ARMENIA

SOCIAL INVESTMENT FUND II PROJECT

MID-TERM MISSION REPORT

JANUARY 2004

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Table of Contents

Page no.

Introduction ..................................................................................................................... 1

PART I: DEVELOPMENT IMPACT REVIEW................................................... 2

Coverage of ASIF II Operations ......................................................................................... 2

Community Infrastructure Projects ..................................................................................... 4

Community Participation .................................................................................................... 5

Enhancement of Social Capital ........................................................................................... 6

Capacity Building................................................................................................................ 8

Capacity Building for Implementing Agencies and Local Contractors .............................. 9

Local Government and School Training ........................................................................... 10

PART II: ASIF II POVERTY TARGETING STRATEGY AND REGIONAL

ALLOCATION REVIEW...................................................................... 15

Poverty Profile................................................................................................................... 15

Targeting Strategy............................................................................................................. 15

Regional Allocations and Actual Disbursements.............................................................. 16

Disbursements in Relation to Population and Poverty Scores .......................................... 17

Impact on Poverty Reduction............................................................................................ 18

Poverty Monitoring ........................................................................................................... 19

PART III: MICROPROJECT CYCLE REVIEW ................................................. 20

Promotion ................................................................................................................... 20

Appraisal ................................................................................................................... 23

Follow-Up ................................................................................................................... 25

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PART IV: COST EFFECTIVENESS REVIEW .................................................... 27

Approach to the Cost-Effectiveness Analysis................................................................... 27

ASIF II Microprojects and Development Strategy ........................................................... 27

Cost-Effectiveness of Microprojects................................................................................. 28

The ASIF Methodology in Microproject Analysis ........................................................... 29

Cost-Effectiveness Study .................................................................................................. 30

PART V: ADMINISTRATIVE, ACCOUNTING AND

REPORTING PROCEDURES .............................................................. 30

Financial Management Review......................................................................................... 31

Project Disbursement Performance................................................................................... 31

The Project Accounting System and the Project’s Financial Accounts ............................ 38

Government Counterpart Contribution ............................................................................. 39

Status of Matching Fund Arrangements under the Project ............................................... 40

Status of Co-Financing Arrangements under the DFID Trust Fund ................................. 44

Financial Reporting Activities of ASIF ............................................................................ 44

The Management Information System.............................................................................. 45

Financial Audits ................................................................................................................ 45

PSR Ratings ................................................................................................................... 46

Action Plan ................................................................................................................... 46

Procurement Review ......................................................................................................... 47

Procurement Plan Review ................................................................................................. 47

Capacity of the ASIF Procurement Staff........................................................................... 49

ASIF General Reporting Arrangements............................................................................ 49

ASIF Staff Training........................................................................................................... 51

PART VI: A PROPOSED FOLLOW-UP PROJECT............................................ 51

ANNEXES

Annex 1 List of ASIFII Microprojects visited during Supervision Missions.......... 52

Annex 2 ASIF II Social Capital Assessment ........................................................... 54

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Annex 3 Summary of ASIF II Local Level Training Activities .............................. 59

Annex 4 Terms of Reference for ASIF II Cost-Effectiveness Study....................... 60

Annex 5 ASIF II Disbursement Table ..................................................................... 67

Annex 6 ASIF II Staff Training Activities .............................................................. 68

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INTRODUCTION The Mid-term Review of the Armenia Social Investment Fund III (ASIF III) Principal Project conducted from April 26 to May 6, 2010, was carried out with the purpose of assessing overall project performance to-date, the current issues and future direction of the project. Team members of the mission included: Caroline Mascarell, Mission Leader, Hilarian Codippily, Social Development Economist, Susanna Hayrapetyan, Senior Health Specialist (ECSHD), Ekaterina Arsenyeva, Financial Management Specialist (ECC10), Alexander Astvatsatryan, Procurement Specialist, and Arman Vatyan, Financial Management Specialist. Mr. Ashot Kirakosyan, Executive Director of the ASIF II Project, and his team, actively participated in and contributed to the Mid-term review. The Mid-term Review report consists of five parts covering in-depth reviews and a sixth part regarding the Government’s request for a proposed ASIF III Project, which are set out below. These reviews were based on documentation available in project and other related files in the ASIF, and project reports and studies, including, but not limited to, procurement and financial management assessments, quality of works reviews, financial audit reports, project progress reports, Beneficiary Assessments, and the recent Social Capital Assessment. Specific attention during these reviews was given to issues raised during project supervision missions, as well as those raised in the quality of works reviews, in the Beneficiary Assessments and in the recent Social Capital Assessment. The reviews were complemented by field visits to selected communities to assess management and supervision arrangements, as well as related training activities of community investment projects in the field. Part I: Development Impact Review: Assessment of the development impact of the project regarding the improvement of basic social and economic infrastructure, short-term employment opportunities, community outreach, and local capacity building. Part II: Poverty Targeting Strategy and Regional Allocation Review: Assessment of the poverty targeting strategy and the regional allocation of funds, focusing in particular on the extent to which actual expenditures by regions are in line with the regional allocations. The assessment also covers the development/poverty alleviation impact. Part III: Microproject Cycle Review: Assessment of the effectiveness of ASIF II activities at all stages of the project cycle covering targeting, transparency and accountability, internal project monitoring systems, quality of works, technical assistance and training, and compliance with the project’s operating criteria and procedures. Part IV: Cost Effectiveness Review: Assessment covering: (i) the main contributions of the ASIF II Project within the broader economic context of the Country Assistance Strategy; (ii) the extent to which simple cost-effectiveness analysis on community microprojects has been carried out, based on criteria such as cost per beneficiary, the size of microprojects, the physical content of the work, unit cost indicators, and the use of least-

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cost analysis; and (iii) the cost-effectiveness in the use of funds, based on unit costs derived from construction work carried out by comparator agencies and other sources. Part V: Administrative, Accounting and Reporting Procedures Review: Assessment of project disbursements, the project accounting system and financial accounts, the status of the government counterpart contributions, matching fund arrangements under the project, cofinancing arrangements under the DFID Trust Fund, procurement and reporting activities, the management information system (MIS), financial audits, staffing issues, and compliance with ASIF II Credit Agreement. Part VI: A Proposed Follow-Up Project. An introduction to the proposed ASIF III Project highlighting the priorities assigned by Government to a possible follow-up ASIF III Project, and some additional components that should be included in such a project. What follows are the findings of the review, outlining the main issues identified, recommendations made for addressing these issues, and arrangements reached on next steps. The findings were prepared jointly by all mission members and with the excellent support, participation and cooperation received from staff of the ASIF. The complete list of microprojects visited during supervision missions, including the Mid-term mission, is included in Annex 1.

PART I: DEVELOPMENT IMPACT REVIEW The review consists of an assessment of the development impact of the project regarding the improvement of basic social and economic infrastructure, short-term employment opportunities, community outreach, and local capacity building. The focus of the assessment covers: (i) demand orientation of the project; (ii) community role and participation; (iii) effectiveness of coordination, management, and information dissemination activities; (iv) appropriateness of technical standards; and (iv) the existence of institutional mechanisms to sustain community involvement in decisions about microproject design, implementation, operation and maintenance, and evaluation. Coverage of ASIF II Operations The ASIF II Project began its implementation activities in October 2000 with the objective of assisting the Government of Armenia in its continuing endeavor to improve living standards of the lower groups among the Armenian population and strengthen institutions at the local level. Within a period of three years, the ASIF has made significant progress in extending its coverage with the aim of improving the quality and availability of community infrastructure in poor communities throughout Armenia, including the provision of school heating systems and school furniture. During the first two years of implementation, the ASIF focused their program in the earthquake zone in support of the Government’s Earthquake Recovery Program. By the end of December 2002, the ASIF had successfully supported the Government’s program responding to priority community infrastructure needs in poor communities throughout the earthquake zone. The ASIF then focused its

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activities on other regions, targeting a wide range of communities throughout Armenia. As of December 2003, the ASIF targeted communities in nine regions covering Aragacotn, Gegarqunick, Kotaik, Lori, Shirak, Syunik, Tavush, Vajoc Dzor, and Yerevan. The ASIF received 946 proposals, of which 188 microprojects had either been completed or were under implementation. There are currently 83 MPs under implementation, of which 54 are for school rehabilitation or construction. As of December 2003, a total of US$13.3 million (IDA: US$9.6 Million, Sponsors: US$1.6 million, DFID: US$1.1 million, Communities: US$911,000, and Government: US$75,000) has been disbursed against microprojects. The average cost of MPs is estimated at US$57,000. The average cost per beneficiary is US$19. In addition, a total of US$1 million was disbursed against goods for microprojects, consisting mainly of school furniture. Tables 1 and 2 below provide a summary of infrastructure works projects by typology covering completed and ongoing projects. See also Table 5 for cost per project and cost per beneficiary.

Table 1: ASIF II - Completed Microprojects by Typology

Type Number % Value (US$) % Beneficiaries %Schools 62 59.05 3,795,908.00 63.65 90,819 28.14Special Schools 4 3.81 454,707.00 7.62 3,239 1.00Water Supply 22 20.95 888,285.00 14.90 44,171 13.69Irrigation 5 4.76 160,145.00 2.69 30,193 9.36Polyclinics 4 3.81 216,518.00 3.63 62,001 19.21Community Centers 2 1.90 72,383.00 1.21 29,983 9.29Health Centers 1 0.95 29,279.00 0.49 24,600 7.62Orphanages 1 0.95 93,980.00 1.58 153 0.05Waste Disposal 4 3.81 252,193.00 4.23 37,580 11.64

TOTAL 105 100.00 5,963,398.00 100.00 322,739 100.00Source: ASIF Office, MIS

Table 2: ASIF II – Ongoing Microprojects by Typology

Type Number % Value (US$) % Beneficiaries %Schools 54 65.06 3,340,033.00 62.00 101,954 57.31Special Schools 6 7.23 440,139.00 8.17 13,040 7.33Kindergarten 1 1.20 23,130.00 0.43 1,540 0.87Water Supply 14 16.87 1,009,159.00 18.73 39,512 22.21Irrigation 1 1.20 29,935.00 0.56 1,017 0.57Community Centers 3 3.61 229,745.00 4.26 2,593 1.46Health Centers 3 3.61 247,773.00 4.60 16,901 9.50Waste Disposal 1 1.20 66,956.00 1.24 1,331 0.75

TOTAL 83 100.00 5,386,870.00 100.00 177,888 100.00Source: ASIF Office, MIS

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Community Infrastructure Projects Microprojects: The community infrastructure projects carried out under the ASIF II Project have generated a visible development impact in terms of social and economic benefits to the poor communities in all regions of Armenia. Of the 105 completed MPs, the majority comprised school rehabilitation or construction (62), followed by water supply (22), and irrigation (5), benefiting 322,700 community members and creating nearly 40,000 man days of short-term employment. In addition, school heating systems were constructed or repaired in 19 schools as part of school projects. Stand-alone school heating systems were also constructed in 15 schools. These projects responded to the communities’ priority needs and were carried out through self-help interventions promoted by the ASIF. Residents in these communities are now enjoying rehabilitated and warmer schools during winter for their children, potable water in their homes, rehabilitated specialized schools for orphanages, handicap children, art students, and rehabilitated sports facilities. They expressed satisfaction in seeing projects being implemented in their communities that yield tangible, visible results which are designed for the common good of the community. These projects also represent hope for the future of children in poor remote rural communities and in the regions devastated by the earthquake in 1988. School Furniture: Since the start of project effectiveness, a total of 392 schools (rehabilitated and newly constructed) received school furniture. This comprised 22,059 desks and 44,118 chairs, amounting to a total value of US$1.06 million. Impact of Community Infrastructure Projects As documented in previous supervision missions and confirmed in the Beneficiary Assessments carried out, as well as in the recent Social Capital Assessment, microprojects implemented under the ASIF II Project improved the quality of essential social and economic infrastructure and services in beneficiary communities throughout Armenia. The benefits of the ASIF microprojects range from improved access to potable and irrigation water to improvement in class attendance and school enrollment, hygiene and health, and the psychological well-being of communities. The ASIF program created opportunities for effective decentralized systems, building upon the interactive partnership between the public and the government. This activity involved redefining the roles and responsibilities of municipal authorities and citizens in the delivery of municipal services, as well as disseminating accurate and accessible information to the public. The participatory process promoted under the ASIF consisted of gradually preparing governments and communities in the fundamentals of participation, project management, and accountability. The Decentralized Approach to the ASIF: The recent Beneficiary Assessment (BA) and Social Capital Assessment were instrumental in highlighting the positive impact of the ASIF II Project in terms of supporting the Government’s decentralization program at the local level, and in particular, strengthening local level institutions and empowering communities. More importantly, the BA revealed that community infrastructure microprojects served as an effective framework for promoting the institutionally strengthened local governments, mobilized community members, and created linkages with

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their constituents under the ASIF microprojects, which enhanced interpersonal trust and strengthened intra-community bonds and cooperation. Both evidence from the BA and from observations made during field visits highlighted that the ASIF II Project provides a clear example of how a decentralized approach has contributed significantly to meeting its key objective of improving the living standards of the poor, through improved basic social services sustained by capacity building. Community Participation Since the project became effective, a total of 1,133 community meetings were organized by the ASIF. There are currently a total of 5,227 community members who have participated or are participating as members of Implementing Agencies, of whom 1,829 are women and 2,188 are local government officials. The majority of community members took part in community meetings to identify and prioritize local problems and to select members of the Implementing Agencies (IAs). During microproject implementation, many community residents provided paid and/or unpaid labor, and volunteered support to the IAs. The in-cash contributions by the communities as of end-October 2003 is estimated at US$911,000. The communities have also contributed a total of US$83,000 in kind and US$14,000 in labor. The key participatory features of the ASIF program are open community meetings and elected Implementing Agencies as part of every microproject, and the effective mechanism of mandatory community contributions adopted under the ASIF I Project and maintained under the ASIF II. With regard to contractor participation, as of December 2003, a total of 151 bid conferences were organized by the ASIF benefiting 1,006 contractors, and a total of 1,001 bid packages were received. A total of 110 contractors participated in ASIF works projects and an estimated number of 47 contractors participated in more than one ASIF project. Effectiveness of ASIF Participatory Framework: Experience under the ASIF has shown that the active engagement of community members under the project’s participatory framework, developed and tested under the ASIF I and later refined under the ASIF II, has yielded positive results. Over the last eight years, citizens in these communities gradually came together and participated in ASIF activities, establishing close working contacts with ASIF staff from promotion to appraisal, to implementation. More importantly, these communities have gradually developed trust in the ASIF program. The combination of experience gained under ASIF I, together with existing levels of social capital, has significantly contributed to the effective participation of community members in the design, implementation and monitoring of projects under ASIF II, which respond to the common good of the community. Community members involved in ASIF projects gradually became aware of the benefits of their engagement in microprojects. A number of communities from Vanadsor, Yerevan, Meghrashen, and Hartavan who participated in ASIF I projects were successful in obtaining funding from ASIF II to support their second round of priority projects. These communities were confident of their new skills in applying for another ASIF project and for carrying out successfully the implementation of a microproject. Furthermore, improved

