Document of The World Bank

Report No: ICR00003553

Public Disclosure Authorized

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-81290)

ON A

LOAN

IN THE AMOUNT OF US$ 15.0 MILLION EQUIVALENT Public Disclosure Authorized TO THE

REPUBLIC OF ARMENIA

FOR A

MUNICIPAL WATER PROJECT

December 15, 2015 Public Disclosure Authorized

Water Global Practice South Caucasus Country Unit Europe and Central Asia Region Public Disclosure Authorized CURRENCY EQUIVALENTS

(Exchange Rate Effective 12/1/2015)

Currency Unit = AMD US$ 1.00 = [482.81]

FISCAL YEAR

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank AMD Armenian Dram AWSC Armenia Water and Sanitation Company CAPEX Capital Expenditure Program CAS Country Assistance Strategy CMU Contract Monitoring Unit CPS Country Partnership Strategy DPO Development Policy Operation EBRD European Bank for Reconstruction and Development ECA Europe and Central Asia ERR Economic Rate of Return EMC Enhanced Management Contract FIRR Financial Internal Rate of Return FM Financial Management FSU Former Soviet Union FY Fiscal Year GoA Government of Armenia IDA International Development Association IFRS International Financial Reporting Standards ISR Implementation Supervision Report KfW Kreditanstlat fur Wiederaufbau KW Kilowatt l/c/d Liters per capita per day MDP Municipal Development Project MWP Municipal Water Project MWWP Municipal Water and Wastewater Project NPV Net Present Value NRW Non-Revenue Water O&M Operation and Maintenance PAD Project Appraisal Document PDO Project Development Objective PIE Project Implementing Entity PIU Project Implementation Unit PPP Public-Private Partnership

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PPIAF Public-Private Infrastructure Advisory Facility PSP Private Sector Participation PSRC Public Services Regulatory Committee SCWE State Committee for Water Efficiency WSS Water Supply and Sanitation YWSC Yerevan Water and Sanitation Company YWWP Yerevan Water and Wastewater Project

Senior Global Practice Director: Junaid Ahmed Country Director Mercy Tembon Practice Manager Dina Umali-Deininger Project Team Leader: Anna Cestari/Zaruhi Tokhmakhian ICR Team Leader: Anna Cestari

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1.

COUNTRY Republic of Armenia

CONTENTS Data Sheet A. Basic Information ...... v B. Key Dates ...... v C. Ratings Summary ...... v D. Sector and Theme Codes ...... vi E. Bank Staff ...... vi F. Results Framework Analysis ...... vi G. Ratings of Project Performance in ISRs ...... ix H. Restructuring (if any) ...... ix I. Disbursement Profile ...... x Main Document 1. Project Context, Development Objectives and Design ...... 1 2. Key Factors Affecting Implementation and Outcomes ...... 4 3. Assessment of Outcomes ...... 10 4. Assessment of Risk to Development Outcome ...... 18 5. Assessment of Bank and Borrower Performance ...... 19 6. Lessons Learned ...... 22 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ...... 23 Annex 1. Project Costs and Financing ...... 25 Annex 2. Outputs by Component ...... 26 Annex 3. Economic and Financial Analysis ...... 30 Annex 4. Bank Lending and Implementation Support/Supervision Processes ...... 39 Annex 5. Beneficiary Survey Results ...... 41 Annex 6. Stakeholder Workshop Report and Results ...... 45 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ...... 46 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ...... 55 Annex 9. List of Supporting Documents ...... 56 Annex 10. Additional Background Information ...... 57 Annex 11. Donor Projects Active in the Water Sector in Armenia, 2012-2015 ...... 59 MAP ...... 61

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A. Basic Information Country: Armenia Project Name: Municipal Water Project Project ID: P126722 L/C/TF Number(s): IBRD-81290 ICR Date: 12/04/2015 ICR Type: Core ICR Lending Instrument: SIL Borrower: ARMENIA Original Total USD 15.00M Disbursed Amount: USD 14.93M Commitment: Revised Amount: USD 14.93M Environmental Category: B Implementing Agencies: Armenia Water and Sewerage Company Cofinanciers and Other External Partners:

B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 11/09/2011 Effectiveness: 06/23/2012 Appraisal: 01/17/2012 Restructuring(s): Approval: 02/21/2012 Mid-term Review: 04/01/2014 04/08/2014 Closing: 06/30/2015 06/30/2015

C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: High Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Satisfactory Government: Moderately Satisfactory Implementing Quality of Supervision: Moderately Satisfactory Moderately Satisfactory Agency/Agencies: Overall Bank Overall Borrower Moderately Satisfactory Moderately Satisfactory Performance: Performance:

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C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments (if Indicators Rating Performance any) Potential Problem Project Quality at Entry No None at any time (Yes/No): (QEA): Problem Project at any Quality of Supervision No None time (Yes/No): (QSA): DO rating before Moderately

Closing/Inactive status: Satisfactory

D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Public administration- Water, sanitation and flood protection 31 31 Water supply 69 69

Theme Code (as % of total Bank financing) Rural services and infrastructure 35 35 Urban services and housing for the poor 65 65

E. Bank Staff Positions At ICR At Approval Vice President: Cyril E Muller Philippe H. Le Houerou Country Director: Laura E. Bailey Asad Alam Practice Manager/Manager: Dina Umali-Deininger Pier Francesco Mantovani Project Team Leader: Anna Cestari Zaruhi Tokhmakhyan ICR Team Leader: Anna Cestari ICR Primary Author: Amanda Joan Goksu

F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document) In line with the Government of Armenia's strategy for continual improvements in service delivery, the Project Development Objective (PDO) is "To support improvement of the quality and availability of water supply in selected service areas of the Armenian Water and Sewerage Company (AWSC)." The selected service areas are: Masis town, Ashtarak town, and Echmiatsin town, and their surroundings.

Revised Project Development Objectives (as approved by original approving authority)

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(a) PDO Indicator(s)

Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Increased weighted average daily supply of drinking water service in selected areas Indicator 1 : from 12.3 hours daily to 16.6 hours daily Value quantitative or 12.3 hours 16.6 hours 17.6 hours Qualitative) Date achieved 02/21/2012 02/22/2012 09/30/2015 Comments Target Exceeded. As of the end of project (6/30/15) the result was 17.4 hours; the (incl. % number increased to 17.6 by 9/30/15. achievement) Decreased weighted average non-revenue water in selected areas from 83.50 percent to Indicator 2 : 70 percent Value quantitative or 83.5% 70% 70% Qualitative) Date achieved 02/21/2012 02/22/2012 09/30/2015 Comments Target Met. As of the end of project (6/30/15) the result was 74%; the number (incl. % decreased to 70% by 9/30/15. achievement) Indicator 3 : Increased ratio of billing and collection from 93.0 percent to 98 percent Value quantitative or 93.5 98 98 Qualitative) Date achieved 02/21/2012 02/22/2012 09/30/2015 Comments Target Met. As of the end of project (6/30/15) the result was 96.5%; the number (incl. % increased to 98% by 9/30/15. achievement)

(b) Intermediate Outcome Indicator(s)

Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised Target approval Completion or Values documents) Target Years Indicator 1 : Decreased annual electricity consumption in KW/m3 Value (quantitative .23 .17 .16 or Qualitative) Date achieved 02/21/2012 02/22/2012 09/30/2015 Comments Target Exceeded. As of the end of project (6/30/15) the result was .17; the number (incl. % decreased to .16 by 9/30/15. achievement)

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Increased average domestic metered consumption per metered registered inhabitant (in Indicator 2 : l/c/d) Value (quantitative 88.5 116 119 or Qualitative) Date achieved 02/21/2012 02/22/2012 09/30/2015 Comments (incl. % Target Exceeded. achievement) Indicator 3 : Decreased percentage of subscribers with more than four months arrears Value (quantitative 27.7 21.0 17.9 or Qualitative) Date achieved 02/21/2012 02/22/2012 09/30/2015 Comments Target Exceeded. As of the end of project (6/30/15) the result was 18.5; the number (incl. % decreased to 17.9 by 9/30/15. achievement) Number of automation systems installed at pumping stations and daily regulation Indicator 4 : reservoirs Value (quantitative 0.0 28 35 or Qualitative) Date achieved 02/21/2012 02/22/2012 06/30/2015 Comments (incl. % Target Exceeded. achievement) Indicator 5 : Increased percentage of water disinfected Value (quantitative 92.9 96 99.3 or Qualitative) Date achieved 02/21/2012 02/22/2012 09/30/2015 Comments Target Exceeded. As of the end of project (6/30/15) the result was 99.5; the number (incl. % increased to 100 by 9/30/15. achievement) Indicator 6 : Decreased amount of water production (l/c/d) Value (quantitative 752 489 481 or Qualitative) Date achieved 02/21/2012 02/22/2012 09/30/2015 Comments Target Exceeded. As of the end of project (6/30/15) the result was 481; the number (incl. % decreased to 329 by 9/30/15. achievement) Increased domestic water metering (as a percentage of domestic subscribers provided Indicator 7 : with water meters in Service Area of AWSC) Value (quantitative 81.2 87 88 or Qualitative) Date achieved 02/21/2012 02/22/2012 09/30/2015

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Comments Target Exceeded. As of the end of project (6/30/15) the result was 95.3; the number (incl. % decreased to 88 by 9/30/15. achievement) Number of people in urban areas provided with access to improved water sources under Indicator 8 : the project Value (quantitative 0 99263 100978 or Qualitative) Date achieved 02/21/2012 02/22/2012 09/30/2015 Comments (incl. % Target exceeded achievement) Number of people in rural areas provided with access to improved water sources under Indicator 9 : the project Value (quantitative 0 33328 31089 or Qualitative) Date achieved 02/21/2012 02/22/2012 09/30/2015 Comments Target not met. As of the end of project (6/30/15) the target was exceeded (33,300) but (incl. % after confirmation of customers was reduced to 31,089 on 9/30/15. achievement) Piped households (customers) with water connections that are benefiting from Indicator 10 : rehabilitation works undertaken by the project Value (quantitative 0 33609 32848 or Qualitative) Date achieved 02/21/2012 02/22/2012 09/30/2015 Comments Target not met. As of the end of project (6/30/15) the target was exceeded (33645) but (incl. % after confirmation of customers was reduced to 32,848 on 9/30/15. achievement)

G. Ratings of Project Performance in ISRs

Date ISR Actual Disbursements No. DO IP Archived (USD millions) 1 10/15/2012 Satisfactory Satisfactory 1.00 2 01/07/2013 Satisfactory Satisfactory 2.94 3 08/07/2013 Satisfactory Satisfactory 5.67 4 01/24/2014 Satisfactory Satisfactory 7.77 5 05/27/2014 Satisfactory Satisfactory 8.87 6 11/19/2014 Satisfactory Satisfactory 11.78 7 06/05/2015 Moderately Satisfactory Moderately Satisfactory 13.48 8 07/08/2015 Satisfactory Satisfactory 14.96

H. Restructuring (if any) Not Applicable

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I. Disbursement Profile

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Executive Summary

The Municipal Water Project (MWP) aimed at supporting improvement in the quality and availability of water supply in selected service areas of the Armenia Water and Sewerage Company (AWSC). The operation followed two other successful operations, the Yerevan Water and Wastewater Project (YWWP) and the Municipal Water and Wastewater Project (MWWP).

The project is rated Moderately Satisfactory having substantially achieved its development objectives. All three key outcome indicators targets have been met, and 80% of intermediate indicator targets have been met.

The investment component of the project was successful. It supported the improvement of water supply services in small towns and rural areas, which are less affluent than the capital city Yerevan, and have higher rates of poverty. In total, about 130,000 people benefitted from the project’s intervention. On average, availability of water supply for these beneficiaries has improved from 12.3 to 17.6 hours/day, exceeding the set target (16.6 hours/day); non-revenue water has been reduced from 83.5% to 70%; and billing and collections increased from 93.5% to 98%. The project has certainly contributed to also improving AWSC’s efficiency as many of the intermediate results indicators show. Water production has decreased while service availability has increased. Energy consumption has decreased, metering has increased beyond set targets and water disinfection as well as the methodology for measuring it (sampling) have improved.

The contribution of MWP to the higher goal of improving overall WSS sector sustainability is less substantial. Since the late 1990s the Government of Armenia has started a reform process which has led to improved service coverage and noticeable efficiency gains. However, this was not accompanied by a tariff reform toward full cost recovery. In the service area of AWSC, tariffs have remained stagnant since 2009, leaving the utility indebted and dependent on Government’s subsidies.

Armenia is the only country in the Former Soviet Union (FSU) that has decided to open the WSS service sector to substantial private sector participation. Over the years, it has also gradually agglomerated service provision under a limited number of utilities. In order to improve WSS service financial sustainability in a rather complex politico-economic context, GoA has decided to move forward with a second wave of reforms and tender for a national lease, possibly with a single tariff for the entire country. GoA hopes this move would provide further efficiency gains and allow tariffs to be kept comparatively low. It is difficult to assess whether this step will yield the expected outcomes. In all cases, the design of the tariff should consider the optimal level of subsidy, and the affordability of such fiscal outlays, as well as the ability of the operator to generate sufficient revenues especially as the customer base may reduce due to out migration.

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1. Project Context, Development Objectives and Design 1.1 Context at Appraisal

1.1.1 Country Background

1. Armenia is a small, landlocked country with a relatively limited economy based on small- scale agriculture and mining. Ethnically, religiously and linguistically distinct from its neighbors, Armenia has a history of conflict and tension with bordering countries, which further restricts its access to markets and opportunities to benefit from regional trade. After the severe economic recessions that followed independence from the Soviet Union, the country’s strong commitment to market reforms and stabilization policies ushered in 6% average annual growth in the second half of the 1990s. Despite such rapid growth, jobs creation lingered and efforts to expand export sectors and increase Foreign Direct Investment have been slow. The economy of the country remains heavily dependent on the remittances provided by a worldwide diaspora that is 8 million people strong, or nearly three times the 3 million nationals residing in Armenia. GDP contracted 14% as a result of the global financial crisis, and poverty rates increased by 4.5% in rural areas and 5% in urban areas between 2008 and 2012. More than one third of Armenians now live in poverty. The government response to this crisis has focused on safeguarding social programs, increasing public investment, short-term job creation and credit and guarantee facilities for private enterprises, resulting in slow but steady growth since 2010.

1.1.2 Sector Background

2. Armenia is a water-rich country with abundant, high-quality surface and groundwater resources to supply its three million inhabitants. On average, water resources total 10.2 billion cubic meters per year, of which only 840 million cubic meters are used for drinking water.1 Water delivery infrastructure was built over 30 years to account for large domestic consumption using Soviet design standards determining very high operation and maintenance (O&M) costs. A decade ago, the infrastructure under Armenia Water and Sewerage Company (AWSC)’s management was in great need of repair and rehabilitation, and most households and businesses received only a few hours of water per day, with leakages and loss of pressure (broken half-filled pipes) compromising water quality and safety.2

3. Local governments are responsible for water and wastewater service in their territories. The water sector (including water supply, wastewater and irrigation) is administered by the State Committee for Water Economy (SCWE) which was created in 2001, and since 2005 has been operating under the Ministry of Territorial Administration. The PPP model was first used for the Yerevan water utility under a Management Contract (2000-2005) which then became a Lease contract in 2006. The 2002 Water Code allows for various forms of private sector participation (PSP) ranging from service contracts to concessions. The sector is regulated by the Public Services Regulatory Committee (PRSC), which sets service standards and tariffs. The majority of Armenians have water supply services provisioned through one of 5 PPP arrangements. Services

1 2006. FAO Aquastat. http://www.fao.org/nr/water/aquastat/countries_regions/Profile_segments/ARM-WU_eng.stm 2 2014. AWSC/Saur. AWSC Total Management Plan. Page 29. 1

for the 1 million inhabitants of the capital city, Yerevan, are managed by the Yerevan Water and Sanitation Company (YWSC). Around 600,000 people in 37 secondary towns and 283 rural areas are managed by the Armenia Water and Sewerage Company (AWSC). The towns of Gyumri, Vanadzor and Armavir (total population about 0.32 million), have created their own utilities. While each of the 5 utilities benefits from some form of PSP, they all remain public, with assets held by SCWE.

