Project Completion Report

Republic of Armenia

Farmer Market Access Programme

Project completion report

Main report and appendices

Mission date: 10 to 21 March 2014 Document Date: 25-Aug 2014 Project No. 1100001141 Report No: 3546-AM

Near East, North Africa and Europe Division Programme Management Department

Republic of Armenia Farmer Market Access Programme Project completion report

Contents

Currency equivalents iii Weights and measures iii Abbreviations and acronyms iv Map of the programme area v Programme at a glance vi Executive Summary vii A. Introduction 1 B. Program description and implementation arrangements 2 C. Programme strategy and approaches 5 D. Assessment of programme relevance 7 E. Programme costs and financing 8 F. Assessment of programme efficiency 9 G. Review of programme outputs 11 H. Assessment of programme effectiveness 13 I. Assessment of impact 13 J. Assessment of sustainability 16 K. Innovation, replication and up-scaling 18 L. Performance for the partners 19 M. Lessons learned 20

List of Tables

Table 1: Total Loan Disbursement to PFIs by RFF by Year of Disbursement 3 Table 2: Total Cumulative FMAP Expenditures, by Year 8 Table 3: Total Actual FMAP Expenditures, by Year 8 Table 4: FMAP-RFF Benefit Stream and EIRR 10 Table 5: FMAP-FREDA Benefit Stream and EIRR 10 Table 6: FMAP-RII Benefit Streams and EIRR – Main Scenario 10 Table 7: Updated Logical Framework: Progress against Objectives, Outcomes and Outputs 12 Table 8: Cost Structure and Net Results of RFF in Terms of Loan Portfolio 17

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Appendices

Appendix 1: Programme logical framework 23 Appendix 2: Record of supervision and follow-up missions 25 Appendix 3: Summary of the amendments to the loan agreement 27 Appendix 4: Actual programme costs 29 Appendix 5: Actual physical progress of the programme 31 Appendix 6: Financial and economic analysis 33 Appendix 7: Impact on the environment 71 Appendix 8: Stakeholder workshop findings 73 Appendix 9: Rural Infrastructure Investment 75 Appendix 10: Financial management 97

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Currency equivalents

Currency Unit = Armenian Dram (AMD) US$1.0 = AMD 405

End of year exchange rates

Date 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 31.12.2008

USD 1.00 ► AMD 404.900 403.530 385.720 363.440 377.890 306.730

Weights and measures

1 kilogram = 1000 g 1 000 kg = 2.204 lb. 1 kilometre (km) = 0.62 mile 1 metre = 1.09 yards 1 square metre = 10.76 square feet 1 acre = 0.405 hectare 1 hectare = 2.47 acres

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Abbreviations and acronyms

ACBA Agricultural Cooperative Bank of Armenia AMD Armenian Dram C1 FMAP Component 1 C2 FMAP Component 2 CARD Centre for Agribusiness and Rural Development CDI Commercially-derived Infrastructure E-IRR Economic Internal Rate of Return FAO Food and Agriculture Organization of the United Nations FEA Financial and Economic Analysis FMAP Farmer Market Access Programme FREDA Fund for Rural Economic Development in Armenia GDP Gross Domestic Product GOA Government of Armenia IDI Investment Derived Infrastructure IFAD International Fund for Agricultural Development IMF International Monetary Fund IRFSP Infrastructure and Rural Finance Support Programme IRR Internal Rate of Return M&E Monitoring and Evaluation MCA Millennium Challenge Account MOA Ministry of Agriculture MOFE Ministry of Finance and Economy MSME Micro, Small and Medium Enterprise MTR Mid-Term Review MUV World Bank Manufactures Unit Value Index O&M Operations and Maintenance OFID OPEC Fund for International Development PAAU Programme Analysis and Administration Unit PAU Programme Administration Unit PCR Project Completion Report PDR Project Design Report PFI Participating Financial Institution PIRP Productive Infrastructure Rehabilitation Project PIU Programme Implementation Unit RAEDP Rural Areas Economic Development Programme RESCAD Rural Enterprise and Small-Scale Agricultural Development RFF Rural Finance Facility RII Rural Infrastructure Investment RIMS Results and Impact Management System SME Small and Medium Enterprise TA Technical Assistance UCO Universal Credit Organization UNDAF United Nations Development Assistance Framework UNDP United Nations Development Programme USD United States Dollar VCMI Value Chain Multiplier Index WOP Without Project Scenario WP With Project Scenario WUA Water User Association

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Map of the programme area

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Programme at a glance

Country Armenia Project Name Farmer Market Access Programme (FMAP) Key Dates IFAD Approval Signing Effectiveness Mid-Term Original Actual Review Completion Completion 12-SEP-2007 08-JAN-2008 05-May-2008 not conducted 30-Jun-2013 31-DEC-2013 Mid-term Review Interim Original Loan Actual Loan Evaluation Closing Closing not conducted not conducted 31-DEC-2013 30-Jun-2014 IFAD Financing Loan SDR million 7,900,000 % disbursed Grant SDR million 330,00 % disbursed Actual Costs and Financing (USD ‘000) Component IFAD Cofinancing PFIs GOVT Total 1.1: FREDA 6,306,082 1,260,537 280,662 7,847,281 1.2: RFF 1,989,055 397,800 2,386,855 2: Rural Infrastruct. 2,347,675 13,615,207 5,547,755 21,510,637 3. Project Mgmt. 2,171,410 384,643 416,887 2,972,940 Total 12,814,221 15,260,387 397,800 6,245,304 34,717,712 Remarks Indicate cofinancing partners, actual amounts, and amount committed for each as at appraisal. IFAD financing included the loan with spending of USD 12,313,843 and a grant with spending of USD 500,378. Co-financing came from OFID (USD 14,999,850 and a Danish Govt. grant with spending of USD 1,260,537. Number of Beneficiaries Total Direct Indirect Women Other Other 98,804 98,804 51,331 Project Objective The goal of the FMAP was to improve the economic and social status of poor rural people in Armenia. Specific objectives were: (1) To stimulate rapid growth of rural enterprises with a comparative economic advantage and strong linkages to poor primary producers and rural people seeking improved employment opportunities; (2) To provide an investment instrument and associated funding which would respond to the need for rural equity finance; and (3) To further develop the capacity of the financial sector in Armenia to respond to needs for small and medium credit products. Country Partners Executing Agency Ministry of Agriculture, Programme Analysis and Administration Unit, later changed into Programme Implementation Unit (PIU) NGOs/civil society NGO “Shen” engaged in the rehabilitation of irrigation supply networks Other Participating Financial Institutions, including banks and microfinance institutions (UCOs) USAID/CHF parallel financing of infrastructure projects

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Executive Summary1

1510998096. The goal of the Farmer Market Access Programme (FMAP) was to improve the economic and social status of poor rural people in Armenia. Specific objectives were: (i) to stimulate rapid growth of rural enterprises with a comparative economic advantage and strong linkages to poor primary producers and rural people seeking improved employment opportunities; (ii) to provide an investment instrument and associated funding which would respond to the need for rural equity finance; and (iii) to further develop the capacity of the financial sector in Armenia to respond to needs for small and medium credit products. Programme target groups were the actually or potentially economically active among the following primary target groups, identified as the rural socio-economic categories with the highest incidence of poverty: (i) subsistence and semi-subsistence farmers, in particular those willing to move to more commercial farming; (ii) the rural unemployed, underemployed and self-employed, including those in rural urban centres; (iii) the landless; and (iv) poor rural women, especially those who are household heads. 1510998097. The Programme was implemented from between 2008 and 2013, with a total cost of US 34.8 million allocated along two technical components that aimed respectively at (i) improved access to financial services, in turn composed of the support to the Rural Finance Facility (RFF) and to the Fund for Rural Economic Development in Armenia (FREDA); and (ii) improved rural infrastructures (RII). 1510998098. Programme design started in 2006; the final Project Design Report (PDR) dated November 2007, shortly after the approval by the Executive Board. The Financing Agreement (FA) was signed in January 2008, and the FMAP became effective in May 2008. Original completion was projected for 30 June 2013, but was extended to 31 December 2013, and closure thus to 30 June 2014. The Project Completion Mission was conducted in February and March 2014. 1510998099. Under component 1.1, FREDA was established as venture capital institution investing in rural agribusiness companies through which support could be provided to small companies and their rural suppliers that are crucial for the development of strategic rural investment chains. This approach was highly innovative for Armenia, new for IFAD (at least in the sub-region), and risky. This should be seen as a very laudable effort of the GOA and IFAD to diversify the range of products and services made available to the target groups. 1510998100. By the end of 2013, FREDA had invested USD 3.15 million (AMD 1 275 million) in nine such companies and had granted five loans worth USD 0.93 million (AMD 376) to investee companies. Companies into which FREDA invested showed generally good performance and improved their procurement from raw material suppliers (farmers) on average by more than 200%, their exports by more than 100%, their sales by about 50%, and their employment by about 40%. Most companies changed their market orientation since FREDA invested: on average, the ratio between exports and domestic sales changed from 1:2 to 2:1 with and through the FREDA participation. The impact assessment commissioned by FREDA and the financial and economic analysis also reveals some additional incomes for raw material suppliers. Non-financial benefits realized by investees include the implementation and adoption of international food security standards, management support in budgeting, implementation of accounting and audit systems, development of tax policies, restructuring of business, optimization of business processes, introduction of international best practices and technology transfer in agricultural goods processing, and market research on regional and sector investments. FREDA will become operationally sustainable in 2014; additional funding from IFAD in 2014 will contribute to economies of scale and increased outreach. Methods applied by FREDA to improve performance of its investees were mostly appropriate, and the same applies to approaches of DANIDA and IFAD to support FREDA. FREDA

1 Mission members comprised Mr Michael Marx, Sen. Credit and Rural Finance Officer, FAO, team leader; Mr. Tommaso Alacevich, Economist, FAO; Mr Michele Pirazzoli, Rural Infrastructure Specialist, IFAD consultant; and Mr Mikael Andersson, Financial Management Specialist, IFAD. Mission dates for Mr Marx and Mr Alacevich were 11-21 March, 19-26 February for Mr Pirazzoli and 12-18 March for Mr Andersson.

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services will remain relevant for many years to come. The internal rate of return on investments was 12%. Overall, the sub-component is rated satisfactory. 1510998101. Under components 1.2 and 1.3, the existing RFF was increased by USD 2 million to assist small-scale farmers who had the intention and capacity to move from subsistence farming into commercial farming activities and who wish to increase productivity and improve quality of their production through application of appropriate inputs and/or modernization of farming methods. This amount increased total lending resources of the RFF to about USD 17 million. Under the RFF, participation agreements were concluded with a total of 16 PFIs, of which nine banks and seven microcredit institutions. During 2009-2013, RFF refinanced 815 development loans for a total amount of USD 10.7 million to small and medium rural enterprises (SMEs) and farm households. The RFF unit does not track loans granted by source of its own funds and therefore only records all loans granted over a period. The average loan amounted to USD 13 147. The additional endowment under FMAP was quickly absorbed by eligible commercial banks in the first two years, but demand for the RFF then slowed down drastically due to declining economic prospects, client demand and unfavorable terms and conditions. This only changed with the adoption of microcredit institutions, which were hitherto barred from accessing the facility, and which needed additional resources. As a unit, the RFF operates profitably since 2009. The rate of return on investments as calculated here was very high, with about 41%. While funding of the RFF may have been useful a decade ago, commercial banks are capable to fund all eligible investments from their own resources. If the Armenian legislation would be updated as already done in many other countries, the microfinance sector would also no longer need RFF resources. Overall, the sub-component is rated satisfactory. 1510998102. Component 2 “Rural Infrastructure Investments” (RII) built on experience gained with four previous IFAD-funded projects in Armenia in infrastructure development and sought to enhance the living conditions of the primary target group and stimulate private sector activity through investments in economic and social infrastructure. One of the two sub-components, Investment Derived Infrastructure, was cancelled as its terms and conditions, especially the beneficiary contribution, was not accepted by potential beneficiaries. Implementation was competently done by the Technical Section, a unit under the Project Implementation Unit (PIU). Most of the funding for this component came from OFID, and IFAD only added about one seventh of the investments. Based on the agreement with OFID, IFAD was not involved in the supervision of the OFID funds that were used to finance the gas. Moreover, all the gas works were started in the first year, because the PIU had already procured the designs under the predecessor project. Under the component, 34 485 people benefitted from water supply, 1 860 from drainage works, 10 579 from road construction, 19 936 from irrigation and 33 060 from connections to the national gas supply network. Concrete physical achievements included 1 435 ha of land under irrigation constructed or rehabilitated, two livestock water points constructed or rehabilitated, 79 gas supply systems constructed, 24 drinking water supply schemes installed, seven drainage systems and 2.2 km of roads rehabilitated. 1510998103. The main problem associated with the component was the low connection rate of the population connected to the natural gas network, which is mainly owned by the Russian Gazprom. With substantial increases in gas prices, connection was no longer affordable or profitable for many, and many people therefore refused to pay for the connection fees, especially the poor. Major causes for this included the absence of a mandatory socio-economic analysis, the complete adoption of proposals worked out before FMAP under predecessor projects, and the absence of a solid coordination mechanism between IFAD and OFID, the two main funders. As a result of the failure of the gas-related activities, the rate of return was at best 4% only, despite the positive outcomes of the other investments funded. Overall, the sub-component is rated moderately unsatisfactory. 1510998104. Total outreach of the FMAP was 98 804, of which 52% were calculated to be women. Out of these, 92 740 were recorded by the completion mission as individual direct beneficiaries of infrastructure investments, with the remaining 6 064 being supported directly under FREDA or RFF measures. In terms of achievements of the PDR target of 160 000 for the RII, this would represent about 58% only.

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1510998105. Given the poor outcomes of the infrastructure component, the overall modest rate of return on investments made, the relatively low overall outreach, the modest impacts achieved, the inadequacies in the field of monitoring and evaluation, and some design and implementation deficiencies, the overall rating of the FMAP is only moderately satisfactory.

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Republic of Armenia Farmer Market Access Programme Project completion report

A. Introduction 1510998106. The goal of the Farmer Market Access Programme (FMAP) was to improve the economic and social status of poor rural people in Armenia. Specific objectives were: (i) to stimulate rapid growth of rural enterprises with a comparative economic advantage and strong linkages to poor primary producers and rural people seeking improved employment opportunities; (ii) to provide an investment instrument and associated funding which would respond to the need for rural equity finance; and (iii) to further develop the capacity of the financial sector in Armenia to respond to needs for small and medium credit products. 1510998107. The Programme was implemented from between 2008 and 2013, with a total cost of USD 34.8 million allocated along two technical components that aimed respectively at (i) improved access to financial services, in turn composed of the support to the Rural Finance Facility (RFF) and to the Fund for Rural Economic Development in Armenia (FREDA); and (ii) improved rural infrastructures (RII). 1510998108. Programme design started in 2006; the final Project Design Report (PDR) dated November 2007, shortly after the approval by the Executive Board. The Financing Agreement (FA) was signed in January 2008, and the FMAP became effective in May 2008. Original completion was projected for 30 June 2013, but was extended to 31 December 2013, and closure thus to 30 June 2014. The Project Completion Mission was conducted in February and March 2014 (see footnote 1). 1510998109. Programme target groups. The FMAP sought to provide benefits to the actually or potentially economically active among the following primary target groups, identified as the rural socio-economic categories with the highest incidence of poverty: (i) subsistence and semi- subsistence farmers, in particular those willing to move to more commercial farming; (ii) the rural unemployed, underemployed and self-employed, including those in rural urban centres; (iii) the landless; and (iv) poor rural women, especially those who are household heads. 1510998110. Programme records do not confirm that this ‘standard’ group of target beneficiaries has ever been reached, for a number of reasons: (i) it would be difficult to reach persons operating more or less in the subsistence sector through loans for commercial/business purposes or as suppliers to agribusinesses; (ii) the instruments and approaches underlying the FMAP are not specifically geared at employment creation, and did not have the potential to create jobs massively; (iii) the picture does not change by making reference to the self-employed, as all farmers operating under their name, and not under a corporate status, would fall into this category; and (iv) women have, following the assumptions made in the monitoring and evaluation (M&E) system, been reached in near equal proportion to the overall gender distribution in the society, but the M&E system did not even include the status of women reached as household heads. Programme records and the impact studies also cannot confirm that programme resources went intentionally or accidentally to poor persons, or that the rural poor had been reached, apart from them being users of common infrastructure constructed for all. This does not indicate that the targets and target groups reached were the wrong ones, but only that there is a discrepancy between official design orientation and actual practice. 1510998111. The global economic crisis that began in late 2008 seriously hit Armenia's economy too. The country's gross domestic product (GDP) decreased to 6.9%, after a longer period with double-digit annual growth. In 2009, a deep recession was recorded, with a reduction of GDP of 14.1%. As a result, the poverty rate in 2009 grew for the first after 1998. In 2010 Armenia's economy recovered slowly with a growth of 2.2%, which could, however, not stop the poverty trend. Only in 2011, when the economy grew by 4.7 %, it was possible to halt the poverty rate decline. In 2012, when the economy grew by 7.2 %, the poverty rate slowly began to drop. In 2012, almost every third Armenian (32.4%) was poor, while 13.5% were very poor and 2.8% were extremely poor. This compares to a poverty level of 34.5% in 2005, the latest data available before the start of the FMAP, of which 5.5% were classified as extremely poor.

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B. Program description and implementation arrangements 1510998112. The FMAP was conceived to have two technical components (plus programme management), in particular (i) improved access to financial services; and (ii) improved rural infrastructures (RII). The rural finance component was originally designed with three sub-components: (i) Rural Venture Capital Fund Development; (ii) Investment Loans to SMEs; and (iii) Farm Development Loans. Sub-components (2) and (3) above were managed by the RFF unit. These sub- components were therefore, for convenience purposes, treated and reported on as one single sub- component. The second component was commonly referred to as ‘rural infrastructure investment’ (RII). This report follows this terminology. 1510998113. Component 1.1: FREDA. The project design analyzed demand and supply of rural financial services in Armenia and concluded that for certain types of investments, and enterprises, the additional provision of capital through the financial sector would not necessarily create a relevant solution. Some rural agribusiness companies, with good potential and high demand for capital, were either not able to provide the required collateral required by banks, and/or assume more debt in their balance sheets as they already received a high proportion of external funding. As a solution, design proposed the creation of a venture capital fund, FREDA, through which support could be provided to small companies and their rural suppliers that are crucial for the development of strategic rural investment chains. This approach was highly innovative for Armenia, new for IFAD (at least in the sub-region), and risky, as venture capital is a highly specialized type of financial service and largely unknown and not well managed. This should be seen as a very laudable effort of the GOA and IFAD to diversify the range of products and services made available to the target groups. 1510998114. This required the creation of a foundation with its board of trustees, recruitment of competent staff, preparation of operational and investment manuals, analysis tools and exit strategies, publicity campaigns, demand assessment of the market, client identification and negotiations, signing of equity participation and loan agreements, participation as director at board meetings, provision of technical assistance, guidance and coaching, regular assessment of investment and portfolio quality, understanding of markets of investees and marketing approaches, and supervision of partners. 1510998115. As required, the design report provided for a range of support strategies and activities to FREDA, including training and coaching, assistance in the design or manuals and procedures, and external coaching. 1510998116. No detailed targets have been set by the design documents, apart from the standard reference that progress and success were to be measured in terms of number and value of equity investments and loans. However, projections were offered regarding the operations of the venture capital organization over a period of ten years, including detailed assumptions. 1510998117. Under the FREDA component, support was directly geared at agribusinesses, not at individuals. By the end of 2013, FREDA had invested AMD 1275 million in nine such companies in ordinary or preferred shares, and had granted five loans worth AMD 376 to investee companies. A total of 70 enterprises accessed financial services from either FREDA or RFF, and 12 enterprises accessed non-financial services from FREDA. Through the FREDA interventions, a total of 98 jobs were created by SMEs, including 44 for men and 54 for women. In addition, a total of 249 indirect jobs were created through these interventions, including 72 for men and 177 for women. 1510998118. Non-financial benefits realized by investees include the implementation and adoption of international food security standards, management support in budgeting, implementation of accounting and audit systems, development of tax policies, restructuring of business, optimization of business processes, introduction of international best practices and technology transfer in agricultural goods processing, and market research on regional and sector investments. 1510998119. Companies into which FREDA invested showed generally good performance and improved their procurement from raw material suppliers (farmers) on average by more than 200%,

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their exports by more than 100%, their sales by about 50%, and their employment by about 40%2. Most companies changed their market orientation since FREDA invested: on average, the ratio between exports and domestic sales changed from 1:2 to 2:1 with and through the FREDA participation. The impact assessment commissioned by FREDA and the financial and economic analysis also reveals some additional incomes for raw material suppliers.3 1510998120. Component 1.2 and 1.3: Rural Finance Facility (RFF). Through this sub- component, the fund endowment of the existing RFF, which had been created in 2005 to manage credit funds for channeling to PFIs, was to be increased by an amount of USD 1 million to improve access of SMEs, which are strategically positioned in these supply chains, to medium and long-term loans from banks. This was also done with a view to facilitate access of FREDA investees to additional term finance under a non-binding recommendation note to the RFF Loan Committee and PFIs. 1510998121. An additional funding of USD 1 million was provided to RFF under sub-component 1.3. It was assumed that the activities of FREDA would induce a need for incremental financial services at the production level of each supply chain provided with equity investment. Sub-component 1.3 aimed to assist those small-scale farmers who have the intention and capacity to move from subsistence farming into commercial farming activities and who wish to increase productivity and improve quality of their production through application of appropriate inputs and/or modernization of farming methods. 1510998122. The implementation arrangements were similar to those of previous projects with funding for the RFF, and based on the same parameters, appraisal tools and approaches. Under the RFF, participation agreements were concluded with a total of 16 PFIs, of which nine banks and seven Universal Credit Organization4 (UCOs). 1510998123. During 2009-2013, 815 development loans for a total amount of USD 10 714 515 were disbursed by RFF to small and medium rural enterprises (SMEs) and farm households. The average loan amounted to USD 13 147. As RFF did not keep separate records on disbursement by source of funds, no separate data on FMAP do exist. Table 1: Total Loan Disbursement to PFIs by RFF by Year of Disbursement

PFI 2009 2010 2011 2012 2013 Total Inecobank 40 000 20 000 60 000 ACBA Credit Agricole Bank Ardshininvestbank 91 600 461 705 178 935 297 100 214 592 1 243 932 Converse Bank 120 000 345 500 201 524 667 024 Unibank 135 000 174 000 100 000 409 000 Anelik Bank 30 958 32 013 62 971 Areximbank Armbusinessbank 138 400 526 800 342 300 505 920 205 000 1 718 420 Artsakhbank 563 000 2 46 999 51 500 861 499 Aregak UCO SEF International UCO 147 236 147 236 Nor horizon UCO 878 263 878 263 Farm Credit UCO 1 209 840 1 209 840 CARD Agrocredit UCO 1 865 280 1 865 280 ECLOF UCO 414 476 414 476 Kamurj UCO 1 176 573 1 176 573

2 These data show the quantitative changes since the date of investment, which was not always at the same time of the year. Such data change naturally every month, quarter and year, and growth patterns after investment also differ very much from company to company. As a consequence, data should be interpreted as indicative only, and not as absolute values. 3 Methodological problems are associated with this statement, as it could not be ultimately determined to what extent supplying farmers only changed the direction of sales towards the FREDA investee, or whether, and to what extent this represents additional production and sales. There are furthermore substantial attribution issues here that could not be addressed. 4 Universal Credit Organizations are credit-only microfinance institutions that do not have the permission to accept deposits.

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Total 420 958 1 897 005 903 234 1 028 520 6 464 798 10 714 515 Source: Impact Assessment of the RFF of FMAP. Yerevan, December 2013: RFF. 1510998124. Component 2: Rural Infrastructure Investments. The component was built on experience gained with four previous IFAD-funded projects in Armenia, with a main focus on irrigation rehabilitation and upgrading (i.e. conversion from pumped to gravity schemes), but supported also water supply and rural road construction. The implementation of natural gas networks, was started under the RAEDP Commercially Derived Infrastructure Component (CDI) and continued under the Productive Infrastructure Rehabilitation Project (PIRP) financed exclusively by OFID, on the basis of the comparative advantage of using natural gas both for household use and for productive purposes. 1510998125. The FMAP Rural Infrastructure Investment (RII) Component objective was to enhance the living conditions of the primary target group and stimulate private sector activity through investments in economic and social infrastructure. More specifically, the component was designed to award competitive contributory grants for investments [...] that: (i) have a demonstrable impact on improving livelihoods of people appropriate to FMAP’s goal and objectives; (ii) complement other investments under the Programme; and (3) reflect the geographic distribution of rural poverty in Armenia. The component comprised two sub-components: (i) Investment Derived Infrastructure (IDI), providing support for investment in public infrastructure directly related to the investment by FREDA in commercial rural entities; and (ii) Social Infrastructure Investments (SII), typically comprising of community based public infrastructure facilities including gas networks, domestic water supply, irrigation, roads and drainage facilities. The SII sub-component had nationwide coverage (excluding Yerevan). In light of the large scope of works identified and following a request from the GOA, RII investments have been directed exclusively to the SII sub-component. 1510998126. The implementation arrangements for the RII Component were drawn from the previous IFAD and OFID financed RAEDP and relied on the services of the same Project Administration or Implementation Unit (PAU, later PIU5). The PIU Technical Section, with its complement of eight staff of which five engineers, retained a key role in the implementation of all infrastructure related issue including procurement, contract management and quality control, while detailed design, daily supervision and construction works were outsourced to the private sector on a competitive basis. 1510998127. The Operation Manual developed for the implementation of the RAEDP Commercially Derived Infrastructure Component (CDI), which includes comprehensive sections on the procurement, supervision and quality assurance of civil works, was referred to for the implementation of the FMAP RII component. For the specific case of the SII sub-component, the principle of carrying out an ex-ante financial analysis, which is reported in the CDI Manual, was not considered in the FMAP design, in light of the mainly social dimension of the investments. 1510998128. Most of the funding for this component came from OFID, and IFAD only added about one seventh of the investments. Based on the agreement with OFID, IFAD was not involved in the supervision of the OFID funds that were used to finance the gas. Moreover, all the gas works were started by PY 1 (basically because the PIU had already procured the designs under its previous operations). 1510998129. Outreach. Recording even direct beneficiaries under a project as diverse as this one is a major undertaking, and not easy to accomplish. Even here, the assumption that all household members would benefit from project measures equally may not be justified, hence the multiplication of households served by the average number of household members may not hold finally. Recording indirect beneficiaries of such diverse activities and investments in infrastructure (e.g. roads) or value chains is a near impossible task. However, the direct beneficiaries as recorded by the PIU M&E unit amount to 98 804, of which 51 331 or 52% were women. Out of these, 92 740 were recorded by the completion mission as individual direct beneficiaries of infrastructure investments, with the remaining

5 Following its change of status as a Governmental Agency in 2011, the PAU was renamed as Rural Areas Economic Development Projects Implementation Unit (RAED-PIU) and underwent a restructuring in its organizational chart.

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6,064 being supported directly under FREDA or RFF measures. In terms of achievements of the PDR target of 160 000 for the RII, this would represent about 58% only. Even though this component had difficulties in reaching its targets on gas connections, the ratio reveals more on an over-optimistic setting of physical targets than on actual performance. 1510998130. As regards the rural infrastructure investments, a total of 34 485 people benefitted from water supply, 1 860 from drainage works, 10 579 from road construction, 19 936 from irrigation and 33 060 from connections to the national gas supply network6. Concrete physical achievements included 1 435 ha of land under irrigation constructed or rehabilitated, two livestock water points constructed or rehabilitated, 79 gas supply systems constructed, 24 drinking water supply schemes installed, seven drainage systems and 2.22 km of roads rehabilitated. 1510998131. Assessment. Rationale and justification offered in the design report appear technically sound. Implementation arrangements envisaged at design were solid, as regards the implementation of the RFF and RII activities under the PIU, which had already established its credibility. Provisions made for the creation of a new institution, FREDA, to manage equity investments were also satisfactory, as they left much of the detailed work for the implementation process. The involvement of rural poor people was on the one hand left for the decentralized implementing bodies under the RII, and to the other to the negotiation process between customer and lender as regards the lending/borrowing process. As these were not key issues in view of the overall orientation of the project, the level of participation presented in the design documents and the later implementation process appear satisfactory. 1510998132. The creation of FREDA was a highly innovative and risky undertaking, and all actors involved in the design and implementation process should be commended for their willingness to assume these risks and lead the process to satisfactory outcomes. 1510998133. As regards the RII, the lack of a mechanism to rank investment proposals submitted by the communities (be it gas, water, etc.) at least on a cost-efficiency basis was surely a design fault. This was never corrected, and had a negative impact on the final outcomes and viability of the investments. 1510998134. Project design compiled very heterogeneous elements under one project, especially infrastructure and rural finance. These two have very little in common, apart from being ingredients to improvements of rural people and their livelihoods. In addition, two very different approaches, such as refinancing financial institutions and equity participation in agribusinesses, were used under the rural finance component. However, these design features are also found in several other country programmes in the ECA sub-region, and as long as they represent the interests of the rural poor and the borrowing government, this should be acceptable.

C. Programme strategy and approaches 1510998135. No explicit formulation of programme strategy and approaches was done in the PDR. Given the heterogeneity of components and their corresponding objectives, different sets of programme strategy and approaches can be identified. 1510998136. As regards the agribusinesses which needed additional funds, but which could not access such either because of their high levels of debt financing, or lack of collateral, design proposed the creation of FREDA. FREDA would use both financial and non-financial support services, and a combination of equity participation and debt financing to leverage investments. FREDA has, in actual implementation, taken its responsibility as co-owner, advisor and provider of technical assistance in a responsible manner, mostly with an adequate mix of interventionism and restraint to avoid over- domination. 1510998137. In actual practice, FREDA has pursued a very careful and selective approach to accept new investments, by adopting a zero-risk approach. While this may appear as not justifiable

6 From these total figures, 7180 persons would have to be deducted as double counted. For details see Appendix 9.

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when using development funds for promoting small enterprises, it should be acknowledged that FREDA needed to gain some experience first and the acceptance of its mode of intervention within government circles and IFAD. The approach not to assume any major risk must therefore be acknowledged as very appropriate under the given circumstances. The same applies to FREADA’s preference to medium-scale investments, thus avoiding the risks and transaction costs that are associated with very small companies. 1510998138. RFF. As regards credit funds, these were to top up the existing funds of the RFF by about USD 2 million, using the same approaches, procedures and products already in place from the predecessor project. Under these, lending was only permitted to commercial banks. Given the lending policies of these banks, in particular as regards collateral requirements and average loan sizes, it was hardly imaginable that the target groups identified in the PDR could be adequately served. 1510998139. When the demand for loans by the commercial banks declined substantially in 2011-2012, the RFF unit showed good initiative to expand lending to UCOs, which had hitherto been barred from accessing RFF loans. This approach led to a substantial reduction of the average loan amounts, as commercial banks were not willing to lend to SMEs or small farmers, not to talk about the poor. The average loan amount (of commercial banks only) decreased from USD 23 741 before 2012 to about USD 10 000 with the inclusion of UCOs. Another substantial change was introduced by permitting UCOs lend in AMD, against the clear preference of banks to lend only in USD. These adjustments are seen as very useful and appropriate. 1510998140. The conclusions from this are that the target group definition in the PDR was contradictory to the actual project design, misleading and incorrect. More target group orientation did not come as a result of insight into deficiencies, but as a result of the lack of commercial banks to borrow from the RFF, and the decision to lend to UCOs. 1510998141. Rural Infrastructure. The FMAP strategy to contribute to poverty reduction and livelihoods improvements in Armenia’s rural areas was to provide support both to the private sector through financial services for agri-related businesses and to the wider population living in the rural areas, through improved access to public infrastructure. FMAP infrastructure development activities as described in the PDR were strictly demand-driven and did not include a predetermination of investments by type (e.g. roads, irrigation, etc.) or specific allocations of funding across marzes. 1510998142. The most prescriptive criteria detailed in the PDR were those applying to the IDI sub-component, which was however not implemented, requiring FREDA investee companies to apply for and co-finance investments in public utilities and the PIU ranking potential investments on the basis of their IRR. This approach to mobilize private financing (to a level of 15%) for public infrastructure development was highly innovative but extremely difficult to implement in the Armenian context, hence GOA’s request to reallocate the funding originally envisaged for the IDI to the SII sub- component. 1510998143. The SII Sub Component was designed as a flexible tool enabling the PIU respond to applications for investments in rural infrastructure prioritized by the communities themselves, which were also required to co-finance the cost of construction to a level of 10% (in cash or in kind). The main criteria to be applied by the PIU for screening applications for SII support originated by applicant communities were technical feasibility and outreach. The PDR, however, did not specify how these criteria were to be weighted to rank investment proposals on a truly competitive approach, which would have significantly improved the overall performance of the component. 1510998144. The lack of overall targets and of well-defined ranking criteria at the early stages of implementation negatively affected the sub-project selection process and the majority of the project proposals selected for implementation were actually received by the PIU during RAEDP7 and PIRP and were not implemented due to lack of funding. While obviously speeding up the implementation process, this resulted in an obvious drift from the competitive process as envisaged at design. The

7 IFAD Supervision mission Aide Memoire, October 2009.

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opportunities for optimizing the use of Programme resources in light of implementation experience and of externalities such as the increased gas price were also limited by an overly fast sub-project identification process, soon followed by formal commitments entered into by the PIU with the communities. 1510998145. The wide geographic spread and lack of clustering mechanisms in the lending programme did limit the opportunities for the development of synergies between the Rural Infrastructure and the Rural Finance components of FMAP. Moreover, due to the limited capacity of interest groups to apply for and to source funding for communal infrastructure investments (an option foreseen in the PDR), the component relied on public funding to supplement the funds collected by community members for co-financing of SII investments to the minimum required level of 10%.

D. Assessment of programme relevance 1510998146. The relevance of venture capital investments into the agribusiness sector remains very high in a specific market niche. This niche lies above a segment composed of micro-enterprises, which are mostly owned by a sole proprietor, a couple or close relatives, which are not interested in getting outsiders involved in their businesses, which operate often under the name of the owner, and not as corporate bodies. The upper bracket is composed of medium to large enterprises with high demand of specialized expertise, leveraged financial products, high orientation towards exports, which are definitely outside what IFAD could finance. Even in a relatively small country such as Armenia, there seems to be a sufficiently large number of enterprises as earmarked under FMAP. 1510998147. In the way RFF support under FMAP was designed, i.e. with its orientation towards commercial banks, this can hardly be seen as relevant for poverty alleviation and for the target groups earmarked in the PDR. The average amounts of commercial bank loans to rural areas were way above the demand and absorption capacity of the target groups. Furthermore, the FMAP resources allocated constituted only one seventh of total RFF resources, which is not significant. Third, the demand for RFF loans by commercial banks slowed down to almost zero in 2011. The fast absorption of funds in the early programme years are an indication of the economic benefits realized by the banks, but not of the need for external financiers to provide the lending resources. Finally, the data contained in the PDR do not indicate that banks were cash strapped and did not have sufficient lending resources, but only stated their high interest in the loan resources. This, however, leaves the question of asset-liability matching of commercial bank resources out of the equation, and whether banks would have been willing to dedicate their own resources to rural/agricultural lending. Both questions cannot be answered today, the first one because details on asset-liability matching are not accessible, and second because perceptions prevailing eight years ago can hardly be reconstructed now. 1510998148. The RII Component was strongly linked to the objectives of the GOA’s poverty reduction policy papers, which confirm the continued relevance of improving the service levels of public utilities and of improving access to irrigation as key conditions for the development of Armenia’s rural areas. In aggregate. Investments in drinking water and gas supply were directly connected to the national MDG progress indicators as well as to the United Nations Development Assistance Framework (UNDAF). As regards gas, orientations were set when investments in rural gas networks were identified as an effective means of targeting poor communities as natural gas was cheaper than any other fuel including firewood and purchased dung cakes. The increased gas retail price combined with the low ability to pay for the one-time cost of connection by the new gas users have substantially reduced the relevance of investments in rural gas networks; while the GOA has taken some action to address these concerns, it remains unlikely that the rural poor are among the direct beneficiaries of gas supply projects due to the relatively high one-time cost for new connections. The ex-ante relevance of gas connection was therefore replaced by an ex-post assessment of relevance for the rural poor. 1510998149. There are many indications that the relatively better-off rural people are quite willing to pay the one-time cost of connection and subsequently also upgrade their household

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appliances. Survey results covering non-connected households report that there is still a wide perception among the rural people that gas is the right investment, the main problem being the one- time cost of connection that they could not or would not want to afford. However, it is obvious that with the increased gas price, even if a poor household gets the connection for free, they would only afford using gas for cooking (i.e. to replace gas tanks), resulting in a very marginal saving. In other words, for those who were already using gas supplied in containers, their main saving was the cost of transport to exchange cylinders. 1510998150. The investments in irrigation carried out under FMAP made a relevant contribution (estimated to some 25%) to the progressive increase of irrigated areas recorded nationwide during the Programme implementation period. In addition, the agro-ecological factors coupled with the structure of private land ownership (with relatively low levels of landlessness and widespread access to at least a small parcel of irrigable farmland) make investments in irrigation infrastructure in rural Armenia inclusive and demanded by the rural poor. Overall, the relatively large share of small backyard plots (0.16 ha/household on average) reached by the FMAP irrigation systems indicate that the FMAP irrigation projects did, in general, benefit the poor segments of the population. 1510998151. The type of (public) infrastructure facilities financed by FMAP were relevant and naturally equally benefit man and women; women participants to the focus group discussions conducted by the PCR mission highlighted that investments in drinking water and gas supply were the most responsive to their needs. Specific assessments of the share of the FMAP infrastructure beneficiaries belonging to disadvantaged groups are not available. However, it is noted that at least four of the communities benefitting from investments in gas networks are largely composed by refugees. Moreover, four bordering communities in Tavoush marz suffering from limited access to agricultural lands due to persistent security concerns have benefitted from FMAP investments in irrigation.