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public facilities in Armenian communities created a strong incentive for community members to become more actively engaged in the maintenance of the rehabilitated facilities. As noted in the recent Beneficiary Assessment, “microprojects were crucial in further boosting participatory spirit and civic identity in the communities targeted.” The ASIF Project successfully built from and strengthened existing levels of social capital, which played an important role in the capacity of local communities to initiate and effectively manage microprojects. The prior endowments of social capital in communities, such as the presence of strong, trusted and effective leaders were key in determining the success of beneficiary communities in obtaining microproject funds from the ASIF and in effectively managing microprojects. Other Benefits of Community Participation in ASIF Projects: The recent BA highlights that many of the beneficiaries who were not directly involved in ASIF microprojects revealed interest in the process, progress and outcomes of the microprojects being carried out in their community. Community members actively took part in the monitoring of microprojects, periodically inquiring about their status by conversing with members of the IA, contractors and ASIF staff. The BA also highlighted an interesting observation that ASIF microprojects in some communities helped lessen the level of tension in a community, as a result of providing equal access to a public facility. In Meghrashen, for instance, the ASIF microproject provided all residents with access to irrigation water. A village member of the beneficiary community who was interviewed expressed the positive impact that the microproject had on the community when he stated “the impact of the irrigation project was good, we received produce this year. And when people’s well-being improves, they become more open-hearted.” Enhancement of Social Capital The recent Social Capital Assessment of the ASIF II Project focused on the approach of the project to enhancing social capital. As mentioned in the Concept Note of the assessment developed in May 2003, the evaluation looked at the effectiveness of the integrated development framework (i.e. project structure, methods and techniques, and service delivery) under the project to enhance both bridging and bonding forms of social capital. During the supervision mission of June 2003, meetings were held with ASIF staff, the Chief of the Household Department of Statistics, and a number of donor and other agencies to discuss technical issues related to the social capital assessment and sampling issues, as well as administrative issues for the preparation of the combined beneficiary/institutional assessments, as part of the social capital review. Annex 2 provides details on the assessment covering objectives, key areas of analysis, methodology, sampling and selection of sites. The findings of the assessment confirm the following key working hypotheses:

• The institutional framework of ASIF II – consisting of institutional arrangements, participatory methods, service delivery, and capacity building - - served as an effective catalyst for institutional development and social capital formation.

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• The institutional linkages strengthened under the framework of the project increased the efficiency of local communities and government institutions in service delivery and created effective social capital.

The recent Beneficiary Assessment, carried out as part of the Social Capital Assessment, highlights some key findings:

Social Capital Bridging:

• The complementary interaction between institutionally-strengthened local governments and mobilized community members participating in ASIF microprojects created linkages between local government and communities.

• The institutional network between local mayors and regional governors was strengthened under the ASIF creating bonds between local and regional governments.

Social Capital Bonding:

• The active engagement of community leaders with their constituents under the ASIF microprojects, which enhanced interpersonal trust, strengthened intra-community bonds and cooperation.

• Professional ties between school principals within and outside of the project area were created as a result of the training induced by the ASIF program producing a stock of trained principals beyond the project area.

The following sections of the Mid-term review will highlight specific findings from the social capital assessment covering different aspects of ASIF II activities.

Partnership Formation: Another positive impact that the project had on communities is partnership formation created at the local level between community members and local government officials. This partnership was reinforced under the ASIF II Project as a result of: (i) requiring government officials to be part of the Implementing Agency; and (ii) establishing a closer link with Government officials through the local government training program. Field visits to microproject sites and findings from the recent Beneficiary Assessment have confirmed the reinforcement of the partnership established between community members and Mayors. As noted in the recent Beneficiary Assessment “the ASIF microprojects played the role of a catalyst by enabling local leaders to demonstrate hard work, and reinforce their position and reputation within their communities. This provided an opportunity for the local leaders to be more effective in mobilizing community members around the most immediate local problems.” As a result of the involvement of local government officials in ASIF projects and of their good performance, as assessed by community members, these leaders gained the trust and in some cases even admiration, and commitment from community members. The active

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participation of effective local leaders participating in ASIF microprojects increased their efficiency in mobilizing communities to cooperate and actively participate in microprojects. At a broader level, it also increased the motivation of community members to become more proactive in their communities, as they became aware of the benefits of their involvement in community activities. In the recent BA, one school director interviewed made reference to this point as he stated, “we all have become aware that in order to get something done, the whole community should be involved.” Impact of New School Furniture provided by the ASIF: Discussions with school principals and members of the Implementing Agencies during field visits revealed that the new school furniture purchased under ASIF II has had a positive impact on the students. The children feel privileged and proud to have new desks, and, as a result treat their surroundings with more respect. In some cases, school principals made the observation that as a result of the new furniture, some students have become more attentive in class, improving their school performance. One pupil interviewed in the school of Saralanj stated “the new school has been very exciting to us. We have started to study better with greater pleasure, we even feel much better at school than at home.” It is clear that children benefiting from ASIF projects react positively to their new desks, appreciating the improved conditions of their schools. The recent BA also highlights that improved school conditions had a positive effect on attracting good teachers from neighboring villages and even improving the quality of teaching. It also noted that improved conditions of schools, motivates teachers and parents to take action on maintenance related issues, with the goal of preserving the good classroom conditions. Areas of Improvement in Community Participation: The recent BA and social capital assessment point to a number of key areas for improving community participation under ASIF II, which relate mainly to the need for strengthening ASIF II capacity building activities targeting beneficiary communities. The following section on capacity building focuses on this topic.

Capacity Building Local level Institutional Strengthening Activities: The ASIF has also supported institutional capacity building at the community and municipal levels so as to improve the quality and sustainability of service delivery and increase civic participation in local development. Local level institutional strengthening activities have been effectively planned, supervised and monitored by a competent team under the Training and Technical Assistance Unit. Discussions with community members and with the staff of the participating training institutes confirmed the first rate services provided by the ASIF team in diffusing development knowledge at the local level, as well as the positive impact of the training program. Since the project became effective, the ASIF team in charge of training activities, with the close collaboration of the participating training institutes has refined a number of training procedures and administrative arrangements based on their initial experience in carrying out training activities at the local level. The following is a summary

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of the key training activities carried out, the impact of these activities, and some lessons learned. Capacity Building for Implementing Agencies and Local Contractors Since the ASIF II Project became effective, the ASIF has been effectively carrying out on-the-job training to community members and contractors at different stages of the microproject cycle. As of December 2003, the ASIF provided on-the-job training to 5,739 Implementing Agency members and 748 contractors. ASIF staff at every level of the MP cycle have been very effective in delivering technical, managerial and organizational support to project committee members in terms of enhancing their capacity to perform their functions related to the community investment projects. With regard to communities, capacity building activities focused on training members of Implementing Agencies to: (a) prepare project proposals, including simple cost-effectiveness analysis of the projects; b) understand the importance of community participation at all stages of the project cycle; (c) select contractors through a competitive process; (d) monitor and supervise project activities, ensuring good operations and maintenance; and (e) manage partnerships with local governments, NGOs, and other entities. Training of contractors has focused on capacity building in the preparation of bids using World Bank procurement guidelines and the implementation of quality control. On-the-job training was also provided to contractors from ASIF follow-up engineers who regularly supervised the microprojects. In cases were the communities benefited from effective local supervisors, daily interactions between the local supervisors and the contractors also served as effective training to the contractors. Impact of IA and Local Contractor Training: The benefits of the MP training and the effectiveness of the ASIF in delivering training to members of the IA and to contractors was evident during field visits and confirmed in the beneficiary assessments carried out under the project. IA members were knowledgeable about the ASIF MP cycle, kept good records of their project documents and were very much engaged in the implementation of the microprojects, including the supervision of works. They interacted closely with their local mayors, who were active members of the IAs, forging solid partnerships with the local government administration. The recent BA highlights that some local leaders obtained technical knowledge about construction and design of infrastructure. A school director interviewed in the BA mentioned that he successfully utilized the knowledge he acquired under an ASIF microproject in the subsequent renovation of the school he administered. The recent BA also documents that many community leaders learned to mobilize communities by organizing community meetings to prioritize problems, write funding proposals, deal effectively with the paperwork and reporting requirements of funding agencies, and in effectively following-up and informing the communities on the status of the funding applications. The participation of local leaders in the initiation, identification and management of the ASIF Microprojects enabled many local leaders to acquire and/or improve skills in fund raising and establishing contacts with donor agencies and organizations.

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Contractors also expressed satisfaction with the training they received during the bid conferences and acknowledged the benefits of a competitive process for the selection of firms to carry out the works. In addition, daily interaction with both ASIF Follow-up engineers and with effective local supervisors, helped raise the consciousness of contractors to be accountable for their work and to the communities they served, stressing the importance of good workmanship and quality of works. Areas of Improvement in IA Training: The findings of the recent BA, as well as observations made during the Mid-term mission highlight a number of areas described below that need to be strengthened regarding capacity building efforts under the ASIF II, focusing both on IA members and contractors. Roles and Responsibilities of IA Members: There is a need to clarify the roles and responsibilities of IA members, strengthen information dissemination of microprojects, and strengthen assessments carried out on microproject beneficiaries. The ASIF has taken note of these findings and is working on improving the training activities carried out during promotion. Specific action for addressing the areas needing improvements are covered in Section III: Microproject Cycle Review. Working with Weaker Communities: There is a need for the ASIF to focus on weaker and less articulate communities who lack the capacity to develop proposals, mobilize community members, carry out effective dialogue with ASIF and other donors, and manage microprojects. Such needy communities are generally left out of ASIF programs and activities, reflecting lack of equitable access to ASIF funds. This problem can be addressed through more effective community outreach and promotional activities. This would require the ASIF promotion team to spend more time with such communities to understand their needs, assist them in mobilizing community participation, disseminate information and develop special training programs specifically designed to address the needs of such communities. Operations and Maintenance. Training in the critical areas of operations and maintenance requires specialized technical skills, which as the Head of the Institutional Support Department noted, was absent from his team. It was therefore agreed that the Promotion team would be trained in these areas. The training program will be carried out in May 2004, after Promotional activities under the ASIF II Project have been completed. The ASIF will prepare TORs for hiring a training institute to train ASIF staff. The ASIF will also present a training proposal for IAs to address the capacity needs. The proposal will include description and coverage of training, targeted communities, budget, and the timetable for training.

Local Government and School Training Despite initial delays experienced in the early part of project implementation, the ASIF has made good progress in carrying out local government and school training activities (see Annex 3 for details) initially targeting communities in the earthquake zone, and later spreading to other regions of Armenia. The benefits of these training activities and the

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effectiveness of the ASIF in administering the training programs were evident during field visits and confirmed in the recent BA and the Social Capital Assessment. The following is a summary of the status of the local government and school training activities and their impact. Local Government Training: During the period November 2001 to December 2003, a total of 39 training sessions were conducted benefiting 1,513 government officials (of whom 354 were women). The trainees were from 747 municipalities in the regions covering Aragatsotn, Shirak, Vayots Dzor, Syuniq, Lori, Tavush, Ararat, and Gegharquniq. In addition, 17 officials from regional offices were invited to participate in the training. Of the total participants in the training, a total of 539 submitted three-year plans developed as a result of the training received. Disbursements related to local government training totaled US$324,936. The local government training was carried out by the following three local training institutes: International Center for Human Development, Business Support Center for Kapan, and the Vahagn NGO. The ASIF plans to carry out a total of 27 additional training sessions benefiting 334 local government officials in the Armavir and Kotaik marzes. The training has provided support to local governments to: (i) raise awareness of the rights and responsibilities of mayors; (ii) develop, plan, and manage their own budgets (i.e. develop three-year plans and annual budgets); (iii) gain a better understanding of the basic concepts and applications of property tax, land tax, and fees; (iv) acquire a basic knowledge of asset management covering inventory monitoring, operation and maintenance of assets, and planning of future investments; (v) strengthen partnerships with marzpets (governors) from the regional offices; and (vi) acquire an understanding of how to reach out, communicate and disseminate information to citizens. In addition, the training program included a special program on the rights and responsibilities of refugees. The methodology used for the local government training included a mixture of theory and interactive training, which, according to the evaluations received from participants, have been effective. Impact of Local Government Training: The results of the evaluations carried out at the end of the training courses, together with discussions held with Government officials during supervision missions, and the findings of the recent Beneficiary Assessment, as well as the Social Capital Assessment, all confirm the importance of the training programs, the satisfaction of the participants with the training services received, and the impact of the training received. Participants were very pleased with their newly acquired skills, providing them with the basic knowledge in a number of important areas. A number of mayors interviewed reported that they now have clarity regarding their duties and responsibilities and of those of the marzpets (regional governors), and that they are better equipped to deal with the higher regional authorities. As one mayor noted during a field visit “the role of self-governing has been clarified and is being applied.” They also stated that the municipal budgets for which they are responsible are now being developed more methodically and systematically. Participants also expressed their gratitude to the ASIF for having organized the training.

