Completion Report

Project Number: 46220-006 Loan Number: 3453 August 2018

Armenia: Infrastructure Sustainability Support Program (Phase 2) This document is being disclosed to the public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS

Currency unit – dram (AMD)

At Appraisal At Program Completion (20 June 2016) (31 December 2017)

AMD1.00 = $0.002083 $0.002076 $1.00 = AMD480.00 AMD481.76

ABBREVIATIONS

ADB – Asian Development Bank ARD – Armenia Roads Directorate GDP – gross domestic product IRI – International Roughness Index ISSP – Infrastructure Sustainability Support Program KPI MOEINR MOF

– – –

key performance indicator Ministry of Energy, Industry and Natural Resources Ministry of Finance

MOTCIT – Ministry of Transport, Communication and Information Technologies

MTA – Ministry of Territorial Administration MTEF – medium-term expenditure framework NRW – non-revenue water PSRC – Public Sector Regulatory Commission RAM – road asset management SCWE – State Committee for Water Economy TA – technical assistance

NOTES

(i) The fiscal year (FY) of the government and its agencies ends on 31 December.

(ii) In this report, "$" refers to United States dollars.

Vice-President Wencai Zhang, Operations 1 Director General Werner E. Liepach, Central and West Asia Department (CWRD) Director Tariq H. Niazi, Public Management, Financial Sector, and Trade

Division, CWRD Team leader Peter Marro, Principal Financial Sector Specialist, CWRD Team members Grigor Gyurjyan, Economics Officer, CWRD

Llona Isabel Marty, Associate Project Analyst, CWRD Lyle Raquipiso, Senior Economics Officer, CWRD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i I. PROGRAM DESCRIPTION 1

II. DESIGN AND IMPLEMENTATION 1 A. Program Design and Formulation 1 B. Program Outputs 2 C. Program Costs and Financing 4 D. Disbursements 4 E. Program Schedule 4 F. Implementation Arrangements 4 G. Technical Assistance 4 H. Monitoring and Reporting 5

III. EVALUATION OF PERFORMANCE 5 A. Relevance 5 B. Effectiveness 6 C. Efficiency 7 D. Sustainability 7 E. Development Impact 8 F. Performance of the Borrower and the Executing Agency 8 G. Performance of the Asian Development Bank 8 H. Overall Assessment 9

IV. ISSUES, LESSONS, AND RECOMMENDATIONS 9 A. Issues and Lessons 9 B. Recommendations 10

APPENDIXES 1. Design and Monitoring Framework 11

2. Policy Matrix 14

3. Status of Compliance with Loan Covenants 21

BASIC DATA

A. Loan Identification 1. Country 2. Loan number 3. Program title 4. Borrower 5. Executing agency 6. Amount of loan 7. Program completion report number

Armenia 3453 Infrastructure Sustainability Support Program, Phase 2 Armenia Ministry of Finance $90,000,000 1694

B. Loan Data 1. Fact-Finding – Date Started – Date Completed 2. Loan Negotiations – Date Started – Date Completed 3. Date of Board approval 4. Date of loan agreement 5. Date of loan effectiveness – In loan agreement – Actual – Number of extensions

6. Project completion date – Appraisal – Actual 7. Loan closing date – In loan agreement – Actual – Number of extensions 8. Financial closing date – Actual 9. Terms of loan – Interest rate – Maturity (number of years) – Grace period (number of years) 10. Terms of relending (if any)

20 June 2016 2 July 2016 07 October 2016 07 October 2016 10 November 2016 11 November 2016 09 February 2017 27 December 2016 0 Not applicable Not applicable 31 December 2017 31 December 2017 0 31 December 2017 LIBOR plus 0.60% less 0.10% rebate 15 years 3 years Not applicable

ii

11. Disbursements a. Dates Initial Disbursement

27 December 2016

Final Disbursement 8 December 2017

Time Interval 11.5 months

Effective Date

27 December 2016

Original Closing Date

31 December 2017

Time Interval 12 months

b. Amount ($‘000)

Category or Subloan Original Allocation Amount Disbursed First Tranche 60,000 60,000 Second Tranche 30,000 30,000 Total 90,000 90,000

C. Program Data

1. Program cost ($‘000) Cost Appraisal Estimate Actual Foreign exchange cost 90,000 90,000 Local currency cost 0 0 Total 90,000 90,000

2. Financing plan ($‘000) Cost Appraisal Estimate Actual Implementation costs Borrower financed 0 0 ADB financed 90,000 90,000 Other external financing 0 0 Total 90,000 90,000 ADB = Asian Development Bank. 3. Cost breakdown by program component ($‘000) Component Appraisal Estimate Actual First Tranche 60,000 60,000 Second Tranche 30,000 30,000 Total 90,000 90,000

4. Program schedule ($‘000) Item Appraisal Estimate Actual First Tranchea 60,000 60,000 Second Trancheb 30,000 30,000

a Released on 27 December 2016. b Released on 8 December 2017.

5. Program performance report ratings: Not applicable

iii

D. Data on Asian Development Bank Missions Name of Mission

Date

No. of

Persons

No. of Person-

Days

Specialization of Members

Reconnaissance 1 26–31 July 2015 1 6 a, b Reconnaissance 2 19–23 October 2015 2 10 a, c Reconnaissance 3 30 November–11 December 2015 4 4 a, b, c, d Reconnaissance 4 8–19 February 2016 4 48 a, b, c, e Reconnaissance 5 28 April–6 May 2017 4 35 a, b, c, f, g, h Fact-finding 20 June–2 July 2016 3 39 a, b, c, e Inception Mission 14–16 December 2016 1 3 a Review Mission 4–10 May 2017 1 7 b Review Mission 4–10 September 2017 1 7 a PCR Mission 9–13 July 2018 2 10 b, i a = economist (public finance), b = economics officer, c = senior private sector development officer, d = associate project officer, e = economist, f = senior energy specialist, g = senior PPP specialist, h = senior portfolio officer; i = principal financial sector specialist

I. PROGRAM DESCRIPTION 1. In November 2016, the Asian Development Bank (ADB) approved a loan to Armenia for the phase 2 of the Infrastructure Sustainability Support Program (ISSP2).1 ISSP2 supported improved infrastructure operations and sustainability through reforms in the road, water and power sectors. Specifically, the program focused on the introduction of program budgeting; improved regulation; increased budget and other allocations for maintenance; improved contracting, maintenance practices, and institutions for infrastructure service delivery; and increased power sector revenue generation. The program was the continuation of the first Infrastructure Sustainability Support Program (ISSP1). 2. The expected impact was improved service delivery in the three targeted sectors. The expected outcome was improved management and sustainability of the road, water supply, and power sectors. The expected outputs included (i) improved public financial management and utility regulation, (ii) increased financing and improved operations in the road sector, (iii) increased financing and improved operations in the water sector, and (iv) increased power sector competitiveness and revenue generation. 3. The program comprised a regular ordinary capital resources loan of $90 million from ADB’s ordinary capital resources and a $500,000 technical assistance grant to support the implementation of the program. The loan was disbursed in two tranches—$60 million for tranche 1, following completion of 16 tranche 1 policy actions, and $30 million for tranche 2 following completion of 18 tranche 2 policy actions. This report presents the overall results of program implementation. The design and monitoring framework is in Appendix 1.