E. Programme costs and financing 1510998152. The total cost of FMAP as recorded were USD 34.8 million allocated along two components that aimed respectively at (i) improved access to financial services (31.0% of the budget, including management costs), in turn composed of the support to the Rural Finance Facility (RFF, 7.8%) and to the Fund for Rural Economic Development in Armenia (FREDA, 23.3%) and (ii) improved rural infrastructures (69.0%). The figures displayed in the table below summarize the expenditures (both actual and cumulative) attributing to the main activities a proportional share of the project’s administrative and recurrent costs related to the functioning of the Project Implementation Unit (PIU). Table 2: Total Cumulative FMAP Expenditures, by Year

Major Activity Total cumulative expenditures per major FMAP activity 2008 % 2009 % 2010 % 2011 % 2012 % 2013 % Sub Tot FREDA 57.943 2% 896.955 5% 1.967.314 7% 4.243.484 14% 6.181.921 19% 8.099.744 23% Sub Tot RFF - 0% 420.000 2% 2.386.800 9% 2.386.800 8% 2.386.800 7% 2.386.800 7% Sub Tot Infrastructures 2.429.617 76% 14.322.161 82% 19.489.241 74% 21.025.961 69% 21.155.519 65% 21.155.519 61% Sub Tot Project Management 688.857 22% 1.833.854 10% 2.661.251 10% 2.975.122 10% 3.007.581 9% 3.192.089 9% TOT 3.176.417 100% 17.472.970 100% 26.504.606 100% 30.631.367 100% 32.731.821 100% 34.834.152 100% Source: FMAP PCR mission based on PIU M&E data.

Table 3: Total Actual FMAP Expenditures, by Year

Major Activity Total actual expenditures per major FMAP activity 2008 % 2009 % 2010 % 2011 % 2012 % 2013 % Sub Tot FREDA 57.943 2% 839.012 6% 1.070.359 12% 2.276.170 55% 1.938.437 92% 1.917.823 91% Sub Tot RFF - 0% 420.000 3% 1.966.800 22% - 0% - 0% - 0% Sub Tot Infrastructures 2.429.617 76% 11.892.544 83% 5.167.080 57% 1.536.720 37% 129.558 6% - 0% Sub Tot Project Management 688.857 22% 1.144.997 8% 827.397 9% 313.871 8% 32.459 2% 184.508 9% TOT 3.176.417 100% 14.296.553 100% 9.031.636 100% 4.126.761 100% 2.100.454 100% 2.102.331 100% Source: FMAP PCR mission based on PIU M&E data.

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1510998153. Further details are provided in Appendix 10, in particular Table 2 which presents the financial performance by financier, by financier and component in USD, IFAD loan and grant disbursements in SDR, and disbursements of the Danish grant.

F. Assessment of programme efficiency 1510998154. The ex-post Financial and Economic Analysis of FMAP is structured around the major activities of the project, including: (i) Rural Finance Facility (RFF), lending funds to commercial banks and Universal Credit Organizations (UCOs); (ii) Fund for Rural Economic Development in Armenia (FREDA), investing in equities and providing technical assistance to agricultural processing companies; and (iii) Rural Infrastructures component (water supply, roads, gas and irrigation schemes). The major benefits generated by the project are represented by a generalized increase of marketing opportunities and access to finance, resulting in increase of income. The main benefits lie (among others) in the following: increased production and productivity of the agricultural and rural activities carried out by the clients of the financial institutions and UCOs that borrowed funds from RFF:  increased production and productivity of the companies that benefitted from FREDA’s investments and support;  increased production and commercialization for the farmers supplying agricultural produce to FREDA-supported companies;  Increased employment, both permanent and seasonal jobs, by FREDA-supported companies and RFF clients; and  Increased agricultural and livestock production through enhanced effectiveness of the irrigation and water supply systems.  Increased agricultural and livestock production through enhanced effectiveness of the irrigation and water supply systems. 1510998155. Main findings. The overall performance of the project is synthesized in an E-IRR of 12.3%. Such level would normally be considered as only moderately satisfactory, just slightly above the cost of capital (fixed, for analysis purposes, at 12%). However, considering the high risk associated to the innovative nature of some interventions (especially as far as venture capital investment through FREDA is considered), and the failure of some of the infrastructures investments for reasons beyond control of the project (such as the gas network, essentially failed for the strong price disincentive for the final users in utilizing the service), the result is more encouraging than what actually appears. Also, among the main factors reducing the level of the IRR is the delay in the creation of incremental benefits (in other words, costs occurred in the first years of the project do not generate benefits for at least two years, thus influencing negatively and substantially the IRR). The positive financial situation of, among others, FREDA encourages to assume that for the upcoming phase of FMAP (i.e. the Infrastructure and Rural Finance Support Programme [IRFSP]), the benefit stream would occur in a shorter period of time (as happened for RFF that already had received the support of two projects prior to FMAP). 1510998156. The E-IRR of the components/sub-components showed considerable variation:  Benefits of RFF were the highest of the project, with an E-IRR at 41.7%. Through the loans generated by the injection of capital from FMAP into the partner financial institutions (banks and UCOs), the sub-component has generated a large number of clients that invested in risky yet profitable agricultural productions and in micro and small enterprises linked to the agricultural sector. Moreover, through the repayments within the agreed schedule, and the anticipated repayments (early repayments), generated mostly in the first years of operations, FMAP-RFF generated an aggregated amount of loans 2.5 times higher than the initial value injected (USD 2 million).  Major sub-sectors taken into account for the analysis were six, representing some 74% of the total amount of loans generated by FMAP injection of capital in the credit system. These sub-

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sectors include: (i) livestock production (mixed meat/dairy production), representing some 47.5% of the loans; (ii) greenhouses (13.2%); (iii) wineries (4.3%); (iv) fish farming (4.1%); (v) cheese production (3.0%); and (vi) crop production (2.0%). Table 4: FMAP-RFF Benefit Stream and EIRR

US$million 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2027

Costs C1b RFF - 506 2,336 13 2 19 - - - - -

Benefits C1b RFF - - 41 - 143 - 215 - 141 - 645 1,655 3,716 5,312 5,316 13,167

Cash flow - - 548 - 2,479 - 229 - 143 - 664 1,655 3,716 5,312 5,316 13,167

IRR 41.7%

1510998157. FREDA. Benefits of FREDA are satisfactory, with E-IRR of 12.8% slightly above the cost of capital (although a scenario including net incremental benefits from reinvestment of the repayments has yet to be integrated in the analysis). The analysis for the PCR is based on a study commissioned by FREDA, analyzing both (i) the performance of the enterprises benefitting of the venture capital investments; and (ii) the effects on the value chain (volume of supplies from farmers).

Table 5: FMAP-FREDA Benefit Stream and EIRR

US$million 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018-2027

Costs C1 FREDA 62,610 899,632 1,133,998 2,365,094 1,979,502 1,917,823 - - - - -

Benefits C1 FREDA - - 23,046 180,066 -484,852 -1,106,062 -866,004 710,545 1,115,295 2,462,422 2,590,468

Cash flow -62,610 -899,632 -1,110,952 -2,185,028 -2,464,354 -3,023,885 -866,004 710,545 1,115,295 2,462,422 2,590,468

IRR 12.8%

1510998158. Rural infrastructure investments component. Net incremental benefits are quite low, mainly due to the failed attempt to increase connection to the gas network (representing 75% of the investment) for domestic and productive purposes. Within this framework, the IRR of 4% of the component is low, and would even fall to 1% if the benefits would be attributed to the entire costs of the project. A possible future additional benefit may eventually derive from an increase in connection rate to the gas network by up to 100% of beneficiaries, which would move the IRR up to 7% (or 4% if all costs would be attributed to the activity, as specified above).

Table 6: FMAP-RII Benefit Streams and EIRR – Main Scenario

WOP WP 2009-2010 2011 2012 2013 2014 2015 2016 2017-2027 Investment costs USD 19,821,649 Aggregate savings USD 1,428,694 1,428,694 1,428,694 1,428,694 1,428,694 1,428,694 1,428,694 Net incremental value USD - 19,821,649 1,428,694 1,428,694 1,428,694 1,428,694 1,428,694 1,428,694 1,428,694

IRR= 4%

1510998159. Efficiency of PIU and Other Support Units. Towards the end of FMAP, FREDA barely had sufficient staff to undertake all required tasks diligently. If it was to enhance the performance of its investees, it would have to employ additional experts to undertake due diligence of new investments and provide expert advice as delegated board member. The unit in charge of infrastructure development in the PIU had just the right number of staff to undertake its tasks and mandates. To the contrary, the RFF seemed to be somewhat overstaffed, with a total of eleven permanent staff and five additional persons on temporary contracts. It appears that the unit has carried forward all procedures, administrative checks, reporting contents and formats, and monitoring

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systems right from the beginning in 2005 till today without ever looking at redundancies, superfluous aspects and procedures that could be shed off without losing effectiveness or transparency. This is in acknowledgement of the fact that the RFF, on the surface, made a net profit of USD 1.9 million from the lending activities. As the accumulation of profits is not, and should not be, the objective of the unit, it would have been more advantageous if the unit would have negotiated with PFIs a reduction of their on-lending rates in return for a lower interest rate for the RFF loans. Given the fund endowment of the RFF, and the use of funds mostly for term lending, this could be done easily in a way that still preserved the overall profitability of the unit.8. 1510998160. Total costs of programme management amounted to 9% of total programme expenditures (excluding the RFF administrative expenses, which are directly borne from the income received). In view of the heterogeneity of the programme, the variety of duties and tasks of staff, and the size of the programme and the country itself, this is satisfactory.

G. Review of programme outputs 1510998161. FREDA. In terms of outputs, FREDA has granted loans worth USD 1.7 million, in addition to investments in shares of nine companies worth USD 3.6 million. These, in combination with non-financial support services, guidance, mentoring and coaching, plus contributions to knowledge management through studies and surveys, has led to positive outcomes at the level of investees. It should be noted that the relatively short period of investments, between 2-4 years, has shown notable progress in terms of production outputs, export share and volume, turnover, and profits, but that the period under review is too short to make any well-founded statement in this regard. In an economy such as Armenia, and in the case of relatively young enterprises, such statement would be more appropriate 5-7 years after the investments. Furthermore, the impacts on FREDA can also be assessed as positive, as the cumulative loss incurred during the four years from 2009-2012 amounted to USD 0.3 million only before grants, which is a good result. Overall, the outputs and outcomes under this component are seen as satisfactory. 1510998162. RFF. Positive aspects are the amount of loans outstanding at project end, which is near identical to the amount of funds transferred under FMAP to the RFF, good repayment rates at the level of UCOs (measured as portfolio-at-risk of 0.5-2.0%), and the final average loan amount at project end. This has not been very encouraging at the start of the FMAP, when the demand for loans by banks decreased drastically and only went up when UCOs were admitted as PFIs. As a consequence of the high average loan amounts granted by banks under the RFF, the number of loans funded through banks is not appealing. Loan repayment rates at bank level were occasionally referred to as 92%, which would not be satisfactory. Efficiency gains, as measured by the ratio between active borrower and personnel, were marginal in a few UCUs, and even deteriorated in two UCOs. 1510998163. As regards infrastructure, some of the physical targets determined during the course of FMAP were reached, while others were not reached. Positive aspects can be seen in the number of about 93 000 beneficiaries of all works combined, which was however below the potential and projected figures. The number of farmers reporting improved farm profitability is satisfactory under the given circumstances and the value of investments made. The core issue here the low level of connections of potential users to the gas networks, because prices for connection and gas supply increased drastically. The overall assessment must therefore be unsatisfactory. 1510998164. Given the overall weight of the infrastructure component, the overall assessment of results is unsatisfactory. The updated logframe with indicators and actual results (deleting means of verification and assumptions and risks) is presented in the table below.

8 Net results over loans outstanding was 6.3% in 2013, using pre-audit management figures provided by PIU.

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Table 7: Updated Logical Framework: Progress against Objectives, Outcomes and Outputs

Narrative Summary Verifiable Indicators Actual results as of 31 Dec 2013

Goal: Improved living  Increase in household asset ownership  12% increase (2011 data) conditions of the poor rural  Reduction in prevalence of malnutrition  0.5% increase between 4.8.2008 people in Armenia. among children below 5 years of age and 5.3.2012 Purpose/ Objectives:  Value of gross loan portfolio (loans  1 989 000 USD (RFF) Increased employment outstanding – loans written off)  1 682 093 (FREDA) opportunities and  Portfolio at risk  Under RFF: participation of  Revenue growth of enterprises UCO 1 1.50% smallholders in  N° of new full time equivalent jobs UCO 2 1.69% competitive agricultural created UCO 3 0.95% supply chains through  N° of smallholders with incremental UCO 4 0.5% expanded access of assets UCO 5 1.3% diversified financial  N° of farmers reporting improved farm UCO 6 2.0% services and infrastructure profitability  n.a.  N° of repeated borrowers  FREDA: 347  Active borrower/personnel  Nil under RFF and RII  N° of beneficiaries reported improved  4984 farmers sustainable access to public facilities  100 RFF before after Change UCO 1 86 95 +9 UCO 2 53 56 +3 UCO 3 81 87 +6 UCO 4 103 83 -20 UCO 5 53 55 +2 UCO 6 95 91 -4  92,740 Output A.1 Rural Venture A1:  11 Capital Fund Development  10  N° of equity/shareholder loans (FREDA)  3 722 073  N° of equity/shareholder loans  EC 852/2004 Hygienic Products: 5 Equity/shareholder loans received/accepted  ISO 22000, HACCP: 4 provided  Value of equity/shareholder loans  Kosher production: 1  N° and type of food health and safety standards met Output A.2: Investment A2:  16 Loans to SMEs provided  374 (cumulative)  N° of participating financial institutions (RFF) and A.3 Farmer  374/13  N° of applications received/accepted by Loans Provided (RFF)  USD 1 989 000 (RFF) PFIs  n.a.  N° and type of loans  nil  Value of gross loan portfolio  n.a.  N° and value of loan repayment rate  USD 4 880 (2013)  N°, type and quality of business and marketing services provided  USD 30 000 (2010)  N° and type of food health and safety standards met  Average loan size

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Output B.1: Investment- B1,B2: USD 21 155 519 Derived Infrastructure and  USD 19.8 million invested in 26 850 HH B.2 Social Infrastructure infrastructure 123 Infrastructure projects provided  40 000/36 2639 households served by the infrastructure component 2 road sections (2.22km)

 100 SII/IDI infrastructure projects 79 implemented  2 road sections (15 km) rehabilitated 17 irrigation projects (1435ha  65 gas-supplies currently irrigated) established/rehabilitated 31  15 irrigation projects (3 000ha/2 194 ha10) 46  17 other social infrastructures supportive of wider public interest  150 village business/economic entities benefiting from SII/IDI investments

H. Assessment of programme effectiveness 1510998165. In terms of the overall goal of improved living conditions of the poor rural people in Armenia, not much progress has been achieved. Between 2005 and 2012, the poverty levels in Armenia had decreased only by 2 percent points. This should however not be over-emphasized given the external factors (global financial crisis) and attribution problems (size of the FMAP in terms of GDP). Programme effectiveness as measured under the FMAP logframe shows a satisfactory level of increase in household asset ownership of 12% (2011 data) and a near stagnant increase in the reduction in prevalence of malnutrition among children below five years of age of 0.5% between 2008 and 2012. 1510998166. In terms of the FMAP objectives of increased employment opportunities and participation of smallholders in competitive agricultural supply chains through expanded access of diversified financial services and infrastructure, the results are mixed. More positive effects can be seen where the Programme had immediate and direct interventions, such as loan volumes, loan repayment, or number of users of facilities newly provided (irrigation, roads, gas etc.). The impact was much less where the FMAP touched the respective field only tangentially, indirectly or marginally, as for example in the case of efficiency of financial service providers, job creation, or number of farmers reporting farm profit increases. Positive elements to be recorded were the comparatively high levels of revenue growth as projected in the financial and economic analysis. The overall assessment in this domain is satisfactory.

I. Assessment of impact 1510998167. Among the different impact domains to be assessed, some are less relevant in the case of FMAP, have not been intended or cannot be shown due to absence of data; this applies to environment and common resource basis, and, to a lesser extent, to food security and agricultural productivity. Physical Assets 1510998168. The farm-households benefiting from investments in irrigation infrastructure have experienced an increase in the value of lands due to improved irrigation. For the newly irrigated areas the net incremental market value the of farm plots is estimated at USD 800/ha. Considering the 974 ha of farmlands currently under irrigation, the aggregate incremental asset value of land is about

9 The potential number of households that can be reached when all the targeted households under gas schemes are connected. 10 The total command area under the irrigation schemes.

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USD 800 000 for an estimated 3 250 households, or USD 250/household. As land is an important collateral, this may eventually also facilitate access to credit and might potentially trigger further investment. According to the surveys commissioned by the PIU at the end of 2013, the communities benefitting from investments in irrigation show also an increase in the heads of cattle between 2008 and 2013 of 26%, which is considerably higher than the country average over the same period (15%). This increase is plausibly attributed to the better feed grown in sufficient quantity in the irrigated lands and is estimated to apply to at least 2 442 household (49% of the 4,984 household benefitting from irrigation). 1510998169. The improved access to gas and water resulted in an increased market value of houses. The incremental value, however, is difficult to quantify as the estimates obtained from the field tend are not reliable. The cost of the connections to the gas network (USD 500 on average) is obviously capitalized as increased value of the houses, totaling USD 4.1 million for the 8 265 household connected. These households did also purchase at least a new domestic appliance operating on natural gas (gas stove, water heater, boiler), with an estimated aggregate value of more than USD 900 000. However, these do not constitute net gains in physical assets, as they were financed from savings. Food Security FMAP investments in irrigation and water supply infrastructure supported the irrigation of the backyards, which are used as food production plots adjacent to the rural houses (0.16 ha in average). It is estimated that this applied to about 2 900 households among the beneficiaries of irrigation investments and 5 480 households (63% of total) among the water supply beneficiaries. While these small plots can be an important element of food security for poor households and may to some extent contribute to increased family income,11 these increments tend to be marginal in view of total consumption needs. Environment and Common Resource Base 1510998170. Overall, the project has generally had a neutral to marginally positive environmental impact. This would increase probably with an increased connection of rural households to the supplier network. Human Assets 1510998171. There is some plausibility in the assumption that in the case of the 4 984 farming households benefiting from irrigation, the Programme has contributed both to an increased production of food for own consumption and availability of food through increased family revenue. Other incomes realized as a result of the loan-funded investments may also have had a positive impact on level and quality of nutrition and affordability of health and education services, although these have not been assessed or quantified, and are therefore merely speculative. Also, while hardly quantifiable, health benefits may be connected with improved access to drinking water and natural gas, especially where gas is used for heating in schools and kindergartens. Despite their positive impacts in terms of livelihood improvements, FMAP investments in infrastructure did not result in any detectable impact in terms of reducing permanent and work migration12 from the beneficiary communities. Social Capital and Empowerment 1510998172. Some positive impacts can be attributed to the Programme as a result of its investments in rural infrastructure, as rural citizens came together under the coordination of their elected leaders to submit applications for Programme support and funds for their contributions. The community administration managed the collection of the cash contributions that have been transferred to the PIU. Contributing households reported that this process was transparent hence effective in empowering the local administration and in raising awareness and sense of ownership of the end

11 The supervision mission Aide Memoire of September 2011 reports a 10% increase in household incomes from these plots, without further details. 12 Finding from the survey commissioned by the PIU on a sample of 16 communities benefitting from FMAP supported infrastructure, compared to nationwide data.

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users. While the Programme fostered collaboration between rural communities and the respective marz offices, it remains unclear on which basis funding from the marz’s budget has been used to reach the eligibility threshold of 10% of community co-financing and to what extent this resulted in political interference in sub-project/community selection. Agricultural Productivity 1510998173. The Programme investments in irrigation infrastructure have contributed to increasing agricultural productivity both in terms of utilization of agricultural land, higher yields and to some extent shifts from low value field crops to cultivation of high value crops. The prominent impact of the irrigation projects is the cultivation of previously non productive (used at best as natural pastureland) farmland. The cropping patterns on irrigation expansion areas show a relatively higher share of field crops (+8% cereals and +24% of fodder) compared to the areas that were previously rain fed or had unreliable access to irrigation prior to the FMAP investment. In light of the relatively short timeframe of observations (three seasons), this trend may be still explained by an overall tendency by the farmers to quickly capitalize on access to irrigation with low risk annual crops. However, such behavior is obviously also related the lack of FMAP’s engagement in awareness raising about the potential opportunities for the cultivation of high value crops created by improved access to irrigation in each agro-ecological zone. 1510998174. Nevertheless, some positive indicators of the shifts to the cultivation of higher value crops (most notably vegetables and grapes) are recorded in the 332 ha of previously cultivated farmlands where the FMAP has improved farmers’ access to irrigation. Yields data recorded between 2009 and 2013 reveal an average increase of 31% for vegetables and 26% of grapes in project areas. The backyard cropping patterns show a prevalence of vegetables and fruits and a sizeable yield increase of 30% from these plots (461 ha in total) directly attributable to FMAP irrigation investments. According to community survey data, the FMAP water supply projects resulted in a 15% milk yield increase for a total of nearly 8 000 milking cows and also supported increased productivity in the backyard plots adjacent to the rural houses due to improved access to water. Institutions and Services 1510998175. An exemplary case of creation of a relevant institution is FREDA, which has been set up as separate legal body (foundation) to bundle investments in agribusinesses on behalf of the GOA. The four first years are certainly not sufficient to show whether FREDA will become and remain successful in terms of selecting and promoting new agribusinesses, and become and remain itself profitable. 1510998176. The investments in rural infrastructure carried out under FMAP contributed to widening the application of these measures across 96 rural communities, comprising of: (i) all communities benefitting from investments in gas; (ii) those under irrigation schemes operated by WUAs; and (iii) the water supply systems operated by water management contractors. On the other hand, 21 community-based water supply schemes and three irrigation schemes financed under FMAP are operated directly by the rural communities (i.e. neither by a WUA nor by a water management contractor). While these local level management arrangements in most cases ensure that services to the poor households are provided at comparatively lower or no cost, concerns are raised about the long term sustainability of these services. 1510998177. While the PIU has been mandated by the GOA as an agency for the development of small scale infrastructure investments in rural Armenia, and has delivered mostly solid design and construction works, this unit does not qualify under this label, as it is of temporary and transitory nature only as project emanations. The same applies to RFF. Financial Assets 1510998178. Most of the revenues and financial assets created under FMAP derived from the rural finance interventions, including both the RFF loans and the FREDA investments. The analysis of the profitability of investments funded under loans sourced from RFF showed that profits were comparatively high. This has been confirmed in the impact surveys and focus group discussions.

15 Republic of Armenia Farmer Market Access Programme Project completion report

Positive impacts associated with FREDA investments on revenues have also been noted, in both the firms into which FREDA invested, but also with the farmers selling their produce to these firms. 1510998179. Given the relatively small scale of the incremental monetary incomes generated by the FMAP supported investments in infrastructure (most notably irrigation), it is unlikely that this constituted a surplus increasing the stock of financial assets of the targeted households. Improvements in irrigation infrastructure and to some extent also in drinking water and gas, however, resulted in increased market value of the rural households’ physical assets that could be used as collateral contributing to improve access to credit. 1510998180. While these effects are noted, there are no data as regards the extent to which these benefits apply to the poor, or the poorer segments of society. Most indicators and indications point at a concentration of financial benefit effects in the middle income groups, much less that for the poor. Markets 1510998181. The PDR did not pre-identify the agricultural value chains to be supported under the Programme and lacked specific activities targeting the irrigation beneficiaries geared to improve access to markets for their produce, e.g. through information on varieties with potential market outlets or through the establishment of producers associations. The lack of wholesale markets, problems with the sales of products and with dealing with middlemen/ resellers are ranked among the key difficulties encountered in the 2012 agricultural season at the national level13 and have been widely reported in the focus group discussions undertaken both by the PIU M&E Specialist and by the PCR mission. Evidence of strong synergies/complementarities of FMAP investments in infrastructure with private sector market actors such as micro and small agro-enterprises (including those supported by FREDA and RFF) is very limited and clearly this was not used as a guiding factor in decision making in the investment selection process.

J. Assessment of sustainability 1510998182. FREDA. All venture capital institutions need a certain trial period to discover their place and market niche, most suitable and promising types of investments and the most appropriate tools and approaches for due diligence, technical support and coaching. Once this phase has been passed, scale issues are to be addressed to reach breakeven and make profits. In the case of FREDA, the FMAP should be seen as the trial phase, during which the institution acquires the required knowledge and experience with a limited capital base. Given the high costs of set-up, product development, acquisition of know-how, and becoming known as a provider of solutions, the limited amounts available for investments, and the fact that most investments only produce improved results after some time, profitability of FREDA should not be expected in the first phase, i.e. under FMAP. 1510998183. In its desire to achieve breakeven, FREDA has however applied an unconventional approach when determining the method for payment of dividends by its investees. FREDA requested that dividends be calculated as fixed percentage of investments per year, thus in the same way as long term loans, and not as a pro rata share of net profits made by the investee companies. This approach provided FREDA with some predictability of income streams, which often does not exist in venture capital companies during the first years after the investment, and some artificial income at early stages. This was however done at the expense of the investees, which had to pay a price for the investments even when they actually did not make sufficient profits. This practice therefore pulled forward the breakeven point for FREDA, but slowed down profitability of investees. In the end, FREDA would have to compare the respective yields (discounted by time value) between the different approaches and check whether income opportunities would be missed by insisting on relatively low dividend yield levels. As breakeven is approaching for FREDA, it may be advisable to change this practice at least for all new investments.

13 National Statistical Service – Social Snapshot of Poverty 2013.

16 Republic of Armenia Farmer Market Access Programme Project completion report

1510998184. The prospects, however, for FREDA to become financially sustainable in the medium run are quite positive. The net losses (excluding grant transfers) over total assets14 declined from 17% and 21% in 2009 and 2010 respectively to 4% in 2011 and 3% in 2012. With increased revenues for 2013, and increased capital made available in 2014 under the new IFAD-funded project, FREDA should, ceteris paribus, start recording a positive net result at least in 2014. The market is also sufficiently large and ready for accepting venture capital investments within the target group/market niche earmarked for FREDA. 1510998185. The sustainability of FREDA also hinges on the quality of the advice provided to investees. With a growing portfolio, and increasing complexity of investee operations, the ability of FREDA to provide all the required coaching and mentoring is a function of having a sufficient number of highly qualified and committed staff to perform these tasks. Some companies into which FREDA had invested at early stages faced some serious problems in the field of marketing, product placement, growth management and process engineering. Ensuring that the core functions of the external investor are properly provided will remain a key task for FREDA board of trustees and management, as well as for external supporters such as IFAD. 1510998186. RFF, with the exception of 2011 and 2012, was making good use of available lending resources, using almost all external loan liabilities for on-lending to PFIs. Its interest rate spread of about 4% permitted the RFF unit to achieve a ratio between interest received on loans granted and its loan portfolio around 3.5-4.0% in most years since 2007. Interest payable to the Ministry of Finance amounted to 0.75%. With a growing loan portfolio, and being able to contain administrative expenses, the ratio between administrative expenses over the loan portfolio declined by about half over the period 2007-2013, down to about 1.4%. As a consequence, the net result expressed in terms of loans outstanding increased gradually, reaching 6.3% in 2013, as shown in the table below. These results show that RFF is operating in a sustainable manner, and can afford to handle other government schemes, such as the interest rate subsidy scheme, without financial problem. For RFF, the sustainability prospects will remain in place as long as RFF will have access to a minimum quantum of lending capital, the interest rate offered remains attractive to PFIs, the terms and conditions remain attractive, and PFIs have sufficient demand for loans which they cannot satisfy from their own resources. Ceteris paribus, this is likely to be so for quite some time. A critical aspect may eventually lie in the ability of RFF to retain sufficiently qualified staff, as the salaries paid to staff are below market rates. However, as long as the RFF unit is concentrated on recording, monitoring and compliance checks, which do not require the highest skills levels, this may be an acceptable strategy as long as all tasks are performed within reasonable delays. Table 8: Cost Structure and Net Results of RFF in Terms of Loan Portfolio in AMD '000 2007 2008 2009 2010 2011 2012 2013* Share loans outst./loans received 96% 99% 99% 96% 77% 79% 104% Interest on loans/loans outstanding 3.5% 2.7% 3.0% 3.9% 4.4% 3.8% 5.8% Interest paid/external loan liabilities 0.57% 0.58% 0.68% 0.76% 0.82% 0.74% 0.75% Admin expenses/loans outstanding 3.1% 2.2% 2.2% 2.6% 2.1% 1.8% 1.4% Net result/loans outstanding -0.1% 0.0% 0.3% 0.7% 2.1% 3.4% 6.3%

1510998187. Political dimensions of sustainability are also assessed quite positive, as the GOA has confirmed a couple of times its support to the PIU concept as a whole, the existence of the RFF as regards refinance services, and has acknowledged the capacity and services of the technical infrastructure unit. Concerns as regards environmental issues have also not arisen so far. 1510998188. The completed infrastructure investments have undergone a multi-step process of checks and controls during handing over to the entities that have re-valued the facilities as fixed assets to their balance sheet. This ensures, in principle at least an annual nominal allocation for

14 Serving as proxy for return on assets.

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operations and maintenance (O&M). Another feature included in the PDR geared to increase the sense of ownership and enhance sustainability is the mandatory 10% contribution to the investment cost for infrastructure, which is aligned with GOA’s standard practice. All facilities visited by the PCR mission are operational and did not have any major breakdown during the least two years, giving an indication of sufficient O&M capacity and obviously adequate quality of construction. However, a number of key issues specific to each type of infrastructure are to be taken into due consideration to evaluate the overall sustainability of FMAP financed infrastructure investments. 1510998189. As for gas networks, their operation and maintenance is the responsibility of “Armrusgasprom” a Closed Joint Stock Company that has proven successful in covering its cost through the collection of consumption fees since 2003, thus sustainable operation of the completed gas networks in not an issue. 1510998190. Only three of the water supply schemes financed under FMAP are operated by a management contractor, the largest in Armenia having a proven track record and established systems for O&M. The remainder 21 water supply schemes are operated directly by the rural communities. Water connections and collection of fees are carried out by the respective community administration; at most, the fee covers the operating costs while the cost of maintenance is covered by the general budget which does also cover the salary of a dedicated staff for system operation. The dependency on budget transfers raises concerns about the long term sustainability of these services, which may hopefully be addressed under a comprehensive new programme under preparation. 1510998191. Meetings with WUAs in receipt of irrigation infrastructure indicate that organizational arrangements are in place to undertake maintenance, replacement of equipment and fixed structures, albeit with continued reliance on state subsidies. While formally well established, and showing progressively improved performance in service delivery, WUAs need strengthening, both in their technical capacity of their executive bodies and in their governance. These are fully and widely acknowledged as aspects requiring further actions. Some concerns arise as regards three communities benefitting from investments in irrigation that do not operate under WUAs. However, as their irrigation systems do not require any external power supply as they operate on gravity, as farmers are reportedly willing to and actually paying the respective community administration for irrigation water to a level that covers operating costs, the main issue remaining here is whether there is sufficient knowledge to draw optimal O&M arrangements. 1510998192. In general, the rural road network is mainly under the ownership of the marz administration but it is not likely that these offices are able to finance the cost related to maintenance without the participation of the central government. As for the FMAP financed investments in drainage facilities, these were only geared to support deferred maintenance of main drains. The nature of these interventions requires that sustainable O&M systems be developed but there is no evidence of such developments in the targeted communities.

K. Innovation, replication and up-scaling 1510998193. The main innovation under FMAP was the creation of a venture capital organization for agribusinesses. This has worked well, taking into consideration that the four years of implementation are a trial phase only. IFAD and the GOA have agreed to enter into the next phase and increase the capital endowment of FREDA to enhance its ability to intervene in the market. With the experience gained here, this approach can be recommended for replication in economies with similar prospects of agribusiness, level of maturity of markets and enterprises, and structure of enterprises. Key considerations here are also the legal framework as regards a controlled exit from operations, and the willingness of the host government to accept that it should not intervene directly in enterprises. 1510998194. The proposed approach in the design of the RII – IDI sub Component to mobilize private financing (to a level of 15%) for public infrastructure development was highly innovative but extremely difficult to be implemented in the Armenian context, hence GOA’s request to reallocate to

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the SII sub Component the funding originally envisaged for the IDI. The design of the SII sub- component was built on the experience gained with RAEDP in setting up a flexible mechanism to respond to applications for co-financing investments in rural infrastructure prioritized by the communities themselves. Similar tradeoffs between the interest in new infrastructure and ensuring ownership, supervision and control by receiving communities have been observed in many other projects across the globe as well. This implies that the balance must be set right in each new project and region, by taking into consideration relevant determinants in the environment. 1510998195. The programmatic approach applied with FMAP was a key design feature to be considered for replication for the development of both social and economic infrastructure investments in scattered locations. This approach was appropriate in light of the high demand from local communities and of the successful mobilization of additional financing during implementation, not foreseen at the PDR stage. The existence of a core PIU with a well-defined field of expertise in infrastructure development supported by service providers on a when needed basis has been a key factor enabling the relatively fast absorption of incremental funds, without major issues on the quality of the infrastructure investments carried out under the Programme. 1510998196. Key innovations to support the scaling up of infrastructure investments recommended by the PCR mission are the need for: (1) enhanced community targeting based on ad hoc poverty studies; (2) in depth feasibility studies to support ranking of investment proposals; and (3) strong coordination with other complementary initiatives.

L. Performance for the partners 1510998197. Compliance with Loan Covenants. The compliance of the borrower and grant recipient with the loan covenants is moderately satisfactory. The main issues were related to the late submission of the AWPB, the FREDA director not being authorized to operate the IFAD grant account and the used accounting standards not being in full compliance with IPSAS cash. The details with regards to the status of implementation and compliance with Project Loan Agreement covenants are presented in Table 6 of Appendix 10. 1510998198. Counterpart Funds. Counterpart funding is rated as highly satisfactory. The contribution of the Government of Armenia towards the Programme was originally appraised at USD 4.990 million. By the project closing date, the contribution of the GOA is USD 6.863 million as against the revised target of USD 6.0 million. This is 114% of the total revised allocation of the Government, indicating active support of the GOA to this Programme. 1510998199. Staffing of PIU. The PIU has hired new FM staff and as a result, the capacity has improved in the area of accounting and recordkeeping. Maintaining staff has been a problem for the programme due more competitive salaries paid outside. 1510998200. The initiative of the GOA to bring the RFF unit back to and closer into the PIU must also be appreciated here. The experience that led to the Paris Declaration and Accra Agenda for Action clearly point at the need to more unified government structures through with relevant projects and programmes are channeled, and not through semi-independent and autonomous project structures and emanations. 1510998201. IFAD and the Danish Government have performed well as regards the new venture capital institution. IFAD supported this by deploying a competent consultant over the entire programme to FREDA, and DANIDA engaged in support initiatives to assist FREDA in many ways, starting from direct training of FREDA staff to coaching and linkages with existing, more sophisticated venture capital companies in Denmark; these have been very laudable and must be acknowledged here, as they were important ingredients to the achievements made by FREDA so far. 1510998202. Programme Management. Inadequacies can be observed in the functionality of the M&E system as regards the ability to capture all relevant issues, transactions and changes, and the absence of a baseline survey. The quality of the impact surveys commissioned towards the end of FMAP has been deplorable, and shows a lack of commitment to get the highest levels of accuracy of

19 Republic of Armenia Farmer Market Access Programme Project completion report

responses from the selected service providers. Critical deficiencies also include the absence of clear definition of physical targets at start, the absence of a baseline survey, and the absence of a mid-term review, against the clear provisions in the PDR and FA; the cumulative effect of these all is that a more solid impact assessment has been hindered. The weakest part of performance is the absence of a coordination mechanism to avoid continued investments into a gas connection network even though there were sufficient alerts that in view of the price changes, these were no longer of much relevance to the target groups. The absence of a solid coordination mechanism, concentrating supervision of the component only on one partner (OFID) and the absence of ongoing revisions of plans against reality changes were the contributing factors to the disappointing outcomes in this single most important investment. 1510998203. Some of the outcomes and impacts assessed as part of the preparation of this PCR should have been assessed regularly by FREDA as part of its efforts to value its investments, and to assess the respective outcomes. This refers in particular to production, sales, employment, export and profitability data that management of investees should provide to board members as part of their information policy. As regards the RFF monitoring, the rather static system has failed to capture backward and forward linkages on the value chain, through which a deeper assessment of outcomes would have been possible. 1510998204. Given the heterogeneity of the design, it is not surprising that the actual level of collaboration between the different implementation units (FREDA, RFF and PIU) has not been very deep and dense. There was more of a parallel existence of these units, which collaborated along minimum requirements, being afraid at times of intrusion and interference, and apparently preserving independence as if this was a precious good. The RFF sought over a longer period a sort of institutional independence and ring-fencing, which does not appear entirely as commensurate with its mandate, status and origin15. Much of this was kept ambiguous and neither side, including IFAD management and supervision missions, sought to clarify these important issues. 1510998205. Overall, the performance of partners is assessed as moderately satisfactory.