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Strengthening of Social Capital at the Vertical and Horizontal Levels: The recent BA and Social Capital Assessment point to the impact of the local government training in strengthening social capital at the vertical and horizontal levels. The framework of the ASIF II Project consisting of small-scale community infrastructure projects complemented by a comprehensive capacity building program has been instrumental in strengthening the partnership between local governments and communities. The complementary interaction between institutionally strengthened local government officials and mobilized community members participating in the ASIF microprojects created linkages between local government and communities (vertical networks). Many community members became more trusting of their local leaders who demonstrated commitment and worked hard during microproject preparation and execution. Local leaders in turn realized the importance of engaging community members in decision-making and community activities. Another finding was that local government officials who participated in ASIF sponsored training programs gained access to wider networks or partnerships with local and regional officials from neighboring communities. New Local Government Training: During the June 2003 supervision mission, the ASIF proposed a number of additional training activities under the local government training. The proposed training, which was approved by both DFID and the Bank, represents priority training needs, as perceived by the ASIF, in targeted communities. The additional training to be carried out as part of the local government training covers: Training to Village Mayors on the revised Law of Local self-Governing: Train village mayors in the revised Law on Local Self-Governing of June 2002 in the regions covering Shirak and Aragatsotn, where the ASIF already carried out local government training, prior to the passage of the new law. A total of 10 training sessions are planned to be carried out covering 179 communities. Training of Newly Appointed Government Officials: Training to benefit government officials who were newly appointed in the fall of 2002 in the regions covering Aragatsotn, Shirak, Vayots Dzor, Syuniq, Lori and Tavush. A total of eight training sessions are planned covering 135 communities. School Training: The ASIF has made good progress in carrying out training activities focusing on school principals, school accountants and school board members, in support of the Government’s decentralized school governance program. The Government’s six year decentralized governance program has already targeted 700 schools throughout Armenia. There are currently 250 schools remaining to be decentralized, bringing a total to 950 schools to be decentralized by end-2005. School Principal Training: As of December 2003, the Center for Education Reform hired by the ASIF to carry out school principal training completed the second phase of training activities during the period July 2002 to June 2003. The training comprised 12 day workshops with 6 hour sessions per day, benefiting 78 school principals, of whom 30 were women, from the regions covering Aragatsotn, Shirak, Syuniq, Lori, Gegharquniq, Tavush,

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and Yerevan. The training provided exposure to school principals in the areas of leadership and management, school legislation and regulation. Impact of School Principal Training: During field visits, the mission learned from school principals interviewed that they were very satisfied with the quality of training they received including the coverage of the program and the results of the training. They learned the basics of school management and administration, how to formulate budgets and manage and monitor resources. They also learned about their rights and responsibilities as school principals. In addition, as a result of the evaluations carried out, a joint two-day training workshop for school principals, accountants, and school board members was included as part of the school training program. This joint training allows participants to gain an understanding of the basic roles and responsibilities of each school staff member, how they can improve their services to the community, and ultimately strengthen their partnership. The recent BA and Social Capital Assessment confirm the positive impact of the school training program. The school director of Maralik who was interviewed during the BA expressed the positive impact of the training when he said “before the training, we were in a position of asking. Now, we can write proposals, we are aware of our rights and the responsibilities of other parties, we know to whom to apply to and what options available to solve our problems.” The school directors in Stepanavan, Aznvadsor and Vanadsor believed that the training provided an excellent opportunity for them to get to know colleagues from other communities in their region, to share with them their experiences, and consult with one another on common problems encountered in school administration. In Gegharot (Aragatsotn marz), the school principals interviewed expressed interest in forming a school principal association in which school principals trained under the ASIF program, or other training program, would provide training to other school principals in their regions. The school principal training also improved relationships between community members with the trained school principals. The reputation of the school principals in their communities was improved as a result of the training they received. The improved effectiveness of the school principals gained them the respect and trust of community members. As a result, school principals were more effective in mobilizing parents in school related activities, including the maintenance of the schools. School Accountant Training: The private local firm Alpha Plus Consulting was hired to carry out this training, which began in January 2002. The training covered the areas of financial management and accounting. As of December 2003, a total of eight seminars were conducted benefiting 118 school accountants (including 106 women) from the regions covering Aragatsotn, Ararat, Lori, Shirak, Syunik, Tavush, Gegharquniq Marzes, and Yerevan. A comparison of pre-training and post-training test scores revealed that the participants had improved their test scores by 54 percent as a result of the training received. Impact of School Accountant Training: On June 2003, the supervision team together with the ASIF and the Bank’s Country Manager were invited to a certificate ceremony, where 42 school accountants from seven different regions received their training certificates. During the ceremony, participants thanked the training institute and the ASIF for the

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services they received and for the knowledge they acquired. Several participants also noted benefits of the training program including sharing experiences, establishing friendships, and expanding their professional network with school accountants from other regions. These participants also attended a two-day training with school principals and school board council members. The recent Beneficiary Assessment notes the interesting finding that the relations between the trained school accountants and the regional Education Department of Vanadsor improved as a result of the training. The effectiveness of the school accountants was appreciated by Marzpet officials, and has led to improved relations with the schools. School Council Training: This training started in October 2002, due to the pending approval of the list of new schools to be included in School Management and Financing Decentralization Program, which included ASIF schools. In June 2002, the Ministry of Education and Science approved the ASIF II list of schools to participate in the school decentralization program. Shortly after the Government’s decision, the Center for Education Reform started the school council training. The training focused on the formation and operation of school councils. As of December 2003, a total of 247 school council members were trained: 20 representing 4 schools in Aragatsotn; 102 representing 20 schools in Shirak; 17 representing three schools in Syuniq; and 108 representing 24 schools in Lori. Impact of School Council Training: The evaluations received from participants of this training program were positive, reflecting their satisfaction with the services received. They were particularly pleased with the knowledge they acquired about the roles and responsibilities of school council members. As a result of the training, school council members came to the realization that their active participation in school matters provided them with a voice to raise important issues concerning school matters and the overall well being of the students. It also brought them closer to school principals and made them more willing to actively participate in monitoring activities of microprojects, as well as in the maintenance of completed school microprojects. ASIF Seminar on Local Level Institutional Strengthening: During the mission, the Bank team together with the Executive Director of the ASIF discussed the usefulness of organizing a seminar in Armenia to disseminate the lessons learned and impact of local level institutional activities carried out under the effective framework of the ASIF II Project. Participants invited to the seminar would include a selective representative groups covering the World Bank Resident Mission, central and local government officials, school principals, accountants and school council members, donors, local sponsors, and training institutions. It was agreed that the ASIF would prepare a draft agenda for the seminar together with a proposed list of participants. The seminar would be financed from proceeds of the ASIF II Project and would take place in May 2004.

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PART II: ASIF II POVERTY TARGETING STRATEGY AND REGIONAL ALLOCATION REVIEW Given that poverty reduction is the overarching objective of the ASIF II Project, this section begins with a brief overview of the nature and dimensions of poverty in Armenia. Poverty Profile With a population of about 3 million and a GDP per capita of around US$700, the extent of poverty in Armenia remains high, despite steady economic growth, averaging around 6.7 percent per year during 1994-2002, and the decreasing trend in poverty in the urban areas. The main sources of economic recovery and growth were the recovery in energy supply, reforms in agriculture, expansion of the service sector, and the substantial flow of international assistance since 1992. Although economic growth has contributed to poverty reduction in the country as a whole, the benefits of growth have not reached some of the poor segments of the population, especially in the rural areas, as described below. Based on the findings of the Integrated Living Conditions Survey (ICLS) of 2001, as reported in the Bank’s draft Poverty Assessment of 2003, and the results previous studies, it is estimated that 1.4 million people, or about 48.3 percent of the population lived in poverty in 2001, compared to 54.8 percent in 1998/99. The ILCS also found that some 600,000 people, or 20 percent of the population lived in extreme poverty, unable to attain the minimum recommended daily intake of energy from food consumption. However, this indicator represents a significant reduction in extreme poverty, from a level of 26.8 percent in 1988/89. The severity of poverty (the Foster-Greer-Thorbecke measure P2) had also declined from 6.5 percent in 1998/99 to 5.1 percent in 2001. But, the rural unemployment rate had almost doubled in 2001, compared to the rate in 1998/99 – in contrast to the urban unemployment rate, which had slightly declined over the same period. Armenia is also the country with the highest income inequality among the transition countries in the region, as indicated by a Gini coefficient of 0.54. It reflects the existence of large segments of the population with varying degrees of poverty, side-by-side with the relatively richer segments of the population. A notable feature, however, was that the Gini coefficient relating to consumption inequality was 0.28 in 2001 -- which is low compared to countries at similar levels of per capita income -- and reflects a large proportion of individuals whose income did not exceed the poverty line, but whose consumption did exceed it. Wide disparities in the levels of poverty also exist across the geographical regions of Armenia. As noted in the ASIF II Project Appraisal Document, the incidence of poverty ranged from a low of 38.1 percent in Armavir to a high of 63.1 in Shirak. Targeting Strategy

The poverty targeting strategy adopted for the ASIF II Project is essentially one of geographical targeting, for marzes (regions) outside Yerevan, based on: (i) the population size in each region; and (ii) three poverty indicators (poverty incidence, severity of poverty, and unemployment), and two regional factors representing special needs of earthquake and

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border zones. The data used for the poverty indicators were the latest available at the time of Project Appraisal in January 2000, i.e. from the World Bank report “Improving Social Assistance in Armenia” of June 1999, and the Armenia State Department of Statistics. The targets for the regional allocation of project funds were derived from a formula based on the average of these five regional poverty indicators (normalized), and the regional population, for all marzes outside Yerevan (see ASIF II PAD Annex 14). For Yerevan, the allocation amounted to 22.5 percent of the total allocation – comparable to 26 percent of project funds disbursed under the ASIF I Project, as agreed during Negotiations. However, in response to a proposal from the Government, in December 2002, the regional allocation of project funds was revised. Under this proposal, the poverty score was calculated on the basis of the three poverty indicators mentioned above, and the number of populated areas in each of the marzes, earthquake zones, and conflict zones. Thus, the regional allocations were then made on the basis of: (i) population size of each marz; (ii) the poverty score, equivalent to the average of the six indicators mentioned above (after normalization); and (iii) a reallocation of the amount initially set aside to compensate for shortfalls in regional disbursements under the ASIF I Project. Regional Allocations and Actual Disbursements

The mid-term review of disbursements by region showed that overall: (i) US$ 6.15 million or 47 percent of a total of US$13.18 allocated from IDA only to microprojects had been spent across the regions (see Table 3 below); and (ii) regional expenditures have been very much line with the regional allocations, as reflected in the relatively high correlation coefficient of 0.84. (IDA funds under the Matching Fund are excluded, as individual sponsors under this scheme choose regions according to their perceptions of priorities.) At the regional level, the table below shows that the largest expenditures (outside Yerevan) have been made in the Lori and Shirak marzes, and a proportionately large expenditure in the Aragacotn marz. This reflects the Government’s priority in first addressing the urgent reconstruction needs in these three marzes in the earthquake zone, which had suffered the most damage from the last earthquake. Tavush is also in the earthquake zone, but the reconstruction needs are considerably less, reflecting in part, a relatively lower number of populated areas.

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Table 3: IDA Allocations by Region and Expenditures

Region

IDA Allocation (US$)

Expenditures from IDA (US$)

Aragatsotn 864,955 706,759Ararat 882,604 0Armavir 792,566 0Gegharkunik 751,702 26,016Kotaik 1,144,036 0Lori 1,861,550 1,894,261Shirak 2,547,482 1,936,541Syunik 570,639 0Tavush 702,347 140,627Vayots Dzor 260,116 163,101Yerevan 2,805,799 1,284,476Total 13,183,796 6,151,781Total % 100 47

Disbursements in Relation to Population and Poverty Scores To what extent are the regional expenditures from IDA only (excluding matching funds), consistent with the regional population and poverty? To answer this question, the relationship between the regional population-poverty index and expenditure by region was analyzed (see Table 4 below). The results show that the largest expenditures have been made in the Lori and Shirak marzes, which the highest P-P indexes, i.e. expenditures directly linked to population size and poverty indicators. The latter reflects, in part, the needs of the earthquake zone, in addition to other poverty indicators. On the other hand, no disbursements had been made, as of November 2003, to the Ararat, Armavir, Kotaik, and Sunik marzes, which are not in the earthquake zone – since priority had been assigned to marzes in the earthquake zone. As regards the overall relationship between the regional disbursements and the P-P indices, the coefficient of correlation was calculated to be 0.679. Its significant deviation from 1.0 once again reflects the decision to focus on the needs of the earthquake zone, as a matter of first priority.

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Table 4: Population-Poverty Index and Regional Expenditures for Regions outside Yerevan

Region Population

(1999) Poverty Score

P.Score x Pop. P-P Index

Expenditures from IDA Only

Aragacotn 166,700 0.609 101,555 5.86 706,759Ararat 310,000 0.599 185,732 10.72 0Armavir 321,100 0.519 166,785 9.63 0Gegarqunick 277,600 0.570 158,186 9.13 26,016Kotaik 328,900 0.732 240,747 13.90 0Lori 394,100 0.721 284,304 16.41 1,894,261Shirak 361,800 0.864 312,700 18.05 1,936,541Sunik 163,600 0.734 120,125 6.94 0Tavush 156,600 0.685 107,265 6.19 140,627Vajoc Dzor 69,100 0.792 54,738 3.16 163,101

TOTAL/AV 2,549,500 1.000 1,732,136 100.00 4,867,305P-P Index vs. IDA Expenditure: Correlation Coeff. = 0.679

Impact on Poverty Reduction Based on the discussions in the field, and information provided in supervision mission reports, as well as beneficiary assessments carried out, microprojects implemented by ASIF have contributed to poverty reduction, in tangible terms both in rural and urban areas. The ASIF has responded directly to the needs of the poor, vulnerable groups and of minority communities. While all 105 microprojects completed have helped improve the living standards of the poor, a few examples, based on the findings of the Beneficiary Assessments of 2002 and 2003, may be useful in illustrating their specific contributions:

• The new school in Aghitu, in the Syunik Region, made a noteworthy contribution in improving educational facilities for a total of 610 beneficiaries. Armenians attach very high priority to education; in the Beneficiary Assessment conducted in 2002, 99 percent of the respondents in rural areas, and 96 percent of respondents in urban areas thought that school rehabilitation was an immediate necessity. The most important benefit from Aghitu school microproject, was the relocation of children from domiks (temporary cabins) and old deteriorated school buildings, with leaking roofs which created serious health hazards, into a new school, well insulated and built of stone. As a result, children are much healthier, and are well motivated to attend school. The project cost was US$89,000 and it created short-term employment equivalent to 900 man-days.