1.1.3 Rationale for Bank Assistance

4. Over the course of the last 17 years, the Bank has taken a large role in driving the shift from a Soviet “social service” model to a modern approach that promotes efficiency and sustainability in service delivery. This has required a sea change in the thinking around water pricing, ownership and sovereignty. Through this period, the Bank has helped to lay the foundation for gradual private sector participation (PSP), helping to enhance government capacity to regulate and monitor before moving the sector up the PSP ladder.

5. The Municipal Water Project (MWP) supported Strategic Objective II of the Country Partnership Strategy (CPS) for Armenia (2009-2013) – Strengthening Competitiveness and Post- Crisis Growth. MWP is the capstone of a nearly two-decade Bank engagement in Armenia’s water sector (see Annex 10 for details). Its primary objective was to support the completion of important infrastructure investments as to improve access to water services in small towns and surrounding rural areas. At the time the Project Appraisal Document (PAD) for MWP was written, investment needs in AWSC’s service area for 2012-2016 (including networks as well as other assets) were about $100 million. The Bank’s $15 million contribution leveraged another $85 million from the European Bank for Reconstruction and Development (EBRD), KfW and the Asian Development Bank (ADB) to fill the gap (see Annex 11 for details).

6. Secondarily, the project has continued to support the modernization process of the water supply and sanitation (WSS) sector in Armenia by financing part of the Management Contract for AWSC. The project, unlike its predecessors, the Yerevan Water and Wastewater Project (YWWP) and the Municipal Water and Wastewater Project (MWWP), briefly described in Annex 10, did not provide specific technical assistance to the Government of Armenia (GoA) with the implementation of reforms in the sector. The actions that had to be taken to move the water sector towards sustainability had been already laid forward in a Policy Note issued by GoA in January 2012 and mostly pertained to strategic decisions the GoA had to take regarding tariffs adjustments and other efficacy gain measures, which went well beyond the scope of MWP.

1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved)

7. In line with the Government of Armenia’s strategy for continual improvements in service delivery, the Project Development Objective (PDO) is “To support improvement of the quality and availability of water supply in selected service areas of the Armenian Water and Sewerage Company (AWSC).” The selected service areas are: Masis town, Ashtarak town, and Echmiatsin town, and their surroundings.

8. The Key Outcome Indicators are:

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 Increased weighted average daily supply of drinking water service in selected areas from 12.3 hours daily to 16.6 hours daily  Decreased weighted average non-revenue water in selected areas from 83.50 percent to 70 percent  Increased ratio of billing and collection from 93.0 percent to 98 percent

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification

9. The PDO was not revised.

1.4 Main Beneficiaries,

10. The project aimed to provide direct benefits to about 133,000 AWSC service customers in the three selected cities receiving project investments (Ashtrak, Masis and Echmiadzin) and neighboring rural settlements. Benefits are described as increased duration of daily service, improved water quality, decreased human vulnerability to risks of water pollution, and improved customer service. An estimated 20,600 customers were to benefit from installation of new meters.

11. The project’s design also anticipated “measurable gains in AWSC sustainability” (PAD, page 5) through improved performance, higher revenue generation, and lower costs. Capacity was to be enhanced through the administration, operations, maintenance and implementation of the investments.

1.5 Original Components (as approved)

12. Component 1: Investments in Water Supply Systems (IBRD: $8.6m; Borrower: $1.72m): Design, implementation and supervision of the rehabilitation of water systems in the cities of Masis, Echmiadzin, and Ashtarak, including their neighboring rural settlements. The work included rehabilitation of water networks linked to operational efficiency and reduction of non-revenue water. The goals of the investments were to finance physical infrastructure that is technically sound, cost effective, reliable, and that reduces technical losses.

13. Component 2: AWSC Investments (IBRD: $1.76m; Borrower: $0.36): This component financed: (i) water meter replacement and installation of meter chambers in several cities and villages throughout the AWSC Service Area to reduce commercial losses; (ii) automation of pumping stations and reservoirs; and (iii) procurement of equipment and machinery for the improvement of O&M system of the AWSC.

14. Component 3: AWSC Management Strengthening (IBRD: $4.6m; Borrower: $0.92): This component financed: (i) about two years of fees for an Enhanced Management Contract (EMC) to improve AWSC administration, operations, maintenance, and ensure optimal implementation of the program investment fund; and (ii) technical studies, project management and monitoring, including independent technical audits, financial audits and operating costs.

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1.6 Revised Components

15. There are no revised components

1.7 Other significant changes

16. The project accumulated savings of US$2 million which was used to: (a) extend on-going rehabilitation works in water supply systems rehabilitation in Echmiatsin and Ashtarak (US$1.11 million under Component 1); (b) procure chlorination equipment (US$0.22 under Component 2); and (c) procure vehicles to improve operational efficiency of the utility by introducing a new approach in the methodology of water meter data collection processes which would in turn improve billing accuracy. The Bank’s economic analysis recommended that vehicle procurement (43 vehicles were proposed) be self-financed by the operator and that a pilot approach be used with a reduced number of vehicles to measure impact before going to scale. The pilot approach was taken and results are pending.

17. Moreover, seven additional (excluding the 28 originally planned) automation systems were installed in reservoirs and pumping stations following additional demand.

2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry

18. Leveraging Earlier Operations. The MWP is a natural continuation of the MWWP and its additional financing, so much so that according to the PAD, it is considered a “repeater operation” (pg. 4). This is further evidenced by the fact that the government requested retroactive financing of feasibility studies for some of the works under MWP (conducted during the MWWP). The government also requested that the Bank advance the appraisal process for faster approval, which it did.

19. Targeted Scope. The MWP, as a $15m investment mainly targeted to infrastructure rehabilitation, could not directly influence the reform agenda given its small size and narrow scope. For example, the institutional support to the utility (Component 3) was designed to cover only year 1 of the project. The Bank was ensured that second generation reforms would be implemented in parallel with the project implementation period, as stated in the policy letter issued just prior to project approval, in which the Deputy Prime Minister announced the government’s commitment to reforms, including tariff increases, to begin in 2014.

20. Leveraging the Enhanced Management Contract It is worth mentioning that three of the four performance indicators of the EMC were included in the project’s design, enabling the project to piggyback on the outcomes of the EMC, which were underpinned by strong monetary incentives. The project also benefited from the use of a mandatory annual audit of the EMC, which provides more assurance on the accuracy of data reported by AWSC. Moreover, budget support to the management contract provided the cash needed to incentivize good performance.

21. Leveraging Other Partner Financing The Bank’s $15 million contribution leveraged another $85 million from EBRD, KfW and ADB to fill the gap. Please see Annex 11 for a list of

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donor projects active in the sector during the course of this project (including disbursements between 2012 and 2015). It was clear from discussions with these donors that they were initially attracted to investing in the sector in Armenia due to the groundwork that the Bank had undertaken to introduce various PPP models over 17 years.

22. Weak Financial Analysis. While the PAD referenced the WB Water Sector Note of 2011, it did not present an analysis of the current or projected financial position of AWSC. A section in the PAD would have better highlighted the risk, and accordingly set clear expectations regarding MWP’s [limited] role in the broader reform agenda. Already the MWWP ICR pointed to this weakness, quoting “Because neither the 2004 PAD nor the 2008 PP included a financial forecast of AWSC operations, AWSC bankruptcy, as a result of accumulated losses and/or reduction of GoA subsidies was not identified as a risk.” According to operational policy (OMS 2.20), this is standard practice for water and wastewater projects implemented by revenue earning utility companies. Having been flagged already in the MWWP ICR it should have been addressed in the MWP PAD.

23. Incorporation of Lessons from Earlier Operations. The MWP provided ample opportunity to build on past successes and learn from past failures, some of which were accounted for the project’s design and others that were not. Several lessons from MWWP and YWWP were incorporated into the design. These are:  Water loss3 should be a performance indicator  Sectorization (zoning) of the network and installation of meters should be conducted to improve operational and financial metrics  Broken meters should be replaced, new meters should be installed at apartment block buildings, and management of meters should be transferred to AWSC.  Typical covenants for water and wastewater utilities request some level of cost recovery (YWWP ICR). The project covenant on indebtedness (see footnote number 6) implies that the entity will cover sufficient costs so as not to incur new debt.  The Armenia Water Sector Note – ESW, 2011: Reform focus should shift to reduce NRW, strengthen institutional development and the financial position of AWSC (to cover O&M and some capital expenditure (CAPEX)), and rehabilitate poor quality infrastructure.

24. There were also other lessons from earlier operations that were not transferred into the design of the MWP, including:  The YWWP ICR stated that a lack of sector financing (either from GOA budget contributions or commercial debt in local currency) was a major risk factor at the time. The debt burden and financing needs of AWSC were even greater than those of YWSC, putting them in the same precarious situation, yet this was not factored into the sustainability of the project.

3 Water loss implies physical (technical) loss. It is an indicator in the EMC, and according to the independent auditor, is taken to mean non-revenue water (NRW), which includes both commercial and technical losses.

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 The MWWP ICR noted that a large portion of losses were from authorized, unbilled consumption (public taps; public commons of apartment buildings) that required changes in local condominium regulations and behavior change for improved demand management. It is estimated today that in AWSC’s service area more than 50% of NRW is due to such local regulations and customs.4 This is a regional challenge common across ECA countries, and requires a mental shift in management of common areas, which is beyond the scope of this project.

2.2 Implementation

25. Implementation Arrangements. The implementation arrangements were well designed and based on experiences working with the same institutions in Armenia since 1998. AWSC was the Project Implementing Entity (PIE), which leveraged the capacity of AWSC in implementing ADB and EBRD projects since 2007 and helped achieve economies of scale by managing all donor funded programs together. This arrangement also strengthens in-house capacity to prepare and implement investment projects and contributes to their sustainability. Key staff in the PIE include: Project Manager, WSS Engineer/ Design Works Specialist, WSS Engineer/Construction Supervision Specialist, WSS Engineer/Construction Supervision Specialist, Procurement Specialist, Financial/Disbursement Specialists, Accountant, and Environmental and Social Impact Specialist. SCWE retained the Contract Monitoring Unit (CMU).

26. The operator was responsible for, among other issues, preparation of the annual investment program, annual procurement plan, sub-project design, construction supervision and the certification of completed works. AWSC prepared composite quarterly project reports to the Bank to describe the physical progress in all service perimeters of the ASWC, as well as outputs and outcomes delivered by the program highlighting successes, constraints, and whether planned targets were achieved or otherwise. The aim of these reports was to monitor timelines and expenditures in the completion and delivery of scheduled activities and outputs.

27. Project Timeline. As of the writing of this ICR, all pipe replacement is complete and some individual connections to households were just recently finished. AWSC could not disconnect customers from the old pipeline during the very hot summer months of June, July and August, and is only now making the final connections to the new pipeline. Thus, water was still being delivered via old deteriorated pipes until mid-September. A baseline beneficiary survey was carried out before the project’s intervention. A follow up survey using a panel approach was planned after implementation. The follow up survey took place only in two areas of the three treated and the beneficiary feedback was collected less than six months from completion of the works. The responses show improvements in levels of satisfaction, but also remaining dissatisfaction, likely linked to the fact that some beneficiaries were only recently connected at the time of the second Survey. Reconnection has been a step by step process.

28. Parallel Efforts at Reform. During the course of project implementation, the Bank supported the sector through two separate operations:

4 Regional Workshop on NRW and Water Operator Partnerships. July 1, 2015. “Non-Revenue Water in Armenia”

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1. A $75m Development Policy Operation signed on November 12, 2014, which was contingent upon the government’s adoption of an Action Plan on Drinking Water Sector Reform, and the tender of a transaction advisor for the national lease contract. The Action Plan was adopted through Government Decree No. N883-N dated August 14, 2014. 2. A Water Sector Tariff Study, financed by the Bank’s Public-Private Infrastructure Advisory Facility (PPIAF), which was published in 2014.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization

29. M&E Design and Implementation. The indicators selected to monitor progress toward the PDO on improved water availability and ‘quality of service’ were well designed with direct and indirect linkages with the EMC. Quality of service is measured directly by Key Indicator 1 (increased hours of supply); and indirectly by Key Indicator 3 (increased ratio of billing and collection). Key Indicator 3 assumes more water is being purchased, meaning that water is more available and/or customers are happier with the quality of service. Quality of the water itself, a component of the service, is also measured through the intermediate result indicator on percent of water disinfected.5 AWSC, through the life of the project, and based on recommendations made by the independent technical auditors, has improved its controls of water potability, focusing on the service areas where it is more likely (given infrastructure age) that water may be affected by secondary contamination.

30. Improved water availability is also measured directly by Key Indicator 1 (increased hours of supply); and indirectly by Key Indicator 2 (reduced non-revenue water), under the assumption that reductions in non-revenue water lead to more water available in the network. Several intermediate indicators also measure progress toward quality and quantity of services (Datasheet indicators 2, 5, and 10).

31. This project used well-tested monitoring and evaluation methods, including baseline and final surveys as well as regular monitoring of indicators well aligned with the Performance Indicators included in the EMC. Three of the four performance indicators of the EMC were included in the project’s design, enabling the project to piggyback on the outcomes of the EMC, which were underpinned by strong monetary incentives. The project also benefited from the use of a mandatory annual audit of the EMC, which provides more assurance on the accuracy of data reported by AWSC, including for areas outside the domain of this project. The audit also offered specific recommendations in the cases where targets were not met. These processes helped AWSC and GoA improve procedures and quality checks.

32. M&E Utilization. The collection methods used were adequate and leveraged the know- how of the Project Implementation Unit (PIU), which has significant experience with M&E on Bank and other donor-funded projects. Data was collected on time and submitted to the Bank on a quarterly basis. The EMC was appropriately used to reinforce data collection on key indicators to

5 The ICR team has assumed that the definition of “improve quality of water services” to mean service level improvements, not improvements in water quality itself. This is also supported by the lack of a key indicator on water quality.

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be submitted (some monthly, some quarterly) to the AWSC Company Management Board, as results were tied to the contractor’s performance bonus.

33. The quality and reliability of data is reinforced by the annual independent audit, which included several other key performance indicators for the utility, and which continues to measure progress even after the project has closed.

2.4 Safeguard and Fiduciary Compliance

34. Safeguards. An environment category B project, compliance with safeguards requirements was consistently found to be satisfactory during the project. AWSC maintained adequate safeguards capacity with the mandate to provide environmental and social oversight of works under MWP throughout implementation. Technical supervision of works under the MWP, including environmental oversight, was provided by a German limited liability company (CES Consulting Engineers Salzgitter). The supervisor provided monthly reports from each of the active works sites. The quality of environmental supervision reports improved over the last year of project implementation, following recommendations from the Bank’s task team.

35. No resettlement or land acquisitions were envisioned under the Project and OP/BP 4.12 was not triggered. AWSC confirmed no incidences of temporary or permanent land acquisition or resettlement had taken place during Project implementation. Quarterly project progress reports by the AWSC included a write-up of safeguards supervision over the previous quarter, including supervision of land acquisition and resettlement.

36. With respect to beneficiary feedback and grievance redress mechanisms, the AWSC confirmed that beneficiaries and customers have multiple ways of providing feedback on the Project, including through AWSC service centers, a telephone hot-line and by email.

37. With respect to the project’s gender informedness, the data collected by the project was disaggregated by gender and the project beneficiary survey included attention to gender issues and vulnerable groups (including focus groups with women and youth, for example).

38. Procurement. Procurement administration under the project was generally found to be satisfactory. Fiduciary support was provided by qualified procurement and financial staff. The Procurement Specialist for the project had substantial experience with Bank’s procedures and regularly attended procurement trainings and workshops organized by the Bank.

39. Financial Management. The Financial Management (FM) arrangements at AWSC for the MWP, including budgeting and planning, accounting, financial reporting, funds flow, internal controls, external audits, and staffing were adequate and acceptable to the Bank, and were found satisfactory through the project.