II. DESIGN AND IMPLEMENTATION A. Program Design and Formulation 4. At the time of project conceptualization, the economy of Armenia was vulnerable to external shocks because of its narrow export base and dependence on remittance inflows, despite annual average real gross domestic product (GDP) growth of 4.7% from 2010 to 2014. The economic slowdown in the Russian Federation combined with reduced export demand from Armenia’s main trading partners caused GDP growth to slow from 3.5% in 2014 to 3.0% in 2015, with an expectation it would drop to 2.2% in 2016. Declining remittance inflows triggered a 30% depreciation of the Armenian dram in November 2014. Lower import tax revenues and rising public expenditures resulted in declining fiscal revenues, causing a surging budget deficit that reached 4.8% of GDP in 2015, from 2.1% in 2014. 5. The program was aligned with the government’s development agenda on sustainable infrastructure provision under Armenia’s development strategy for 2014–2025.2 The development strategy planned to enhance the reliability and efficiency of water supply operations and improve the quality of water supply and drainage services. It also aimed to increase resources for road maintenance and to make better use of resources. The program is also aligned with the government’s Medium-Term Expenditure Framework (MTEF) 2018–20203 and with ADB’s Water Operational Plan 2011–2020; Sustainable Transport Initiative Operational Plan; Energy Policy;

1 ADB. 2016. Report and Recommendations of the President to the Board of Directors: Proposed Policy-Based Loan

and Technical Assistance Grant for the Infrastructure Sustainability Support Program (Phase 2). Manila. 2 Government of Armenia, Ministry of Finance. 2014. Armenia Development Strategy for 2014–2025. Yerevan. 3 Government of Armenia, Ministry of Finance. 2016. Medium-Term Expenditure Framework 2018–2020. Yerevan.

2

and development priorities in ADB’s country partnership strategy, 2014–2018 and country operations business plan for Armenia, for 2016–2018.4 6. ISSP2 continued the progress achieved under ISSP1 in 2012, which focused on institutional reforms to align government agencies in the water and road sectors with their responsibilities and avoid duplication of effort. In addition to continuing the reforms initiated under ISSP1 in these sectors, based on a request by the government, ADB included support for ongoing reforms in the power sector in ISSP2.

B. Program Outputs 7. The program delivered four outputs, which were all fully implemented by the end of the program. These were: 8. Output 1: Improved public financial management and utility regulation. This output supported the commitment of the government to fully introduce program budgeting in Armenia by 2019. This required significant reforms in public finance management, a major portion being the development and adoption of methodologies and guidelines for line agencies. A comprehensive set of methodologies and guidelines were developed and approved by the Ministry of Finance (MOF) and circulated among line agencies. The government has started using these guidelines in 2018 as a basis for budget proposals and accompanying documents developed by line agencies. 9. Strengthening the capacity of line agencies was also an essential part of the reforms supported by ADB. The ADB program modified existing budget structures, introduced new key performance indicators (KPIs) and developed strategies and costing guidelines for the Ministry of Transport, Communication and Information Technologies (MOTCIT); the Ministry of Energy, Industry and Natural Resources (MOEINR); and the State Committee for Water Economy (SCWE) to align the agencies’ activities with recently approved program budgeting guidelines. 10. The presence of a single operator in the water sector and changing market rules in the energy sector required that Armenia have a strong, professional and independent regulator. In response to public criticism following an increase in electricity tariffs, ISSP2 supported an evaluation of the operations of the Public Services Regulatory Commission (PSRC) and the implementation of the government action plan to improve PSRC’s independence, transparency, and accountability. Following public consultation, PSRC approved new operational rules and model contracts for drinking water supply and sanitation services. New legal amendments allowed PSRC to have an increased budget allocation, which enabled PSRC to attract professional staff on more competitive terms. 11. Output 2: Increased financing and improved operations in the road sector. This output aimed to increase financing, and improve planning, transparency and accountability in the road transport sector. Under ISSP2, the government introduced a 20% value-added tax on diesel and increased excise taxes on diesel, petrol, and compressed natural gas. The government also increased the road maintenance budget for 2017–2019 by an annual average of 22%. ISSP2 supported the government in introducing periodic maintenance contracts, price indexing and longer contracts (up to 7 years). These changes provided more certainty and flexibility for

4 ADB. 2011. Water Operational Plan, 2011–2020. Manila; ADB. 2010. Energy Policy. Manila; ADB. 2009. Sustainable

Transport Initiative Operational Plan. Manila; ADB. 2015. Country Operations Business Plan: Armenia, 2016–2018. Manila. and ADB. 2014. Country Partnership Strategy: Armenia, 2014–2018. Manila.

3

contractors, while introducing some performance elements to road maintenance contracts. The government introduced the concept of “middle” (or midterm) repair as a budgetary item in Armenia’s road classification framework, in line with internationally accepted practices, which lengthens the economic life of roads. Similarly, the concept of “bad” roads was introduced in the road maintenance program to protect road infrastructure from severe, rapid damage and ensure uninterrupted safe traffic movement. 12. ISSP2 also supported the implementation of road surveys and the installation of traffic count stations on all major highways to increase the amount and accuracy of data for analysis of road conditions, and establish a sound traffic management system. The increased data also supported decision-making regarding road investment and maintenance. 13. Output 3: Increased financing and improved operations in the water sector. ISSP2 sought to address the significant underinvestment in Armenia’s water infrastructure since its independence in 1991, which has led to substantial non-revenue water (NRW). ISSP2 supported the preparation and implementation of an action plan to reduce NRW. To improve the supply of water throughout the country, the government signed a lease contract with a single operator. ADB consultants provided inputs to determine annual maintenance expenditure levels, which were included in the contract. The contract also included specific performance provisions regarding duration of water supply, NRW, and water quality, with a technical auditor engaged to ensure that the expected outcomes are achieved. KPMG was appointed as the financial auditor to ensure accurate and transparent financial reporting by the operator. 14. Under ISSP2, SCWE created a new investment planning department in order to adequately prioritize investments in this sector. The department has its full complement of 12 professional staff, as required by ADB, and guidelines have been developed for its operations. SCWE also reviewed the implementation of the water supply and sanitation sector strategy and financing plan, and reported the results to the government. 15. To prepare for further development of Armenia’s water sector, a new section on sanitation has been added to the water code, with provisions that (i) define wastewater, including delineating between industrial and residential wastewater; (ii) define wastewater treatment, including delineating between wastewater removal, pre-treatment and treatment; (iii) define the monitoring of wastewater responsibilities; and (iv) address licensing, wastewater permitting, and penalties. These legislative changes will improve wastewater management. 16. Output 4: Increased level of power sector competitiveness and revenue generation. ISSP2 supported government efforts to move away from the previous monopsony power purchase model, which has led to suboptimal energy use and pricing. ISSP2 reforms include allowing (i) competition between power generators, (ii) large customers to purchase power directly from generating companies, and (iii) cross-border and interstate trade of surplus seasonal power. These reforms make rehabilitation of aging assets and investments in new assets attractive to investors, thereby improving power sector sustainability. Among the policy actions undertaken by the government to achieve these goals were (i) approval of a grid code detailing technical regulations for the transfer of power between generators and purchasers, (ii) approval of market rules detailing economic regulations for the sale of power to purchasers, and (iii) approval of some preliminary amendments to the current Energy Law (2001) to enable the new market structure to come into force. The government also approved a 3-year implementation plan to implement the new competitive power market, which includes a more comprehensive overhaul of the Energy Law (2001).