M. Lessons learned 1510998206. The FMAP is very heterogeneous. Design represents the different, and diverging interests of a range of institutions, including ministries of agriculture and finance, OFID and IFAD, reflected in the inconsistent target group definition, approaches to reach project goals, gender orientation and priority for economic development. In retrospect, it does not appear that in the Central Asian Region, where several such project types have prevailed, such mix may augur well for achieving overall goals and objectives. The fact that this has been so for quite some time, and that structures are in place for such projects, is not a sufficient justification to pursue outdated and less efficient approaches. FMAP has done most things right, but not done the right thing in several important domains. 1510998207. In a country with little to no experience with venture capital operations, the creation of a new institution is innovative but highly risky. Its success depends on the proper functioning of a chain of support mechanisms and frameworks, not just on some of them. Essential ingredients here comprise: (i) proper structuring of the institution, including governance; (ii) sufficient number of experienced staff; (iii) adequate legal framework; (iv) sufficient dynamism in the respective business sector; (v) susceptibility of SMEs regarding external equity partners under a government project; (vi) sufficient capital endowment for investments, eventually coupled with loan capital; (vii) adequate

15 While it is evident that a transparent financial management of a refinance unit such as RFF requires separate accounting and separate keeping of funds, the decision of the GOA to merge the RFF unit under the PIU must be appreciated. The RFF unit lacks till today all ingredients to keep it as an independent organization, as insinuated in several supervision mission reports. The fear of external influence expressed by RFF staff and supervision missions did not materialize at all. In retrospect, it is not possible to determine whether the constant expression of this fear contributed to solid RFF management without undue interference, or whether it has been a groundless exaggeration. However, in retrospect, the decision to make the RFF unit accountable to the PSC only, and not to the PIU, should be seen as anomaly.

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endowment to support investee companies as required, in managerial, governance, technical, marketing and other relevant domains; (viii) adequate training and exposure of staff spread over a longer period of time; (ix) access to the honest experience of agencies with similar vocation; and (x) continuity of professional technical assistance and consultants. The creation of new organizations is obviously much more work for all partners engaged, and their commitment and flexibility are needed to turn emerging problems into hurdles that can be overcome. 1510998208. The assumptions that capital markets in Armenia, and also in some other Central Asian countries, were underdeveloped and short of investment capital, may have been valid a decade ago, but are not longer valid in Armenia today. The commercial banking sector is long of loanable resources, and the sheer availability of investment funds that could be tapped in is no longer a sufficient enticement to lend. Furthermore, only the absence of an appropriate legal framework for UCOs, which are by law prohibited from mobilizing deposits, makes them keen to look at any reasonable source of funds for their on lending. The real assistance needed would be assistance to the central bank to reformulate its microfinance legislation, and to assist UCOs become deposit-taking microfinance institutions, not pouring additional funds into the RFF. There is also more demand, and potential, in assisting the GOA to develop the agriculture sector through value chain development and value chain finance, technical guidance and innovation, quality enhancement, enhancing productivity of land (not of capital, or labor, or crops produced), strengthening competitiveness and introducing risk management tools and instruments. 1510998209. The RFF unit, like many similar units in other Central Asian countries, has used a cameralistic, project-oriented record keeping system. This simplistic system is not sufficiently explicit, and understates the status of the RFF unit as financial service provider. A move to reporting along formats common for the financial sector, with balance sheet and income statement, with an analytic perspective treating it as profit centre, would therefore have been more commensurate with its task, even if RFF is neither a legal body, nor a financial institution. 1510998210. Like many financial institutions, the RFF carries along a baggage of previous projects in terms of systems and procedures. It would have been useful not to act as mere accounting unit replicating old systems, but to review systematically and comprehensively all approaches, tasks, reports, data capture methods, procedures, reporting formats, etc., with a view to shed off tasks, reduce complexity and simplify operations where possible. 1510998211. Under FMAP, the PIU proved capable of carrying out small scale rural infrastructure investments even in remote and scattered locations. The PIU has gained experience with demand-driven approaches. However, the application of such approaches needs to be tied up with clearly defined outreach targets and investment ranking criteria geared to maximize the efficiency of the use of funds and inform decision making in sub-project selection. Feasibility studies covering engineering, social and value chain (marketing) aspects of investments would provide additional key information to guide investment selection and to provide a solid baseline for impact assessment. Dedicated studies should also be conducted to support enhanced poverty targeting. 1510998212. Among the key lessons learned from the implementation of the FMAP is that investments in rural gas networks clearly fell short of outreach targets. There are widespread concerns over the increased gas price, resulting in a slow progress in new connections and there is evidence that gas projects are comparatively less effective than other investments in public infrastructure in reaching out to the poor16. The rate of connections in the FMAP financed schemes is a low 43% on average, 3-4 years after completion of the works. Some of the causes for this have been pointed at above. 1510998213. Investments in domestic water supplies, on the other hand, have proven cost effective and provided equitable benefits17 for the youth, women, and men and were effective in

16 See also “Poverty and Distributional Impact of Gas Price Hike in Armenia”, World Bank Policy and research working paper (July 2012). 17 FMAP Supervision mission Aide Memoire September 2011.

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reaching the poor. The positive impact of the investments in domestic water supply on milking cows’ productivity is confirmed by findings across FMAP beneficiary surveys. Additional benefits derive from the use of domestic water for watering the backyards next to the household. The rural water supply systems are de facto used as Multiple Use (MU) facilities catering for domestic, livestock watering and to some extent irrigation use. 1510998214. Investments in irrigation carried out under FMAP gave a positive contribution to increasing agricultural productivity mainly in terms of utilization of agricultural land, higher yields and to some extent shifts from low value field crops to cultivation of high value crops. Following the construction or rehabilitation of primary and secondary irrigation facilities, the uptake of irrigation in farmlands with no tertiary distribution or where these systems are beyond the point of repair, requires complementary investments. Labor shortages in some rural communities have also emerged as causes of slow uptake. These aspects need to be evaluated thoroughly when computing the projected benefit streams (hence the viability) of new investments in irrigation. An immediate uptake of irrigation and increased yields (+30%) are recorded in the backyards adjacent to the households, which are an important element of food security for the poor households and to some extent contributed to increased family income. The shifts of cropping patterns in the farmlands benefitting from improved irrigation needs to be supported by extension and awareness raising focusing on: (i) the potential opportunities for the cultivation of high value crops specific in to each agro-ecological zone; and (ii) access to credit for farm development. This is particularly relevant to maximize the benefits arising from the expansion of the irrigated farmlands, where low value annual field crops would otherwise be grown. 1510998215. Specific implementation arrangements applied to the construction of both gas and domestic water supply projects involving two procurement processes to complete the works has proven suboptimal during execution. A comprehensive approach including the construction of all the necessary facilities under a single contract as well as the option of bulking the works into homogenous bid packages should be in place. 1510998216. The transfer of management responsibility of completed water supply facilities to the private operators would be facilitated by their upfront involvement in design and acceptance of technical standards. A capacity needs assessment needs to be carried out and dedicated capacity building on water systems O&M shall be provided to the administrative and technical staff of the communities that would continue managing directly their own irrigation or domestic supply.

22 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 1: Programme logical framework

Appendix 1: Programme logical framework

Narrative Summary Verifiable Indicators Means of Verification Assumptions/Risks Goal: Improved living conditions  Increase in household asset ownership  Household surveys.  National security remains adequate of the poor rural people in  Reduction in prevalence of malnutrition among  UNICEF’s Armenian Demographic and  Absence of external economic shocks Armenia. children below 5 years of age Health Survey (DHS).  Impact assessment surveys  National statistical data (Income Expenditures and Food Consumption in Armenia and Social Snapshot and Poverty in Armenia)  Programme M&E database Purpose/ Objectives: Increased  Value of gross loan portfolio (loans outstanding –  Programme M&E database  Liberal economic policies continue employment opportunities and loans written off).  National and marz level statistics  No deterioration in external trade participation of smallholders in  Portfolio at risk  Export/import statistics routes competitive agricultural supply  Revenue growth of enterprises.  RFF database (PFIs record)  Continued reforms in financial sector chains through expanded access  N° of new full time equivalent jobs created (policy and regulatory framework) of diversified financial services  FREDA’s Investment Memorandum for and infrastructure  N° of smallholders with incremental assets each company  N° of farmers reporting improved farm profitability  Farmer Market Access Facilitators’  N° of repeated borrowers Annual Report on the value chains for  Active borrower/personnel each company  N° of beneficiaries reported improved sustainable access to public facilities Output A.1 Rural Venture Capital A1: A1, 2, 3 & B1, 2:  Political situation conducive to private Fund Development (FREDA)  N° of equity/shareholder loan  Programme M&E database investment Equity/shareholder loans provided N° of equity/shareholder loan received/accepted A1:  Availability of potential investors to  Value of equity/shareholder loan.  FREDA’s Investment Memorandum for take entrepreneurial risks  N° and type of food health and safety standards met each Company (containing business  Financial institutions willing and able plans) to address the intended target groups  GOA and IFAD able to identify and agree on the establishment and operations of a venture capital fund  Demand for medium, long-term loans from small, medium entrepreneurs

23 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 1: Programme logical framework

Output A.2 Investment Loans to A2: A2, A3: SMEs provided (RFF) and A.3  N° of participating financial institutions  RFF database (PFI’s records) Farmer Loans Provided (RFF)  N° of applications received/accepted by PFIs  National and marz level statistics  N° and type of loans  Public sales records and enterprise  Value of gross loan portfolio records  N° and value of loan repayment rate  RESCAD Competitive Grant records  N°, type and quality of business and marketing services provided  N° and type of food health and safety standards met  Average loan size Narrative Summary Verifiable Indicators Means of Verification Output B.1 Investment-Derived B1, B2: B1, B2: Infrastructure and B.2 Social  USD 19.8 million invested in infrastructure  Supervising engineers’ annual Infrastructure provided  40 000 households served by the infrastructure infrastructure investment summary  100 SII/IDI infrastructure projects implemented report  2 road sections (15 km) rehabilitated  65 gas-supplies established/rehabilitated  15 irrigation projects (3000ha)  17 other social infrastructures supportive of wider public interest  150 village business/economic entities benefiting from SII/IDI investments

24 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 2: Record of supervision and follow-up missions

Appendix 2: Record of supervision and follow-up missions

The following supervision and follow-up missions have been conducted during the course of the FMAP: 1510998217. Supervision mission from 1.-10.10.2009 1510998218. Supervision mission from 16.-29.10.2010 1510998219. Supervision mission from 30.8.-17.9.2011 1510998220. Supervision mission from 5.-23.11.2012 1510998221. Supervision mission from 27.5.-10.6.2013

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Republic of Armenia Farmer Market Access Programme Project completion report Appendix 3: Summary of the amendments to the loan agreement

Appendix 3: Summary of the amendments to the loan agreement

1. The Financing Agreement (FA) of the FMAP (Loan No. 730-Am and Grant No. 971-AM) dated 8 January 2008. The following amendments have been mutually agreed upon: (i) First amendment to the Programme Loan Agreement dated 28 October 2008 changing Article III, Section 3.11 (c) to assure that funds will be committed to financing of activities under the Investment Derived Infrastructure (IDI) sub-component being financed from IFAD loan resources; (ii) Second amendment dated 3 December 2008 introducing changes to the Preamble, sections 1.01, 1.02, and 1.05 of the Agreement, and changes to the General Conditions; (iii) Third amendment dated 12 February 2010 changing Article III, Section 3.11 (c); (iv) Fourth amendment dates 24 January 2011 pertaining to a reallocation of funds; (v) Fifth amendment dated 12 December 2011 changing Sections 1.02 (b), 8.04, Schedule 3, I, A, 1.1 and 3.3 (a), and Schedule 4, paragraph 12. 2. The FA on the supplementary grant funded by the Government of the Kingdom of Denmark (Grant no. SUPPL-COFIN DE-730-AM) dated 19 June 2009. The following amendments have been mutually agreed upon: (i) First amendment dated 23 June 2011 postponing the completion date to 30 June 2012 and the grant closing date to 31 December 2012

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Republic of Armenia Farmer Market Access Programme Project completion report Appendix 4: Actual programme costs

Appendix 4: Actual programme costs

Table 1: Total Cumulative FMAP Expenditures, by Year

Major Activity Total cumulative expenditures per major activity including PIU* costs % 2008 % 2009 % 2010 % 2011 % 2012 % 2013 Sub Tot FREDA 57,943 2% 896,955 5% 1,967,314 7% 4,243,484 14% 6,181,921 19% 8,099,744 23% Sub Tot RFF - 0% 472,246 3% 2,677,158 10% 2,690,097 9% 2,691,719 8% 2,710,425 8% Sub Tot Infrastructures 3,118,474 98% 16,103,769 92% 21,860,134 82% 23,697,786 77% 23,858,181 73% 24,023,983 69% TOT 3,176,417 100% 17,472,970 100% 26,504,606 100% 30,631,367 100% 32,731,821 100% 34,834,152 100% Source: FMAP PCR mission based on PIU M&E data.

Table 2: Total Actual FMAP Expenditures, by Year

Major Activity Total actual expenditures per major activity including PIU* costs % 2008 % 2009 % 2010 % 2011 % 2012 % 2013 Sub Tot FREDA 57,943 2% 839,012 6% 1,070,359 12% 2,276,170 55% 1,938,437 92% 1,917,823 91% Sub Tot RFF - 0% 472,246 3% 2,204,912 24% 12,939 0% 1,622 0% 18,706 1% Sub Tot Infrastructures 3,118,474 98% 12,985,295 91% 5,756,365 64% 1,837,652 45% 160,395 8% 165,802 8% TOT 3,176,417 100% 14,296,553 100% 9,031,636 100% 4,126,761 100% 2,100,454 100% 2,102,331 100% Source: FMAP PCR mission based on PIU M&E data.

Further details are provided in Appendix 10.

29

Republic of Armenia Farmer Market Access Programme Project completion report Appendix 5: Actual physical progress of the programme

Appendix 5: Actual physical progress of the programme

See above Table 7: Updated Logical Framework: Progress against Objectives, Outcomes and Outputs

31

Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Appendix 6: Financial and economic analysis18

A. Introduction 1510998222. The Farmer Market Access Programme (FMAP) was implemented between 2008 and 2013, with a total cost of USD 34.8 million that aimed respectively at: (i) improved access to financial services (31.0% of the budget, including management costs), in turn composed of the support to the Rural Finance Facility (RFF, 7.8%) and to the Fund for Rural Economic Development in Armenia (FREDA, 23.3%); and (ii) improved rural infrastructures (69.0%). Management costs have been attributed to the respective activities. 1510998223. The figures displayed in the tables 1 to 3 below summarize the expenditures (both actual and cumulative) attributing to the main activities a proportional share of the project’s administrative and recurrent costs related to the functioning of the Project Implementation Unit (PIU), while Table 4 summarizes the detailed break-down of project expenditures.

Table 1: Total Cumulative FMAP Expenditures, by Year

Project Total Activities 2008 % 2009 % cumulative2010 % 2011 % 2012 % 2013 % Sub Tot FREDA 57,943 2% 896,955 5% 1,967,314 7% 4,243,484 14% 6,181,921 19% 8,099,744 23% Sub Tot RFF - 0% 472,246 3% 2,677,158 10% 2,690,097 9% 2,691,719 8% 2,710,425 8% Sub Tot Infrastructures 3,118,474 98% 16,103,769 92% 21,860,134 82% 23,697,786 77% 23,858,181 73% 24,023,983 69% TOT 3,176,417 100% 17,472,970 100% 26,504,606 100% 30,631,367 100% 32,731,821 100% 34,834,152 100%

Table 2: Total Actual FMAP Expenditures, by Year

Project Total actual Activities 2008 % 2009 % expenditure2010 % 2011 % 2012 % 2013 % Sub Tot FREDA 57,943 2% 839,012 6% 1,070,359 12% 2,276,170 55% 1,938,437 92% 1,917,823 91% Sub Tot RFF - 0% 472,246 3% 2,204,912 24% 12,939 0% 1,622 0% 18,706 1% Sub Tot Infrastructures 3,118,474 98% 12,985,295 91% 5,756,365 64% 1,837,652 45% 160,395 8% 165,802 8% TOT 3,176,417 100% 14,296,553 100% 9,031,636 100% 4,126,761 100% 2,100,454 100% 2,102,331 100%

Table 3: Total Actual FMAP Expenditures by Year, at 2013 Prices

Project Total actual Activities 2008 % 2009 % (prices2010 % 2011 % 2012 % 2013 % Sub Tot FREDA 62,610 2% 899,632 6% 1,133,998 12% 2,365,094 55% 1,979,502 92% 1,917,823 91% Sub Tot RFF - 0% 506,366 3% 2,336,006 24% 13,445 0% 1,656 0% 18,706 1% Sub Tot Infrastructures 3,369,634 98% 13,923,499 91% 6,098,614 64% 1,909,444 45% 163,793 8% 165,802 8% TOT 3,432,244 100% 15,329,497 100% 9,568,619 100% 4,287,982 100% 2,144,951 100% 2,102,331 100% Source: FMAP Budget at 2013 prices with deflator elaborated from Manufactures Unit Value Index (MUV) Archive (World Bank – http://go.worldbank.org/KL49KCB8N0)

18 Citation convention: All amounts expressed in this section refer to Armenian Drams (AMD), unless stated otherwise.

33 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 4: Overview of FMAP Expenditures, as of 31 December 2013

Financial performance by financier by component in USD cumulative amounts spent by 31 December, 2013 IFAD loan IFAD OFID Danish GOA contrib. PFIs Clients Tender Total % % Total Gross per major % gross Total by Grant Grant participati major activity including PIU* per major activity on fees activity costs activity Component Rural Finance Investment Capital - FREDA 5,397,431 1,206,901 99,167 6,703,499 19% 8,099,744 23% 8,099,744 23% Salaries and allowances - FREDA 261,730 385,727 54,025 701,482 2% Other operating costs FREDA 230,404 124,636 91,187 446,227 1% TA, Specialists FREDA 114,651 13,639 128,290 0% Equipment, goods and vehicles FREDA 97,602 22,644 120,246 0% Refinancing Capital - RFF 1,989,000 397,800 2,386,800 7% 2,386,800 7% 4,780,867 14% Sub-total Rural Finance 7,976,167 500,378 - 1,331,537 280,662 397,800 - 10,486,544 30% 12,880,611

Rural Infrastructure - Civil Works 1,989,088 13,615,207 5,547,911 21,152,206 61% TA, Specialists 3,313 3,313 0% Sub-total Rural Infrastructure 1,992,401 - 13,615,207 - 5,547,911 - - 21,155,519 61% 21,155,519 61% 21,953,541 63%

Project management 2,171,717 358,683 417,028 45,143 2,992,571 9% 3,192,089 9% Unsupported expenditures 173,558 25,960 199,518 1%

Total 12,313,843 500,378 13,999,850 1,331,537 6,245,601 397,800 - 45,143 34,834,152 100% 34,834,152 *PIU costs distributed in RFF and Infra, as FREDA has its own management unit (with separate costs).

B. Ex-post financial and economic analysis (FEA)

Elements of the Xx-ante FEA 1510998224. FMAP ex-ante analysis had been founded around the illustration of the relationships between primary producers, infrastructure and the medium/small-scale enterprises in the value chains potentially supported by the FREDA equity financing. To demonstrate these relationships, models for the following value chains had been defined: (i) Improved irrigation and availability of finance leads to an increase of grape production to satisfy the increased demand by a winery; (ii) Expansion of a dairy herd due to access to credit and more water points leads to greater productivity of livestock to meet the demand for milk from dairy processing; (iii) Improved irrigation, better husbandry and access to finance result in improved production and quality of tomatoes to fulfill the demand of the cannery industry.

Ex-post financial and economic analysis of FMAP 1510998225. The ex-post Financial and Economic Analysis of FMAP has been structured around the major activities of the project, aiming to estimate the stream of incremental costs and benefits of all project’s activities, building on recorded data for the period 2008-2013, complemented by estimates for the period 2013-2027. As such, the analysis built financial models aimed to identify the cash flow of each activity, building on the activities actually carried out by the project, amending, thus, the projections carried out in the ex-ante analysis. 1510998226. Focus of the analysis comprised the following: (i) Production models of the most representative activities funded by small and medium size credit operated by commercial banks and Universal Credit Organizations receiving financing from the Rural Finance Facility (RFF); (ii) Production models of medium size agro-processing and food-production enterprises benefitting of the venture capital investments and technical assistance received from the Fund for Rural Economic Development in Armenia (FREDA) and the effect on the incremental volume of supplies from farmers in the same value chain; and (iii) Models on the benefits for users of rural infrastructures (water supply, roads, gas and irrigation schemes), operated by the Rural Infrastructure Investment component (RII). 1510998227. Such models were then aggregated to identify the specific net incremental benefit stream of each sub-component (RFF and FREDA) and component (RII). In the aggregation, the RFF sub-component was also adjusted to take into account the expected dynamics of credit activities,

34 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis such as the generation of additional loans through the repayment of the outstanding credits, and the consequent generation of additional incremental net benefits. 1510998228. Background documentation. The analysis of the results of FMAP built on the actual support that FMAP has provided to the actors focused by the ex-ante analysis, including small and medium agricultural producers benefitting directly of RFF loans and of the rural infrastructures and indirectly as well as the small/medium enterprises benefitting of FREDA investments, and indirectly of the farmers supplying agricultural produce to such FREDA-targeted companies. 1510998229. The analysis built on the results registered in three studies, respectively focusing on RFF and FREDA and a third in-depth analysis of RII: (i) The Fund Rural Economic Development in Armenia (FREDA) and FREDA’s projects’ monitoring and evaluation – Final Report, Strategy, Jan 2014; (ii) Impact Assessment of Rural Finance Component of FMAP, PASV-RAC, Dec 2013; and (iii) Rural Infrastructure Investment analysis for Project Completion Report, IFAD, May 2014. 1510998230. The two first, carried out by national consulting firms, provided a first basis to project the stream of benefits and costs expected for the beneficiaries stakeholders, while the third study (by an independent international consultant) carried out an in depth analysis of the results of the infrastructure investments. 1510998231. Macro-economic parameters. Detailed assumptions on models are described in the sections dedicated to the specific project activities. The main general assumptions on macro- economic parameters, shown in Table 5 below, are summarized as follows:  Reference period (2008-2027). For the financial and economic analysis it was considered a period of 20 years starting from the project inception, hence from 2008 to 2027.  Actualization of costs and benefits (2013 constant prices). All prices of commodities, as well as enterprises’ profits and costs, have been actualized at 2013 levels, by using Economist Intelligence Unit and World Bank Manufactures Unit Value Index (MUV).19  Agricultural sector growth (mid-term projection at 5.2%). The projections of costs and performance of the small and medium production units as well as of the enterprises have been set around the estimated growth of the agricultural sector in Armenia (Economist Intelligence Unit and IMF data).

Table 5: Macro-economic parameters

from available sources estimated / projected 2019 Macro Economic Parameters 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 / 2027 Agric-GDP growth (EIU) 3.3% 6.3% 5.0% 5.3% 5.2% 5.2% 5.2% NA AMD-USD (EIU) 363.0 374.0 372.5 401.8 409.6 427.8 448.4 GDP deflator (IMF) 2.6% 7.8% 4.2% 4.0% 4.3% 4.0% 4.0% 4.0% 4.0% 4.0% NA U.S. GDP deflator (2013) 93.3 94.4 96.2 97.9 100 100 100 100 100 100 100 Deflator parameter (2013) 1.07 1.06 1.04 1.02 1 1 1 1 1 1 1

Main Findings of Ex-post FEA 1510998232. With an overall Economic Internal Rate of Return (E-IRR) of 14.6% the project has demonstrated to be able to generate a solid net incremental benefit stream. Such result can be considered as moderately satisfactory, solidly above the cost of capital (set, for analysis purposes, at 12%). However, such value represents the projected streams of aggregate benefits of the three major activities, yet hiding a large diversity of performance among the various project components. 1510998233. The analysis of the disaggregated stream of benefits for the individual FMAP sub- components highlights how the diversity of the activities determines similarly different levels of performance. Such difference depend on the novelty of the activity (micro and small size credits promoted by RFF have a higher profitability than the innovative venture capital investments operated

19 World Bank - Source: http://go.worldbank.org/KL49KCB8N0.

35 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis by FREDA), as well as on market conditions (such as the price of gas, whose raise has reduced the incentive to use the renewed gas networks and therefore the expected related benefits). Details of the project’s sub-components are described in the dedicated sections. 1510998234. However, considering the high risk associated to the innovative nature of some interventions (FREDA), and the failure of some of the infrastructures investments for reasons beyond control of the project (GAS network), FMAP benefits appear to be satisfactory. 1510998235. Among the most significant factors influencing the IRR is the delay in the creation of occurrence of incremental benefits. In other words, the preparatory costs incurred by the project before the actual investments and their corresponding benefit took place have influenced – negatively and by a significant manner, the project’s rate of return. The positive financial situation of, among others, FREDA encourages to assume that for the upcoming phase of FMAP (i.e. the IRFSP), the benefit stream would occur in a shorter period of time (as happened for RFF that already had received the support of two projects prior to FMAP).

Table 6: FMAP Net Incremental Benefits and EIRR

Calculation of FMAP E-IRR (C1 and C2)

(figures in '000 US$) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2027

Costs C1 (RFF) - 506 2,336 13 2 19 Costs C1 (FREDA) 63 900 1,134 2,365 1,980 1,918 Costs C2 (RII) 3,370 13,923 6,099 1,909 164 166 Total 3,432 15,329 9,569 4,288 2,145 2,102

Benefits C1 (RFF) - -41 -143 -215 -141 -645 1,655 3,716 5,312 5,316 13,167 Benefits C1 (FREDA) - - 23 180 -485 -1,106 -866 711 1,115 2,462 2,970 Benefits C2 (RII) - - - 1,429 1,429 1,429 1,429 1,429 1,429 1,429 1,429 Total - -41 -119 1,393 803 -322 2,218 5,855 7,856 9,207 17,566

Cash flow -3,432 -15,371 -9,688 -2,895 -1,342 -2,425 2,218 5,855 7,856 9,207 17,566 EIRR (20 years) 14.6%

1510998236. Several alternative scenarios have been also analyzed as part of a sensitivity analysis. The results are displayed in the table below.

Table 7: Sensitivity Analysis

Scenarios EIRR

Base case 14.6%

RFF Benefits (no additional loans) 12.4%

FMAP Projected benefits decrease by 10% 13.5%

FMAP Projected benefits decrease by 20% 12.3%

RFF projected benefits decrease by 10% 13.9%

RFF Projected benefits decrease by 20% 0.0%

1510998237. A more detailed description of the results at component level (or sub-component) should help identifying the positive elements, the potentially good elements, and the risks that a project of this kind should avoid for a satisfactory use of an IFAD loan.

36 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

C. RFF 1510998238. The Rural Finance Facility was established in 2006 under the IFAD-funded Rural Areas Economic Development Programme. Aiming to assist small-scale farmers willing and capable to move from subsistence farming into commercial farming activities and wishing to increase their productivity and or to improve the quality of their production through application of appropriate inputs and/or modernization of farming methods, FMAP included a capital allocation for incremental refinancing capital for RFF. The overall amount of the reallocation (USD 2m) was specifically aiming to refinance commercial banks, and at a second stage only, also UCOs, for loans to small-scale farmers in those rural commodity chains considered critical for development and growth in rural areas. 1510998239. As for the other main activities, the analysis of RFF benefit streams aims to identify the attribution of RFF benefits to the funds allocated from FMAP budget only. Since its establishment, RFF benefitted of an initial funding from the Rural Areas Economic Development Programme RAEDP (IFAD funded) for USD 8.8 million and of an additional funding from Rural Enterprise and Small-Scale Agricultural Development project RESCAD (World Bank as main donor) for USD 5.5 million, both in 2006. The core capital of RFF was complemented in 2009 by an additional USD 2.0m funding from FMAP. Out of such core capital, which in the meantime has generated (i) additional loans further to the repayments of the first credits; and (ii) profits from the interests on capital borrowed by commercial banks, and a total volume of USD 41.2 million loans disbursed from April 2006 to December 2013. 1510998240. After October 2012, RFF stopped to track the initial source of funds in its database, recording only the beneficiary institution (either a commercial bank or a UCO). For the total attribution of loans to FMAP, there are actual figures from September 2009 to October 2012, after which it was necessary to estimate the attribution to FMAP. 1510998241. High turnover of loans. Out of an initial injection of funds from FMAP into RFF of USD 2.0 million (September 2009), some additional USD 0.3million were immediately mobilized as contribution of the PFIs. Moreover, and more significantly, due to a high rate of early repayment of the loans and the rapid turnover of funds, the total amount of loans disbursed to borrowers reached the amount of USD 5.0 million (between September 2009 and December 2013). As a result, the initial investment of FMAP into RFF funds generated a multiplier effect on loans of around 2.5 (i.e. 2.5 times higher volume of loans compared to the actual initial capital made available by FMAP), as displayed in Table 8.

Table 8: Summary of FMAP-RFF Invested Amounts

Summary Table: FMAP generated loans

2009-2012 2012-2013 TOT RFF num Amount num Amount num Amount (USD) (USD) (USD) RFF 168 4,055,517 198 966,291 366 5,021,808 # of loans per period 168 4,055,517 887 8,762,433 % of tot period period 100.0% 100.0% 22.3% 11.0% Average size (USD) 24,140 4,880 13,721

Initial FMAP investment 2,000,000 FMAP investment Multiplier 2.51

1510998242. Geographic location. The geographic distribution of loans was mostly directed to Ararat, Armavir, Geharkounik, Lori and Kotayk marzes, accounting for some 47% of the country’s poor people and receiving around 85% of the total FMAP generated loans (with 50% of them in the Armavir and Kotayk marzes alone). Despite the high incidence of poverty in Shirak marz (12% of the poor of the country), only 1.7% of the volume of loans was directed there, although the share of total amount

37 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis of loans passed from 1% to 3% after the UCO were included in the FMAP/RFF borrowers (see Table 9).

Table 9: Geographic Location of FMAP-RFF Loans

Summary Table: FMAP-RFF loans location

Marzes 2009-2012 2012-2013 2009-2013 1 Aragatsotn 7.0% 7.4% 7.1% 2 Ararat 17.3% 28.6% 19.5% 3 Armavir 26.8% 19.3% 25.4% 4 Gekharkunik 5.8% 12.5% 7.1% 5 Kotayk 29.3% 7.5% 25.1% 6 Lori 8.0% 6.0% 7.6% 7 Shirak 1.4% 3.1% 1.7% 8 Sunik 0.8% 9.6% 2.5% 9 Tavush 0.7% 2.1% 1.0% 10 Vaiots Dzor 2.9% 4.0% 3.1% 11 Yerevan TOT 100% 100% 100%

1510998243. Reaching out poor areas. Overall, the demand-driven nature of the lending mechanism has allowed FMAP to cover all marzes – excluding Yerevan for the prevalence of urban livelihoods. In such distribution, the coverage has matched the distribution of poverty in the country, although not systematically. While on one end the demand of loans has neglected some of the poorest areas of the country (e.g., Lori and Shirak marzes), on the other hand it has oriented the focus on Ararat, Armavir and Kotayk marzes (receiving almost 70% of the loans), hosting some 30% of the poor people of the country (details on poverty levels in Armenia are summarized in Table 10).

Table 10: Poverty in Armenia

Marzes Poverty Total Poor Pop. Geographic incidence Pop. (estimate) distribution (2010) (2011) of poor (excluding Yerevan) 1 Aragatsotn 28.9% 132,925 38,415 3.6% 2 Ararat 42.4% 260,367 110,396 10.2% 3 Armavir 33.0% 265,770 87,704 8.1% 4 Gekharkunik 43.6% 235,075 102,493 9.5% 5 Kotayk 46.8% 254,397 119,058 11.0% 6 Lori 45.9% 235,537 108,111 10.0% 7 Shirak 48.3% 251,941 121,688 11.3% 8 Sunik 26.8% 141,771 37,995 3.5% 9 Tavush 37.1% 128,609 47,714 4.4% 10 Vaiots Dzor 26.1% 52,324 13,657 1.3% 11 Yerevan 27.5% 1,060,138 291,538 TOT 3,018,854 1,078,768

1510998244. Purpose of the loans. RFF has classified the loans in fifteen activity categories. The fifteen categories can be classified in four main clusters: (i) Agricultural production. Seven categories (the large majority), spanning livestock, crop and fisheries, and representing 82.8% of the amount of FMAP-RFF loans; (ii) Food processing. Three categories, including wine making and dairy production, representing 10.4% of the amount of loans; (iii) Rural services. Three categories, including cooling systems, leasing and other agricultural services (overall 3.2% of the investments); and

38 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

(iv) Other activities. Two heterogeneous categories (including “other agricultural activities”20 production, services and transformation), representing 3.6% of the investments. 1510998245. Average interest rate. Overall, RFF average interest rates of FMAP funded RFF loans remained stable between 12% and 13%. However, the variance of interest rates increased significantly after the inclusion of UCOs as beneficiaries of RFF refinancing. UCOs apply typically higher interest rates than commercial banks (around 33% of the loans had interest rates higher than 14%). 1510998246. Financial institutions. A total of 7 commercial banks and 7 UCOs were reached by FMAP-RFF capital injection (disaggregated figures are reported in Table 11). Initially, only commercial banks were targeted. From November 2012, FMAP started to lend funds also to UCOs (with typically smaller size of average loans), aiming to enhance their outreach to smaller-scale producers and agri-food entrepreneurs. The targeted activities did not change substantially, except for a slight transfer of preferences (marginal, in absolute value of loans) from livestock production including poultry to other agricultural activities, showing probably a preference for diversification of the livelihoods.

Table 11: Financial Institutions Targeted by FMAP-RFF

Financial institutions Total Average loans Share on (figures in USD) disbursed total Commercial Banks Inecobank 66,044 34,890 1.3% ASHIB 1,044,932 12,055 20.8% Conversebank 501,287 34,380 10.0% Unibank 269,000 35,570 5.4% Anelikbank 34,488 23,843 0.7% ABB 1,456,876 25,456 29.0% Artsakhbank 859,344 67,827 17.1% Sub-total Banks 4,231,971 84% UCOs Aregak UCO 1,462 1,310 0.0% SEF International 16,237 1,039 0.3% Nor Horizon LTD 114,948 10,509 2.3% Farm Credit UCO CC 197,511 6,703 3.9% Card Credit CJSC 225,881 9,369 4.5% ECLOF UCO LLC 49,985 3,795 1.0% KAMURJ UCO CJSC 183,813 2,053 3.7% Sub-total UCOs 789,837 16% TOTAL FMAP-RFF 5,021,808 100%

Ex-post FEA of RFF 1510998247. Through the loans generated by the injection of capital from FMAP into the partner financial institutions (banks and UCOs), the sub-component has indirectly served a large number of clients that invested in risky yet profitable agricultural productions and in micro-small enterprises linked to the agricultural sector. Moreover, through the normal repayments within the agreed schedule and the early repayments in the first years of FMAP operations, the FMAP generated an aggregated amount of loans 2.5 times higher than the initial value injected. 1510998248. The analysis builds on the data collected through field questionnaires to 55 farmers who received loans from RFF during the period of 2009-2013 compared with 56 non beneficiaries carried out for the “Impact Assessment of Rural Finance Component of Farmer Market Access Programme”, (PASV-RAC, Jan 2014). The questionnaires targeted six of the fifteen categories targeted by RFF, representing 74% of the total amount borrowed by RFF clients. The available data, despite lacking of details on the various components of costs, of type of investments and on the

20 For the period 2012-2013, other agricultural activities includes various activities (RFF has not carried out a precise disaggregation): (i) mushroom production, (ii) stone graving, stone processing, stone polishing…, plus (iii) everything non-pure agricultural activities (including 1 dental clinic, 2 taxi service…).

39 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis quantities and quality of the product, were however used in a revised and simplified production model, also for consistency with the rest of FMAP FEA, used for the analysis of benefits streams. 1510998249. As from November 2012, the accounting system of RFF did no longer distinguish the source of funding of the loans, from that date the amount of RFF loans attributable to FMAP had to be estimated, to account for a fair attribution of results of FMAP’s investments. 1510998250. The following assumptions were made for the calculation of RFF generated loans:  The total amounts invested for Jan 2009/Oct 2012 are taken from the accounting system of RFF;  After November 2012, the RFF system kept track of the amount of loans disbursed deriving from the repayment of FMAP (i.e. loans generated by the repayment of originally FMAP- funded loans). Such amount, for the period November 2012 – December 2013 was slightly below USD 1 million (USD 966 291), corresponding to some 11% of the total amount of loans delivered by RFF in the same period;  A proportion corresponding to the amount of loans generated by FMAP funds over the total amount delivered by RFF was applied in order to estimate the amount of FMAP loans;  Such percentage was applied to all categories of loans to determine the purpose, average size, and duration. The database of FMAP generated-loans was built following the assumption that FMAP generated loans have contributed proportionately to all categories of loans; and  The database of FMAP-generated loans comprises a portfolio of 366 loans, for a total amount of USD 5.0 million, generated from an initial financing of USD 2.0 million, with a multiplier effect of 2.5 (i.e. for every dollar injected into RFF in 2009, FMAP generated 2.5 dollar of loans). 1510998251. Descriptive statistics of the use of FMAP-RFF funds are presented in the Summary Table 12.