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40. The Loan Agreement included a Covenant 6 to monitor the financial sustainability of AWSC. The covenant set a limit for the Project Implementing Entity’s (PIE, i.e. AWSC) indebtedness at 1.2 times the estimated maximum debt service requirements of the Implementing Entity for any succeeding fiscal year on all debt of the PIE, including the debt to be incurred. Exceeding such level should have happened only with the Bank’s prior approval. After the GoA fell into non-compliance (as noted in the 2012 management letter from the auditor), the Bank requested (letter of July 18, 2013) to meet with the GoA to “assess remedial measures”. GoA responded that to cover the short term indebtedness of AWSC it would provide subsidies, while for the longer term sustainability, it would move forward with the second wave of reforms, including a national lease and nation-wide tariff. The Bank acknowledged the Government's commitments and efforts toward sector sustainability, especially in a difficult economic period. The financial sustainability of AWSC is discussed further in the Efficiency (Section 3.3) as well as in Annex 3. The final FM rating is Moderately Satisfactory, reflecting the good performance of the project financial management while acknowledging that the financial situation of AWSC was still weak at the time of project closing. It is also understood that with a national lease AWSC will cease to exist in its current form.

2.5 Post-completion Operation/Next Phase

41. Five water companies currently serve 75% of the country’s population under PPP contracts. All of these contracts will end in 2016 and the government plans to tender a national lease. Thus, the lessons learned from the past 15 years of Bank support to PPPs in Armenia will culminate in a new lease contract, and AWSC will continue to benefit from private sector participation. Key to the success of the new lease will be commitment to a new generation of sector reforms, such as condominium legislation and tariff reform, which presents a potential opportunity to continue modernizing the sector, but also a potential risk to sustainability if the reforms are not implemented fully and quickly.

42. As of the writing of this ICR, several other donors, including EBRD and ADB, have entered the sector. The EMC is also now funded by a KfW grant under Amendment 5, which was signed on December 31, 2013 and is valid through 2016. Under this new contract, Saur has also taken over management of three regional utilities (known as CJSC service area) as a leader of a consortium with German MVV and AEG Services LLC.

43. Additional Bank support will likely come through technical assistance in the design of the new lease contract. The government plans to hold a limited competitive bid for a national lease. The Bank’s PPIAF trust fund is finalizing plans to send a PPP specialist for advisory support.

44. One tariff is being proposed for the entire country in an effort to bring the quality of services outside Yerevan to a higher standard while cross-subsidizing to enable the repayment of

6Unless net revenue for the preceding FY is at least 1.2 times the estimated maximum debt service requirement for any succeeding fiscal year on all debt of the entity including the debt to be incurred.– Section II.B.4 of Schedule 2 of Loan Agreement IBRD 8129). In 2012 net revenue was negative, thus the covenant is not met in 2013.

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loans, several of which come due in 2016. The perception that block tariffs create a corruption risk has prevented a quality discussion from taking place on tariff setting.

45. Tariff adjustment to achieve cost recovery is being supported by the Development Policy Operation Series. The PPIAF-financed Armenia Water Sector Tariff Study published in spring 2015 provided recommendations in line with this objective, with an eye to preventing potential shocks for vulnerable populations. While water tariffs are some of the lowest in the region, 41% of people outside of Yerevan are willing to pay more than they do now for improvements. The PPIAF-funded proposal recommends a transitional tariff increase coupled with subsidies to target poor households, which could be administered through the existing Family Benefits Program.

3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation

46. Objectives. Rating: High. The project’s objectives remain highly relevant at the time of the writing of this ICR. Improvement of services and modernization of the water sector in Armenia is and continues to be a process that requires significant and long-term engagement between donors, the public and private sectors. The project components remained relevant to the 2014-1017 CPS and in particular to Engagement Area 1.3: Improved access, quality, and sustainability of key infrastructures. The CPS objective is to enhance the effectiveness and impact of infrastructure. WBG work on improving transport, energy and water infrastructure is to support effective targeting of the benefits to the bottom 40 percent of the population. The project also remained aligned with the Armenia Development Strategy 2025, which envisages enhancement of human capital through better access to quality services, including healthcare, education, culture, and basic infrastructure.

47. Design and Implementation. Rating: Substantial. The project’s components were adequately designed to achieve the PDO. Components 1 and 2 contributed directly to improved services by way of new infrastructure, better metering, and improved O&M. Component 3 had both a direct impact on the PDO for the entire service area of AWSC (including the project area) by supporting the management contract; as well as an indirect impact on services in the project area by way of improved company administration and operation.

48. Component 1 also aimed to reduce non-revenue water (a key indicator). Although not fully documenting it with an economic and financial analysis on its impacts on availability or quality of services in the AWSC’s service area, the PAD recognized that very high levels of NRW could substantially undermine other efficiency gains achieved by AWSC. A problem also flagged in the MWWP’s ICR, which stated that NRW was a major concern (Armenia having one of the highest NRW levels in the world) that should be addressed in subsequent projects. The MWP results framework proactively included an NRW indicator and target but not a clear justification of why the target was selected as optimal (from a cost/benefit perspective). Despite not focusing project investments specifically on NRW reduction, results on NRW reduction have been remarkable, with NRW reduced by more than 10% (a substantial reduction) through activities aimed to reduce

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commercial losses, 7 and the target is expected to be achieved eventually as a result of the investments made under this project.

49. The project was also well designed in terms of its focus on bringing improved services to the poor. The three towns selected for infrastructure improvements are a mixture of urban and rural areas outside of Yerevan. On average, poor urban areas outside Yerevan spend the highest percentage of their income on WSS services. It can be extrapolated from the final beneficiary surveys in Masis and Astharak, that 60% of the (sample) population is under the poverty line, and one-fifth of the population is considered extremely poor8.

50. The MWP did not include long-term institutional strengthening, which was taken up by other donors. KfW took over financing of the management contract after year 1 of the MWP, and EBRD supported the transaction advisor role for the planning of the national lease contract. The lack of Bank support to the broader institutional reform agenda had two consequences. On one hand, there was no mechanism to mitigate the risk of financial sustainability of the operator. On the other hand, the project objectives, which had a narrow focus on infrastructure and service improvements, were met within the initial 3-year time frame.

51. The project’s successful implementation depended on timely infrastructure development and system component replacement over a very short three year period. All three key indicators depended highly on the successful rehabilitation of more than 200 kilometers of distribution network and installation of more than 9,000 individual meters across three towns, in addition to continual implementation of the terms of the EMC by the operator.

52. The project was disbursed on time and delivered within budget and the team gave sufficient consideration to problems as they arose, including flagging the financial sustainability concern in supervision missions and requesting expert advice. The majority of issues raised during supervision missions were addressed quickly and adequately, including:  Improvements in gender disaggregated data  Customer feedback mechanisms/surveys used to monitor impacts  Environmental monitoring presence bolstered at project sites  Change in procurement plan for vehicle purchases

3.2 Achievement of Project Development Objectives Rating: Substantial

7 Monetary losses from illegal connections, under metering, faulty meter readings, etc. (pg. 28 of 2012 independent audit). The technical audits of 2012 and 2013 confirmed that nearly all reductions in NRW up to that point could be attributed to reductions in commercial losses.

8 Page 37. Survey of Project Beneficiaries in Masis, Ashtarak and Echmiatsin Subprojects. Final Report (second stage survey) AVAG Solutions, LTD. June, 2015.

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53. The project has undoubtedly supported the improvement of the quality and availability of water supply services in the three towns.

54. All three key indicators for the project have been met9.As a result of the project, there was an increase in the weighted average daily supply of drinking water from 12.3 to 17.6 hours per day (key indicator 1); a decrease in the weighted average non-revenue water from 83.5% to 70% (key indicator 2); and an increase in the ratio of billing and collection from 93.5% to 98% (key indicator 3.)

55. Eight out of the 10 intermediate results targets have been met. Combined, these achievements demonstrate improved quality and quantity of service and point to improved utility performance via efficiency gains: reduced electricity consumption, fewer proportion of subscribers with arrears greater than 4 months; more water disinfected; more domestic water metering; an increase in average metered consumption; and more than 131,000 people provided with access to improved water services.

56. Regarding the unmet indicator targets (intermediate indicators 9 and 10), the number of people with connections in rural areas was 2,239 people less than the target of 33,328; and 761 fewer households were connected than the target of 33,609. The inability to meet the target is, according to AWSC, due to out migration from rural into urban areas over the course of the three year project. The target was also designed using informal data collected from mayors in 2011, rather than from the national statistical service, and thus may have been somewhat inaccurate.

57. AWSC has achieved improved operational efficiency in the areas targeted by the project. NRW reduction results are substantial, and have been achieved through the following interventions:  AWSC has managed to cut production from 752 l/c/d (liters per capita per day) to 481 l/c/d (surpassing the target of 489) while providing more hours of service (17.4 hours per day up from 12.3 hours per day) to the same customer base. This infers a significant reduction in NRW.  In a similar vein, increased average domestic metered consumption and increased domestic water metering with the same customer base and reduced production point to water being saved in the network. The 2012 audit confirms that all loss reductions are commercial.  The rehabilitation of degraded and inefficient pipes reduces physical leakages; illegal connections have been identified and removed during the course of the project which will further reduce commercial losses.  Commercial losses are being reduced through a variety of methods and will help AWSC better understand customer demand and locate service problems, including leakages.  Investments in sectorization in the three towns and improved metering lay the groundwork for improved leak detection and a full-scale NRW reduction plan that tackles technical losses.

9 Final numbers are as of September 30, 2015. Due to weather constraints impeding construction in the winter and reconnection in the summer, final data for key indicators 2 and 3 was not available until all works were completed September 30, 2015, which was 3 months after the closing of the project.

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58. Improvements in billing and collections prove that commercial programs to improve payment are working. AWSC continues to use and publicize a very popular lottery for which only paying customers can purchase a ticket (the lottery is said to have increased the number of paying customers from 30,000 to 200,000). AWSC also continues to provide several payment options for easy access, including payment via SMS, at post offices, banks, or via the company’s website.

59. AWSC also has a program to reduce illegal connections by looking for customers who purchase energy yet are not a water customer; new software to analyze consumption patterns; verification through SMS phone images and staff using GPS; and the installation of thousands of new, more accurate meters (the former Class B meters did not register the first 50 liters of water consumed; new meters register after 5 liters consumed). All of this has led to an increase in average domestic metered consumption from 88.5 l/c/d to 119 l/c/d (surpassing the target of 116 l/c/d). Thus, both billing and collections are increasing simultaneously.

60. The results of the end surveys indicate overall customer satisfaction with the project. Nearly 66.7% of households mentioned that some positive changes in their water supply occurred between 2014 and 2015. The proportion of households that are dissatisfied with the short duration of water supply decreased 1.7 times after project completion, and those dissatisfied with low pressure decreased 2.4 times after project completion. Twenty percent of customers surveyed in Masis after project implementation reported being fully or partially satisfied with the operation of the centralized water supply system, a 47% increase from before the project. In Ashtarak, 70.5% were fully or partially satisfied, a 38% increase from before the project.

3.3 Efficiency Rating: Modest

61. The physical investment implemented under the project have certainly contributed to improved revenues and reduced costs for AWSC. Indicators consistently show improved service efficiency (reduced energy consumption and water production) and improved revenues in the project area. The project itself was implemented efficiently, within the allocated timeframe, three years, and with budget saving, which were invested in further infrastructure and equipment. The financial sustainability of AWSC, however, did not improve, on the contrary, the annual financial results are getting more negative each year and the subsidies for the company are increasing (AWSC tariffs have not changed since 2009).

62. The fact that AWSC would likely soon cease to exist, replaced by a new company operating under a countrywide lease arrangement, make future assumptions and calculations of an estimated economic rate of return (ERR) and financial internal rate of return (FIRR) rather arbitrary and speculative (see further details in Annex 3). Nevertheless, in order to provide an analysis of the impacts of the investments, an ERR has been calculated using similar assumptions as per the PAD.

63. The ERR calculated after implementation is 25.5% and the net present value (NPV) is AMD 4,269 million (USD 9 million at current exchange rate), assuming a discount rate of 10% and 30 years of asset life, with corresponding benefits to be realized starting 2016, substantially in line with PAD projections. As in the PAD, this calculation was done only for component 1.

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Components 2 and 3 may add further to the project’s NPV and ERR but the team has limited data and there are too many additional investments into the company leading to results, which cannot be associated entirely with the project (see Annex 3, table 1). The project has also low per capita investment cost of AMD 39,120 (USD 94 at current exchange rate) per capita. This is good given the population density of the project areas. As a result, the economic benefits from the project Component 1 investments are considered to be satisfactory with respect to its economic efficiency, but the fact that overall the AWSC financial situation is extremely unsustainable despite the project financing of the management contract leads overall modest results.

64. Economic estimate of project benefits. The ex-post economic analysis includes: (a) the cost of all project components, including capital and operating costs; and (b) all measurable economic benefits, per the PAD. These are mainly: (1) time saved in fetching water; (2) cost savings on non-incremental water consumption; and (3) the value of increased water consumption. As with all economic analyses, the costs are perfectly observed while the benefits are not. Lacking proper data the team had to use the PAD's assumptions for annual cost savings on non-incremental water and time saved10 (see PAD, page 47) as well as the uncertainties about projections (see above).

65. Benefits are obtained from the reduced time to collect water: the PAD indicator envisaged increased supply from baseline of 12.3 hours (weighted average) to 16.6 hours at the end of the project. The company is currently reporting 17.4 hours, which means that the end target is exceeded. In monetized terms this is additional revenue of AMD 64 million per year for the project area (at the current tariffs). There is also a benefit from decreased electricity consumption: PAD baseline indicator is 0.23 KW/m3 and the end-project target was set at 0.17 KW/m3. The company is currently reporting 0.17 KW/m3, which means that the end target is met. In monetized terms, this means significant cost savings. Despite electricity price increase over MWP implementation period, the company contained its electricity costs by reducing consumption. It should be mentioned though that the overall operation and maintenance costs in the project area increased by AMD 13.7 million between 2012 and 2014.. It should be mentioned though that the overall operation and maintenance costs in the project area increased by AMD 13.7 million between 2012 and 2014. Another benefit is increased metered consumption: the baseline of this indicator is 88.5 l/c/d and the end-project target was set at 116 l/c/d percent. The company is reporting 119 l/c/d, which exceeds the end target. This indicator reveals avoided coping costs. The team used the PAD’s projections to monetize the savings. Additional information and calculations are presented in Annex 3.

66. Financial estimate of project benefits. The main challenge of estimating of the financial benefits of the project is the going concern of AWSC: the going concern accounting principle is the assumption that an entity will remain in business for the foreseeable future. An entity is assumed to be a going concern in the absence of significant information to the contrary (for more information see Annex 3). In the latest audited financial statements of the company (FS 2014) note 3.2 states that "in accordance with decree No1366-A dated 05.12.2013, the Government of the

10 1 hour less than 24 hour daily supply of water corresponds to 5 minutes time spent fetching water.

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Republic of Armenia approved the approach to transfer water system operating rights from "Armenian Water and Sewerage" CJSC to a lessee on tender basis. However, the implementation of the decree was postponed, and it was decided to extend the contract with "Saur" SA organization by prolonging the functions of the executive body in the company till the end of May 2016." With this in mind, it does not make much sense to project future financial benefits from the project using the company’s future revenue stream. Nevertheless, an analysis in Annex 3 shows that AWSC’s financial situation is extremely unsustainable.

3.4 Justification of Overall Outcome Rating Final Rating: Moderately Satisfactory

67. The PDO remains highly relevant to the current priorities of the Government of Armenia. It is also well aligned with the World Bank’s strategy for Armenia. However, the project did not fully take into account lessons from previous experiences, and there were minor shortcomings in project design. Thus, relevance of objectives is rated high and relevance of design is rated substantial. In terms of achievement of objectives, the improvement in quality and availability of water supply is rated substantial. The overall efficiency is rated as modest. Benefits include time savings, reduced energy consumption and increased metered water consumption (and therefore increased revenue).