4

17. In addition, the government undertook a comprehensive analysis of contracts in the water and power sectors to better understand its contingent liabilities, results of which were published as a separate section in the 2018–2020 MTEF. Through this process the government also developed a framework from which to assess future public–private partnership contracts. Further, corporate governance of the five wholly government-owned power corporations was improved, with the appointment of two independent directors on each board, and one woman director on each board. C. Program Costs and Financing 18. There were no unforeseen program costs or cost overruns preventing the program from being implemented in a timely manner. The size of the loan was appropriate based on the original justification of (i) the nature and sequence of the required reforms, (ii) the cost of implementing these reforms, (iii) government resources for development expenditure and financing needs, and (iv) the time required to undertake the reforms. The development expenditure needs were calculated on the basis of items (i)–(iv), and the program financed a portion of this expenditure. D. Disbursements 19. The program loan was disbursed in two tranches after loan effectiveness conditions and policy actions were met in line with ADB’s disbursement procedures for policy-based loans. The loan became effective on 27 December 2016, with the first tranche of $60 million disbursed on the same date. The second tranche of $30 million was disbursed on 8 December 2017.5 E. Program Schedule 20. The program was implemented according to the initially assigned implementation schedule. No extensions were required. Policy actions have been completed on schedule with no major delays. F. Implementation Arrangements 21. The MOF was the executing agency and responsible for overseeing, coordinating, and reporting on the program’s implementation. The program had five implementing agencies: MOF, MOEINR, MOTCIT, SCWE, and PSRC. Each implementing agency was responsible for meeting policy actions, while MOF coordinated their delivery. Implementation arrangements were adequate given the program’s size and context. No significant changes were made during implementation. G. Technical Assistance 22. Capacity development technical assistance (TA) was approved with the loan, and supported the government in implementing tranche 2 policy actions. The TA also provided training and advisory to MOF, MOTCIT, PSRC, MOEINR, and SCWE regarding:

(i) preparation of MOF guidelines providing detailed instructions that define programs and budget structures and update sectoral strategies and costing guidelines (policy action 1);

5 ADB. 2017. Progress Report on Tranche Release: Armenia: Infrastructure Sustainability Support Program, Phase 2

(Second Tranche). Manila.

5

(ii) preparation of guidelines for support to MOTCIT and SCWE to conduct performance audits for road and water projects (policy action 1);

(iii) a review of PSRC’s organizational structure and determination of the skills and experience required to meet its objectives (policy action 2);

(iv) review of the operations of MOTCIT’s Armenian Roads Directorate (ARD), and a proposal for and approval of a new structure (policy action 9);

(v) development of SCWE guidelines for the operation of a new investment planning and asset management department (policy action 11);

(vi) preparation of a gap analysis report for the technical design codes for water infrastructure projects (policy action 11); and

(vii) a study of contingent liabilities for the water and energy sectors (policy action 18). 23. The TA completion report prepared in March 2018 rated the technical assistance successful.6 H. Monitoring and Reporting

24. The loan agreement had 13 covenants. The covenants were relevant, and no covenant was modified, suspended, or waived. By the loan closing date, all covenants were complied with. The status of compliance with the loan covenants is in Appendix 3. 25. The program’s monitoring and reporting arrangements were complied with. ADB monitored program implementation through review missions and discussed progress with the executing and implementing agencies. The policy actions were monitored by MOF, which was responsible for ensuring the implementation of policy actions and following-up on progress.

III. EVALUATION OF PERFORMANCE A. Relevance 26. The program was highly relevant. The ADB program was a natural continuation of work that started with pilot programs in 2003 and culminated in the approval of ISSP1 in 2014 and ISSP2 in 2016 to address the substantial deterioration of the country’s road, water and power sectors, which resulted in poor service delivery. 27. During preparation of ISSP2 ADB played a critical role in convincing the government to introduce a value-added tax on diesel and increase other fuel excise taxes, which provided the fiscal resources for increased road and water maintenance expenditures. ADB also contributed to policy dialogue in power sector reforms; supported PSRC in establishing market rules for a power tariff structure and preparing a power grid code to enable regional power trading; improved ARD’s transparency in decision-making, capacity and operational efficiency, and ability to recruit and retain competent staff; 7 and supported the building of a new investment planning and asset

6 ADB. 2018. Technical Assistance Completion Report: Supporting Implementation of Phase 2 of the Infrastructure

Sustainability Support Program in Armenia. Manila. 7 The ARD is the national government agency responsible for maintaining highways and roads—particularly those

making up the country’s arterial road system, while MOTCIT is the main national government agency responsible for formulating transport programs, projects, and regulatory measures and planning transport systems. Given funding limitations, ARD does not fully carry out its road maintenance function. MOTCIT sets the fare structure of the public transport systems and the regulations ensuring fair competition, safety, and efficiency in those systems. Although the private sector operates public transport through the franchise system, MOTCIT defines the regulations when it issues the franchises.

