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Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 11964-AM

STAFF APP2AISAL REPORT

ARMENIA

EARTHQUAKE RECONSTRUCTION PROJECT

JANUARY 5, 1994

MICROGRAPHICS

Report No: 11964 AMType: OAR

Infrastructure DivisionCountry Department IVEurope and Central Asia Region

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

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CURRENCY EQUIVALENT

Currency Unit - Ruble (R)/Dram

EXCHANGE RATES: RUBLES/DRAMS PER $

(End of Period)

Ruble: Dec 1991 169.2Jun 1992 144.0Dec 1992 400.0Jun 1993 1000.0

Dram: Nov 22 1993 14.0 (introduction)Dec 18 1993 80.0

WEIGHTS AND MEASURES

Metric System

ABBREVIATIONS AND ACRONYMS

EBRD = European Bank for Reconstruction andDevelopment

EC = European CommissionEQZ = Earthquake ZoneEU = European UnionFSU = Former Soviet UnionGOA = Government of ArmeniaICB = International Competitive BiddingIDA = International Development AssociationIFC = International Finance CorporationLCB Local Competitive BiddingMOE = Minizry of EconomyMOF = Ministry of FinancePPU Project Preparation UnitPIU = Project Implementation UnitUN United NationsUNDP = United Nations Development ProgramUSAID = United States Agency for International

Development

FISCAL YEAR

January 1 - December 31

FOR OFMICL1 USE ONLY

ARMENIA

EARTHQUAKE RECONSURUCTION PROJECTCredit and Project Summary

Borrower: Armenia

Executing Agencies: Ministry of Economy

Beneficiaries: Approximately 2,000 households will receive shelter and 2,500 workerswill be employed in reconstructed factory shells. Approximately 500,000residents of temporary housing areas will benefit from sanitary facilities(e.g., community bathhouses).

Credit Amount: SDR 20.1 million. (US$28.0 million equivalent)

Terms: 35 years, 10 year grace period.

Project Objectives: The primary objectives are: a) to provide improved housing and livingconditions to residents of the earthquake zone; b) to reconstruct basicinfrastructure which will support employment creation; and c) to developa longer term sustainable program for rehabilitation in the earthquakewone.

Project Description: The project will complete the reconstruction of housing, factory shellsand municipal infrastructure that could provide immediate assistance andemployment to the needy population in the earihquake zone. It will alsosupport some key reforms in housing policy (e.g., privatization, costrecovery, single family self-help housing, etc.) and help develop theoverall housing reform agenda for Armenia. Additionally, it will preparea long-term regional development strategy to rehabilitate the earthquakezone and will provide equipment to the Ear uake Engineering Institute.

Benefits and Risks: Project Benefits. Benefits of the project include a major impact onpoverty alleviation in the EQZ through employment creation andsubsidized improved housing and other welfare infrastructure. It will alsoinclude policy development in the housing sector and promote theinstitutional development of a private construction industry throughtraining, competitive procurement and improved constructionsupervision. The factory shells component was subject to a rigorouseconomic analysis. Selected factories show a weighted average rate ofreturn on incremental project investments of 50% and an aggregatecreation of 2,500 permanent jobs. Selected factories would also increaseexports. A rate of return for housing is impossibl. o calculate in theabsence of a housing market; however housing investments have beenselected based on their efficiency lowest cost solution) and their

This document has a restricted distribution and may be used by recipients only in the performanceof their offcial duties. Its contents may not other-ise be disclosed without World Bank authorization.

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contribution to sector goals (e.g. privatization, cost recovery, promotionof individual initiative in housing provision).

