Republic of Armenia Infrastructure and Rural Finance Support Programme Final Project Design Report Main report and annexes Document Date: May 2014 Project No. 1690 Report No: ____-AM Near East, North Africa and Europe Division Programme Management Department Republic of Armenia Infrastructure and Rural Finance Support Programme Final project design report Main report Contents Page Currency equivalents iii Abbreviations and acronyms iii Map of IFAD Operations in the Country v Map of the Programme area vi Executive Summary vii Logical Framework xiii I. STRATEGIC CONTEXT AND RATIONALE 1 A. Background 1 B. Country and Rural Development Context 2 C. Rationale 6 II. PROGRAMME DESCRIPTION 9 A. Development Objectives 9 B. Programme Components 9 C. Target Group and Programme Area 10 D. Description of Inputs and Outputs/Outcomes 12 III. PROGRAMME IMPLEMENTATION 17 A. Approaches 17 B. Implementation Schedule for Civil Works 20 C. Planning, M&E, Learning and Knowledge Management 23 D. Financial Management 24 E. Procurement and Governance 26 F. Supervision 28 G. Risk Identification and Mitigation 29 IV. PROGRAMME COSTS, FINANCING, BENEFITS AND SUSTAINABILITY 32 A. Estimated Programme Costs 32 B. Proposed Programme Financing 33 C. Summary Benefits and Economic Analysis 34 D. Sustainability 38 TABLES Table 1: Armenia: Reduction in the Incidence of Poverty 1998/99 to 2007 4 Table 2: Programme Costs by Component 32 Table 3: Proposed Programme Financing Sources by Type of Investment 33 Table 4: Proposed Programme Financing Sources by Component 33 Table 5: IRFSP EIRR: Summary 38 i Republic of Armenia Infrastructure and Rural Finance Support Programme Final project design report Main report Page ANNEXES Annex 1: Country and Rural Context and Complementary Projects by Donors 1 Annex 2: Poverty, Gender and Poverty Inclusion in Armenia 11 Annex 3: Country Performance and Lessons Learned 23 Annex 4: Detailed Programme Description 29 Annex 5: Institutional Aspects and Implementation Arrangements 45 Annex 6: Planning, Monitoring and Evaluation and Learning and Knowledge Management 55 Annex 7: Financial Management and Disbursement Arrangements 63 Annex 8: Procurement 83 Annex 9: Scaling-up Framework 93 Annex 10: Financial and Economic Analysis 99 Annex 11: Programme Implementation Manual 109 Annex 12: Compliance with IFAD Policies 175 Annex 13: Environmental and Social Review Note (ESRN) 177 Annex 14: Programme Life File 187 ii Republic of Armenia Infrastructure and Rural Finance Support Programme Final project design report Main report Currency equivalents Currency Unit = Dram (AMD) USD 1.00 = AMD 405 AMD 100 = USD 0.25 Abbreviations and acronyms ADB Asian Development Bank ADS Agricultural Development Strategy AWPB Annual Workplan and Budget ASL Above Sea Level ECU Eurasian Customs Union ED Engineering Division EDMC Enterprise Development and Market Competitiveness Project EIA Environmental Impact Assessment EU European Union FED Finance for Economic Development FMAP Farmers Market Access Programme FTA Free-trade Agreement GAF German-Armenian Fund GDP Gross Domestic Product GII Gender Inequality Index GoA Government of Armenia IAD Internal Audit Department FREDA Fund for Rural Economic Development in Armenia ILCSs Integrated Living Condition Surveys IRFSP Infrastructure and Rural Finance Support Programme IRR Internal Rate of Return ISEP Irrigation Systems Enhancement Project MASC Marz Agricultural Support Centers MFI Microfinance Institution M&E Monitoring and Evaluation MoA Ministry of Agriculture MoF Ministry of Finance MNP Ministry of Natural Protection MTA Ministry of Territorial Administration NCB National Competitive Bidding NSS National Statistical Service OFID Organisation of Petroleum Exporting Countries Fund for International Development PAs Programme Accounts PCB Participating Commercial Banks PCR Project Completion Report PIU Project/Programme Implementation Unit PPL Public Procurement Law PSC Programme Steering Committee iii Republic of Armenia Infrastructure and Rural Finance Support Programme Final project design report Main report RACP Rural Asset Creation Programme RAEDP Rural Areas Economic Development Programme RAWI Rural Areas Water Infrastructure RFF Rural Finance Facility SDS Sustainable Development Strategy SMEs Small and Medium Size Enterprises USAID United States Agency for International Development USD United States Dollar WB World Bank WUA Water Users’ Association iv Republic of Armenia Infrastructure and Rural Finance Support Programme Final project design report Main report Map Map of IFADOperations inthe Country Republic of Armenia Infrastructure and Rural Finance Support Programme Final project design report Main report Map of the Programme Area the Programme Map of iv iv iv Republic of Armenia Infrastructure