6

management department in SCWE. These reforms also resulted from ADB’s ongoing dialogue on the design of ADB’s investment projects in these sectors, and supported increased efficiency and sustainability in these projects. 28. The program continued to be highly relevant during implementation period and was consistent with the Armenia Development Strategy, 2014–2025 (footnote 2); the Medium-Term Expenditure Framework, 2016–2019; and the Republic of Armenia Government Program.8 It was further aligned with ADB’s Midterm Review of Strategy 2020; Water Operational Plan, 2011–2020; Sustainable Transport Initiative Operational Plan; the Energy Policy; country partnership strategy, 2014–2018; and country operations business plan, 2016–2018 (footnote 3). 29. The program has led to increased financing for maintenance and better management of infrastructure assets in the road, water, and power sectors. Better maintenance reduces the need for rehabilitation. Economic benefits have been realized through government cost savings on major rehabilitation works, reduced government subsidies to the sectors, and increased tax revenue. Improved revenues and tightly managed expenditures allowed greater fiscal resources for high-priority needs. Road users have gained economic benefits from reduced transportation costs, and water and power consumers have benefitted from more reliable services. Strengthened regulation of these sectors, increased competition in the power sector, and reforms required to export power have had a broader positive impact on inclusive growth. While the design of the program was highly relevant to achieve the outcome, the government must continue improving its results-based management systems to ensure sustainability. B. Effectiveness

30. The program was effective, and its outcome and outputs were achieved. Through its outputs, the program supported improvements in public financial management capacity and utility regulations through implementation of program budgeting by line ministries. Under ISSP2, the government also improved PSRC’s independence, transparency, and accountability, and increased its financing to fulfill its mandate. In the road sector, the program mobilized additional financial resources and improved operations by introducing a value-added tax and an increase in excise taxes. MOTCIT improved the rehabilitation and maintenance of roads by strengthening of ARD’s transparency in decision-making, capacity and operational efficiency. This included better prioritization by introducing international roughness index calculations as part of cost–benefit analysis, broadening the types of maintenance work to be undertaken, using simplified performance-based contracts, and increasing the flexibility of road maintenance contracts in terms scope and time period. To improve critical information for prioritizing recurrent and capital expenditures for roads, the MOTCIT issued traffic count and evaluation guidelines, installed 6 traffic count stations (to date, with 24 in the process of being procured), and undertook a pavement condition survey. Similarly, ISSP2 assisted in increased financing and improved operations in the water sector. SCWE signed a 15-year lease contract in 2017 with Veolia Water CJSC to deliver piped drinking water across Armenia, which included an allocation for maintenance of $89 million for the concession period, to be funded from tariff revenues, thereby limiting fiscal contingent liabilities. The contract also included appropriate performance indicators for the daily availability of water, maintaining water quality, and reducing NRW (which was estimated to be as high as 75% at the beginning of the program, and has since declined to 70%). Sachsen Wasser, the auditor appointed by SCWE, began conducting annual audits in 2017 to ensure the concessionaire’s compliance with the terms of the contract; penalties can be imposed for non-

8 Government of Armenia. 2012. Medium-Term Expenditure Framework 2016–2019. Yerevan; and Government of

Armenia. 2012. Republic of Armenia Government Program. Yerevan.

7

compliance. To ensure proper management oversight of its assets, SCWE established an investment planning and asset management unit. Furthermore, PSRC prepared drinking water and wastewater rules and model contracts, which were approved in 2016. Finally, the government reviewed laws and regulations to improve sanitation services. ISSP2 also helped MOEINR to liberalize the power sector market to make the sector financially sustainable and more efficient by (i) developing market rules and structures that allow broader competition and opportunity for cross-border and interstate trade of surplus seasonal power; (ii) introducing a tariff for the single power distribution company that allows third parties to access the distribution network and import power, and enables direct contracting between power producers and large customers; and (iii) amending the Energy Law (2001) to allow greater competition and cross-border and interstate trading. Finally, to ensure sustainability of reforms through a stronger corporate governance structure the government appointed two independent directors to the boards of the five wholly state-owned power corporations, including one female director on each board. 31. The implementation status of the policy actions is presented in Appendix 2. All actions were fully met. 32. TA resources were used effectively. The program successfully supported the implementing agencies in meeting the targeted policy actions. C. Efficiency 33. The implementation of the program was highly efficient. No major changes were required in the scope of the program, all policy actions were completed, and the loan was fully disbursed and closed according to the original schedule. The efficiency was a result of (i) thorough program preparation starting, with the project preparatory TA and leading to an appropriate design; (ii) effective policy dialogue with the executing agency; (iii) the commitment of the government, which provided sufficient staff resources; and (iv) capacity building and implementation support provided through the effective use of TA. 34. Because of the strong commitment of all implementing agencies during project implementation, all necessary work was undertaken as originally planned. Throughout the program, MOF ensured that reforms were implemented as scheduled through regular meetings and monthly reporting on project implementation progress. The ADB project team held regular meetings with MOF’s international relations department to discuss possible implementation issues and bottlenecks. Proactive support by the ADB project team and TA consultants ensured efficient implementation. All consultants delivered their outputs as planned by closely working with line agencies to ensure timely approval of the necessary legal acts, which served as documentary evidence for completion of policy actions. D. Sustainability 35. The program is likely to be sustainable. The reforms under the program provided the framework for strengthening the government’s public finances and its management capacity in the water, road and energy sectors, with new policies and systems gradually introduced and implemented during ISSP2. 36. Despite a relatively unfavorable external environment, with a slow economic recovery caused by the recession in the Russian Federation and declines in the agriculture and construction sectors, on the basis of stronger demand in Armenia and abroad the economy grew

8

by 7.5% in 2017, following near-zero growth (0.2%) in 2016. 9 Inflation increased to 1.0% in 2017, and the current account deficit widened slightly to 2.5% of GDP. Growth is projected to moderate to 4.0% in 2018 and 4.2% in 2019, with inflation remaining below 3.0% and the current account deficit widening toward 3.0% of GDP. While plans for medium-term fiscal consolidation limit the ability of fiscal policy to support growth, the government’s efforts to promote the private sector and improve the business climate, along with expected continued increases in remittances, should promote further expansion. Continued fiscal consolidation is critical to reduce the still relatively high levels of public debt (58.8% of GDP). E. Development Impact 37. The overall development impact of the program is satisfactory. The impact of the program on institutional development and sustainable improvement of Armenia’s public finances was significant. During its implementation, ISSP2 played a critical role in building consensus on reform directions among relevant government agencies, which is typically a gradual, long-term process. 38. The program helped restructure line agencies, reduce duplication of functions, and improve the operational efficiency of PSRC, MOTCIT, MOEINR and SCWE. Losses from non-revenue water were substantially reduced. F. Performance of the Borrower and the Executing Agency

39. The performance of the borrower and executing agency was satisfactory. The government showed genuine commitment to achieving the necessary reforms. MOF successfully carried out program administration, including (i) overseeing and coordinating the timely implementation of the policy actions across MOF, MOTCIT, MOEINR, PSRC, and SCWE; (ii) providing timely reporting; and (iii) managing disbursements. Continuity of key staff throughout the program period greatly enhanced the program implementation. The government and the executing agency ensured full compliance with all loan covenants. ISSP2 benefited greatly from the government’s reform-minded leadership, which substantially reduced most of the implementation risks that could have hindered the program’s completion. G. Performance of the Asian Development Bank 40. ADB’s performance was satisfactory. The program was jointly monitored by staff from ADB headquarters and the ADB Armenia Resident Mission. Because of the short implementation period and the effective management of the program by the executing and implementing agencies, ADB fielded two review missions for a total of 14 person-days to support progress monitoring, address implementation issues, and provide technical input. ISSP2 was an example of a successful partnership between the government and ADB. ADB cooperated closely with the executing and implementing agencies, and no major disagreements arose during implementation. 41. Although the program’s comprehensive nature placed considerable demands on government institutions, ADB (through its advisory role and TA) contributed significantly to capacity development and helped realize the needed policy and institutional changes to strengthen administration, systems, and procedures in key reform areas. ADB demonstrated sufficient flexibility to accommodate government requests for additional activities under the TA (para. 22). 9 ADB. 2018. Asian Development Outlook 2018: How Technology Affects Jobs. Manila.