Table 12: Purposes of FMAP-RFF Loans

Summary Table: Purposes of FMAP generated loans

Purpose Total Share on Share on Share on Average Number of % on total Amount of total total total size of loans 2009- number loans (USD) amount amount amount loan (USD) 2013 2009-2013 2009-2013 (2009-12) (2012-13) (2009-13) 2009-2013 1 livestock production 2,384,448 49.3% 39.9% 47% 10,901 219 59.8% 2 greenhouse 663,097 13.6% 11.7% 13% 15,792 42 11.5% 3 horticulture 460,399 9.1% 9.3% 9% 18,370 25 6.8% 4 poultry 315,475 7.5% 1.2% 6% 42,984 7 2.0% 5 w ine production 218,115 5.3% 0.2% 4% 67,670 3 0.9% 6 fish farming 204,427 3.7% 5.7% 4% 19,518 10 2.9% 7 other agricultural activity* 158,788 - 16.4% 3% 8,570 19 5.1% 8 processing 156,504 3.7% 0.7% 3% 66,901 2 0.6% 9 dairy production 148,675 2.5% 5.0% 3% 45,997 3 0.9% 10 cooling systems 137,411 3.4% - 3% 22,163 6 1.7% 11 crop production 99,204 1.1% 5.8% 2% 6,445 15 4.2% 12 beekeeping 29,253 0.6% 0.6% 0.6% 4,525 6 1.8% 13 mixed agro 23,770 0.0% 2.5% 0.5% 6,264 4 1.0% 14 agricultural services 20,328 0.3% 0.8% 0.4% 8,690 2 0.6% 15 Leasing 1,914 0.0% 0.2% 0.0% 2,144 1 0.2%

TOTAL 5,021,808 100.0% 100.0% 100.0% 346,934 366 100.0%

1510998252. The main assumptions used for the estimation of net incremental benefits from FMAP-RFF loans are the following:  Out of the fifteen sub-sectors targeted for RFF loans, the analysis focused on the six chosen by the “RFF Impact Assessment”. Those represent some 74% of the total amount of loans lent by the ten institutions that borrowed from FMAP-RFF investment. Such sub-sectors include: (i) livestock production, including mixed meat/dairy production (representing around 47.5% of the amount of loans);

40 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

(ii) greenhouses (13.2%); (iii) wineries (4.3%); (iv) fish farming (4.1%); (v) cheese production (3.0%); and (vi) crop production (2.0%).  Such categories are considered to be sufficiently representative of FMAP-RFF investments.  The corresponding estimated net incremental estimated benefits have been proportionately increased as if they represented the total amount invested.  For all categories, benefits are expected to reach their maturity at the fourth year after the loan has been contracted, starting from 40% of the full revenue at the year of the investment, reaching proportionately 100% at a pace of additional 20% per year.  The number of loans per category has been estimated according to the available RFF monitoring data, and it was assumed that loans were distributed in time on a pro-rata basis weighted by the amount lent during the two major reference periods (2009-2012 and 2013). Such assumption was used to estimate when in time the net benefits were generated (see Table 13 with estimated number of loans).

Table 13: Estimated Number of RFF Loans (based on pro-rata distribution)

2008 2009 2010 2011 2012 2013 Total Livestock - 13 40 40 40 132 265 Greenhouses - 3 9 9 9 31 61 Crop production - - 1 1 1 2 5 Fish Farming - 1 2 2 2 5 12 Cheese production - - - - - 1 1 Wineries - - 1 1 1 4 7 Total - 17 53 53 53 175 351

 Considering the high repayment rate, documented by RFF monitoring data, and based on the average loan duration of four years, it was considered that the reimbursement of loans would finance new loans for the same categories.  The reinvested amount was reduced by an estimated 20%, disaggregated by risk of failure of the activities and management costs of the loans for the financial institutions.  The benefits of the financial institutions, disaggregated by type of financial institution (UCOs have typically a higher share of loans among their assets than commercial banks which tend instead to diversify more their activities), was estimated on the total amount of capital received by FMAP-RFF.  An estimate of the net incremental benefits of UCOs and banks was carried out as the contribution to the profits of the incremental loans generated by FMAP-RFF refinancing, based on the estimated return on loans.21 Stream of incremental benefits from the additional loans generated by the reimbursements of the outstanding loans (repeated increase, every six years), with reduction of a lump sum 20% of incremental net benefits due to (1) absorbing risk of failure of the funded activities; (2) profit of banks/UCOs.

Table 14: Stream of Incremental Profits Generated by Banks and UCOs

Total Amounts disbursed (2009-2013) Expected return on loans Commercial Banks 4,231,971 0.73% 30,723 UCOs 789,837 4.50% 35,569 TOTAL 5,021,808

21 Source for this exercise have been data available from the published Annual Reports of commercial banks (several years), and data available at Mix Market (www.mixmarket.org).

41 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Incremental benefit streams of Banks and UCOs beneficiaries of FMAP-RFF loans 2008 2009 2010 2011 2012 2013 2014 2015-2027 Incremental Benefits Banks 0 0 0 0 30,723 30,723 30,723 30,723 Incremental Benefits UCOs 0 0 0 0 35,569 35,569 35,569 35,569

Results 1510998253. RFF represents the most successful activity of the project, with 41.7% E-IRR (Table 15).

Table 15: Benefit Streams of RFF and Corresponding IRR

US$million 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2027

Costs C1b RFF - 506 2,336 13 2 19 - - - - -

Benefits C1b RFF - - 41 - 143 - 215 - 141 - 645 1,655 3,716 5,312 5,316 13,167

Cash flow - - 548 - 2,479 - 229 - 143 - 664 1,655 3,716 5,312 5,316 13,167

IRR 41.7%

1510998254. Through the loans generated by the injection of capital from FMAP into the partner financial institutions (banks and UCOs), the sub-component has served a large number of clients that invested in risky yet profitable agricultural productions and in micro and small enterprises linked to the agricultural sector. Moreover, through the repayments within the agreed schedule, and the anticipated repayments (early repayments), generated mostly in the first years of operations, FMAP-RFF generated an aggregated amount of loans 2.5 times higher than the initial value injected (USD 2 million). 1510998255. Several alternative scenarios were analyzed to complement the analysis with additional information: a) Scenario 1. Particularly striking is the difference between the base scenario and a scenario taking into account only the benefits of the first loans generated by RFF (i.e., for a total amount invested of USD 2 million). In such case, the net benefits of RFF component would generate 12.6% IRR considering the agricultural activities only, and 14.2% IRR including the incremental benefits of banks and UCOs (Tables 16 and 17, below). b) Scenario 2. As alternative analysis, based on the base scenario (i.e., taking into account also the loans generated by the repayments of RFF during FMAP life cycle), the stream of benefits excluding the additional generation of loans from repayments carried out after FMAP life cycle (i.e., the expected repayments) was calculated. Such scenario would produce 39.0% IRR for RFF-funded agricultural activities only, and 39.6% IRR including the incremental benefits of banks and UCOs (Tables 16 and 17, below). c) Scenario 3. As a more optimistic scenario, the stream of benefits was calculated as if the entire amount of loans was reinvested (i.e. excluding the 20% reduction due to estimated risk of failure of the agricultural activities themselves and the costs of loans management from the banks and UCOs). Such scenario, expectedly the highest, would generate 41.7% IRR for RFF-funded agricultural activities only, and 42.2% IRR including the incremental benefits of banks and UCOs (Tables 16 and 17).

Table 16: Summary of RFF EIRR as per Alternative Scenarios

Descriptive scenario / IRR-RFF comp. Estimated IRR Base Scenario 41.7% Scenario 1 – first loans only 14.2% Scenario 2 – excluding exp. Add. Loans 39.6%

42 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Scenario 3 – no risks, no mgt. costs 42.2%

1510998256. Benefit streams of commercial banks and UCOs, taken into account as the proportional contribution to profits of the incremental loans generated by FMAP-RFF capital injection was also taken into account, and is summarized in the Table 17 below.

Table17: Estimated stream of net incremental benefits of commercial banks and UCOs

Total Amounts disbursed (2009-2013) Expected return on loans Commercial Banks 4,231,971 0.73% 30,723 UCOs 789,837 4.50% 35,569 TOTAL 5,021,808 Incremental benefit streams of Banks and UCOs beneficiaries of FMAP-RFF loans 2008 2009 2010 2011 2012 2013 2014 2015-2027 Incremental Benefits Banks 0 0 0 0 30,723 30,723 30,723 30,723 Incremental Benefits UCOs 0 0 0 0 35,569 35,569 35,569 35,569

1510998257. Employment. Income growth of beneficiary households contributed to the expansion of households, which in turn led to the creation of new jobs. The difference in employment between the without project and with project situation has been studied in the Impact Assessment Report for RFF. As displayed in Table 18, beneficiary households increase the share of hired work, reducing work of household members, friends and relatives. An opposite behavior was registered for the control group, which apparently continued to rely on family members, friends and relatives.

Table 18: The Number of Employed per Average Household

Permanent job Temporary job WOP WP Diff. WOP WP Diff.

Household members 2.58 2.65 0.07 1.95 1.95 0 Friends and relatives Beneficiaries 2.50 2.11 -0.39 2.50 2.50 0 Employees (hired workers) group 3.43 4.25 0.82 3.71 6.43 2.72 Household members 2.59 2.61 0.02 2.10 2.14 0.04 Friends and relatives 1.50 2.00 0.50 1.86 2.29 0.43 Employees (hired workers) Control group 4.00 3.00 -1.00 3.25 3.50 0.25

43 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 19: Alternative Scenario 1 for RFF Benefits and IRR (loans only)

Scenario 1 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-2027 TOTAL INCREMENTAL BENEFITS (pre-inv) - - 42,231 - 102,336 - 120,955 - 51,144 278,764 533,182 694,716 694,716 694,716 TOTAL INCREMENTAL COSTS - 506,366 2,336,006 13,445 1,656 18,706 - - - - TOTAL NET INCREMENTAL BENEFITS - - 548,598 -2,438,342 - 134,400 - 52,800 260,058 533,182 694,716 694,716 694,716

12.6%

Table 20: Alternative Scenario 1 for RFFB Benefits and IRR (with Financial Institutions)

Alternative - first loans only 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-2027 TOTAL INCREMENTAL BENEFITS (pre-inv) - - 42,231 - 102,336 - 120,955 - 51,144 278,764 533,182 694,716 694,716 694,716 Incremental benefits Banks - - - - 30,723 30,723 30,723 30,723 30,723 30,723 Incremental benefits UCOs - - - - 35,569 35,569 35,569 35,569 35,569 35,569 TOTAL INCREMENTAL COSTS - 506,366 2,336,006 13,445 1,656 18,706 - - - - TOTAL NET INCREMENTAL BENEFITS - - 548,598 - 2,438,342 - 134,400 13,492 326,350 599,474 761,009 761,009 761,009 14.2%

Table 21: Alternative Scenario 2 for RFF Benefits and IRR (loans only)

Scenario 2 (excluding expected additional loans) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-2027 TOTAL INCREMENTAL BENEFITS (pre-inv) - - 41,149 - 142,513 - 215,482 - 207,160 - 711,224 1,619,906 3,756,847 5,411,521 5,411,521 TOTAL INCREMENTAL COSTS - 506,366 2,336,006 13,445 1,656 18,706 - - - - TOTAL NET INCREMENTAL BENEFITS - - 547,515 -2,478,519 - 228,927 - 208,816 - 729,930 1,619,906 3,756,847 5,411,521 5,411,521 Scenario 1 - number of loans a 39.0%

Table 22: Alternative Scenario 2 for RFFB benefits and IRR (with Financial Institutions)

Scenario 3 (no risk of failure, no loans mgt costs) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-2027 TOTAL INCREMENTAL BENEFITS (pre-inv) - - 41,149 - 142,513 - 215,482 - 207,160 - 711,224 1,581,527 3,622,328 5,204,138 5,208,656 TOTAL INCREMENTAL COSTS - 506,366 2,336,006 13,445 1,656 18,706 - - - - TOTAL NET INCREMENTAL BENEFITS - - 547,515 -2,478,519 - 228,927 - 208,816 - 729,930 1,581,527 3,622,328 5,204,138 5,208,656 Scenario 1 - number of loans a 41.7%

Table 23: Alternative Scenario 3 for RFF Benefits and IRR (with Financial Institutions)

Scenario 3 (no risks) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-2027 TOTAL INCREMENTAL BENEFITS (pre-inv) - - 41,149 - 142,513 - 215,482 - 207,160 - 711,224 1,581,527 3,622,328 5,204,138 5,208,656 Incremental benefits Banks - - - - 30,723 30,723 30,723 30,723 30,723 30,723 Incremental benefits UCOs - - - - 35,569 35,569 35,569 35,569 35,569 35,569 TOTAL INCREMENTAL COSTS - 506,366 2,336,006 13,445 1,656 18,706 - - - - TOTAL NET INCREMENTAL BENEFITS - - 547,515 - 2,478,519 - 228,927 - 142,523 - 663,637 1,647,819 3,688,621 5,270,431 5,274,949 42.2%

44 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

D. FREDA 1510998258. The analysis for the PCR is based on a study commissioned by FREDA, analyzing both (i) the performance of the enterprises benefitting of the venture capital investments; and (ii) the effects on the value chain (volume of supplies from farmers).

Projected Benefits for the Beneficiaries Companies 1510998259. The analysis built on an impact study carried out in 2013 on the performance of FMAP supported companies that had a specific focus on the effects of FREDA’s investments on sales, generation of employment within the client companies and on incremental procurement from farmers. Additional and corrective sources have also been data from FREDA monitoring and accounting system, in some cases complemented by data from client companies. Typical information available are aggregated values of sales (and other aggregated incomes, where applicable), costs (disaggregated by direct, indirect and other costs), including the value of agricultural products procured from the farmers. The analysis for the performance of FREDA investments built on the performance of the 10 FMAP-funded companies, with costs and revenues projected for a period of 20 years under specific assumptions for with- and without- project scenario.

Table 24: Summary of FMAP-FREDA Investments

Summary of FMAP-FREDA Investments 2009-2014

FREDA Total Technical 2010 2011 2012 2013 FREDA Equity FREDA Loan Assistance (mAMD, (mAMD, (mAMD, (mAMD, Company Sub-Sector Year (AMD, current Equity (AMD, (AMD, current Constant Constant Constant Constant prices) Share current prices) prices 2013) prices 2013) prices 2013) prices 2013) prices) Akvatechavtomatika Fish Farming 2010 200.0 30% 52.7 - 226.06 57.16 Pyunik Pedigree Poultry Poultry 2010 200.0 27% 52.8 140 226.06 209.10 Meghri Cannery Cannery 2010 50.0 28% 65.6 78 56.51 155.72 Agrolog Fruit Storage 2011 20.0 42% 2.2 - 365 Wines Wine Processing 2011 200.0 34% 43.0 - 216.94 44.89 Cheese Town Dairy Processing 2011 115.0 33% 43.0 - 124.74 44.81 Harprod Cannery 2011 200.0 29% 42.8 216.94 44.65 Araler TOT Sheep Breeding 2012 90.0 44% 48.6 160 94 209 Sis Natural Cannery, Juices 2012 200.0 25%+1 38.8 200 209 239 Arzni Meat Slaughterhouse 2014 100.0 44% 35.1 100 104 135 Gomq Cheese Making Factory Dairy Processing 39.0 42% Total million AMD 1,414.00 424.46 678.00 508.63 980.61 541.13 582.47 Total million USD 3.49 1.05 1.67 1.26 2.42 1.34 1.44

1510998260. Assumptions for the projections. For the situation without-project (WOP), the main assumption considered is that the client companies in Armenia would follow at least and on average the rate of growth of the agricultural sector (projected, as per various sources, at +5.0% and +5.3% respectively for 2014 and 2015). For the following period, the average growth of 5.2% in the agriculture sector in Armenia was considered a reasonable reference for both sales and costs. Therefore, all costs and sales were projected to grow at the rate of the agriculture sector, taking as baseline period the year before the investment was carried out. 1510998261. For the with-project scenario (WP), the growth of sales is assumed to be higher than the one of agriculture, mainly because of the expected improvement of competitiveness in the respective markets generated by FREDA investments and technical assistance to its client companies. Therefore, the main fact underlying the analysis is that the increase of capital operated by FREDA for the 10 companies has resulted in the procurement of new equipment aimed to: (i) increase the levels of production and sales; (ii) gain efficiency and productivity; (iii) enhance the quality of the products; or (iv) a combination of these effects. Such investments are therefore expected to increase the production capacity and to enhance the quality of products (becoming more attractive and competitive on domestic and foreign markets). As such, and all other macroeconomic factors remaining constant (i.e. domestic and international demand, availability and supply of production inputs…), the projected sales are composed of multiple phases: (a) at first, the enterprises growth at

45 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis an expected rate higher than the average growth of the sector, and costs, justified by the expected efficiency gains, increase at lower rates than the ones of the sales; (b) in a second moment, production enters into a maturity stage, where the growth rate of sales are stabilized around the average growth of the sector, and same path is followed by the production costs; (c) finally, sales and costs are just assumed constant during the project years from 11th to the 20th year (i.e., no assumptions on growth of costs and sales were taken for the second projected decade). For taxation, a 20% on net gross profit was applied (see Table 25).

Table 25: FREDA Client Companies – Projected Tax Flow

Expected Tax flow from FREDA client 2020- companies 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2029 AMD (Million) - Constant prices 2013 - - 80.42 - 39.92 - 40.43 9.19 38.76 138.14 145.32 152.88 160.83 169.19 US$ ('000) - Constant prices 2013 - -196.36 - 97.48 - 98.71 22.45 94.65 337.30 354.84 373.29 392.70 413.12 (When negative is a net reimbursement from the Govt to the client companies)

1510998262. Details of the assumptions are described below, and shown in summary in Table 26. Net incremental benefits resulting from the projections projected performance of companies that already benefitted of FREDA’s support are reported in 26.  With-project projection parameters. On one hand, (i) sales are foreseen to grow at an initial rate of 20%, for the first projected year, and then 15% for 2 years, stabilized at 5.2% for another four years (which is the expected rate of growth of the agriculture sector) and then nil until the end of the projection; on the other hand; and (ii) costs grow as a function of the overall production capacity, but at lower rates due to the expected increased productivity and efficiency of the processing. After an initially projected increase of 10%, two periods with growth of costs of 7.5% are projected, followed by four years of growth at the expected agriculture sector growth and then null until the end of the projection.  Without project projection parameters. In the absence of a significant investment, both sales and costs are adjusted to the expected growth rate of the agriculture sector. This positive growth represents a conservative assumption, decreasing the divergence between the projected increased turnovers in the with and without project scenarios (i.e., lower incremental benefits deriving from the increased production capacity and productivity due to the investment).

Table 26: FREDA Client Companies – Projection Parameters

actual values /a projections /b 2021 Growth parameters 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 / 2030 With project: Sales Actual values 20% 15% 15% 5.2% 5.2% 5.2% 5.2% NA With project: Costs (at constant 2013 prices) 7.5% 7.5% 7.5% 5.2% 5.2% 5.2% 5.2% NA Without project: Sales Actual values 4.6% 3.3% 6.3% 5.0% 5.3% 5.2% 5.2% 5.2% 5.2% 5.2% NA Without project: Costs (2013 prices) 4.6% 3.3% 6.3% 5.0% 5.3% 5.2% 5.2% 5.2% 5.2% 5.2% NA \a Source: FREDA Monitoring and accounting data for Actual Values and Economist Intelligence Unit for economy's values \b No reasonable assumptions on or projections of growth can be done for the period 2021-2030

Table 27: FREDA Client Companies – Projected Net Incremental Benefits

Incremental BENEFITS (million AMD) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020- 2029 1 "Akvateckavtomatika" CJSC - (116.08) (80.77) (412.12) (36.31) 28.05 122.30 128.66 135.35 142.39 149.80 2 "Pyunik PPP" CJSC - (136.70) (637.79) (36.45) (8.81) 7.37 51.71 54.40 57.23 60.21 63.34 3 "Meghri Cannery" CJSC - 1.97 8.23 (4.68) 13.00 21.73 36.44 38.34 40.33 42.43 44.63 4 "365 Group" CJSC - - (2.21) (6.45) 42.09 58.40 85.05 89.48 94.13 99.02 104.17 5 "Harprod" CJSC - - (34.40) (35.58) 30.63 49.04 74.11 77.96 82.02 86.28 90.77 6 "Cheese Tow n" CJSC - - (1.59) (3.58) (5.27) (1.60) 4.61 4.85 5.10 5.37 5.65 7 "Agrolog" CJSC ------8 "Araler" CJSC - - - (0.66) 0.42 0.60 0.88 0.93 0.98 1.03 1.08 9 "Sis Natural" CJSC - - - (8.54) (34.60) (56.57) 111.81 117.62 123.74 130.17 136.94 TOTAL - (251) (749) (508) 1 107 487 512 539 567 596

Projected Benefits for Farmers Suppliers 1510998263. As for the performance of FREDA client companies, the analysis of the impact on farmers incremental revenues built on the results of the investments carried out within FMAP. As such,

46 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis the projections of the net incremental benefits for the farmers comprise the effects on the procurement on six main value chains: fish, vegetables, fruits, grapes (separate from fruits specifically for wine production), milk and livestock feed. 1510998264. Assumptions on increased farmers’ production. Main assumption is that the increased production capacity of FREDA client companies results in an increased demand of agricultural products, hence in an increased production from farmers, mainly depending on an expansion of the area under production. Net incremental farmer revenues are presented in Table 28. For both, with- and without-project scenarios production, the structure of costs is assumed to be the same, as no specific investments have been registered nor facilitated by the project or by the companies. On the overall growth of production and sales, the demand of the client companies (using the projected direct costs as proxy) is assumed to be the main driver. However, the growth in the value of sales is assumed to be lower than the one of direct costs, as other inputs, chemicals, or temporary workers play a significant role in the composition of direct costs. As such, the expected growth rate of the agricultural sector is assumed as the reference growth for the sales. For the without-project scenarios, the same growth rate for sales was used as reference growth, though applied to the value of sales registered before the client companies carried out the investments.

Table 28: Net Incremental Procurement from Farmers – Projections (in AMD million)

(million AMD) Net Incremental Production 2020- 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Procurement Cost 2027 Fish 75% - 4.4 49.4 61.4 79.3 74.0 77.8 81.9 86.1 90.6 95.3 100.3 Fruits and vegetables 50% - 4.5 23.7 34.7 235.3 139.7 147.0 154.6 162.7 171.1 180.0 189.4 Wine / Grapes 75% - - 4.0 - 0.6 13.3 6.7 7.0 7.4 7.8 8.2 8.6 9.1 Milk 65% - - - 9.3 4.0 17.9 11.2 11.8 12.4 13.0 13.7 14.4 15.2 Fruits 50% - - 3.3 - 0.7 - 0.7 - 0.7 - 0.8 - 0.8 - 0.9 - 0.9 - 0.9 - 1.0 Feed 65% - - - 7.9 9.8 9.3 9.8 10.3 10.8 11.4 12.0 12.6 - 8.9 71.0 106.8 354.9 240.1 252.6 265.8 279.6 294.1 309.4 325.5

Projected FREDA Performance 1510998265. The analysis builds on FREDA financial performance during the implementation of FMAP. Costs include investments and technical assistance to selected companies plus the recurrent costs required to achieve FREDA’s expected results (around USD 8.3 million). Profits and revenues of FREDA (unaccounted in the economic analysis as they represent a transfer) are composed of dividends from the client companies and of the interests on subsidiary loans. 1510998266. Although FREDA is expected to gain revenue from the (i) payment of interests, (ii) repayment of the main investment; and (iii) subsidiary loans, expected between 10 and 12 years as per the projected cash flow analysis of the enterprises, which could potentially generate additional investments in the sector, the expected additional net incremental benefits are not included in the analysis. The projected cash flow of the companies (see also Table 26) show a generalized difficulty in the ability of investees to buy back the stocks sold to FREDA at the beginning of the investment. As such, it is considered wiser and more conservative to include FREDA’s benefits as non-accounted part of the benefits of FMAP. 1510998267. Additional unaccounted benefits. Additional benefits are expected to be generated from the generation of employment, but the available data do not allow to disaggregate by full-time or temporary job, or to disaggregate by gender of employee, making the overall calculation of the overall net incremental benefits from employment difficult. In addition to the net job creation, the annual payroll has also increased by 51% between 2009 and 2012, while the average salary during the same period grew by 39%. In Table 29 (below), the summary of employment generated during the FMAP life-cycle. Moreover, FREDA’s benefits are also part of the yet unaccounted contribution to FMAP impact.

47 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 29: FREDA Client Companies – Employment Generation during FMAP

Number of FREDA - Employment employees (pre- Number of Number of Average annual generation capacity investment) employees (2012) employees (2013) Total observed difference increase Total 249 308 310 61 24%

Table 30: EIRR and FIRR of FREDA during FMAP

US$million 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018-2027

Costs C1 FREDA 62,610 899,632 1,133,998 2,365,094 1,979,502 1,917,823 - - - - -

Benefits C1 FREDA - - 23,046 180,066 -484,852 -1,106,062 -866,004 710,545 1,115,295 2,462,422 2,590,468

Cash flow -62,610 -899,632 -1,110,952 -2,185,028 -2,464,354 -3,023,885 -866,004 710,545 1,115,295 2,462,422 2,590,468

IRR 12.8%

E. Rural Infrastructure Investments 1510998268. The bulk of the analysis of the Rural Infrastructure Investment of FMAP is included in the ad hoc study carried out after a mission held by IFAD in the first quarter 2014. The benefit streams generated by investments in Water Supply, Roads and Irrigation are respectively reported in Appendix 5-6 and 7 of the mentioned study, while the data reported in Appendix 4 provide the basis for the calculation of the incremental annual expenditures of the rural households using natural gas. 1510998269. The RII Component was initially valued at about USD 14.7 million, but it attracted incremental resources that were not foreseen at the design stage. These include an incremental USD 4.0 million of OFID Loan funding (negotiated by the Government of Armenia (GOA) in addition to the USD 10.0 million included in the PDR financing plan) and about USD 900 000 from a reallocation across the IFAD loan categories carried out during implementation. Both the IFAD and OFID loan allocations have been fully disbursed ahead of schedule by the end of 2011.

48 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Tables

Table 31: RFF Livestock Production Model

Original Findings (from interviews for RFF "Impact Assessment") Unit WOP W/P Livestock product sales revenue USD 2003 2759 Animal sales revenue USD 538 567 Gross Income USD 2540 3326 Incremental income 786 Livestock breeding expenses USD 862 1027 Total expense USD 862 1027 Incremental costs USD 165 Scenario 1 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 - Y20 40% 60% 80% 100% 100% 100% 100% 100% 100% 100% incremental income -1210 -545 121 786 786 786 786 786 786 786 Incremental costs 165 165 165 165 165 165 165 165 165 165 Net Incremental Income - 1,374.99 - 709.73 - 44.47 620.79 620.79 620.79 620.79 620.79 620.79 620.79

IRR= 21% 7% NPV@12%= $1,321 USD Interest Rate for NPV 12%

49 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 32: RFF Greenhouse Production Model

Production Value, USD WoP W/P WoP W/P Vegetables ton 20.38 29.72 10,457 18,007 Flowers tousand pieces 4.4 131.5 840 28,395 Seedlings tousand pieces 0.7 0.5 86 62 Generated revenue USD 11,383 46,464 Incremental income USD 35,081 Purchase of seedlings, seeds and planting material USD 1,963 2,872 Purchase of fertilizers USD 867 1,141 Water use fee USD 254 408 Purchase of pesticides USD 464 662 Greenhouse heating expenses USD 1,052 7,768 Salary USD 341 1,975 Repair expenses USD 704 1,494 Other expenses USD 691 988 Total expense USD 6,336 17,307 Incremental costs USD 10,971 Progressive benefits Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10-Y20 40% 60% 80% 100% 100% 100% 100% 100% 100% 100% incremental income 7203 16496 25789 35081 35081 35081 35081 35081 35081 35081 Incremental costs 10,971 10,971 10,971 10,971 10,971 10,971 10,971 10,971 10,971 10,971 Net Incremental Income - 3,767.90 5,524.94 14,817.78 24,110.62 24,110.62 24,110.62 24,110.62 24,110.62 24,110.62 24,110.62

IRR= 240% 64% NPV@12%= $133,771 USD Interest Rate for NPV 12%

50 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 33: RFF Crop Production Model

Original Findings (from interviews for RFF "Impact Assessment") Unit WOP W/P Crop product sales revenue USD 8990 13662 Generated revenue USD 8990 13662 Incremental income 4672 Crop production expenses USD 1235 1592 Total expense USD 1235 1592 Incremental costs USD 357 Progressive benefits Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10-Y20 40% 60% 80% 100% 100% 100% 100% 100% 100% 100% incremental income -3525 -793 1939 4672 4672 4672 4672 4672 4672 4672 Incremental costs 357 357 357 357 357 357 357 357 357 357 Net Incremental Income - 3,882.88 - 1,150.53 1,581.81 4,314.16 4,314.16 4,314.16 4,314.16 4,314.16 4,314.16 4,314.16

IRR= 49% NPV@12%= $12,778 USD Interest Rate for NPV 12%

51 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 34: RFF Fish Farm Production Model

Original Findings (from interviews for RFF "Impact Assessment") Unit WOP W/P Fish sales revenue USD 35185 60926 Incremental income 25741

Purchase of fingerlings and planting material USD 2,160 4,012 Purchase of fish feed USD 2,346 3,086 Water use fee USD 185 574 Pesticides USD 463 586 Cost of methods for increasing the amount of oxygen in water USD 1,543 2,160 Salary USD 1,358 2,346 Repair expenses USD 1,049 2,111 Other expenses USD 4 154 Total expense USD 9,109 15,031 Incremental costs USD 5,922

Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10-Y20 40% 60% 80% 100% 100% 100% 100% 100% 100% 100% incremental income -10815 1371 13556 25741 25,741 25741 25741 25741 25741 25741 Incremental costs 5,922 5,922 5,922 5,922 5,922 5,922 5,922 5,922 5,922 5,922 Net Incremental Income before investment - 16,736.20 - 4,551.00 7,634.20 19,819.40 19,819.40 19,819.40 19,819.40 19,819.40 19,819.40 19,819.40

IRR= 33% NPV@12%= $71,923 USD Interest Rate for NPV 12%

52 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 35: RFF Dairy Production Model

Original Findings (from interviews for RFF "Impact Assessment") Production Value, USD WoP W/P WoP W/P Cheese sales revenue ton 29.95 69.675 94,444 232,284 Incremental income USD 137,840 Milk of own production ton 2.5 3.5 617 1,251 Purchase of milk ton 98.5 194.3 24,321 69,444 Price for 1 ton of purchased milk USD/ton 246.9 357.5 Cheese production costs USD 37,531 85,802 Total expense USD 62,469 156,498 Incremental costs USD 94,029 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10-Y20 40% 60% 80% 100% 100% 100% 100% 100% 100% 100% incremental income -1531 44926 91383 137840 137840 137840 137840 137840 137840 137840 Incremental costs 94,029 94,029 94,029 94,029 94,029 94,029 94,029 94,029 94,029 94,029 Net Incremental Income before investment - 95,559.89 - 49,103.10 - 2,646.31 43,810.48 43,810.48 43,810.48 43,810.48 43,810.48 43,810.48 43,810.48

IRR= 13% NPV@12%= $15,198 USD Interest Rate for NPV 12%

53 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 36: RFF Wine Production Model

Original Findings (from interviews for RFF "Impact Assessment") Production Value, USD WoP W/P WoP W/P

Wine sales revenue thousand litres 62.3 103.3 177,531 284,198 Incremental income 106,667 Grapes of own production ton 53.3 70.0 Purchase of grapes ton 163.0 191.7 60,741 74,584 Price for 1 ton of purchased grapes USD/ton 373 389 Price for grapes of own production USD 19,874 27,240 Import of raw material ton 45.0 47.3 14,173 15,160 Wine production expenses USD 71,056 99,065 Total expense 166,216 216,439 Incremental costs USD 50,222 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10-Y20 40% 60% 80% 100% 100% 100% 100% 100% 100% 100% incremental income -63852 -7012 49827 106667 106667 106667 106667 106667 106667 106667 Incremental costs 50,222 50,222 50,222 50,222 50,222 50,222 50,222 50,222 50,222 50,222 Net Incremental Income before investment - 114,074.11 - 57,234.60 - 395.09 56,444.41 56,444.41 56,444.41 56,444.41 56,444.41 56,444.41 56,444.41

IRR= 17% NPV@12%= $86,103 USD Interest Rate for NPV 12%

54 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 37: RFF – Base Scenario – Loans Only

Base Scenario: progressive benefits Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Y20 Livestock - 1,374.99 - 709.73 - 44.47 620.79 620.79 - 479.20 53.01 585.22 1,117.43 1,117.43 1,832.58 Greenhouses - 3,767.90 5,524.94 14,817.78 24,110.62 24,110.62 21,096.30 28,530.57 35,964.84 43,399.11 43,399.11 71,174.54 Crop production - 3,882.88 - 1,150.53 1,581.81 4,314.16 4,314.16 1,207.85 3,393.73 5,579.61 7,765.48 7,765.48 12,735.39 Fish Farming - 16,736.20 - 4,551.00 7,634.20 19,819.40 19,819.40 6,430.43 16,178.59 25,926.75 35,674.91 35,674.91 58,506.85 Cheese production - 95,559.89 - 49,103.10 - 2,646.31 43,810.48 43,810.48 - 32,637.44 4,527.99 41,693.43 78,858.86 78,858.86 129,328.53 Wineries - 114,074.11 - 57,234.60 - 395.09 56,444.41 56,444.41 - 34,814.87 10,656.73 56,128.34 101,599.94 101,599.94 166,623.90

Benefits from Loans 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2027 Livestock (2009) NA - 17,875 - 9,226 - 578 8,070 8,070 - 6,230 689 7,608 14,527 23,824 Livestock (2010) NA NA - 55,000 - 28,389 - 1,779 24,832 24,832 - 19,168 2,120 23,409 59,679 Livestock (2011) NA NA NA - 55,000 - 28,389 - 1,779 24,832 24,832 - 19,168 2,120 46,054 Livestock (2012) NA NA NA NA - 55,000 - 28,389 - 1,779 24,832 24,832 - 19,168 32,430 Livestock (2013) NA NA NA NA NA - 181,499 - 93,684 - 5,870 81,945 81,945 199,945 TOTAL - - 17,875 - 64,226 - 83,967 - 77,097 - 178,765 - 52,029 25,315 97,337 102,832 361,931 18% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2027 Greenhouses (2009) NA - 3,765 5,528 14,821 24,114 24,114 21,099 28,534 35,968 43,402 71,178 Greenhouses (2010) NA NA - 33,911 49,724 133,360 216,996 216,996 189,867 256,775 323,684 597,749 Greenhouses (2011) NA NA NA - 33,911 49,724 133,360 216,996 216,996 189,867 256,775 554,928 Greenhouses (2012) NA NA NA NA - 150,716 220,998 592,711 964,425 964,425 843,852 2,276,030 Greenhouses (2013) NA NA NA NA NA - 497,363 729,292 1,955,947 3,182,601 3,182,601 7,765,548 TOTAL - - 3,765 - 28,383 30,634 56,482 98,104 1,777,093 3,355,767 4,629,636 4,650,314 11,265,432 240% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2027 Crop production (2009) NA ------Crop production (2010) NA NA - 3,882.88 - 1,150.53 1,581.81 4,314.16 4,314.16 1,207.85 3,393.73 5,579.61 11,336.43 Crop production (2011) NA NA NA - 3,882.88 - 1,150.53 1,581.81 4,314.16 4,314.16 1,207.85 3,393.73 9,937.47 Crop production (2012) NA NA NA NA - 3,882.88 - 1,150.53 1,581.81 4,314.16 4,314.16 1,207.85 8,538.51 Crop production (2013) NA NA NA NA NA - 7,765.76 - 2,301.07 3,163.62 8,628.32 8,628.32 21,053.09 TOTAL - - - 3,883 - 5,033 - 3,452 - 3,020 7,909 13,000 17,544 18,810 50,866

55 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 37 (cont’d)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2027 Fish Farming (2009) NA - 16,736.20 - 4,551.00 7,634.20 19,819.40 19,819.40 6,430.43 16,178.59 25,926.75 35,674.91 58,506.85 Fish Farming (2010) NA NA - 33,472.41 - 9,102.01 15,268.39 39,638.79 39,638.79 12,860.86 32,357.18 51,853.50 104,536.06 Fish Farming (2011) NA NA NA - 33,472.41 - 9,102.01 15,268.39 39,638.79 39,638.79 12,860.86 32,357.18 92,058.42 Fish Farming (2012) NA NA NA NA - 33,472.41 - 9,102.01 15,268.39 39,638.79 39,638.79 12,860.86 79,580.77 Fish Farming (2013) NA NA NA NA NA - 83,681.02 - 22,755.02 38,170.98 99,096.98 99,096.98 241,796.62 TOTAL - - 16,736 - 38,023 - 34,940 - 7,487 - 18,056 78,221 146,488 209,881 231,843 576,479 52% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2027 Cheese production (2009) NA ------Cheese production (2010) NA NA ------Cheese production (2011) NA NA NA ------Cheese production (2012) NA NA NA NA ------Cheese production (2013) NA NA NA NA NA - 95,559.89 - 49,103.10 - 2,646.31 43,810.48 43,810.48 106,897.56 TOTAL ------95,560 - 49,103 - 2,646 43,810 43,810 106,898 17% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2027 Winery (2009) NA ------Winery (2010) NA NA ------Winery (2011) NA NA NA - 114,074.11 - 57,234.60 - 395.09 56,444.41 56,444.41 - 34,814.87 10,656.73 108,420.25 Winery (2012) NA NA NA NA - 114,074.11 - 57,234.60 - 395.09 56,444.41 56,444.41 - 34,814.87 79,318.42 Winery (2013) NA NA NA NA NA - 456,296.43 - 228,938.40 - 1,580.38 225,777.65 225,777.65 550,897.46 TOTAL - - - - 114,074 - 171,309 - 513,926 - 172,889 111,308 247,407 201,620 738,636 20% Scenario 1: progressive benefits 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2027 TOTAL INCREMENTAL BENEFITS (pre-inv) - - 41,149 - 142,513 - 215,482 - 207,160 - 711,224 1,589,202 3,649,232 5,245,615 5,249,229 13,100,241 TOTAL INCREMENTAL COSTS - 506,366 2,336,006 13,445 1,656 18,706 - - - - - TOTAL NET INCR. BENEFITS - - 547,515 -2,478,519 - 228,927 - 208,816 - 729,930 1,589,202 3,649,232 5,245,615 5,249,229 13,100,241 Base Scenario (RFF loans only) 41.2%