and Rural Finance Support Programme Final project design report Main report Main report Final Programme Support Finance and Rural Infrastructure of Republic report design project Executive Summary Armenia A. Strategic Context and Rationale 1. The Government of Armenia (GoA) requested IFAD to finance a new Programme in Armenia to assist with continuing to resolve the widespread occurrence of poverty in the rural areas of Armenia in July 2013. IFAD fielded an inception mission in Armenia from 29 July-11 August 2013, which identified the broad scope of a Programme that could be introduced into the IFAD pipeline for Armenia. As with previous IFAD programmes in Armenia a cofinancing with OFID 1 was proposed. The Programme was called the Infrastructure and Rural Finance Support Programme (IRFSP or Programme). The Programme was approved at the concept stage by GOA and IFAD for further processing. 2. The Government indicated a strong interest for the IRFSP to include successful components of previous IFAD operations in Armenia, i.e. rural infrastructure improvement and the provision of rural finance. Armenia has already demonstrated a good capacity to implement development activities with IFAD in these areas in previous programmes through the experienced existing RAED PIU (for infrastructure) and through two independent units involved in rural finance the Rural Finance Facility (RFF) and the Fund for Rural Economic Development in Armenia (FREDA). 2 The current good performance of these three organizations gives confidence that the capacity is in place to launch such a successful broadly focused programme as has been proposed by GoA. Following a detailed design mission in November 2013, IFAD fielded a final design mission in April 2014 (1-13 April). This report presents the proposals resulting from these missions and the discussions with GoA on Programme details. Final proposals were presented at a wrap-up meeting in Yerevan on April 12. 3. The rationale for designing the Programme with these core components comes from the analysis of poverty data which show that those rural producers who make some of the best progress in overcoming poverty are those who boost their income by producing and selling crops for cash. The chief constraints for farmers who wish to move into cash crops include the uneven rainfall occurrence, lack of access to finance, inadequate access to irrigation water caused by inexistent or dilapidated irrigation infrastructure, limited awareness and know-how about appropriate technologies. Because of the above, to provide for sustained poverty reduction it is therefore important to link three elements: (i) the means for farmers to produce cash crops (in this case irrigation to deal with the uneven rainfall problem); (ii) the financial support (in this case rural finance); and (iii) relevant technical advice and training. It is proposed to combine these three elements in the proposed IRFSP. If possible, optimizing water use for irrigation should normally be carried out in conjunction with water development for household use 3 to ensure compatibility of proposals with the two subsectors and to take advantage of shared infrastructure opportunities. This is also proposed in this Programme to take advantage of the opportunity 1 OFID: Organisation of Petroleum Exporting Countries Fund for International Development. 2 The RFF is a revolving fund providing refinancing capital to the private financial sector for on-lending to the agricultural sector, established under IFAD’s Rural Areas Development Programme (RAEDP; 2005-2009) in Armenia. The FREDA is an innovative equity fund for investment in industries processing agricultural goods with strong forward or backward links to smallholders, established under IFAD’s Farmer Market Access Programme (FMAP; 2008-2013) in Armenia. Both units are operationally sustainable. 3 Typically multiuse facilities providing drinking water for human needs and water for vegetables production and livestock in the household plot. vii Republic of Armenia Infrastructure and Rural Finance Support Programme Final project design report Main report Main report Final Programme Support Finance and Rural Infrastructure of Republic report design project to upgrade the living and working conditions of the target group of project though the provision of improved domestic water supplies. Armenia B. Economic Context, Target Populations and Programme Area 4. Economic Context. Over the past two decades, the performance of the Armenian economy ranged from a real GDP contraction of 42% following the collapse of the former Soviet Union causing widespread poverty, to sustained annual growth rates of over 10% between 2001 and 2008. The international financial crisis of 2008 again caused a setback but