Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No: 63649-AM

PROJECT PAPER

ON A Public Disclosure Authorized PROPOSED ADDITIONAL LOAN

IN THE AMOUNT OF US$18 MILLION

TO THE

REPUBLIC OF ARMENIA

FOR AN

Public Disclosure Authorized IRRIGATION REHABILITATION EMERGENCY PROJECT

September 27, 2011

Public Disclosure Authorized Europe and Central Asia Region Sustainable Development Department

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

CURRENCY EQUIVALENTS

(Exchange Rate Effective September 27, 2011)

Currency Unit = US$ and Armenian Dram (AMD) US$1.00 = AMD 370.75

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AF Additional Financing AMD Armenian Dram CFSQC Consulting Firm for Supervision and Quality Control CPAR Country Portfolio Assessment Review CPS Country Partnership Strategy CSOs Civil Society Organizations DA Designated Account DO Development Objective DPL Development Policy Loan DPO Development Policy Operation EIA Environmental Impact Assessment EMP Environmental Management Plan ENPV Economic Net Present Value ERR Economic Rate of Return FM Financial Management FMM Financial Management Manual FMRs Financial Monitoring Reports FMS Financial Management Specialist FNPV Financial Net Present Value FRR Financial Internal Rate of Return GCF Government Counterpart Funding GDP Gross Domestic Product GIS Geographic Information System GOA Government of Armenia GPN General Procurement Notice I&D Irrigation and Drainage IBRD International Bank for Reconstruction and Development IDA International Development Association IDP Irrigation Development Project IFRs Interim Un-Audited Financial Reports IP Implementation Progress IPR Implementation Progress Report LA Loan Agreement MCA Millennium Challenge Account (Armenia) MCC Millennium Challenge Corporation MOF Ministry of Finance MONP Ministry of Nature Protection

MOTA Ministry of Territorial Administration MTR Mid-Term Review NGO Non-Governmental Organization NPV Net Present Value O&M Operation and Maintenance PA Project Account PDO Project Development Objective PIU Water Sector Projects Implementation Unit PMB Project Management Board PMP Pest Management Plan POI Project Outcome Indicator PP Procurement Plan RA Republic of Armenia RFP Request for Proposal RPF Resettlement Policy Framework SCWM State Committee of Water Management SPN Specific Procurement Notice USSR Union of Soviet Socialist Republics WSA Water Supply Agency WUAs Water Users Associations WUF Water Users Federation

Vice President: Philippe Le Houerou Country Director: Asad Alam Sector Director: Peter Thomson Country Manager: Jean-Michel Happi Sector Manager: Dina Umali-Deininger Task Team Leader: Giuseppe Fantozzi

ARMENIA

ADDITIONAL FINANCING OF THE IRRIGATION REHABILITATION EMERGECY PROJECT

CONTENTS

ADDITIONAL FINANCING DATA SHEET i I. Introduction 1 II. Background and Rationale for Additional Financing 1 III. Proposed Changes 3 IV. Appraisal Summary 5 Annex 1. Results Framework and Monitoring 8 Annex 2. Operational Risk Assessment Framework (ORAF) 13 Annex 3. Detailed Description of Modified or New Project Activities 17 Annex 4. Revised Estimate of Project Costs 20 Annex 5. Revised Implementation Arrangements and Support 23 Annex 6. Economic and Financial Analyses 34

ARMENIA

ADDITIONAL FINANCING OF THE IRRIGATION REHABILITATION EMERGENCY PROJECT

ADDITIONAL FINANCING DATA SHEET

Basic Information - Additional Financing (AF) Country Director: Asad Alam Sectors: Irrigation and Drainage Sector Manager: Dina Umali-Deininger (100%) Team Leader: Giuseppe Fantozzi Themes: Rural services and Team Co-Leader: Arusyak Alaverdyan infrastructure (100%) Project ID: P126509 Environmental category: Partial Expected Effectiveness Date: 12/1/2011 Assessment Lending Instrument: SIL Expected Closing Date: 6/30/2013 Additional Financing Type: Scale Joint IFC: up/Restructuring Joint Level: Basic Information - Original Project Project ID: P116681 Environmental category: B Project Name: Irrigation Rehabilitation Expected Closing Date: 12/31/2011 Emergency Project Lending Instrument: ERL Joint IFC: N/A Joint Level: N/A AF Project Financing Data [X ] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: Proposed terms: Additional loan would be an IBRD flexible loan at 6 months flexible LIBOR for US Dollars plus variable spread repayable in 25 years, including a grace period of 10 years. AF Financing Plan (US$m) Source Total Amount (US $m) Total Project Cost: 21.6 Co-financing (beneficiaries): 0.2 Borrower: 3.4 Total Bank Financing: 18.0 IBRD 18.0 IDA Client Information Borrower: Republic of Armenia Responsible Agency: State Committee for Water Management under the Ministry of Territorial Administration Contact Person: Andranik Andreasyan Telephone No.: +374-10 540909 Fax No.: +374-10 540603 Email: [email protected]

i AF Estimated Disbursements (Bank FY/US$m) FY 2012 2013 Annual 8.0 10.0 Cumulative 8.0 18.0

Project Development Objective and Description Original Project development objective: (i) to improve water use efficiency in two selected irrigation schemes; and (ii) to foster immediate rural employment.

Revised Project development objective: (i) to improve water use efficiency in the selected irrigation schemes; and (ii) to foster immediate rural employment.

Project description: Component 1: Rehabilitation of identified stretches of canals in the selected irrigation schemes: The component includes: (i) civil works for the main and secondary canals rehabilitation in Aragastotn, Kotayk, Shirak, Lori, Ararat, and Armavir marzes; (ii) consultancy services for supervision of rehabilitation works. Component 2: Rehabilitation of tertiary irrigation networks in communities of Lori, Shirak, Gegharkunik, and Armavir marzes; (ii) consultancy services for supervision of rehabilitation works. Component 3: Project Management and Institutional Activities. Safeguard and Exception to Policies Safeguard policies triggered: Environmental Assessment (OP/BP 4.01) [X]Yes [ ] No Natural Habitats (OP/BP 4.04) [ ] Yes [X] No Forests (OP/BP 4.36) [ ]Yes [X] No Pest Management (OP 4.09) [X]Yes [ ] No Physical Cultural Resources (OP/BP 4.11) [ ]Yes [X] No Indigenous Peoples (OP/BP 4.10) [ ]Yes [X] No Involuntary Resettlement (OP/BP 4.12) [X]Yes [ ] No Safety of Dams (OP/BP 4.37) [ ]Yes [X] No Projects on International Waterways (OP/BP 7.50) [X]Yes [ ] No Projects in Disputed Areas (OP/BP 7.60) [ ]Yes [X] No Does the Project require any waivers of Bank policies? [ ]Yes [X] No Have these been endorsed or approved by Bank management? [ ]Yes [X] No

Conditions and Legal Covenants: Financing Agreement Description of Date Due Reference Condition/Covenant Schedule 2, Section I, A2 The Borrower shall update the By Project effectiveness Operational Manual and maintain the updated Operational Manual in form and content satisfactory to the Bank. Schedule 2, Section II, B1 The Borrower shall maintain or Recurrent cause to be maintained a financial management system in accordance with the provisions of Section 5.09 of the General Conditions. ii Schedule 2, Section II, B2 The Borrower shall prepare and Recurrent furnish to the Bank not later than forty five (45) days after the end of each calendar quarter, interim unaudited financial reports for the Project covering the quarter, in form and substance satisfactory to the Bank. Schedule 2, Section II, B3 The Borrower shall have its Recurrent Financial Statements and those of the irrigation institutions financed under the project audited in accordance with the provisions of Section 5.09 (b) of the General Conditions. Each audit of the Financial Statements shall cover the period of one fiscal year of the Borrower. The audited Financial Statements for each such period shall be furnished to the Bank not later than six (6) months after the end of such period. Schedule 2, Section I, A1 The Borrower, through SCWM, Recurrent shall designate the PIU with the responsibility for procurement planning, monitoring and reporting, disbursement and implementation of internal financial controls, maintenance of Project accounts and preparation of Project Reports, and shall ensure that PIU at all times shall have adequate staff and resources to fulfill its responsibilities with respect to Project implementation and management. Schedule 2, Section I, A3 Until completion of the Project the Recurrent Borrower shall maintain the WUAs’ Support Group which will assist in the implementation of the Project. Schedule 2, Section I, A4 The Borrower shall ensure that Recurrent necessary budgetary resources for adequate operation and maintenance of irrigation systems are made available to the irrigation sector in the Borrower’s annual budget. Schedule 2, Section I, B The Borrower shall ensure that the Recurrent Project is carried out in accordance with the provisions of the Anti-Corruption Guidelines.

iii Schedule 2, Section I, C1 The Borrower, through SCWM, Recurrent shall apply for the activities under Parts A and B of the Project the criteria, policies, procedures and arrangements set out in the EIA and RPF. Schedule 2, Section I, C2a The Borrower shall ensure that Recurrent civil works on any particular section of the canal selected under Part A and B of the Project will not start, unless an EMP for that canal section, satisfactory to the Bank, has been prepared by the Borrower and disclosed locally, and on the SCWM website, not later than thirty (30) days before the beginning of the works. Schedule 2, Section II, A1 The Borrower shall monitor and Recurrent evaluate the progress of the Project and prepare Project Reports in accordance with the provisions of Section 5.08 of the General Conditions and on the basis of the indicators acceptable to the Bank. Each Project Report shall cover the period of one calendar semester, and shall be furnished to the Bank not later than one month after the end of the period covered by such report. Schedule 2, Section IV, B1 No withdrawal shall be made: (a) Recurrent for payments made prior to the date of this Agreement; (b) for payments under works in Category (1) and (2), until and unless a consultant firm for carrying out of technical supervision under Parts A and B of the Project, satisfactory to the Bank, has been selected by the Borrower; and (c) for payments for works under Part B of the Project in Category (2), unless a Beneficiary Contribution Account at the State Treasury for Part B.1 of the Project has been opened by the Borrower and an amount of $210,000 equivalent has been deposited into it for the purposes of Part B.1 of the Project.

iv

I. INTRODUCTION

1. This Project Paper seeks the approval of the Executive Directors to provide an additional loan in an amount of US$18 million to the Armenia Irrigation Rehabilitation Emergency Project (IREP), Project ID number P116681, IBRD Loan N7768-AM. 2. The proposed additional loan would help finance the costs associated with scaled-up activities to enhance the impact of a well-performing Project. The following changes to IREP are proposed: (a) revise the PDO from "(i) to improve water use efficiency in two selected irrigation schemes;" to (i) to improve water use efficiency in the selected irrigation schemes; and "(ii) to foster immediate rural employment,” to (ii) to foster immediate rural employment, to reflect the geographical expansion of Project activities; (b) revise the results framework to reflect the expanded Project area and additional rehabilitation activities at the primary, secondary, and tertiary levels; (c) drop the establishment of a pilot Water Users Federation (WUF), as project assessments indicate it is premature to set it up at this time; and (d) extend the December 31, 2011 closing date by eighteen months to June 30, 2013 to accommodate completion of the additional activities. 3. As the original Project, the Additional Financing (AF) will address problems arising from the economic crisis, while creating longer-term benefits for irrigation users through the improved quality of irrigation infrastructure. The expected outcomes are: (i) 44.2 million cubic meters (MCM) annual water savings equivalent to about US$1.4 million estimated at the financial price of water (about US$2.1 million if estimated at the economic cost of water);1 (ii) temporary employment of 7,000 person/months or 583 jobs with income generation of US$3.7 million for unemployed rural workers; and (iii) increased permanent employment estimated at 850 agricultural jobs by Project end and potential for up to 2,100 jobs in three years after Project completion through returning agricultural lands to irrigation (about 2,600 hectares (ha) by June 30, 2012 and 6,550 ha by June 30, 2016). Although there are no direct co-financiers in the AF, the Millennium Challenge Corporation (MCC) was a key partner preparing Project designs and completing feasibility studies.

II. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING

4. Proposed changes are consistent with both strategic themes of the FY09-12 Country Partnership Strategy (CPS) presented to the Board on June 11, 2009, namely: “addressing vulnerability”, and “competitiveness and growth”. Expected outcomes are directly linked with the declared CPS outcomes: “area returned to irrigation increases as a result of rehabilitation” and “rural output and employment are supported”. The CPS also stated that: “there is a need to complete priority irrigation works to minimize water losses and strengthen the capacity of less experienced WUAs”. In this regard, CPS also highlighted that “a new irrigation loan would enable the Bank to further restore irrigation works and facilitate the next institutional step in creating federations of WUAs” 5. On July 28, 2009, the original IREP loan of US$30.0 million was approved; on October 6, 2009, it became effective. The original Project Development Objectives (PDOs) were: (i) to improve water use efficiency in two selected irrigation schemes; and (ii) to foster immediate

1 The financial cost of one cubic meter of water for farmers was based on 2011 tariff, which is equal to 11.0 AMD (US$0.03); the economic cost depends on water location and sources of water; average it is equal to 17.1 AMD (US$0.047), which is 1.55 times higher than average financial cost. 1

rural employment. At the original closing date of June 30, 2011, disbursements had reached about 98 percent of the original loan. 6. IREP implementation progressed very well under all components, except minor issues related to: (i) the Institutional Strengthening Study included under the Component 2, which experienced procurement delays and now is expected to be finalized by December 2011; and (ii) the establishment of a pilot Water Users Federation (WUF) that was dropped from Project activities list in 2010 in agreement with the Government of Armenia (GOA).2 A Level II restructuring was approved in June 2011 to extend the Project closing date by six months to finalize and conduct a consultation about the Institutional Strengthening Study. 7. So far, Project results show that IREP impact is consistent with original expectations, and is some cases have even exceeded them. Under IREP some 89.4 kilometers (km) (or 107 percent of the target) were rehabilitated, including 57.7 km in Talin Irrigation Scheme and 31.7 km in Armavir Scheme.3 Water losses declined by about 96.9 MCM, from around 114 MCM to some 17.1 MCM. Temporary jobs created during construction equaled to about 11,379 person/months (or 126 percent of the targeted 9,000 person/months),4 of which 67 percent was unskilled labor, primarily benefitting poorer households. Longer term development impacts include an estimated 8,000 ha returned to irrigation to the benefit of small-scale farmers in surrounding areas; over time this is expected to provide incentives for cultivation of higher value crops, which should result in additional long-term job creation and improved livelihoods for poorer households. 8. Project financial management performance is satisfactory with are no overdue audits and full compliance with financial covenants. The Project has been consistently rated Satisfactory on Implementation Progress (IP) and Development Objectives (DOs). Government counterparts and implementing agency, including the State Committee for Water Management (SCWM), Ministry of Territorial Administration (MOTA), Ministry of Finance (MOF), are highly committed to Project outcomes. Project implementation work is highlighted regularly by Armenian political leadership, and a Project has been showcased by national television and print media. 9. On May 27, 2011, Government requested that the World Bank consider an Additional Financing to IREP to help mitigate the effects of the continuing economic and financial crises and the resulting unemployment. In addition, extensive preparatory work has already been completed with MCC financing for new investments. The rationale behind this request is to: (i) enhance IREP development impact; (ii) respond to the growing demand from the rural poor for support to rehabilitate irrigation structures; (iii) continue to provide short-term employment opportunities in the construction sector; (iv) secure long-term jobs in the agricultural sector; and (v) to capitalize on resources used by the MCC Program to investigate the sites and prepare designs before these become obsolete in the medium term. 10. Canals and sections were selected for rehabilitation based on the existence of ready or almost-ready designs developed under the soon-to-be closed MCC Program, which, due to time and financial constraints, could not be implemented. These investments, selected for financing under the MCC Program, have been recently verified for feasibility and technical, economic,

2 Dropping the pilot of a WUF was decided due to ongoing consolidation process of Water Users Associations (WUAs), costs associated with WUF establishment (in particular heavy machinery needed for Operation and Maintenance (O&M) of main canals), and due to the relatively low incomes of farmers that makes it premature to establish a WUF. 3 Considering Project implementation performance and accumulated during Project implementation savings the Mid-Term Review (MTR) mission team cleared additional priority rehabilitation works for the Armavir canal, previously excluded due to fund limitations, and for which preliminary design was available: a 7.0 km long earth section in the Armavir canal. Construction works for this addition were completed by April 2011. 4 During the peak construction period about 1,000 people were working in canal rehabilitation works, the majority of which coming from local settlements. In general, out of 7,608 man month unskilled jobs, 4,484 were from the local settlements. 2 environmental, and social point soundness. The World Bank team has validated these findings, and verified the analysis using information collected by MCC, by the PIU and by the SCWM. 11. The Bank team also considered employment generation and in particular, poverty alleviation since all regions of Armenia have experienced rising poverty during the crisis, although the degree varies. Armenia Poverty Update, a March 2011 World Bank report, notes that Shirak and Kotayk remain the two poorest marzes. In Shirak, some 47.2 percent of people live below the poverty line; in Kotayk, 43 percent. The next poorest regions are Lori (41.7 percent), Gegharkunik (40.4 percent), Ararat (39.8 percent), and Armavir (31.3 percent). Total estimated construction costs are US$20.0 million, of which about US$16.01 or almost 80 percent will be invested in these six marzes, representing the top 50 percent of the poorest regions in Armenia; the three poorest marzes will receive about 41 percent of total investments 12. The planned activities are consistent in nature and implementation modalities to those financed under IREP and would leverage Project development impact and results. Also, AF was considered the most appropriate financing mechanism to provide an adequate safety net for unskilled workers as the economic and financial crisis continues to diminish employment opportunities among the rural poor. The IREP AF meets OP/BP 13.20 requirements in terms of: (i) implementing additional or expanded activities to scale up Project impact and development effectiveness; and (ii) implementation of slightly modified Project activities. Furthermore, the AF is the appropriate instrument to maximize development impact and results instead of a repeater project or a completely new operation. III. PROPOSED CHANGES

13. The proposed revised PDOs are: (i) to improve water use efficiency in the selected irrigation schemes; and (ii) to foster immediate rural employment. Original Project activities were focused on rehabilitating primary and secondary irrigation canals in only two selected irrigation schemes, namely Armavir and Talin, while AF will scale up/restructure these activities and expand Project geographic coverage. Proposed additional activities for the restructured Project, with total cost of US$21.6 million (including Government and beneficiary contributions and contingencies) would have three components (Component 2 is added under this AF). Component 1: Rehabilitation of identified stretches of primary canals (US$15.90 million) in the selected irrigation schemes. Six schemes will be involved and around 50 km of main and secondary canal sections will be rehabilitated. The component will also finance consultancy services for rehabilitation works. Component 2: Rehabilitation of on-farm irrigation network (US$4.02 million) will rehabilitate selected tertiary canals. Nineteen communities of Lori, Shirak, Gegharkunik and Armavir marzes will benefit from improved water conveyance over about 2,500 hectares. Beneficiary farmers will co-finance investment costs (contributions collected by MCC will be made available before tendering). The component will also finance consultancy services for rehabilitation works. Component 3: Project Management and Institutional Activities (US$1.68 million It will finance three sub-components: (a) Project management, monitoring and evaluation, and WUA support; (b) Audits (PIU, WSAs and WUAs); and (c) Technical Assistance including studies for a gravity scheme construction in the Meghri region. 14. Project outcome indicators. The original PDO indicators are maintained because the AF merely scales up existing activities, so the targets are increased: (i) the volume of water savings

3 goes up to 131 MCM from 97 (35 percent increase);5 (ii) temporary employment goes up to 16,000 person/days from 9,000 (77 percent increase); (iii) potential permanent employment created goes up to 3,250 jobs from 2,400 (35 percent increase); (iv) value of wages paid goes up to US$8.2 million from US$4.5 million (81 percent increase). The target changes for the Intermediate outcome indicator: potential estimated increase in irrigated areas due to rehabilitation works was 7,300 ha and estimated total was 35,570 ha (up from 28,275 ha) but it is now 31,195 ha.6 The same logic is applied to the revised AF target and the overall increase would be 80,290 ha (125 percent increase). An additional intermediate outcome indicator for new Component 2 is 1,700 ha of potentially restored irrigation area in communities with rehabilitated tertiary networks. Establishing a pilot WUF was dropped from the original IREP and will not be included under the AF. The following Table shows the original and AF proposed indicators and targets.

PDO Indicator Original target Changes with AF Revised target Reduction of water losses on primary sections 22.5% to 3.0% 26.1% to 16.8% 26.1% to 16.8% of selected schemes (% / amount) 97 MCM 34.4 MCM 131 MCM # of temporary jobs created (person months) 9,000 7,000 16,000 # of potential permanent agricultural jobs 2,400 850 3,250 created Value amount of wages generated US$4.5 M US$3.7 US$8.2 Intermediate Outcomes Original target Changes with AF Revised target Component 1: Potential increase in irrigated areas as a result of rehabilitation works 35,570 52,000 87,570 (IREP/AF). Component 2: Potentially restored irrigation area in communities with rehabilitated tertiary - 1,760 1,760 network. Component 3: - Preparation of business plans for WUAs 100% 100% 100% - GIS WUA MIS in place nationwide 100% 100% 100% - Definition of improved subsidy policy Done On-going Done - Establishment of a pilot WUF Done Dropped Dropped 15. Costs by component. Total Project costs would be increased almost 60 percent under the proposed AF, from the original US$36.33 million to US$57.93 million. Rehabilitation works costs would increase by 60 percent while Project management and institution strengthening costs would increase by 51 percent. Component Original cost Changes with AF Revised cost (US$ million) (US$ million) (US$ million) 1: Rehabilitation of primary canals 33.08 15.90 48.98 2: Rehabilitation of tertiary canals - 4.02 4.02 3: Project management and institutions 3.25 1.68 4.93 Total 36.33 21.60 57.93

5 Initially during IREP preparation, water loss in the two canals was incorrectly estimated at about 22.5 percent and the targeted level was set at only 3.0 percent (19.5 percent decrease), which is unrealistic even for the newly constructed canals. Given that all planned rehabilitation works plus additional 7.0 km of the Armavir canal are completed, the water losses reduced on average by about 30 percent (from around 36 percent to some 6.0-7.0 percent). 6 The assumption is that an annual increase in irrigated areas will be gradual—20 percent— and may reach the target in five years because farmers will likely need to invest to expand their cultivated land, which typically happens in phases. 4 IV. APPRAISAL SUMMARY