9

H. Overall Assessment

42. Overall, the program was highly successful. It was highly relevant to the government’s efforts to improve the public financial management capacity and mobilize funding for quality and service improvements in the water, road and energy sectors; and it was effective in achieving the targeted outputs and outcomes. The program was highly efficient in completing the large number of policy actions in line with the original schedule. The program is likely to be sustainable due to the government’s commitment to continue public sector reforms. The institutional development is significant, and the overall impact of the program is satisfactory. ADB’s overall performance in the program is rated satisfactory, the performance of the borrower is satisfactory, and the performance of the consultants is also satisfactory.

Overall Ratings Criteria Rating Relevance Highly relevant Effectiveness Effective Efficiency Highly efficient Sustainability Likely sustainable Overall Assessment Highly successful Development impact Satisfactory Borrower and executing agency Satisfactory Performance of ADB Satisfactory ADB = Asian Development Bank. Source: Asian Development Bank.

IV. ISSUES, LESSONS, AND RECOMMENDATIONS A. Issues and Lessons 43. Lessons include the following:

(i) This type of program should avoid numerous, complex policy actions, and focus on the core elements of the government’s reform agenda. Policy actions must be prioritized based on a clearly defined, time-bound roadmap; ADB loan covenants should be relevant and in line with program requirements and scope.

(ii) TA should accompany policy-based programs to ensure targeted policy actions are met on time, and to strengthen government capacity to ensure reform effectiveness and sustainability. Fact-finding should include an accurate training and capacity building needs assessment to determine the TA support scope.

(iii) The ISSP2 intervention is a model for the consultation process applied by different infrastructure divisions of ADB’s Central and West Asia Department in preparing a relevant, responsive and timely policy reform agenda that incorporated lessons and issues from previous ADB infrastructure projects.

(iv) The government’s sustained commitment ensured reforms transcended short-term political considerations. Successful policy-based programs must obtain feedback from all stakeholders through a comprehensive consultation process, and devote sufficient resources to cultivate a meaningful stakeholder dialogue and institutionalize reform ownership.

10

B. Recommendations 44. In designing a successful program, it is essential to understand (i) the level of the government’s support for policy-level reforms, (ii) institutional constraints, and (iii) the technical capacity of government agencies and other relevant stakeholders to handle comprehensive reforms. ADB’s involvement in the program strengthened the executing agency’s commitment to and stakeholder support for complex and time-consuming reforms. 45. ADB should maintain its strength in (i) results-based technical requirements, aligned with the country’s standards for policy-based program preparation, and (ii) a consultative approach to program design. Project preparation TA should allocate sufficient funds to combine technical expertise, an in-depth understanding of the country context, and knowhow from international best practices. Program design should avoid setting ambitious performance targets and indicators, which should be based on a realistic assessment of the economic conditions and risks that may affect program implementation. 46. To ensure successful implementation, single programs should not seek to address all major constraints; complementary policy-based programs (such as ISSP1 and ISSP2) should be used instead. Before designing larger programs ADB should take a gradual, incremental approach; validate a concept’s applicability; learn lessons; and motivate stakeholders. 47. The covenants in the loan and project agreements were relevant and should be maintained in their existing form. 48. Further action or follow-up. Recommendations related to the program:

(i) Additional private sector participation in the provision of infrastructure services. The successful conclusion of the water production and distribution contract with Veolia Water CJSC and development of a framework to assess public–private partnership contracts in the energy sector and private participation in the road sector should generate additional private sector provision and investment in infrastructure services. Private financing of commercially viable infrastructure interventions will alleviate pressure on the fiscal budget.

(ii) Continued ADB policy dialogue. Given ADB’s substantial presence in the road transport, water supply, and power sectors, ADB should continue its policy dialogue with the government to further deepen infrastructure sector reforms.

(iii) Close coordination and monitoring. Close coordination between ADB, the Armenia Resident Mission, and the government should be maintained to foster fruitful policy dialogue that could develop into additional programs.

(iv) Additional ADB assistance. To ensure the sustainability of future interventions, and based on the success of ISSP1 and ISSP2, ADB should consider a new program that builds on their lessons and achievements, with a focus on the efficient use of scarce fiscal resources.

49. Timing of the program performance evaluation report. ADB’s Independent Evaluation Department should prepare a program performance evaluation report 2 years after completion of ISSP2 to assess the cumulative impact of the ISSP1 and ISSP2. This will result in a more precise and comprehensive assessment of the long-term impact and sustainability of the reforms while key government officials are still employed by the executing authority.

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Indicators and Targets Project Achievements Impact Improved service delivery in road, water supply, and power sectors (Armenia Development Strategy) ª

At least 50% of the road network (interstate, republic, and local roads in km) is satisfactory or better in riding quality (as measured by IRI ≤ 4) by 2020 (2012 baseline: 41%) 65% of households have access to 24-hour water supply in 2020 (2012 baseline: 59%) 0.3% of GDP of all public investments will be in the energy sector by 2020 (2012 baseline: 0.17%)

Not yet due. Unlikely to be achieved. In 2016 at least 21% of road network is in satisfactory condition. Not yet due. Likely to be achieved. In 2016 at least 66.6% of households have access to 24 hour water supply. Not yet due. Likely to be achieved. Current public investment in the energy sector is approximately 0.25%

Outcome Improved management and sustainability of road, water supply and power sectors.

a. By 2017, MOTCIT, MOEINR, and SCWE published their performance against program budget KPIs at least half-yearly b. By 2017, SCWE reported annually on maintenance expenditure in the water supply sector

All of the 3 institutions are publishing their performance as measured against KPIs every 6 months. Achieved.

c. By 2017, MOTCIT reported annually on maintenance expenditure in the road sector

Achieved.

Outputs By 2016 1. Improved public financial management and utility regulation

1a. Government plan to increase PSRC’s independence, transparency and accountability approved

1b. PSRC issued rules for drinking water

usage and wastewater treatment, and contract templates

By 2017 1c. MOF instructed all line agencies to

execute program budgeting 1d. Government approved formula to

increase PSRC budget

Achieved. PSRC has substantially improved and strengthened its operations. Achieved. Achieved. PSRC’s budget has been increased by AMD 22 million of which AMD 8 million has been allocated to registered NGOs.

