 0.0 0.6 125.0 Internet users (per 10O people) 0.0 0.1 1.3 44.0 Computer users (per lDO people) Education indicators (%) Measles immunization (% of 1-year ICT indicators (per 100 people) olds) 125 -10 18D 10D - 140 75 120 75- 10D 50 50 80 25 60 25 40 20DO 20D5 2010 0 . . 20 0. 190 1995 200 2010 20D0 2005 2010 Note: Figures in italics are for years other than those specified. ..indicates data are not available. 5/14/13 Development Economics, Development Data Group (DECDG). 85 Annex A. 3. Key Socio-Economic Indicators Armenia Social Indicators Latest single year Same regionlincome group Europe & Lower- Central middle- 1980-85 1990-95 2005-11 Asia income POPULATION Total population, md-year (millions) 3.3 3.2 3.0 405.2 2,518.7 Growth rate (% annual average for period) 1.5 -1.9 -0.6 0.3 1.6 Urban population (% of population) 67.1 66.3 63.9 64.1 39.4 Total fertility rate (births per oman) 2.5 2.1 1.7 1.8 2.9 POVERTY (% of population) National headcount index .. .. 35.0 Urban headcount index .. .. 35.2 Rural headcount index .. .. 34.5 INCOME GNI per capita (US$) .. 450 3,490 7,272 1,619 Consumer price index (2005=100) .. 68 166 143 140 INCOMEICONSUMPTION DISTRIBUTION Gini index .. .. 37.1 Lowest quintile (% of income or consumption) .. .. 10.3 Highest quintile (% of income or consumption) .. .. 35.3 SOCIAL INDICATORS Public expenditure Health (% of GDP) .. .. 1.7 4.0 2.0 Education (% of GNI) .. .. .. 4.4 4.0 Net primary school enrollment rate (% of age group) Total .. .. 84 92 85 Male .. .. 83 92 87 Female .. .. 86 91 83 Access to an improved water source (% of population) Total .. 92 96 96 87 Urban .. 99 98 99 93 Rural .. 78 93 91 83 Immunization rate (% of children ages 12-23 months) Measles .. 96 96 96 80 DFT .. 98 93 95 79 Child malnutrition (% under 5 years) .. .. 4 2 25 Life expectancy at birth (years) Total 70 69 74 71 65 Male 67 65 71 66 64 Female 72 72 77 75 67 Mortality Infant (per 1,000 live births) 54 42 12 19 50 Under 5 (per 1,000 live births) 64 48 14 23 69 Adult (15-59) Male (per 1,000 population) 158 216 165 273 244 Female (per 1,000 population) 85 119 80 116 175 Maternal (per 100,000 live births) .. .. 9 34 300 Births attended by skilled health staff (%) .. .. 100 98 57 CAS Annex B5. This table w as produced from the CMU LDB system. 05/14/13 Note: 0 or 0.0 means zero or less than half the unit show n. Net enrollment rate: break in series betw een 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months w ho received vaccinations before one year of age or at any time before the survey. 86 Annex B. 1. Selected Indicators of Bank Portfolio Performance and Management CPS Annex B1 Selected Indicators* of Bank Portfolio Performance and Management As Of Date 10/2/2013 Indicator 2011 2012 2013 2014 Portfolio Assessment Number of Projects Under Implementation a 15 13 14 14 Average Implementation Period (years) b 3.1 3.0 2.6 2.8 Percent of Problem Projects by Number a, c 0.0 0.0 0.0 0.0 Percent of Problem Projects by Amount a, c 0.0 0.0 0.0 0.0 Percent of Projects at Risk by Number a, d 0.0 0.0 0.0 0.0 Percent of Projects at Risk by Amount a, d 0.0 0.0 0.0 0.0 Disbursement Ratio (%) e 51.3 42.2 33.7 10.8 Portfolio Management Yes Yes CPPR during the year (yes/no) Supervision Resources (total US$) Average Supervision (US$/project) Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 43 11 Proj Eval by OED by Amt (US$ millions) 1,004.2 195.6 % of OED Projects Rated U or HU by Number 7.0 9.1 % of OED Projects Rated U or HU by Amt 10.1 14.0 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 87 Annex B.2. Operations Portfolio (IBRD/IDA and Grants) CPS Annex B2 Armenia Operations Portfolio (IBRDIlDAand Grants) As Of Date 1012/2013 Closed Projects 56 IBRDIlDA* I Total Disbursed (Active) 236.08 of which has been rel 0.00 Total Disbursed (Closed) 793.38 of which has been rel 114.87 Total Disbursed (Active + C 1,029.46 of which has been rel 114.87 Total Undisbursed (Active) 202.35 Total Undisbursed (Closed) 0.00 Total Undisbursed (Active + 202.35 Active Projects )ifference Betweei Last PSR Expected and ActuE Supervision Rating Original Amount in US$ Millions Disbursements" Project ID Project Name