Project Risks. This is the first time that the Bank has financed physicalworks in Armenia, and neither Bank staff, nor Government officials andArmenian professionals can fully anticipate problems that might occur.This difficulty has been mitigated by allowing for a review duringimplementation of Phase I of the project, by keeping the project smallin scale and scope, and by including larger contingencies than usual. Inaddition, there is a blockade affecting the main supply routes intoArmenia, and civil strife in Georgia can interfere with shipments. Thishas been mitigated by carefully reviewing transportation constraintsduring preparation and maximizing the use of private sector importersand suppliers, who have a better record of overcoming these problems.In other Bank operations in the FSU, it has been found that kcalunfamiliarity with Bank procurement regulations can slowimplementation. The training of PIU staff, government officials and localcontractors in Bank procurement procedures which has already beeninitiated during project preparation should reduce delays. Furthermore,a major portion of the Technical Assistance and Training program hasbeen dedicated to this potential problem. There is a risk that changes inthe project implementation staff (see Paragraph 3.3) will delayimplementation of the project, although the commitment to the projectthe GOA has displayed suggests that all efforts will be made to reducethis risk. Finally, there is a risk that occupants might be unwilling orunable to pay for the maintenance of the units, making the housingcomponent less sustainable than desired. However reduced designstandards and costs will make the project more cost effective than itsoriginal design, and payments from beneficiaries under the project willbt larger than they will have been without the policy changes that arebeing attempted.

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.,'Oj* Loca, _,US$ Millon JProject Locl Foreign Total Percent

Land sites and infrastructures 1.7 1.7 4j . - . 11-

Construction: Sunk Costs

Housing 5.9 5.9 13

Factory Shells 9.7 - 9.7 21

Construction: Incremental Costs 5.7 13.2 18.9 41

Technical Assistance 0.2 2.1 2.3 5

Design, supervision, administration 0.1 0.5 0.6 1

Base Costs 23.3 15.8 39.1 85

Physical contingencies' 1.0 2.2 3.2 7

Price contingencies (15%) 1.0 2.7 3.7 8

Total contingencies 2.0 4.9 6.9 15

Total Costs 25.3 20.7 46.0- -- -

Project Financing-

State Authorities Oand, infrastructure,sunk costs) 17.3 _ 17.3 __ _

(5% of incremental local costs) 0.3 - 0.3

IDA (mcremental costs) 7.7 20.3 28.0 l

Donor assistance - 0.4 0.4

Sub-total (excluding sunk costs) 8.7 20.7 28.7

Total 25.3 20.7 46.0

1 Physical contingencies are 10% on technical assistance and 15% on all other activities.

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IDA DISBURSEMENT SCHEDULE(net of taxes and duties)

US$ millionIDA Fiscal Year Tal

Annual Cumulative

1994 7.1 7.1

1995 11.5 18.6

1996 9.4 28.0

Economic Rateof Retur: Not applicable for housing, municipal and TA components; estimated at an

average of 50% for factory shell completion.

Poverty Category: Program of Targeted Interventions

Map: IBRD Ne 23943R

STAFF APPRAISAL REPORT

ARMENIA

EARTIfQUAKE RECONSTRUCTION PROJECT

CONTENTS

CREDIf ANr PROJECT SIJMMARY .......................... * ... i-iv

I.BACKGRUNDu ............. 1

II. TM PROJECr . 3A. Rationale for IDA Involvement.. 3B. Project Objectives.. 3C. Project Area.. 3D. Project Summary .. 3E. Detailed Project Description.. 4

Housing Component ....... 4Apartment Completion Sub-component ....................... SUnit Allocation ..................................... 6Cost Recovery ...................................... 6Strengthening Sub-component ............................ 7Single Family Housing Sub-component ....................... 7

Munc..pal Services. 8Public Bathhouses Sub-componen. 8Water and Sewer Sub-component. 8Community acilities. 9

Factory Shells Component. 9Technical Assistance, Training, and Equipment .10

Procurement and Construction Management .10Housing Reform .10Regional Development and Reconstruction of the Earthquake Zone 10Support to the Earthquake Engineering Center .10Evaluation of Phase I of Project Implementation and Preparation of

Pe.se. 10F. Project Costs and Financing .. 11G. Project Benefits and Risks .. 13H. Ecoromic Evaluation .. 13I. Environmental Considerations .13

m. PROJECr MLEMiENTATION .15

A. Organization Responsibilities .15Central Government. 15Project Implementation Unit. 15Local Construction Firms. 15Local Governments ..................................... 16