3.5 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development

68. Fifty-three percent of project beneficiaries were women, and an estimated 60 percent of beneficiaries were poor.11 The project targeted communities with a significant poor population that were also receiving few hours of supply per day, and who were located in the poorer urban and rural areas of Armenia, outside of Yerevan.

69. Poverty and gender impacts were assessed through the first and second stage beneficiary surveys in Masis and Ashtarak subproject areas, including a study of water consumption by wealth quintile, and a series of Focus Group Discussions to identify perceptions of various groups including women, youth and the poor. These assessments aided in understanding the changes as a result of project implementation (gender) and provided a baseline for future interventions (poverty). Further information is provided in Annex 5.

70. The study by wealth quintile showed that the richest population consumes from the AWSC network 1.85 times as much as the poorest quintile. As a share of their income, the highest wealth quintile pays 5 times less than the poor in Masis and 3.8 times less than the poor in Ashtarak. The conclusion that access to drinking water for the poor is more costly and thus reduces demand is key information in the design of the future water tariff, which should include sufficient subsidies for the poor.

11 Estimated from sample of Masis and Ashtarak subproject area end surveys, using monthly per capita expenditures as a proxy for poverty rates (page. 37).

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71. Gender disaggregated data and Focus Group Discussions show that in general the living conditions of working age women are mostly influenced by the current condition and peculiarities of water supply. A large portion of households surveyed (61.9% average of both towns) think that the actual changes in the water supply which happened after the Project implementation have had a factual influence (significant influence and influence at some extent) on living conditions of their working age female members, 56.5% - working age male members, 28.9% - female children, 33% - male children, 20% - female elders, 13% - male elders.

72. Moreover, the surveys asked women, the poor, youth, and mixed groups about the key problems in the AWSC system, which will allow AWSC to better understand its customer base.

(b) Institutional Change/Strengthening (particularly with reference to impacts on longer- term capacity and institutional development)

73. AWSC has excelled at improving performance even in this constrained environment and since 2005 has been on a positive trajectory toward continual performance improvements.12 Over the course of the MWP, AWSC has made strides toward more sustainable operations by building staff technical skills, bringing in international best practices, and devising practical solutions to cut costs and increase revenues in the absence of much needed second stage sector reforms. Bringing the PIU into AWSC has improved the capacity of those staff, who interface daily with management, which increases opportunities for learning.

74. Under Component 2, the utility automated the pumping station and reservoir in Masis Town, cutting costs in terms of staffing the facilities, and enabling staff to develop more modern operating skills. The procurement of vehicles for staff improved their capacity to respond to complaints and conduct other oversight activities.

75. Customer management and relations have dramatically changed for the better. The establishment of a Customer Service Center and the centralization of billing in the headquarters of AWSC in 2012 have helped build a modern platform for customer management, in which customer feedback mechanisms and responsiveness are institutionalized in the business model. Despite the direct linkage between revenue generation and profit (given the flat tariff) AWSC has a strong customer-service oriented identity that promotes efficiency and quality services.

76. Under Component 3, the Enhanced Management Contract has led to several institutional improvements. Before the management contract began, 75% of AWSC’s staff didn’t speak English. Today, English is a priority and staff are encouraged to take language courses. Staff capacity on tendering and managing sub-contracts (such as for facility maintenance and accounting services), engineering design (from the International Federation of Consulting Engineers), environmental and social safeguards, safety measures and information technology proficiency training have also been enabled under the EMC. The development of a Total Management Plan (TMP) also

12 Nov 2012 Aid Memoire. Annex I shows continual improvement.

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engendered a new skill set within the company and a more business-oriented focus. The TMP was thus critical for professionalizing operations and ensuring sufficient capacity to undertake a lease contract. The document is also a tool for AWSC and GoA to identify and plan for future investments, as well as to compare the affordability of tariffs with the investment requirements13.

77. For a former-Soviet country, the shift from a socialist view of public goods to a one where the private sector can make a positive contributions to service delivery improvements, is extraordinary from a psychological and political viewpoint. A lot has been achieved considering the political economy and the specific challenges posed by the influence of the Soviet system.

78. Further actions can be taken to improve performance, as detailed in the EMC and the technical audit of 2013, including: Use of the TMP as a long-term investment planning tool; improvements in leak detection; and increasing water supply in the areas with the fewest hours per day. Once enacted, these will further improve service performance.

(c) Other Unintended Outcomes and Impacts (positive or negative)

79. Exogenous factors related to political economy and sector reform have had various types of impacts on the outcome of the project.

80. First, legal reforms to allow meter installation by AWSC enabled the company to start billing based on actual use rather than piped diameter. Similarly, new laws enabled AWSC to disconnect non-paying customers, providing an incentive for customers to pay their bills to the utility. However, the reforms stopped short of changing condominium laws or meter ownership laws, which prevents AWSC from having full control in installing, maintaining and reading meters. Nevertheless, AWSC has modeled best practice approaches from Europe in auditing meter reading by taking pictures with smart phones and uploading them to a central database to verify accuracy of the self-reported data. Overall, AWSC has seen a dramatic improvement in its level of autonomy as a result of these and other, broader, legal reforms regarding PSP, from decision making on staffing to more direct customer management.

81. Second, the lack of an increase in the tariff since 2009 has led to increasing financial losses for AWSC. Likewise, prices are volumetric and are the same for residential and commercial customers, and there are no plans to introduce differentiated pricing.

82. As a result of the sustained commitment from the Bank over the last 15 years, several donors have entered the water sector in Armenia. MWP alone leveraged $85 million in donor investment from ADB, EBRD and KfW. With the Bank’s retreat from the sector, these donors continue to fund much needed infrastructure investments and support to the management contract.

83. Finally, the project’s completion impacts the decision to move to a lease contract. The decision to contract one operator for the entire country comes from a desire to improve the quality

13 Various options for levels of investment and their corresponding levels of tariff increases are presented in the TMP, as noted in the Borrower’s ICR

17 of services outside of Yerevan and to cross-subsidize from the capital to the poorer urban and rural areas. Under this new structure, the operator would be able to repay IFI loans coming due starting in 2016. Assuming tariffs are increased to the optimal level, this arrangement has the potential to bring more and better services to disadvantaged areas, including the poor.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops

84. In Masis, 220 households were included in the baseline survey, 93% of which were re- surveyed on the second round. In Ashtarak, 211 households were included in the baseline, 96% of which were re-surveyed on the second round. Unfortunately the survey took place very soon after works were completed and thus cannot reflect the full benefits of the project. At least six months should have passed from completion of work to obtain a more objective assessment of the beneficiaries’’ opinion. . The main findings include:

 Averaging the results of the two sub-project areas, 45% of customers surveyed after the Project’s implementation reported being fully or partially satisfied with the operation of the centralized water supply system. Before the Project implementation this figure comprised 32%. Thus, the share of satisfied customer households increased by 43% on average (66% in urban areas and 27% in rural areas). Some household still reported being dissatisfied, likely due to the delayed connections, which are being done through a step by step process.  Likewise, the proportion of households that are dissatisfied with the short duration of water supply decreased 1.7 times after Project completion, and those dissatisfied with low pressure decreased 2.8 times after Project completion. Low pressure is a bigger problem in hot summer months than in the winter.  Average hours of supply per day increased to 16.7 hours from 12.7 hours on average across the project area; however, for Masis town the increase was larger for rural areas, while for Ashtarak the increase was larger for urban areas.  Households pay 10% more water now than they did before the project, given a 9.5% increase in daily per capita consumption.  Water quality remains a concern even after the project; 52.4% of customers surveyed are still dissatisfied with water quality, down from 63.3% before the project. Moreover, 30.8% of households still consume other sources of water for drinking, washing, cooking etc., a 27% decrease from 2014.  However, it is telling that there was also a 20% decrease in the proportion of households treating their water (boiling, filtering, adding chlorine, settling, or other) after the project, which infers an improved perception of the water quality.

4. Assessment of Risk to Development Outcome Rating: High

85. The successes of MWP and predecessor projects has fomented a strong commitment to PPPs in the sector. The efficiency gains made and the increased revenues of AWSC yield a low risk that the economic and political winds will change in the future. It is very likely that innovations in service delivery under the new lessee contract will continue to build stability in the sector.

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86. Historically, PPPs are successful when risk is transferred slowly to the private sector and managerial responsibilities are transferred gradually to local staff. While this was the case with Yerevan Jur, which is now run by Armenian nationals,14 AWSC is comparatively much farther behind with day to day operations highly dependent on ex-patriot staff and very little risk transferred to the operator. The EMC is still being paid for by donor contributions, and gaps in the budget are filled through GoA’s unconditional subsidies. A jump from this volatile financial situation to a national lease is likely too large of a step given the size and complexity of AWSC’s service area and investment requirements vis-a-vis those of Yerevan.

87. The planned tariff adjustments may also bring significant social risk, as was seen earlier in 2015 with the intention to raise energy tariffs. A communication strategy will also be required to prevent “rate shock” and unrest. This risk has been known for many years and mitigation plans are well document in the 2011 Water Sector Note as well as the 2014 Water Sector Tariff Study.

88. Private companies are interested in bidding on the national lease contract, but the competition will be limited to the four companies that have already worked in Armenia’s water sector. Thus there is some risk that a suitable bid will not be proposed, and is highly dependent on the commitment to tariff reform, including the transparency of the regulator in approving changes, and the expectations of the lessee with regard to what costs they must cover. If bidding is limited, attention should be given to promoting transparency and fairness and adhering to international best practices.

5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry

Rating: Moderately Satisfactory

89. The project was a repeater operation of MWWP, aimed to complete urgent infrastructure rehabilitation in underserved communities. The project’s design built on past successes, incorporated many (but not all) lessons learned, and had adequate indicators and monitoring mechanisms that leveraged those in the management contract. Regarding the financial position of AWSC, the PAD well referenced the Sector Note prepared by World Bank in 2011, which discussed the financial situation of AWSC and possible scenarios to improve its viability. A more robust analysis of the government’s constraints /ability to pursue tariff increases and the risks associated could have been done and included in the PAD.

90. The path from a highly centralized social service-like approach, typical of the FSU, to a more modern, efficient and sustainable model is long and fraught of complexities. Armenia is performing fairly well when compared with other neighboring countries, which twenty years ago started from very similar circumstances. The Bank is to be commended for its perseverance and support to the Government of Armenia. The ICR team feels that such support has been very

14 According to the YWWP ICR, “it is usually admitted that the transfer of know-how has already taken place”. Page 18.

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valuable in the improvement of WSS services in Armenia. The financial sustainability of the sector has not yet been achieved, but the transformation process has started. An increase in tariffs, which is currently deemed necessary to move the sector towards cost recovery, has been lagging due to economic and political considerations. In the preparation documents of MWP, the Bank could have been more candid about these objective constraints. The Government’s ability to act on tariff increases should have been analyzed in light of the macro economic conditions of the country and expectations on the reforms that would improve financial sustainability of the sector should have been adjusted accordingly.

91. After 15 years of engagement, the Bank made a cautious move in limiting the investment period and loan amount of this project to give time to get the sector on a more sustainable footing without making further major commitments. Part of the reason for the shift away from investment loans was due to Armenia reaching its borrowing limit, and the CMU’s call for fewer, larger projects to generate efficiencies. The Bank’s continued engagement did, however, attract an additional $85 million in financing from other donors who remain active in the sector.

(b) Quality of Supervision

Rating: Moderately Satisfactory

92. The Bank provided substantial guidance, feedback and support to the client throughout implementation. The Bank team comprised the skills necessary to monitor all aspects of the project. Supervision missions were conducted on a regular basis with participation of technical, engineering, procurement, financial management and safeguards specialists. Having a TTL in the field helped with regular follow up and addressing issues as they arose. The team was critical for catalyzing additional trust funds to supplement support on the tariff reform agenda. The PPIAF Tariff Study was published in 2014 in time to inform the lease strategy.

93. The financial unsustainability of AWSC was raised repeatedly in Bank reporting and communication to the borrower, as it was also linked to a financial covenant (see paragraph 40). The 2014 decision by GoA to move to a national lease, shifted the focus from moving tariffs toward cost recovery levels to an even broader discussion on institutional reform and financial sustainability through homogenized services for the entire country, with the aim of improving efficiencies while also promoting equity in service delivery. In the meantime, GoA committed to cover the revenue gap for AWSC. The Bank considered this approach a plausible medium term solution, more socially acceptable, under the circumstances, than a sudden tariff increase. Hence the Bank decided not to act (suspend disbursement) on the noncompliance with the covenant regarding AWSC’s indebtedness; a suspension was not deemed justified nor a reasonable option on such otherwise well performing project with a concerned client intent on sector reform.

94. Finally, considered the higher level decisions made and the overall fiscal situation in Armenia, during implementation of the MWP, the Bank decided to shift its support to the WSS sector from specific investments to a reform focused approach, supported by a specific trigger for

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the Second Development Policy Operation (DPO) and targeted technical assistance such as the PPIAF tariff study to help the client prepare to implement its reform agenda15.

(c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory

95. Due to minor shortcomings in the design, overall Bank performance is rated as Moderately Satisfactory. The Bank’s supervision of the project was adequate and as concerns arose over the sustainability of AWSC supplemental support outside the project was provided to ensure the best policies would be adopted in the long-run. The Bank continued to receive assurances from the GoA that needed reforms were afoot, steered by the design of the national lease contract, justifying its decision not to enforce the loan covenant.

5.2 Borrower Performance (a) Government Performance Rating: Moderately Satisfactory

96. The Government of Armenia (GoA) has been a pioneer in water sector reform in the region. The Lease of Yerevan and the MC/EMC of AWSC are the only examples of substantial private sector engagement in the former Soviet Union countries. Substantial steps have been taken through the years to implement reforms that would improve service levels, efficiency and also allow private participation. For example, legal reforms to allow meter installation by AWSC enabled the company to start billing based on actual use rather than piped diameter. Similarly, new laws enabled AWSC to disconnect non-paying customers, providing an incentive for customers to pay their bills to the utility.

97. Before and during the implementation of this project, GoA had committed to take steps to limit AWSC debt and improve sustainability, see paragraph 40 on the financial covenant. On the tariff increase side, however, a slow recovery from the economic crisis and unemployment remaining above 16% capped the willingness and ability of the GoA to act decisively on tariffs. This, in turn, has limited the progress of AWSC towards more sustainable and self-sufficient operations. Moving forward, even with a national lease contract, the GoA would accelerate service improvements by acting on the following aspects: i) a substantial tariff reform, which is to take into account the evidence provided by the existing analyses on affordability as well as recommendations to decouple tariffs from social assistance programs; ii) discontinuing the practice of providing subsidies to the operator upon request (usually through annual budgeting process); iii) limiting borrowing concessional loans to replace aging infrastructure without a plan for repayment; and iv) ensuring independent and merit based human resource decisions of the utility.

15 As a prior action for DPO-2, the Borrower has: (i) adopted an Action Plan on Drinking Water Sector Reforms, including the decision to create a new, nation-wide lease contract through the approval of Government Decree No. N883-N dated August 14, 2014, and (ii) has started the Action Plan’s implementation by issuing the tender for the transactions advisory for a new lease contract, as evidenced by the announcement published on: www.scws.am, ww.procurement.am, and in the government’s official newsletter.

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(b) Implementing Agency or Agencies Performance Rating: Moderately Satisfactory

98. AWSC delivered quality construction in a timely fashion and within budget, while meeting fiduciary and safeguard requirements. It was, however, very dependent on the government for operating subsidies. There is a semiannual IFR requirement under the project. The International financial Reporting Standards (IFRs) have always been received on time and were mostly acceptable to the Bank. IFR for S2, 2014 included inaccurate posting of certain actual expenditures to improper cost lines. The issue was corrected and the IFR re-submitted. The only lapse in on- time reporting has occurred with the latest (2014) technical audit, which is still not completed. The PIU had sufficient capacity to carry out the project on time and within budget. They did an excellent job of coordinating donor programs and leveraging their M&E expertise to report efficiently and effectively on results.