56 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 38: FREDA – Akvatechavtomatica Projected Growth

Company: Akvatekhavtomatika Sector: Fish breeding and proccessing

FREDA Investment Total Amount 200,000,000 Amount in AMD Year of investment 2010 year Expected duration 7 years Subsidiary Loan Subsidiary Loan N/A Interest rate N/A Duration N/A

in million AMD constant prices 2013 in AM D actuals, constant prices 2013 projected, constant prices 2013

2009 / Year before 2010 2011 2012 2013 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 investment

Sales 185,033,000 496,445,000 691,477,000 907,119,000 467,828,524 198 526 718 926 468 792 910 1,047 1,101 1,159 1,219 1,282 1,282 1,282 1,282 1,282 1,282 1,282 1,282 1,282 1,282 Export 29,413,000 294,552,000 516,475,000 769,052,000 349,528,899 32 312 537 785 350 595 684 787 828 871 916 964 964 964 964 964 964 964 964 964 964 % of Export in Sales 16% 59% 75% 85% 75% 2 0 0 (0) Other Income 1,214,000 61,203,000 1,695,000 160,000 3,646,081 1 65 2 0 4 21 24 28 29 31 33 34 34 34 34 34 34 34 34 34 34 Gains from assets* - 346,402,000 620,035,000 640,825,000 - 367 644 654 - 500 575 661 695 731 769 809 809 809 809 809 809 809 809 809 809 Total Costs, including (184,611,000) (715,135,000) (1,347,513,000) (1,544,313,000) (806,267,759) (198) (758) (1,400) (1,577) (806) (1,220) (1,312) (1,410) (1,484) (1,561) (1,642) (1,727) (1,727) (1,727) (1,727) (1,727) (1,727) (1,727) (1,727) (1,727) (1,727) Direct costs (139,696,000) (485,173,000) (1,017,983,000) (1,096,729,000) (611,610,149) (150) (514) (1,058) (1,120) (612) (888) (954) (1,026) (1,079) (1,135) (1,194) (1,257) (1,257) (1,257) (1,257) (1,257) (1,257) (1,257) (1,257) (1,257) (1,257) Indirect Costs (41,478,000) (229,962,000) (308,654,000) (413,962,000) (194,657,610) (44) (244) (321) (423) (195) (318) (341) (367) (386) (406) (427) (450) (450) (450) (450) (450) (450) (450) (450) (450) (450) Other costs (3,437,000) - (20,876,000) (33,622,000) - (4) - (22) (34) - (15) (16) (17) (18) (19) (20) (21) (21) (21) (21) (21) (21) (21) (21) (21) (21) GROSS MARGIN 1,636,000 188,915,000 (34,306,000) 3,791,000 (334,793,154) 2 200 (36) 4 (335) 92 197 325 342 360 379 398 398 398 398 398 398 398 398 398 398 Taxes - - 4,788,000 3,998,000 - - - 5 4 - (18) (39) (65) (68) (72) (76) (80) (80) (80) (80) (80) (80) (80) (80) (80) (80) NET MARGIN 1,636,000 188,915,000 (29,518,000) 7,789,000 (334,793,154) 2 200 (31) 8 (335) 74 158 260 274 288 303 319 319 319 319 319 319 319 319 319 319 Incremental profits - Akvatekhavtomatika - (115) (79) (428) (37) 29 124 131 138 145 152 152 152 152 152 152 152 152 152 152 Incremental profits - pre-taxation - (141) (105) (451) (46) 36 155 164 172 181 190 190 190 190 190 190 190 190 190 190 Incremental taxation stream - (26) (26) (23) (9) 7 31 33 34 36 38 38 38 38 38 38 38 38 38 38 * Gain arising from fair value of biological assets Note 1: Information for 2009-2012 from audit reports actuals, constant prices 2013 in AM D in million AMD constant prices 2013 projected, constant prices 2013 2009 / Year before 2010 2011 2012 2013 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 investment

Sales 185,033,000 496,445,000 691,477,000 907,119,000 467,828,524 198 526 379 391 416 447 481 506 532 560 589 619 619 619 619 619 619 619 619 619 619 Export 29,413,000 294,552,000 516,475,000 769,052,000 349,528,899 32 312 180 186 197 212 228 240 252 265 279 294 294 294 294 294 294 294 294 294 294 % of Export in Sales 16% 59% 75% 85% 75% 2 (0) 0 0 Other Income 1,214,000 61,203,000 1,695,000 160,000 3,646,081 1 65 35 36 38 41 44 46 49 51 54 57 57 57 57 57 57 57 57 57 57 Gains from assets* - 346,402,000 620,035,000 640,825,000 - - 367 192 198 211 227 244 256 270 284 298 314 314 314 314 314 314 314 314 314 314 Total Costs, including (184,611,000) (715,135,000) (1,347,513,000) (1,544,313,000) (806,267,759) (198) (758) (500) (516) (549) (576) (607) (638) (672) (706) (743) (782) (782) (782) (782) (782) (782) (782) (782) (782) (782) Direct costs (139,696,000) (485,173,000) (1,017,983,000) (1,096,729,000) (611,610,149) (150) (514) (347) (359) (381) (400) (421) (443) (466) (491) (516) (543) (543) (543) (543) (543) (543) (543) (543) (543) (543) Indirect Costs (41,478,000) (229,962,000) (308,654,000) (413,962,000) (194,657,610) (44) (244) (151) (156) (165) (174) (183) (192) (202) (213) (224) (236) (236) (236) (236) (236) (236) (236) (236) (236) (236) Other costs (3,437,000) - (20,876,000) (33,622,000) - (4) - (2) (2) (2) (2) (2) (2) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) Profit 1,636,000 188,915,000 (34,306,000) 3,791,000 (334,793,154) 2 200 106 109 116 138 161 170 179 188 198 208 208 208 208 208 208 208 208 208 208 Taxes - - 4,788,000 3,998,000 - - - (21) (22) (23) (28) (32) (34) (36) (38) (40) (42) (42) (42) (42) (42) (42) (42) (42) (42) (42) Net Profit w/project 1,636,000 188,915,000 (29,518,000) 7,789,000 (334,793,154) 2 200 84 87 93 111 129 136 143 150 158 166 166 166 166 166 166 166 166 166 166

57 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 39: FREDA – Pyunik Pedigree Poultry Projected Growth

Company: Pyunik Pedigree Poultry Sector: Poultry sector

FREDA Investment Total Amount 200,000,000 Amount in AMD Year of investment 2010 year Expected duration 6 years Subsidiary Loan Subsidiary Loan 140,000,000 Amount in AMD Year / Month of the Loan 15/11/2013 Interest rate - Repayment date 09/04/2014 Working capital Purpose of the Loan replenishment

in million AMD constant prices 2013 in AM D actuals, constant prices 2013 projected, constant prices 2013 2009 / Year before 2010 2011 2012 2013 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 investment Sales 324,417,000 467,569,000 484,547,000 482,310,000 198,080,236 348 495 503 493 198 416 478 550 579 609 641 674 674 674 674 674 674 674 674 674 674 Export 195,000,000 143,000,000 66,900,000 79,840,000 38,719,000 209 152 70 82 39 114 131 151 159 167 176 185 185 185 185 185 185 185 185 185 185 % of Export in Sales 60% 31% 14% 17% 20% 0 0 (0) (1) Other Income 25,830,000 48,081,000 728,061,000 27,707,000 8,743,388 28 51 757 28 9 36 41 47 50 52 55 58 58 58 58 58 58 58 58 58 58 Gains from assets* (80,757,000) (199,904,000) - - (84) (204) ------Total Costs, including (420,114,000) (439,719,000) (1,245,912,000) (918,169,000) (204,298,108) (450) (466) (1,295) (938) (204) (398) (428) (460) (484) (509) (535) (563) (563) (563) (563) (563) (563) (563) (563) (563) (563) Direct costs (278,655,000) (354,727,000) (983,011,000) (720,802,000) (140,604,592) (299) (376) (1,021) (736) (141) (305) (328) (353) (371) (391) (411) (432) (432) (432) (432) (432) (432) (432) (432) (432) (432) Indirect Costs (75,068,000) (84,992,000) (222,416,000) (182,920,000) (63,693,516) (80) (90) (231) (187) (64) (92) (99) (107) (112) (118) (124) (131) (131) (131) (131) (131) (131) (131) (131) (131) (131) Other costs (66,391,000) - (40,485,000) (14,447,000) - (71) - (42) (15) ------Profit (69,867,000) 75,931,000 (114,061,000) (608,056,000) 2,525,516 (75) 80 (119) (621) 3 54 92 138 145 153 161 169 169 169 169 169 169 169 169 169 169 Taxes - 287,000 15,737,000 1,262,000 - - 0 16 1 - (11) (18) (28) (29) (31) (32) (34) (34) (34) (34) (34) (34) (34) (34) (34) (34) Net Profit w/project (69,867,000) 76,218,000 (98,324,000) (606,794,000) 2,525,516 (75) 81 (102) (620) 3 43 74 110 116 122 129 135 135 135 135 135 135 135 135 135 135 Incremental profits - Pyunik - (138) (657) (37) (10) 7 51 53 56 59 62 62 62 62 62 62 62 62 62 62 Incremental profits - pre-taxation - (164) (667) (47) (12) 9 64 67 70 74 78 78 78 78 78 78 78 78 78 78 Incremental taxation stream - (25) (11) (10) (2) 2 13 13 14 15 16 16 16 16 16 16 16 16 16 16 Note 1: The loan was provided in November 2013 and returned in April 2014 Note 2: Information for 2009-2012 from audit reports. The loss in 2011 and 2012 is so huge due to the requirements by IFRS standards. If youactuals, look at constantthe figures prices for 2013, 2013 there is net profit as these figures were taken from tax report and not the audit report by IFRS. in AM D in million AMD constant prices 2013 projected, constant prices 2013 2009 / Year before 2010 2011 2012 2013 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 investment Sales 324,417,000 467,569,000 484,547,000 482,310,000 198,080,236 348 495 483 499 531 570 613 645 679 714 751 790 790 790 790 790 790 790 790 790 790 Export 195,000,000 143,000,000 66,900,000 79,840,000 38,719,000 209 152 189 195 207 223 239 252 265 279 293 308 308 308 308 308 308 308 308 308 308 % of Export in Sales 60% 31% 14% 17% 20% 0 (0) 0 0 Other Income 25,830,000 48,081,000 728,061,000 27,707,000 8,743,388 28 51 41 42 45 49 52 55 58 61 64 67 67 67 67 67 67 67 67 67 67 Gains from assets* - - (80,757,000) (199,904,000) ------Total Costs, including (420,114,000) (439,719,000) (1,245,912,000) (918,169,000) (204,298,108) (450) (466) (479) (495) (526) (553) (582) (625) (658) (692) (728) (766) (766) (766) (766) (766) (766) (766) (766) (766) (766) Direct costs (278,655,000) (354,727,000) (983,011,000) (720,802,000) (140,604,592) (299) (376) (353) (364) (387) (407) (428) (460) (484) (510) (536) (564) (564) (564) (564) (564) (564) (564) (564) (564) (564) Indirect Costs (75,068,000) (84,992,000) (222,416,000) (182,920,000) (63,693,516) (80) (90) (89) (92) (98) (103) (108) (116) (122) (129) (136) (143) (143) (143) (143) (143) (143) (143) (143) (143) (143) Other costs (66,391,000) - (40,485,000) (14,447,000) - (71) - (37) (38) (41) (43) (45) (49) (51) (54) (57) (60) (60) (60) (60) (60) (60) (60) (60) (60) (60) Profit (69,867,000) 75,931,000 (114,061,000) (608,056,000) 2,525,516 (75) 80 45 47 49 66 83 74 78 82 87 91 91 91 91 91 91 91 91 91 91 Taxes - 287,000 15,737,000 1,262,000 - - 0 (9) (9) (10) (13) (17) (15) (16) (16) (17) (18) (18) (18) (18) (18) (18) (18) (18) (18) (18) Net Profit w/project (69,867,000) 76,218,000 (98,324,000) (606,794,000) 2,525,516 (75) 81 36 37 40 53 67 60 63 66 69 73 73 73 73 73 73 73 73 73 73

58 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 40: FREDA – Meghri Cannery Projected Growth

Company: Megri Cannery Sector: Fruit and vegetable proccessing FREDA Investment Total Amount 50,000,000 Amount in AMD Year of investment 2010 year Expected duration 7 years Subsidiary Loans Subsidiary Loan 1* 40,000,000 Amount in AMD Year of Loan 1 2010 year Interest rate 12% interest rate Duration 60 months Working capital replenishment Purpose of the Loan and production cost financing Subsidiary Loan 2 48,000,000 Amount in AMD Year of Loan 2 2012 year Interest rate 12% interest rate Duration 60 months Current activities financing and Purpose of the Loan fixed assets replenishment

in million AMD constant prices 2013 in AM D actuals, constant prices 2013 projected, constant prices 2013 2009 / Year before 2010 2011 2012 2013 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 investment Sales 67,948,000 90,609,000 98,503,800 159,916,000 164,489,400 73 96 102 163 164 158 182 209 220 231 243 256 256 256 256 256 256 256 256 256 256 Export 32,342,000 31,743,000 40,900,000 109,146,000 91,411,000 35 34 42 111 91 84 96 111 116 123 129 136 136 136 136 136 136 136 136 136 136 % of Export in Sales 48% 35% 42% 68% 56% 0 0 1 0 Other Income 208,000 233,000 4,563,200 8,400,800 1,179,600 0 0 5 9 1 4 5 6 6 6 7 7 7 7 7 7 7 7 7 7 7 Gains from assets* ------Total Costs, including (64,642,000) (84,136,000) (94,149,300) (152,288,400) (164,055,000) (69) (89) (98) (156) (164) (136) (146) (157) (165) (174) (183) (193) (193) (193) (193) (193) (193) (193) (193) (193) (193) Direct costs (42,487,000) (58,902,000) (59,217,200) (113,356,500) (115,546,400) (46) (62) (62) (116) (116) (95) (103) (110) (116) (122) (128) (135) (135) (135) (135) (135) (135) (135) (135) (135) (135) Indirect Costs (19,641,000) (22,822,000) (30,692,900) (38,852,700) (48,508,600) (21) (24) (32) (40) (49) (39) (42) (45) (47) (50) (52) (55) (55) (55) (55) (55) (55) (55) (55) (55) (55) Other costs (2,514,000) (2,412,000) (4,239,200) (79,200) - (3) (3) (4) (0) - (2) (2) (2) (2) (2) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) Profit 3,514,000 6,706,000 8,917,700 16,028,400 1,614,000 4 7 9 16 2 26 40 57 60 63 67 70 70 70 70 70 70 70 70 70 70 Taxes (1,590,000) (1,687,000) (2,434,800) (2,810,300) (1,090,100) (2) (2) (3) (3) (1) (5) (8) (11) (12) (13) (13) (14) (14) (14) (14) (14) (14) (14) (14) (14) (14) Net Profit w/project 1,924,000 5,019,000 6,482,900 13,218,100 523,900 2 5 7 13 1 21 32 46 48 51 53 56 56 56 56 56 56 56 56 56 56 Incremental profits - Meghry - 2 9 (4) 14 23 38 40 42 44 46 46 46 46 46 46 46 46 46 46 Incremental profits - pre-taxation - 4 10 (5) 17 29 47 50 52 55 58 58 58 58 58 58 58 58 58 58 Incremental taxation stream - - - 1 2 (0) 3 6 9 10 10 11 12 12 12 12 12 12 12 12

actuals, constant prices 2013 in AM D in million AMD constant prices 2013 projected, constant prices 2013 2009 / Year before 2010 2011 2012 2013 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 investment Sales 67,948,000 90,609,000 98,503,800 159,916,000 164,489,400 73 96 88 91 97 104 112 118 124 130 137 144 144 144 144 144 144 144 144 144 144 Export 32,342,000 31,743,000 40,900,000 109,146,000 91,411,000 35 34 36 37 39 42 45 48 50 53 56 58 58 58 58 58 58 58 58 58 58 % of Export in Sales 48% 35% 42% 68% 56% 0 (0) 0 0 Other Income 208,000 233,000 4,563,200 8,400,800 1,179,600 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Gains from assets* ------Total Costs, including (64,642,000) (84,136,000) (94,149,300) (152,288,400) (164,055,000) (69) (89) (83) (86) (91) (96) (101) (108) (114) (120) (126) (132) (132) (132) (132) (132) (132) (132) (132) (132) (132) Direct costs (42,487,000) (58,902,000) (59,217,200) (113,356,500) (115,546,400) (46) (62) (56) (58) (62) (65) (69) (74) (78) (82) (86) (90) (90) (90) (90) (90) (90) (90) (90) (90) (90) Indirect Costs (19,641,000) (22,822,000) (30,692,900) (38,852,700) (48,508,600) (21) (24) (24) (24) (26) (27) (29) (31) (32) (34) (36) (38) (38) (38) (38) (38) (38) (38) (38) (38) (38) Other costs (2,514,000) (2,412,000) (4,239,200) (79,200) - (3) (3) (3) (3) (3) (3) (3) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) Profit 3,514,000 6,706,000 8,917,700 16,028,400 1,614,000 4 7 6 6 6 9 12 10 11 11 12 12 12 12 12 12 12 12 12 12 12 Taxes (1,590,000) (1,687,000) (2,434,800) (2,810,300) (1,090,100) (2) (2) (1) (1) (1) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) Net Profit w/project 1,924,000 5,019,000 6,482,900 13,218,100 523,900 2 5 5 5 5 7 9 8 8 9 9 10 10 10 10 10 10 10 10 10 10

59 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 41: FREDA – 365 Group Projected Growth

Company: 365 Group Sector: Wine making company

FREDA Investment Total Amount 200,000,000 Amount in AMD Year of investment 2011 year Expected duration 5 years Subsidiary Loan Subsidiary Loan N/A Interest rate N/A Duration N/A

in million AMD constant prices 2013 in AM D actuals, constant prices 2013 projected, constant prices 2013 2010 / Year before 2011 2012 2013 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 investment Sales 105,821,400 194,920,000 211,839,866 268,644,887 112 203 216 269 275 316.253 363.691 382.603 402.499 423.429 445.447 445.447 445.447 445.447 445.447 445.447 445.447 445.447 445.447 445.447 445.447 Export 46,580,711 63,414,218 126,970,225 151,050,679 49 66 130 151 139 159.437 183.353 192.887 202.917 213.469 224.569 224.569 224.57 224.57 224.57 224.57 224.57 224.57 224.57 224.57 224.57 % of Export in Sales 44% 33% 60% 56% Other Income - 749,500 636,668 6,637,388 - 1 1 7 3 3.71051 4.26709 4.48897 4.7224 4.96797 5.2263 5.2263 5.2263 5.2263 5.2263 5.2263 5.2263 5.2263 5.2263 5.2263 5.2263 Gains from assets* 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total Costs, including (95,353,300) (189,155,505) (205,817,298) (264,278,635) (101) (197) (210) (264) (207) (223) (240) (252) (265) (279) (294) (294) (294) (294) (294) (294) (294) (294) (294) (294) (294) Direct costs (73,909,100) (129,287,400) (127,248,757) (174,920,373) (78) (134) (130) ####### ####### -149.51 (161) -169.08 -177.87 -187.12 -196.85 -196.85 -196.85 -196.85 -196.85 -196.85 -196.85 -196.85 -196.85 -196.85 -196.85 Indirect Costs (21,444,200) (59,868,105) (78,568,541) (82,272,265) (23) (62) (80) (82) (66) -71.484 (77) -80.842 -85.046 -89.468 -94.12 -94.12 -94.12 -94.12 -94.12 -94.12 -94.12 -94.12 -94.12 -94.12 -94.12 Other costs - - - (7,085,997) - - - (7) (2) -2.0472 (2) -2.3152 -2.4356 -2.5622 -2.6954 -2.6954 -2.6954 -2.6954 -2.6954 -2.6954 -2.6954 -2.6954 -2.6954 -2.6954 -2.6954 GROSS MARGIN 10,468,100 6,513,995 6,659,236 3,917,643 11 7 7 4 71 97 128 135 142 149 157 157 157 157 157 157 157 157 157 157 157 Taxes (2,093,600) (1,336,880) (1,398,450) (2,411,427) (2) (1) (1) (2) (14) (19) (26) (27) (28) (30) (31) (31) (31) (31) (31) (31) (31) (31) (31) (31) (31) NET MARGIN 8,374,500 5,177,115 5,260,786 1,506,216 13 5 5 2 57 78 103 108 113 119 126 126 126 126 126 126 126 126 126 126 126 Incremental profits - 365 Group - (2) (6) 45 62 89 94 99 104 110 110 110 110 110 110 110 110 110 110 110 Incremental profits - pre-taxation - (2) (6) 56 77 112 118 124 130 137 137 137 137 137 137 137 137 137 137 137 Incremental taxation stream - - (0) 0 11 15 22 24 25 26 27 27 27 27 27 27 27 27 27 27

actuals, constant prices 2013 in AM D in million AMD constant prices 2013 projected, constant prices 2013 2010 / Year before 2011 2012 2013 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 investment Sales 105,821,400 194,920,000 211,839,866 268,644,887 112 203 163 173 186 199.639 210.02 220.941 232.43 244.517 257.232 257.232 257.232 257.232 257.232 257.232 257.232 257.232 257.232 257.232 257.232 Export 46,580,711 63,414,218 126,970,225 151,050,679 49 66 60 63 68 73.1191 76.9213 80.9212 85.1291 89.5558 94.2127 94.2127 94.213 94.213 94.213 94.213 94.213 94.213 94.213 94.213 94.213 % of Export in Sales 44% 33% 60% 56% -20% 6% Other Income - 749,500 636,668 6,637,388 - 1 0 0 0 0.49412 0.51982 0.54685 0.57529 0.6052 0.63667 0.63667 0.63667 0.63667 0.63667 0.63667 0.63667 0.63667 0.63667 0.63667 0.63667 Gains from assets* ------0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total Costs, including (95,353,300) (189,155,505) (205,817,298) (264,278,635) (101) (197) (154) (163) (172) (181) (194) (204) (215) (226) (238) (238) (238) (238) (238) (238) (238) (238) (238) (238) (238) Direct costs (73,909,100) (129,287,400) (127,248,757) (174,920,373) (78) (134) (110) ####### ####### -129.08 (139) -145.98 -153.57 -161.56 -169.96 -169.96 -169.96 -169.96 -169.96 -169.96 -169.96 -169.96 -169.96 -169.96 -169.96 Indirect Costs (21,444,200) (59,868,105) (78,568,541) (82,272,265) (23) (62) (44) (47) (49) -51.554 (55) -58.302 -61.334 -64.524 -67.879 -67.879 -67.879 -67.879 -67.879 -67.879 -67.879 -67.879 -67.879 -67.879 -67.879 Other costs - - - (7,085,997) - - - - - 0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 GROSS MARGIN 10,468,100 6,513,995 6,659,236 3,917,643 11 7 9 10 15 19 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 Taxes (2,093,600) (1,336,880) (1,398,450) (2,411,427) (2) (1) (2) (2) (3) (4) (3) (3) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) NET MARGIN 8,374,500 5,177,115 5,260,786 1,506,216 13 5 7 8 12 16 13 14 14 15 16 16 16 16 16 16 16 16 16 16 16

60 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 42: FREDA – Harprod Projected Growth

Company: Harprod Sector: Fruit and vegetable grow ing and proccessing

FREDA Investment Total Amount 200,000,000 Amount in AMD Year of investment 2011 year Expected duration 7 years Subsidiary Loan Subsidiary Loan N/A Interest rate N/A Duration N/A

in million AMD constant prices 2013 in AM D actuals, constant prices 2013 projected, constant prices 2013 2010 / Year before 2011 2012 2013 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 investment Sales 89,197,000 74,711,376 217,060,995 313,509,018 95 78 222 314 245 281.887 324.17 341.027 358.761 377.416 397.042 397.042 397.042 397.042 397.042 397.042 397.042 397.042 397.042 397.042 397.042 Export 64,947,000 52,297,963 151,942,697 102,680,000 69 54 155 103 125 143.604 165.145 173.732 182.766 192.27 202.268 202.268 202.27 202.27 202.27 202.27 202.27 202.27 202.27 202.27 202.27 % of Export in Sales 73% 70% 70% 33% Other Income 978,000 67,627,436 46,047,190 - 1 69 46 46 53.4168 61.4293 64.6237 67.9841 71.5193 75.2383 75.2383 75.2383 75.2383 75.2383 75.2383 75.2383 75.2383 75.2383 75.2383 75.2383 Gains from assets* 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total Costs, including N/A (70,259,126) (275,242,111) (347,778,928) (189) (203) (218) (229) (241) (254) (267) (267) (267) (267) (267) (267) (267) (267) (267) (267) (267) Direct costs (61,925,396) (226,922,410) (280,331,246) - (64) (232) ####### ####### -166.53 (179) -188.33 -198.12 -208.42 -219.26 -219.26 -219.26 -219.26 -219.26 -219.26 -219.26 -219.26 -219.26 -219.26 -219.26 Indirect Costs (8,333,730) (48,319,701) (67,447,682) - (9) (49) (67) (34) -36.243 (39) -40.988 -43.119 -45.361 -47.72 -47.72 -47.72 -47.72 -47.72 -47.72 -47.72 -47.72 -47.72 -47.72 -47.72 Other costs - - - - - 0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 GROSS MARGIN 2,570,000 5,430,250 9,446,320 11,777,280 3 6 10 12 103 133 168 176 186 195 205 205 205 205 205 205 205 205 205 205 205 Taxes (514,000) (1,086,050) (1,889,264) (2,355,456) (1) (1) (2) (2) (21) (27) (34) (35) (37) (39) (41) (41) (41) (41) (41) (41) (41) (41) (41) (41) (41) NET MARGIN 2,056,000 4,344,200 7,557,056 9,421,824 3 5 8 9 82 106 134 141 148 156 164 164 164 164 164 164 164 164 164 164 164 Incremental profits - Harprod - (34) (35) 34 54 80 84 88 93 98 98 98 98 98 98 98 98 98 98 98 Incremental profits - pre-taxation - (42) (43) 43 67 100 105 110 116 122 122 122 122 122 122 122 122 122 122 122 Incremental taxation stream - - (8) (9) 9 13 20 21 22 23 24 24 24 24 24 24 24 24 24 24

actuals, constant prices 2013 in AM D in million AMD constant prices 2013 projected, constant prices 2013 2010 / Year before 2011 2012 2013 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 investment Sales 89,197,000 74,711,376 217,060,995 313,509,018 95 78 89 95 102 109.214 114.893 120.868 127.153 133.765 140.72 140.72 140.72 140.72 140.72 140.72 140.72 140.72 140.72 140.72 140.72 Export 64,947,000 52,297,963 151,942,697 102,680,000 69 54 64 68 73 78.1364 82.1995 86.4739 90.9705 95.701 100.677 100.677 100.68 100.68 100.68 100.68 100.68 100.68 100.68 100.68 100.68 % of Export in Sales 73% 70% 70% 33% 15% 6% Other Income - 978,000 67,627,436 46,047,190 - 1 1 1 1 0.64477 0.6783 0.71357 0.75067 0.78971 0.83077 0.83077 0.83077 0.83077 0.83077 0.83077 0.83077 0.83077 0.83077 0.83077 0.83077 Gains from assets* ------0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total Costs, including N/A (70,259,126) (275,242,111) (347,778,928) (73) (38) (40) (42) (44) (48) (50) (53) (55) (58) (58) (58) (58) (58) (58) (58) (58) (58) (58) (58) Direct costs - (61,925,396) (226,922,410) (280,331,246) - (64) (33) -3533% -3709% -39.06 (42) -44.173 -46.47 -48.887 -51.429 -51.429 -51.429 -51.429 -51.429 -51.429 -51.429 -51.429 -51.429 -51.429 -51.429 Indirect Costs - (8,333,730) (48,319,701) (67,447,682) - (9) (4) (5) (5) -5.2566 (6) -5.9447 -6.2538 -6.579 -6.9211 -6.9211 -6.9211 -6.9211 -6.9211 -6.9211 -6.9211 -6.9211 -6.9211 -6.9211 -6.9211 Other costs ------0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 GROSS MARGIN 2,570,000 5,430,250 9,446,320 11,777,280 3 6 52 55 60 66 68 71 75 79 83 83 83 83 83 83 83 83 83 83 83 Taxes (514,000) (1,086,050) (1,889,264) (2,355,456) (1) (1) (10) (11) (12) (13) (14) (14) (15) (16) (17) (17) (17) (17) (17) (17) (17) (17) (17) (17) (17) NET MARGIN 2,056,000 4,344,200 7,557,056 9,421,824 3 5 41 44 48 52 54 57 60 63 67 67 67 67 67 67 67 67 67 67 67

61 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 43: FREDA – Cheese Town Projected Growth

Company: Cheese Town Sector: Milk Processing

FREDA Investment Total Amount 115,000,000 Amount in AMD Year of investment 2011 year Expected duration 6 years Subsidiary Loan Subsidiary Loan N/A Interest rate N/A Duration N/A

in million AMD constant prices 2013 in AM D actuals, constant prices 2013 projected, constant prices 2013 2010 / Year before 2011 2012 2013 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 investment Sales 62,305,000 3,759,175 67,366,311 130,606,900 66 4 69 131 81 93.5209 107.549 113.142 119.025 125.214 131.725 131.725 131.725 131.725 131.725 131.725 131.725 131.725 131.725 131.725 131.725 Export - - - 102,000,000 - - - 102 41 46.92 53.958 56.7638 59.7155 62.8207 66.0874 66.0874 66.087 66.087 66.087 66.087 66.087 66.087 66.087 66.087 66.087 % of Export in Sales 0% 0% 0% 78% Other Income 2,465,246 - - - 3 - - 1 1.17832 1.35506 1.42553 1.49965 1.57764 1.65967 1.65967 1.65967 1.65967 1.65967 1.65967 1.65967 1.65967 1.65967 1.65967 1.65967 Gains from assets* 0 0 0 0 0 0 0 0 0 0 Total Costs, including N/A (31,759,669) (63,951,939) (129,300,466) (33) (65) (129) (82) (88) (94) (99) (104) (110) (115) (115) (115) (115) (115) (115) (115) (115) (115) (115) (115) Direct costs (20,709,161) (43,161,990) (98,707,141) - (22) (44) -9871% -5887% -63.29 (68) -71.575 -75.297 -79.212 -83.332 -83.332 -83.332 -83.332 -83.332 -83.332 -83.332 -83.332 -83.332 -83.332 -83.332 Indirect Costs (11,050,508) (20,789,949) (30,593,325) - (11) (21) (31) (23) -24.386 (26) -27.578 -29.012 -30.521 -32.108 -32.108 -32.108 -32.108 -32.108 -32.108 -32.108 -32.108 -32.108 -32.108 -32.108 Other costs ------0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Profit (1,250,000) (25,535,248) 3,414,372 1,306,434 (1) (27) 3 1 1 7 15 15 16 17 18 18 18 18 18 18 18 18 18 18 18 Taxes - - (682,900) (261,287) - - (1) (0) (0) (1) (3) (3) (3) (3) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) Net Profit w/project (1,250,000) (25,535,248) 2,731,472 1,045,147 (1) (27) 3 1 1 6 12 12 13 14 14 14 14 14 14 14 14 14 14 14 14 Incremental profits - Cheese Town - (1) (3) (4) (0) 6 6 7 7 7 7 7 7 7 7 7 7 7 7 7 Incremental profits - pre-taxation - (1) (4) (5) (1) 8 8 8 9 9 9 9 9 9 9 9 9 9 9 9 Incremental taxation stream (1) (27) 5 5 6 9 10 10 11 12 12 12 12 12 12 12 12 12 12 12

actuals, constant prices 2013 in AM D in million AMD constant prices 2013 projected, constant prices 2013 2010 / Year before 2011 2012 2013 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 investment Sales 62,305,000 3,759,175 67,366,311 130,606,900 66 4 36 38 41 44.3602 46.6669 49.0936 51.6465 54.3321 57.1574 57.1574 57.1574 57.1574 57.1574 57.1574 57.1574 57.1574 57.1574 57.1574 57.1574 Export - - - 102,000,000 - - - - - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 % of Export in Sales 0% 0% 0% 78% 825% 6% Other Income - 2,465,246 - - - 3 3 3 3 3.25053 3.41956 3.59738 3.78444 3.98123 4.18826 4.18826 4.18826 4.18826 4.18826 4.18826 4.18826 4.18826 4.18826 4.18826 4.18826 Gains from assets* ------0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total Costs, including N/A (31,759,669) (63,951,939) (129,300,466) (33) (34) (36) (38) (40) (43) (45) (48) (50) (53) (53) (53) (53) (53) (53) (53) (53) (53) (53) (53) Direct costs - (20,709,161) (43,161,990) (98,707,141) - (22) (22) -2363% -2481% -26.125 (28) -29.545 -31.081 -32.697 -34.398 -34.398 -34.398 -34.398 -34.398 -34.398 -34.398 -34.398 -34.398 -34.398 -34.398 Indirect Costs - (11,050,508) (20,789,949) (30,593,325) - (11) (12) (13) (13) -13.94 (15) -15.765 -16.585 -17.447 -18.355 -18.355 -18.355 -18.355 -18.355 -18.355 -18.355 -18.355 -18.355 -18.355 -18.355 Other costs ------0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Profit (1,250,000) (25,535,248) 3,414,372 1,306,434 (1) (27) 5 5 6 8 7 7 8 8 9 9 9 9 9 9 9 9 9 9 9 Taxes - - (682,900) (261,287) - - (1) (1) (1) (2) (1) (1) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) Net Profit w/project (1,250,000) (25,535,248) 2,731,472 1,045,147 (1) (27) 4 4 5 6 6 6 6 7 7 7 7 7 7 7 7 7 7 7 7

62 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 44: FREDA – Araler Projected Growth

Company: Araler Subsidiary Loan 2 110,000,000 Amount in AMD Sector: Sheep breeding Year of Loan 2 2013 year Interest rate 12% interest rate FREDA Investment Total Amount 90,000,000 Amount in AMD Duration 60 months Year of investment 2012 year Purpose of the Loan Expected duration 6 years in AM D Subsidiary Loans Preparatory w orks 3,340,000 Subsidiary Loan 1 50,000,000 Amount in AMD Construction w orks 81,664,000 Year of Loan 1 2012 year Refrigerating 9,432,000 Interest rate 12% interest rate equipments Duration 60 months Refrigerating trucks 6,525,000 Working Capital 9,039,000 Purpose of the Loan Working capital replenishment Total 110,000,000

in million AMD constant prices 2013 in AM D actuals, constant pricesprojected, 2013 projected,constant prices constant 2013 prices 2013 2011 / Year before 2012 2013 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 investment Sales 2,580,000 641,667 1,300,000 3 1 2 2 3 3.17659 3.34177 3.51555 3.69835 3.89067 3.89067 3.89067 3.89067 3.89067 3.89067 3.89067 3.89067 3.89067 3.89067 3.89067 3.89067 Export ------0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 % of Export in Sales 0% 0% 0% Other Income 357,000 N/A - 0 0 1 1 0.66535 0.69994 0.73634 0.77463 0.81491 0.81491 0.81491 0.81491 0.81491 0.81491 0.81491 0.81491 0.81491 0.81491 0.81491 0.81491 Gains from assets* - - - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total Costs, including (2,296,500) (907,000) N/A (2) (1) (2) (2) (2) (2) (2) (2) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) Direct costs (2,296,500) (550,000) (2) (1) (2) -168% -181% -1.9464 (2) -2.1541 -2.2661 -2.384 -2.384 -2.384 -2.384 -2.384 -2.384 -2.384 -2.384 -2.384 -2.384 -2.384 -2.384 Indirect Costs (357,000) - (0) (0) (0) (0) -0.2407 (0) -0.2664 -0.2803 -0.2948 -0.2948 -0.2948 -0.2948 -0.2948 -0.2948 -0.2948 -0.2948 -0.2948 -0.2948 -0.2948 -0.2948 Other costs - - - - - 0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 GROSS MARGIN 283,500 91,667 N/A 0 0 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 Taxes (56,700) (18,333) N/A (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) NET MARGIN 226,800 73,334 N/A 0 0 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 Incremental profits - Haraler - (1) 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Incremental profits - pre-taxation - (1) 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Incremental taxation stream - (0) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

in million AMD constant prices 2013 in AM D actuals, constant pricesprojected, 2013 projected,constant prices constant 2013 prices 2013 2011 / Year before 2012 2013 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 investment Sales 2,580,000 641,667 1,300,000 3 1 2 2 2 2.1556 2.2677 2.38562 2.50967 2.64017 2.64017 2.64017 2.64017 2.64017 2.64017 2.64017 2.64017 2.64017 2.64017 2.64017 2.64017 Export ------0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 % of Export in Sales 0% 0% 0% Other Income - 357,000 N/A - 0 0 0 0 0.47113 0.49563 0.5214 0.54851 0.57703 0.57703 0.57703 0.57703 0.57703 0.57703 0.57703 0.57703 0.57703 0.57703 0.57703 0.57703 Gains from assets* ------0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total Costs, including (2,296,500) (907,000) N/A (2) (1) (1) (2) (2) (2) (2) (2) (2) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) Direct costs (2,296,500) (550,000) - (2) (1) (2) -165% -173% -1.8622 (2) -2.061 -2.1681 -2.2809 -2.2809 -2.2809 -2.2809 -2.2809 -2.2809 -2.2809 -2.2809 -2.2809 -2.2809 -2.2809 -2.2809 Indirect Costs - (357,000) - - (0) (0) (0) (0) -0.2303 (0) -0.2549 -0.2681 -0.2821 -0.2821 -0.2821 -0.2821 -0.2821 -0.2821 -0.2821 -0.2821 -0.2821 -0.2821 -0.2821 -0.2821 Other costs ------0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 GROSS MARGIN 283,500 91,667 N/A 0 0 2 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Taxes (56,700) (18,333) N/A (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) NET MARGIN 226,800 73,334 N/A 0 0 1 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1