B. Project Phasing ............ 16C. Procurement ............ 19

Civil Works ..... ....... 20Goods ............ 20Consutants ..... .... 20

D. Disbursements ......................... 21E. Accounts and Audits ......... ...... 21F. Project Monitoring and Supervision ............ .. ................ 22

Reporting Procedures ................. ................... 22Implementation Performance Monitering Indicators ........ .......... 22Supervision schedule .................. ................... 22

IV. AGREEhsiNTS, CO. IDITIONS AND RECOMMENDATIONS .... ......... 23

ANNEXES

Annex 1.1 Legislative Achievements and Outstanding IssuesAnnex 1.2 Housing Policy Reform Statement of IntentAmnex 1.3 Housing Policy Reform: Program for External AssistanceAnnex 2 Cost RecoveryAnnex 3 Economic JustificationAnnex 4 Issues in Contracting and ProcurementAnnex S Regional Economic Study of the Earthquake Zone and Long-Term

Infrastructure Investment StrategyAnnex 6 Action Plan by Phase of Project and SubcomponentsAnnex 7 Implementation PlanAnnex 8 Contents of Implementation VolumeAnnex 9 Organizational Structure of Project Implementation UnitAnnex 10 Disbursement ScheduleAnnex 11 Procurement ScheduleAnnex 12 Implementation Responsibilities

TABLES

2.1 Project Costs2.2 Project Fmancing3.1 Expenditures by Phase of Project and Subcomponent3.2 Summary of Proposed Procurement Arrangements

MAP IBRD 23943R

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Ipechisp, Con, :X 1)- ':y ' .'1wpmrrnhwmrawetaAA1ar ~.... "

~~ Son,ardl~~~~.C. 0*4 anvd C. M'_ (An. f.

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ARMENL1


I. BACKGROUND

1.1 In the last five years, Armenia has suffered a series of devastating shocks-the earthquakeof 1988, the dissolution oV the Sovie- Union block and the current regional unrest. The earthquake ofDecember 1988 caused extensive dam4ge to housing, factories, community facilities and infrastructurcin about one third of the country. Twenty-five to thfity thousand people died in the earthquake,approximately 530,000 persons were left homeless, and 40 % of the country's manufacturing capacitywas destroyed.

1.2 Efforts to recover from the earthquake's devastation have been thwarted by the upheavalfollowing the breakup of the Soviet Union. International rescue efforts in December 1988 and early 1989were followed rapidly by reconstruction projects led by a committee under the Supreme Soviet of theUSSR. Work continued until mid-1991, when the Soviet work crews were withdrawn to their newlyindependent home countries, leaving vast areas of partially completed apartment blocks, factories, andinfrastructure projects. Subsequent relief measures have focused on assistance to refugees fromAzerbaijan, often ignoring victims of the earthquake in the same communiti.s.

1.3 As a consequence, the Earthquake Zone (EQZ) continues to have severe shortages ofshelter, basic infastructure and industrial facilities. Unemployment in the EQZ remains as high as 75%;tens of thousands of families continue to live in "container communities" comprised of adapted railroadboxcars, steel shipping containers and large fuel tanks supplied by the Soviet Union immediately afterthe earthquake; and one of the affected cities (Spitak) has virtually no piped water. These problems arecompounded by the transport blockade imposed by the conflict with Azerbaijan which has disrupted thetrade flows from Georgia and other neighboring countries and reduced energy supplies. Temporaryhouses are unheated and uninsulated, and temperatures inside them fall weil below zero during the winter.The temporary housing installed after the earthquake has some access to sanitary services, but there isa high risk of environmental and health problems. Finally, the long delay in finishing the reconstructioneffort, combined w.t the high rate of unemployment, is weakening public confidence, and the crime rateis beginning to rise in some EQZ communities. Thus, despite the passage of 5 years since the earthquake,the population of the EQZ continues to require urgent assistance.