16. Economic Analysis: The AF is expected to yield substantial net incremental benefits in terms of increased farm profitability for 88,750 farmers, over about 56,300 ha of irrigated land. The AF yields net incremental benefits with a financial net present value (FNPV) of US$2,045 per ha. Farmers benefit from a gross margin that increases from US$669 per ha to US$1,469 per ha. The expected financial internal rate of return (FRR) to farmers is 22.1 percent and FNPV US$33.7 million. Economic analysis shows that the Project yields net incremental economic benefits with an economic internal rate of return (ERR) of 26.7 percent at a 12 percent discount rate. Economic net present value (ENPV) for the Project is estimated at US$37.5 million. The investment in primary and secondary canals is expected to yield ERR of 27.2 percent and ENPV of US$31.3 million. Estimated economic returns to investment in tertiary canals are 24.6 percent and ENPV, US$6.2 million. 17. Sensitivity analyses tested Project robustness for four risk variables: increased Project cost, benefits decline, combined increase in Project cost and decline in anticipated benefits, and a two-year delay in benefit accumulation. Project sensitivity is negligible to changes in costs or delays in benefit accumulation. The 20 percent increase in Project cost drops baseline level of ERR to 24.1 percent. The two-year delay in benefit accumulation will reduce the baseline ERR to 26.1 percent. The Project is moderately sensitive to benefit decline, and combined benefit decline and Project cost increase. The 20 percent benefit decline reduces baseline levels of the ERR to 17.2 percent. Combined 20 percent benefit decline and 20 percent Project cost increase drops the ERR to 15.2 percent. 18. Environmental Safeguards: The AF environmental classification is Category B and it triggers no safeguard policies additional to those under the original IREP because the AF will support rehabilitation of the existing irrigation schemes through relining of canals while retaining their design capacities. No new construction will be financed. Based on the nature and scope of planned physical works, the expected impact on human health and natural environmental is minor. 19. Initially, rehabilitation of schemes proposed for AF was planned under the MCC Program. During the Program concept stage the Borrower had carried out an Environmental Impact Assessment (EIA) and developed subsequent site-specific Environmental Management Plans (EMPs) for individual irrigation schemes targeted for rehabilitation, including those proposed for AF. These EMPs have been updated with minor revisions to meet the requirements of the World Bank OP/BP 4.01 Environmental Assessment and to comply with implementation arrangements under a Bank-financed project. The revised site specific EMPs will be subject to a new round of public consultation after which the final versions will be re-disclosed in-country on the SCWM web-site and published in the Bank’s InfoShop no less than thirty days before the beginning of the works on any particular section of the canal. 20. World Bank OP 4.09 Pest Management is triggered because the AF aims to return agricultural land to irrigation as well as improve water supply to irrigated areas, which may intensify agriculture and alter some cropping patterns leading to the increased pesticide use. Associated risks will be mitigated through public awareness campaign for safe and optimal pesticide use. 21. The AF triggers OP/BP 7.50 Projects on International Waterways because several irrigation canals proposed for rehabilitation transport water abstracted from the tributaries of the international rivers Araks and Debed. However, no new canals will be built, nor will the existing intake be enlarged. Instead, the AF will support only rehabilitation of existing canals to prevent waste and loss of existing water allocations. Therefore, communication to the riparian states on

5 the AF interventions has been deemed unnecessary and on August 11, 2011, the task team obtained an exception on notification. 22. Social Safeguards: No new social safeguards are triggered. The World Bank policy on Involuntary Resettlement (OP/BP 4.12) remains triggered as a precautionary measure; a remote possibility exists that existing fruit trees could block contractor access to canal sections to be rehabilitated or their roots could threaten the integrity of the works, therefore some might have to be removed from the sanitary zone. However, IREP supervision missions confirmed that no trees or objects were removed from the sanitary zone during the rehabilitation works carried out in 2009 - 2011. Adequate measures to mitigate any possible land acquisition through compensation or reconstruction are included in the existing IREP Resettlement Policy Framework (RPF) prepared by the Millennium Challenge Account Armenia (MCA) and adopted by GOA, and procedures will be in place for contractors to inform the PIU of any need to remove any trees or structures. Overall it is anticipated that Project benefits - employment, income generation, and increased smallholder livelihoods will far outweigh potential social risks associated with land acquisition. In addition, rehabilitation works are likely improve physical conditions for 20–30 residential structures adjacent to the canal in Kosh and Aragats villages, where canal water now seeps into family homes. 23. Technical Issues: The MCC Program designs are preliminary but works are relatively simple - principally relining main and secondary canals and replacing tertiary canal sections with pre-cast flumes and/or pipes. During Project preparation, the PIU checked the designs, amended as required, and submitted them to the Water Design Institute (Armenian Authority for hydraulic works) for technical approval. The works program comprises 10 contract packages, eight for main and secondary canals and two for tertiary canals. It is anticipated that all designs and contract packages will be ready for tendering by end-September 2011. 24. Financial Management: Project financial management (FM) arrangements under the original IREP, implemented by the PIU, have been acceptable to the Bank; these arrangements will remain the same in place under AF. The annual audited Project financial statements (separate for the main Project and AF) and the entities’ annual financial statements will be submitted to the Bank within six months of the end of each fiscal year, and for the Project, also at Project closing. The audited financial statements will be posted on a website (facilitated by the PIU) within one month of the receipt of audited reports from the auditor. In addition, following the Bank’s formal receipt of the financial statements from the recipient, the Bank will make them available to the public in accordance with Bank Policy on Access to Information for Bank- financed operations. See Annex 5 for a description of slight differences to funds flow (co- financing) arrangements under Component 2 of the Project. 25. Procurement: The Bank’s most recent Procurement and Consultant Selection Guidelines (January 2011) will be followed under the AF. The most recent versions of the standard Request for Proposal (RFP) and bidding documents available on the Bank website will be used as templates for procurement of Civil Works, Goods and Selection of Consultants. Regular ECA Region thresholds for procurement methods and prior/post review will be used for AF; the flexible procurement arrangements agreed under the original IREP will be discontinued. 26. On July 21, 2011, the PIU and the Bank agreed on a Final (draft) Procurement Plan (PP). Given the 18-month implementation period, and potential to carry out rehabilitation works during irrigation off-season (10 months during end-November to end-April), civil works procurement and consulting firm selection for construction supervision will begin immediately. Contracts with successful bidder(s) and consultant firm will be signed after Loan effectiveness. 27. Institutional Issues: The AF will continue institutional reform activities with WUAs, aiming to increase their ability to successfully improve canal O&M and performance and raise 6 cost-recovery rates to ensure sustainability of AF interventions. The Bank team will continue dialogue with Government (i) to ensure sufficient budget allocation for adequate irrigation systems maintenance; and (ii) to assess appropriate tariff levels for cost–recovery, using regional experience and tariff payment affordability measures. These measures will facilitate increases to achieve full cost-recovery for the whole irrigation system, now estimated at about 45 percent. 28. Closing Date: The AF implementation will require 18 months from expected Loan effectiveness, December 2011; it is proposed to extend the original Project closing date to June 30, 2013.

7

ANNEX 1. RESULTS FRAMEWORK AND MONITORING ARMENIA: Additional Financing of the Irrigation Rehabilitation Emergency Project Results Framework

Revisions to the Results Framework Comments/ Rationale for Change PDO Current (PAD) Proposed The Project development The Project development objectives (PDO) The primary objective of the objectives (PDO) are: are: additional financing is to scale up the impact generated under the (i) to improve water use (i) to improve water use efficiency in the original Project in terms of the efficiency in two selected selected irrigation schemes; and almost identical PDOs. The AF irrigation schemes; and (ii) to foster immediate rural employment. will benefit from designs prepared (ii) to foster immediate rural by the Design Institute and employment. reviewed by the Millennium Challenge Corporation (MCC) for

sound technical and environmental justification. The MCC Program closing on September 29, 2011, is unable to finance implementation of these investments. PDO indicators Current (PAD) Proposed change Reduction of water losses on Revise and change the target value. Revision and change of target the primary sections of Reduction of water losses in the selected value is linked with the geographic Armavir and Talin’s schemes schemes (cubic meters). expansion of activities proposed (cubic meters). under the AF. Number of temporary jobs Change the target value. Change of target value is linked to created (person/months) and a geographic expansion of activities value of wages generated proposed under the AF and (based on average pay per day) expected increase in temporary jobs and value of wages generated. Number of permanent Change the target value. Change of target value is linked to agricultural jobs created geographic expansion of activities proposed under AF and expected increase in water savings and lands returned to irrigation. Intermediate Results indicators Current (PAD) Proposed change Component 1 Revise and change target value. Revision and change of target Restored irrigation areas in Restored irrigation area in selected value is linked to geographic Armavir and Talin schemes schemes (ha). expansion of activities proposed (ha). under AF. Component 2 Preparation of business plans No change for WUAs

Definition of an improved No change subsidy mechanism and policy

Establish a pilot Water User Dropped WUF pilot was dropped due to on- Federation going consolidation of WUAs, costs associated with establishing WUF (e.g., heavy machinery 8

Revisions to the Results Framework Comments/ Rationale for Change needed for O&M of main canals) and due to lower farmer incomes, hence premature to establish WUF. New Component (2) New New indicator added to measure Restored irrigation area in outcome of new component. communities with rehabilitated tertiary network.

9

REVISED PROJECT RESULTS FRAMEWORK

Project Development Objective (PDO): (i) to improve water use efficiency in the selected irrigation schemes; and (ii) to foster immediate rural employment. Baseline Cumulative Target Values Original Progress Responsibility Data Source/ PDO Level Results Indicators UOM7 Project To Date 2011 2012 2013 Frequency for Data Comments Methodology Start (2011) Collection Core (2009) Under IREP 62% of the total lengths of the two canals were rehabilitated and consequently the losses were reduced from 114 MCM to Million 1. PDO Level Indicator Monthly 17.1 MCM. Under AF it is cubic 17.1/ Reduction of water losses in the 114 34.7 17.5 6.1 during WSA reports PIU planned to rehabilitate less meters 40.4 selected schemes (IREP/AF). season than 17% of the total length (MCM) of the canals in the selected schemes, consequently, water losses will be reduced from 40 MCM to about 6 MCM. Under IREP the actual result Q4-2011, PIU and 2. PDO Level Indicator Contractors is 11,379 person/month but Q1-2012, Construction Number of temporary person-months Number 0 11,379 9,917 13,667 16,000 monthly time the original target was 9,000. Q4-2012, supervision jobs created sheets The new target is set based Q1-2013 company on the original target. Under AF overall possible increase in agricultural area due to saved water would be about 6,400 ha. However, only 20% of the potential 3. PDO Level Indicator increase may occur in each Number of permanent agricultural jobs Number 0 2,400 2,520 2,900 3,250 Annual GIS, WUAs PIU year due to associated created investment costs. Therefore, by the end of the Project – which is two agricultural seasons – only about 40% (2,600 ha) may be brought back to irrigation and

7 UOM = Unit of Measurement.

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consequently the estimated agricultural jobs would about 850 with a possibility to become around 2,100 in 3 years after Project closing. Under IREP the actual result Q4-2011, PIU and 4. PDO Level Indicator Contractors is US$5.4 million; the US$ Q1-2012, Construction Amount of wages generated (only for 0 5.45 5.2 7.2 8.2 monthly time original target was US$4.5 million Q4-2012, supervision construction workers) sheets million; the new target is set Q1-2013 company based on the original target. Beneficiaries Project beneficiaries (water users) This new core indicator was Number N/A 30,000 114,000 116,000 118,000 Annual GIS, WUAs PIU not included in the Results Framework of IREP. This new core indicator was Of which female (beneficiaries) % N/A 4.0 7.0 7.3 7.5 Annual GIS, WUAs PIU not included in the Results Framework of IREP.

Intermediate Results and Indicators

Baseline Target Values Unit of Original Progress Responsibility Data Source/ Intermediate Results Indicators Measur Project To Date 2011 2012 2013 Frequency for Data Comments Methodology ement Start (2011) Collection Core (2009)

Intermediate Result 1 for Component 1:

Under AF overall potential increase in agricultural area due to saved water in main and secondary canals would 1. Intermediate result indicator be about 4,700 ha. Potential increase of total irrigation However, only 20% of 31,195/ 32,655/ 34,115/ area as a result of rehabilitation hectares 28,275 31,195 Annual GIS, WUAs WUAs, PIU potential increase may 47,215 48,155 49,095 works on main/secondary canals occur each year due to (IREP/AF). associated investment costs. Therefore, by end- Project – two agricultural seasons – only about 40% (1,880 ha) may be brought back to irrigation

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Intermediate Results and Indicators

Baseline Target Values Unit of Original Progress Responsibility Data Source/ Intermediate Results Indicators Measur Project To Date 2011 2012 2013 Frequency for Data Comments Methodology ement Start (2011) Collection Core (2009) though potentially in five years it would be possible to reach 52,000 ha.