99. Managing the PIU within AWSC has drastically improved the implementation of all donor- funded projects due to easier communication between the parties. This shortened the time for decision making as there was not a third party through which to communicate. The utility integrated PIU is much more efficient, professional and less bureaucratic than the external PIU.

(c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory

100. Although the implementation of the project went well and all investments were completed on time, lack of timely reforms in the sector have continued to hamper the overall sustainability of AWSC.

6. Lessons Learned

101. Armenia is an absolute pioneer in using extensive PPP for providing water supply and waste water services, in the former Soviet Union. No other country in the region has utilized this instrument to this extent. Most countries have a fully public supply system or outsource only small parts of the service, such as maintenance or collection of payments (very popular payment kiosks). The following two lessons can be learned from the Armenia’s experience:

102. Strengthen enabling environment to encourage PSP and service sustainability. In all FSU countries, the consumer’s price of water supply and sanitation services remains very low. Most utilities, whether public or private, struggle to achieve financial sustainability because the tariffs are far too low to cover operating costs. In most cases tariffs are decided at the local council level and are hence affected by politics. In general, the regulators should be strengthened to provide guidance not only on maximum affordability level for the consumers but to also on the minimum requirements for a utility to cover its operations and maintenance costs.

103. Designing the PPP and setting the right incentives for risk transfer. PPPs come in various shapes and sizes and details matter. Under PPP models, risk should be transferred to the private

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sector at a level commensurate with the scale of private participation. PPPs should not be assessed, in general, as a good or bad model for a specific country as any recommendation would depend on the specific needs not only of the sector, but of the service area. In terms of this project, one must differentiate between the experience of Yerevan Jur and of AWSC in implementing PPPs in Armenia, especially given the disparities in asset base, customer base and O&M requirements. To ensure sustainability of service, the provider’s solution, should be accompanied by a tariff reform that allows progress towards cost recovery. In the case of AWSC financial sustainability significantly lagged during the project because tariffs were not raised and the efficiency gains were not sufficient to make ends meet. Subsidies were provided from GoA to the operator to compensate for the lack of revenue from tariffs, but this, in the longer term, would create the wrong incentives and undermine further efficiency gains. Therefore, in conclusion, budget support to management contracts should require extensive analysis of the incentive structure, including on the details associated with performance measurement.

104. Regarding the implementation of the project two lessons should be taken into account for future similar operations:

105. Project implementation and timeline. The construction seasons should be accounted for in project design and a project closing date should not occur in the middle of construction season. Unusually cold and warm weather should be noted as a potential risk to on-time completion. In the case of MWP, the closing date in the middle of the summer meant that works were executed right until the end of the project, thus also hindering the ability to survey the beneficiary once the effects of the project could be fully felt, i.e. six or more months after completion of the works.

106. Taking advantage of a PPP arrangement in full. SAUR management of AWSC had positive impacts on project implementation; procurements were carried out on time and financial management was also done adequately. Such PPP arrangement could bring even further benefit to the utility. Large international operators have access to wholesale opportunities that are not accessible to other purchaser or though other purchasing mechanisms. Taking advantage of this wholesale opportunity should be considered for similar projects involving a PPP, and discussed with WB procurement.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies

107. The Borrower’s ICR was completed by AWSC on November 12, 2015. The complete ICR provides a consistent analysis of the project background, implementation and results. A summary of the major points of the ICR, especially where the information adds details to what is presented already in this document, are provided in Annex 7. The full Borrower’s ICR is also available for review.

108. The Borrower’s ICR includes a great level of detail on the implementation of the project by AWSC, including the implementation and audit arrangements, financial management, procurement, and environmental and social mitigation measures. The Borrower’s ICR confirms the achievement of all project targets as of September 30, 2015.

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109. What is most notable in the Borrower’s ICR is the additional information provided regarding the outcomes and performance of the enhanced management contract; details on the total management plan and its potential as an investment planning tool; social and gender concerns as tied to customer feedback mechanisms; strengthening of the capacity of AWSC (which is focused on capacity building through infrastructure and O&M improvements); AWSC’s financial situation, and overall outcomes. While it is found that the Borrower’s ICR is overly optimistic about the future financial sustainability of AWSC, all other comments by the borrower are well aligned with those in this document.

110. The client also reviewed a draft of the Bank’s ICR and the chairman of SCWE submitted a letter on December 9, 2015 confirming its views. Overall, the client confirmed the achievements of the project and believes the project is fully satisfactory. The client stated that the rating of “moderately satisfactory” was “quite a modest rating” given the relative importance of meeting the indicator targets compared with the efficiency of the project, which is rated modest.

111. Despite the operational efficiency gains achieved, financial sustainability of AWSC remained stagnant during MWP’s implementation. This is identified as the main shortcoming of the project. As the Borrower’s underlines in their letter of comments to the ICR, meeting the set targets is the clearest indicator of project performance; however, in the overall ICR rating, efficiency has a significant weight, hence the final “MS” rating assigned to the project. While the Bank acknowledges that GoA has a broad vision to improve the sector through second generation reforms, including the new nation-wide lease contract, such progress could not yet be recorded during the lifetime of MWP.

(b) Cofinanciers, other partners and stakeholders

112. The other donors active in Armenia’s water sector acknowledge the important role the Bank has played, since 1998, on the reform agenda. All donors in concert have been supporting the government of Armenia toward more sustainable water and sanitation services.

113. Throughout the MWP, the Bank remained an influential financier, building strong synergies with other donors, including ABD, KfW and EBRD. The Bank’s continued support has been critical to crowding in donor funding to continue making improvements. KfW and EBRD continue to fund the EMC, while ADB informed the ICR team that they envisage more investments in the pipeline to improve water supply and sanitation services.

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Annex 1. Project Costs and Financing (a) Project Cost by Component (in USD Million equivalent) Actual/Latest Appraisal Estimate Percentage of Components Estimate (USD (USD millions) Appraisal millions)

Total Baseline Cost 14,962,500.00 14,931,000.00 100 Total Project Costs 14,962,500.00 14,931,000.00 100 Front-end fee IBRD 37,500.00 37,500.00 100 Total Financing Required 15,000,000.00 14,968,500.00 100

(b) Financing Appraisal Actual/Latest Type of Estimate Estimate Percentage of Source of Funds Cofinancing (USD (USD Appraisal millions) millions) Borrower 3.00 3.06 100.00 International Bank for 15.00 14.97 100.00 Reconstruction and Development Discrepancies due to exchange rate fluctuations between USD-AMD during the implementation of project.

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Annex 2. Outputs by Component

The project’s three components and their associated outputs and outcomes are described below.

Component 1

Description: Investments in Water Supply Systems ($10.78 million): Design, implementation and supervision of the rehabilitation of water systems in the cities of Masis, Echmiadzin, and Ashtarak, including their neighboring rural settlements. The works included rehabilitation of water networks linked to operation efficiency and reduction of non-revenue water.

Outputs: 1. Design, implementation and supervision of the rehabilitation of water systems in the cities of Masis, Echmiadzin, and Ashtarak and adjacent villages. a. Water Systems in Masis town and Ayntap, Hayanist, Dashtavan, Darbnik villages were completed as of March 25, 2015 as follows: i. Rehabilitation of 2 boreholes, ii. Installation of 1 new, Q=100l/sec, H=100m capacity pumping unit, iii. Renovation of daily regulation reservoir (DRR) control unit, iv. Construction of de200-de500mm, 5,6km length water mains from DRR to distribution network, v. Construction of de50-de200mm, 55,7km waterlines in distribution network of the settlements, vi. Installation of 2822 water meter chambers (WMC) for private houses and de20-de32mm inlet lines with 17,9km total length. b. Water Systems in Ashtarak town and Ohanavan, Karbi, Mughni, Sasunik, Karin villages were completed as of June 15, 2015 as follows: i. Installation of 2 new, Q=80l/sec, H=140m capacity pumping unit, ii. Renovation of control units for 2 groups of DRRs. Ashtarak town distribution network is divided into two major zones and in one of them the distribution network is completely renewed and the other zone is partially renovated. iii. Construction of de50-de250mm, 65,9km total length waterlines, iv. Installation of 3141 WMC for private houses and de20-de32mm inlet lines with 25,6km total length. c. Water Systems in Echmiadzin town and Aygeshat, Dasht, Shahumyan, Norakert villages were completed as of June 15, 2015 as follows: i. Renovation of control units for 4 groups of DRRs, construction of new building for chlorination plant, ii. Construction of 50-de200mm, 2,5km total length waterlines from the DRR to the distribution network of the villages, iii. The distribution network of Echmiadzin town is divided into 3 major zones, in two of them the distribution network is completely renewed, iv. Construction of de50-de400mm, 61,2km total length waterlines in the distribution networks of two zones of Echmiadzin town,

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v. Installation of 3765 WMC for private hoses and de20-de32mm, 25,9km total length inlet lines.

Outcomes:  Operation conditions of the pumping stations and boreholes are improved;  Electricity consumption in pumping stations is reduced;  Control unit operation conditions for providing water from the DRR to the settlements are improved; and  Water losses in the distribution networks are considerably reduced and hours of supply increased

Component 2

Description: AWSC Investments ($1.98 million): This component financed: (i) water meter replacement and installation of meter chambers in several cities and villages throughout the AWSC Service Area to reduce commercial losses; (ii) automation of pumping stations and reservoirs; and (iii) procurement and installation of equipment and machinery for the improvement of O&M system of the AWSC.

Outputs: 1. Water meter replacement and installation of meter chambers in several cities and villages throughout the AWSC Service Area to reduce commercial losses a. Installation of 19,500 sets of residential water meters class C and 1,100 sets of electronic ultrasonic water meters with wireless reading; b. Installation of 1,000 sets of concrete reinforced water meter chambers; and c. Installation of 2,000 sets of polymer-sand water meter chambers 2. Procurement and Installation of 35 automated systems for the operation of the DRRs and pumping stations in AWSC service perimeter. Initial plan was for only 28 automated systems. a. This activity investment allowed AWSC to have an in-line monitoring of the strategic facilities of its perimeter. Based on this monitoring, a SCADA system has been developed to set automatic rules to operate equipment (automatic start and stop of pumps, compliancy of water quality est.) and warn AWSC staff in case of deviation (reservoir overflow, energy failure est.) 3. Procurement and installation of equipment and machinery for improvement of AWSC’s O&M systems a. Procurement and installation/use of: 4 set Cesspool Emptier, 15 vehicles, 40 chlorine & 10 turbidity measurement devices, 55 km of polyethylene pipes, prefabricated steel reinforced concrete manholes and IT equipment for AWSC strengthening

Outcomes: 1. Better knowledge of AWSC perimeter for production and distribution figures for relative staff; 2. Staff optimization;

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3. Production and energy savings: decrease of volume production (m3) and energy use (kWh); 4. Operational ratio improvements; 5. Better water sanitary condition: on-line follow-up of water quality. The residual chlorine rate and turbidity value of critical water system are under monitoring and allow AWSC staff to act immediately in case of deviation. 6. Improved accuracy of customer’s water meters; 7. Change in the ownership of individual water meters from customer to company; 8. Increased average consumption per customer; 9. Decreased NRW 10. Increased billing and collection 11. The installation of the new house connections with water meters inside chambers located at the property boundary of the customers enables easy access to water meter without customer’s attendance need, limited the possibility to tamper water meters, clarifies the responsibility border between company and customer and optimized the commercial water meter’s reading process. 12. Cars for the commercial field staff speed up water meter reading process and optimize staff productivity. Impact is felt on billing and collection outcomes that are continuously improving. Indirect consequence is reallocation of some older car to operational field staff, which was also more productive. 13. Cesspools emptiers enable the AWSC staff to be more reactive and efficient in case of sewage obstruction. There are now a fewer number of obstructions, decrease of average duration of obstruction and obstruction frequency in critical spots of the sewage network in AWSC service areas. Improvement of sanitary conditions for neighboring population.

Component 3

Description: AWSC Management Strengthening ($5.22 million): This component financed: (i) about two years of fees for the Enhanced Management Contract (EMC) to improve AWSC administration, operations, maintenance, and ensure optimal implementation of the program investment fund; and (ii) technical studies, project management and monitoring, including independent technical audits, financial audits and operating costs.

Outputs: 1. Two years of fees for the EMC a. Management Fixed Fee including VAT & Profit Tax (calculated through 31 December 2013) and incentive/bonus compensation in order to improve AWSC administration, operations, maintenance, and ensure optimal implementation of the program investment fund. 2. Technical studies, project management and monitoring, including financial audits and operating costs a. Support in financing of PIU and CMU to ensure efficient Project management, supervision and coordination, AWSC and Project Financial Audits and Project Beneficiaries Survey 3. Technical Audit Reports of AWSC 4. Total Management Plan

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Outcomes: 1. The quality and the efficiency of water and wastewater disposal services provided by the Company have been improved. Special attention was paid to the improvement of daily hours of water supply, higher reliability and greater water safety. 2. The consumers’ willingness to pay for water and wastewater services was promoted through higher quality and better arrangements of consumers’ service. 3. The financial state of the Company was improved 4. Staff training and re-qualification courses were organized to improve management, operation and maintenance and financial sectors thus ensuring stable operations of these sectors after contract completion. 5. The Total Management Plan provides a longer term business plan, including asset management, operational and investment requirements and the associated economic decisions required.

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Annex 3. Economic and Financial Analysis

The ICR team faced a significant challenge regarding how to approach the economic and financial benefits assessment of this project. The economic and financial benefits calculations involve certain projections and are usually expressed as either income or value added of the project. The main problem the team faced was the going concern of AWSC: the going concern accounting principle is the assumption that an entity will remain in business for the foreseeable future. An entity is assumed to be a going concern in the absence of significant information to the contrary. The going concern concept is not clearly defined in generally accepted accounting principles, and so is subject to a considerable amount of interpretation regarding when an entity should report it.

However, generally accepted auditing standards do instruct an auditor regarding the consideration of an entity’s ability to continue as a going concern. How this is applicable to the AWSC and the project: in the latest audited financial statements of the company (FS 2014) note 3.2 states that "in accordance with decree No1366-A dated 05.12.2013, the Government of the Republic of Armenia approved the approach to transfer water system operating rights from "Armenian Water and Sewerage" CJSC to a lessee on tender basis. However, the implementation of the decree was postponed, and it was decided to extend the contract with "Saur" SA organization by prolonging the functions of the executive body in the company till the end of May 2016." Having this in mind, it does not make much economic and financial sense to project future benefits from the project using the company’s future revenue stream. The simple reason is that there is no reason to believe that there will be such future revenue stream. Nevertheless ERR and NPV have been calculated for the purpose of this ICR.

Economic Benefits. The estimated ERR is 25.5% and the NPV is AMD 4,269 million (USD 9 million at current exchange rate), assuming a discount rate of 10% and 30 years of asset life (as in the PAD), with corresponding benefits to be realized starting 2016. Like in the PAD, this calculation was done only for component 1. Components 2 and 3 will add further to the project’s NPV and ERR but the team has limited data and there are too many additional investments into the company leading to results, which cannot be associated entirely with the project (see table 1). The project has also low per capita investment cost of AMD 39,120 (USD 94 at current exchange rate) per capita. This is good given the population density of the project areas. Additional limitations to the calculation of the project’s ERR include: ‐ lack of quantitative data on the situation; ‐ costs and monetized benefits at the beginning and completion of the project; ‐ other investments by IFIs in the company (risk of claiming results that are not entirely due to the WB intervention); ‐ Government decision on dissolving the company (one operator with one tariff for the entire country from 2016. For further information see World Bank (2015): Armenia Water Sector Tariff Study); ‐ Tariffs of the company have not been changed since April 1st, 2009.