63 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 45: FREDA – SIS Natural Projected Growth

Company: SIS Natural Sector: Fruit and vegetable grow ing and proccessing

FREDA Investment Total Amount 200,000,000 Amount in AMD Year of investment 2012 year Expected duration 7 years Subsidiary Loan Subsidiary Loan 200,000,000 Amount in AMD Year of loan 2012 year Interest rate 10% interest rate Duration 60 months Purpose of the Loan Working capital replenishment

in million AMD constant prices 2013 in AM D actuals, constant prices 2013projected, constant prices 2013 2011 / Year before 2012 2013 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 investment Sales 1,530,384,175 1,508,652,862 1,928,315,669 1,590 1,541 1,928 2,081 2,394 2752.6 2895.73 3046.31 3204.72 3371.36 3371.36 3371.36 3371.3612 3371.36 3371.36 3371.36 3371.36 3371.36 3371.36 3371.36 3371.36 Export 523,391,386 823,168,402 912,513,804 544 841 913 1,052 1,210 1391.1 1463.44 1539.54 1619.59 1703.81 1703.81 1703.81 1703.8122 1703.81 1703.81 1703.81 1703.81 1703.81 1703.81 1703.81 1703.81 % of Export in Sales 34% 55% 47% Other Income 1,450,000 3,060,000 5,155 2 3 0 2 2 2.48364 2.61279 2.74865 2.89158 3.04195 3.04195 3.04195 3.0419459 3.04195 3.04195 3.04195 3.04195 3.04195 3.04195 3.04195 3.04195 Gains from assets* - - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total Costs, including (1,391,682,175) (1,401,472,322) (1,799,118,519) (1,446) (1,431) (1,799) (1,938) (2,229) (2,396) (2,521) (2,652) (2,790) (2,935) (2,935) (2,935) (2,935) (2,935) (2,935) (2,935) (2,935) (2,935) (2,935) (2,935) (2,935) Direct costs (1,108,656,318) (1,154,238,365) (1,462,628,512) (1,152) (1,179) (1,463) ####### ####### -1959.2 (2,061) -2168.25 -2281 -2399.61 -2399.61 -2399.61 -2399.614 -2399.61 -2399.61 -2399.61 -2399.61 -2399.61 -2399.61 -2399.61 -2399.61 Indirect Costs (283,025,857) (247,233,957) (336,490,007) (294) (252) (336) (353) (406) -436.862 (460) -483.477 -508.618 -535.066 -535.066 -535.066 -535.0661 -535.066 -535.066 -535.066 -535.066 -535.066 -535.066 -535.066 -535.066 Other costs ------0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 GROSS MARGIN 140,152,000 110,240,540 129,202,305 146 113 129 145 167 359 378 397 418 440 440 440 440 440 440 440 440 440 440 440 440 Taxes (28,030,400) (22,048,108) (25,840,461) (29) (23) (26) (29) (33) (72) (76) (79) (84) (88) (88) (88) (88) (88) (88) (88) (88) (88) (88) (88) (88) NET MARGIN 112,121,600 88,192,432 103,361,844 117 90 103 116 133 287 302 318 334 352 352 352 352 352 352 352 352 352 352 352 352 Incremental profits - Sis Natural - (5) (33) (55) 121 127 133 140 148 148 148 148 148 148 148 148 148 148 148 148 Incremental profits - pre-taxation - (7) (41) (68) 151 159 167 175 185 185 185 185 185 185 185 185 185 185 185 185 Incremental taxation stream - (1) (8) (14) 30 32 33 35 37 37 37 37 37 37 37 37 37 37 37 37

in million AMD constant prices 2013 in AM D actuals, constant prices 2013projected, constant prices 2013 2011 / Year before 2012 2013 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 investment Sales 1,530,384,175 1,508,652,862 1,928,315,669 1,590 1,541 1,664 1,789 1,923 2022.97 2128.16 2238.83 2355.25 2477.72 2477.72 2477.72 2477.7198 2477.72 2477.72 2477.72 2477.72 2477.72 2477.72 2477.72 2477.72 Export 523,391,386 823,168,402 912,513,804 544 841 736 791 850 894.565 941.082 990.019 1041.5 1095.66 1095.66 1095.66 1095.6577 1095.66 1095.66 1095.66 1095.66 1095.66 1095.66 1095.66 1095.66 % of Export in Sales 34% 55% 47% Other Income 1,450,000 3,060,000 5,155 2 3 2 3 3 2.99264 3.14826 3.31197 3.48419 3.66537 3.66537 3.66537 3.6653716 3.66537 3.66537 3.66537 3.66537 3.66537 3.66537 3.66537 3.66537 Gains from assets* Total Costs, including (1,391,682,175) (1,401,472,322) (1,799,118,519) (1,446) (1,431) (1,529) (1,606) (1,691) (1,818) (1,912) (2,012) (2,116) (2,226) (2,226) (2,226) (2,226) (2,226) (2,226) (2,226) (2,226) (2,226) (2,226) (2,226) (2,226) Direct costs (1,108,656,318) (1,154,238,365) (1,462,628,512) (1,152) (1,179) (1,239) ####### ####### -1472.34 (1,549) -1629.44 -1714.18 -1803.31 -1803.31 -1803.31 -1803.313 -1803.31 -1803.31 -1803.31 -1803.31 -1803.31 -1803.31 -1803.31 -1803.31 Indirect Costs (283,025,857) (247,233,957) (336,490,007) (294) (252) (290) (305) (321) -345.273 (363) -382.115 -401.985 -422.888 -422.888 -422.888 -422.8884 -422.888 -422.888 -422.888 -422.888 -422.888 -422.888 -422.888 -422.888 Other costs ------0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 GROSS MARGIN 140,152,000 110,240,540 129,202,305 146 113 136 186 235 208 219 231 243 255 255 255 255 255 255 255 255 255 255 255 255 Taxes (28,030,400) (22,048,108) (25,840,461) (29) (23) (27) (37) (47) (42) (44) (46) (49) (51) (51) (51) (51) (51) (51) (51) (51) (51) (51) (51) (51) NET MARGIN 112,121,600 88,192,432 103,361,844 117 90 109 149 188 167 175 184 194 204 204 204 204 204 204 204 204 204 204 204 204

64 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 46: FREDA – Farmers’ Benefits

Farmers' Incremental Production Main Product 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 COSTS Cost 1 "Akvateckavtomatika" CJSC Fish 75% 13 148 184 238 222 234 246 258 272 286 301 301 301 301 301 301 301 301 2 "Pyunik PPP" CJSC Poultry NA ------3 "Meghri Cannery" CJSC Fruits and vegetables 50% 4 10 5 6 6 6 7 7 7 8 8 8 8 8 8 8 8 8 4 "365 Group" CJSC Wine / Grapes 75% 12 (2) 40 20 21 22 23 25 26 27 27 27 27 27 27 27 27 5 "Harprod" CJSC Fruits and vegetables 50% 14 13 (15) (2) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) 6 "Cheese Tow n" CJSC Milk 65% (17) 7 33 21 22 23 24 25 27 28 28 28 28 28 28 28 28 7 "Agrolog" CJSC Fruits 50% 3 (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) 8 "Araler" CJSC Hay / feed 65% 15 18 17 18 19 20 21 22 23 23 23 23 23 23 23 23 9 "Sis Natural" CJSC Fruits and vegetables 50% 17 244 136 143 151 159 167 175 185 185 185 185 185 185 185 185 TOTAL 0 18 170 239 564 419 441 464 488 513 540 568 568 568 568 568 568 568 568

Farmers' Incremental Production Main Product 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 BENEFITS Cost 1 "Akvateckavtomatika" CJSC Fish 75% 18 198 246 317 296 311 328 345 363 381 401 401 401 401 401 401 401 401 2 "Pyunik PPP" CJSC Poultry NA ------3 "Meghri Cannery" CJSC Fruits and vegetables 50% 9 20 11 12 12 12 13 14 15 15 16 16 16 16 16 16 16 16 4 "365 Group" CJSC Wine / Grapes 75% 16 (2) 53 27 28 30 31 33 34 36 36 36 36 36 36 36 36 5 "Harprod" CJSC Fruits and vegetables 50% 28 25 (30) (5) (5) (5) (6) (6) (6) (7) (7) (7) (7) (7) (7) (7) (7) 6 "Cheese Tow n" CJSC Milk 65% (27) 12 51 32 34 35 37 39 41 43 43 43 43 43 43 43 43 7 "Agrolog" CJSC Fruits 50% 7 (1) (1) (1) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) 8 "Araler" CJSC Hay / feed 65% 22 28 27 28 29 31 33 34 36 36 36 36 36 36 36 36 9 "Sis Natural" CJSC Fruits and vegetables 50% 34 488 272 287 301 317 334 351 369 369 369 369 369 369 369 369 TOTAL 0 27 241 345 919 659 693 730 767 807 849 894 894 894 894 894 894 894 894

Production Net incremental benefits Main Product 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Cost 1 "Akvateckavtomatika" CJSC Fish 75% 4 49 61 79 74 78 82 86 91 95 100 100 100 100 100 100 100 100 2 "Pyunik PPP" CJSC Poultry NA ------3 "Meghri Cannery" CJSC Fruits and vegetables 50% 4 10 5 6 6 6 7 7 7 8 8 8 8 8 8 8 8 8 4 "365 Group" CJSC Wine / Grapes 75% 4 (1) 13 7 7 7 8 8 9 9 9 9 9 9 9 9 9 5 "Harprod" CJSC Fruits and vegetables 50% 14 13 (15) (2) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) 6 "Cheese Tow n" CJSC Milk 65% (9) 4 18 11 12 12 13 14 14 15 15 15 15 15 15 15 15 7 "Agrolog" CJSC Fruits 50% 3 (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) 8 "Araler" CJSC Hay / feed ? 65% 8 10 9 10 10 11 11 12 13 13 13 13 13 13 13 13 9 "Sis Natural" CJSC Fruits and vegetables 50% 17 244 136 143 151 159 167 175 185 185 185 185 185 185 185 185 TOTAL 0 9 71 107 355 240 253 266 280 294 309 326 326 326 326 326 326 326 326

65 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 47: FREDA – Enterprise Benefits

million AMD - Constant prices (2013) 1 US$ = 409.54 AMD (Average 2013)

Incremental COSTS 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 1 "Akvateckavtomatika" CJSC 211.89 54.75 ------2 "Pyunik PPP" CJSC 211.89 54.83 ------3 "Meghri Cannery" CJSC 52.97 68.12 ------4 "365 Group" CJSC ------5 "Harprod" CJSC - 207.81 43.96 ------6 "Cheese Tow n" CJSC - 119.49 43.87 ------7 "Agrolog" CJSC - 207.81 43.72 ------8 "Araler" CJSC - - 91.91 160.00 ------9 "Sis Natural" CJSC - - 204.24 200.00 ------10 FREDA ------X Farmers ------TOTAL 477 713 428 360 ------

Incremental BENEFITS (no Taxation) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 1 "Akvateckavtomatika" CJSC - (141.24) (105.21) (450.74) (46.38) 35.89 155.49 163.58 172.08 181.03 190.44 190.44 190.44 190.44 190.44 190.44 190.44 2 "Pyunik PPP" CJSC - (163.57) (667.48) (46.95) (12.20) 8.62 63.54 66.84 70.32 73.98 77.82 77.82 77.82 77.82 77.82 77.82 77.82 3 "Meghri Cannery" CJSC - 3.58 10.49 (4.63) 17.15 28.50 47.22 49.67 52.26 54.98 57.83 57.83 57.83 57.83 57.83 57.83 57.83 4 "365 Group" CJSC - (2.42) (5.89) 56.12 77.43 111.83 117.65 123.77 130.20 136.97 136.97 136.97 136.97 136.97 136.97 136.97 5 "Harprod" CJSC - (42.08) (43.21) 42.84 66.99 99.69 104.87 110.33 116.06 122.10 122.10 122.10 122.10 122.10 122.10 122.10 6 "Cheese Tow n" CJSC - (1.18) (3.66) (5.45) (0.52) 7.64 8.03 8.45 8.89 9.35 9.35 9.35 9.35 9.35 9.35 9.35 7 "Agrolog" CJSC 8 "Araler" CJSC - (0.88) 0.54 0.76 1.12 1.18 1.24 1.30 1.37 1.37 1.37 1.37 1.37 1.37 1.37 9 "Sis Natural" CJSC - (6.61) (40.69) (68.19) 150.67 158.50 166.75 175.42 184.54 184.54 184.54 184.54 184.54 184.54 184.54 10 FREDA X Farmers 8.91 70.97 106.78 354.90 240.14 252.63 265.76 279.58 294.12 309.42 325.50 325.50 325.50 325.50 325.50 325.50 325.50 325.50 TOTAL 9 71 (194) (453) (322) 265 415 917 964 1,015 1,067 1,106 1,106 1,106 1,106 1,106 1,106 1,106

Incremental Net Benefits (468) (642) (622) (813) (322) 265 415 917 964 1,015 1,067 1,106 1,106 1,106 1,106 1,106 1,106 1,106 E-IRR 18%

66 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 48: FREDA - Profit and Loss Statement

Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Appendix 1 2010 2011 2012 2013-approx 2014 2015 2016 2017 2018 2019 2020 PROFIT AND LOSS STATEMENT ’000 AMD ’000 AMD ’000 AMD ’000 AMD ’000 AMD ’000 AMD ’000 AMD ’000 AMD ’000 AMD ’000 AMD ’000 AMD

Dividends from equity investments 32,466 118,936 210,454 214,256 196,707 216,346 266,805 322,831 356,110 372,072 394,045 Interest from mezzanine loans - - - - - 54,105 132,793 206,288 244,700 259,271 279,597 Interest from subordinated loans 2,157 6,726 22,057 45,920 88,994 90,291 104,779 121,480 128,943 129,888 133,961 Interest income on bank deposits and current accounts - 15,029 24,885 5,000 ------Other Income 585 2,594 (217) ------Total Revenue 35,208 143,285 257,179 265,176 285,701 360,743 504,378 650,599 729,753 761,230 807,603 Interest expense on IFAD loans, measured at amortized cost (9,467) (27,143) (46,997) (43,454) (50,243) (50,243) (87,312) (111,678) (123,211) (121,817) (120,718) Net revenue 25,741 116,142 210,182 221,722 235,458 310,499 417,066 538,921 606,541 639,413 686,886 Income from grants received 140,409 182,675 210,679 253,972 103,536 102,500 205,000 205,000 102,500 - -

Total administrative expenses, of which (140,753) (185,859) (222,173) (322,574) (265,943) (249,951) (359,801) (367,503) (273,078) (179,047) (187,931) Salaries (50,381) (52,219) (47,188) (70,772) (74,311) (109,017) (114,468) (120,191) (126,201) (132,511) (139,137) Rents (12,126) (12,484) (12,000) (12,000) (12,600) (15,120) (15,876) (16,670) (17,503) (18,378) (19,297) Professional services procured (27,518) (85,238) (124,509) (220,000) (158,900) (102,500) (205,000) (205,000) (102,500) - - Non-refundable taxes and penalties (9,123) (18,195) (22,067) (8,900) (9,345) (11,214) (11,775) (12,363) (12,982) (13,631) (14,312) Depreciation and amortization (8,699) (5,407) (5,837) (2,640) (2,112) (1,690) (1,752) (1,802) (1,841) (1,873) (1,898) Fuel expenses (2,740) (2,882) (2,962) (3,480) (3,654) (4,385) (4,604) (4,835) (5,076) (5,330) (5,597) Repair and maintenance expenses (1,285) (1,361) (1,967) (1,752) (1,840) (2,208) (2,318) (2,434) (2,556) (2,684) (2,818) Business trips (12,817) (1,252) (2,424) (900) (945) (1,134) (1,191) (1,250) (1,313) (1,378) (1,447) Communication and information services (2,758) (1,232) (861) (1,129) (1,186) (1,423) (1,494) (1,569) (1,647) (1,730) (1,816) Other administrative expenses (13,306) (5,589) (2,358) (1,000) (1,050) (1,260) (1,323) (1,389) (1,459) (1,532) (1,608)

Net foreign exchange gain/(loss) (2,907) 7,263 10,446 ------Provishions for loses (5,623) (30,055) (52,284) (38,280) (18,263) (40,762) (65,566) (94,104) (108,991) (115,092) (124,739) Profit before income tax 16,868 90,166 156,851 114,839 54,788 122,286 196,698 282,313 326,972 345,275 374,216 Income tax (485) (2,598) (15,814) (22,968) (10,958) (24,457) (39,340) (56,463) (65,394) (69,055) (74,843) Net Profit/ (loss) for the year 16,383 87,568 141,037 91,872 43,831 97,829 157,359 225,851 261,578 276,220 299,373

67 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 49: FMAP Economic IRR

Calculation of FMAP E-IRR (C1 and C2)

(figures in US$) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2027

Costs C1 (RFF) - 506,366 2,336,006 13,445 1,656 18,706 Costs C1 (FREDA) 62,610 899,632 1,133,998 2,365,094 1,979,502 1,917,823 Costs C2 (RII) 3,369,634 13,923,499 6,098,614 1,909,444 163,793 165,802 Total 3,432,244 15,329,497 9,568,619 4,287,982 2,144,951 2,102,331

Benefits C1 (RFF) - -41,149 -142,513 -215,482 -140,867 -644,931 1,655,495 3,715,524 5,311,907 5,315,522 13,166,534 Benefits C1 (FREDA) - - 23,046 180,066 -484,852 -1,106,062 -866,004 710,545 1,115,295 2,462,422 2,970,497 Benefits C2 (RII) 1,428,694 1,428,694 1,428,694 1,428,694 1,428,694 1,428,694 1,428,694 1,428,694 Total - -41,149 -119,467 1,393,277 802,975 -322,299 2,218,186 5,854,764 7,855,896 9,206,638 17,565,724

Cash flow -3,432,244 -15,370,646 -9,688,086 -2,894,705 -1,341,976 -2,424,630 2,218,186 5,854,764 7,855,896 9,206,638 17,565,724 EIRR (20 years) 14.6%

68 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 6: Financial and economic analysis

Table 50: Sensitivity Analysis of FMAP

Sensitivity calculation (figures in US$) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2027 FMAP Costs 3,432,244 15,329,497 9,568,619 4,287,982 2,144,951 2,102,331 - - - - -

RFF Benefits (no additional loans) - -41,149 -142,513 -215,482 -140,867 -644,931 1,686,198 3,823,139 5,477,814 5,477,814 5,477,814 All other benefits - - 23,046 1,608,760 943,842 322,632 562,690 2,139,239 2,543,989 3,891,116 4,399,191 Cash flow -3,432,244 -15,370,646 -9,688,086 -2,894,705 -1,341,976 -2,424,630 2,248,889 5,962,379 8,021,803 9,368,931 9,877,005 EIRR 12.4% 10% FMAP Costs 3,432,244 15,329,497 9,568,619 4,287,982 2,144,951 2,102,331 - - - - - FMAP Projected benefits decrease by 10% - -41,149 -119,467 1,393,277 802,975 -322,299 1,996,367 5,269,287 7,070,306 8,285,975 15,809,152 Cash flow -3,432,244 -15,370,646 -9,688,086 -2,894,705 -1,341,976 -2,424,630 1,996,367 5,269,287 7,070,306 8,285,975 15,809,152 EIRR 13.5% 20% FMAP Costs 3,432,244 15,329,497 9,568,619 4,287,982 2,144,951 2,102,331 - - - - - FMAP Projected benefits decrease by 20% - -41,149 -119,467 1,393,277 802,975 -322,299 1,774,548 4,683,811 6,284,717 7,365,311 14,052,580 Cash flow -3,432,244 -15,370,646 -9,688,086 -2,894,705 -1,341,976 -2,424,630 1,774,548 4,683,811 6,284,717 7,365,311 14,052,580 EIRR 12.3% 10% FMAP costs 3,432,244 15,329,497 9,568,619 4,287,982 2,144,951 2,102,331 - - - - - RFF projected benefits decrease by 10% - -41,149 -142,513 -215,482 -140,867 -644,931 1,489,946 3,343,972 4,780,717 4,783,970 11,849,880 All other benefits equal - - 23,046 1,608,760 943,842 322,632 562,690 2,139,239 2,543,989 3,891,116 4,399,191 Cash flow -3,432,244 -15,370,646 -9,688,086 -2,894,705 -1,341,976 -2,424,630 2,052,636 5,483,211 7,324,705 8,675,086 16,249,071 EIRR 13.9% 20% FMAP costs 3,432,244 15,329,497 9,568,619 4,287,982 2,144,951 2,102,331 - - - - - RFF Projected benefits decrease by 20% - -41,149 -142,513 -215,482 -140,867 -644,931 1,324,396 2,972,420 4,249,526 4,252,418 10,533,227 All other benefits equal - - 23,046 1,608,760 943,842 322,632 562,690 2,139,239 2,543,989 3,891,116 4,399,191 Cash flow -3,432,244 -15,370,646 -9,688,086 -2,894,705 -1,341,976 -2,424,630 1,887,087 5,111,659 6,793,514 8,143,534 14,932,418 EIRR 13.1%

69

Republic of Armenia Farmer Market Access Programme Project completion report Appendix 7: Impact on the environment

Appendix 7: Impact on the environment

1510998270. No detailed information is available as regards the overall impact of FMAP on the environment. As regards infrastructure investments, the project is has generally had a neutral to marginally positive environmental impact. This would increase probably with an increased connection of rural households to the supplier network. Details regarding infrastructure investments are provided in Appendix 9 under Assessment of impact (Environment and Common Resource Base). 1510998271. No information is available as regards the environmental impact of FREDA investments or the loans granted under RFF.

71

Republic of Armenia Farmer Market Access Programme Project completion report Appendix 8: Stakeholder workshop findings

Appendix 8: Stakeholder workshop findings

Not applicable, as no stakeholder workshop was conducted during the mission.

73

Republic of Armenia Farmer Market Access Programme Project completion report Appendix 9: Rural Infrastructure Investment

Appendix 9: Rural Infrastructure Investment

F. Introduction 1510998272. The Farmer Market Access Programme (FMAP) is built on experience gained with four IFAD-funded projects in Armenia implemented in the past 10 years, in chronological order: the Irrigation Rehabilitation Project (IRP), co-financed with the World Bank; the North-West Agricultural Services Project (NWASP), the Agricultural Services Project (ASP) and the Rural Areas Economic Development Programme (RAEDP), co-financed with OFID. All these projects had infrastructure development components with a main focus on irrigation rehabilitation and upgrading (i.e. conversion from pumped to gravity schemes), but supported also water supply and rural road construction. The implementation of natural gas networks, was started under the RAEDP Commercially Derived Infrastructure Component (CDI) and continued under the Productive Infrastructure Rehabilitation Project (PIRP) financed exclusively by OFID,22 on the basis of the comparative advantage of using natural gas23 both for household use and for productive purposes. The geographic area of these interventions comprised the seven dominantly mountainous marzes of Shirak, Lori, Tavoush, Gegharqunik, Vajots Dzor, Sjunik and Aragatsotn. 1510998273. The considerations drawn on the implementation of the RII Component were based on the M&E data available at the PIU, selected findings from a survey carried out by local consultants at end of 2013, field visits and focus group discussions undertaken by the PCR Mission (covering 9 communities in four project marzes, benefitting from natural gas, drinking water and irrigation investments) as well as discussions undertaken at the PIU were additional important sources of information to validate the available data and identify weaknesses and strengths in design and implementation.

G. Project description and implementation arrangements 1510998274. The FMAP Rural Infrastructure Investment (RII) Component objective was to enhance the living conditions of the primary target group and stimulate private sector activity through investments in economic and social infrastructure. More specifically, the component was designed to award competitive contributory grants for investments [...] that: (i) have a demonstrable impact on improving livelihoods of people appropriate to FMAP’s goal and objectives; (ii) complement other investments under the Programme; and (iii) reflect the geographic distribution of rural poverty in Armenia.24 The component comprised two sub components: (i) Investment Derived Infrastructure (IDI), providing support for investment in public infrastructure directly related to the investment by FREDA in commercial rural entities; and (ii) Social Infrastructure Investments (SII), typically comprising of community based public infrastructure facilities including gas networks, domestic water supply, irrigation, roads and drainage facilities. The SII sub-component had nationwide coverage (excluding Yerevan). In light of the large scope of works identified and following a request from the GOA, RII investments have been directed exclusively to the SII sub component. The summary of SII investments completed under FMAP including the relevant outreach targets are reported in the following table.

22 The PIRP was implemented by the PIU in parallel with RAEDP and replicated the RAEDP CDI concept. 23 The natural gas retail price in 2007 was 59AMD/m3, making gas cheaper than any other fuel including firewood and purchased dung cakes. 24 FMAP PDR Component Description.

75 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 8: Stakeholder workshop findings

Table 1: FMAP Infrastructure Investments and Outreach

Source: PCR mission elaborations of PIU data.

1510998275. The implementation arrangements for the RII Component are drawn from the previous IFAD and OFID financed RAEDP and relied on the services of the same Project Administration Unit (PAU) established under RAEDP, hereinafter referred to as PIU.25 The PIU Technical Section, with its complement of eight staff of which five engineers, retained a key role in the implementation of all infrastructure related issue including procurement, contract management and quality control, while detailed design, daily supervision and construction works were outsourced to the private sector on a competitive basis. 1510998276. The Operation Manual developed for the implementation of the RAEDP Commercially Derived Infrastructure Component (CDI), which includes comprehensive sections on the procurement, supervision and quality assurance of civil works, was referred to for the implementation of the FMAP RII component. For the specific case of the SII sub-component, the principle of carrying out an ex-ante financial analysis, which is reported in the CDI Manual was not considered in the FMAP design, in light of the mainly social dimension of the investments. 1510998277. At the early stages of implementation, the PIU concurred with OFID26 in a specific implementation arrangement for the construction of rural gas networks to be undertaken under FMAP, on the basis of potential savings. The arrangement included the procurement in bulk of gas pipes from the international market and hence a second separated procurement process for their installation. Based on the available data, conclusions cannot be drawn on whether the arrangement was cost effective, but indeed it turned out to be sub-optimal in terms of stretching PIU technical staff capacity as well as competences to take care of handling, storing and transport of construction materials, adding to the challenges of overseeing the simultaneous execution of civil works in scattered locations. 1510998278. Technical challenges were also experienced with the specific implementation arrangements applying to 12 water supply schemes and 6 gas schemes co-financed by IFAD and USAID in order to comply with the cofinancier’s requirements. These works were also executed under separate contracts for e.g. earthworks and pipe laying works, resulting into implementation difficulties. These were recorded and remedial actions identified during the IFAD annual supervision missions27. While this implementation arrangement is deemed sub-optimal, the final result of this cooperation in terms leveraged financing not foreseen in the PDR (see also section D - Project Costs and Financing) and of contribution to the component’s total outreach is highly satisfactory.

25 Following its change of status as a Governmental Agency in 2011, the PAU was renamed as Rural Areas Economic Development Projects Implementation Unit (RAED-PIU) and underwent a restructuring in its organizational chart. 26 IFAD was not involved in the supervision and administration of OFID financing as these aspects were governed directly by OFID in agreement with the GOA. 27 IFAD Supervision Missions Aide Memoires 2011-13.

76 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 9: Rural Infrastructure Investment

1510998279. Notwithstanding the difficulties faced in the two instances noted above, the PIU has effectively undertaken all the necessary follow up actions prior to FMAP closing28 to verify and ensure the quality of completed works, including ex-post assessments. Overall, the implementation arrangements for the execution of rural infrastructure projects applied by the PIU under FMAP were satisfactory considering the scope of works and the pace of implementation. During the peak implementation years of 2009-10 the PIU managed 101 contracts serving 123 rural communities scattered across the 10 Programme marzes, discarding the option of bulking the works into homogenous bid packages in order to mobilize comparatively smaller local contractors.29 The infrastructure facilities visited by the PCR mission are operational and did not have any major breakdown since at least two years, giving an indication of adequate quality of the works (and sufficient O&M capacity, see also section J- Assessment Of Sustainability).

H. Project strategy and approaches 1510998280. The FMAP strategy to contribute to poverty reduction and livelihoods improvements in Armenia’s rural areas was to provide support both to the private sector through financial services for agri-related businesses and to the wider population living in the rural areas, through improved access to public infrastructure. 1510998281. Both FMAP sub-components for infrastructure development as described in the PDR were strictly demand-driven and did not include a predetermination of investments by type (e.g. roads, irrigation, etc.) or specific allocations of funding across marzes. 1510998282. The most prescriptive criteria detailed in the PDR were those applying to the IDI sub-component, which were however not implemented, requiring FREDA investee companies to apply for and co-finance investments in public utilities and the PIU ranking potential investments on the basis of their IRR. This approach to mobilize private financing (to a level of 15%) for public infrastructure development was highly innovative but extremely difficult to implement in the Armenian context, hence GOA’s request to reallocate the funding originally envisaged for the IDI to the SII sub- component. 1510998283. The SII Sub Component was designed as a flexible tool enabling the PIU respond to applications for investments in rural infrastructure prioritized by the communities themselves, which were also required to co-finance the cost of construction to a level of 10% (in cash or in kind). The main criteria to be applied by the PIU for screening applications for SII support originated by applicant communities were: (i) technical feasibility of proposed investment; (ii) number of individuals assisted per USD 10 000 of proposed investment; (iii) number of beneficiary households; (iv) equity contribution by applicants of at least 10% (cash or in kind) of the total investment cost; (v) complementarity with other FMAP activities; (vi) operation and maintenance arrangements; and (vii) expected improvement to current production and living conditions (e.g. health, environment). The PDR, however, did not specify how these criteria were to be weighted to rank investment proposals on a truly competitive approach, which would have significantly improved the overall performance of the component. Moreover, the PDR did not present basic outreach target indicators that were then introduced during the 2010 IFAD Supervision mission/mid-term review (MTR).30 1510998284. The lack of overall targets and of well-defined ranking criteria at the early stages of implementation negatively affected the sub-project selection process and the majority of the project proposals selected for implementation were actually received by the PIU during RAEDP31 and PIRP and were not implemented due to lack of funding. A major irrigation gravity main that was not completed under RAEDP in Tavoush marz was also selected for implementation. While obviously

28 This included two legal cases contractors who failed to perform according to specifications in 2 contracts for the construction of gas supply schemes and a reimbursement obtained from USAID for works carried out by the PIU outside the scope of cooperation agreement. 29 About 50 civil works contractors were mobilized for the implementation of the Programme. 30 IFAD 2010 Supervision Report- Appendix 6 – updated Logical Framework. 31 IFAD Supervision mission Aide Memoire, October 2009.

77 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 8: Stakeholder workshop findings speeding up the implementation process (e.g. the detailed designs for the major investments in gas distribution networks in Shirak marz were carried out under these previous programmes, hence were readily available at FMAP start), this resulted in an obvious drift from the competitive process as envisaged at design. The opportunities for optimizing the use of Programme resources in light of implementation experience and of externalities such as the increased gas price (see the following section on efficiency) were also limited by an overly fast sub-project identification process, soon followed by formal commitments entered into by the PIU with the communities. 1510998285. On the other hand, another key requirement set in the PDR for SII investments, i.e. to reflect the geographic distribution of rural poverty in Armenia, was rather fulfilled as the geographic distribution of investments matches the distribution of rural poverty according to the National Statistical Service. The largest share of investments (43% of total expenditures for civil works) took place in the northern marzes of Shirak and Lori which rank highest in the NSS poverty map.32 The distribution of infrastructure investments by marz does also correlate with the target area of previous IFAD financing (i.e. the seven dominantly mountainous marzes of Shirak, Lori, Tavoush, Gegharqunik, Vajots Dzor, Sjunik and Aragatsotn) where the PIU has acquired a vast experience in operating with the regional and local authorities. All the ten Programme marzes, however, benefitted from infrastructure investments as shown in the following table.

Table 2: FMAP Infrastructure Investments by Type, Marz and Amounts of Contracted Qorks

Source: PCR mission elaborations of PIU data.

1510998286. The wide geographic spread and lack of clustering mechanisms in the lending programme did limit the opportunities for the development of synergies between the Rural Infrastructure and the Rural Finance components of FMAP. Moreover, due to the limited capacity of interest groups to apply for and to source funding for communal infrastructure investments (an option foreseen in the PDR), the component relied on public funding (the community budget) to supplement the funds collected by community members for co-financing of SII investments to the minimum required level of 10%.

I. Assessment of relevance 1510998287. The RII Component was strongly linked to the objectives of the GOA’s policy papers on Poverty Reduction i.e. the Sustainable Development Programme (SDP) and its latest update33, which confirm the continued relevance of improving the service levels of public utilities and of improving access to irrigation as key conditions for the development of Armenia’s rural areas. In

32 National Statistical Service (NSS) – Social Snapshot of Poverty 2013. 33The SDP ,adopted with RA Government Decree N 1207-N (30 October 30 2008) is in effect the second Poverty Reduction Strategy Paper (PRSP-2) covering the period 2008-2021; the Armenia Development Strategy (draft November 2012) covers the period 2012-2025 and updates the SDP.

78 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 9: Rural Infrastructure Investment aggregate, it is estimated that about 8% of the total rural population in Armenia had access to FMAP supported investments in rural infrastructure. 1510998288. Investments in drinking water supply and gas supply were also directly connected to the national MDG progress indicators as well as to the United Nations Development Assistance Framework (UNDAF). As the major investment programme for rural gas supply networks in Armenia during 2009 and 2010, FMAP made a contribution to the achievement of the UNDAF target of 100% gas coverage for communities with more than 300 households by 2015. On the other hand, these targets were set when investments in rural gas networks were identified as an effective means of targeting poor communities34 as natural gas was cheaper than any other fuel including firewood and purchased dung cakes. The increased gas retail price combined with the low ability to pay for the one- time cost of connection by the new gas users have substantially reduced the relevance of investments in rural gas networks; while the GOA has taken some action to address these concerns35, it remains unlikely that the rural poor are among the direct beneficiaries of gas supply projects due to the relatively high one-time cost for new connections. 1510998289. The investments in irrigation carried out under FMAP made a relevant contribution (estimated to some 25%) to the progressive increase of irrigated areas recorded nationwide during the Programme implementation period.36 In addition, the agro-ecological factors coupled with the structure of private land ownership (with relatively low levels of landlessness and widespread access to at least a small parcel of irrigable farmland) make investments in irrigation infrastructure in rural Armenia inclusive and demanded by the rural poor. Overall, the relatively large share of small backyard plots (0.16ha/household on average) reached by the FMAP irrigation systems indicate that the FMAP irrigation projects did, in general, benefit the poor segments of the population. 1510998290. The type of (public) infrastructure facilities financed by FMAP naturally equally benefit man and women; women participants to the focus group discussions conducted by the PCR mission highlighted that investments in drinking water and gas supply were the most responsive to their needs. Specific assessments of the share of FMAP infrastructure beneficiaries belonging to disadvantaged groups are not available. However, it is noted that at least four of the communities benefitting from investments in gas networks (Nor Khachakap, Arjahovit, Shatjrek, Sis) are largely composed by refugees37. Moreover, four bordering communities in Tavoush marz (Koti, Baghanis, N.Karmiraghbyur and Movses) suffering from limited access to agricultural lands due to persistent security concerns have benefitted from FMAP investments in irrigation.

J. Project costs and financing 1510998291. The RII Component was initially valued at about USD 14.7 million, but it attracted incremental resources that were not foreseen at the PDR stage. These include an incremental USD 4.0 million of OFID loan funding (negotiated by the GOA in addition to the USD 10.0 million included in the PDR financing plan) and about USD 900 000 from a reallocation across the IFAD loan categories carried out during implementation. Both the IFAD and OFID loan allocations have been fully disbursed ahead of schedule by end 2011.

34 In the World Bank study “Rural Infrastructure in Armenia: Addressing Gaps in Service Delivery” (September 2004) gas projects had the highest priority ranking across the surveyed communities. 35 The GOA has established a subsidy scheme for vulnerable HH entitled to a reduced gas tariff; however, the high cost of connection is still a major obstacle for the poor to access the benefits of natural gas. 36 Estimated to some 2 500 ha of which 2 104 ha under WUAs between 2009 and 2012 (WB Water PIU). 37 Refugees from the Karabakh war are still a vulnerable segment of the rural population.

79 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 8: Stakeholder workshop findings

Table 3: FMAP Rural Infrastructure (audited expenditures by financier in USD)

1510998292. It shall be noted that the low contribution from GOA and beneficiaries (62% of PDR target) shown in the above table is mainly due to the fact that the PDR target includes the in-kind contributions from the communities that are not audited in the PIU accounts. These in kind contributions are estimated to be about USD 1.5 million. The parallel financing leveraged from USAID/WFP and for 12 water supply schemes and six gas schemes is estimated to some additional USD 1.1 million. To a smaller extent, parallel financing was leveraged also from local governments and NGOs that carried out the rehabilitation of sections of irrigation distribution systems to serve the backyards or the extension of additional branches of the gas networks in selected communities. Moreover, the gas projects resulted in induced investments by the beneficiaries not only for the connection and the installation of the meter (estimated to USD 4.1 million in aggregate) but also for the purchase of new domestic appliances operating on natural gas (estimated to USD 900 000 in aggregate).