• The reconstruction of the Maralik Polyclinic, in the Shirak Region has significantly

improved the access to health facilities in the area. Prior to reconstruction, the building had been in a completely deteriorated state, with rooms which were not suitable for receiving patients; the building had been dirty, cold and humid. As a

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result, many local residents had preferred to visit the polyclinic in Gyumri. After reconstruction the Maralik Polyclinic, has witnessed a significant increase in the number of patients from 20-25 per day to 30-35 per day. This project, which serves13,500 residents, cost a sum of US$59,000 and created short-term employment equivalent to 900 man-days.

• The potable water system in Hartavan in the Aragatsotn Region made a far-

reaching impact upon the lives of over 1000 villagers in the area. Prior to the microproject, all of the villagers were forced to fetch water from remote sources, since the Hartavan water supply system has collapsed. The ASIF financed microproject consisted of the rehabilitation of a part (420 meters) of the internal water supply system, a new pipeline connecting a local water source, and the construction of two storage basins. As a result, water supply in the village has greatly improved, and most residents gained ready access to water. Residents who did not gain access to water were dissatisfied, but through the network of contacts within the village they were able to get water from those who had access to water. The project cost was US$30,000, and created short-term employment equivalent to 630 man-days.

• The lack of irrigation water in the village of Meghrashen, in the Shirak Region,

was a serious problem for a long time. Consequently, crop cultivation became increasingly difficult, and many villagers switched to subsistence agriculture, with drastic reduction in income. The ASIF financed microproject, consisting mainly of the construction of a pump station, now provides water for a total area of 1600 ha., of which 1000 ha. is arable, and benefits a total of 1950 villagers. This the microproject has greatly contributed to the economic development of the village. The project cost was US$35,700, and it created short-term employment equivalent to 393 man-days.

• The reconstruction of the orphanage in Vanadzor, in the Lori Region, is an example

of how the ASIF financed microproject has raised the living conditions of a vulnerable group. In the new building, children are now have the benefit of spacious rooms with adequate light, comfortable bedrooms, a dining room, and special rooms for studies. However, two problems mentioned by the staff of the orphanage were the low quality of works in some parts of the building, and new bathrooms which did not function properly. Both these problem areas were addressed subsequently. The project which cost US$94,000, has benefited 153 persons.

Poverty Monitoring Looking to the future, poverty monitoring at the community level on a regular basis will be an important component of Armenia’s poverty reduction program, in which the ASIF plays a significant role. It is therefore suggested that the ASIF includes a poverty monitoring component, including the needed capacity building, in its program of future activities. This

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could link up nicely with the program of household surveys/ILCS that are being carried out, and provide valuable information on tangible benefits received by the poor.

PART III: MICROPROJECT CYCLE REVIEW The Mid-term mission observed that the ASIF team at the promotion, appraisal, and follow-up stages have been effective in their delivery of technical, managerial, and organizational support to community members in Armenia. As noted in earlier supervision reports, the ASIF staff is judged to be professionally competent, hard working, committed and responsible. Since the first ASIF operation, they have refined and strengthened procedures at all stages of the microproject cycle of the ASIF II Project focusing on delivering quality services to poor and vulnerable communities targeted under the project. In recognition of the quality of services provided by ASIF staff, the Government of Armenia recently approved salary increases in the ASIF amounting to a total of approximately 35 percent. This decision is important, as it will help retain ASIF technical staff for carrying out the remainder of the ASIF program. The following is an assessment of the effectiveness of ASIF activities at all stages of the microproject cycle covering transparency and accountability, internal project monitoring systems, technical assistance and training, and compliance with required procedures. The assessments draws from findings from the Mid-term mission, previous supervision missions, Beneficiary Assessments, quality of works reviews, and the recent Social Capital Assessment. Promotion The Mid-term mission assessed promotional activities to have been in general carried out effectively by the Head of the Institutional Support Department and his three staff members. The promotion team has worked hard in their promotional activities initially covering the earthquake zone and later expanding their activities to other regions of Armenia. As of December 2003, promotional activities were carried out in the following regions: Shirak, Lori, Aragatcotn, Tavush, Vayotc Dzor, Gegharqunik, Ararat, Kotayk, and Yerevan. Promotional activities in these regions targeted 1,266 communities. A total of 1,133 community meetings were held and as a result of promotional activities, a total of 946 project proposals were developed and submitted to the ASIF. The Promotion team worked with a total of 946 Implementing Agencies comprising 5,227 members. The Head of Promotion informed the mission that the last phase of promotional activities will be carried out during the period October 2003 to May 2004, and will cover the Armavir and Syuniq regions and in three remaining communities (out of the total of 12) in Yerevan. As a result of effective promotional activities carried out under ASIF I and improved promotional activities under ASIF II, there has been a significant increase in the number of project proposals received which were self-initiated by communities who had worked with the ASIF under the first ASIF project and those who had heard about the project through different channels of the media and by word-of-mouth. Field visits during the mission

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confirmed the effectiveness of promotional activities in the communities visited. Implementing Agency members as well as municipal authorities interviewed were well informed about ASIF procedures at all stages of the project cycle and provided detailed information, on the preparation and implementation of their projects. They also commended the ASIF team for the quality of services they had received from them. The following is an detailed assessment of promotional activities carried out under the ASIF II Project. Procedures: The average cycle of promotional activities is about three months. In the initial phase of promotion, due to the heavy workload in working in the Shirak and Lori marzes, a total of 6 ASIF staff were working on promotional activities - one staff member from the Follow-Up Unit, one from Appraisal Unit, one from the Training and Technical Coordination Unit and three staff from the Promotion Unit. As a result of the hard work of the promotion team, promotional activities in these regions were completed in a record time of 2.5 months. The average number of field visits carried out by each promotion engineer is between three to four visits per proposal. Promotional activities are carried out at the district level. The ASIF announces upcoming meetings in the regions two weeks prior to the date set for the meeting. Prior to the meetings organized, the ASIF requests communities to present expressions of interest within seven days. The general meetings take place in those communities which have submitted such letters of interest. Community Outreach and Information Dissemination: Procedures for promotional activities under the ASIF II Project were developed to ensure the effective delivery of community outreach and information dissemination. The Promotion team carries out their activities in four different stages. During the first stage, the promotion team visits the Marzpets (regional Governors) to discuss the ASIF project, provide information on the allocation of funds to that region, and to get an idea from the regional Governors on the priorities of the communities in the region. During the second stage, the promotion team carries out a needs assessment of the community. They also gather social data and meet with municipal and village council authorities providing them with general information on the project and on ASIF procedures. During the third stage of promotion, the team meets with community members at the district level providing them with general information on the ASIF project, ASIF policies and procedures and funding aspects of the project. They also discuss the procedures for the general community meeting and fix a date for this meeting. The fourth stage is the general meeting where community members elect the members of the Implementing Agency. The ASIF also participates at this meeting providing information to community members on the preparation of the proposals, the deadlines for the submission of the proposals and the document requirements, the importance of community contribution and of the maintenance of the facilities rehabilitated. At the same time, the Promotion team meets with the media officials, both in Yerevan and at the local level to agree on a plan to disseminate information on the ASIF to local television, radios, and newspapers. The four-stage approach to promotional activities has had a positive impact in terms of community outreach and information dissemination. The series of meetings held with both local government officials and community members has contributed to the solid build-up of

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partnerships at the local level. The advantage of this approach is that it allows the ASIF to gradually engage communities members to work together towards the common good of their community and to actively participate in the ASIF microproject cycle. Such an approach develops the confidence and capacity of communities to organize themselves, to reflect upon the priorities of their communities, and to actually participate in the development of a project proposal to benefit the citizens of their community. Community Outreach and Promotional Activities Covering Yerevan Schools: The promotional team follows different community outreach procedures targeting schools in Yerevan. The team first starts with a general meeting for school principals in each community. They also meet with officials from the Department of Education of the Mayor’s office. During the general meeting the ASIF provides general information on the ASIF, the microproject cycle and sets the deadline for submission of project applications. After the first stage of Appraisal and the initial selection of schools, the ASIF fixes the date for the general community meeting. The next phase is the provision of general training to the IA by the ASIF. Key Constraints Experienced during Promotion: During the mission, the promotion team highlighted some constraints experienced during promotion. The first constraint is the low attendance of community members at community meetings. On average 30 percent of community members participate at these meetings. The main problem is the communities’ engagement in seasonal work in the rural areas. Another problem concerns the raising of awareness of community members of the importance of community contributions. Their mentality is that financial contributions are the responsibility of their local government. It should be noted that many of the communities that the ASIF has worked with in the earthquake zone, are familiar with ASIF type operations and the requirement of community contributions. Nevertheless, this is an issue and one that the ASIF needs to deal with when they carry out their promotional activities. Another constraint experienced during promotion is the tension in relations between some school principals and mayors. Although this is not common, the ASIF does run into conflictive situations involving these two parties, which are not always easy to resolve. One possible explanation is that the decentralization process of schools, while it is approved by the central government, it is not always accepted at the local government level. The decentralization process is slow, as it requires a change of mentality at the local level, which is difficult to achieve. Despite these constraints, which are in large part outside the control of the ASIF, promotional activities in general, have been carried out effectively. ASIF Action Plan to strengthen Promotional Activities: During the Mid-term mission, the promotion team presented an Action Plan to address weaknesses identified in the Beneficiary Assessments and in the recent Social Capital Assessment carried out under the Project. The Action Plan focuses on improved community outreach and promotional procedures, including a strengthened capacity building program benefiting members of the Implementing Agencies. Decentralization of Promotional Procedures: The proposal for decentralizing promotional procedures was developed with the aim of capitalizing on the effective promotional

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activities and local level training carried out under the first ASIF operation and under the current ASIF II project. Promotional activities over the last eight years have targeted and trained a large number of communities throughout Armenia. Local government training was also carried out in these communities targeting local government officials. Local communities and government officials throughout Armenia are now familiar with ASIF activities, they are trained to mobilize their communities, take part in decision-making activities, and carry out microprojects effectively. Building upon the existence of trained communities and strengthened local government officials, the ASIF promotional team, with the support and encouragement from the Bank mission, is proposing to decentralize some of its promotional activities at the local level. Specifically, the ASIF is planning to provide a more active role to trained local government officials in community outreach and promotional activities. The proposed decentralization of promotional activities requires that the dissemination of information activities and general community meetings be organized by city and village council officials. It also entails the priority ranking of community projects and the pre-selection of applications be carried out by these officials. It was agreed that the ASIF would pilot the proposed procedures in the Syuniq marz. A capacity needs assessment of participating city and village council officials would be carried out to determine the training needs of these officials. Strengthened Capacity Building of Implementing Agencies: The ASIF promotional team has been reflecting on the findings and recommendations provided by the Bank supervision missions, as well as those from the Beneficiary Assessments. Specifically, they have been focusing on ways to improve information dissemination activities and capacity building activities benefiting Implementing Agencies. During the mission they presented an Action Plan to improve procedures in these areas. The plan focuses on two stages: a first stage in which ASIF promotional staff received comprehensive training in the areas of information dissemination, effective supervision of microprojects, and operations and maintenance of different types of public facilities. The second stage would involve the carrying out of an improved training program benefiting a total of 350 communities. The proposed timetable for the two-stage training is from May 2004 to December 2004. It was agreed that the ASIF would further develop the training proposals and present to the Bank two sets of detailed Terms of Reference covering the training programs benefiting ASIF promotional staff and IAs. Appraisal As noted in previous supervision mission reports, the five engineers in the Appraisal Unit have by far the heaviest workload in the MP cycle given the demanding two-stage appraisal cycle approach. All microprojects financed under ASIF II are subject to a pre-appraisal and an appraisal. The pre-appraisal cycle which takes an estimated two-three days consists of pre-screening microprojects which have satisfied basic requirements to merit full appraisal. The Appraisal engineers use pre-appraisal criteria to rank microprojects. A microproject must meet the preliminary selection criteria described in the Operational Manual, namely, microproject typology, community support and cost considerations.