1.4 In spite of the difficult conditions, the Government of Armenia (GOA) has demonstrateda remarkable commitment to undertake the economic reforms necessary to restructure its economy. Withrespect to housing, privatization legislation has passed the first stage of review in Parliament and otherhousing policy reforms are being designed (see Annex l.b for Housing Policy Reform Statement ofIntent). A policy to privatize industrial enterprises has strong support; the details of its implementationare being formulated with assistance of the rec,.ntly approved Institution Building Project (Loan 3585-AM). The immediate task for the government is to weather the current crises and re-build itsinfrastructure in a manner consistent with long-term reform goals.

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1.5 lhis project seeks to alleviate the current crisis in the Earthquake zone and is beingprocessed to start implementation during the next construction season. A Japanese grant of US$1.0million has helped the Government prepare the project. Basic design, engineering work, cost estimatesand a sociological srvey to identify the living conditions, income and priority needs of the targetpopulation have been completed. A project unit has been created and is ready to manage implementation.The GOA has displayed a strong commitment to the project and has acted rapidly to provide facilities(such as offices, staff and equipment) necessary for the preparation of tei project. The project will notsolve all the problems of the EQZ; the actual volume of reconstruction necessary is well beyond the scopeof a single operation. However, it will provide an opportunity for the Government to reaffirm itscommitment to the reconstruction effort and provide for a coherent plan for continuing the process.

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HI. THE PROJECT

A. Rationale for IDA Lnvolvement

2.1 Despite the passage of 5 years since the earthquake, a crisis continues to exist in theearthquake zone. At present no international or bilateral assistance programs in Armenia focus on capitalinvestments in housing or employment, either for eat ',quake relief or to stimulate a faltering nationaleconomy. The current economic situation makes it difficult for the Government tc continue reconstructionwithout international financing. Financing a reconstruction program will alleviate pressirg economic andsocial problems and provide a unique opportunity to support implementation of basic economic reformsin housing and infrastructure.

B. P-oject Objectives

2.2 The primary objectives are: a) to provide improved housing and living conditions toresidents of the Earthquake Zone; b) to reconstruct basic infrastructure which will support employmentcreation: and c) to develop a longer term sustainable program for rehabilitation in the earthquake zone.

C. Project Area

2.3 The Earthquake Zone, located in the northwest corner of Armenia contains about onethird of the country's area (approximately 10,000 sq. km.). The haf million people left homeless afterthe quake constituted one-sixth of Armenia's total popuiaiion. The project will emphasize the three largestcities in the EQZ: Gumri (populationt 270,000), which is the second largest city in Armenia, Vanadzor(population 180,000), the third largest city, and the smaller city of Spitak (population 20,000). Gumriand Vanadzor sustained serious damage during the 1988 quaks; Spitak, which was at the epicenter of thequake, was totally destroyed. The EQZ was a major industrial area before 1988. Vanadzor alone hadsome 33 state owned enterprises and an additional 1,900 private business. Spitak had 33 state companiesand 260 private businesses. In addition to being a major industrial area, the region has special historicaland cultural significance. Gumri is the home of a number of national historical and architecturalmonuments; it is also a major transport nexus for rail lines from Georgia and Turkey.

D. Project Summary

2.4 The project will complete the reconstruction of housing, factory shells and municipalinfrastructure that could provide immediate assistance and employment to the needy population in theearthquake zone. It will also support some key reforms in housing policy (e.g., privatization, costrecovery, single family self-help housing, etc.) and help develop the overall housi"g reform agenda forArmenia. Additionally, it will prepare a long-term regional development strategy to rehabilitate theearthquake zone and will provide equipment to the Earthquake Engineering Center.

2.5 The project was prepared under Japanese Grant funding. The project will be dividedinto two phases. The first phase construction was initiated during 1993 and is eligible for retroactivefinancing; construction will continue through the 1994 construction season. The second phase will beginduring the 1994 construction season and will be completed in 1995. All feasibility studies, the detailedengineering, and cost estimates for Phase I have been completed by the Project Preparation Unit andappraised by the Association. The procurement process has been proceeding since negotiations in July

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1993, and the first contracts were awarded in October, 1993. Delays In starting construction have beendue to the government's lack of funds in spite of being eligible for retroactive financing under the credit.Final engineering and appraisal for Phase 11 will be carried out during the course of Phase 1. Details onthe breakdown by project phase are givel' in paras. 3.7-3.9.