K. Assessment of efficiency 1510998293. The construction costs and technical solutions applied to investments in water supply, and irrigation compare with those incurred under RAEDP as well as other infrastructure development projects supporting the same type of investments in Armenia during the same period (such as Millennium Challenge Account (MCA) and the WB financed Armenia Social Investment Fund III project). Road projects on the other hand, show a very high cost per unit length (USD 270 000 per km), which may be explained by the fact that in peri-urban locations, higher standards and appurtenant structures are required as compared to roads linking rural communities. The PCR mission was not in a position to assess whether the procurement in bulk of gas pipes from the international market resulted in significant savings and enhanced cost efficiency in the execution of gas supply projects as this would require a detailed ad-hoc analysis of the Bill of Quantities (BoQs) which is beyond the scope of the PCR. It is, however, noted that the finished unit cost per meter of pipe laid in the FMAP gas projects (some USD 27/m) appears to be within a standard range considering the nominal sizes of pipes normally used in gas distribution. As for the design/construction and supervision/construction ratios (3% and 2%, respectively), these are fully in line with common engineering practice in the region. 1510998294. On the other hand, the selection process of FMAP investments in rural infrastructure obviously did not follow cost efficiency criteria. The relevant basic cost/benefit ratios for the different types of infrastructure investments financed under FMAP are reported in the table below, evidencing that that the distribution of investments by type does not reflect the cost/beneficiary ratios.

80 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 9: Rural Infrastructure Investment

Table 4: FMAP Rural Infrastructure Cost/Beneficiary Indicators

Source: PCR mission calculations on the basis of PIU data.

1510998295. The largest share (74% of the total expenditures for civil works and materials) in the FMAP portfolio is represented by the natural gas projects, which are the type of infrastructure showing the highest cost/beneficiary. This high cost/beneficiary is partly due to the fact that, to date, only 43% of the potential beneficiary households have connected to the gas networks financed by the FMAP, but even in the best case scenario in which all the households that have access to gas pipelines would become gas users, the cost/household of USD 767 would still be a relatively high. 1510998296. Besides the high cost/beneficiary, the PCR mission noted cases in which either the Programme did not ensure coverage of the whole settlement area (in turn causing inequality as well as relatively higher incidence of mobilization costs on the total cost) or supported the construction of middle pressure lines while the complementary investments in low pressure networks are still pending, also contributing to the low efficiency rating of gas projects. 1510998297. Water supply projects have the lowest cost per beneficiary, which is also explained by the high level of parallel financing mobilized for their implementation. As for the irrigation investments, the cost per ha under improved irrigation is USD 2 200 which is on the low side for irrigation development in Armenia. To this effect it shall be noted that the major investment in irrigation financed under FMAP builds on the considerable sunk cost of an irrigation main in Tavoush marz (the Koti scheme) that was taken over and completed under FMAP. The development of tertiary distribution systems allowing the exploitation of the full potential of this scheme38 would raise the overall irrigation development cost under FMAP to USD 2 700/ha, still indicating an efficient use of funding. 1510998298. As for the FMAP financed investments in drainage facilities, it is emphasized that these were only geared to support deferred maintenance of main drains and their cost efficiency may not be compared with that of other investments in infrastructure in terms of cost/beneficiary in light of the high cost of recurrent maintenance relative to the initial amount invested (see also below section J - Sustainability). 1510998299. While the cost efficiency of FMAP RII investments varies largely depending on the type of infrastructure considered and includes a number of positive indicators, the RII Component’s emphasis on natural gas underpins a low efficiency in the use of funds for rural infrastructure development.

L. Review of project outputs 1510998300. The PDR did not present basic outreach target indicators for the RII component. These were introduced during the 2010 IFAD supervision mission/MTR,39 setting the component overall target to serve 100 communities and 40 000 household. An indicative target distribution of investments by type was also developed to facilitate first level RIMS reporting. The key outputs of the RII component were reported on a database maintained by the PIU M&E officer to monitor progress against targets. Inconsistencies in the database were noted during the IFAD supervision and implementation support missions40 and the database was hence consolidated during the preparation

38 Development of 330 ha of farmlands with tertiary distribution systems valued at USD 4 800/ha. 39 IFAD 2010 Supervision Report- Appendix 6 – updated Logical Framework. 40 IFAD M&E Implementation Support Mission (Dec. 2012).

81 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 8: Stakeholder workshop findings of the PCR. Key output indicators that were reassessed during the PCR mission included: (i) an update of the gas connections as per official records from the gas operator; (ii) the evaluation of total command area, incremental area, share of backyard plots and actual uptakes of the investments in irrigation; and (iii) a reassessment of the number of direct beneficiaries of drainage projects. The consolidated outreach data of all the FMAP investments in infrastructure are presented in the table below. The total outreach is calculated by considering that four communities (Lernansk, Chambarak, Chinari and Ashotzk) benefitted from both gas and either water supply or road projects, while a community (V. Karmiraghbyur) benefitted from FMAP financed investments in irrigation, gas and water supply.

82 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 9: Rural Infrastructure Investment

Table 5: Outreach of FMAP Infrastructure Investments by Type of Investment and Marz

Natural Gas Drainage Systems project name Communities Beneficiaries HHs * project name Communities Beneficiaries HHs

Aragatsotn Lori Nor Artik, Hatzashen 2 320 80 Tandzut river bed cleaning/banks reinforcement 1 100 25 Karbi 1 88 22 Gegharkunik Voskevaz 1 580 145 Norakert drainage system cleaning/rehab 1 480 120 Ohanavan 1 332 83 Sarukhan collector cleaning 1 400 100 Aragats 1 124 31 Daranak canal cleaning 1 380 95 Vardenut 1 208 52 Pambak riverbed cleaning 1 120 30 Zarinja 1 228 57 Gavaraget riverbed cleaning 1 140 35 Apna 1 204 51 Tavush Tsaghkashen 1 88 22 Debed riverbed cleaning, 220m bank reinforcement/Arjis 1 240 60 Dashtadem 1 176 44 Total 7 1860 465 Quchak 1 220 55 Community Roads Camaqasar 1 16 4 project name Communities Beneficiaries HHs Shirak Tavush Ani Kayaran 1 52 13 Dilijan/Shamakhyan road repair 1 2924 812 Ani Pemza 1 0 0 Gegharkunik Lanjik-Karaberd 2 520 130 Chambarak, Nzhdeh street rehab. 1 7655 1913 Sarakap 1 84 21 Total 2 10579 2725 Jrapi-Haykadzor 2 360 90 Aghin-Isahakyan 2 388 97 Irrigation Systems Shirakavan 1 344 86 project name Communities Beneficiaries HHs Dzitankov 1 452 113 Ararat Sarnaghbyur 1 832 208 Berdik Tube Well Irrig 1 200 50 GDP Rehab in Ashotzk 0 Artashat Tube Well Irrig 1 2400 600 Pokr Sepasar, Mets Sepasar, Krasar 3 336 84 Armavir Ashotzk 1 868 217 Artamet Tube Well Irrig 1 224 56 Amasya 1 1732 433 Armavir town 2 Tube Well Irrig 1 3200 800 Voghji, Meghrashat 2 168 42 Aknashen 1 1672 418 Mets Mantash 1 104 26 Vayotz Dzor 0 Pokr Mantash 1 40 10 Vardahovit Irrigation system rehab 1 360 90 Arevshat 1 208 52 Khndzorut, Sers Irrigation System rehab 2 908 227 Lernakert 1 68 17 Tavush 0 Geghanist 1 60 15 Voskepar- Koti irrigation II phase 4 3692 923 Bagravan 1 132 33 Berd-Tovuz-N.Karmiraghbyur-V.Karmiraghbyur-Movses internal5 irrigation7280 networks1820 rehab. Lori Total 17 19936 4984 Lernavan 1 400 100 Drinking Water Systems Lernapat 1 208 52 Project Name Communities Beneficiaries HHs Dsegh, Gyulagarak 2 288 72 Lori Pambak 1 128 32 Novoseltzevo Water System Rehab 1 191 48 Shirakamut 1 152 38 Kachachkut Water Supply 1 460 115 Lernantzk 1 396 99 Artsni 1 300 75 Nor Khachakap 1 324 81 Lernantzk 1 1570 393 Arjahovit 1 112 28 Ararat Sarchapet 1 1504 376 Vosketap Water System Rehab 1 5311 1328 Akhtala- Svinetz district 1 24 6 Sisavan Water System Rehab 1 2255 564 Mets-Pokr Ayroum 1 0 0 Shirak Spitak- Banavan/Tashir distr. 1 268 67 Kamo 1 1545 386 Ararat Pemzashen 1 3727 932 Sipanik 1 152 38 Jrarat 1 1267 317 Sis, Noramarg 2 56 14 Tavush Vosketap-Avshar 2 6076 1519 Chinari 1 1271 318 Noyakert, Yeghegnavan 2 1520 380 Artsvaberd 1 3271 818 Qaghtzrashen 1 20 5 Choratan 1 1052 263 Armavir Verin Karmiraghbyur 1 1727 432 Janfida 1 852 213 Kirantz 1 289 72 Pshatavan 1 632 158 Gegharkunik Gegharkunik Vardenik Water 1 905 300 Shatjrek 1 160 40 Lchashen Water 1 5102 1276 Chambarak 1 4932 1233 Vayotz Dzor Tavush Gomk, Azatek, Bardzruni water system rehab 3 1134 283 V. Karmiraghbyur 1 1004 251 Syunik Chinari 1 848 212 Vardanidzor, Lehvaz, Kashuni Water system rehab 3 894 224 Vayotz Dzor Tsav 1 368 92 Por, Zaritap, Vayk 3 8 2 Armavir Gladzor 1 1384 346 Aygeshat internal water network rehab. 1 1846 462 Aghavnadzor, Arpi 2 352 88 Total 24 34485 8698 Kotayk Nor Yerznka 1 92 23 Proshyan 1 320 80 Nurnus 1 284 71 Meghradzor 1 308 77 Yeghvard Nati 1 148 37 Syunik Aghitu 1 0 0 Angeghakot 1 776 194 Vachaganavan -Kapan 1 0 0 Total 79 33060 8265 * number of connections updated as of 2013 December 31 1510998301. The wide coverage of communities (123% of target) is not matched by an equally satisfactory outreach in terms of number of households directly benefitting from FMAP supported investments in infrastructure, which, at the time of PCR preparation, is only 58% of the target. The shortfall is mainly due to the large share taken in the FMAP portfolio by the natural gas projects; to date, only 43% of the potential beneficiary households have connected to the gas networks financed by the FMAP. Once the gas schemes will be utilized by all potential users, the total RII outreach will

83 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 8: Stakeholder workshop findings be able to rise to about 36 000 households (or 90% of the PDR target). The aggregate outreach data of the RII Component which summarized below present additional output indicators for each type of investments.

Table 6: FMAP Gas Projects Physical Data and Uptake Rates

Source: PCR mission calculations on the basis of PIU data.

1510998302. The aggregate length of gas pipes installed across the 79 communities benefitting from FMAP investments in gas supply networks is more than 550 km (including middle and low pressure) that would technically allow the connection of 19 391 households. Of these, some 43% have paid a connection fee of USD 500 on average41 and use gas for domestic purposes (cooking, boiling of water and to a lesser extent heating). Besides their ability to pay, a key aspect determining the consumption patterns of the connected households is the distance to the community main source of firewood. The PIU data report that some 80% of the communities benefitting from FMAP investments in gas network have poor access (at a distance of more than 30 km) to firewood. The public buildings connected to the gas systems (on average 1.5 per community) comprise schools, hospitals, kindergartens and community centres; the commercial consumers comprise bakeries and greenhouses, the latter being located exclusively in Aragatsotn and Ararat marzes.

Table 7: FMAP Water Supply Projects - Physical Data and Service Levels

Source: PCR mission calculations on the basis of PIU data. 1510998303. FMAP investments in water supply networks (including pipe installation, spring capping and storage tanks) benefitted 8 869 households across 24 communities. The systems have increased the service level (+ 36% hours of supply) of water for domestic use. A survey commissioned by the PIU revealed that in all communities’ domestic water is provided to livestock for an average of 6.8 months in the barns. This has reportedly resulted in a measurable (+15%) milk yield increase from a total of nearly 8 000 milking cows (on average 0.9 milking cow per rural household). In addition, the

41 According to the latest household survey of end 2013

84 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 9: Rural Infrastructure Investment survey revealed the widespread use (63%) of domestic water for irrigating the backyard plots adjacent to the rural households with an average size of 0.16 ha.

Table 8: FMAP Irrigation Projects - Physical Data and Uptake Rates

Source: PCR mission calculations on the basis of PIU data.

1510998304. The improved irrigation systems in 17 communities are currently serving 1 435 ha (with a potential to expand up to 2 162 ha) of which 461ha of backyards (90% of target) and 974 ha of farmlands (59% of target). The uptake rates both in the backyards and in the farmlands are not less than 83% with a noticeable exception of the Koti scheme in Tavoush marz, where the extension of irrigation to the farmlands requires substantial additional investments in tertiary level irrigation pipelines. Labor shortages in rural communities particularly affected by out-migration42 were also reported as causes of slow uptake.

Table 9: FMAP irrigation projects - cultivation of farmlands as at the end of 2013

Source: PCR mission calculations on the basis of PIU data.

1510998305. The table above shows that with specific reference to the targeted farmlands, 642 ha out of the 974ha which are now irrigated are to be considered a net incremental as these areas were not cultivated before the FMAP financed investments.

Table 10: FMAP Road Projects - Physical Data

Source: PCR mission calculations on the basis of PIU data.

1510998306. The 2.2 km of asphalt surfacing in two major rural centres directly benefits some 2 725 households which are located along or necessarily have to drive through these streets to reach their homes from the town centre. While characterized by a relatively short working life, the deferred

42 See the case of Voskepar under the Koti irrigation pipeline completed by IFAD in 2011.

85 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 8: Stakeholder workshop findings maintenance of main drains financed by FMAP prevented damage to the property (i.e. buildings and agricultural land) of 465 households across seven communities. 1510998307. The data reported in the tables above confirm the considerable achievement in terms of geographic spread and overall number communities benefitting from of RII investments. The total number of small enterprises directly benefitting from RII investments is difficult to assess, but it is expected to be only a fraction of the number of communities served.43. No significant trend is evident on the establishment or expansion of small scale commercial farming in the areas targeted by FMAP irrigation investments.

M. Assessment of project effectiveness 1510998308. The effectiveness of the FMAP RII Component is measured by the extent to which the investments were successful at introducing improvements in the livelihoods of the rural people and by the incremental income streams generated, in turn representing a proxy for the component’s contribution to rural economic growth. 1510998309. A survey commissioned by the PIU across a sample of FMAP beneficiaries reveals that rural people directly benefitting from FMAP investments in public infrastructure widely report livelihood improvements attributed to the Programme (see the table below). An overall positive qualitative assessment by the beneficiaries is also confirmed by the field visits undertaken by the PCR mission.

Table 11: Livelihood Improvement Ratings by FMAP Infrastructure Beneficiaries

Source: Surveys commissioned by PIU by the end of 2013.

1510998310. The economic benefits generated by FMAP supported investments in rural infrastructure are only to a limited extent related to development of specific rural enterprises and mostly derive from improvements to the low efficiencies of smallholder farming activities prevailing in most of Armenia’s rural communities. 1510998311. The main economic benefits for the target group are extended by the investments in irrigation and water supply which have a direct impact on incomes both directly from crop production and indirectly from livestock production through the increased availability of fodder. The extension of irrigated areas, and changes in yields and cropping patterns recorded in the FMAP irrigation areas result in an estimated incremental income of USD 202 per beneficiary household. 1510998312. The provision of farmers’ trainings and awareness raising on access to financial services (including, but not limited to the RFF) to complement the investments in irrigation infrastructure were not included in the FMAP design. Such activities have been carried out, to a limited extent, by other actors (e.g. by an NGO active in Tavoush) but their systemic implementation remain a key factor to speed up the uptake and maximize the returns to farmers from improved irrigation, hence increasing the effectiveness of these investments. In addition, considerable incremental income streams would be generated from the irrigation expansion areas (300ha) under the Koti gravity main which require, however, further investments in the tertiary distribution network (see also sections G and F above).

43 The MCA Report on Rural Community Survey (2009) records the occurrence of food processing enterprises only in 19% of the 262 surveyed communities.

86 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 9: Rural Infrastructure Investment

1510998313. FMAP financed investments in water supply have also had a direct impact on incomes mainly connected with the increased productivity of milking cows due to improved availability of drinking water in the barns estimated to USD 56/household. These benefits are generally extended immediately and equitably to the rural households targeted. 1510998314. Investments in gas do not produce positive monetary benefit streams, but rather they result in increased costs, mainly in connection with the increased expenditures for relatively better off households using gas for heating during winter. On the other hand, such incremental costs are incurred for improved services resulting in livelihood improvements widely attributed to FMAP by the beneficiaries. Current projections reveal that under the assumption of constant prices, only in a scenario of 100% connections and a relatively larger share (+10%) of users using natural gas exclusively for cooking and hot water, the annual benefit stream from gas projects would become positive (USD 439 427 in aggregate or USD 23/household). The increase in the consumer price of natural gas has obviously played a major role in downsizing the benefit stream compared with what had been assessed at the time of FMAP design. 1510998315. While resulting in marginal or no savings at the household level, improved access to gas has benefitted some 46 rural enterprises which had the opportunity to enhance their production capacity (mainly greenhouses and small bakeries), ultimately resulting in an increase in employment, which is, however, marginal considering the scale of FMAP infrastructure operations. A case study carried out at the community of Voskevaz, where the FMAP contributed to revive and boost a dormant tradition of heated greenhouses, reports the case of an investment in gas supply that stimulated private sector activity. 1510998316. The two FMAP-supported road projects brought immediate benefits to the targeted communities in terms of reduced vehicles operations and maintenance, while no plausible assessments on how improved roads affected the volumes of traded commodities could be drawn at completion point.

Table 12: FMAP Infrastructure Projects - Economic Benefit Streams

Source: PCR mission calculations on the basis of PIU data and survey data commissioned by PIU. 1510998317. The effectiveness of FMAP RII investments in terms of incremental income/household varies depending on the type of infrastructure considered. The aggregate benefit streams generated by investments in water supply, roads and irrigation provide the basis for the calculation of incremental annual expenditures of rural households. The benefit streams result in an overall Component IRR of 4%, which is acceptable for infrastructure investments with a dominating social dimension as for the case of the SII sub-component of the FMAP. The relatively higher IRR computed for irrigation and water supply, however, shows that a more balanced distribution of investments by type would have increased the Component IRR well above 10%.

N. Assessment of impact 1510998318. Due to the extensive coverage of RII investments, some of the impacts of the RII Component may be related to the trends highlighted by the National Statistical Service’s 2013 Social

87 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 8: Stakeholder workshop findings

Snapshot of Poverty, comparing data from the Integrated Livelihoods Condition Survey (ILCS) of 2008 and 2012. Besides the use of official statistics, the impact of RII investments is assessed through interviews with beneficiaries carried out within the scope of the PIU M&E activities during implementation, complemented by findings from a survey commissioned by the PIU to local consultants at end 201344 and by the PCR mission own findings.

Physical Assets 1510998319. The farm-households benefiting from investments in irrigation infrastructure have experienced an increase in the value of lands due to improved irrigation. For the newly irrigated areas the net incremental market value the of farm plots is estimated to USD 800/ha.45 Considering the 974 ha of farmlands currently under irrigation, the aggregate incremental asset value of land is about USD 800 000 for an estimated 3 250 households. It shall be noted that such incremental assets would also contribute to facilitate farmers’ access to credit and might potentially trigger further investment and rural growth. According to the surveys commissioned by the PIU at the end of 2013, the communities benefitting from investments in irrigation show also an increase in the heads of cattle between 2008 and 2013 of 26%, which is considerably higher than the country average over the same period (15%). This increase is plausibly attributed to the better feed grown in sufficient quantity in the irrigated lands and is estimated to apply to at least 2,442 household (49% of the 4,984 household benefitting from irrigation). 1510998320. The improved access to gas and water did also result in an increased market value of the rural houses. The incremental value, however, is difficult to quantify as the estimates obtained from the field (through questionnaires and interviews) are variable and tend to be highly subjective. The cost of the connections to the gas network (USD 500 in average) is obviously capitalized as increased value of the houses, totaling USD 4.1 million for the 8 265 household connected. These households did also purchase at least a new domestic appliance operating on natural gas (gas stove, water heater, boiler), with an estimated aggregate value of more than USD 900 000. 1510998321. An inquiry carried out into the impacts of the FMAP financed drainage projects revealed that these served to reduce the risk of flooding and prevented damage to the assets of 465 households, especially buildings and agricultural land valued of an aggregate value of USD 2.4 million.

Food Security 1510998322. The Programme investments in irrigation and water supply infrastructure supported the irrigation of the backyards, which are used as food production plots adjacent to the rural houses (0.16 ha in average). It is estimated that this applied to about 2900 household among the beneficiaries of irrigation investments and 5 480 household (63% of total) among the water supply beneficiaries. These small plots are an important element of food security for the poor households and to some extent contribute to increased family income.46

Environment and Common Resource Base 1510998323. Programme supported interventions do not seem to have run contrary to major environmental norms and concerns. Overall, the project has generally had a neutral to positive environmental impact. The most noticeable positive impact was the reduction of wood harvesting in connection with availability of natural gas as alternative fuel, potentially having a long term important environmental impact. Based on the changes in the energy consumption baskets of the new gas

44 The survey was intended to provide the basis for an Impact Assessment of the FMAP Infrastructure Component but the draft findings made available to the PCR mission are used selectively in this PCR in light of the limitations in the sampling frame, particularly in respect to the identification of the “control group”. 45 A highly conservative estimate based on community leaders surveys. 46 The supervision mission Aide Memoire of September 2011 reports a 10% increase in household incomes from these plots, without further details.

88 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 9: Rural Infrastructure Investment consumers, the total volume of firewood saved annually as a result of FMAP gas projects is currently 39 460 m3, equivalent to about 56 ha of forest.47 Once all the FMAP targeted households will be connected to the gas network, environmental benefits may increase by a factor of two. However it shall be noted that these estimates are highly sensitive to changes in the percentage of gas users using gas for heating, which at the national level have experienced a decline between 2010 and 2012 (see the table below), possibly due to the increased gas price.

Table 13: Armenia: Heating Facilities 2010 and 2012 (in percent of households)

Source: ILCS 2010 and 2012.

Human Assets 1510998324. The Programme has contributed both to an increased production of food for own consumption and availability of food through increased family revenue, particularly for the 4 984 farming households benefiting from irrigation. Plausibly this led to improvements in level and quality of nutrition and affordability of health and education services. While hardly quantifiable, health benefits are recorded also in connection with improved access to drinking water and natural gas. This is particularly evident when gas is used for heating in schools and kindergartens, however not all of the targeted public buildings succeeded to mobilize funding for the installation of a centralized heating. Despite their positive impacts in terms of livelihood improvements, FMAP investments in infrastructure did not result in any detectable impact in terms of reducing permanent and work migration48 from the beneficiary communities.

Social Capital and Empowerment 1510998325. The Programme support to investments in Rural Infrastructure resulted in rural citizens coming together under the coordination of their elected leaders to: (i) submit applications for Programme support; and (ii) raise monetary and in kind contributions to the cost of construction. To this effect, ultimately more than 90 000 individuals benefitted directly from improved infrastructure because of collective action. The community administration managed the collection of the cash contributions that have been transferred to the PIU. Contributing HH met by the PCR mission revealed that this process was transparent hence effective in empowering the local administration and in raising awareness and sense of ownership of the end users. The Programme has also fostered collaboration between the rural communities and the respective marz offices. However, it remains unclear on which basis funding from the marz’s budget has been used to reach the eligibility threshold of 10% of community co financing and to what extent this resulted in political interference in sub- project/community selection.

Agricultural Productivity 1510998326. The Programme investments in irrigation infrastructure have contributed to increasing agricultural productivity both in terms of utilization of agricultural land, higher yields and to some extent shifts from low value field crops to cultivation of high value crops. The prominent impact

47 Assuming 0.5 m3 of firewood from a mid-sized tree and 14 trees on 100 m2. 48 Finding from the survey commissioned by the PIU on a sample of 16 communities benefitting from FMAP supported infrastructure, compared to nationwide data.

89 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 8: Stakeholder workshop findings of the irrigation projects is the cultivation of previously non productive (used at best as natural pastureland) farmland.

Table 14: FMAP Irrigation Cropping Patterns in Farmlands

Source: PIU Irrigation Database (as at the end of 2013). 1510998327. As shown in the above table, the cropping patterns on the 642 ha of irrigation expansion areas show a relatively higher share of field crops (+8% cereals and +24% of fodder) compared to the areas that were previously rain fed or had unreliable access to irrigation prior to the FMAP investment. In light of the relatively short timeframe of observations (three seasons), this trend may be still explained by an overall tendency by the farmers to quickly capitalize on access to irrigation with low risk annual crops. However, such behavior is obviously also related the lack of FMAP’s engagement in awareness raising about the potential opportunities for the cultivation of high value crops created by improved access to irrigation in each agro-ecological zone. 1510998328. Nevertheless, some positive indicators of the shifts to the cultivation of higher value crops (most notably vegetables and grapes) are recorded in the 332 ha of previously cultivated farmlands where the FMAP has improved farmers’ access to irrigation (see table above). Yields recorded between 2009 and 2013 by the relevant marz statistical offices collected by the PIU reveal an average increase of 31% for vegetables and 26% of grapes in project areas. 1510998329. The backyard cropping patterns show a prevalence of vegetables and fruits (44% and 33% on average, respectively) in all the different agro-ecological zones. The household survey reveals a sizeable yield increase of 30% from these plots (461 ha in total) directly attributable to FMAP irrigation investments. 1510998330. According to community survey data, the FMAP water supply projects resulted in a 15% milk yield increase for a total of nearly 8.000 milking cows and also supported increased productivity in the backyard plots adjacent to the rural houses due to improved access to water.

Institutions and Services 1510998331. The PIU has been acknowledged by the GOA as a key agency for the development of small scale infrastructure investments in rural Armenia. During FMAP implementation the PIU has proven capable of delivering on design and construction works to acceptable standards and has taken appropriate measures to correct technical defects when required. The GOA has furthermore seen that such an agency is needed to the extent that it has been restructured in 2011 as a governmental institution with added flexibility to manage the implementation of international projects (e.g. on staff recruitment and procurement). 1510998332. Even prior to FMAP, the GOA supported poor people’s access to domestic water, irrigation and gas through various support measures financed by the state budget. These included: (i) a cap on the domestic water tariff applicable by water management contractors; (ii) subsidies to WUAs to bring down the cost of irrigation water paid by the farmers to a standard nationwide

90 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 9: Rural Infrastructure Investment volumetric fee; and (iii) a subsidy scheme for vulnerable households entitled to a reduced gas tariff. The investments in rural infrastructure carried out under FMAP contributed to widening the application of these measures across 96 rural communities, comprising of: (i) all communities benefitting from investments in gas; (ii) those under irrigation schemes operated by WUAs; and (iii) the water supply systems operated by water management contractors. 1510998333. On the other hand, 21 community-based water supply schemes and three irrigation schemes financed under FMAP are operated directly by the rural communities (i.e. neither by a WUA nor by a water management contractor). While these local level management arrangements in most cases ensure that services to the poor households are provided at comparatively lower or no cost,49 concerns are raised about the long term sustainability of these services. To this effect, it is the PCR mission assessment that the communities managing their own water supply and irrigation systems would have benefitted from capacity building of community administrative and technical staff on systems O&M.

Financial Assets 1510998334. Given the relatively small scale of the incremental monetary incomes generated by the FMAP supported investments in infrastructure (most notably irrigation, see above), it is unlikely that this constituted a surplus increasing the stock of financial assets of the targeted households. Improvements in irrigation infrastructure and to some extent also in drinking water and gas, however, resulted in increased market value of the rural households’ physical assets that could be used as collateral contributing to improve farmers’ access to credit.

Markets 1510998335. The PDR did not pre-identify the agricultural value chains to be supported under the Programme and lacked specific activities targeting the irrigation beneficiaries geared to improve access to markets for their produce, e.g. through information on varieties with potential market outlets or through the establishment of producers associations. The lack of wholesale markets, problems with the sales of products and with dealing with middlemen/ resellers are ranked among the key difficulties encountered in the 2012 agricultural season at the national level50 and have been widely reported in the focus group discussions undertaken both by the PIU M&E Specialist and by the PCR mission. Evidence of strong synergies/complementarities of FMAP investments in infrastructure with private sector market actors such as small and micro agro-enterprises (including those supported by FREDA and RFF) is very limited and clearly this was not used as a guiding factor in decision making in the investment selection process.

O. Assessment of sustainability 1510998336. The completed infrastructure investments have undergone a multi-step process of checks and controls during handing over to the entities that have re-valued the facilities as fixed assets to their balance sheet. This ensures, in principle at least an annual nominal allocation for O&M. Another feature included in the PDR geared to increase the sense of ownership and enhance sustainability is the mandatory 10% contribution to the investment cost for infrastructure, which is aligned with GOA’s standard practice. All the facilities visited by the PCR mission are operational and did not have any major breakdown during the least two years, giving an indication of sufficient O&M capacity and obviously adequate quality of construction. However, a number of key issues specific to each type of infrastructure are to be taken into due consideration to evaluate the overall sustainability of FMAP financed infrastructure investments. 1510998337. As for gas networks, their operation and maintenance is the responsibility of “Armrusgasprom” a Closed Joint Stock Company that has proven successful in covering its cost

49 Contributions for O&M are sourced from the community budget. 50 National Statistical Service (NSS) – Social Snapshot of Poverty 2013.

91 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 8: Stakeholder workshop findings through the collection of consumption fees since 2003, thus sustainable operation of the completed gas networks in not an issue. 1510998338. Only three of the water supply schemes financed under FMAP are operated by the AWSC’s management contractor, the largest in Armenia having a proven track record and established systems for O&M. The remainder 21 water supply schemes are operated directly by the rural communities. Water connections and collection of fees are carried out by the respective community administration; at most, the fee covers the operating costs while the cost of maintenance is covered by the general budget which does also cover the salary of a dedicated staff for system operation. The dependency on budget transfers raises concerns about the long term sustainability of these services, which may hopefully be addressed under a comprehensive programme to address this issue being developed by KfW.51 1510998339. Meetings with WUAs in receipt of irrigation infrastructure indicate that organizational arrangements are in place to undertake maintenance, replacement of equipment and fixed structures, albeit with continued reliance on state subsidies. For the case of the Berd scheme, a governmental subsidy of AMD 6.3/m3 is applied to cover the O&M, indicating a cost recovery level of 64% only, which is above the national average of 48% (2010, MCA Armenia). All of the irrigation schemes relying on pumping have been transferred to the respective WUAs, hence benefit from subsidies and technical capacity building activities accessible to WUAs such as those provided by the WUA Support Group (SG) established by the WB under the Ministry of Territorial Development.52 While formally well established, and showing progressively improved performance in service delivery, WUAs need strengthening, both in their technical capacity of their executive bodies and in their governance. These are fully acknowledged as aspects requiring further actions by the SG and are being addressed by the ongoing WB project in the irrigation sector (ISEP, scheduled for completion in 2016) which would also pilot the transition to differentiated irrigation water tariffs. 1510998340. Only three out of 17 communities benefitting from investments in irrigation do not operate under WUAs. Notably, their irrigation systems do not require any external power supply as they operate on gravity, minimizing the cost of operation. The farmers are reportedly willing to and actually paying the respective community administration for irrigation water to a level that covers operating costs, but it remains unclear whether cross subsidization from the general budget takes place and whether there is sufficient knowledge to draw optimal O&M arrangements. To this effect, it is the PCR mission assessment that the communities managing their own irrigation systems would have also benefitted from capacity building of community administrative and technical staff on irrigation systems O&M. The transfer of O&M responsibility to WUAs remains the best option for the more complex systems such as those operating on pumping and those serving several communities, such as the Koti gravity main in Tavoush. The latter has been formally handed over to the relevant WUA just prior to the PCR mission after two seasons of operation by the communities. For this scheme the water fee applied by the WUAs nationwide (AMD 11/m3) was estimated to cover the full O&M cost (technical cost of water).53 It is also noted that the technical cost of water is expected to be reduced with the expansion of the irrigated area under the scheme, increasing its likelihood of sustainability. 1510998341. In general, the rural road network is mainly under the ownership of the marz administration but it is not likely that these offices are able to finance the cost related to maintenance without the participation of the central government. As for the FMAP financed investments in drainage facilities, it shall be emphasized that these were only geared to support deferred maintenance of main drains. The nature of these interventions requires that sustainable O&M systems be developed but there is no evidence of such developments in the targeted communities.

51 The respective study is being carried out covering 560 rural communities throughout Armenia, which is due to be completed in August 2014. 52 IFAD played a key role in the establishment and the development of the appropriate legal framework for WUAs in Armenia until 2006. WUA establishment and capacity building has been since then taken over up-scaled under successive projects in the irrigation sector financed by the World Bank. 53 IFAD Supervision mission Aide Memoire, June 2013.

92 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 9: Rural Infrastructure Investment

P. Innovation, replication and up-scaling 1510998342. The proposed approach in the design of the RII – IDI sub Component to mobilize private financing (to a level of 15%) for public infrastructure development was highly innovative but extremely difficult to be implemented in the Armenian context, hence GOA’s request to reallocate to the SII sub Component the funding originally envisaged for the IDI. The design of the SII sub Component was built on the experience gained with RAEDP in setting up a flexible mechanism to respond to applications for co-financing investments in rural infrastructure prioritized by the communities themselves. 1510998343. The programmatic approach applied with FMAP was a key design feature to be considered for replication for the development of both social and economic infrastructure investments in scattered locations. This approach resulted appropriate in light of the high demand from local communities and of the successful mobilization of additional financing during implementation, not foreseen at the PDR stage. The existence of a core PIU with a well-defined field of expertise in infrastructure development supported by service providers on a when needed basis has been a key factor enabling the relatively fast absorption of incremental funds, without major issues on the quality of the infrastructure investments carried out under the Programme. 1510998344. Investments in domestic water supply and irrigation continue to be a priority reflected in the GOA strategies for the development of the rural areas, providing the scope for up scaling IFAD’s partnership with OFID for rural infrastructure development in Armenia. The ultimate scale of required investments defined in the Armenia Development Strategy for 2012-2025 (ADS), is about USD 520 million and USD 390 million for domestic water supply and irrigation systems enhancements. Lessons learned with the implementation of FMAP (also see below section M- Lessons Learned) would substantially drive up the efficiency and effectiveness of any scaling up operation involving investments in rural infrastructure. The achievement of sustainable operation and of full scaled benefits from continued investments in irrigation and water supply are also supported by ongoing dedicated programmes by other donors (e.g. the World Bank and KfW) to improve water infrastructure management. 1510998345. Key innovations to support the scaling up of infrastructure investments recommended by the PCR mission are the need for: (i) enhanced community targeting based on ad hoc poverty studies; (ii) in depth feasibility studies to support ranking of investment proposals; and (iii) strong coordination with other complementary initiatives.

Q. Performance of partners 1510998346. As the major financier of the FMAP infrastructure component, after the some delays at start up, OFID has performed satisfactorily, ensuring adequate cash flow for the Programme even during the two peak construction seasons of 2009 and 2010, when timely replenishments became critical in order to effect payments to the contractors. Moreover, OFID was responsive to the GOA’s demand to increase the cofinancing to the FMAP envisaged at the stage of PDR preparation by 40%. While directly supervising the use of its funding, in agreement with the GOA, OFID did not carry out external engineering assessments on the works but these have been commissioned ex-post, on an ‘as needed’ basis, by the PIU. 1510998347. The partnership with USAID/CHF for the purpose of cofinancing investments in rural social infrastructure was not envisaged at the time of design. In spite of difficulties during implementation and commissioning, the PCR mission assesses the result of the collaboration overall positive in terms of leveraging and outreach. The partnership for the implementation of water supply projects included also the local NGO “Shen” that has carried out (during 2012) the rehabilitation of the internal irrigation supply network in the community of Koti and is planning to do the same in Voskevan in 2013. Both villages are under the gravity main financed by OFID, IFAD and Government. 1510998348. The GOA has fulfilled its contractual obligations, including co-financing for investments in infrastructure and VAT on design and civil works. Communities have also met their

93 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 8: Stakeholder workshop findings obligations by raising the required level of contribution (in cash or in kind) to infrastructure development, in some instances supported by the marz administration. 1510998349. As IFAD was not involved in the supervision and administration of OFID financing, its role in the implementation of the RII Component was not as prominent as for the other components of the FMAP. The IFAD annual supervisions were geared to monitor the overall progress and identify any need for remedial actions on total of 13 civil works contracts; implementation support was also provided by IFAD to improve the quality of the M&E database on infrastructure retained by the PIU.