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Microprojects must also meet other criteria covering: (i) lack of basic infrastructure; (ii) legal permits; (iii) owner’s permits; (iv) community contribution; and (v) sustainability and maintenance. If a microproject meets the above criteria, then the proposal moves to the second stage of appraisal where it is evaluated using another set of technical criteria covering such items as technical norms and standards; cost per beneficiary; cost-effectiveness; grade of municipality in training; proximity to the border; the inclusion of the microproject in marz list of priorities; and other relevant criteria. These criteria and the ranking proposed by the ASIF are incorporated in the Appraisal Report. In addition, the report provides an environmental checklist prepared by the Appraisal engineer. The second stage of appraisal takes an estimate of three to four months. As of December 2003, a total of 743 projects were appraised and 200 projects were being appraised in the regions covering Kotaik, Ararat, Gegharkunik, and in two communities in Yerevan. Following the recruitment of two additional Appraisal engineers, on average, each engineer currently handles 40 projects and makes up to 10 field visits per project. This represents an improvement in the workload of appraisal engineers who previously were handling 70 projects each. Change Orders: The Appraisal Unit is also responsible for handling change orders. As of December 2003, the average value of change orders was 1.2 percent over the contracted value. This represents a significant improvement, as compared to the ASIF I project, where the ASIF was receiving a large number of change orders, some of which exceeded the 15 percent limit. The main reason for the drop in change orders under the ASIF II Project is a direct consequence of improved quality of microproject design. The ASIF now contracts on a competitive basis the design and supervision of microprojects. This was made possible by increasing the allocation from 3 percent of the total microproject value under ASIF I to 8 percent under ASIF II. MP Cost Estimation: According to the Head of Appraisal, there have been significant improvements in cost estimations when comparing MIS cost estimates and MP contract costs. On average the difference between the MIS cost estimate and the MP contract cost is 14 percent. This is a significant improvement from the ASIF I, where the difference was on average 30 percent. This improvement can be attributed to: (i) better quality MP design, as a result of hiring qualified firms; and (ii) stricter procurement procedures where bidders must meet certain qualifications. In addition, the ASIF tries to maintain, at least on a six month basis, the unit price base in the MIS. In October 2003, the ASIF hired a consultant to carry out an investigation of market prices of construction materials, with the aim of updating their unit price database in the MIS. The updated database was approved by the ASIF Board in November 2003 and includes a wider range of construction materials. Action Plan of Appraisal Unit to Address Issues raised in Quality of Works Review: The Mid-term mission together with the Head of the Appraisal Unit discussed the Action Plan developed by the Unit covering specific steps taken by the Unit to address the issues raised in the Quality of Works review carried out during the June 2003 Supervision mission. One of the areas of concern noted in the review is the quality of designs, and in particular, those related to the construction of roofs and of water retaining tanks. The review concluded that

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these types of designs were too complicated, leading to future maintenance problems. The review also noted that the design of new or rehabilitated schools lacked access for the disabled and, as noted in the earlier report, lacked appropriate seismic requirements. There was also an observation that the designs provided insufficient information regarding building details. ASIF Workshop: During October 17 to 18, 2003, the ASIF organized a workshop to discuss issues raised in the quality of works review. All ASIF staff participated at this workshop, as well as a number of invited guests participating in ASIF microproject activities including design institutions, supervision organizations, local supervisors and contractors. One key issue discussed at the workshop involved the importance of construction standards. The ASIF stressed the importance of using norms and standards for construction and that all participating design firms and contractors would be held accountable to applying such standards under ASIF projects. A construction demonstration room in the ASIF was developed and became operative in January 2004. This showcase room displays the technical standards and quality of output in typical components expected under ASIF microprojects. To address the problem of norms and standards, the ASIF has established the practice of including norms and standards for all project types in bid documents. During the workshop, it was also agreed that appraisal and follow-up engineers in the ASIF would work together on issues relating to microproject design. The collaboration of engineers at the appraisal and follow-stages of the microproject cycle would ensure greater accountability among ASIF engineers for improving the quality of construction designs. Follow-Up During the Mid-term mission, the follow-up engineers were supervising a total of 95 microprojects, 63 percent of which are school projects. This means that the five engineers were supervising a total of approximately 20 projects each, amounting to a very heavy work load. However, this is an improvement compared to the last year when each engineer was handling up to 30 projects. Each engineer does a total of 8 field trips per month, with each trip lasting up to two weeks. As of December 2003, the ASIF had appraised a total of 743 Microprojects. According to the Quality of Works review carried out in May 2003, the quality of works were found to be in general adequate. However, the report highlighted a number of areas that need improvement, which are summarized below:

• Low quality construction materials used for items such as doors and windows fittings.

• Inappropriate refurbishment of items that actually require total replacement. • Poor completion of building finishes by contractors. • Lack of sufficient cover to reinforce steel in concrete construction. • Poor scheduling, resulting in damage to buildings during construction. • Weak site supervision, mainly as a result of the low capacity of supervisors,

especially at the rural level.

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Action Plan of Follow-Up Unit to Address Issues raised in Quality of Works Review:The Mid-term mission together with the Head of the Follow-Up Unit discussed the Action Plan developed by the Unit covering specific steps taken by the Unit to address the issues raised in the Quality of Works review carried out during the June 2003 Supervision mission. The Action Plan points to specific actions to be taken during the implementation of projects. The Action Plan focuses on improvements in the overall microproject framework covering the unit price database, evaluation of construction designs, supervision of works, and training activities. The actions proposed reflect preventive measures to avoid poor designs and poor quality of works. They stress a closer cooperation and collaboration between all team members working on microprojects at the local level and in the ASIF. The Appraisal and Follow-up Units are working together on the development of a manual in two volumes covering norms and standards for construction materials, and those covering pipes. The Follow-up Unit has also designed new supervising formats to be used by supervising firms hired under the ASIF. These forms are more detailed requiring the inclusion of pictorial illustrations of the different stages of construction, together with a detailed written explanation on the status of works, including a section on recommendations. In addition, as it has already been noted above, the Follow-up team works closely with the Appraisal team in evaluating construction design. Other Improvements of Procedures in the Follow-Up Unit include:

• New Evaluation of Follow-up Engineers: After the hand-over process of microprojects, the Head of the Microproject Department prepares an overall evaluation of microprojects covering construction design, supervision carried out by local supervisors and firms, ASIF training and supervision, and quality of works. For those projects that receive a very poor evaluation, the Head of the Unit will use the evaluation to make the case for dismissing poor performers including design firms, supervisors, contractors and ASIF engineers responsible for the microprojects under review.

• Selection of Local Supervisors: The Head of the Follow-Up Unit reviews,

evaluates and provides its no objection to the candidates selected by the design firm to supervise the works. This will ensure that the local supervisors selected are qualified and will carry out their supervisory task efficiently.

• Contractors to visit ASIF Construction Demonstration Room: Prior to

participating in the bidding process, interested contractors will be encouraged to visit the ASIF’s construction demonstration room, displaying the technical standards and quality of output in typical components expected under ASIF microprojects.

• Combined Supervision visits of Microproject Team Players: Combined

supervision visits of microproject sites will be carried out with the participation of ASIF follow-up engineers, members of the IA, contractors, local supervisors, and

27

design firms. Joint supervisions will allow key team members of microprojects, to assess the progress of construction, discuss issues that may arise, and reach agreement on actions to be taken in the event of poor quality of works.

• Special training to Contractors: The follow-up team is designing new training

programs to be carried out at the regional level to benefit contractors in areas relating to quality of works. The proposal is to organize a two-day seminar at the regional level, which would be carried out during community outreach and promotion. Such standard training would therefore be carried out as part of promotional activities relating to capacity building activities.

• Allocation of a Budget line in Microproject Budgets for Operations and

Maintenance: Introduction of a budget line, as part the total microproject cost, to ensure for initial period the operations and maintenance of public facilities renovated under the ASIF. The allocations for operations and maintenance would be between $500 to $1000. This amount would be transferred to an account to be managed by the Head of the IAs.

PART IV: COST EFFECTIVENESS REVIEW Approach to the Cost-Effectiveness Analysis The cost-effectiveness of ASIF II was analyzed at two levels: (i) the contribution of the ASIF II Project, at the macro level to the broad economic and social development goals of the Country Assistance Strategy for Armenia; and (ii) the cost-effectiveness of the ASIF II microprojects based on simple criteria, such as cost per project by type, cost per beneficiary, and unit costs of construction. ASIF II Microprojects and Development Strategy The ASIF II Project has been one of the mechanisms of the Armenian Government for poverty alleviation through improving accessibility, sustainability and quality of social services to the poor. It has been effective in carrying out this mandate by financing the construction and rehabilitation of social and economic infrastructure, to complement the work of other line ministries, as for example the construction or rehabilitation of a large number of schools. The ASIF Project has been crucial in strengthening social capital formation at the local level and in providing short-term employment opportunities to the low income groups. The ASIF II Project has supported one of the key CAS objectives of investing in human capital, through better education, basic health, and efficiently targeted social protection to improve the quality of life of all Armenians and to expand the skill base of the country’s economy (see CAS dated May 1, 2001). The ASIF II Project is also consistent with the main findings and recommendations of the Bank Economic and Sector Work (ESW). Thus, the Public Expenditure Review of April 2003 highlights the years of under-financing

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basic public health and education, which in the absence of urgent attention, could create longer term problems for Armenia’s growth and competitiveness. Cost-Effectiveness of Microprojects Pending a detailed cost-effectiveness study to be conducted by the ASIF in early 2004, a preliminary analysis of the costs of completed MPs, was carried out during the Mid-term mission. It revealed that the ASIF has been diligent in implementing the MPs in a cost-effective manner. The average cost of MPs completed was US$56,794, as shown in the table below. Some of the other salient features of the analysis were:

• the average cost for school projects (the highest number in project typology) is estimated at US$61,244 while the average for water supply projects (the second highest type) stood at US$40,377;

• the average cost of microprojects ranged widely from a low of US$29,279 for

health clinics (mainly reconstruction) to special schools (e.g. sports schools involving large gyms) at over US$113,677. The latter reflects the specialized types of construction works involved;

• the overall average cost per beneficiary was estimated at US$18.48. The average

cost per beneficiary across different types showed a very wide variation ranging from a low of US$1.19 for health centers (mainly reflecting the access to facilities by population served, rather than the number of patients), to a high of US$614.25 for orphanages, which by their nature serve only a limited number of orphans; and

• the short-term employment created by the 105 microproject was estimated at nearly

40,000 man days or approximately 130 man years.

Table 5: ASIF II Completed Microprojects by Typology

Type NumberValue (US$) Beneficiaries Man Days

Cost/Proj (US$)

Cost/Benf. (US$)

Schools 62 3,795,908.00 90,819 18,593 61,224 41.80

Special Schools 4 454,707.00 3,239 1,190 113,677 140.38

Water Supply 22 888,285.00 44,171 11,472 40,377 20.11

Irrigation 5 160,145.00 30,193 2,208 32,029 5.30

Polyclinics 4 216,518.00 62,001 2,130 54,130 3.49Community Centers 2 72,383.00 29,983 795 36,192 2.41

Health Centers 1 29,279.00 24,600 393 29,279 1.19

Orphanages 1 93,980.00 153 n.a. 93,980 614.25

Waste Disposal 4 252,193.00 37,580 3,147 63,048 6.71

TOTAL 105 5,963,398.00 322,739 39,928 56,794 18.48Source: ASIF Office MIS

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The ASIF Methodology in Microproject Analysis

As noted during the June 2003 Supervision mission, hitherto, the use of detailed cost-effectiveness analysis has been hampered by the absence of baseline data on unit cost indicators. In these circumstances, and pending the cost-effectiveness study mentioned below, the ASIF’s Appraisal Engineers carry out a cost-effectiveness analysis only in general terms, at the project appraisal stage. It covers the following aspects:

• Beneficiaries Served: Consideration of the beneficiaries and refugees served, and sustainability through operations and maintenance budgets;

• Technical Criteria: An assessment of the technical nature of the work involved, its structural soundness for the intended purposes, and compliance with technical norms and standards;

• Economic Criteria: An assessment of construction costs, project alternatives, least cost solutions, unit costs, cost per beneficiary, and community contributions;

• Geographical Factors: Special consideration to projects in the earthquake zone, having regard to construction costs; and

• Operations and Maintenance: A verification of proposed plans and responsibility for operations and maintenance, covering specific maintenance arrangements, collection of user fees, covering of recurrent costs, and any external conditions, inputs, infrastructure, and sources required to provide support to the project.

During the Mid-term Mission, the importance of having a proper cost accounting system was emphasized, once again. If the main problem is the lack of baseline data, it could be solved by gathering and codifying comparative data through a cost-effectiveness study (see below), or by using the first year’s average project cost data, by typology, as benchmarks, or a judicious combination of both. Obviously, there would be some projects with costs above the norms, for justifiable reasons (e.g., construction in the earthquake zone). In such cases, the ASIF Management will need to know the extent of the deviations from norms, and the underlying reasons. Moreover, cost-effectiveness of microprojects will be an important consideration for a possible follow-up operation beyond ASIF II. As noted in the Project Appraisal Document, the main objective of a well formulated cost accounting system is to provide the ASIF Management with an organized information system for the ASIF II Project to ensure greater cost-effectiveness in the use of public funds in meeting the basic social and economic infrastructure needs of the poor. Although the present Management Information System (MIS) has a wealth of cost data, further work needs to be done to analyze and present such data in a more explicit form for use by ASIF Management on a monthly basis. In specific terms the objectives of such a reporting format would be to: • provide information on the full cost of projects, including ASIF overheads, more

explicitly; • help monitor the cost of providing basic social infrastructure for the poor; • develop a framework for implementing cost efficiency measures; and

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• provide a basis for formulating budgets for future years. Such a framework should at least include: (i) a full composition of the direct costs of microprojects into labor, materials, and site services; (ii) an analysis of overhead expenditures; (iii) a more realistic estimate of total project costs, including overhead costs; and (iv) the unit costs of providing social infrastructure (cost per microproject, cost per beneficiary, cost per unit of pipeline rehabilitated etc.). Current Status: The composition of direct costs referred to above is available in the MIS, but such information is not presented explicitly in the reporting system. Information on overhead expenditures also exists in the accounting records, but needs to be analyzed in detail. As agreed with ASIF, overhead costs, at least as a percentage, should be included in the total cost of microprojects. Unit costs referred to above are also available, but only the cost per beneficiary is explicitly used. Statistical information reflecting these aspects needs to be presented in the quarterly reports in suitable tabular and graphical form. Cost-Effectiveness Study During the Mid-term mission, terms of reference for local consultants were developed and agreed upon with ASIF for carrying out a cost-effectiveness study of completed microprojects. This study, inter alia, includes:

• analyzing direct costs of construction in terms of labor, materials, and equipment costs at site;

• norms and standards and unit costs analysis, based on based on information from a few construction companies and architectural firms;

• gathering of unit costs of comparator organizations engaged in work similar to that of ASIF and an examination of ASIF construction costs vis-à-vis comparator organizations;

• documenting methods of monitoring construction costs adopted by government agencies and municipalities; and an examination of whether there is a duplication of effort and/or complementarities between the activities of ASIF and other agencies.