2. Increased financing and improved operations

By 2016 2a. Government road maintenance

The Government road

12 Appendix 1

Design Summary Performance Indicators and Targets Project Achievements in the road sector budget increased to $28.3 million in

2017 2b. Government revised fuel tax regime

including a 20% VAT on diesel, and increased excise taxes on diesel, petrol and CNG

2c. At least 5 new methods introduced to

expand coverage of, and improve contracting for, road maintenance

By 2017 2d. Government road maintenance

budget increased to $34.4 million (2018) and $42.5 million (2019)

2e. ARD issued at least 5 new contracts

using new methods to expand coverage of, and improve contracting for, road maintenance

maintenance budget increased to $31 million in 2017. Achieved. 5 new methods were introduced to expand coverage of, and improve contracting for, road maintenance. The Government road maintenance budget increased to $36 million in 2018. Since 2017, ARD uses the new methods in all of the contracts that it enters into.

3. Increased financing and improved operations in the water sector

By 2016 3a. Signed lease contract with a private

water concessionaire provider for $79 million maintenance work during the 15-year concession period

3b. Signed lease contract with a private

water concessionaire provider for KPIs enforcing improved water supply service duration, reduced NRW and improved water quality

3c. Investment planning and asset

management department created in SCWE

By 2017 3d. SCWE employed at least 12

professional staff in the investment planning and asset management department

3e. SCWE contracted independent auditor

to audit new lessee’s performance

After a competitive international bidding process, a 15-year contract was signed with the private concessionaire Veolia Water CJSC. The contract with Veolia Water CJSC contained specific KPIs to be complied with. Achieved. The new investment planning and asset management department has currently a staff strength of 12 staff. Achieved.

4. Increased level of power sector competitiveness and revenue generation

By 2016 4a. Government consulted on future

market structure in the power sector 4b. Government consulted on amending

the Energy Law (2001) to enable cross-border trading

Achieved. Achieved.

Appendix 1 13

Design Summary Performance Indicators and Targets Project Achievements 4c. PSRC introduced power sector

distribution tariff 4d. Government appointed at least 2

independent directors to boards of government-owned power corporations, and appoints at least one woman to each board

By 2017 4e. Government submitted revised Energy

Law to the National Assembly 4f. PSRC market rules introduced for

competitive power trading and new tariff structure implemented

4g. PSRC introduced grid code to permit

cross-border trading

Achieved. The Government has appointed in all 5 government-owned power corporations independent directors and one female director. Achieved. Achieved. Achieved.

ADB = Asian Development Bank, ARD = Armenian Roads Directorate, CNG = compressed natural gas, KPI = key performance indicators, MOEINR = Ministry of Energy, Industry and Natural Resources, MOF = Ministry of Finance, MOTCIT = Ministry of Transport, Communication and Information Technology, MTEF = medium-term expenditure framework, NRW = non-revenue water, PSRC = Public Sector Regulatory Commission, SCWE = State Committee for Water Economy, TASF = Technical Assistance Special Fund, VAT = value-added tax. a Government of Armenia. 2014. Armenia Development Strategy for 2014–2025. Yerevan. Source: Asian Development Bank.

14 Appendix 2

POLICY MATRIX

Policy Actions Tranche 1 Tranche 2 Output 1. Improved public financial management and utility regulation 1.1 Program budgeting executed

1. MOTCIT and SCWE formulate KPIs to execute program budgeting, and introduce performance auditing in their internal audit departments. MOF prepared several guidelines that provide detailed instructions in terms of (i) defining programs, measures and budget classifications; (ii) drafting sectoral strategies; (iii) defining performance indicators and measures; (iv) developing costing guidelines; (v) introducing prescribed formats for budget documents for the National Assembly, the government and state agencies; and (vi) aligning methodological instructions for the medium-term expenditure framework (MTEF) and annual budget requests. ISSP2 also supported MOEINR, MOTCIT and SCWE in implementing program budgeting—specifically, preparing agency-specific program-costing guidelines and sectoral strategies (aligned with MOF guidelines); supporting MOTCIT and SCWE to undertake a performance audit; and preparing program budget structures and key performance indicators for MOEINR.

1. MOF shall have issued guidelines to execute program budgeting to all line departments and MOTCIT, SCWE and MOEINR implement program budgeting for 2019 budget. Building on the tranche 1 completed policy actions, MOTCIT and SCWE published the results of key performance indicators (using indicators prepared in 2016), and the SCWE 2017 budget documentation was prepared in program budget form.

1.2 Utility regulation strengthened

2. Government issues plan to improve PSRC’s independence, transparency and accountability. The government approved a legal action plan to increase PSRC’s transparency and accountability that required implementation of 15 specific activities. Substantially meeting this policy action entailed approval by the government of amendments to laws regulating PSRC, public servant remuneration and civil service operations. These changes required PSRC to be more transparent and publish its annual report, regulatory decisions, budget and other operational decisions. 3. PSRC drafts operational rules and model contracts for drinking water

2. PSRC shall have implemented a plan approved by government to improve its transparency and accountability. To increase its transparency and accountability as required under tranche 2, the PSRC is now required to appear before the National Assembly to explain its annual work program and related budget, and present its annual report; it must also appear before a National Assembly committee for questioning if required. To ensure meaningful regulatory decisions and help disparate consumer groups, the PSRC must financially support consumer groups in providing input to regulatory decisions. Along with increased transparency and accountability, the legislative changes also give PSRC more responsibility to

Appendix 2 15

Policy Actions Tranche 1 Tranche 2 supply and wastewater and seeks public feedback. With the impending introduction of a single water operator, PSRC prepared new operational rules and model contracts for drinking water supply and sanitation services.

recruit staff and offer pay that is closer to market rates. 3. PSRC shall have issued operational rules and model contracts for drinking water supply and wastewater. PSRC was required to publicly consult on and then approve the draft rules and contracts. The rules are now in effect, and the domestic and commercial contracts now in use are based on the approved model contracts. 4. PSRC’s budget shall have been increased for 2018 to enable it to meet the requirements of the government approved plan. Legislative changes to PSRC give it the ability to pay staff at rates above the civil service pay scales but required an increase in PSRC’s budget. To meet this policy action, the National Assembly had to approve amendments to the PSRC Law (2003) that included a formula enabling PSRC to receive additional funds of ARM 22 million from the budget. The amendments to the PSRC Law (2003) came into force in June 2017, and the government approved a higher appropriation for PSRC through the budget process. The funding has been made available now.

Output 2. Increased financing and improved operations in the road sector 2.1 Increased road maintenance funding

4. The 2017 road maintenance budget increases by at least 22% as compared to 2016, excluding donor financing. Underfunding was the primary reason road maintenance was inadequate. ISSP2 required the government to increase the road maintenance budget over 2017–2019 by an annual average of at least 22%. 5. Government introduces a 20% VAT on diesel and increases the excise taxes on diesel, petrol and CNG. A new law introducing a 20% VAT on diesel and increasing the excise taxes on diesel, petrol and CNG was submitted to Parliament in 2016 approved in 2017.