Intermediate Result 2 for Component 2:

Under AF overall potential increase in agricultural area due to saved water in tertiary canals would be about 2. Intermediate result indicator 1,760 ha. However, only Restored irrigation area in 20% of potential increase hectares 0 0 0 352 704 Annual GIS, WUAs WUAs, PIU communities with rehabilitated may occur each year due tertiary network. to associated investment costs. Therefore, by end- Project – two agricultural seasons – only about 40% (704 ha) may be brought back to irrigation. Intermediate Result 3 for Component 3:

This activity started under 5. Intermediate result indicator In Consulting Number 0 44 44 44 N/A PIU IREP and will be Developed WUA business plans progress Firm completed by end 2011. This activity started under 6. Intermediate result indicator In Consulting Yes/No None Yes Yes Yes N/A PIU IREP and will be Subsidy policy study progress Firm completed by end 2011. 7. Intermediate result indicator This activity has been GIS WUA information system in place Yes/No 15 44 44 44 44 N/A WUAs PIU completed. nation wide

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ANNEX 2. OPERATIONAL RISK ASSESSMENT FRAMEWORK (ORAF)

REPUBLIC OF ARMENIA ADDITIONAL FINANCING TO IRRIGATION REHABILITATION EMERGENCY PROJECT (IREP AF) 1. Project Stakeholder Risks Rating Low Description : Risk Management : Lack of Government commitment to irrigation and The Bank team will continue dialogue with Government to maintain commitment level. drainage (I&D) reform agenda and deterioration of I&D Add a small institutional component that includes WUA staff training to build on success infrastructure due to lack of financial means available for achieved under (now–closed) IDP and original IREP to introduce improvements. Water Supply Agencies (WSAs) and WUAs for adequate operation and maintenance (O&M) of canals rehabilitated ‐ Resp: Bank/Client| Stage: Implementation| Due Date: On-going | Status: In progress under the Project. Risk Management :

‐ Resp: | Stage: | Due Date: | Status:

3. Implementing Agency Risks (including fiduciary) 3.1. Capacity Rating: Low Description: The Water Sector Development and Institutional Improvement PIU has been managing Bank-supported projects for many years; the staff is capable and experienced in implementing Bank-supported water projects. No major governance issue has emerged under earlier projects; no evidence exists of fraud or corruption under the ongoing Project.

However, in view of Government decision to separate Risk Management : policy making from implementation function and transfer Bank and GOA have to agree on: policy making from the PIUs to the line Ministries, the a) cost/staffing structure to carry out Bank funded projects; and main risk is that as a result of additional operational tasks b) the need to hire staff to be paid from the state budget for carrying out non-Bank other than Bank-funded projects, some PIUs may be funded activities. overloaded unless the Government assign additional staff ‐ Resp: Client| Stage: Implementation| Due Date: On-going | Status: In progress to carry out additional responsibilities. ‐

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Risk Management :

‐ Resp: | Stage: | Due Date : | Status: 3.2. Governance Rating: Low Description: Risk Management : The PIU had no governance issues or cases related to World Bank projects or in general. ‐ Resp: | Stage: | Due Date : | Status: Risk Management :

‐ Resp: | Stage: | Due Date : | Status:

4. Project Risks 4.1. Design Rating: Moderate Description: Risk Management : This is an Additional Financing Project, prepared under an Though the PIU responsible for the implementation has capable and skilled staff and is expedited time schedule, which increases risk for Project experienced in the preparation and implementation of Bank water projects, the Bank design, environmental, social and fiduciary safeguards and team will be closely monitoring implementation and will rapidly deploy any corrective procurement oversights. measures needed.

‐ Resp: Bank/Client| Stage: Implementation| Due Date: On-going | Status: In progress Risk Management :

‐ Resp: | Stage: | Due Date : | Status: Risk Management :

‐ Resp: | Stage: | Due Date : | Status: 4.2. Social & Environmental Rating: Low Description: Risk Management : Some providers of civil works may lack sufficiently high To date, Project implementation has proven that if environmental monitoring is integral corporate standards for environmental performance, which to close technical supervision of works by PIU, contractors generally follow EMPs or may lead to shortfalls in construction, waste management, respond to outstanding issues flagged by supervisors. Site-specific EMPs for the sections

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and/or restoration of construction and work campsites of canals rehabilitated under AF will be finalized prior to commencement of civil works prior to demobilization. and PIU will be required to maintain arrangements for environmental supervision and reporting satisfactory to the Bank throughout AF implementation.

‐ Resp: Client| Stage: Implementation| Due Date: On-going | Status: In progress Risk Management : There is a minor likelihood of fruit trees, boundary walls, A Resettlement Policy Framework was prepared and disclosed by the client for IREP and animal housing and fences in the sanitary zones of canals contains provisions to mitigate any potential resettlement impacts resulting from canal having to be removed to allow contractors access to rehabilitation under the AF. complete works. Such cases carry minor risk of inadequate compensation for loss to the property owners/users. ‐ Resp: Client| Stage: Implementation| Due Date: On-going | Status: In progress Risk Management :

‐ Resp: | Stage: | Due Date : | Status: 4.3. Program & Donor Rating: Low Description: Risk Management : Interventions financed by multiple donors may lack Continue to ensure dialogue among donors through meetings and sharing information. cohesiveness. ‐ Resp: Bank| Stage: Implementation| Due Date: On-going | Status: In progress Risk Management :

‐ Resp: | Stage: | Due Date : | Status:

4.4. Delivery Monitoring & Sustainability Rating: Low Description: Risk Management : Insufficient funding may prevent adequate O&M of The Bank will closely monitor Government allocation of sufficient resources to WSAs rehabilitated canals. and WUAs for adequate O&M of rehabilitated canals. Government commitment will be requested to implement follow-up actions, based on the results of study on institutional strengthening.

‐ Resp: Bank/Client| Stage: Implementation| Due Date: On-going | Status: In progress Risk Management :

‐ Resp: | Stage: | Due Date : | Status:

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4.5. Other Rating: Description: Risk Management :

‐ Resp: | Stage: | Due Date : | Status:

‐

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ANNEX 3. DETAILED DESCRIPTION OF MODIFIED OR NEW PROJECT ACTIVITIES

1. The AF focuses on water use efficiency and employment creation through rehabilitation works that account for about 92 percent of the Project, similar to IREP. Rehabilitation works will take place on around 50 km of main and secondary canals and about 63 km of tertiary canals in Aragatsotn, Kotayk, Shirak, Lori, Ararat, Gegarkunik, and Armavir marzes (regions). Rehabilitation will reduce water losses by an estimated 34.4 million cubic meters (MCM) from primary and secondary canals, and 9.9 MCM from tertiary canals. Project implementation, audits, limited institutional activities and review of documents for constructing a gravity scheme in the Meghri region will account for about 7.0 percent of the Project. In part, this scheme was studied under the Millennium Challenge Corporation (MCC) Program and Government proposes that it be included under future Bank-financed operations. 2. The proposed AF has the following components: Component 1. Rehabilitation of main and secondary canals (US$15.90 million). Identified stretches of main/secondary canals in the selected irrigation schemes will be rehabilitated: a total of about 50 kilometers (km) sections, namely Arzni-Shamiram system (23.76 km), Shirak system (4.6 km), Lower Hrazdan system (5.28 km), Artashat system (4.82 km), Talin system (4.32 km), Myasnikyan Main aru (canal) (3.19 km), and Nalband canal (4.25 km). The component includes: (i) civil works for the main and secondary canals rehabilitation (US$15.29 million); (ii) consultancy services for supervision of rehabilitation works (US$0.61 million). Component 2. Rehabilitation of tertiary network (US$4.02 million). On-farm irrigation network (around 63 km) in 19 communities of Lori, Shirak, Gegharkunik, and Armavir marzes will be rehabilitated to improve existing irrigation water services over 2,500 hectares (ha) and potentially restore irrigation on 1,760 ha. These activities are co-financed by farmers; the MCC has collected funds and deposited them in accounts that will be made available to the PIU before tendering. Appropriate FM measures were discussed and agreed. The component includes: (i) civil works for tertiary canal rehabilitation (US$3.86 million); (ii) consultancy services for supervision of rehabilitation works (US$0.16 million). Component 3. Project Management and Institutional Activities (US$1.68 million). There are three sub-components, namely: (a) Project management and WUAs support (US$0.92 million). The Project would finance all incremental PIU operating costs necessary to implement the Project and carry out monitoring and evaluation activities (US$0.61 million) and costs for WUAs Support Group (US$0.31 million). Refresher training on enhanced water management techniques and practices, including for O&M of pumping stations, and for improving alternative water-saving irrigation structures and practices on tertiary canals and on- farm irrigation practices will be provided to the two WSA and the eight WUAs involved in Project rehabilitation activities. (b) Audits (US$0.40 million) for the PIU, WSAs, and WUAs. (c) Technical Assistance (US$0.36 million) to verify environmental, economic, and technical feasibility of gravity scheme construction in the Meghri region (US$360,000). In part, the Meghri scheme was studied under the MCC Program and Government has proposed its inclusion in potential future Bank-financed operations.

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3. IREP interventions were limited to primary canals. AF will also focus on rehabilitation of main/secondary canals with only about 18 percent of funds to be used for rehabilitation of tertiary canals, the new second component. The existing MCC-prepared studies and designs, shared with the IREP team, match the details and quality of those used for tendered works implemented under IREP; and will use the same advanced procurement packaging and sequencing. The WUA Support Unit under the PIU will provide similar training to WUAs. 4. Impact on Employment. Under IREP almost 11,000 person/months employment were generated from laying over 77,000 m3 concrete. Based on IREP experience, estimates for employment and income generation outcomes under the additional loan are the following: (i) for the main canals, based on labor required to lay 39,000 m3 concrete in sections to be rehabilitated, about 5,500 person/months of employment are anticipated; (ii) for rehabilitating tertiary canals, about 1,500 person/months are anticipated. Therefore, the Project is expected to generate about 7,000 person/months of temporary employment, equivalent to 583 jobs per year; over 500 of these jobs will be generated in construction works on main and tertiary canals; the rest are in associated activities (batching, quarrying, lab work, supervision). 5. Close to 70 percent of temporary employment created will be for unskilled workers, most of whom live in communities adjacent to the canals; they will earn on average US$450 per month, generating total revenue of US$2,385,922 for these communities. This is an important source of income for local smallholders in winter when agricultural activities are limited. Skilled workers are expected to earn an average of US$800 a month, generating total revenue of US$1,358,361.

Impact on Employment and Income Function/Skill Level Person/Months Temp jobs Income US$ Main Canal Works 4,531 378 Batching Plant 255 21 Quarry 129 11 Lab Work 217 18 Supervision 208 17 Water Stops Production 159 13 Tertiary Canal Works 1,500 125 Total Employment 7,000 583 Skilled 1,698 141 1,358,361 Unskilled 5,302 442 2,385,922 Total Income 3,744,283

6. By June 30, 2013, which is two agricultural seasons, only about 2,600 ha (40 percent) of land may be brought back under irrigation, creating an estimated 850 agricultural jobs, and potential to rise to about 2,100 jobs by June 30, 2016 - three years after Project closing. These estimates are ultra conservative with regard to permanent agricultural jobs as they do not take into account upstream and downstream non-farm employment that could be generated as a result of the increased production generated. Nevertheless, potential exists for overall agricultural land area to increase to about 6,500 ha, so estimates were based on a modest assumption of 20 percent annual increase, linked to farmers’ investment costs to bring land back under irrigation. However, IREP experience demonstrated that the number of agricultural jobs increased not only because of restored irrigated lands but also because

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increased irrigation efficiency often encourages farmers to cultivate higher value crops, which creates additional agricultural jobs.