The ex-ante economic analysis included in the project PAD yielded an NPV of AMD 2,529 million and an ERR of 26.1 %. The main differences between the ex-ante and ex-post are the assumptions related to the tariff revenues (for further information see World Bank (2015): Armenia Water Sector Tariff Study). Additional information is presented below:

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Table 1: Economic analysis

Economic analysis Year 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2030 2035 2040 2045 2046 Additional revenue (000'AMD) 64,412 64,412 64,412 64,412 64,412 64,412 64,412 64,412 64,412 64,412 64,412 64,412 64,412 64,412 64,412 Estimated savings from reduced time collecting the water* (000'AMD) 23,171 23,171 23,171 23,171 23,171 23,171 23,171 23,171 23,171 23,171 23,171 23,171 23,171 23,171 23,171 Estimated savings from non‐ incremental water consumption** (000'AMD) 778,250 778,250 778,250 778,250 778,250 778,250 778,250 778,250 778,250 778,250 778,250 778,250 778,250 778,250 778,250 Additional costs (000'AMD) (13,744) (13,744) (13,744) (13,744) (13,744) (13,744) (13,744) (13,744) (13,744) (13,744) (13,744) (13,744) (13,744) (13,744) (13,744) Capex (000'AMD) (4,188,916)

Economic benefits (000'AMD) (3,336,827) 852,089 852,089 852,089 852,089 852,089 852,089 852,089 852,089 852,089 852,089 852,089 852,089 852,089 852,089 EIRR (%) 25.5% NPV (000'AMD) $4,268,855 Discount rate (%) 10% * Using PAD's assumption for annual cost savings on non‐incremental water ** Using PAD's assumption that 1 hour less than 24 hour daily supply of water is corresponding to 5 minutes time of fetching water.

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The PAD anticipated that the main economic benefits of the project would be time saved in fetching water (coping costs), cost savings on non-incremental water consumption, and the value of increased water consumption. A couple of PDO indicators and IR indicators were developed to reflect the expected economic and financial benefits: increased daily supply of water, increased collection ratio, decreased electricity consumption, increased metered consumption and decreased percentage of customers with more than four months arrears. Indicators:

 Increased weighted average daily supply of drinking water service in selected areas: PAD indicator envisaged increased supply from baseline of 12.3 hours (weighted average) to 16.6 hours at the end of the project. The company is currently reporting 17.4 hours, which means that the end target is exceeded. This indicator is helping us to understand the project related time savings. Due to the limitations listed above while the end target was achieved, available data do not allow to conclude on the monetary terms of time saving and value of the reduced household coping costs.  Increased collection ratio: the baseline of this indicator is 93.5 percent and the end-project target was set at 98 percent. The observed data indicates that the current collection level is 96.5 percent. The end target is close to be met. Despite the fact that the tariffs have not been updated since 2009 the company is constantly increasing its revenues mainly due to increased supply leading to increased consumption, increased billing (customers’ base) and collection. Further financial analysis is done in this regard only concentrating on the direct investments in Ashtarak, Echmiadzin and Masis (see below).  Decreased electricity consumption: PAD baseline indicator is 0.23 KW/m3 and he end-project target was set at 0.17 KW/m3. The company is currently reporting 0.17 KW/m3, which means that the end target is met. This have helped the company to manage its electricity costs despite the number of increases of electricity prices. Further economic benefits should also be mentioned here despite the difficulty in monetizing them as avoidance of greenhouse emissions at company and national level.  Increased metered consumption: the baseline of this indicator is 88.5 l/c/d (litter per person per day) and the end-project target was set at 116 l/c/d percent. The company is reporting 119 l/c/d, which is exceeding the end target. This indicator is again helping us to understand the avoided coping costs (see increased water supply).  Overall improvement of the performance of AWSC: Component 3 of the project is financing two years of the management contract with a private operator to improve (i) AWSC administration, operations, maintenance, and ensure optimal implementation of the program investment fund; and cover for (ii) technical studies, project management and monitoring, including independent technical audits, financial audits and operating costs. As can see the performance of the company is improving and there are economic benefits that can be attributed to the management of the company. We have to mention though that the operating subsidies for the company are slowly increasing in the past couple of years. Due to external risks as the lack of tariff increases since 2009 we believe that it is only fair to say that despite the significant challenges the overall performance improvement (and management of significant investment program) in the company might outweigh the cost of the management contract.

Financial benefits and performance. The PAD says that the main incremental financial benefit to AWSC from the project would be the projected increased revenue collection as a result of

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increased sale volumes and collection rates in the service areas of the Project investments. Having in mind the above mentioned caveats and limitations and the availability of financial data (available breakdown of the financial data at company level) we will only present summarized data on the company level and three cities.

Table 2: Financial data of AWSC (2012-2014)

AWSC (000'AMD) 2012 2013 2014 Revenues 3,746,086 3,934,112 4,223,647 Change 5.0% 7.4% Operating costs 4,392,478 5,765,666 5,969,761 Change 31.3% 3.5% Operating result (646,392) (1,831,554) (1,746,114) Change 183.4% -4.7%

As projected the company did manage to increase its revenues mainly due to of increased sale volumes (see increased water supply) and billing and collection (cashflow revenues increased as well). Unfortunately, AWSC operating costs increased significantly in 2013 (mainly as a result of increased electricity costs and costs of materials) but since then the pace of their increase is smaller compared to the revenue increase (the team has also reviewed the first two quarters of 2015). Operating result is still very challenging (last price increase was in April 1, 2009) and the tariffs are way below the cost recovery level (for further information see World Bank (2015): Armenia Water Sector Tariff Study.

AWSC incurred significant debt for the period 2012-2014 (see below). So far the only interest payment that the company is in charge of (affecting its financial position) is on ADB Credit 2860 (see FS 2014, note 19 f). The tariffs do not cover all interest, principal payments as well as the costs associated with the management contract. When principal repayments start it will be impossible for the company to service them. AWSC’s financial situation is extremely unsustainable.

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Table 3: AWSC debt incurred during the period 2012-2014

Disbursed Disburse d Disbursed amount Disbursed amount in Financing source Project interventions (main activities financed) amount in 2012 amount in 2013 in 2014 2015 (Q1 and Q2) Total 2012-15 The Project Development Objectives are to improve the quality of Water and Wastew ater services in the Armenia Water and Sanitation Company (AWSC) Service Area by providing efficient and sustainable Water and Wastew ater services and strengthening the IDA Credit 3893 (000'AMD) capacity and sustainability of AWSC”. The MWWP included three main components: (1) AWSC management strengthening (Cost $10.61 mil); (2) AWSC investments (Cost $2.96 mil); and (3) investments in AWSC Branch systems (Cost $12.49 mil). 16,786 0 0 0 16,786 The Additional Financing Project to MWWP supported the scaling up of the MWWP program of w ater system rehabilitation and improvements, including extension of the ongoing management contract betw een the AWSC (the w ater utility in charge of the project), and an international w ater supply utility operator. The additional helped to enhance the sustainability, impact and development effectiveness of the MWWP project IDA Credit 4514 (000'AMD) and maximized its development outcomes as w ell as helped to continue w ith the institutional and financial capacity building of AWSC. The MWWP included three main components: (1) AWSC management strengthening (Cost $9.68 mil); (2) AWSC investments (Cost $4.26 mil); and (3) investments in AWSC Branch systems (Cost $11.96 mil). 371,910 0 0 0 371,910 WSSP is aimed at improving the public health and environment for about 616,000 people living in 21 tow ns and about 101 villages w here is an urgent need for WSS improvements in the frame of 25 subprojects through safe and reliable w ater supply and only urgent ADB Credit 2363 (000'AMD) improvement of sew erage and sanitation facilities. Project is structured around tw o complementary components: 1) Component A: Infrastructure Investment (Cost about $43.00 mil); and 2) Component B: Management Improvement & Development nt A: Infrastructure Investment (Cost about $2.00 mil) 693,108 0 0 0 693,108 The WSSP-AF Project w ill improve public health and environment for about 400,000 people (households and other consumers) living in 18 tow ns and up to 92 villages in the frame of 10 subprojects through safe, reliable and sustainable w ater supply. The ADB Credit 2860 (000'AMD) Additional Financing Project w ill fund tw o project components w hich include: (i) municipal infrastructure rehabilitation and improvement (Cost about $48.00 mil); and (ii) management improvement and development (Cost about $2.00 mil), w hich include gender features. 609,910 3,377,581 6,315,212 1,367,913 11,670,616 The objective of the Lake Sevan Environmental Project w as the Improvement of Wastew ater Treatment and Collection in Five Municipalities located Near Lake Sevan Scope: -Rehabilitation of Sew er Netw orks in GAVAR, SEVAN, MARTUNI, VARDENIS and JERMUK EBRD Credit 37030 (000'AMD) tow ns - Design and Construction of WASTE WATER TREATMENT PLANTS in GAVAR, VARDENIS and MARTUNI tow ns (mechanical treatment) Financial means: EBRD loan -7.0 mln EUR, EBRD grant - 5.0 mln EUR, RA Co-financing- 1.76 mln EUR 415,099 0 0 0 415,099 The Municipal Water Project is structured around three complementary components: 1) Investments in Water Supply Systems Systems (Cost $10.80 mil); 2) Armenia Water and Sew erage Company (AWSC) Investments (Cost $1.90 mil); and 3) AWSC Management IBRD Credit 8129(000'AMD) Strengthening (Cost $5.30 mil). The activities under the Project brought direct benefits to about 132,000 AWSC service consumers in selected Project areas of Ashtarak, Masis and Echmiatsin, and their neighboring rural settlements. 1,184,652 1,972,369 1,647,351 1,515,438 6,319,810

The purpose of the Armenian Small Municipalities Water Project is (i) the improvement of EIB Credit 31304 (000'AMD) municipal w ater supply in the Tavush, Lori, Shirak, Gegharkunik, Kotayk, Syunik municipalities and the Vayots Dzor province (17 tow ns) and (ii) the rehabilitation of the 0 0 2,530,088 770,955 3,301,043 w ater treatment plants and sew erage collectors in the Tavush (tow n of Dilijan) and Vayots Dzor (tow n of Jermuk) marzes. EBRD Credit 40718 (000'AMD) Financial means: 26.04 mln EUR, from w hich EBRD loan -6.5 mln EUR, EIB loan - 6.5 mln EUR, NIF grant -7.6 mln EUR, other donors – 1.1 mln EUR, RA Co-financing- 4.34 mln EUR. 34,698 3,198,203 0 0 3,232,902 35

Table 4: Financial data in the service areas of the project investments – cities of Ashtarak, Ejmiatsin and Masis

Bill payment (000'AMD) Change City Base year 2010 Target 2012 Target 2013 Target 2014 Total 2012-14 PAD-Actual Ashtarak City (PAD) 94,868 104,355 108,007 111,788 324,150 Ashtarak City (actual) 108,295 118,228 124,062 350,585 8% Ejmiatsin city (PAD) 222,106 244,317 252,868 261,719 758,904 Ejmiatsin city (actual) 250,560 249,993 277,800 778,353 3% Masis city (PAD) 107,361 118,098 122,231 126,509 366,838 Masis city (actual) 104,083 100,934 107,922 312,938 -15%

With the exception of Masis City the financial projections were outperformed. Compared with the baseline, the bill payments (collected revenue) in Ashtarak increased by 31%; in Ejmiatsin increased by 21%; and in Masis increased 1% (bearing in mind the lack of tariff increase).

Table 5: Additional breakdown of financial data in the service areas of the project investments – areas of Ashtarak, Ejmiatsin and Masis

Ashtarak city and villages (000'AMD) 2012 2013 2014 Total Revenue 131,193 137,283 147,665 416,142 Change 4.6% 7.6% Operating Costs (272,268) (268,669) (268,185) (809,122) Change -1.3% -0.2% Operating result (141,074) (131,386) (120,520) (392,980) Change 6.9% 8.3% Capex (1,558,074) Ejmiatsin city and villages (000'AMD) 2012 2013 2014 Total Revenue 284,674 287,173 317,604 889,451 Change 0.9% 10.6% Operating Costs (204,797) (197,345) (197,496) (599,638) Change -3.6% 0.1% Operating result 79,876.21 89,829 120,108 289,813 Change 12.5% 33.7% Capex (1,457,939) Masis city and villages (000'AMD) 2012 2013 2014 Total Revenue 157,219 150,046 172,229 479,494 Change -4.6% 14.8% Operating Costs (640,723) (654,049) (665,851) (1,960,623) Change 2.1% 1.8% Operating result (483,503) (504,003) (493,622) (1,481,129) Change -4.2% 2.1% Capex (1,172,903)

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It should be known that AWSC is having a unified tariff for the entire service area. This means that users in one area support users from another area and this and this does not conflict with international good practice that the tariffs be set at company level (trying to achieve solidarity irrespective of the production and distribution costs at any single WSS system that is operated and maintained). The main point of the table above is to highlight that the company steadily managed to increase its revenues in the service areas of the project investments – areas of Ashtarak, Ejmiatsin and Masis, while keeping the increase of operating cost much lower or even decreasing them. It is clear from the actual data presented by AWSC that the financial performance in the area of project investments has improved, unfortunately this did not manage to contribute to improved financial performance at company level.

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Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Responsibility/ Names Title Unit Specialty Lending Ahmed A. R. Eiweida Lead Urban Specialist GSURR TTL Zaruhi Tokhmakhyan Senior Infrastructure Specialist GSUOA TTL Darejan Kapanadze Senior Environmental Specialist GENDR Safeguards Xavier Cledan Mandri- Lead Financial Officer GCPDR Perrott Senior Social Development Chukwudi H. Okafor GSURR Specialist Jyoti Bisbey Infrastructure Finance Specialist GCPDR Christopher Schmandt Consultant GSURR Petre Manjgaladze Consultant ECCGE Supervision/ICR Ahmed A.R. Eiweida Lead Urban Specialist GSURR GWAD Anna Cestari Sr Water Resources Specialist TTL R Zaruhi Tokhmakhyan Senior Infrastructure Specialist GSUOA TTL Tatyana Shadrunova Senior Operations Officer GSURR Darejan Kapanadze Senior Environmental Specialist GENDR Safeguards Ronnie W. Hammad Senior Operations Officer GGODR Kirsten Hommann Senior Economist GSURR Senior Social Development Sarah G. Michael GSURR Social GWAW David Stiggers Consultant P Aleko Maisuradze Temporary ECCGE Nora Mirzoyan Consultant GSU18 GWAD Philippe Marin Sr. Water & Sanitation Specialist R GWAD Amanda Joan Goksu Operations Officer R GWAD Ivaylo Hristov Kolev Sr. Water & Sanitation Specialist R

(b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs)

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Lending FY12 18.90 85,486.55

Total: 85,486.55 Supervision/ICR FY12 0.90 4,707.98 FY13 20.92 100,049.34 FY14 19.73 84,300.61 FY15 11.82 35,027.10 FY16 3.35 20,908.31

Total: 244,993.34

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Annex 5. Beneficiary Survey Results

The baseline survey was conducted for all three towns in the MWP project area in January 2014, and a second stage survey was first conducted for Masis subproject area in June, 2015, as works had been completed in May, 2015; and then in the Ashtarak subproject area in November, 2015. Both surveys were well designed, using the same methodology and the same consulting firm. The surveys aimed to capture socioeconomic conditions of the representative groups, as well as their satisfaction with and perceptions of the Project.

Summary of changes in key monitoring indicators in Astarak and Masis Subproject areas

The 1st and 2nd stage surveys carried out separately in Masis and Ashtarak Subproject areas allowed calculating the changes in key monitoring indicators after completion of project-supported rehabilitation of the water system in both areas jointly. The following table represents the key monitoring indicators as well as some additional indicators before and after completion of the Project activities in Ashtarak and Masis Subproject areas.