2.6 The project will include four components, as listed below:

Housing:

(i) Completion of presently unfinished apartments;(ii) Repair and strengthening of damaged apartnent buildings; and,(iii) Land development and construction of serviced plots and starter houses for single

family ownership and self-help expansion.

Municipal Services:

(i) Provision of bathhouses for temporary housing areas, some of which will incorporatesolat heating;

-ii) Completion of selected water supply and sewerage sub projects in Spitak, Vanadzor,and Stepanovan; and

(iii) Community facilities.

U;,;Tnished Factory Shells:

(i) Completion of factory shells for existing profitable industries.

Technical Assistance, Training, Equipment and Studies for:

(i) Procurement and construction supervision(ii) Housing reform;(iii) Regional development of the Earthquake Zone; and(iv) The Earthquake Engineering Center.

E. Detailed Project Description

Housing Component

2.7 Housing will be provided through several subcomponents: finishing the construction ofapartment buildings begun by the Soviet Union; strengthening and repair of condemned apartmentbuildmgs rendered uninhabitable by the earthquake; and developing single family housing suitable forprogressive construction. Most of the housing construction in Phase I will be the completion of nearlyconstructed apartments since these can be finished at low cost and in a short time period. In Phase II,fewer nearly finished units will be available for completion; and construction will emphasize the othermethods subject to endorsement in the course of the mid-term review of the project.

2.8 While the project is primarily designed to alleviate severe housing and employmentconditions within the earthquake zone, it will be implemented at a crucial moment in the development

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of Armenia's housing policy.3 The Armenian Parliament has recently passed a law for mass privatizationof housing which grants ownership of units to their occupants throughout the country at a nominal fee.In the future, the Government will not be responsible for s& -ter provision with the one exception of theEarthquake Zone where it has a strong legal and moral obligation to continue doing so. However, to setthe precedent for the market-oriented housing system, individuals receiving housing in the EQZ will berequired to cover at least part of the construction costs. Home owners will be in any case responsible formaintenance costs. Assistance will be provided simultaneously to the GOA to develop an action plan for(a) the legal, regulatory and institutional reforms expressed in its Housing Policy Statement of Intent; and(b) policies on sustainable targeted subsidies on a nation-wide basis.(see Annex 1.2). The Regional Studyof the Earthquake Zone (see Annex 5) will coordinate the continuing effort to reconstruct the region withthe development of reform policies. At negotiations it was agreed that the borrower will submit at tfhetime of mid-term review an action plan on housing policy reform as described in Annex 1.2 (para. 4.1,a).

2.9 Apartiaent Completion Subcomponent. Approximately 7,000 apartment units wereoriginally identified as candidates for completion. From these 800 units were selected for Phase 1. Theinitial selection process has identified up to 700 additional units which appear suitable for completion inPhase II. The criteria for selection was:

(i) A high level of existing completion (60-90%);

(ii) Location in a viable neighborhood with existing infrastructure, transport and communityfacilities; and

(iii) A high level of earthquake resistance in both the design standards and in the completedportion of the structure.

Under the Reconstruction Study described in Annex 5, the remaining structures will be evaluated and aprogram for deciding their fate will be designed (i.e., whether to complete, sell-off, or demolish them).

2.10 'he selection of units for completion was conducted by international and Armenian Seismicengineers in cooperation with local authorities. The post earthquake norms of 14.5 square meters perperson were used in the basic designs. However, as a part of project preparation, the units weresignificantly redesigned with cheaper standards (e.g. linoleum in place of parquet, unpainted interiorwalls, showers in place of bathtubs, additional units on the ground floof and attics, subdivision of largeunits, kerosene heaters in place of steam radiators)4 thereby more than doubling the number of units thatcould be completed with the samne funds. Units will cost an average of US$2,200 (before contingencies)to complete in Phase I; in Phase IJ the cost per unit will rise as starting points are at a lower level ofcompletion. The average per unit cost throughout the project is estimated at US$3,000 beforecontingencies. The total base costs for the subcomponent are estimated at US$4.7 million.