5. The 2018 and 2019 road maintenance budget shall have been increased by 48% and 82%, respectively, compared to 2016, excluding donor financing. These annual increases are included in the 2018–2020 MTEF, with an annual road maintenance appropriation of about $34 million in the 2018 budget approved by the government. The road maintenance appropriation was increased by 50% in the 2017-2018 budget and by 21% in the 2018-2019 budget.

16 Appendix 2

Policy Actions Tranche 1 Tranche 2 2.2 Improved road maintenance operations

6. Government approves (i) new criteria for road rehabilitation and (ii) minimum standards for accepting completion of road rehabilitation works. Through a government decree, the government approved new, broader criteria for road rehabilitation projects including the international road roughness index. 7. Government approves maintenance contracts permitting (i) performance-based payments, (ii) flexibility in pricing and timing, and (iii) periodic maintenance. MOTCIT developed a performance-based contract that included capital and maintenance works and had a term of up to 7 years and a price-indexing component. 8. MOTCIT issues traffic count guidelines to improve prioritizing road maintenance. Through a minister’s decree in 2017 (?), MOTCIT issued traffic count guidelines to improve prioritizing road maintenance.

6. MOTCIT shall have awarded at least one road rehabilitation contract as per new minimum requirements. Through a MOTCIT decree issued in 2017, all road rehabilitation contracts use the new criteria. 7. MOTCIT shall have awarded at least one (i) performance-based contract, (ii) contract with price indexing, (iii) contract for a period which is not the standard 5 years, and (iv) periodic maintenance contract. To meet the policy action, MOTCIT has issued: (i) 1 periodic maintenance contract; (ii) 1 periodic maintenance contract and

up to 7-year performance based routine road maintenance contract;

(iii) 1 routine maintenance contract on roads previously classified as “bad” roads. MOTCIT will ensure all routine maintenance contracts issued for roads previously classified as “bad” will be for at least 60 kms; and

(iv) 1 contract with price indexing (factoral pricing).

8. MOTCIT shall have installed at least 10 new traffic count stations and conducted a pavement condition survey covering at least 1,200 kilometers. MOTCIT completed a pavement condition survey for 1,200 km of roadway, and purchased 30 new traffic count stations of which 6 are installed and 24 are under processing. 9. Government shall have reviewed ARD with a view to strengthening ARD by increasing its independence through a plan providing for a corporate structure with an adequate pay scale to retain professionals, and dedicated funding from MOF. MOTCIT’s Armenian Roads Directorate is responsible for collecting data on road conditions; undertaking technical analyses of road condition data; and tendering, issuing, and monitoring road

Appendix 2 17

Policy Actions Tranche 1 Tranche 2 maintenance contracts. Given its central role, the directorate’s responsibilities, accountability, and structure have an important impact on road maintenance outcomes. A review of the Armenian Roads Directorate’s operations was undertaken under tranche 2, and a new structure approved. Key changes include the establishment of a division responsible for road safety, the shifting of resources to data collection and analysis, and an explicit focus on staff development.

Output 3. Increased financing and improved operations in the water sector 3.1 Increased water maintenance funding

9. The 15 years lease contract with the private water concessionaire is in force and provides for mandatory maintenance expenditure of at least $79 million throughout the contract period funded by tariff revenues. In 2016, the government completed a significant international tender that leased all the reticulated water assets in Armenia that were connected to the water grid to a private operator. ADB consultants supported this process with an emphasis on determining annual maintenance expenditure levels, which were included in the contract. In November 2016, the international firm Veolia Water CJSC won the contract.

3.2 Improved water supply services and strengthened water policy operations

10. Signed 15-year lease contract with a private concessionaire in force providing key performance metrics for minimum water supply service duration, progressive reduction of NRW and minimum water quality standards. The contract with Veolia Water CJSC contained key performance metrics for minimum water supply service duration, progressive reduction of NRW and minimum water quality standards 11. SCWE established investment planning and asset management department. SCWE created a new investment planning and asset management department to provide policy advice on

10. SCWE shall have contracted an independent firm to audit the private concessionaire’s compliance with the key performance metrics under the concessionaire’s contract, and the concessionaire shall have appointed a financial auditor. To ensure that the contract will generate the expected benefits, SCWE contracted Sachse Wasser as an independent auditor to annually audit Veolia Water CJSC’s contract compliance, including its key performance metrics. Penalties can be issued for failing to meet contract conditions and key performance indicators, and the technical auditor thus plays a critical role in incentivizing Veolia Water CJSC to adhere to the contract. To ensure accurate and transparent financial reporting by Veolia Water CJSC in Armenia, Veolia Water CJSC

18 Appendix 2

Policy Actions Tranche 1 Tranche 2 investments and greater oversight of Veolia Water CJSC in delivering on its contractual obligations in 2017. 12. SCWE prepared an action plan to reduce NRW. An action plan to reduce the non-revenue water level was prepared by SCWE. Currently, the NRW level is estimated to be between 70-75%—a slight reduction of the earlier 75%—and is expected to reach 45% in 15 years.

contracted KPMG as its financial auditor to audit its annual accounts. A SCWE decree was issued to appoint the auditor. 11. SCWE investment planning and asset management department shall have appointed at least 12 professionals and shall have prepared guidelines to execute its mandate. In addition to the creation of the new department and in order to meet the terms of the policy action, SCWE fully staffed the department with 12 people; developed guidelines for department operations, including a methodology for collating and presenting data on project costs; and undertook a gap analysis on water infrastructure technical design codes. Compliance with this policy condition was done through a SCWE letter to ADB identifying new staff employed. Also, SCWE issued a decree on new methodological process for collating and presenting data on the costs of projects, and technical design codes of water infrastructure gap analysis report. 12. SCWE shall have monitored implementation of water strategy and reported the results to the government. To ensure the strategy remained relevant and could guide government decision-making, SCWE conducted a review of the strategy’s implementation and reported the results to the government; the key finding is that more attention and significant investment are needed to provide water delivery and sanitation services to those without reticulated water, who are primarily rural residents. The environmental impacts associated with the lack of investment in sanitation services are likely to worsen if current policies are not revised. Compliance was shown by a Government protocol decision on review of implementing the water strategy.

Appendix 2 19

Policy Actions Tranche 1 Tranche 2 13. Government shall have drafted amendments to sanitation legislation that improve wastewater management. An interagency working group was established to examine sanitation issues and advise the government on necessary legislative changes. The government approved several amendments to the Water Code (2002), including provisions on: (i) defining wastewater, including delineating between industrial and residential wastewater; (ii) defining wastewater treatment, including delineating between wastewater removal, pre-treatment and treatment; (iii) defining the monitoring of wastewater responsibilities; (iv) licensing and permitting wastewater; and (v) penalties. Compliance was shown by government approval of the amendments to the Water Code to improve sanitation management. Moreover, the RA National Assembly adopted the draft law on 3 March 2018.