The study is expected to recommend how the cost-effectiveness of microprojects could be improved, while complying with the required norms and standards of construction in Armenia. This study is scheduled to commence in February 2004, and to be completed in by end-March 2004. Annex 4 sets out the terms of reference for the study.

PART V: ADMINISTRATIVE, ACCOUNING AND REPORTING PROCEDURES Financial Management and Administrative Review: The review of financial management arrangements of the ASIF II Project has demonstrated that the financial management system including accounting, controls, auditing and reporting continues to be adequate and satisfy the Bank’s financial management requirements. During the Mid-term mission, the following areas were assessed:

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- Project disbursements; - Project accounting system and financial accounts; - Status of Government counterpart contributions; - Matching Fund arrangements under the project; - Co-financing arrangements under the DFID Trust Fund; - Reporting activities of ASIF; - The Management Information System (MIS); - Financial audits; - Staffing issues; and - Compliance with ASIF II Credit Agreement.

Financial Management Review

Project Disbursement Performance Bank Accounts held. Currently, the ASIF II holds four types of accounts: special account; government contribution accounts; transit accounts; and an account for operational expenses of the ASIF Office, as set out in the table below.

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Table 6: Bank Accounts held by ASIF Type of Account Bank Account 1. Special Account Citibank, New

York

IDA Credit Special Account DFID Grant Fund special account

2. Government contribution accounts

Credit Yerevan Bank Armenian Savings Bank

Old AMD account (balance of AMD 42,204,894)

New AMD account (the first transfer to this account took place on 23 June 2003 – for details see section on “The status of Government counterpart contributions”)

3. Transit Accounts Armenian Development Bank

Credit Yerevan Bank

IDA Credit US$ transit account;

DFID Grant US$ transit account;

AMD transit account (used for AMD payments both from IDA Credit and from DFID Grant);

Sponsors (IFAD) US$ transit account;

Sponsors (other sponsors providing money for matching fund) US$ transit account;

Sponsors AMD transit account (used for AMD payments both from IFAD and other sponsors);

Communities’ contribution two transit accounts – US$ and AMD. Communities’ contribution two transit accounts – AMD (balance of AMD 1,837,722) and US$ (balance of US$ 276,274);

Sponsors two transit accounts – AMD (balance of AMD 11,530,465) and US$ (balance of US$ 5).

4. ASIF Office Operational Expenditure Account

HSBC Bank AMD Account for salaries, advances and remunerations payments to the ASIF staff and other individual consultants.

Status of frozen funds in Credit Yerevan Bank. All accounts in Credit Yerevan Bank are still frozen, and the bank is under management by the Central Bank. Total US$ equivalent of funds frozen in Credit Yerevan Bank as of November 1, 2003 was US$ 375,813 (at an exchange rate of AMD 558.34/1 US$). Details about the breakdown of this total, and the year-end balances for 2001 and 2002 are shown in the table below.

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Table 7: Frozen Funds in Credit Yerevan Bank

Funds Rate Amount in US$ as of

31.12.2001

Rate Amounting US$ as of

31.12.2002 Government Contribution, AMD

42,204,894 561.81 75,123 584.89 72,159

Communities Contribution, AMD

1,837,722 561.81 3,271 584,89 3,142

Communities Contribution, US$

276,275 - 276,275 276,275

Sponsors, AMD 11,530,465 561.81 20,524 584.89 19,714Sponsors, US$ 5 - 5 - 5Total, US$ 375,198 371,295

At the time of the June 2002 supervision mission, the ASIF Director had reached verbal agreement with the President of the Central Bank that these amounts will be repaid to the ASIF. The next steps expected at that time were to properly document the verbal agreement and work out the repayment schedule, which would provide for full repayment of the frozen balances by the end of FY2002.

Neither at the time of the June 2003 supervision nor at the time of November 2003 Mid-term mission, was a written agreement reached with Credit Yerevan Bank. However, one mitigating factor is that Government of Armenia has started to provide further funding to ASIF, in addition to the unspent frozen balance in Credit Yerevan Bank (further details are in the section on the status of Government counterpart contributions). However, this does not resolve the problem of remaining funds, which constitute 80 percent of the total frozen balance. The issue regarding the resolution of this problem is, therefore, carried forward to the updated Action Plan noted below.

By the end of November 2003, the ASIF Director was planning to have a meeting with the President of the Republic of Armenia on this matter, with a view to seeking help in resolving this long-standing problem.

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Disbursement Performance. For ASIF II, there is no definite pattern of disbursements over the year. Since the category “Works” constitutes 73 percent of total uses of funds, particular attention is paid to: (a) the pattern of the execution of works; and (b) related progress in payments over the year. While both patterns are relatively similar in 2001 and 2002, represented by curves with sharp rises every second month starting from August 20011, sharp shortfalls occurred every following month, and a general rising trend from the start to the end of the year. In 2003 the patterns changed; the slope of the curve became steeper, with a distinct rise in the summer months. It should be also noted that the overall level of disbursements in 2002 is higher than in 2001, and in 2003 the level was approximately the same as in 2002.

The following charts show the trends in physical progress of works, and the trends in disbursements in 2001 – 2003 for ASIF II Project.

ASIF II: Trends in Works (US$ Th.)

29.16 45.49 56.67

173.33

313.69

214.86

457.16

293.86

391.36

44.42

108.56 123.79

208.93183.82

477.93

359.29

628.18

410.69

602.42

384.29

655.27

145.13 141.33

82.24

295.61336.11

362.45

575.08 594.25

388.23417.96

227.72

0

100

200

300

400

500

600

700

Janu

ary

Febru

ary

Mar

chApr

ilM

ayJu

ne July

Augus

t

Septe

mbe

r

Octobe

r

Novem

ber

Decem

ber

2001

2002

2003

1 Before August 2001 the patterns of works progress and payments progress did not correlate, basically, due to starting year of the project – the initial allocation of funds under the ASIF second project took place in the end of November 2000, and during the first several months of the project the disbursements and the volume of works contracted were quite low

35

ASIF II: Trends in Disbursements

29.00 36.56 20.2666.19

372.14

146.46

371.93

223.58

341.85

252.16308.90

59.20

181.10

116.06

318.13

249.78

418.87371.56

532.67

367.78

588.74

374.67

561.53

267.81

157.71 158.41

271.92324.02 333.36

461.79

524.84

397.70 414.88

202.48

0

100

200

300

400

500

600

700

Janu

ary

Febru

ary

Mar

chApr

ilM

ayJu

ne July

Augus

t

Septe

mbe

r

Octobe

r

Novem

ber

Decem

ber

2001

2002

2003

The table below provides analysis of the level of disbursements achieved as at the time of the Mid-term mission, and the budgeted disbursements till the end of the project, in total and separately for IDA. All amounts are in US$ millions.

Table 8: ASIF II: Actual and Planned Disbursements (US$ Millions)

Total Disbursements IDA Disbursements IDA – planned per PAD Year ended 31 December

Year Cumulative Year Cumulative Year Cumulative

2001 actual 3.1 3.1 2.1 2.1 2.6 2.6

2002 actual 5.6 8.7 4.1 6.2 3.6 6.2

2003 (part) actual 4.6 13.3 3.4 9.6 - -

2003 (QIV) plan 0.9 14.2 0.9 10.5 - -

2003 (total) plan 5.5 14.2 4.3 10.5 3.8 10.0

2004 plan 5.8 20.0 4.4 14.9 4.0 14.0

2005 plan 5.6 25.6 4.1 19.0 4.0 18.0

2006 plan 2.0 27.6 1.0 20.0 2.0 20.0

The expected closing date of the project is December 31, 2005. However, as shown in the above table, the initial plan, documented in the PAD, does include 2006, which is usually intended to cover a four-month grace period. Typically payments during a grace period are quite low, and usually lower than US$2.0 million planned. Therefore, the ASIF Finance Manager expects that it will be necessary to apply for extension of the closing date, even though the disbursements, at least for the IDA part, were progressing well in accordance with the plan in the PAD or even exceeding it slightly. As seen in the above table, as of the

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time of the Mid-term Review, when the project was completing its 3rd year, the disbursements were only around 50 percent of the total. With two more years left until the closing date of December 31, 2005, it is obvious that this time is not sufficient for disbursement of further 50 percent. Therefore, the ASIF Finance Manager plans to apply for extension of the closing date to 30 June 2006, to be followed by a four-month grace period.

The cumulative amount of expenditures (from all sources of funds) planned for 2003 per PMR 1-A “Project Sources and Uses of Funds” was US$13.3 million (this is different from the planned cumulative disbursements of US$14.2 million per the table above. However, this difference is due to underestimation in budgets in the beginning of the year). Cumulative-to-date plans represent the sum of actual expenditures for the previous period (year) and budgeted expenditures for the reporting period (year).

Analysis of variances between actual cumulative expenditures and budgeted cumulative expenditures as of November 11, 2003 shows that categories of expenditures which are ahead of budgets are:

1. 1-A “Microprojects other than sponsored” (the expenditures obviously speeded up in 2003, resulting in a significant positive variance in this year);

2. 1-B “Sponsored microprojects” (for this category, however, the trend is different – the expenditures obviously slowed down in 2003, and the positive variance is accumulated from prior years);

3. 2-A “Goods for microprojects” (here the expenditures seem to be exceeding budgeted numbers more or less evenly over the 2003 and previous years).

For the rest of categories, the expenditures are, to different degrees, behind budgets. Most significant variance (in absolute terms) is, however, for operating costs (US$450,000), which is good, since it shows economy in the use of funds for operational expenses, rather than any delay in project implementation, and a cumulative effect of this trend over the years 2000 – 2003. Other delays are not significant, and are mostly due to the fact that actual cumulative expenditures as of November 11, 2003 were compared to budgeted cumulative expenditures as of the end of Quarter IV of 2003 (December 31, 2003), since PMR 1-A is prepared on a quarterly basis. The table below provides breakdown of cumulative expenditures as of November 11, 2003 by source of financing, category of expenditures and comparison to budgets (all amounts are in US$ thousand).

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Table 9: Cumulative Expenditures by Source of Financing as of November 11, 2003 (In US$ Thousands)

Category World

Bank Government

of ROA DFID Sponsors Communities Total

actual Budget PMR 1-A

Variance PMR 1-A

1-A 5,532 51 - - 563 6,147 6,006 (141)

1-B 1,602 22 - 1,607 348 3,579 3,220 (359)

2-A 1,063 - - - - 1,063 960 (103)

2-B 142 - - - - 142 218 76

3 69 - 3 - - 72 87 15

4 1,131 2 - - 1,132 1,583 450

CS - - 562 - - 562 669 107

Training - - 494 - - 494 531 37

PPF 80 - - - - 80 0 (80)

Totals 9,619 75 1,059 1,607 911 13,271 13,274 3

1-A Microprojects other than sponsored 1-B Sponsored microprojects 2-A Goods for microprojects 2-B Other goods 3 Consultant services, training and study tours 4 Operating costs CS Consulting services

Summary tables showing breakdown of cumulative expenditures as of November 11, 2003 by components and categories of expenditures see in Annex 5. It should be noted that ASIF continues to practice “short-term borrowings” between the sources of financing in order to avoid delays in payment to contractors. To do so, ASIF transfers certain amounts from one local transit bank account to another (for example, from communities’ contribution transit account to sponsors transit account) and finances expenditures out of the proper source of financing (proper bank account). When the funding is received, “borrowed” money is transferred back.

Thus, as of November 11, 2003, the allocation of funding, expenditures and “short-term borrowings” were as shown in the following table.

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Table 10: ASIF II Short-Term Borrowings from Transit Accounts (In US$ Thousands)

IDA (*) Government DFID Communities Sponsors Total

Sources of funds 9,757 211 1,079 1,360 1,615 14,022

Uses of funds (9,619) (75) (1,059) (911) (1,607) (13,271)

Frozen in Credit Yerevan Bank

- (75) - (280) (20) (375)

“Short-term borrowing”

- - - (80) 78 2 (**)

(*) Sources of funds for IDA also includes PPF advance of US$80,000.

(**) This small difference represents the amount of litigation expenses paid from the bank account, but not relating to activities associated with any of the donors. This amount is expected to be refunded soon.

It should be noted that there is an accumulated excess of community contributions over actual expenditures financed by communities due to the method of calculation of the size of community contributions. The total cost of a microproject includes building works, plus preparation of design documentation, plus costs of technical supervision and authorship supervision (required by RA legislation). The amount of a community contribution due is calculated as 10 percent of this grand total. However, actually only 10 percent of the cost of building works is required from communities, because the cost of all consultancy works is covered from DFID funds, and currently constitutes 5 - 5.5 percent of the grand total. Moreover, as a result of the tender process, the cost of building works generally reduces by additional 5 percent approximately. Legally (based on the Framework Agreements signed between ASIF and communities), these excess community contributions belong to ASIF, and are currently used as a source of liquid funds. The Project Accounting System and the Project’s Financial Accounts

The project’s internal controls, accounting and reporting systems, including, but not limited to: (i) accounting for contributions in-kind received from the Government and communities; (ii) reconciliation of accounting records with the World Bank disbursement summaries; (iii) reconciliation of bank accounts; and (iv) filing system, were examined in detail during June 2003 supervision, and the results are included in the ASIF II Project Supervision Mission Report of June 20, 2003. Therefore, these are not repeated in this report, except for the inclusion of the updated table summarizing the still un-reconciled differences between the ASIF and World Bank accounting records.

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Table 11: Withdrawal Applications According to ASIF and World Bank Records

Withdrawal application According to ASIF records

(US$)

According to World Bank records

(US$)

Difference

(US$) WA#4, 2 August 2001 Category 1-A Category 1-B

108,610.58 115,760.97

120,047.78 104,323.77

(11,437.20)

11,437.20 WA#6, 9 October 2001 Category 2-A Category 4

18,003.52 28,763.77

46,767.24

-(28,763.72)

28,763.77 WA#8, 4 December 2001 Category 1-A Category 1-B

171,367.24 105,867.75

182,904.09

94,330.90

(11,536.85)

11,536.85 WA#17, 16 September 2002 Category 1-A Category 1-B

194,889.25

58,183.04

194,990.98

58,081.31

(101.73)

101.73 WA#19, 31 October 2002 Category 2-B Category 3

14,000.00

-14,000.00

--(*) -(*)

WA#23, 14 March 2003 Category 2-A Category 2-B

5,559.13

--

5,559.13

5,559.13

(5,559.13) (*) This was a mistake of ASIF, which has been discovered by ASIF Financial Manager in the period between June and November 2003 and which is to be corrected both by ASIF and by the World Bank LOA.