Fiscal Year IBRD IDA GRANT Cancel. Undisb. Orig. rm MbEtive on ProgreS Rev'd. P120028 COMMUNITY AGRI. RES. MANAGEM. AND COMFS S 2011 16 7.83371 -4.49278 P128442 DISEASE PREVENTION & CTRL S S 2013 35 30.9807 -3.08547 P115647 E-SOCIETY & INNOVATION S MS 2011 24 19.5964 9.09636 P107772 EDUC QUAL & REL (APL#2) MS S 2009 25 11.1807 3.43306 P116748 ELECTRICITY SUPPLY RELABILITY S S 2011 39 32.5405 6.04049 P116680 ENERGY EFFICIENCY MS MS 2012 1.82 1.45797 -0.36203 P104467 HLTH SYS MOD (APL2) S S 2007 19 22 0.04405622 6.86297 -13.0109 0.9891 P127759 IRRIGATION SYSTEM ENHANCEMENT PROJEC # # 2013 30 24.925 P126782 LIFELINE ROAD NETWORK IMPROVEMENT PRS S 2013 45 36.0839 P115486 LIFELINE ROADS IMPROVEMENT PROJECT S S 2009 76.6 25 0.00002088 1.91538 -75.6683 -38.072 P126722 MUNICIPAL WATER S S 2012 15 9.29544 3.29544 P117384 PSMP II S S 2010 9 4.1542 -0.5458 P094225 SIF 3 S S 2007 7 44 0.00724572 5.41489 -21.4558 -13.456 P111942 TAX ADMIN MODERN S S 2013 12 11.5652 Overall Result 264.6 179 1.82 0.05132282 203.807 -110.947 -50.538 88 Annex B.3. IFC - Committed and Disbursed Outstanding Investment Portfolio CPS Annex B3 IFC - Committed and Disbursed Outstanding Investment Portfolio As of 8/31/2013 (In USD Millions) Committed Disbursed Outstanding **Quasi Partici **Quasi Partici FYApproval Company Loan Equity Equity *GT/RM pant Loan Equity Equity *GT/RM pant 12/13/2011 Acba bank 47.14 0 0 2.72 0 47.14 0 0 1.01 0 2010 Acba leasing 2.14 0 0 0 0 2.14 0 0 0 0 11/13/2010 Ameriabank 13.75 0 0 4.35 0 13.75 0 0 0.86 0 2007/11 Armeconombank 1.27 0 0 0 0 1.27 0 0 0 0 2008 Ashib 5 0 0 0 0 5 0 0 0 0 2012 Byblos armenia 9.62 0 0 0 0 4.62 0 0 0 0 2010 Elite group 5.17 0 0 0 0 5.17 0 0 0 0 2013 Euroterm 2.5 0 0 0 0 1.5 0 0 0 0 2013 Finca armenia 4 0 0 0 0 0 0 0 0 0 2012 Hsbc armenia 22 0 0 0 0 14.67 0 0 0 0 2006 Inecobank 0 1.21 0 0 0 0 1.21 0 0 0 0/08/09/10/11/12/13 Lydian intl 0 11.73 0 0 0 0 11.73 0 0 0 2006 Narek 0.95 0 0 0 0 0.95 0 0 0 0 Total Portfolio: 113.54 12.94 0 7.07 0 96.21 12.94 0 1.87 0 * Denotes Guarantee and Risk Management Products. ** Quasi Equity includes both loan and equity types. 89 CPS Annex B.4. -Summary ofPlanned Lending and AAA As of 10/09/2013 FY14 FY15 FY16 FY17 AAA (FY14-15) IBRD IDA IFC IBRD IFC IBRD IFC IBRD IFC Cluster I: Supporting Competitiveness and Job Creation - Development Policy Lending 31 41 50 50 60 - Power Sector Policy Note - Agriculture Resources & Supply Chain 23 7 45 - Environment Sector Policy Note - Long Term Export Finance 20 - Export Development Strategy Note - Electricity Supply Reliability AF 30 50 - Innovation Policy Note - Trade Promotion & Quality Infrastructure 40 - CEM on Growth - Tourism Economy & Infrastructure Dev. 55 - Water Resource Management Note - Road Network Improvement AF 40 - IFC projects 40 40 40 40 Cluster II: Improving Efficiency and Equity in Social Services - Education Quality and Relevance - 2 15 15 - Health Sector Financing - Social Protection Administration - 2 21.5 - Vulnerability Assessment - Disease Prevention and Control - 2 40 - Social Investment Fund - 2 30 Cross-Cutting Cluster: Improving GAC - Subnational PEFA Assessment Measures in Public Services - Programmatic Fiscal Work - Public Sector Modernization / PFM - 2 20 - Social Accountability Rural Services - Judicial and Political Economy Analysis IBRD 599 159 150 145 145 TOTAL IDA 84.5 84.5 IFC 160 40 40 40 40 Z1V-- CPS Annex B.5. - Summary of Non-lending Services-Armenia (IFC) As of Date 10/0912013 Completion Cost Product FY (Us Audience Objective FY (US$000) Recent Completions Armenia Regulatory Simplification and FY11 1539 G K, PS Doing Business Reform Project Armenia Microfinance Program FY12 720 G PS Armenia Banking Market Development FY12 1189 G, other PS Project ECA FM Crisis Management Program FY13 1563 (reg'l) G, other K, PS Underway/Planned Armenia Investment Climate Reform FY14 1657 G K, PS Project Armenia Food Safety Project FY14 428 G, other PS Armenia Sustainable Energy Finance FY14 1157 G, other PS Project ECA SME Banking Project FY15 2189 (reg'l) G K, PD ECA Corporate Governance Program FY15 4810 (reg'l) G, other K, PS a. 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