Key monitoring indicators and their values before and after completion of project- supported rehabilitation of the water system in Ashtarak and Masis Subproject areas Masis Subproject area Ashtarak Subproject Total, Masis and area Ashtarak Subproject areas

% % %

Indicators Before, After, Before, After, Before, After, 1st 2nd 1st 2nd 1st 2nd stage stage stage stage stage stage

Survey Survey Increase, Survey Survey Increase, Survey Survey Increase, AWSC customer 1. h/hs usually receiving water 95.4 96.8 1.5 77.6 99.0 27.6 86.7 97.9 12.9 from centralized water supply system every day, % 2. Average duration of daily water supply, 13.6 16.2 19.1 11.2 17.2 53.6 12.7 16.7 31.5 hours

3. AWSC customer h/hs using other 55.5 59.4 7.0 28.0 1.4 ‐95.0 42.0 30.8 ‐26.7 sources of water, %

4. AWSC customer h/hs referred to the 44.5 45.1 1.3 73.0 99.1 35.8 58.5 72.0 23.1 centralized water supply system as

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Masis Subproject area Ashtarak Subproject Total, Masis and area Ashtarak Subproject areas

% % %

Indicators Before, After, Before, After, Before, After, 1st 2nd 1st 2nd 1st 2nd stage stage stage stage stage stage

Survey Survey Increase, Survey Survey Increase, Survey Survey Increase, the main source of drinking water,%

AWSC customer 5. h/hs connected to 67.3 67.5 0.3 44.5 44.1 ‐0.9 56.4 57.0 1.1 the centralized sewage system, % AWSC customer 6. h/hs having installed and 96.8 98.6 1.9 88.2 98.6 11.8 92.6 98.6 6.5 operational water

meters, % AWSC customer h/hs reported 7. making regular monthly payments 98.0 97.6 ‐0.4 93.8 93.0 ‐0.9 96.1 95.5 ‐0.6 against the water consumed from the centralized system, % Average quantity of water consumed 8. from the centralized water 12.0 13.7 14.2 9.8 11.1 13.3 11.0 12.1 10.0 supply system per one beneficiary h/h, per month, cubic meters Average daily per 9. capita consumption of water from the 107.0 117.0 9.3 80.8 94.2 16.6 94.9 103.9 9.5 centralized water

supply system, liter AWSC customer 10 h/hs which are fully or to some extent . satisfied with the 13.7 20.0 46.0 51.1 70.5 38.0 32.0 44.7 39.7 operation of the centralized water supply system, % 11 AWSC customer . h/hs which are 49.1 36.4 ‐25.9 57.3 24.6 ‐57.1 53.1 30.6 ‐42.4 dissatisfied with the short duration of

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Masis Subproject area Ashtarak Subproject Total, Masis and area Ashtarak Subproject areas

% % %

Indicators Before, After, Before, After, Before, After, 1st 2nd 1st 2nd 1st 2nd stage stage stage stage stage stage

Survey Survey Increase, Survey Survey Increase, Survey Survey Increase, water supply per day, %

AWSC customer 12 h/hs which are . dissatisfied with the 60.9 30.0 ‐50.7 43.6 15.6 ‐64.2 52.4 23.0 ‐56.1 low pressure of water in the system, % 13 AWSC customer h/hs which are . dissatisfied with the 87.3 83.6 ‐4.2 38.4 19.9 ‐48.2 63.3 52.4 ‐17.2 quality of water in the system, % AWSC customer h/hs which are 14 aware of the general tariff of . drinking water 60.0 62.0 3.3 65.4 72.0 10.1 63.4 67.2 6.0 supply and sewerage services per 1 cubic meter of water, % AWSC customer 15 h/hs which are aware of the . possibility to apply 79.5 84.8 6.7 73.5 77.7 5.7 76.6 81.5 6.4 to the customer service center of AWSC, % AWSC customer 16 h/hs treating 36.8 31.4 ‐14.7 14.2 9.5 ‐33.1 25.8 ‐20.2 water, % 20.6 AWSC customer h/hs collecting and 17 52.3 70.5 34.8 80.6 58.8 ‐27.0 66.1 64.7 ‐2.1 holding water in containers, %

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Additional indicators in Ashtarak and Masis Subproject areas Total, Masis Ashtarak Masis and Subproject Subproject Ashtarak area area Subproject areas 54.0 81.4 66.7 AWSC customer h/hs mentioned that some positive changes in their 18 water supply occurred between 2014 and 2015, % 42.6 81.3 61.5 AWSC customer h/hs mentioned that the actual changes in the water supply due to Project implementation have had a factual (significant 19 or at some extent) influence on living conditions of their working age female members, % 37.7 75.3 56.1 AWSC customer h/hs mentioned that the actual changes in the water supply due to Project implementation have had a factual (significant 20 or at some extent) influence on living conditions of their working age male members, %

AWSC customer h/hs mentioned that the actual changes in the water 23.8 34.1 28.8 supply due to Project implementation have had a factual (significant 21 or at some extent) influence on living conditions of their female children, % AWSC customer h/hs mentioned that the actual changes in the water 24.0 42.3 30.0 supply due to Project implementation have had a factual (significant 22 or at some extent) influence on living conditions of their male children, % AWSC customer h/hs mentioned that the actual changes in the water 6.3 34.8 20.1 supply due to Project implementation have had a factual (significant 23 or at some extent) influence on living conditions of their female elder members, % AWSC customer h/hs mentioned that the actual changes in the water 6.4 20.4 13.2 supply due to Project implementation have had a factual (significant 24 or at some extent) influence on living conditions of their male elder members, %

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Annex 6. Stakeholder Workshop Report and Results

Not applicable.

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Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR

Note: The following are selected excerpts taken from the Borrower’s ICR that demonstrate the Borrower’s perspective on the project’s implementation and outcomes and add detail that is not presented in the main document.

Introduction

Demands on water production are considered to be high because of the high level of Non Revenue Water (NRW), i.e. technical and commercial losses. Tariff levels are low and, consequently, there are insufficient funds to adequately deal with asset rehabilitation. Notionally, tariffs should aim at O&M cost recovery, with mechanisms for adjustment for varying economic conditions. Tariff levels in Armenia, at around AMD 200/m3 (US$0.55/m3), appear low in relation to regional or international norms (where typical examples are around AMD 320-400/m3), although the current median monthly household expenditure for water is below typical affordability threshold norms.

Armenian Water and Sewerage Company 16 (AWSC) is a state water company, with established operating board, employees and facilities. It provides water supply and wastewater services to more than 277,000 domestic and business customers in 37 cities and 271 villages. The agency responsible for water services in parts of Armenia covering 45% of the total population. The water supply to over 300 settlements is implemented through about 100 systems, 545 intake structures, 2,500 km long water mains, 3,600 communal distribution networks, 45 pump stations, 380 daily regulation reservoirs (DRR), 109 chlorinating stations and 11 water treatment plants. The wastewater disposal is implemented through about 1,900 km long sewerage collectors. Currently the Company carries out its activities through 2 regional branches, 19 sectors and 16 subsectors. The AWSC was established on January 1971 by the Resolution of the Council of Ministers of the former Armenian Soviet Socialist Republic in the system of the Ministry of Housing and Communal Services. In 1990, according to the Law on Enterprises, the AWSC was reorganized as a state enterprise of special significance and in 1999 become the closed joint stock company with 100 percent of shares belonging to the State Committee of Water Economy (SCWE).

PDO Level Results Indicators and Intermediate Results Indicators Outcome

As it was stated above, and in accordance to the Project Appraisal Document (PAD) the Project sets the following Outcome Indicators:

 Increase weighted average daily supply of drinking water service in selected areas from 12.30 hours daily to 16.60 hours daily. As of 30 September 2015 the weighted average daily supply of drinking water service in Project Area is 17.6 hours daily.

16 www.armwater.am

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 Decrease weighted average non-revenue water in selected areas from 83.50 percent to 70 percent. As of 30 September 2015 the weighted average non-revenue water in Project Area is 70%.  Increase ratio of billing and collection from 93.50 percent to 98 percent. As of 30 September 2015 the ratio of billing and collection is 98%.

In fact all targets for PKPIs including PDO Level Results Indicators, as well as the Intermediate Results Indicators are achieved or exceeded the target values projected for the end of 2015.

Enhanced Management Contract and Key Performance Indicators

The PPP arrangement under a management contract covers only service provision and excludes infrastructure investment. Most of the infrastructure was built during the Soviet era and has not been refurbished since. Prior to Management Contract both service and infrastructure were poor. With the substantial improvement in service, the state of the infrastructure and assets need to be brought to a reasonable level. Considering the significant progress that has been made under the AWSC management contract from 2004 until December 2011, a good track record has been established in terms of consumer payments and GoA commitment to continuous sector reform. The GoA was seeking to transfer more of the commercial and performance risks to the Management Contractor. As a result, a more advanced PPP arrangement such as the ‘Enhanced Management Contract (EMC) was envisaged under this Project to further improve sector performance, which mandates the operator to prepare a Total Management Plan (TMP) towards the end of 2013. A Total Management Plan will be the master plan which details the state of existing assets, the current business plan and a future forecast for expansion. Given the fact that the utility was under a private management contract for already 10 years, from 2004 to 2015, essential data on the utility’s infrastructure and distribution networks already exists and needs to be consolidated and analyzed.

The decision to transfer the utility into the EMC model was substantiated with the analysis carried out under the Water Sector Policy Note (ESW), which indicates that there are still a few prerequisite reforms that the GoA needs to complete before moving the utility into a lease contract, e.g. Transfer of meters to the operators, establish a TMP, implementation of a $100 million investment program in the AWSC during 2012-2017, to increase efficiency and reduce losses. The EMC has been negotiated and signed between the AWSC and the MC operator in October 2011. It is enforced until December 2013 with possible extension for one additional year subject to satisfactory performance. The EMC specifies in detail respective rights and obligations of the operator and the AWSC.

The EMC includes the following innovative tasks in the context of sector reform in Armenia:

 Key performance indicators: The performance regime has been updated and brought in line with measuring both the operational and financial sustainability of AWSC.

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Additional performance indicators are now added to the EMC, namely, financial performance and reduction in losses (non-revenue water).  Incentive mechanisms for better service: The private operator will be better accountable for the performance indicators with a more vigorous system of calculating incentives and penalties. The key performance indicators connect the management fees to the performance under the contract by creating a base and an incentive payment structure.  Total Management Plan: The intent of the Total Management Plan (TMP) is to ensure the long-term sustainability of AWSC. By helping the State Committee on Water Economy (SCWE) make better decisions on when it is most appropriate to repair, replace, or rehabilitate particular assets and by developing a long-term funding strategy, the AWSC can ensure its ability to deliver the required level of service on a long-term basis. TMP will serve as a crucial tool to help achieve the PDO by providing the basis for planning and designing a potential future concession of AWCS water system.

The Performance Indicators were set under the EMC to evaluate the performance of the Management Contract. There are 22 Performance Indicators (PIs) in total in the Enhanced Management Contract. They include the number of 4 (four) Key Performance Indicators (KPIs) that form the basis for calculation of incentives and penalties were redefined as part of Amendment #4. The Table 3, presented below, showing the assessment of the status of these four KPIs as per the end of Contract Year 9 (2013).

Table 3: Performance Indicators for Incentive Compensation Calculation Achievement Indicator Target 2014 No. End of 2014 1 Service duration (h/d) Urban communities: - 1st group of cities (11) 22.7 22.71 - 2nd group of cities (14) 17.6 18.05 - 3rd group of cities (11) 13.2 15.31 Rural communities: 286 rural communities 15.7 15.76 2 Financial performance Collected revenues, mil AMD 4,500 4,613 3 Water losses (%) Water losses, % 70 66.3 4 Water Quality Sanitary norms compliancy > 95% 98.6%

All KPI targets were achieved as end of 2014, which must result in a bonus payment of 120,421 Euros according Enhanced Management Contract Agreement. The letter for bonus request was sent to SCWE in February 2015.

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The EMC have been financed under the IBRD funds till the end of 2013. Since January 2014 the financing of the EMC have been implemented by the German Development Bank (KfW). Originally it was planned that EMC will be transferred to a Lease Arrangement by 2014. However the Government decided to have only one Operator for the entire country (Unite 5 Utilities: Yerevan Djur CJSC, Armenian Water and Sewerage CJSC, Shirak Water and Sewerage CJSC, Lori Water and Sewerage CJSC, Nor Akunq CJSC). In fact it was appropriate to transfer the end of the all 4 Utilities Management Contracts to match with the end of the Yerevan Djur CJSC Lease Contract, which is the 31st of May 2016.

5.2 Total Management Plan

The Total Management Plan (TMP), which aims to model the master plan for Water sector until 2030, has been officially handed over to SWCE on May 2014.

TMP package is including 2 items, i.e. the TMP report that explains assumptions, frame and results of TMP tool, and the TMP itself which is a Excel file and provide business plan of Water sector on AWSC perimeter according different scenario.

This TMP provides a longer term management plan, combining planning for asset needs, operational and investment requirements and the associated economic decisions required. This is linked to more effective operation of AWSC against required levels of service as illustrated in the diagram presented below.

Total Management Plan cycle

This TMP is foreseen to be used for two main purposes:

 As a management tool to review overall AWSC activities and provide options to assist in operational and investment planning, with presentation of potential options for a variety of levels of service, tariff and capital investment scenarios

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 To act as a mechanism for discussion and decision by the SCWE in consultation with the management of AWSC to develop an agreed option for a five year investment program (i.e. 2016 – 2020 for this current TMP) within a wider 15 years strategic planning horizon.

The number of 5 scenarios have been designed and agreed with SCWE and WB representatives to illustrate outcomes and added value of TMP:

 Full investment and full recovery with Tariff as a “Classic scenario”,  Lower tariff fixed by PSRC and compensate with yearly subsidy as “Option 1 scenario”,  Investment of biological process on all AWSC WWTP as “Option 2 scenario”,  Implementation of “Security and Protection Armenian Program” as “Option 3 scenario”,  Implementation of lower share of investments plan as “Option 4 scenario”.

After running TMP Excel file according each scenario positive and negative impacts of each one are discussed in TMP report, especially possibilities to fund investments and O&M costs through tariff, grants, loans or subsidies.

5.9 Social and Gender Issues

a) Beneficiary feedback and grievance redress mechanisms.

Customers had multiple ways of providing feedback on the Project, including through AWSC Customer Service/Calling Centre, a telephone hot-line and by email. All project construction sites were provided with signboards with contact information for the AWSC, as well as supervising company’s and contractor’s contact information. Serious complaints were not registered; all the routine proposals and recommendations were appropriately addressed by the Consultant.

The Project did not envisage resettlement or land acquisitions activities, consequently the OP/BP 4.12 was not applied. No incidences of temporary or permanent land acquisition or resettlement have taken place during Project implementation. Consequently, no social impact was registered and no people/households were affected by project-related changes in use of land, water, natural resources, or income losses.

b) Project Beneficiaries Survey

“Project Beneficiaries Survey in Masis, Ashtarak and Echmiadzin Subprojects” was two stage survey conducted under the consulting services of “Avag Solutions LLC” procured by AWSC, to collect data in the Project communities before and after implementation of MWP, as well as to analyze the impact of the Project to the population of selected beneficiary communities.

The first stage (Pre-Project Stage) of survey under “Project Beneficiaries Survey in Masis, Ashtarak and Echmiadzin Subprojects” was conducted in January-March, 2014. The main

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respondents were 652 customers of 3 towns and 8 rural settlements of the AWSC CJSC service area.

The second stage (Post-Project Stage) of survey was conducted in April-June 2015. The main respondents were 220 customers of the AWSC from Masis town and 4 ruaral settlements (Ayntap, Dashtavan, Hayanist, Darbnik). The second stage of survey encompassed only the beneficiaries of “Masis town and nearby four villages” subproject as the completion of technical part of other subprojects (Ashtarak and Echmiatsin) practically coincided with survey period due to which the beneficiaries could not advantage from new waterlines before survey commencement. The beneficiary survey of remaining communities will be conducted in Oct-Nov. 2015 and will be financed out of the Loan Proceeds. In Masis subproject, the survey results proved progress as per almost all indicators, namely, according to key indicators average daily water supply duration increased from 12.3 hours/daily in 2012 to 17.2 hours/daily in 2015.