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ANNEX 4. REVISED ESTIMATE OF PROJECT COSTS ARMENIA: Additional Financing of Irrigation Rehabilitation Emergency Project Summary of Project Costs for Additional Financing Length of Total Estimated stretches to length of cost of Description of Activity be canal rehabilitation rehabilitated (m) (000' US$) (m) Component 1. Rehabilitation of Main and Secondary Canals Civil Works 1. Arzni-Shamiram, stage 1 35,095.0 3,560.0 2,306.0 2. Arzni-Shamiram, stage 2 44,791.0 5,472.0 1,914.0 3. Diversion canal of Mkhchyan PS 17,360.0 2,010.0 452.0 4. Dvin canal 15,268.0 2,811.0 535.0 5. Shirak system, distributor 26 25,840.0 3,550.0 353.0 6. Lower Hrazdan, stage 1 28,300.0 1,203.0 738.0 7. Lower Hrazdan, stage 2 21,900.0 2,368.0 809.0 8. "Shah Aru" canal 8,788.0 1,712.0 712.0 9. Nalband canal 43,000.0 4,251.0 843.0 10. Talin canal, right branch 10,300.0 4,318.0 608.0 11. Arzni branch 15,000.0 9,174.0 3,405.0 12. Kassakh canal, left branch 6,500.0 3,073.0 565.0 13. Kassakh canal, right branch 5,400.0 2,481.0 587.0 14. Shirak main canal 18,620.0 1,064.0 431.0 15. Myasnikyan Mayr Aru canal 5,275.0 3,186.0 485.0 Supervision of rehabilitation works - - 590.0 Sub-total for component 1 301,437.0 50,233.0 15,333.0 Component 2. Rehabilitation of Tertiary Canals Civil Works 1. Meghrashen community, Shirak marz 1,400.0 97.0 2. Communities in Gegharkunik marz 22,800.0 1,435.0 3. Jrashen community, Lori marz 1,700.0 105.0 4. Communities in Talin system, Armavir marz 25,300.0 1,483.0 5. Communities in Armavir system, Armavir marz 5,600.0 283.0 6. Agavnatum community, Armavit marz 6,000.0 319.0 Supervision of rehabilitation works 149.0 Sub-total for component 2 62,800.0 3,871.0 Component 3. Project Management and Institutional Activities 3.1. Incremental Project Management 885.0 3.1.1. PIU Staff/Consultants and Operation Costs 587.5 3.1.2. WUAs Support Group (Consultants and Operation Costs) 297.5 3.2. Consultancy Services 735.0 3.2.1. Audit of WUAs and WSAs (0.53m), and PIU (0.12m) 389.0 3.2.2. Meghri Gravity Scheme Feasibility Study 346.0 Sub-Total of component 3 1,620.0 TOTAL PROJECT BASE COSTS 20,824.0 Physical Contingencies (2%) 416.5 Price contingencies (1.725%) 359.2 TOTAL PROJECT COSTS 21,600

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Summary of Project Combined Costs for Original Project and Additional Financing

Actual Total Cost Length of length of including stretches to be Base Cost Actual Cost Description of Work stretches contingencies rehabilitated ('000 US$) ('000 US$) rehabilitated ('000 US$) (m) (m) Component 1. Rehabilitation of Main and Secondary Canals Civil Works (IREP) 1. Rehabilitation of Talin irrigation scheme 59,010 57,790 18,460.0 19,383.0 17,781.8 2. Rehabilitation of Armavir irrigation scheme 24,800.0 31,723.0 11,550.0 12,127.5 14,531.7 Supervision of rehabilitation works (IREP) 1,550.0 1,570.0 1,631.4 Civil Works (AF) 1. Arzni-Shamiram, stage 1 3,560.0 2,306.0 2,391.9 2. Arzni-Shamiram, stage 2 5,472.0 1,914.0 1,985.3 3. Diversion canal of Mkhchyan PS 2,010.0 452.0 468.8 4. Dvin canal 2,811.0 535.0 554.9 5. Shirak system, distributor 26 3,550.0 353.0 366.1 6. Lower Hrazdan, stage 1 1,203.0 738.0 765.5 7. Lower Hrazdan, stage 2 2,368.0 809.0 839.1 8. "Shah Aru" canal 1,712.0 712.0 738.5 9. Nalband canal 4,251.0 843.0 874.4 10. Talin canal, right branch 4,318.0 608.0 630.6 11. Arzni branch 9,174.0 3,405.0 3,531.8 12. Kassakh canal, left branch 3,073.0 565.0 586.0 13. Kassakh canal, right branch 2,481.0 587.0 608.9 14. Shirak main canal 1,064.0 431.0 447.1 15. Myasnikyan Mayr Aru canal 3,186.0 485.0 503.1 Supervision of rehabilitation works (AF) 590.0 612.0 Sub-total for component 1 (IREP + AF) 134,043.0 89,513.0 46,893.0 48,984.7 33,944.9 Component 2. Rehabilitation of Tertiary Canals (AF) Civil Works (AF) 1. Meghrashen community, Shirak marz 1,400.0 97.0 100.6 2. Communities in Gegharkunik marz 22,800.0 1,435.0 1,488.5 3. Jrashen community, Lori marz 1,700.0 105.0 108.9 4. Communities in Talin system, Armavir marz 25,300.0 1,483.0 1,538.2 5. Communities in Armavir system, Armavir marz 5,600.0 283.0 293.5 6. Agavnatum community, Armavit marz 6,000.0 319.0 330.9 Supervision of rehabilitation works 149.0 154.6 Sub-total for component 2 (IREP + AF) 62,800.0 0.0 3,871.0 4,015.2 0.0 Component 2/3. Project Management and Institutional Activities (IREP + AF) 2.1. Incremental Project Management (IREP) 1,110.0 1,130.0 1,201.5 1. PIU Staff/Consultants and Operation Costs 700.0 710.0 (IREP) 803.0 2. WUAs Support Group (Consultants and 410.0 420.0 Operation Costs) 398.5 3.1. Incremental Project Management (AF) 885.0 918.0 0.0 3.1.1. PIU Staff/Consultants and Operation Costs 587.5 609.4 (IREP AF) 3.1.2. WUAs Support Group (Consultants and 297.5 308.6 Operation Costs) 2.2. Consultancy Services (IREP) 1,640.0 1,700.0 888.9 2.2.1. Institutional Strengthening Study 1,000.0 1,050.0 506.4

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2.2.2. Audit of WUAs (0.28m), WSA (0.08m) and 640.0 PIU (0.03m) 650.0 382.5 3.2. Consultancy Services (AF) 735.0 762.4 0.0 3.2.1. Audit of WUAs and WSAs (0.53m), and PIU 389.0 403.5 (0.12m) 3.2.2. Meghri Gravity Scheme Feasibility Study 246.0 358.9 2.3. Goods (IREP) 2.3.1. Grader for Water User Federation (IREP - 410.0 420.0 dropped) 0.0 Sub-Total of Component 2/3 (IREP + AF) 4,780.0 4930.3 TOTAL PROJECT COST (IREP) 34,720.0 36,330.5 33,944.9 TOTAL PROJECT COSTS (AF) 20,824.0 21,599.7 TOTAL PROJECT COSTS (IREP + AF) 55,544.0 57,930.2

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ANNEX 5. REVISED IMPLEMENTATION ARRANGEMENTS AND SUPPORT ARMENIA: Additional Financing of Irrigation Rehabilitation Emergency Project

Implementation Arrangements 1. The Water Sector Projects Implementation Unit (PIU) of the State Committee of Water Management (SCWM) under the Ministry of Territorial Administration (MOTA) was established on December 15, 1995, as a State Enterprise by Government Decision N577. Since December 22, 1999, the PIU reports to a Project Management Board (PMB) under the chairmanship of SCWM, which was established by Government Decision N765. The PMB’s primary responsibility is to supervise and define policies for PIU-implemented projects, including final quality acceptance of rehabilitated works. 2. During the past 12 years, the PIU under SCWM successfully implemented a US$110.25 million credit under five IDA-funded projects and gained valuable experience in procurement using World Bank procurement and consultant selection guidelines. The PIU is now implementing the IBRD-funded US$30.0 million IREP. The PIU Director (since 1995) and two procurement specialists (since 1999 and 2000 respectively) have experience in World Bank-financed procurement. The PIU Planning and Design Department has implementation experience from previous projects; they will prepare technical procurement documentation (technical specifications and TORs). 3. The PIU employs 17 staff for Project design work, managing works procurement, and financial management, plus nine people from the Water Users Associations (WUAs) Support Group. The PIU will coordinate all Project activities; be responsible for all IREP AF procurement, and financial control; and carry out limited design and supervision activities. The PIU activities will be based on detailed annual work plans and associated budgets to be agreed with IBRD at the beginning of each Project year. The PIU will ensure that Monitoring Indicators in the monitoring framework are collected in an effective and timely manner. 4. The PIU will be responsible for technical aspects of Project implementation, namely prepare and review technical specifications and TORs; review and approve rehabilitation designs; review and evaluate technical components of bids; supervise civil works contracts; review and approve monthly works certificates and requests for variation orders. 5. In all contracts for civil works, design, and supervision, MOTA will be represented jointly by SCWM and the PIU. For civil works, a qualified engineer from the PIU will be nominated as a Project Engineer/Manager. 6. As in the original Project, the PIU is responsible for overall Project management and coordination; supervision of works will be contracted with an engineering firm—Consulting Firm for Technical Supervision and Quality Control (CFTSQC)—identified through international competitive selection. This firm will be responsible to ensure high-quality works, support the PIU in scheduling, and ensure adequate collection of timely M&E information. 7. The PIU will revise the Project Operational Manual that was developed for the Irrigation Development Project (IDP) and updated for IREP, with material and specific Environmental Management Plans (EMPs). 8. The PIU will be responsible for Project monitoring during implementation, data collection for indicators will be undertaken by the Supervision Contractor. The PIU will retain responsibility for regular updating of Project monitoring indicators during the Project

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implementation. The PIU will closely monitor the supervision consultant for civil works and Project consulting services and financial statements. Follow-up on data gathering of monitoring indicators is essential to ensure timely Project completion and flag any delays. The PIU will prepare semi-annual Project reports and submit them to the Bank for review. The PIU has multi-year experience with Bank-financed projects, thus capacity is adequate to collect required monitoring indicators. 9. The CFTSQC and PIU engineers will collect data on water loss reductions by comparing intake figures with measurements of water deliveries to secondary canals, or by isolating completed sections and deriving losses. Direct temporary employment generation figures will be collected by requiring contractors to provide monthly labor lists to the PIU with the number of workers on the payroll. Indirect temporary employment will be measured during the winter using monthly surveys of the main construction materials suppliers. Permanent agricultural employment data will be derived from WUAs GIS system. Technical Issues 10. Work Designs: Designs were prepared under the Millennium Challenge Corporation (MCC) Program and are sufficiently detailed for construction; the Armenian Water Design Institute (Authority for Hydraulic Works) will be available for technical support to the PIU and supervision consultants - on design adaptations, change orders, and any other technical design support required. These services will be funded from the SCWM budget. 11. The two principal works categories are rehabilitation of main/secondary canals (Component 1) and rehabilitation of tertiary canals (Component 2). Table 1 summarizes the 34 canals (15 main/secondary; 19 tertiary) in 12 irrigation systems. Table 1: Summary of Rehabilitation Works Irrigation Rehab Irrigated Water Restored # Canal Canals Cost Systems Length Area Saving Area # # (m) (ha) (MCM) (ha) ($M) 1 Main/Secondary 15 6 50,233 47,216 34.36 4,791 15.33 2 Tertiary 19 6 62,758 2,528 9.86 1,760 3.87 Total 34 12 112,991 49,744 44.22 6,552 19.20