R. Lessons learned 1510998350. Under FMAP the PIU proved capable of carrying out small scale rural infrastructure investments even in remote and scattered locations. The PIU has gained experience with demand-driven approaches. However, the application of such approaches needs to be tied up with clearly defined outreach targets and investment ranking criteria geared to maximize the efficiency of the use of funds and inform decision making in sub-project selection. Feasibility studies covering engineering, social and value chain (marketing) aspects of investments would provide additional key information to guide investment selection and to provide a solid baseline for impact assessment. Dedicated studies should also be conducted to support enhanced poverty targeting. 1510998351. Among the key lessons learned from the implementation of the FMAP is that investments in rural gas networks clearly fell short of outreach targets. There are widespread concerns over the increased gas price, resulting in a slow progress in new connections and there is evidence that gas projects are comparatively less effective than other investments in public infrastructure in reaching out to the poor54. The rate of connections in the FMAP financed schemes is a low 43% in average, 3-4 years after completion of the works. 1510998352. Investments in domestic water supplies, on the other hand, have proven cost effective and provided equitable benefits55 for the youth, women, and men and were effective in reaching the poor. The positive impact of the investments in domestic water supply on milking cows’ productivity, already highlighted in the RAEDP Project Performance Assessment, is confirmed by findings across FMAP beneficiary communities. Additional benefits derive from the use of domestic water for watering the backyards next to the household. The rural water supply systems are de facto used as Multiple Use (MU) facilities catering for domestic, livestock watering and to some extent irrigation use. 1510998353. Investments in irrigation carried out under FMAP gave a positive contribution to increasing agricultural productivity mainly in terms of utilization of agricultural land, higher yields and to some extent shifts from low value field crops to cultivation of high value crops. Following the construction or rehabilitation of primary and secondary irrigation facilities, the uptake of irrigation in farmlands with no tertiary distribution or where these systems are beyond the point of repair, requires complementary investments. Labor shortages in some rural communities have also emerged as causes of slow uptake. These aspects need to be evaluated thoroughly when computing the projected benefit streams (hence the viability) of new investments in irrigation. An immediate uptake of irrigation and increased yields (+30%) are recorded in the backyards adjacent to the households, which are an important element of food security for the poor households and to some extent contributed to increased family income.56 The shifts of cropping patterns in the farmlands benefitting from improved irrigation needs to be supported by extension and awareness raising focusing on: (i) the potential opportunities for the cultivation of high value crops specific in to each agro-ecological zone; and (ii) access to credit for farm development.57 This is particularly relevant to maximize the benefits

54 See also “Poverty and Distributional Impact of Gas Price Hike in Armenia”, World Bank Policy and research working paper (July 2012). 55 FMAP Supervision mission Aide Memoire September 2011. 56 The FMAP Supervision Mission Aide Memoire (Sept 2011) reports a 10% increase in household incomes from these plots. 57 See also RAEDP Programme Completion Report, October 2010.

94 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 9: Rural Infrastructure Investment arising from the expansion of the irrigated farmlands, where low value annual field crops would otherwise be grown. 1510998354. Specific implementation arrangements applied to the construction of both gas and domestic water supply projects involving two procurement processes to complete the works58 has proven suboptimal during execution. A comprehensive approach including the construction of all the necessary facilities under a single contract as well as the option of bulking the works into homogenous bid packages shall be considered. 1510998355. The transfer of management responsibility of completed water supply facilities to the private operators would be facilitated by their upfront involvement in design and acceptance of technical standards. A capacity needs assessment needs to be carried out and dedicated capacity building on water systems O&M shall be provided to the administrative and technical staff of the communities that would continue managing directly their own irrigation or domestic supply.

58 Separate procurement processes for: (i) materials; (ii) installation works for the case of gas; and (iii) earthworks; and (iv) pipe installation works for the case of water supply.

95

Republic of Armenia Farmer Market Access Programme Project completion report Appendix 10: Financial management

Appendix 10: Financial management

1510998356. Implementation Arrangements. The Office of the Prime Minister functions replaced the Ministry of Agriculture as the Lead Programme Agency (LPA) in 2011. The Programme is headed by a Programme Steering Committee composed of the Prime Minister, the Minister of Agriculture, representatives of the Central Bank, various other ministries and representatives from the business community. The Programme is managed and coordinated by the PIU. The responsibilities of the PIU include planning, budgeting, financial management, monitoring, impact assessment, and administrative reporting. The implementation of the rural finance component is delegated to FREDA and the RFF unit respectively, which entered into framework agreements with the PIU. Both RFF and FREDA have their own financial management systems in place including planning, budgeting, accounting reporting and external audit. It is anticipated that the RFF will be finally integrated with the PIU during 2014 as per a government decision, but financial management arrangements are expected to remain largely the same. 1510998357. Financial Profile. In accordance with the design document, the Programme is financed by the following financing sources: IFAD loan 730-AM (SDR 7.9 million), IFAD grant 971-AM (SDR 330 000), Danish Grant DE 730-AM (USD 1 680 000), OFID loan 1226P USD 14.0 million), Government of Armenia including taxes and duties (revised to USD 6 million). In addition, clients and participating financial institutions have contributed to the programme in cash and in-kind (about 20% of the RFF investments). Of the IFAD financing sources the IFAD loan and Grant have already past their closing date, while the Danish grant was extended by one year. The new completion date of the Danish grant is 30 June 2014 and the new closing date is 31 of December 2014. 1510998358. Financial Management. In 2010, the auditors issued a qualified opinion on the project financial statements and flagged inconsistencies in the financial statements. They identified material amount of ineligible expenditures from the IFAD loan and the Danish grant, mis-procurement and issues with contract management related to civil works, improper use of credit cards and a number of significant internal control issues resulting in formal investigation by the Public Prosecutor’s Office of the Republic of Armenia for fraud and corruption. IFAD issued a letter outlining the need for clarifications and repayments. In 2010/2011, project management, including the project director and the chief accountant, was changed and a reconstruction of the project accounts was undertaken by an external consulting company, PHP partners. To date, a total amount of USD 173 558 under the IFAD loan and USD 25 960 under the OFID loan mostly related to salaries and technical assistance incurred during 2008-2010 have been labeled as unsupported expenditures in the project financial statements. 1510998359. At the moment, the investigations are still underway and criminal proceedings concerning the IFAD financed part under the FMAP comprise about AMD 30 million pertaining to overpayment of salaries out of which AMD 6.9 million has been deposited in a separate account managed by the PIU. An additional AMD 4.1 million will soon be transferred to the PIU from the General Prosecutor’s Office. Furthermore, the General Prosecutor’s Office has initiated litigation against Surham LLC, a construction company, for misappropriations amounting to AMD 32 193 500. The PIU estimates that these cases will take another 2-3 years to reach a settlement, and will inform IFAD of any major developments. 1510998360. It is to be noted that after the change in the PIU management in 2010, the current FM team and PIU management have made notable efforts to the extent possible to reconcile the accounts, update the records, instate tighter controls and to bridge the gaps in accounts. The details of the current FM arrangements in place are described in more detail below. 1510998361. Staffing. The PIU has hired new FM staff and as a result, the capacity has improved in the area of accounting and recordkeeping. Maintaining staff has been a problem for the programme due more competitive salaries paid outside.

97 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 8: Stakeholder workshop findings

1510998362. Annual Work Plan and Budgeting. The PIU prepares the AWPB based on inputs from FREDA and RFF. The AWPB has been highly rated by IFAD although sometimes the submission of the AWPB had been delayed. 1510998363. Accounting Systems. Currently, two software programmes are used by the PIU for accounting and reporting (ArmSoft and Planner), which have been deemed satisfactory by IFAD missions. ArmSoft is used to record all transactions by component, category and financing source. Planner allows for integrated planning and reporting on expenditure and physical outputs, as well as procurement planning. Accounting data generated by ArmSoft is uploaded into Planner for purposes of generating reports on financial performance in comparison with the AWPB projections. The budget control reporting feature is present in Planner, which contains the contracts management module as well. The PIU has also set up an online payment system with third party verification and the financing source and project are indicated on the invoice before approval. All financial data of the PIU is backed up on a daily basis on servers located in a secure server room. In addition, on a weekly basis, the PIU copies all of its data onto disks that are then stored off-site, thereby implementing offsite backup. 1510998364. Flow of Funds. The IFAD Special Accounts for IFAD loan, IFAD grant and the Danish grant were denominated in USD and held in commercial banks (e.g. HSBC, Armbusinessbank). From the special accounts the funds were transferred to different project accounts and to the incremental investment account and project operating accounts maintained by FREDA and to the incremental credit account maintained by the RFF unit. To date, the remaining balance of the special accounts of the IFAD loan and grant is as follows: IFAD loan account: USD 73, IFAD grant account: USD 18 211.9. The remaining balance in the grant account will have to be returned to IFAD after which the account should be closed. In the Danish Grant Special account, the remaining balance is USD 250 105.69 (as at 28 of February). 1510998365. Disbursement Performance. The disbursement performance is rated highly satisfactory. To date, the following withdrawal applications have been disbursed:  25 withdrawal applications (WAs) for the IFAD loan, for a total amount of USD 12 313 842 (equivalent to SDR 7 892 710), representing 99.9% of the loan allocation. The available balance in the IFAD loan account is SDR 7 289.  4 WAs for the IFAD grant, for a total amount of USD 518 590 (equivalent to SDR 329 488), representing 99.84% of the grant allocation. The available balance in the IFAD grant account is SDR 511.  3 WAs for the Danish grant, for a total amount of USD 1 667 380 representing 99.2% of the loan allocation. The available balance in the IFAD Danish grant account is USD 12 619.  22 WAs for the OFID loan, for a total amount of USD 13 999 850, representing 99.9% of the loan allocation. 1510998366. Reconciliation of the Danish Grant. As at 28 of February 2014, IFAD has disbursed USD 1667 380 of which USD 406 844 remains unjustified. Of these funds, USD 250 105 is deposited in the Special account of the PIU, USD 55 865 is deposited in the account held by FREDA and some USD 108 000 are still held as unclaimed expenditures (the positive difference is due to interest earned). 1510998367. Counterpart Funds. Counterpart Funding is rated as highly satisfactory. The contribution of the Government of Armenia towards the Programme was originally appraised at USD 4.990 million. By the project closing date, the contribution of the GOA is USD 6.863 million as against the revised target of USD 6.0 million. This is 114% of the total revised allocation of the Government, indicating active support of the GOA to this Programme. 1510998368. Reallocations of Funds. In 2011, IFAD approved a reallocation request from the Government of Armenia reallocating funds (SDR 801 300) from “salaries and allowances”, “technical assistance” and the “unallocated” category to the “civil works, “other operating cost” and “equipment, goods and vehicles” categories. In February 2013, GOA requested a reallocation of IFAD grant

98 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 10: Financial management proceeds and after IFAD’s approval SDR 92 800 was reallocated from the “Technical Assistance, Training and Specialists” category to the category of “Salaries & Allowances contracted specialists and staff of FREDA”. 1510998369. Compliance with Loan Covenants. The compliance with the loan covenants is moderately satisfactory. As mentioned by supervision missions, the main issues were related to the late submission of the AWPB, the FREDA director not being authorized to operate the IFAD grant account and the used accounting standards not being in full compliance with IPSAS cash. The details with regards to the status of implementation and compliance with Project Loan Agreement covenants are presented in Appendix 10, Table 6. 1510998370. Financial Reporting and External Audit. The project financial statements are prepared using cash basis and in accordance with national accounting standards, which are not in full compliance with IPSAS cash. Full compliance by the PIU with IPSAS cash is expected during 2014. The quality of the financial reporting has been assessed by IFAD as mostly satisfactory. The external audit arrangements are assessed as moderately satisfactory. Since the beginning of the project, the PIU has prepared consolidated financial statements which have been audited by external auditors (SOS audit LTD, KMPG etc.) in accordance to international standards of auditing and procured using the Consultants Qualification Selection method. The audit TORs have been subject to IFAD clearance and audit reports have been submitted on time. As explained above, in 2010 the auditors issued a qualified opinion and identified several material internal control issues including ineligible expenditures and mis-procurement. Since 2011 the auditors (KPMG) have issued an unqualified opinion and to date all of the internal control issues identified in the management letter have been addressed. As noted by IFAD’s audit reviews, the auditors issued a ”blanket opinion” instead of the three separate opinions required by IFAD’s guidelines. The PIU is currently in the process of contracting the external auditors (KPMG) to conduct the audit for the fiscal year 2013, which will also be the final audit for the IFAD loan and IFAD grant. 1510998371. Internal Audit. The PIU did not have an internal audit function in place. However, in November 2013, the recently established internal audit committee of “Republic of Armenia Government staff”, reporting to the Prime minister’s office, undertook its first audit of the PIU and the draft report was shared by the mission. The audit was performed in accordance with national standards of internal audit and focused on compliance with national rules and regulations. The auditors identified certain shortcomings in the agency’s financial management and internal control system. The shortcomings were mostly related to non-compliance with national regulations related to the maintenance of fixed asset register, lack of work regulation including employees monitoring and performance evaluation and lack of guidelines related to civil works (verification, signing of documents and verification). The PIU management is expected to address these issues during 2014. 1510998372. Financial Management of the Implementing Partners/units. The financial management of the implementing partner FREDA and of the RFF is considered satisfactory. Both FREDA and the RFF unit operate three sets of accounts: (i) incremental investment/credit account (to where IFAD funds are channeled to through the Designated Account operated by the PIU); (ii) revolving fund accounts for reflows; and (iii) an operational accounts for operating expenditures. RFF and FREDA have accounting software in place (RFF ARMENIA, 1-C and Armsoft), the annual financial statements are prepared in accordance with IFRS accounting standards and audited annually by an independent auditor acceptable to IFAD in accordance with International Standards on Auditing. In addition, expenditures are reported to the PIU using cash basis. In the past three years, the RFF and FREDA audit reports have been unqualified and no material internal control issues have been noted. 1510998373. Financial performance of both FREDA and the RFF unit can be considered satisfactory. Under FMAP, RFF received USD 1 989 000 (during the period of 20.11.09-29.12.10). The amount was fully disbursed within two years of receipt. To date, as part of the FMAP project FREDA has received funds as follows: (i) IFAD loan USD 5.99 million, IFAD grant USD 374 500 and Danish grant USD 1 358 400. These funds were disbursed as follows (i) IFAD loan USD 5.99 million, IFAD

99 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 8: Stakeholder workshop findings grant USD 352 327 (some USD 22 200 unspent were returned to PIU) and Danish grant USD 1 302 540. Consequently the FREDA still has USD 55 865 as part of the Danish grant. It is to be noted that some USD 66 000 of the grant was spent by the PIU as part of the start-up activities. As part of the government contribution FREDA has received USD 235 000. 1510998374. The financial management arrangements of RFF and FREDA could be further improved through the following:  Financial reporting audited financial statements should include a table disclosing funds by expenditure category and by financier for the reporting period and cumulative to ensure that funds can be traced to the funding source;  The audit report should also provide separate opinions on (i) the operation of the main bank accounts: incremental investment/credit account, revolving accounts and operating account; and (ii) the statement of expenditure and adequacy of the supporting documentation kept by the implementing partners; and  The Internal control environment of FREDA could be strengthened through the following: (i) improve the segregation of duties in the accounting department by hiring an accountant assistant; (ii) establishment of a HR function with the associated relevant policies; (iii) establishment of an internal audit function; and (iv) more effective policies in monitoring of and investing in projects. 1510998375. Project Completion Activities. As part of the programme completion activities, the PIU has fully justified the IFAD loan and recovered the balance of the special account. With regards to the IFAD grant, an amount of USD 18 211.90 will need to be returned to IFAD to recover the unjustified amount of SDR 11 839.06. After this, the special accounts should be closed. As stated above, the PIU is currently in the process of contracting the external auditors (KPMG) to conduct the audit for the fiscal year 2013 which will also be the final audit for the IFAD loan and IFAD grant. 1510998376. With regard to the Danish grant, it has to be ensured that all funds are committed before the completion date of 30 June 2014, by when all project activities must stop (excluding winding up activities). By closing date, the final WA (USD 12 619) has to be claimed, all incurred expenditures will have to be duly justified, and the remaining WA and the unspent balance returned to IFAD. Moreover, the final audit for the Danish Grant will have to be undertaken and submitted to IFAD by closing date. 1510998377. Tables below show the financial performance by financier, by financier and component in USD, IFAD loan and grant disbursements in SDR, and disbursements of the Danish grant. Table 1: Financial Performance by Financier

Approved Revised Disbursement Per cent Financier (USD ‘000) (USD '000) (USD ‘000) disbursed IFAD loan 11 899 11 899 12 314 103% PFIs* 900 900 398 44% Government (incl. Taxes) 4 990 6 000 6 863 114% Clients** 2 030 2 030 493 24% Danish Grant 1 680 1 680 1 667 99% IFAD Grant 501 501 519 104% OFID 14 000 14 000 14 000 100% Other**** 0 0 127

Total 36 000 37 010 36 380 98%

* Disbursement figure for PFIs is the estimated amount based on reports provided to RFF by PFIs (20% of RFF investments). ** in-kind contribution is excluded. *** The difference between totals in table 3A and 3B is due to the fact that the table 3A shows amounts paid by donors to the Borrower but does not include the balances on-hand in the project accounts.

100 Republic of Armenia Farmer Market Access Programme Project completion report Appendix 10: Financial management

**** Receipt from tender participation fees, interest received etc.

Table 2: Financial performance by financier by component (USD) Financial performance by financier by component in USD cumulative amounts spent by 31 December, 2013 Component IFAD loan IFAD OFID Danish GOA PFIs Clients Tender Total Grant Grant contrib. participation fees Rural Finance Investment Capital - FREDA 3 463 407 1 120 402 99 167 4 682 976 Salaries and allowances - FREDA 1 964 560 351 125 49 669 2 365 353 Other operating costs FREDA 227 770 140 135 86 831 454 736 TA, Specialists FREDA 22 52 364 149 254 223 969 351 Equipment, goods and vehicles 22 97 602 120 246 FREDA 644 Refinancing Capital - RFF 1 989 055 397 800 2 386 855 Sub-total Rural Finance 7 794 758 500 378 1 260 537 280 662 397 800 10 234 136

Rural Infrastructure

Civil Works 2 344 362 13 081 656 5 199 675 20 625 693 TA, Specialists 3 313 533 551 348 080 884 944 Sub-total Rural Infrastructure 2 347 675 13 615 207 5 547 755 21 510 637

Project management 1 997 852 358 683 416 887 45 143 2 818 565 Unsupported expenditures*** 173 558 25 960 199 518

Total 12 313 843 500 378 13 999 850 1 260 537 6 245 304 397 800 45 143 34 762 855

** The difference between totals in table 3A and 3B is due to the fact that the table 3A shows amounts paid by donors to the Borrower while 3B shows the amounts spent by the project but does not include balances on-hand in the project accounts.

Table 3: IFAD loan disbursement (SDR) as at 28 February 2014 IFAD loan disbursements SDR (as at 28 February 2014)

Original Current Per cent Category Description Allocation Allocation Disbursement Balance disbursed W/A Pending I A Civil works 758000 1391000 1386088.8 4911.2 100%

II A Equipment, Goods and Vehicles 92000 129000 124954.58 4045.42 97%

III A Technical Assistance and Training 294000 94200 78236.7 15963.3 83%

IV A Investment Capital - FREDA 3464000 3464000 3430018.54 33981.46 99%

IV B Investment Capital -RFF 1386000 1386000 1296565.24 89434.76 94%

V B Salaries & Allowances -FREDA 165000 165000 162921.75 2078.25 99%

V C Salaries & Allowances -PAAU 990000 553500 637025.76 -83525.76 115%

VI A Other operating costs -FREDA 89000 144000 147603.12 -3603.12 103%

VI B Other operating costs -PAAU 497000 573300 629295.94 -55995.94 110%

Unallocated 165000

Initial deposit 0

Total 7900000 7900000 7892710.43 7289.57 100% 0

Table 4: IFADIFAD grant grant disbursementdisbursements SDR (SDR) (as at 28 -asFebruary at 28-2014) February 2014

Original Current Per cent W/A Category Description Allocation Allocation Disbursement Balance disbursed Pending III B Technical Assistance and Training 185000 92191.8 92191.8 0 100% V A Salaries & Allowances -FREDA 145000 237808.2 225457.33 12350.87 95% Initial deposit 11839.06 -11839.06 0 Total 330000 330000 329488.19 511.81 100% 0

According to final WA, 7 the balance of the grant equals to USD 18211.91 which should be returned to IFAD upon IFAD's repayment instruction.

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Table 5: DanishDanish Grantgrant disbursements disbursement USD (as (USD) at 28-February as at 2014)28 February 2014

Original Current Per cent W/A Category Description Allocation Allocation Disbursement Balance disbursed Pending I Pre-investment Support FREDA 350000 350000 349179.87 820.13 100% II Investment Facilitation&Support -FREDA 1100000 1100000 724099.33 375900.67 66% III Post Investment Support -FREDA 80000 80000 47122.43 32877.57 59% IV Programme Management -FREDA 150000 150000 140135.28 9864.72 93% Initial deposit - 4 406844.04 406844.04 Total 1680000 1680000 1667380.95 12619.05 99% 4

Note: The Danish Government Grant closing date has been extended up to 31.12.2014

Table 6: Compliance with Loan Covenants

Target/action Compliance Section Covenant due date Status/Date Remarks Section 2.03 (a) The PAU/PAAU shall open and thereafter maintain in Complied with. a commercial bank proposed by the Borrower and accepted by the Fund a Special Account denominated in US Dollars for the purpose of financing the Programme. Section 2.03 (c) The PAU/PAAU, on behalf of the Borrower, shall be Complied with. fully authorized to operate the Special Account in accordance with Section 4.08 of the General Conditions. Section 2.04 (a) The PAU/PAAU shall open and thereafter maintain in Complied with. a commercial bank proposed by the Borrower and accepted by the Fund a Grant Bank Account denominated in US Dollars for the purpose of receiving Grant proceeds. Section 2.04 (b) As from the Effective Date, the Borrower may request Not complied The FREDA withdrawals from the Grant Account in advance during with. director is still the Programme Implementation Period. The amounts not authorized so requested shall not exceed the amount of to operate the expenditures which are included in the AWPB for the IFAD Grant relevant Programme Year to be financed from the Bank Account. Grant. The Programme Director, on behalf of the Borrower, shall be authorized to operate the Grant Bank Account exclusively for Eligible Expenditures under the Grant until the FREDA Statutes have been approved by the Fund and the FREDA Board of Trustees, the FREDA Director and other key staff personnel have been appointed by the Borrower and have been deemed acceptable to the Fund. After the said conditions have been met and, subject to the approval by the Fund, the FREDA Director, on behalf of the Borrower, shall be authorized to operate the Grant Account. Section 2.06 The Borrower shall pay to the Fund a service charge Semi-annually Complied with. at the rate of 0.75% per annum on the principal on each 1 amount of the Loan outstanding. February and 1 August. To be routinely monitored for compliance. Section 3.02 (a) The PAU/PAAU shall prepare and/or consolidate draft To be routinely Complied with. AWPBs for each Programme Year. Each draft AWPB monitored for shall include, among other things, a detailed compliance. description of planned Programme activities during the coming Programme Year, a procurement plan for eighteen months and the sources and uses of funds therefore, based on the respective work plans and budgets prepared by each of the Programme Parties. In addition the AWPB for the first Programme Year

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Target/action Compliance Section Covenant due date Status/Date Remarks shall include a procurement plan for the first eighteen (18) months after Effective Date. Section 3.02 (b) Before each Programme Year, the PAU/PAAU shall To be routinely Partly The AWPB submit a draft consolidated AWPB to the PCC for its monitored for complied with. submitted to review and approval. When so reviewed and compliance. the Fund for approved, the PCC shall submit the draft consolidated comments in a AWPB to the Fund for comments and approval, no timely manner later than thirty (30) days before the beginning of the but relevant Programme Year. If the Fund does not submission for comment on the draft AWPB within thirty (30) days of IFAD’s receipt, the AWPB shall be deemed approved by the approval Fund. experienced delays. Section 3.03 Programme Operating Account. PAU/PAAU shall Complied with. open and maintain a Programme operating account in AMD in a commercial bank proposed by the Borrower and acceptable to the Fund (the “Programme Operating Account”). This account shall be operated by the Programme Director. It shall receive IFAD loan funds from the Special Account. The account funds shall be utilized for: (i) make payments to suppliers and service providers for goods and services, as appropriate; and (ii) make payments for PAU/PAAU salaries and allowances. Section 3.04 PAU/PAAU shall open and maintain a Programme To be routinely Complied with. civil works account in AMD in a commercial bank monitored for proposed by the Borrower and acceptable to the Fund compliance. (the “Programme Civil Works Account”). This account shall be operated by the Programme Director. It shall receive IFAD and OFID financial Assistance funds through their respective Special Accounts, as well as Government and local community contributions for civil works. The account funds shall be utilized to make payments to contractors for civil works. Section 3.05 FREDA shall open and maintain an incremental To be routinely Complied with. investment account in USD in a commercial bank monitored for proposed by the Borrower and acceptable to the Fund compliance (the “Incremental Investment Account”). This account shall be operated by FREDA Director. It shall receive IFAD and OFID Financial Assistance funds through their respective Special Accounts. The account funds shall be utilized for the purpose of equity investments and shareholder loans in rural business selected by FREDA. Section 3.06 FREDA shall open and maintain an investment To be routinely Complied with. account in a commercial bank proposed by the monitored for Borrower and acceptable to the Fund (the “FREDA compliance. Investment Account”). This account shall be operated by FREDA Director. It shall receive revenues from FREDA equity investments, dividends and repayments from FREDA shareholder loans. The account shall be utilized to: (i) make further equity investments and shareholder loans in selected rural business; (ii) effect payments for FREDA’s investments; and (iii) effect interest payments to the Ministry of Finance and Economy. Section 3.07 FREDA shall open and maintain an operating account To be routinely Complied with. in AMD in a commercial bank proposed by the monitored for Borrower and acceptable to the Fund (the “FREDA compliance. Operating Account”). This account shall be operated by the FREDA Director. It shall receive funding from IFAD grant bank account and FREDA Investment Account to cover operating expenditures.

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Target/action Compliance Section Covenant due date Status/Date Remarks Section 3.08 The RFF shall open and maintain an incremental To be routinely Complied with. credit account in USD in a commercial bank proposed monitored for by the Borrower and acceptable to the Fund (the compliance. “RFF/FMAP Incremental Credit Account”). This account shall be operated by the RFF Director. It shall receive IFAD loan funds from the Special Account. The account funds shall be utilized to finance RFF’s incremental on-lending to PFIs. Section 3.09 The RFF shall open and maintain a revolving fund To be routinely Complied with. account in USD in a commercial bank proposed by monitored for the Borrower and acceptable to the Fund (the compliance. “RFF/FMAP Revolving Fund Account”). This account shall be operated by the RFF Director. The account funds shall be utilized for: (i) receive interest payments and principal repayments from the PFIs; (ii) revolve principal repayments into new loans to the PFIs; (iii) effect interest payments to the Ministry of Economy and Finance; and (iv) transfer portion of interest income to existing RFF Operating Account to cover RFF costs. Section 3.10 The Borrower shall make the proceeds of the Complied with. Financing available to the Programme Parties in accordance with the AWPBs. Section 3.11 (a) In addition to the proceeds of the Financing, the Complied with. Borrower shall make available to the Programme Parties, promptly as needed, such funds, facilities, services and other resources as may be required from time to time to carry out the Programme in accordance with this Agreement. Section 3.11 (b) Without limiting the generality of paragraph (a) above, Complied with. the Borrower shall make available to the Lead Programme Agency and other Programme Parties during the Programme Implementation Period counterpart funds from its own resources in an aggregate amount of approximately five million US Dollars (USD 5 000 000) in accordance with its customary national procedures for development assistance, of which two million five hundred thousand US Dollars (USD 2 500 000) in cash contribution shall be used to finance the Rural Infrastructure Component and up to two million five hundred thousand US Dollars (USD 2 500 000) to cover taxes and duties. Section 3.11 (c) The Borrower shall ensure that the proceeds of the Complied with. OFID Financial Assistance funds are made available to the Programme Parties in accordance with the AWBPs. Section 3.12 Channeling of Programme Resources. The Complied with. Programme Director shall transfer available funds and other resources called for in the AWBPs to FREDA and RFF, in accordance with the FREDA and RFF/FMAP Subsidiary Agreements, to carry out the respective Programme component. Section 3.13 All procurement financed from the proceeds of the Complied with. loan and grant shall be carried out in accordance with Schedule 4. Section 4.01 The PAU/PAAU shall establish, as soon as To be routinely Complied with. practicable but in no event later than ninety (90) days monitored for after the Effective Date, and thereafter maintain an compliance. appropriate management information system to enable it to continuously monitor the Programme, in accordance with the Fund’s Guidelines for Project

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Target/action Compliance Section Covenant due date Status/Date Remarks Monitoring and Evaluation and Section 8.02 (Monitoring of Project Implementation) of the General Conditions. Section 4.02 (a) The Programme Parties shall prepare and submit to To be routinely Complied with. PAU/PAAU periodic financial and physical progress monitored for reports. PAU/PAAU shall develop standardized compliance. reporting formats. The Programme Director shall prepare and submit to the PCC, and the Fund analytical financial and physical progress reports for each six month period which shall be based upon contracted implementing partner’s reports and progress as recorded against the AWPB for each Programme Year. Section 4.02 (b) The PAU/PAAU shall submit to the Fund annual To be routinely Complied with. progress reports on Programme implementation, as monitored for required by Section 8.03 (Progress Reports) of the compliance. General Conditions, no later than ninety (90) days after the end of each reporting period during the Programme Implementation Period. In addition to the matters specified in the Section 8.03, each progress report shall include the comprehensive and mandatory data, disaggregated by gender to the extent possible, specified in the applicable indicators for the Fund’s “Results and Impact Management System (RIMS)”, as indicated in the logical framework for the Programme. Section 4.05 The Borrower and each Programme Party shall Continuous Complied with. facilitate all evaluations and reviews of the Programme that the Fund may carry out during the Programme Implementation Period, as required by Section 10.05 (Evaluations of the Project) of the General Conditions. Section 5.01 The Programme Parties shall adopt accounting To be routinely Partly Audited systems consistent with international standards and monitored for complied with. Financial the Borrower’s requirements. The PAU/PAAU shall compliance. Statements prepare and/or consolidate financial statements of the Submitted by operations, resources and expenditures related to the 30 of June Programme required by Section 9.02 (Financial each year. Statements) of the General Conditions in respect of These are each Fiscal Year and deliver such financial statements prepared in to the Fund within six (6) months of the end of each accordance Fiscal Year. with national accounting standards which do not fully comply with IPSAS cash. Section 5.02 (a) Within sixty (60) days after the Effective Date, the Complied with. Borrower shall appoint, with the prior approval of the Fund, an independent auditor selected in accordance with the procedures and criteria set forth in the Fund’s “Guidelines on Project Audits (for Borrowers’ Use)” as may be amended from time to time, to audit the financial statements relating to the Programme for the first two (2) Fiscal Years. Thereafter, as soon as practicable but in no event later than ninety (90) days after the beginning of each succeeding Fiscal Year, the Borrower, with the prior approval of the Fund, shall confirm such auditor’s appointment or so appoint a new independent auditor for such Fiscal Year in accordance with this paragraph.

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Target/action Compliance Section Covenant due date Status/Date Remarks Section 5.02 (b) The Borrower shall have the consolidated financial By 30 June of Partly PAAU is in the statements relating to the Programme audited each each Complied with. process of Fiscal Year by such auditor in accordance with the Programme contracting International Standards on Auditing, and the Fund’s year. auditors to “Guidelines on Project Audits (Borrowers’ Use)” 2003, To be routinely audit the as may be amended from time to time, until the Loan monitored for financial Closing Date in accordance with Section 9.03 (Audit of compliance. statements of Accounts) of the General Conditions. In addition to the 2013. In the audit report on the consolidated financial statements, past three the auditor shall provide: (i) an opinion on the certified years the statements of expenditure and the operation of the auditors have Special Account; and (ii) a separate management not issued a letter, addressing the adequacy of the accounting and “blanket internal control systems of the Programme Parties. opinion” and The PAU/PAAU shall deliver a certified copy of the not a separate audit report and the above-mentioned items to the opinion on the Fund within six (6) months after the end of each such operation on Fiscal Year. The PAU/PAAU shall submit to the Fund the SA or the the reply to the management letter of the auditor SOE. within one month of receipt thereof. Section 5.02 (c) The independent auditor shall additionally be required Partly Reputable to provide a specific opinion on the procedures complied with Audit employed in FREDA’s operations, as well as on its Companies in transactions and accounts. The opinion shall be Armenia such focused on the degree to which FREDA has adhered as KPMG or to its Statutes, Business Plan and centre on backward PriceWaterhou linkages to targets groups. The auditor shall also be seCoopers do required to provide an opinion on the procedures not have the employed in RFF operations, as well as on its expertise transactions and accounts. The opinion shall be required to focused on the degree to which RFF has adhered to extend the its By-laws, Business Plan and the use of Programme scope of their resources in relation to the stated RFF-FMAP work to opine objectives. on the required topics while adhering to quality standards, without that audit costs are multiplied. In view of this, it was agreed that this covenant be waived for the time being. Schedule 2.2 Withdrawals from the Loan and Grant Accounts shall Complied with. be made in amounts no less than (USD 20 000) or its equivalent, or such other amount as the Fund may designate from time to time. Schedule 2.4 Withdrawals from the Loan and Grant Accounts may Complied with. be made against certified statements of expenditure in respect of Eligible Expenditures in such amounts as the Fund may designate from time to time by notice to the Borrower. The records evidencing such expenditures need not be submitted to the Fund, but shall be retained by the Borrower for inspection by the representatives of the Fund, in accordance with Sections 4.07 (Statements of Expenditure) and 10.03 (Visits, Inspections and Enquiries) of the General Conditions.

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Target/action Compliance Section Covenant due date Status/Date Remarks Schedule 3I The Borrower shall establish a Programme To be routinely Complied with. A 2.1 and A 2.2 Coordination Committee (PCC), with composition monitored for acceptable to IFAD, to ensure compliance of compliance. implementation with the policies and criteria of the Programme. The PCC shall be chaired by the Minister of Agriculture and shall include the Ministry of Finance and Economy (representative), a Chamber of Commerce representative, Chairman of the Bankers’ Association, Ministry of Trade and Economic Development (representative), Ministry of Territorial Administration (representative) and representative Marzpets. The Programme Director shall act as Secretary. Schedule 3I The PAU/PAAU shall continue to support and monitor To be routinely Complied with. A 3.3 (b) the activities carried out by the Revolving Funds monitored for established under the previous IFAD Projects (the compliance. North-West Agricultural Services Project, the Agricultural Services Project and the Rural Areas Economic Development Programme). Schedule 3I FREDA shall be headed by the FREDA Director, with Complied with. A 4.2 a complement of appropriate staff, recruited by the FREDA Director on terms and conditions acceptable to the Fund and subject to the prior approval of the Fund. FREDA’s professional staff, in addition to the FREDA Director, shall include: a Financing Expert; a Rural Business Expert; and a Chief Accountant. Schedule 3I FREDA shall be governed by a Board of Trustees Complied with. A 4.3 comprising: Government representation and highly professional private sector participants, including financial sector, legal, marketing, business and rural development experts. These private sector representatives will constitute the majority of the members of the Board of Trustees. The Board of Trustees will provide the overall policy and strategic guidance for FREDA. The Government will nominate the members of the Board of Trustees with the prior approval of the Fund. While the Government shall be the owner of FREDA and nominate its Board members, FREDA shall have complete independence as long as it operates according to its approved Statutes. Schedule 3I The FREDA Board of Trustees shall appoint a FREDA Complied with. A 4.4 Director, subject to the prior approval of the Fund. The FREDA Director shall have qualifications and experience acceptable to the Fund. The responsibilities shall include the overall leadership, guidance and management for the implementation of FREDA, in accordance with the provisions of this Financing Agreement, FREDA Statutes and the FREDA Subsidiary Agreement. The Director of FREDA will act as secretary to the Board of Trustees. Schedule 3I RFF shall manage such loans under the overall rules Complied with. B 1.3 and procedures now in force under RAEDP, acceptable to the Fund as amended from time to time, unless otherwise stated in this Agreement and related documents.

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Target/action Compliance Section Covenant due date Status/Date Remarks Schedule 3I The RFF/FMAP Subsidiary Agreement. The Ministry Complied with. B 1.4 of Finance and Economy and RFF shall enter into a subsidiary agreement (the “RFF/FMAP Subsidiary Agreement), which shall provide, among other things, that PAU/PAAU, on behalf of the Borrower, shall transfer funds available from the proceeds of IFAD loan in accordance with RFF/FMAP’s AWPBs, as approved by the PCC, and the Fund. Schedule 3I A Selection Committee chaired by the FREDA Complied with. B 2.1 Director shall be established for the purpose of approval of Investment Derived Infrastructure grant awards on the basis of eligibility criteria acceptable to the Fund. The Selection Committee shall be comprised of at least the following members: (i) FREDA Director (Chairman); (ii) PAU/PAAU Director; (iii) FREDA Financing and Rural Business Experts; and (iv) PAU/PAAU Engineers. Implementation of the subcomponent will be the responsibility of the PAU/PAAU. Schedule 3I Implementation of the sub-component, including Complied with. 2.2 selection of investments on the basis of eligibility criteria acceptable to the Fund shall be carried out by the PAU/PAAU. Schedule 3II The Borrower and each Programme Party shall Complied with. 1 ensure that gender concerns are integrated into all Programme activities during Programme implementation. Schedule 3II The Borrower shall exempt the IFAD loan and grant Complied with. Import duties, 5(a) proceeds from all import duties, excise taxes and excise taxes value added taxes (VAT) on expenditures, including, and value but not limited to, vehicles, motorcycles, computers, added taxes printers and software, office equipment, laboratory (VAT) are equipment and supplies, video sets and any other reimbursed by goods. For taxes, the Borrower shall use the amount the mentioned in Section 3.11 (b). Government upon submission of relevant supporting documentation . Schedule 3II IFAD loan and grant proceeds shall not be used to Complied with. 5(b) social security charges for Programme staff to the Social Security Fund. For all such charges, the Borrower shall use the amount mentioned Schedule 3II In Section 3.11 (b). Income taxes shall be paid by the Complied with. 5(c) contracted staff and individual service providers directly and shall not be retained by the PAU/PAAU, FREDA, RFF or other implementing agencies.

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