3A description of the current status of Armenian housing policy, the Government's statement of intenton future policy, and the project's strategy for aiding the development of housing policy are provided inAnnex 1.

'Unless the energy problem is solved before construction and district heat is again operational.

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2.11 Units to be completed under the project will be used to demonstrate a series of keyinitiatives consistent with the progress of general housing policy reforms such as a) private ownership,b) private responsibility for maintenance, c) some cost recovery, d) the use of "sweat equity' in placeof cash contibutions and e) subsidy transparency and targeting.

2.12 Unit Allocation. Following the earthquake, allocation criteria were announced in Decree# N371 of 1989 giving priority to those suffering injury or loss of family members. On this basisapartments were allocated by the local authorities, even though the units were not completed. A surveyhas been undertaken by the Project Preparation Unit of the families allocated to the units selected underthe project. This was done to confirm that families that were selected met the announced allocationcriteria. (Priority is given to invalids as a result of the earthquake, and to families who lost an incomeprovider and have an underage child or three or more children.) The survey showed that on average 2.5persons will occupy each bedroom. In addition, it was found that nearly all families affected by theearthquake are now experiencing severe financial difficulties (see Annex I of the Implementation volume).

2.13 The allocation process will be left intact, except for the units which are to be subdivided.In Phase I less than 5% of the new units will be created in this manner. The existing beneficiary of a unitbeing subdivided will be given an opportunity to occupy a newly-created apartment in an attic or groundfloor, one of the apartments created from the previously-allotted unit, or be reassigned to anotherbuilding. All beneficiaries will be offered the opportunity to purchase a starter home in the single familyhousing areas as an alternative to their apartment. This will leave additional apartments to be allocatedaccording to the previously announced allocation criteria. At negotiations it was agreed that the allocationcriteria for apartments will not be changed without prior approval of the Assec.iation (para. 4.1, b)

2.14 All apartment units will be allocated as private owner-occupied units, with a condominiumarrangement for property maintenance for each building. It is anticipated that there will be little cashoutlay for maintenance since the buildings are constructed from extremely resilient materials and only themost basic public services are currently being provided. In the short run, residents will be able tomaintain the buildings with their own labor, a practice which is common even in state-owned housing inArmenia. USAID has agreed that the apartment buildings privatized through this project will be includedin their pilot program to organize condominium associations.

2.15 Cost Removery. Incremental costs of construction will be covered by an up-front subsidyof 75% and a 25% contribution from recipients of apartment units. The up-front subsidy is consistentwith the provisions of the mass privatization law for housing (para. 2.8). Recipients' contributions willbe made over 25 years through monthly payments not exceeding one-fourth of the minimum wage. Loanswill be denominated in dollars and monthly payments indexed to the minimum salary.5 In a limitednumber of cases of demonstrated need, beneficiaries may be allowed to use 'sweat equity' in lieu of cashmonthly payments for up to two years. Beneficiary households will be required to surrender theirtemporary housing units ("domiks") but will not receive monetary compensation for them since such aprogram would be administratively complex and beneficiaries will be receiving subsidies. At negotations,the Government agreed to the terms and conditions of cost recovery for apartments and single familyhomes completed wnder the project (para. 4.1, c).

51n the sociological survey it was found that average household incomes in the EQZ approximate oneminimum salary and average willingness to pay for housing falls close to 25% of this amount in currentrubles.

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2.16 Strengthening Subcomponient. Approximately 25,000 apartment units had to be vacatedfor repairs after the earthquake, with occupants moved to temporary housing areas but retaining theirright to the unit. However, the process of strengthening and repair was relatively complicated comparedto construction and proceeded slowly. Although little repair work has been done, the presence ofscaffolding around many buildings has allowed easy access and many structures have been stripped ofdoors, windows and other fixtures.