Government Counterpart Contribution

According to the PAD and the Credit Agreement, the Government should have provided financing to ASIF II in two installments (June 15 and December 15) in local currency equivalent to US$80,000 each. The total financing to be provided by the Government amounted to US$880,000 (US$80,000 multiplied by 11 half-year periods). However, due to unclear wording of Section 3.01(b) of Article III of the Credit Agreement, the Government interprets its obligations as replenishment of the co-financing account so that the balance on this account amounts to the US$80,000 equivalent in local currency as at June 15 and December 15 every year. Clearly, such interpretation would lead to providing significantly less than the planned US$880,000.

It should be noted, however, that actual demands of ASIF in Government co-financing are much lower than US$880,000. ASIF currently uses Government co-financing only for the following payments:

(a) Microprojects (other than sponsored microprojects) under Part A.1 and A.2 of the project, which are to be financed 90 percent by IDA, and 10 percent by communities, in case communities contribute all or part of their contributions in-kind; and

(b) Sponsored microprojects under Part A.1 and A.2 of the project, which are to be financed 45 percent by IDA, 45 percent by sponsors, and 10 percent by communities, in case communities contribute all or part of their contributions in-kind.

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The need for Government co-financing arises because the value of community contributions in-kind are not included in the official value of contracts (for details see Section on “Accounting for contributions in kind received from the Government and communities” of ASIF II Project Supervision Mission Report of June 20, 2003), and official value of contracts (which is obviously less than actual) is then divided into a 90 percent share to be paid by IDA, and a 10 percent share to be paid by the Government.

The initial calculation of Government co-financing needed for the ASIF II Project was based on the experience of ASIF I Project, where the volume of community contributions in-kind was quite high. In the second project it is quite low, amounting to only US$ 120,834 equivalent, or 9 percent of the total (for the 3rd Quarter 2003, this share was even lower and amounted to 4 percent).

By the time of the Mid-term mission, the Government provided:

1. An initial installment of AMD 43,118,400 (US$80,000 at the rate of 538.98 AMD/1 US$) on October 9, 2000. Of the initial installment, only AMD 913,506 (approximately equivalent to US$2,347) were used for project purposes. AMD 42,204,894 is currently frozen in Credit Yerevan Bank. The US$ equivalent value of frozen funds in Credit Yerevan Bank as of November 11, 2003 was US$75,590.

2. AMD 18,465,000 (US$31,570 at the rate of 584.89 AMD/1 US$) was provided on December 30, 2002. This amount was reimbursed directly to the community contribution account in Armenian Development Bank, from which expenses were originally made by ASIF, without passing through the Government contribution account opened in Armenian Savings Bank. Further payments of GOA contribution were made to ASB.

3. AMD 25,860,100 (equivalent to US$44,132) was provided on June 23, 2003. This allowed to completely cover all previously accumulated “debt” of GOA to the communities contributions account in Armenian Development Bank in respect of expenditures financed from that account but relating to GOA.

4. AMD equivalent of US$55,379 was provided in September 2003. As a result, at the time of the MTR, the balance on GOA contribution account was equivalent to US$60,680. It is not clear how to utilize this amount, since it is too large to finance only the occasional fraction of GOA in microprojects. Thus, it was decided at the ASIF Board meeting to implement several microprojects with IDA share equal to zero. The question about the share of communities, or if the microprojects will be 100 percent financed by GOA funds, has not been decided yet.

The cumulative expenditures covered out of that funding amounted to equivalent US$75,000.

Status of Matching Fund Arrangements under the Project

Main sponsors providing financing under Matching Fund arrangements continue to be the All Armenian Fund, Aznavour pour l’Armenie, IFAD, Armenian General Benevolent Union (AGBU, Austria and Switzerland offices), the Tufenkian Fund and Armenian Development Services. At the time of the Mid-term review, most active work had been carried out with the All Armenian Fund and IFAD. By November 2003, Aznavour pour l’Armenie (APA) was owing to ASIF around US$30,000 for works already performed. All

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works, which have been planned with APA, have been completed. The sum of US$30,000 has been “borrowed” from the general pool of sponsors’/communities funds, and now are expected to be re-financed by APA.

Since 2003 UNHCR is no longer one of the sponsors, due to the fact that it has depleted its budget for ASIF. No new sponsors appeared in 2003. The only two new organizations are Knights of Vardan and Pasadena Sisters, that do not participate as sponsors, and only provide funds on behalf of communities (when communities have insufficient funds to finance its 10 percent share of the microprojects cost).

Amounts of financing raised for the ASIF II Project from different sponsors are detailed in the table below. It should be noted that the same sponsors not only participate in matching funds, but also provide financing for the communities in cases when communities cannot provide their 10 percent share.

Table 12: ASIF II – Financing by Sponsors under Matching Fund Arrangements (US$)

No. Sponsor Committed amount as at

11/11 (US$)

Total Cumulative

Amount raised as at

11/2003

Total Amount raised in

2003

Total Amount raised in

2002

Total Amount raised in

2001

1 UNHCR 356,417 307,254 (766)* 122,439 185,581

2 All Armenian Fund 373,295 338,811 67,874 116,730 154,207

3 Tufenkian Fund 50,244 16,962 - - 16,962

4 ADS - 16,177 - - 16,177

5 AGBU/Austria - 9,925 - - 9,925

6 AGBU/Switzerland 12,085 12,085 - - 12,085

7 Aznavour pour l’Armenie (APA)

405,000 363,567 - 33,592 329,975

8 IFAD 710,000 549,980 289,980 260,000 -

Total Financing under Matching Fund Arrangements

1,907,041 1,614,761 357,088 532,761 724,912

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Table 13: ASIF II – Financing by Sponsors Provided to Communities (US$)

No. Sponsor Committed Amount as at

11/11 (US$)

Total Cumulative

Amount raised as at

11/2003

Total Amount raised in

2003

Total Amount raised in

2002

Total Amount raised in

2001

1 UNHCR - 53,679 1,540 21,192 30,947

2 Knights of Vardan (KoF) 331,762 74,387 257,375 -

3 All Armenian Fund - 16,936 - - 16,936

4 Pasadena Sisters 10,000 - 10,000 -

5 Tofekian Fund - - - - -

6 ADS - - - - -

7 AGBU/Austria - - - - -

8 AGBU/Switzerland - 51,081 27,546 23,535 -

9 Aznavour pour l’Armenie (APA)

- 45,293 45,293 - -

10 IFAD - - - - -

Total Financing provided for Communities by same Sponsors

- 508,751 148,765 312,102 47,883

Notes: Agreements are concluded with each sponsor.

* Agreements with UNCHR are concluded annually for a definite amount of money. The unused balance has to be returned to UHCHR in the end of each year. The negative amount shown for 2003 represents such returned balance.

There is a single Agreement of ASIF with the Tufenkian Fund, Armenian Development Services (ADS) and AGBU (Austria), according to which Tufenkian Fund acts on behalf of ADS and AGBU in cooperating with ASIF. There has only been one Agreement, signed in March 2001, for total amount of financing of US$50,244, covering certain specific microprojects.

There is also just one Agreement with AGBU (Switzerland), dated September 2001, in accordance with which AGBU has to finance one project with US$12,085. This funding has been provided, and by the time of the Mid-term Review, ASIF did not have any uncompleted (ongoing) projects with AGBU. However, the ASIF Director has reached oral agreement with AGBU in respect of further financing in amount of US$50,000, but there is nothing in written form so far.

Arrangements with IFAD are similar to arrangements with IDA. ASIF presents to IFAD Withdrawal Applications. Total amount of financing to be provided by IFAD by October 1, 2005 is US$710,000. As of November 2003, IFAD had verbally expressed its intention to provide a further US$1.5 million. However, it has yet to be properly documented in an Agreement. It should be noted that there is also no clarity so far in respect of the timing of provision of such financing. It can be provided partially within the framework of ASIF II (the amount which can realistically be utilized by ASIF by the end of second project under

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matching funds arrangements is in case of IFAD not more than US$200,000), and the rest, around US$1.3 million, might be provided already within the framework of a possible third project which is currently under consideration. The decision on the amounts of financing to be provided and the timing for such provision is likely to take place in February 2004.

The All Armenian Fund (in cooperation with some other external donors) agreed to present some further US$100,000 for four microprojects which are already in the list of projects approved by the ASIF Board. The written Agreement has yet to be prepared and signed.

Information about the number and total cost of microprojects financed by each sponsor as of November 11, 2003 is presented in the table below. The same table provides information about amounts paid (disbursed) on behalf of each sponsor. It should be noted that in some cases the amount disbursed exceeds the amount received. That means that money expected to be received from one sponsor was borrowed from the general pool of sponsor funds and disbursed on behalf of that sponsor. It should be noted that in case of UNHCR, the difference representing the exchange rate difference, which increased due to the fact that in 2001 the Agreement with UNHCR was fixed in AMD, while all contracts with contractors and suppliers were fixed in US$ payable in local currency at the rates valid on the dates of payment, will not be reimbursed by UNHCR. Contractual relationships between ASIF and UNHCR are completed. This exchange rate difference has, therefore, been reimbursed partially from other sponsor’s funds and also partially from interest received by ASIF on bank accounts for sponsor’s funds.

Table 14: ASIF II – The Number and Total Cost of Microprojects financed by Sponsors

Name Total # of MPs

Total Contracts’

cost (US$)

Sponsor’s Commitment

(US$)

ASIF’s & Communities’ Commitment,

(US$)

Paid on behalf of Sponsors as of 11/11/2003

(US$)

Actually raised from Sponsors as

of 11/11/2003 (US$)

All Armenian Fund 8 843,360 373,295 470,064 355,476 338,811

Aznavour pour l’Armenie 7 918,636 413,386 505,250 394,925 363,567

UNHCR 11 749,279 337,176 412,103 307,491 307,254

IFAD 25 1,569,122 706,105 863,017 495,482 549,980

AGBU, Switzerland 1 25,711 11,570 14,141 11,410 12,085

AGBU, Austria 9,925 9,925

Tufenkyan Fund 16,183 16,962

Armenian Development Services (ADS)

1 94,028

42,313

51,715

16,183 16,177

Total 53 4,200,136 1,883,845 2,316,291 1,607,075 1,614,761

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Status of Co-financing Arrangements under the DFID Trust Fund

In accordance with the PAD and the Credit Agreement, total amount of financing provided by donors was expected to be US$3.18 million equivalent. This amount was based on expected a contributions from the Government of Norway of US$580,000, a contribution from the Government of Germany of US$600,000, and contribution from DFID (UK) of US$2.0 million.

At the time of the Mid-term review, it was clear that the project will not receive any financing from the Governments of Norway and Germany (US$1.18 million in total). The only agreement signed was for the DFID Grant for GBP 1,176,000, which at the time of effectiveness of the Grant (02/21/01) amounted to US$1,709,000 at the rate of 1.4535 US$/1 GBP. Of that amount, by the time of the review, three tranches of GBP 650,000 had been fully disbursed, and the 4th tranche was partially disbursed. Information on the amount of financing provided by DFID and the expenditures financed out of these funds is provided in the Tables 9 and 10 above.

Financial Reporting Activities of ASIF

Compliance with PMR requirements

ASIF currently produces the following PMRs and other reports:

1. PMR 1-A “Project Sources and Uses of Funds”, 2. PMR 1-B “Uses of Funds by Project Activity”, 3. PMR 1-C “Aggregated Balance Sheet”, 4. Aggregated Cash Flow Statement (during the June 2003 Supervision, it was decided to

allow ASIF to substitute from June onwards PMR 1-D “Project Cash Withdrawals” with the Aggregated Cash Flow Statement);

5. Other reports as needed, since the MIS used in ASIF is very flexible in terms of reports generation.

These reports are reviewed regularly during supervision missions, including the current Mid-term review, and have been found satisfactory.

During the June 2003 supervision mission, it was noted that PMR 2-A “Output Monitoring Report – Contract Management” needed additional attention. By the time of MTR, ASIF started had preparation of this report (and incorporated it in the MIS). However, it is not used by ASIF management since there are other reports, basically substituting PMR 2-A, which have been traditionally used since the start of ASIF II and installation of the new MIS, and continue to be used. In fact, PMRs are also not used for management decision-making purposes, and instead, the statutory reporting forms for the Government (special reporting package in respect of World Bank-financed projects) are used, which are very close to PMRs in formats, but have less detail in terms of categories of expenditures (just 4: goods, works, consultancy services, and operating costs) and, thus, are more convenient to use. Aggregated Cash Flow Statement is also frequently used.

Review of the Quarterly Progress Reports presented to the World Bank. ASIF Quarterly Report No 3 for 2003 was reviewed and found satisfactory. Financial information included in the report was found sufficiently complete and informative, and reliable (produced by ASIF MIS). It was noted that ASIF has started to include in the quarterly reports information on contributions in-kind, which was one of the points of the Action Plan

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proposed by the results of the June 2003 supervision. This is a positive change. One point for improvement might be the need for more details in respect of financing provided by the Government and of expenditures financed out of these funds. This point is carried forward in the new updated Action Plan.

The Management Information System

The project MIS was examined in detail during June 2003 supervision, and the results are included in the ASIF II Project Supervision Mission Report of June 20, 2003. Thus, these are not repeated in this MTR Report.

Financial Audits

Audit report for the year ended December 31, 2002 was received on time. The Audit report in respect of both sources of financing (IDA Credit and DFID Grant) is unqualified.

Significant issues raised in the Management Letter are the following:

1. Un-reconciled amounts in the accounting records of ASIF and the World Bank. This point is still outstanding, since ASIF has unfortunately historically experienced difficulties in communications with the Bank LOA. The point is, in fact, carried forward in the updated Action Plan.