Strengthening the Capacity of AWSC

The main activities implemented for the strengthening of the AWSC capacity and achieved outcomes in the frame of MWP are presented below..

a) Procurement and Installation of 35 Automated Systems

The number of 35 Automated Systems for monitoring the operation of the DRRs and Pumping Stations in AWSC service perimeter have been purchased and installed, instead of the preliminary estimated 28 Automated Systems. This activity investment allowed AWSC to have an in-line monitoring of the strategic facilities of its perimeter. Based on this monitoring, a SCADA system has been developed to set automatic rules to operate equipment (automatic start and stop of pumps, compliancy of water quality est.) and warn AWSC staff in case of deviation (reservoir overflow, energy failure est.) Main outcomes of this project were:  Better knowledge of AWSC perimeter for production and distribution figures for relative staff,  Staff optimization,  Production and energy savings: decrease of volume production (m3) and energy use (kWh),  Operational ratios improvements,  Better water sanitary condition: on-line follow-up of water quality b) Water Meters Installation

The number of 19,500 sets of class C residential water meters have been purchased and installed in the project areas, as well as in the different areas of AWSC service perimeter in the frame of MWP. This activity aims 2 mains goals, particularly to improve accuracy

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of customer’s water meters, and to switch gradually the ownership of individual water meters from customer to company. After the installation of these water meters it has been noticed that the average consumption per customer significantly increased, which results in both decrease of NRW and increase of billing and collection. The activities on improving the AWSC system through sectorization and installation of water meters implemented under MWP have considerably improved operational and financial indicators. c) Procurement of 40 chlorine and 10 turbidity measurement devices

Thanks to this activity the first on-line water quality follow up in Armenia has been achieved. Due to this, the residual chlorine rate and turbidity value of critical water system are under monitoring and allow AWSC staff to act immediately in case of deviation. So the implemented activity has significant impact on the sanitary safety improvement.

d) Water meter chambers

The amount of 3,000 plastic as well as polymer-sand water meter chambers has been purchased under the MWP, however in total 9,728 water meter chambers have been installed in the project areas. The installation of the new house connections with water meters inside chambers located at the property boundary of the customers enables easy access to water meter without customer’s attendance need, limited the possibility to tamper water meters, clarifies the responsibility border between company and customer and optimized the commercial water meter’s reading process. This activity has also the share in billing and collection improvement as well as in reduction of NRW.

e) Equipment and machinery for the improvement of O&M system of the AWSC.

These equipment and machinery purchased under the MWP includes the mainly the procurement of 15 small cars for the commercial department of AWSC and 3 cesspools emptier for strengthening the capacity of AWSC branches and sectors. Cars were supplied to our commercial field staff in order to speed up water meter reading process and optimizing our staff productivity. Impact is felt on billing and collection outcomes that are continuously improving. Indirect consequence is reallocation of some older car to operational field staff, which was also more productive. Cesspools emptier were delivered on area were AWSC is servicing sewerage network. These machineries enable the AWSC staff to be more reactive and efficient in case of sewage obstruction. Result can be felt in the decrease of number of obstructions, decrease of average duration of obstruction and obstruction frequency in critical spots of the sewage network in AWSC service areas. Obviously a direct impact is also improvement of sanitary conditions for neighboring population.

Financial Situation of AWSC during the Project Implementation Period

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This section provides some financial data of AWSC during the MWP Project Implementation Period.

Table 4: Main Financial Data of AWSC for the Project Implementation Period (Mil AMD) Costs 2010 2011 2012 2013 2014 2015* Revenue 4,184.8 4,265.3 4494.38 4714.4 4962.77 5122.8 Collection 3,797.4 4,026.3 4204.24 4425 4544.72 4720.31 Collection rate (%) 90.1% 94% 94% 94% 92% 92% Subsidy 811.6 811.6 811.6 1141.4 902.82 1145.05 Cost of sales (3,771.4) (4,812.9) (5050.44) (5697.72) (5591.52) (5799.7) Administrative costs 2,498.5 713.7 756.41 874.23 1044.45 1273.17 Resource and environment payment 53.2 53.7 56.1 57.9 46.33 41.61 Chlorine, bleaching chlorine and reagents 65.5 49.6 129.8 130.2 108.17 274.64 Current rehabilitation works 159.4 179.4 237.33 256.2 245.48 223.49 Fuel 239.1 310.3 327.22 291.77 270.28 277.05 VAT, taxes and mandatory payments 531.3 427.4 595.5 770.4 203.48 10.71 Labor costs (including mandatory payment) 1,941.1 2,112.2 2026.31 2317.59 2482.37 2417.09 Average staff number 1,776 1,694 1,609 1,494 1,351 1,278 Mil AMD 996.1 966.6 921.77 999.43 1190.96 1281.94 Electricity Mil KW-hr 40.46 39.6 38.35 36.64 36.61 33.37 * - Some figures for 2015 are presented as of 12 November 2015.

The table shows that AWSC has improved collection indicator, accrual and recording systems and has fully abandoned the practice of fee collection in cash by Company employees. The installation of water meters and increasing of water supply service hours in many places have increased consumers’ willingness to pay for services. Simultaneously, electricity consumption was reduced; however the electricity costs are increased due to the permanent increase of the electricity tariff since 2013. The average staff number was reduced; meantime the labor costs (salary rates) have increased.

Assessment of Outcomes

a) Management Operation Outcomes

The Management Contractor of AWSC, SAUR S.S. Company, has made considerable efforts resulting in improvement of the system and higher performance indicators. a) The quality and the efficiency of water and wastewater disposal services provided by the Company have been improved. Special attention was paid to the improvement of daily hours of water supply, higher reliability and greater water safety. b) The consumers’ willingness to pay for water and wastewater services was promoted through higher quality and better arrangements of consumers’ service. c) The financial state of the Company was improved and its future sustainability was ensured.

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d) Staff training and re-qualification courses were organized to improve management, operation and maintenance and financial sectors thus ensuring stable operations of these sectors after contract completion. e) Additional equipment required for operation and maintenance of the system was procured. The infrastructures in Masis, Echmiadzin and Ashtarak towns and neighboring villages operated by the company were rehabilitated, renewed or upgraded under MWP fund. Investment programs were prepared and implemented within the contract period through the available funds and the long-term investment needs were assessed. f) The TMP detail elaborated, which provides a longer term management plan, combining planning for asset needs, operational and investment requirements and the associated economic decisions required.

b) MWP Project Outcomes

The Municipal Water Project was completed in time, on 30 June, 2015 (Closing Date), and the transactions were completed on 12 October, 2015. No expenses related to the Project were incurred after the Closing Date and the payments made during the Grace period related to expenses incurred before the Closing Date. No any withdrawals from IBRD Loan 8129-AM were made after Closing date and no expenditures related to the Project were submitted to the WB after 12 October, 2015. There were no uncovered prepayments (except advance for audit service) or payables outstanding to contractors related to the Project as of 12 October, 2015. The Cash Balance as of 12 October, 2015 at Designated Account at the amount of USD 102,297.46 will be refunded to WB after paying for final audit service, and the Cash Balance as of 12 October, 2015 at Local currency account at the amount of USD 4,948.18 will be refunded to the Government of RA.

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Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders

Not applicable

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Annex 9. List of Supporting Documents

1. Project Appraisal Document, Mission Aide Memoires, Management Letters, Borrower Letters, and Project Implementation Status Reports. 2. World Bank Group’s Armenia Country Partnership Strategy (CPS) 2009-2013 3. World Bank Group’s Armenia Country Partnership Strategy (CPS) 2014-2017 4. Republic of Armenia Policy Letter from Armen Gevorgyan, Deputy Prime Minister, 2012. 5. Regional Workshop on NRW and Water Operator Partnerships. July 1, 2015. “Non- Revenue Water in Armenia”. Power point Presentation. 6. AVAG Solutions LTD. Survey of Project Beneficiaries in Masis, Ashtrarak and Echmiatsin Subprojects (MWP – C1.5/3-5). Final Report (First Stage Survey). March 2014. 7. AVAG Solutions LTD. Survey of Project Beneficiaries in Masis, Ashtrarak and Echmiatsin Subprojects (MWP – C1.5/3-5). Final Report Masis (Second Stage Survey). June 2015. 8. AVAG Solutions LTD. Survey of Project Beneficiaries in Masis, Ashtrarak and Echmiatsin Subprojects (MWP – C1.5/3-5). Final Report Ashtarak (Second Stage Survey). November 2015. 9. Implementation Completion and Results Report (P063398) on a Credit in the Amount of SDR 15.40 million and an additional financing of SDR 12.8 million to the Republic of Armenia for the Municipal Water and Wastewater Project. June 14, 2012. Report No: ICR00002347 10. Implementation Completion and Results Report (P087641) on a Credit in the Amount of SDR 13.00 million to the Republic of Armenia for the Yerevan Water and Wastewater Project. June 28, 2012. Report No: ICR00002346. 11. IBRD Program Document for a Proposal Loan in the Amount of $75 million USD to the Republic of Armenia for a Second Development Policy Operation. October 16, 2014. Report No. 91143-AM 12. AWSC Total Management Plan. Saur/AWSC. 2014 13. Action Plan for Development of PPP Aimed at Improvements in the RA Water Supply Sector. 14. Ramboll. Management Contract of Armenian Water and Sewerage CJSC Independent Audit of the Activities and Performance Indicators of Contract Year 8. Final Report. April 2013. 15. Ramboll. Management Contract of Armenian Water and Sewerage CJSC Independent Audit of the Activities and Performance Indicators of Contract Year 9. Final Report. May 2014. 16. AWSC/SAUR. Borrower’s ICR. November 12, 2015.

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Annex 10. Additional Background Information

Predecessor World Bank Projects in Armenia’s WSS Sector

Bank support started in 1998 with a US$30 million International Development Association (IDA) credit to improve efficiencies in Yerevan under the Municipal Development Project (MDP) and its additional financing. MDP supported a management contract with ACEA of Italy, which resulted in more permanent supply, lower per capita water consumption, lower energy consumption, and an improved billing and collection ratio. When the MDP closed, the government decided to graduate Yerevan to a lease contract, enabling the private sector to take on more commercial and operational risks. The Yerevan Water and Wastewater Project (YWWP) ran from 2005 to 2011 and invested another US$20 million in improvements under the lease contract with Veolia, which will end in 2016 having made significant improvements in the operation of YWSC and the quality of services delivered.

Outside of Yerevan, given the geography of the country, the use of PSP has been more challenging, and the transition slower. Lessons from the MDP were also taken to AWSC’s service area in 2004 under the Municipal Water and Wastewater Project (MWWP), where a similar management contract was designed and awarded to Saur of France. MWWP’s total investment, including additional financing, was US$43m between 2004 and 2012. Under MWWP, 264,000 households benefited from improved services but many challenges remained in the service area, including: a number of underserved communities receiving only 12 hours of water a day on average, fast decaying infrastructure that had gone well beyond its life expectancy and requiring urgent rehabilitation to keep service running, as well as 85% non-revenue water, and a lack of financial sustainability of the operator.

Details of the Enhanced Management Contract

The management contract, started under MWWP, was amended four times before the start of MWP, and was re-named “Enhanced Management Contract” (EMC). New tasks were added to the EMC, and SCWE requested an additional expat to be hired by Saur to oversee the new tasks. The EMC financed by the project ended on December 31, 2013, after which the government negotiated a new management contract with Saur whereby the operator takes over the responsibility of management of three regional utilities as a leader of the consortium with German MVV and AEG Services LLC. The new arrangement is regulated under Amendment 5 of the management contract for the period 2014-2016 as is financed by a grant from KfW. Payments made by donors to the operator in support of the Management Contract under both Amendments 4 and 5 are listed in Table 2.

Table 2. Donor Budget Support to the Enhanced Management Contract (2012-2015) Financing of the Payments private management Payments Payments Payments made in of AWSC - "SAUR" made in made in made in 2015 Total SA contract 2012 2013 2014 (Q1 and Q2) 2012-15* IDA Credit 3893 16,786 0 0 0 16,786

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IDA Credit 4514 292,855 0 0 0 292,855 IBRD Credit 8129 415,394 680,101 190,054 0 1,285,548 KfW 0 0 229,111 442,374 671,485

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Annex 11. Donor Projects Active in the Water Sector in Armenia, 2012-2015

Total Financing Investment source Project interventions (main activities financed) 2012-15 The Project Development Objectives are to improve the quality of Water and Wastewater services in the Armenia Water and Sanitation Company (AWSC) Service Area by providing efficient and sustainable Water and Wastewater services and strengthening IDA Credit 3893 the capacity and sustainability of AWSC”. (000'AMD) The MWWP included three main components: (1) AWSC management strengthening (Cost $10.61 mil); (2) AWSC investments (Cost $2.96 mil); and (3) investments in AWSC Branch systems (Cost $12.49 mil). 16,786 The Additional Financing Project to MWWP supported the scaling up of the MWWP program of water system rehabilitation and improvements, including extension of the ongoing management contract between the AWSC (the water utility in charge of the project), and an international water supply utility operator. The additional helped to enhance the sustainability, impact and IDA Credit 4514 development effectiveness of the MWWP project and maximized (000'AMD) its development outcomes as well as helped to continue with the institutional and financial capacity building of AWSC. The MWWP included three main components: (1) AWSC management strengthening (Cost $9.68 mil); (2) AWSC investments (Cost $4.26 mil); and (3) investments in AWSC Branch systems (Cost $11.96 mil). 371,910 WSSP is aimed at improving the public health and environment for about 616,000 people living in 21 towns and about 101 villages where is an urgent need for WSS improvements in the frame of 25 ADB Credit subprojects through safe and reliable water supply and only urgent 2363 improvement of sewerage and sanitation facilities. Project is (000'AMD) structured around two complementary components: 1) Component A: Infrastructure Investment (Cost about $43.00 mil); and 2) Component B: Management Improvement & Development nt A: Infrastructure Investment (Cost about $2.00 mil) 693,108 The WSSP-AF Project will improve public health and environment for about 400,000 people (households and other consumers) living ADB Credit in 18 towns and up to 92 villages in the frame of 10 subprojects 2860 through safe, reliable and sustainable water supply. The Additional (000'AMD) Financing Project will fund two project components which include: (i) municipal infrastructure rehabilitation and improvement (Cost about $48.00 mil); and (ii) management 11,670,616

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improvement and development (Cost about $2.00 mil), which include gender features.

The objective of the Lake Sevan Environmental Project was the Improvement of Wastewater Treatment and Collection in Five Municipalities located Near Lake Sevan Scope: EBRD Credit -Rehabilitation of Sewer Networks in GAVAR, SEVAN, 37030 MARTUNI, VARDENIS and JERMUK towns (000'AMD) - Design and Construction of WASTE WATER TREATMENT PLANTS in GAVAR, VARDENIS and MARTUNI towns (mechanical treatment) Financial means: EBRD loan -7.0 mln EUR, EBRD grant - 5.0 mln EUR, RA Co-financing- 1.76 mln EUR 415,099 The Municipal Water Project is structured around three complementary components: 1) Investments in Water Supply Systems Systems (Cost $10.80 mil); 2) Armenia Water and IBRD Credit Sewerage Company (AWSC) Investments (Cost $1.90 mil); and 3) 8129(000'AMD) AWSC Management Strengthening (Cost $5.30 mil). The activities under the Project brought direct benefits to about 132,000 AWSC service consumers in selected Project areas of Ashtarak, Masis and Echmiatsin, and their neighboring rural settlements. 6,319,810 EIB Credit The purpose of the Armenian Small Municipalities Water Project 31304 is (i) the improvement of municipal water supply in the Tavush, (000'AMD) Lori, Shirak, Gegharkunik, Kotayk, Syunik municipalities and the 3,301,043 Vayots Dzor province (17 towns) and (ii) the rehabilitation of the water treatment plants and sewerage collectors in the Tavush (town EBRD Credit of Dilijan) and Vayots Dzor (town of Jermuk) marzes. 40718 Financial means: 26.04 mln EUR, from which EBRD loan -6.5 mln (000'AMD) EUR, EIB loan - 6.5 mln EUR, NIF grant -7.6 mln EUR, other donors – 1.1 mln EUR, RA Co-financing- 4.34 mln EUR. 3,232,902 26,021,273

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MAP

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