12. Some 113 km of canals will be rehabilitated; 50 km are main/secondary and 63 km are tertiary canals. The irrigated area of the canals is about 50,000 ha (the original system irrigated area is greater; the reduction is due, in part, to declining water deliveries over time). Estimated water savings from canal rehabilitation is about 44 MCM, which will enable some 6,500 ha of previously irrigated lands to be restored. 13. MCC preliminary designs. One issue in preparing the AF for the IREP is whether preliminary designs for the works are complete and accurate, whether the bill of quantities is complete, and whether technical specifications are sufficient for immediate integration into the AF contract packages. Selected designs were reviewed during earlier and pre- appraisal/appraisal missions; it was concluded that the main/secondary designs were adequate if the drawings and bill of quantities are amended to match specific canal reaches to be rehabilitated under the AF. Main/secondary, as well as tertiary canal designs are complete and are currently with the Armenian Water Design Institute for final approval, which is expected by the end-August and packages will be ready for tendering. 14. Water Losses and Savings: The overall principle for the Project is that existing water takes (rate and volume) will be maintained but higher water availability will result from

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reducing water losses from canals. These water savings will generate benefits from increased water availability within the system command area, improved supply reliability to existing irrigated areas, and restoring irrigation to areas within the command. 15. Water losses and savings were determined by the Millennium Challenge Account (MCA) study phase for main/secondary canals, and quantities and area were determined for the Project systems. The approach is based on measuring canal differential discharges over the reaches identified for rehabilitation (within interpretation of losses within the reaches), (in liter/second), from which annual water losses were calculated for a 120-day irrigation season (in ‘000 m3) for each reach. This information forms the basis to calculate water losses for priority reaches to be determined under the IREP. 16. Specific water losses per reach were not provided, but in review, a comparison of the total water losses for the canal (for the reaches identified by MCA) and those selected for rehabilitation under the IREP show reasonable consistency in water losses per unit length. Therefore it can be assumed that water loss estimates are consistent with MCA methodology. The PIU reported that the annual water losses for tertiary canals were determined by the WUA for the selected canal reaches. 17. To determine water savings and restored irrigated area from these savings, a methodology similar the original IREP is adopted. Water savings after restoration are determined as 85 percent of annual losses for main/secondary canals and 66 percent for tertiary canals. The restoration area is calculated as annual water saving divided by annual average irrigation demand (cubic meters per hectare). Annual irrigation demand varies among systems depending on climatic zone, typical cropping patterns, and land area, ranging from 8,400 to 4,800 cubic meters per hectare (as determined by the PIU). This approach is relatively simple but reasonable given that cropping patterns for restoration areas are as yet unknown, and that the rehabilitated canal reaches form only part of the distribution system. 18. Figure 1 shows national canal locations, and Tables 2 and 3 list details.

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LOCATION OF PROJECTS PROPOSED FOR REHABILITATION UNDER IREP AF

Nalband man canal

Shirak canal

Shirak canal, distributor 26

Arzni-Shamiram, stage 1

Kassakh, left branch Tertiary canals

Kassakh, right branch

Arzni-Shamiram, stage 2

Talin main canal, right

Myasnikyan “Mayr Aru”

Lower Hrazdan, stage 2

“Sha Aru” canal Lower Hrazdan, stage 2

Arzni branch

Diversion canal of Mkchyan pump station

Dvin canal

Figure 1: Location of Works (prepared by PIU)

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Table 2: Secondary and Main Canals

Total Length Rehabn Irrigated area Water losses Water Restored Cost Cost Marz System Irrigation canal length savings area

(m) (m) (ha) (MCM) (MCM) (ha) (M AMD) (M USD) Kotayk Arzni‐Shamiram Arzni‐Shamiram, stage 1 35,095 3,560 4,400 2.43 2.07 287 902 2.40 Azagastotn " Arzni‐Shamiram, stage 2 44,791 5,472 5,600 3.08 2.62 363 749 1.99 Kotayk " Arzni branch 15,000 9,174 3,800 5.48 4.66 647 1,331 3.54 Azagastotn " Kassakh canal, left branch 6,500 3,073 2,019 2.50 2.12 295 221 0.59 Azagastotn " Kassakh canal, right branch 5,400 2,481 1,100 2.44 2.08 289 230 0.61 Arzni‐Shamiram Subtotal 106,786 23,760 16,919 15.93 13.54 1,881 3,432 9.13 Diversion canal of Mkchyan Ararat Artashat 17,360 2,010 2,330 4.32 3.68 438 177 0.47 pump station Ararat " Dvin canal 15,268 2,811 1,100 3.49 2.97 353 209 0.56 Armavir " Myasnikyan "Mayr Aru" canal 5,275 3,186 500 1.35 1.15 159 190 0.50 Artashat Subtotal 37,903 8,007 3,930 9.16 7.79 950 576 1.53 Shirak Shirak Shirak main canal 18,620 1,064 9,817 1.25 1.06 221 169 0.45 Shirak " Shirak system, distributor 26 25,840 3,550 3,500 1.12 0.95 198 138 0.37 Shirak Subtotal 44,460 4,614 13,317 2.37 2.01 419 307 0.82 Armavir Lower Hrazdan Lower Hrazdan, stage 1 28,300 1,203 4,140 2.96 2.52 300 288 0.77 Armavir Lower Hrazdan Lower Hrazdan, stage 2 21,900 2,368 4,200 5.98 5.09 606 316 0.84 Armavir Lower Hrazdan "Shah Aru" canal 8,788 1,712 760 1.00 0.85 101 278 0.74 Lower Hrazdan Subtotal 58,988 5,283 9,100 9.95 8.45 1,006 883 2.35 Lori Nalband Nalband canal 43,000 4,251 950 1.76 1.50 312 330 0.88 Armavir Talin Talin canal, right branch 10,300 4,318 3,000 1.26 1.07 223 238 0.63 Total 301,437 50,233 47,216 40.43 34.36 4,791 5,765 15.33

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Table 3: Tertiary Canals Water Rehabn Command Irrigated Water Water Restored Cost Cost # Marz System WUA Community users length area area losses saving area

# (m) (ha) (ha) (MCM) (MCM) (ha) (M AMD) (M USD)

1 Armavir Talin Qarakert Bagramyan 30 364 61 40 0.29 0.19 40 10.00 0.03

2 " " " Myasnikyan 500 7,800 505 330 2.38 1.58 329 200.50 0.53

3 " " " Dalarik 90 4,200 184 120 0.87 0.57 119 99.00 0.26

4 " " " Qarakert 100 4,500 168 110 0.79 0.53 110 92.50 0.25

5 " " Shenik Bagaran 42 700 45 24 0.20 0.15 31 14.00 0.04

6 " " " Vanand 28 6,165 582 380 2.16 1.43 298 126.54 0.34

7 " " " Yervandashat 81 700 96 63 0.36 0.24 50 16.00 0.04

8 " " Talin Lernagog 250 866 150 83 0.66 0.48 100 21.15 0.06

" Talin subtotal 1,121 25,295 1,791 1,150 7.71 5.17 1,077 580 1.54

9" Armavir Armavir Arevadasht 39 2,786 137 90 0.51 0.34 47 34.38 0.09

10 " " " Hatsik 164 1,954 262 140 1.19 0.86 119 56.00 0.15

11 " " " Noravan 58 815 153 100 0.57 0.38 53 20.00 0.05

Armavir subtotal 261 5,555 552 330 2.27 1.58 219 110.38 0.29

12 " Lower Hrazdan Khoy Agavnatun 390 5,952 336 180 1.53 1.11 154 125.00 0.33

13 Lori Nalband Getik Jrashen 325 1,699 132 86 0.49 0.32 67 40.80 0.11

14 Gegarkunik Sevan Martuni Upper Getashen 306 4,866 214 140 0.45 0.30 42 140.00 0.37

15 " " " Martuni 1,500 7,700 303 198 0.64 0.42 58 191.78 0.51

16 " " " Dzoragyug 340 2,975 199 130 0.42 0.28 39 74.38 0.20

17 " " " Asthadzor 428 4,122 184 120 0.38 0.26 36 85.00 0.23

18 " " " Vagashen 655 3,182 199 130 0.42 0.28 39 70.00 0.19 Total 5,675 62,758 4,008 2,528 14.52 9.86 1,760 1,455.13 3.87 Sevan subtotal 3,229 22,845 1,099 718 2.31 1.54 214 561.15 1.49

19 Shirak Shirak Shirak Megrashen 349 1,412 98 64 0.21 0.14 29 38.10 0.10

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Procurement 19. Procurement for IREP AF will be carried out in accordance with World Bank “Guidelines: Procurement under IBRD Loans and IDA Credits” and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” published in January 2011 and the provisions stipulated in the Loan Agreement (LA). For each contract to be financed under the LA, procurement or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame were agreed between the Borrower and the Bank in the Procurement Plan (PP). A General Procurement Notice (GPN) was published on August 11, 2011, in UNDB on-line. Specific Procurement Notices (SPN) will be published for all ICB procurement and Consulting contracts as per the Guidelines as the corresponding bidding documents and Request for Proposals (RFPs) become ready and available. 20. Bank staff carried out an assessment of PIU capacity under the SCWM to implement Project procurement; the PIU was found satisfactory. Procurement implementation and arrangements will be the same as those under the original IREP. 21. Procurement Plan: The PIU developed an initial PP for the entire AF Project scope, which provides information on procurement packages, methods, and Bank review method. The Procurement Plan will be agreed upon between the Borrower and the Bank Project team at negotiations, and will be available from the implementing agency’s Project database and on the World Bank external website. The PP will be updated as required in agreement with the Bank Project team to reflect actual Project implementation needs. 22. Frequency of Procurement Supervision: In addition to the prior review of procurement contracts to be carried out by the Bank team, 20 percent of the contracts that are subject to post review will be post reviewed. A Project supervision mission is expected every six months, during which post reviews will be conducted. At a minimum, one post-review report will be prepared each year and include physical inspection of sample contracts, including those subject to prior review. Not less than 10 percent of the contracts will be physically inspected. 23. Anti Corruption Measures: These include broader advertisement of contracting opportunities, bid preparation training for construction company representatives, conducted by the PIU, post-reviews and site visits, conducted by the Bank team, in accordance with Bank Anti-Corruption Guidelines that are integral to the Project Loan Agreement. Financial Management 24. The financial management (FM) functions under AF, including budgeting and planning, accounting, internal control, funds flow, financial reporting, and auditing will continue to be handled by WSDII PIU. The FM arrangements under the original IREP implemented by the PIU were acceptable to the Bank. The last FM implementation support and supervision follow-up mission (conducted in April 2011), the review of quarterly Interim Un-Audited Financial Reports (IFRs), and annual audit reports of projects implemented by the PIU, demonstrated that the FM arrangements under active projects are satisfactory. The PIU will update its FM Manual and accounting software prior to AF implementation (these are capacity building actions, not conditions). The client is in compliance with the audit covenant; the latest audit reports for the original IREP with clean (unmodified) opinions were received by the due date and found acceptable to the Bank. The latest audit reports for WSAs and WUAs (beneficiaries, not implementing entities) under the original IREP were also received by the due date and were acceptable. The overall FM risk for the additional financing is Moderate.

