Document of THE WORLD BANK FOR OFFICIAL USE ONLY Report No. 22292 Public Disclosure Authorized PERFORMANCE AUDIT REPORT ARMENIA Public Disclosure Authorized INSTITUTION BUILDING LOAN (Loan 3585-AM) June 5, 2001 Public Disclosure Authorized OperationsEvaluation Department Public Disclosure Authorized 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 Currency Unit: Armenian Dram Average Exchange Rate (Armenian Dram to US$) 1993 9.11 1997 490.85 1994 288.65 1998 504.92 1995 405.91 1999 535.06 1996 414.04 2000 539.53 Abbreviations and Acronyms ASYCUDA UNDP Customs Software ECA Europe and Central Asia Regional Office ES Employment Service EU European Union GOA Government of Armenia IAS International Accounting Standards IBL Institution Building Loan IBRD International Bank for Reconstruction and Development ICR Implementation Completion Report IMF International Monetary Fund OED Operations Evaluation Department PAR Performance Audit Report SAC Structural Adjustment Credit SATAC Structural Adjustment Technical Assistance Credit TA Technical Assistance UNCTAD United Nations Conference on Trade and Development USAID United States Agency for International Development Fiscal Year January 1 - December 31 Director-General, Operations Evaluation : Mr. Robert Picciotto Director, Operations Evaluation Department Mr. Gregory K. Ingram Manager, Country Evaluation & Regional Relations : Mr. Ruben Lamdany Task Manager Mr. Elliott Hurwitz Peer Reviewer Mr. Jorge Garcia-Garcia FOR OFFICIAL USE ONLY The World Bank Washington, D.C. 20433 U.S.A. Office of the Director-General June 5 2001 Operations Evaluation ' MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Armenia-Institution Building Loan (IBL; Loan 3585-AM, US$10.74 million) Attached is the Performance Audit Report (PAR) for the above loan to Armenia, made from 1993 to 1997. The country's first loan was initiated in adverse circumstances-due to the economic transition and the war with Azerbaijan-and was the only one on 1BRD terms (all subsequent lending has been on IDA terms). The country had embarked on an extremely ambitious reform program, and requested the Bank's assistance. The project objectives were to provide technical assistance to the government to strengthen the institutional basis for economic reform in four areas: (a) economic management; (b) resource mobilization; (c) enterprise reform (which consisted mainly of privatization support); and (d) financial sector reform. The project was well targeted, focusing on development of government capacity in critical areas including macroeconomic policy; debt management; tax and customs administration; and privatization. The objectives were for the most part achieved because the government was substantially committed to reform and made considerable progress in a number of key areas-although the pace of advancement was variable. The government developed its own institutional capacity for independent macroeconomic policy formulation, and competency was extended to a much wider group of officials. Macroeconomic performance steadily improved during the TBL, and it seems plausible that the advice and training provided were instrumental in the improved performance. Tax and customs administration were modernized, and revenue increased substantially, although the IBL was probably not responsible for the short-term surge in revenue. After a slow start, voucher privatization progressed rapidly, with the exception that no progress was made (during the term of the JBL) on privatization of large enterprises. The IBL provided a useful foundation for later reforms, which accelerated after the May 1994 ceasefire. The PAR rates the outcome of the project as moderately satisfactory, sustainability as likely, and institutional development as substantial. These ratings are higher for institutional development than the OED Evaluation Summary, but lower than that of the ICR, which rated outcome as satisfactory. The PAR finds that while the EBL contributed to the speed and quality of the country's reform progress, as a project that was a complement to the policy dialogue, it did not adequately address several areas which later emerged as key constraints to the country's development. Three main lessons emerge from the project. First, given the high level of borrower commitment, this TA loan was an effective way for the Bank to engage and stimulate reform. Second, in a highly uncertain situation-the Bank in essence knew little about Armenia when the IBL was designed-flexibility is essential for a TA project. And third, an inexperienced borrower requires additional supervision. This was exemplified by the poor consultant performance and the instance in which government employees apparently worked under an IBL subcontract. Robert Picciotto by Gregory K. Ingram 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. Contents Preface....................................................... Ratings and Responsibilities ....................... ........... inm.... 1. Background ...................................................... 1 2. Objectives and Design of the Loan ....................................2 Background and Description of Objectives ................... ....... 2 Relevance of Objectives .............................. ......... 4 Assessment of Instrument .................. ......... 55........ 3. Implementation Experience ..................................... 5 Economic Management ............. ............ 66........... Resource Mobilization..........................................7 Enterprise Reform ................................... ........ 7 Financial Sector Reform ........................................... 7 4. Outcome ............................................ ..... 8 5. Institutional Development Impact. ............................... 9 6. Sustainability......... ....... ............................ 10 7. Bank Performance .................................. 10 8. Borrower Performance............................... ........ 11 9. Lessons Learned...................1........................I Annexes A. Individuals Interviewed ................................. ..... 13 B. Basic Data Sheet ........................................... 15 The report was prepared by Elliott Hurwitz (Consultant). Mr. Jorge Garcia-Garcia was the peer reviewer. Norma Namisato provided administrative support. Preface This is a Performance Audit Report (PAR) on the Institution Building Loan (IBL), in the amount of US$12.0 million. Cofinanciers included USAID (US$3.4 million), and the EU (US$1.1 million), with total planned financing of US$16.5 million. Of the IBRD contribution of US$12 million, US$10.74 was disbursed and US$1.26 million was cancelled. Actual project cost was US$15.3 million. The loan was approved on March 30, 1993, effective on June 15, 1993, and closed on November 30, 1997, one year later than the original closing date. The PAR is based on the Implementation Completion Report (ICR), the President's Report, the legal documents, project files, related economic and sector work, and discussions with Bank and Fund staff, and government documents. An OED mission visited Armenia in March 2001, to discuss the project and several other projects with present and former officials, other donors, and World Bank Field Staff. Their cooperation and assistance in preparing this report is gratefully acknowledged. The draft PAR was sent to the Borrower and the cofinancing agencies for comments but none were received. 111 Ratings and Responsibilities Ratings ICR OED ES OED PAR Outcome Satisfactory Marginally Moderately Satisfactory Satisfactory Sustainability Likely Likely Likely Institutional Development Partial Modest Substantial Bank Performance Satisfactory Satisfactory Satisfactory Borrower Performance Satisfactory Satisfactory Satisfactory Responsibilities Staff Appraisal Completion Task Manager Chris Hall/Onno Ruhl Onno Ruhl/Cyril Muller Division Chief Wafik Grais Wafik Grais Country Director Basil Kavalsky Judy O'Connor 1 1 Background 1.1 Extremely adverse circumstances. It is difficult to overstate the calamity that faced Armenia in 1991-93. The country, land-locked and with few natural resources, was beginning the transition from a centrally-planned to a market economy, with very limited institutional capacity. As a result of the conflict raging with Azerbaijan over Nagorno Karabakh (NK), an ethnic Armenian enclave inside Azerbaijan, refugees from Azerbaijan were streaming into Armenia. At the same time, Azerbaijan imposed a trade embargo, shutting off most supplies of energy and other critical goods (the main natural gas pipelines which supplied Armenia through Azerbaijan were closed). The border with Turkey, which was sympathetic to Azerbaijan, was closed, and the main routes into the country to the north through Georgia were subject to frequent interdiction by bandits and separatists fighting the Georgian Government. Finally, the earthquake of December, 1988 in which more than 30,000 people were killed, had destroyed a major portion of the country's productive capacity and left over 300,000 people (ten percent of the country's population) housed in primitive, unheated sheds in the mountainous north. As a