Output 4. Increased power sector competitiveness and revenue generation 4.1 Reforms undertaken to introduce competition in the power sector

13. Government initiates stakeholder consultation towards eliminating a single-buyer power purchase market structure. Done. 14. Government initiates stakeholder consultation to amend the Energy Law (2001) to facilitate cross-border power trading with the European Union. Done. 15. PSRC introduces a distribution tariff to allow third-party access to the distribution network, as part of the move to a more competitive power sector. Done. 16. Government improves corporate governance by appointing independent directors to each board of wholly-government owned power corporations, and at least one woman in each such board.

14. Government shall have agreed on the new power market structure and approved a time-bound action plan to implement the new competitive power market; With the support of other development partners, the government approved some preliminary amendments to the current Energy Law (2001) to enable the new market structure to come into force. 15. Government shall have submitted a revised Energy Law to the National Assembly. The government also approved a time-bound 3-year implementation action plan, which includes more comprehensive overhaul of the Energy Law (2001). 16. Government shall have introduced a Grid Code to permit cross border trading; The power sector reforms include the provision of detailed regulations for the technical transfer of power between

20 Appendix 2

Policy Actions Tranche 1 Tranche 2 Done.

generators and purchasers, and economic rules for the sale of power to purchasers. These rules also regulate, technically and economically, the export and import of power. PSRC—the technical and economic regulator for the power sector—produced, consulted on, and approved the technical regulations (in the form of a new Grid Code) and economic regulations (in the form of new Market Rules). A PSRC decree approving the Grid Code for the system operator, and transmission and distribution networks was issued. 17. PSRC shall have introduced market rules for competitive power trading including implementing new tariff structure. An PSRC decree approving and announcing the Market Rules for implementation of the distribution tariff was also issued. 18. MOF shall have conducted a study on contingent liabilities related to contracts with private counterparties in the power and water supply sectors. The government undertook a comprehensive analysis of contracts in the water and power sectors to better understand the government’s contingent liabilities from these contracts. Through this process the government also developed a framework from which to assess future public–private partnership contracts. To ensure that the analysis is transparent, the results were published, and will continue to be published annually, in the 2018–2020 MTEF. Compliance was shown by an MOF decree with results of the contingent liability study in the two sectors. The MTEF for 2018-2020 highlights findings of the two studies.

ADB = Asian Development Bank, ARD = Armenia Road Directorate, IRI = international roughness index (meter/kilometer), KPI = key performance indicator, MOF = Ministry of Finance, MOTCIT = Ministry of Transport, Communication and Information Technology, RAM = road asset management, MTEF = medium-term expenditure framework, PIP = public information plan, PSRC = Public Services Regulatory Commission, SCWE = State Committee on Water Economy, TA = technical assistance, TOR = terms of reference a The notation (1.1) and subsequent numbering of the same format refer to the policy conditions as listed in the

program design and monitoring framework.

Appendix 3 21

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant

Reference in Loan Agreement

Status of Compliance

(a) The Borrower shall cause the Program to be carried out with due diligence and efficiency and in conformity with sound applicable technical, financial, business and development practices.

(b) In the carrying out of the Program, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 4 to this Loan Agreement.

Article 4, Particular Covenants, Section 4.01

Complied with.

The Borrower shall make available, promptly as needed and on terms and conditions acceptable to ADB, the funds, facilities, services, land and other resources, as required, in addition to the proceeds of the Loan, for the carrying out of the Program and for the operation and maintenance of the Program facilities.

Article 4, Particular Covenants, Section 4.02

Complied with.

The Borrower shall ensure that the activities of its departments and agencies with respect to the carrying out of the Program are conducted and coordinated in accordance with sound administrative policies and procedures.

Article 4, Particular Covenants, Section 4.03

Complied with.

(a) As part of the reports and information referred to in Section 7.04 of the Loan Regulations, the Borrower shall furnish, or cause to be furnished, to ADB all such reports and information as ADB shall reasonably request concerning the implementation of the Program, including the accomplishment of the targets and carrying out of the actions set out in the Policy Letter.

(b) Without limiting the generality of the foregoing or Section 7.04 of the Loan Regulations, the Borrower shall furnish, or cause to be furnished, to ADB quarterly reports on the carrying out of the Program and on the accomplishment of the targets and carrying out of the actions set out in the Policy Letter.

Article 4, Particular Covenants, Section 4.04

Complied with.

1. The MOF shall be the Program Executing Agency and shall be responsible for the overall implementation of the Program, including compliance with all policy actions, disbursements and maintaining records. The MOF, MOEINR, MOTCIT, PSRC and SCWE shall be the Implementing Agencies for their respective components under the Program.

Schedule 4, Program Implementation and Other Matters

Complied with.

2. The Borrower shall ensure that Implementing Agencies shall be adequately staffed and provided with the necessary financial,

Complied with.

22 Appendix 3

Covenant

Reference in Loan Agreement

Status of Compliance

technical and other resources to perform their functions under the Program.

3. The Borrower shall ensure that all policy actions adopted under the Program, as set forth in the Policy Letter and the Policy Matrix, continue to be in effect for the duration of the Program.

Schedule 4, Policy Actions and Dialogue

Complied with.

4. The Borrower shall keep ADB informed of policy discussions with other multilateral and bilateral aid agencies that may have implications for the implementation of the Program and shall provide ADB with an opportunity to comment on any resulting policy proposals. The Borrower shall take into account ADB’s views before finalizing and implementing any such proposal.

Complied with.

5. The Borrower shall ensure that the Counterpart Funds are used to finance the implementation of certain programs and activities consistent with the objectives of the Program.

Schedule 4, Use of Counterpart Funds

Complied with.

6. The Borrower, the Program Executing Agency and the Implementing Agencies shall: (a) comply with ADB's Anticorruption Policy (1998, as amended to date) and acknowledge that ADB reserves the right to investigate directly, or through its agents, any alleged corrupt, fraudulent, collusive or coercive practice relating to the Program; and (b) cooperate with any such investigation and extend all necessary assistance for satisfactory completion of such investigation.

Schedule 4, Governance and Anticorruption

Complied with.

7. The Borrower shall undertake periodic reviews every 3 months during the Program implementation period to evaluate the scope, implementation arrangements, progress and achievement of the objectives of the Program. In addition to the periodic reviews, a mid-term review shall take place during the first quarter of 2017. The Borrower shall ensure that ADB shall have the opportunity to participate in such periodic and mid-term reviews and, as a part of each such review, the Borrower shall provide a written status report to ADB on the progress and implementation of reforms included in the Program. The policy actions shall be monitored by MOF, which is responsible for ensuring the implementation of policy actions and following-up on progress.

Schedule 4, Monitoring and Review

Complied with.