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25. Project proceeds will flow through US$ denominated Designated Account (DA) to be opened in the States Treasury. Project funds will flow from the Bank, either via a single DA, which will be replenished on the basis of full documentation, SOEs, or by using the direct payment method. Details will be provided in the Disbursement Letter. The FM arrangements for AF would remain the same (except for funds flow arrangements under Component 2). The funds flow arrangements under Component 2 will be as follows: prior to disbursement, a beneficiary contribution account to be opened at the State Treasury and managed by the PIU and beneficiary contributions of US$210,000 equivalent collected under the MCC Program (as confirmed by the PIU) to be transferred to that account. The amount will represent the beneficiary share of Component 2 expenditures, equivalent to 5.0 percent of financing of works under the Component 2. The 76 percent will be financed from AF loan proceeds and the remaining part is the government contribution. The funds flow mechanism for other Components will remain the same as for the original Project. 26. The audit of Project, WSA, and WUA financial statements will be conducted by independent private auditors acceptable to the Bank, on terms of reference acceptable to the Bank. The annual audited project financial statements (separate for IREP and AF) and the entities’ annual financial statements will be submitted to the Bank within six months of the end of each fiscal year, and for the Project, also at Project closing. The audited financial statements will be posted on a website (facilitated by the PIU) within one month after audit reports are received from the auditor. In addition, following the Bank’s formal receipt of these financial statements from the recipient, the Bank will make them available to the public in accordance with the Bank Policy on Access to Information for Bank-financed operations. 27. Existing formats of project management-oriented IFRs will be used for AF monitoring and supervision, and a full set of IFRs (separate for IREP and AF) will be submitted to the Bank every quarter for the duration of the AF, no later than 45 days after the calendar quarter end. Environmental Safeguards 28. The AF is classified as environmental Category B, based on a desk review of information on proposed new activities and field work findings. No new construction will be financed; instead, the proposed AF will support rehabilitation of existing irrigation schemes by relining sections of main/ secondary, and on-farm canals while retaining their design capacities. The mission made field trips to several sites selected for AF intervention to verify that the nature and scope of planned physical works are the same as those undertaken under the original IREP; therefore the mission agreed that the AF triggers no additional safeguard policies. 29. OP 4.01 Environmental Assessment is triggered and AF environmental screening has been undertaken according to requirements, as mentioned above. Similar to IREP, the infrastructure selected for rehabilitation under the AF initially was planned under the Infrastructure Activity of the Irrigated Agriculture Project prepared with MCC funding. During the Project concept stage, the Borrower carried out an Environmental Impact Assessment (EIA); the Ministry of Nature Protection (MONP) of the Republic of Armenia (RA) carried out an expert review and approved the Project concept. The EIA complies with World Bank requirements for OP/BP 4.01. Also, the MCC financed development of site-specific Environmental Management Plans (EMPs) for individual irrigation schemes selected for rehabilitation under the AF, including main/ secondary, and on-farm infrastructure. Overall, the EMPs align with World Bank standards. In addition, the Task Team will carry out their detailed review and will recommend any minor changes that the Borrower may need to make to update the EMPs. They will then be re-disclosed and opened for the second round of comments from the

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potentially affected local communities (first community consultations held back in 2008) at least 30 days prior to the commencement of works at each individual project site. 30. Overall, anticipated negative impact of AF implementation on human health and the natural environmental is minor. The Project carries little risk of destroying important habitats, damaging forest stands, altering natural waterway hydrology, or affecting other ecosystems in any tangible and/or irreversible ways. Project activities will cause temporary and localized impacts typical of repairs to irrigation infrastructure, including construction waste, and silt and litter excavated from canals. All waste will be disposed in sites designated by local authorities. Deploying construction machinery carries typical risks of minor motor fuel and lubricant spillage, and generating noise, dust, and vibration. Using heavy vehicles to transport construction materials and waste may inconvenience local residents but the impacts can be easily mitigated by adhering to good construction standards. All canals were constructed decades ago, have been operated continuously since, and lie in a semi-arid zone with relatively scarce vegetation and little wildlife so planned rehabilitation works are unlikely to disrupt local environmental balance. 31. OP 4.09 Pest Management is triggered; however, it is deemed unnecessary to develop a self-standing Pest Management Plan (PMP) since the threat is indirect and low-risk. Instead, the AF will finance public awareness campaigns on optimal and safe use of pesticides in the coverage area, maintaining a few well-targeted and successful activities initiated under IREP. Pest management is triggered because one important expected outcome of the AF is returning agricultural land to irrigation and it is anticipated that improved water supply to existing irrigated areas could intensify agriculture and alter cropping patterns toward higher-value crops. All of the above may entail slightly increased pesticide use. 32. The original IREP triggered OP/BP 7.50, Projects on International Waterways, though an exception was granted regarding communication to the riparians. For the AF, the World Bank mission carefully analyzed each of the fifteen sections of main/secondary canals proposed for rehabilitation under the AF for any potential effects on international water use. Findings are as follows: Arzni-Shamiram (sections 1 and 2), Arzni branch, low Hrazdan (sections 1 and 2) and Shah-Aru canals transport water abstracted from the Hrazdan River (some of which arrives in irrigation schemes after primary use by HPPs). Hrazdan River originates from Lake Sevan, located within Armenian territory. Dvin canal abstracts water from Azat reservoir fed by Azat River, which originates in the mountains of Armenia. Kazagh (right and left branches) canals are fed from the Kasagh River, which also originates in the mountains of Armenia and feeds the Aparan reservoir located within the country. Mkchyan pump station derivation canal takes water from the drainage collector. Residual amounts of the above water sources flow into the Araks River, which is an international waterway shared by Armenia and Turkey, and traversing parts of Iran and Azerbaijan. Shirak main and Shirak distributor canals and Talin right branch and Myasnikyan canals transport water abstracted from Akhurian River. A section of this river flows along Armenia’s border with Turkey and feeds the Akhurian reservoir shared by Armenia and Turkey, eventually flowing into Araks River. Nalband canal feeds from the Chichkhan River, a small tributary of the trans-boundary Debed River flowing to Georgia. 33. During the 1920s, Armenia and Turkey signed the first agreement on Araks water use; in 1973, a new agreement was signed between the Union of Soviet Socialistic Republics (USSR) and Turkey. Until 2003, Armenia had not been utilizing agreed-upon water volumes; then Government constructed a water intake structure under the Irrigation Development Project financed by the World Bank, which put Armenia closer to the established water volume ceiling. Armenia (USSR) and Iran have an agreement on joint utilization of border areas of the Araks River for irrigation, power generation, and domestic use. 31

34. The World Bank mission concluded that although the AF triggers OP/BP 7.50 Projects on International Waterways, special notification to riparian states is unnecessary because no new canals will be built, nor will the existing intake be enlarged. The AF of IREP will support only rehabilitation of existing canals by focusing on preventing wastage and loss of existing water allocations. Therefore, the Project will alter neither quantity nor quality of water downstream from the Project area, maintaining the status quo. Nevertheless, on August 11, 2011, the Task Team obtained an exception on communicating to riparians, using the same rationale as the original IREP. 35. The OP/BP 4.11, Physical Cultural Resources is not triggered because no known historical/cultural sites are located along infrastructure selected for AF rehabilitation. In case of chance finds during earth works, all civil works contractors are obligated to stop activity and immediately notify the State Agency for Protection of Historical and Cultural Monuments. 36. The PIU will conduct AF implementation; this Water Sector Development and Institutional Improvement PIU has multiple years experience with Bank-supported projects and is familiar with safeguard compliance requirements. The IREP implementation has demonstrated so far that if environmental monitoring is integral to the PIU’s close technical supervision of works, contractors generally follow EMPs or respond to outstanding issues flagged by supervisors. Site-specific EMPs will be finalized prior to commencement of civil works for canal sections to be rehabilitated under the AF; throughout AF implementation, the PIU must maintain arrangements for environmental supervision and reporting satisfactory to the Bank. Social Safeguards 37. No new social safeguards are triggered. OP/BP 4.12 Involuntary Resettlement remains triggered as a precautionary measure; a remote possibility exists that existing fruit trees could block contractor access to canal sections to be rehabilitated or their roots could threaten the integrity of the works, therefore some might have to be removed from the sanitary zone. However, IREP supervision missions confirmed that no trees or objects were removed from the sanitary zone during the rehabilitation works carried out in 2009 - 2011. Adequate measures to mitigate any possible land acquisition through compensation or reconstruction are included in the existing IREP Resettlement Policy Framework (RPF) which had been prepared by the Millennium Challenge Account Armenia (MCA) in consultation with stakeholders such as GOA Implementing Agencies and Non Governmental Organizations (NGOs), and subsequently updated, and disclosed by the IREP Project Implementation Unit. These measures include the provision of compensation equivalent to the economic value of the tree, taking into account the tree’s age, annual productivity and market price, and the price of a sapling. Any objects to be removed such as boundary walls or fences will be reconstructed by the contractor. Procedures are in place for contractors to inform the PIU of any need to remove any trees or structures. This will be done through standardized forms for each object or tree that have to be completed and submitted to the PIU environmental specialist along with the EMP. The data from these forms can then be incorporated into a Resettlement Action Plan (RAP), which will be shared with the World Bank task-team. Adequate provision has been made for grievance redress, with the Community Head acting as a grievance focal point at the local level, while villagers will also be made aware of the alternative of directly contacting the PIU environmental specialist with grievances. For problems that cannot be resolved on the spot by the Community Head or PIU Environmental Specialist, a grievance redress committee will be formed on a case-by-case basis, comprising representatives of local NGOs, the PIU, the affected Community, and an independent expert. Overall it is anticipated that Project benefits - employment, income generation, and

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increased smallholder livelihoods will far outweigh potential social risks associated with land acquisition.

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ANNEX 6. ECONOMIC AND FINANCIAL ANALYSES ARMENIA: Additional Financing of Irrigation Rehabilitation Emergency Project

Introduction 1. The Additional Financing (AF) of the Irrigation Rehabilitation Emergency Project (IREP) aims at improving water service delivery and water management on about 56,300 ha of arable land through: (i) rehabilitation of primary and secondary canals serving around 52,000 ha; (ii) rehabilitation of tertiary canals serving over 4,300 ha; and (iii) strengthening water management institutions. 2. The investment in irrigation infrastructure is expected to generate multiple benefits including quantifiable benefits: (i) incremental production increases from agricultural land returned to irrigation; (ii) moderate yield increases on land adjacent to irrigated lands; (iii) transformed cropping patterns toward higher-value crops; and (iii) pump station electricity savings during gradual return of irrigable land to production. Methodology 3. The economic and financial analyses examine Project viability based on detailed analysis of short-listed schemes under Components 1 and 2, for valley, pre-mountain, and mountain agricultural zones. Field-level data on crop production cost, cropping patterns, cropping intensity, and existing farm management practices are collected from multiple sources, including survey data from randomly selected rehabilitated WUAs; the IREP PIU monitoring and evaluation database; Ministry of Agriculture data; and Project preparation team findings. 4. Incremental benefits are estimated by comparing ‘without-Project’ and ‘with-Project’ gross margins per hectare of a representative selection of typical irrigated crops for the Project area. Individual analysis was carried out for each (i) main/secondary canal; (ii) tertiary canal; and (iii) Project Component. The overall Project impact is calculated by aggregating benefits to each Component. The Project benefits are assessed for 25 years, which corresponds to the potential technical life span of rehabilitated irrigation schemes if adequately operated and maintained, at 2011 financial prices, using opportunity cost of capital at 12 percent. No residual value is assumed for irrigation infrastructure at the end of Project period. 5. Financial prices of locally traded outputs and inputs are converted into economic prices by deducting direct agricultural subsidies and taxes. Economic prices for imported agricultural inputs and outputs are calculated at their border parity prices. The financial cost of unskilled labor is converted into economic cost using a shadow wage rate conversion factor of 0.80. 6. Sensitivity analysis is conducted to test the robustness of economic and financial returns of Project investments for four risks variables: (i) a 20 percent increase in Project cost; (ii) a 20 percent decline in projected benefits; (iii) combined 20 percent increase in Project cost and 20 percent decline in anticipated benefits; and (iv) a two-year delay in realizing benefits. Key Assumptions 7. Project Area. The Project will directly benefit people who earn their livelihoods from around 56,300 hectares, of which 52,000 hectares of Project lands are served by main/secondary canals and 4,300 hectares by tertiary canals. Some 49,800 hectares of Project lands are now irrigated but water availability is unreliable and water volume is insufficient. The remaining 6,500 hectares within the command area, which are rainfed, are out of agricultural production but expected to return to agricultural production once irrigation water supply is restored.