2. ASIF has no specific procedures in place for handling free financial resources in the form of spare funds from community contributions, economized in the result of contracts being concluded for somewhat lower amounts as those estimated and offered for the tender. The ASIF Finance Manager, though, commented that so far this is not an urgent recommendation. It will become more relevant in 2005, when the ASIF will have no further inflow of funds from community contributions. Currently, balances in bank accounts are of more relevance, and these are being monitored. The comment is accepted as valid.

3. No annual stocktaking of assets and liabilities is conducted by ASIF. The ASIF Finance Manager accepted the recommendation to conduct such stocktaking only in respect of fixed assets. No stocktaking is planned for settlements with suppliers and contractors (that is, debtors and creditors) due, first, to the very significant number of debtors and creditors and absence of resources (time and otherwise) to perform such stocktaking, and second, because there is no legislative requirement for this. Since the settlements are monitored anyways by various alternative procedures, the decision of ASIF Finance Manager seems acceptable.

4. Unresolved problem of frozen funds in Credit Yerevan Bank. This problem is still unresolved. Comments see above.

5. Other recommendations in the Management Letter are either of minor nature, or have been fulfilled either in the manner recommended by the auditors or in an alternative manner.

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Staffing Issues: The staffing of finance department of ASIF is sufficient both in terms of numbers of staff and in terms of staff qualifications and professional experience.

Compliance of ASIF II with Credit Agreement: ASIF complies with the Finance Covenants of the Credit Agreement.

PSR Ratings

Rating

Financial Management (unchanged from the time of June 2003 supervision): HS

Financial Performance S

Action Plan

The following is a proposed Action Plan to address issues raised in the financial management and accounting review. 1. Continue work on resolution of the problem of funds frozen in Credit Yerevan Bank.

2. Start including in Quarterly Reports to the World Bank more detailed information on the amounts which are actually expensed by ASIF on behalf of the Government, and amounts reimbursed by the Government, both cumulatively and for the reporting period.

3. Implement the still outstanding auditors’ recommendations as given in the Management Letter for the year 2002 audit.

4. Clarify the un-reconciled differences between the World Bank and ASIF’s accounting records.

5. In the future Quarterly Reports to the World Bank, include information on the contributions received both in cash and in kind not only for the reporting period, but also cumulatively. This may give some further perspective on the trends.

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Procurement Review

Procurement Plan Review

The mission carried out a review of the implementation of the Procurement Plan (PP) for the period of May 2006 – April 2010. The implementation of the PP was discussed and it was agreed that the Procurement Unit would prepare a detailed analysis regarding the originally planned procurement plan and the changes that took place in the plan during project implementation. Some of the information provided by the Procurement Unit during the mission is summarized below:

Works (i) NCB:

Micro-projects: 86 works contracts at the total amount AMD 5,858.0 mil. have been signed and 77 of which have been completed, within the planned AMD 5,846.0 mil..

(ii) Minor Works:

Micro-projects: 37 works contracts at the total amount of AMD 912.0 mil. have been signed and 34 of which have been completed, within the planned AMD 905.0 mil..

Goods

(i) NCB: Furniture: 24 contracts for procurement of sets of school desks, easy chairs, black boarders and bookcases for different marzes of RA a total amount AMD 1,505.0 mil, have been signed and 23 of which have been completed, within the planned AMD 1,498.0 mil.

(ii) Shopping:

Furniture: 7 contracts for procurement of sets of school desks, black boarders and bookcases for different marzes of RA a total amount AMD 126.0 mil., have been signed and completed, within the planned AMD 126.0 mil. Computer and office equipment: 5 contracts at the total amount AMD 55.0 mil., have been signed and completed, within the planned AMD 55.0 mil. Vehicles: 3 contracts at the total amount AMD 58.0 mil., have been signed and completed, within the planned AMD 58.0 mil.

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Consulting Services (i) LCS:

Financial Audits: 1 contract amounting to AMD 4.8 mil, has been signed. The cost estimate was AMD 4.8 mil. One additional contract for financial audit on amount AMD 5.4 mil has been signed based on SSS method.

(ii) QBS:

Beneficiary assessment and cost effectiveness study: 3 contracts totally amounted AMD 23.3 mil. have been signed and completed, within the planned AMD 23.0 mil. General appreasal of projects design: 3 contracts totally amounted AMD 19.8 mil. have been signed.

(iii) SSS Author supervision: 26 contracts at the total amount AMD 13.5 mil., have been signed and 25 of which have been complated. Appraisal and promotion engineer: 5 contracts at the total amount AMD 19.6 mil. have been signed.

(iv) IC Appraisal and promotion engineer: 17 contracts at the total amount AMD 86.3 mil. have been signed and completed, within the planned AMD 64.7 mil. Social Services Monitoring Specialist and other: 7 contracts at the total amount AMD 15.4 mil. have been signed and 5 of which have been completed, within the planned AMD 15.4 mil.

(v) CQ Design & Author Supervision: 14 contracts at the total amount AMD 403.5 mil. have been signed .

Technical supervision of civil works: 6 contracts at the total amount AMD 172.0 mil. have been signed within the planned AMD 173.7 mil. Complex appraisal and investigation: 4 contracts at the total amount AMD 18.0 mil. have been signed.

Municipal Finacial Management Training: 2 contracts at the total amount AMD 64.9 mil. have been signed and one of which has been completed already.

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Overall Status of the Procurement Plan. Based on the information relating to the completed procurement activities and the disbursements per category, the ASIF should have prepared an analysis showing the total amounts spent per category, the observance of the respective thresholds, and the aggregates specified in the DCA and GA. The remaining activities and the procurement to be completed till the end of the project, should have also been specified. However, during the Mid-term review, the Bank mission learned that the updated implementation plan and procurement were still under discussion and concurrence was to be sought with the Government. The mission informed the ASIF that any new additional activities or reconsideration and/or cancellation of any previously planned and approved activities should be justified and cleared by the Bank, and if necessary, respective amendments to the DCA and GA should be made. A detailed updated procurement plan is expected from the ASIF by end-February 2004.

Post Review: The procurement post review was carried out during the Mid-term on April 26-28, 2010. The last post review had been carried out in June, 2009. Based on the findings of the previous post reviews, it should be noted that procurement arrangements and the Bank’s Guidelines have been followed and the procurement management of the project activities implementation is satisfactory. Issues in Procurement: In the process of the procurement review, several procurement issues were discussed. Special attention was paid to the necessity of advertising of contract award information, requesting of insurance certificates, submitting the appropriate licences as precondition of contract award, excluding the retention amount from the all types of contract for consulting services, not charging the short-listed companies, revision in OM the set of documents requested for qualification of bidders and bids itself, extending the completion date of contracts before expiration of it (if mutual agreement is obtained).

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Capacity of the ASIF Procurement Staff

The ASIF’s Procurement Department currently managed by its Head of Department and includes one procurement specialist, assigned recently and one lawyer. The management and implementation of procurement activities is well organized. Furthermore, procurement documentation is systematically stored and maintained. The mission found that the department’s capacity to carry out the procurement plan continues to be satisfactory. ASIF General Reporting Arrangements

To date, the ASIF has submitted all required quarterly and annual reports in a timely manner. These reports are informative, and provide valuable feedback on how the ASIF II Project is progressing, especially on the physical progress of works. However, some further improvements are needed to upgrade the quality of the reports, provide more analytical content based on the wealth of information available in the MIS, and to make such reports more effective management tools for achieving the overarching objective of poverty reduction in a cost-effective manner. A number of needed changes to these reports were discussed during the Mid-term Review mission, as set out below. It was agreed that these changes will be reflected in the next quarterly report. Cumulative Status of Project Activities: The quarterly report provides an account only of activities of the quarter concerned, and excludes information of the cumulative project status. As a result, the reader is compelled to refer all previous reports to get a cumulative picture, or request ASIF for a separate report on the cumulative status. At the end of the fifth year, for example, the reader will have to refer to either 20 previous quarterly reports, or five annual reports, or request ASIF for a special report. Since all of the cumulative project information is available in the ASIF’s MIS, it is recommended that the cumulative picture be presented along with the quarterly information. This will provide the reader, and the ASIF Management with clearer view as to how the ASIF II Project is progressing on the whole. Such information needs to be combined with a few key targets, so as to clearly depict the remaining program under ASIF II, and the tasks ahead. Also, the text should include an adequate discussion of the progress made to date, problems encountered, solutions found, and the key issues yet to be addressed in completing the remainder of the ASIF II Project.

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Distribution of Microprojects by Marz: Although the quarterly report contains an annex of all the projects completed, it does not convey to the reader summary account of the distribution of projects by marz. It is recommended that the quarterly report present an analytic text table showing the projects completed during the quarter, by marz, and the cumulative number of projects completed by marz. The data for such tables is readily available in the MIS. The text should include a discussion covering inter alia, the rationale for assigning initial focus on certain marzes (e.g., those in the earthquake zone), special problems in particular marzes, levels of participation, proactive ness of local officials and community leaders, and other relevant issues. Poverty Targeting and Regional Allocation of Funds: The quarterly reports need to be strengthened with an addition of a separate section on poverty targeting. This section should contain a text table showing at least the funds disbursed by marz from the IDA in relation to the allocation by marz, as per the last re-allocation of December 2002. It would also be useful to have a similar table for the Matching Fund Program (IDA and other Sponsors), which would reflect allocations based on Sponsors’ perceptions of regional priorities. The section should include an adequate discussion of the results, covering inter alia, the reasons for initial focus on certain marzes, and reasons targeting other marzes later on in the ASIF II program.

Microproject Costs by Typology: The costs of microprojects by typology need to be included in the quarterly report, since such costs will, in the end, determine the number of microprojects that could be completed within the available resource envelope, recognizing, of course, the demand driven nature of the project. As seen from Table 1, there is a considerable variation in microproject costs by typology, due to the inherent nature of the types of the microprojects. There is also a considerable variation in the costs per beneficiary, reflecting estimates of the number of members served by each type of microproject. Such information would be valuable for the purpose of monitoring the ASIF II Project as a whole. It is therefore recommended that a text table similar to Table 1 be included in the quarterly report, combined with a suitable text explaining salient features and underlying reasons of the range of microproject costs and costs per beneficiary. Trends in Microproject Costs: An equally important aspect that needs to be included in the quarterly report concerns trends in microproject costs. Changes in average microproject costs could occur due to a variety of factors such as changes in the mix of microprojects by type, shifts between rehabilitation and new construction, construction in the earthquake zone, price increases in labor and materials, or general inflation. Such information could be presented in tabular and graphical form together with a suitable text explaining the underlying factors. It would be useful to know for example, deviations in costs from baseline data, and the underlying reasons. As noted in the section on cost-effectiveness, one option for the development of baseline data, would be the benchmarks for microproject costs derived from the first year of operations. Financial Reporting: As noted above in this section of the Mid-term Report, financial information included in the quarterly reports are sufficiently complete and informative, and

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reliable. It was noted that ASIF has started to include in the quarterly reports information on contributions in-kind, which was one of the points of the Action Plan proposed by the results of the June 2003 supervision. This is a positive change. One point for improvement might be the need for more details in respect of financing provided by the Government and of expenditures financed out of these funds.

ASIF Staff Training

Since the project became effective, staff in the ASIF have been encouraged by the Executive Director to participate in training courses to enhance their skills and to attend international conferences and seminars on topics relevant to ASIF operations. As a result ASIF technical staff have actively participated in a number of training courses (see details in Annex 6) covering financial management and accounting, procurement, monitoring and evaluation, planning and management, and English language classes. The conferences and seminars attended by ASIF technical staff, to name a few, include the ECA Net conferences; a conference organized by the American Council for Collaboration in Education and Language Study covering investments in Armenia, current environment and perspectives; and regional seminars on social funds organized by the Bank. In addition, the Executive Director participated in a social fund study tour organized by the World Bank in Latin America.

In addition, as a result of the ECA net, the ASIF has participated in productive and useful exchanges with other social fund staff from Moldova, Ukraine and recently Macedonia and Kosovo, who have or planning to visit the ASIF headquarters. Some ASIF technicians, such as the MIS specialist and the disbursement officer have also visited a number of social fund projects to assist project implementation units in the setting up of Management information systems and in dealing with disbursement related issues. It is also worth noting that the Head of the Procurement Department, participated on the fiduciary training took place in November 2009, Tbilisi.

PART VI: A PROPOSED FOLLOW-UP PROJECT During the wrap-up meeting, the Deputy Minister of Finance expressed satisfaction on behalf of the Government on the successful and productive implementation of the ASIF II operation in support of the Government’s poverty reduction program. He noted in particular the impact of the project on improving the living standards of the poor and vulnerable groups, supporting the Government’s decentralization program, developing local level institutions, and strengthening public governance. He also expressed appreciation on the performance of ASIF staff in the delivery of services to local communities throughout Armenia. The Deputy Minister drew attention to the two letters addressed to Bank Management respectively from the Prime Minister of Armenia dated November 1, 2003 and from the Minister of Finance and Economy dated July 17, 2003, which emphasize the importance of continuing ASIF operations through a proposed follow-up ASIF III Project. It was noted

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that these operations should focus on the continuation of ASIF’s current activities, together with the broadening of its scope with the provision of social care services. In addition, the Deputy Minister also mentioned that the Government was interested in expanding the coverage and resources to address school furniture needs and to the improvement of local access roads. The mission informed the Deputy Minister that the Bank’s country assistance program for the medium term which includes a provision for an ASIF III Project is still under discussion. The recent Country Assistance Strategy (CAS) dated February 2004, provides a tentative allocation of US$15 million for a proposed ASIF III Project. Once the Country Assistance Strategy (CAS) is discussed and finalized with the Government of Armenia, the next steps in project preparation will be to: (i) reach agreement on the objectives, coverage and financing of the proposed ASIF III project; (ii) establish a project preparation timetable; (iii) seek co-financing from interested donors; and (iv) obtain funding for project preparation activities.