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8. Project Beneficiaries. The Project is expected to provide direct benefits to about 88,750 water users. The average landholding size in the Project area is 0.6 ha. Agriculture is the sole source of livelihood for almost 85 percent of Project beneficiaries; the other 15 percent rely on agriculture, seasonal male outmigration, and other off-farm employment. 9. Project Benefits. The main quantifiable Project benefits will derive from (i) incremental yields generated by agricultural lands that will return to production after irrigation water supply is restored; (ii) a five percent yield increase for crops grown on land adjacent to irrigation canals, assumed to be 20 percent of currently irrigated areas; (iii) transforming cropping patterns towards higher-value crops on land described in (i) and (ii); and (iv) pump station electricity savings during gradual return of irrigable lands to production. For main/secondary canals, the analysis assumes that only 80 percent of incremental lands will be operated annually. One hundred percent of incremental lands served by tertiary canals are assumed to return to production if the total area is around 70 hectares. This assumption is based on a projection that WUAs will be able to manage and operate available water for small land areas without additional skills, time, and financial resources. 10. Estimated incremental benefits are considered to be relatively conservative. The analysis excludes several possible benefits in the ‘with-Project’ scenario to simplify analysis and avoid overestimating benefits. Excluded quantifiable benefits include the following: (i) avoiding further decline in irrigated areas in the ‘without-Project’ scenario; (ii) potential yield increases and improved cropping patterns on agricultural lands located in central land areas; (iii) increased potential for non farm income from employment during canal rehabilitation works. 11. Furthermore, several non quantified Project benefits are expected: (i) reduced flooding among settlements and household plots that now have major drainage problems; (ii) fewer disputes over water allocation; (iii) environmental benefits, including decreased agrochemical pollution and soil erosion; and (iv) multiplier effects in upstream and downstream sectors. 12. Scope and Timing of Benefits. It is assumed that farmers with land in the tertiary section will start reaping benefits from increased yields and improved cropping patterns in the second season after canal rehabilitation. Also, it is expected that: (i) benefits will accumulate gradually from incremental irrigated lands served by main/ secondary canals, over five years starting from the second season after scheme rehabilitation; (ii) benefits to incremental lands served by tertiary canals, on land areas less than 70 hectares, will begin to accumulate in the first post- rehabilitation season; and (iii) full Project maturity will be reached in year seven and/or eight. 13. Cropping Patterns and Yields. The ‘without Project’ cropping patterns are as follows: (i) the valley zone is dominated by wheat (21 percent), potatoes (20 percent), orchards (14 percent), vegetables/gourds (15 percent), and vineyards occupy around 14 percent of total agricultural lands; (ii) in the pre-mountain zone, orchards (29 percent) and alfalfa (20 percent); (iii) in the mountain zone, potatoes (50 percent), wheat (20 percent), vegetables/gourds (17 percent), alfalfa (11 percent), and orchards (2.0 percent). In the ‘with Project’ scenario, in all three agricultural zones, improved water availability on existing irrigated lands and restored water supply to now- unproductive lands is expected to increase land area devoted to vegetables, orchards, and grapes, at the expense of areas now used for production of wheat and alfalfa.

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Table 1. Cropping Patterns by Agricultural Zones (%)

Valley Pre-mountain Mountain Crop No No No Project Project Project Project Project Project Wheat 20.7 10.2 13.9 7.2 33.9 19.7 Vegetables, and gourds 15.0 18.7 14.0 16.2 17.0 17.3 Alfalfa 13.1 11.0 20.4 17.7 13.5 11.0 Potato 19.9 22.3 17.1 19.6 34.2 49.9 Orchards 17.7 21.1 26.2 28.6 1.4 2.1 Grape 13.6 16.7 8.4 10.7 0.0 0.0

14. Current yields for all crops are summarized in Table 2. Estimated yields for irrigated wheat in the valley zones are 3.3 t/ha; pre-mountain, 3.0 t/ha; and mountain, 2.8 t/ha. Average yields for tomatoes are 18.0 t/ha; cabbages 26.1 t/ha; and potatoes, 19.7 t/ha. Estimated yields for apricots are 3.5 t/ha; apples, 6.4 t/ha; and grapes, 5.9 t/ha. These yields are expected to rise by five percent after improved availability of irrigation water in tertiary areas of now-irrigated lands and restored irrigation water to incremental agricultural land. Table 2. Yields by Agricultural Zones (kg/ha)

Valley Pre-mountain Mountain Crop No No No Project Project Project Project Project Project Wheat 3,325 3,500 3,040 3,200 2,850 3,000 Tomato 36,100 38,000 20,853 21,950 19,000 20,000 Cabbage 38,000 40,000 33,250 35,000 33,250 35,000 Alfalalfa 13,300 14,000 11,400 12,000 9,500 10,000 Potato 28,500 30,000 26,600 28,000 23,750 25,000 Apricot 4,750 5,000 4,275 4,500 5,130 5,400 Apple 9,500 10,000 8,550 9,000 7,600 8,000 Grape 11,780 12,400 11,780 12,400 - - 15. Project Costs. Estimated Project financial base cost in 2011 prices is US$21.6 million. Project Component costs are distributed in the following shares: Component 1: Rehabilitate identified stretches of canals in selected irrigation schemes (73.8 percent); Component 2: Rehabilitate tertiary irrigation network communities (18.8 percent); and Project Management and institutional activities (7.4 percent). Component 2 cost excludes the 15 percent water users’ financial contribution, already collected under the MCC Program. Estimated Project economic cost is the financial cost minus price contingencies and all taxes and duties.

Financial Analysis 16. Farm level analysis. Project financial impact on farm households varies by type of canal, costs of rehabilitation works, scope of expected benefits, and farm location. Under Component 1, the highest incremental gross margin at US$1,207/ha is expected for valley-zone farmers; pre- mountain and mountain–zone farmers will gain incremental gross margins at US$635 per hectare. Under Component 2, valley-zone farmers are expected to receive the highest gross margin at US$2,168/ha. Lowest returns are expected for mountain-zone farmers at US$1,227/ha. Estimated average incremental gross margin to Project farmers served by main/secondary and tertiary canals is US$800/ha. 36

Table 3. Financial Gross Margins Gross Margin, US$/ha Farm Models No Project Incremental Project Component 1: Rehabilitation of primary and secondary canals Valley 873 2,080 1,207 Pre-mountain 903 1,536 634 Mountain 576 1,211 635 Component 2: Rehabilitation of tertiary canals Valley (40) 2,128 2,168 Pre-mountain 285 1,560 1,275 Mountain 313 1,540 1,227 Project average 669 1,469 800

17. Project level analysis. Estimated Project-generated annual incremental gross margin is US$14.5 million, or about US$800/ha. Estimated financial rate of return for Component 1 is 22.6 and Component 2 is 20.1 percent. Overall Project financial return is 22.1 percent with FNPV of US$33.7 million. Table 4. Summary of Financial Results FNPV FRR (%) Description (US$ '000) Component 1: Rehabilitation of primary and secondary canals 22.6 28,237 Component 2: Rehabilitation of tertiary canals 20.1 5,461 Overall Project 22.1 33,698 Incremental gross margin (US$000) 14,473 Incremental gross margin per hectare (US$) 800

Economic Analysis

18. Results. Under Component 1, economic rates of return vary from 17.1 to 53.5 percent. The highest economic return is expected for the Myasnikyan "Mayr Aru" canal at an ERR of 53.5 percent and the ENPV of US$3.9 million. Lowest estimated returns are for Nalband canal because rehabilitation costs are higher than average at US$695/ha. Expected returns to the canal are an ERR of 17.1 percent and an ENPV of 1.7 million. Overall estimated economic returns to Component 1 are an ERR of 27.2 percent and an ENPV of US$31.3 million. Details of scheme economic results are in Table 5. Table 5. Scheme-wise Economic Results for Component 1 ENPV ERR Schemes Zone (US$ (%) '000) Arzni-Shamiram, stage 1 valley 39.9 3,485.5 Arzni-Shamiram, stage 2 valley 40.2 2,815.0 Diversion canal of Mkchyan pump station valley 38.7 3,453.9 Dvin canal valley 46.3 5,490.6 Shirak system, distributor 26 valley 19.6 654.0 Lower Hrazdan, stage 1 pre-mountain 21.4 2,140.0 Lower Hrazdan, stage 2 pre-mountain 23.9 2,415.9 "Shah Aru" canal pre-mountain 24.0 933.0 Nalband canal pre-mountain 17.1 1,726.0 37

Talin canal, right branch pre-mountain 25.4 1,055.0 Arzni branch pre-mountain 22.9 825.0 Kassakh canal, left branch pre-mountain 19.2 388.0 Kassakh canal, right branch mountain 40.9 1,692.0 Shirak main canal mountain 22.9 914.0 Myasnikyan "Mayr Aru" canal mountain 53.5 3,893.0 Overall Component 1 27.2 31,298.0

19. Overall, Component 2 is expected to generate economic returns at an ERR of 24.6 percent and an ENPV of US$6.2 million. The Noravan canal investment will generate the highest return with an ERR of 47.6 percent and an ENPV of US$0.4 million. Lowest estimated return is for Upper Getashen canal, an ERR of 17.1 percent and the ENPV of 0.08 million (Table 6). Table 6. Scheme-wise Economic Results for Component 2 ENPV (US$ ERR (%) Schemes Zone '000) Arevadasht valley 35.0 353.0 Hatsik valley 42.0 907.0 Noravan valley 47.6 439.0 Agavnatun valley 32.8 1,085.0 Bagramyan pre-mountain 34.2 125.0 Myasnikyan pre-mountain 22.9 797.0 Dalarik pre-mountain 19.9 250.0 Qarakert pre-mountain 20.6 274.0 Bagaran pre-mountain 26.4 83.0 Vanand pre-mountain 27.5 854.0 Yervandashat pre-mountain 31.4 156.0 Lernagog pre-mountain 33.9 316.6 Jrashen mountain 28.2 207.0 Upper Getashen mountain 13.7 48.0 Martuni mountain 25.2 298.0 Dzoragyug mountain 16.9 85.0 Astgadzor mountain 14.9 53.0 Vagashen mountain 17.1 85.0 Megrashen mountain 21.3 94.0 Overall Component 2 24.6 6,231.0

20. Economic rate of return to the Project is robust at 26.7 percent and with an ENPV of US$37.5 million. Details of economic results by Components are in Table 7. Table 7. Summary Economic Results ENPV ERR ('000 (%) Description US$) Component 1: Rehabilitation of primary and secondary canals 27.2 31,298.0 Component 2: Rehabilitation of tertiary canals 24.6 6,231.0 Overall Project 26.7 37,529.0

21. Sensitivity Analysis. Project sensitivity is negligible to Project cost changes and delays to benefit accumulation. A 20 percent increase to Project cost drops baseline ERR to 24.1 percent. A two-year delay in benefit accumulation results in an ERR of 26.1 percent. The Project is moderately sensitive to benefit declines, and combined Project cost increases/benefit declines. A 20 decline in 38

benefits reduces the ERR to 17.2 percent; combined 20 percent benefit reduction/20 percent increases to Project cost drops the ERR to 15.2 percent. Details are in Table 8. Table 8. Sensitivity Analysis ERR ENPV Variables (%) (US$’000) Baseline results 26.7 37,529 a. Project costs increase by 20% 24.1 34,336 b. Benefit decline by 20%: 17.2 10,235 c. Combined (a) and (b) 15.2 7,042 d. Two-year delay in benefit accumulation 26.1 32,710

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