2.17 Strengthening of such buildings has been studied by the Earthquake Engineering Center andthe National Design Institute and found to be feasible. After strengthening, the structures will meet anew6 seismic engineering code which has been reviewed and found acceptable to the Association. Repairof the buildings will also have the advantage of preserving existing neighborhoods. The cost of thistechnique is estimated at approximately US$3,000 per apartment unit for strengthening and an equalamount for repairs. Such work involves non-traditional technologies and a higher level of quality control.The project will strengthen and repair about 500 units, mainly to test the technical feasibility of applyingthe technique on a wider scale. The units will be allocated to their previous occupants under the sameterms provided by the mass privatization law for housing.

2.18 Single Family Housing Subcompo.tent. In Armenia, the tradition of individual homeownership has survived throughout the Soviet years, especially in the rural areas. About 30% of thehousing units of Armenia remains in individual ownership, including 20% of urban dwelling units.However, construction of individually owned single family housing has been discouraged in urban areasthrough laws and regulations. For example, town planning and building codes are geared to largeapartment buildings only, current standards for plot and house size are excessive, and there are noresources for private housing finance. Moreover the shortage of energy, materials and cash, suppressesindividual housing construction, making it accessible only to a small section of the population.

2.19 The Central Government and local governments in the EQZ want to revive single familyhoasing in Armenia, and they requested that a subcomponent be included to demonstrate that thepopulation can participate with its own resources and initiatives to the reconstruction of housing in theEQZ, and to the further improvement of their housing conditions in both the EQZ and in the rest ofArmenia. This subcomponent will provide serviced plots and starter homes for self-help or self contractedexpansion. It will test appropriate and affordable designs, offer a wider range of housing types to thepublic, and familiarize local people with the concept of a market-oriented urban housing supply. It willalso allow an opportnity to test the technic~al feasibility of transferring temporary housing units toserviced plots.

2.20 The project will fiance the development of plots of up to 155 square meters serviced withbasic infrastructure (water, sewer, electricity and gas) at a cost of US$400 per plot. Expandable starterhomes of up to 30-50 square meters at an additional cost of up to US$2,400 will also be offered as anoption, bringing the total cost for a plot and starter home to approximately US$2,800. Design prototypeswill be constructed to show the final house after expansion. In the first phase of the project a smallnumber (15 each) of serviced plots, plots with core houses and final, expanded house prototypes will beconstructed in each city. In Phase II the program will be expanded to develop additional plots, plots withfoundations and plots with core houses in each city if warranted by the experience in Phase I. Total costsfor both phases are estimated at US$2.1 million.

6The new code was promulgated after the earthquake under the Soviet Union era.

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2.21 Access to serviced lots or core houses will be offered as an alternative to those householdshaving rights to apartments to be completed under the project. Beyond this group, priority fordetermining who can purchase a unit will be established under the same general criteria promulgated afterthe earthquake (i.e., loss of home, family members, etc.). The houses and land will be privately ownedand land titles will be given as long-term transferrable occupancy rights until the policy for privateownership of urban land is fully established.' At negotiations, it was agreed that the criteria forallocation of single family hoa.sing would follow the current criteria and would not be changed withoutthe prior approval of the Association (para. 4.1, b).

2.22 On equity grounds, this component will receive an up front subsidy of only 25%. Along-term policy on housing subsidies will be addressed as part of the housing policy TA component(para. 6 of Annex 1.2) in the context of sustainable macroeconomic and fiscal policies. Recipients wouldbe required to contribute 75 % of the cost of infrastructure provision on the plot and housing constructionto phase in the concept of total private responsibility for housing costs. Land would be provided for anominal fee. As with the completed apartments, the balance to be recovered will be maintained in dollarsand the monthly payment indexed to the minimum wage. At negotiations, the GOA agreed to the termsand conditions for cost recovery for single family housing (para 4.1, c).

Munidpal Services

2.23 Public Bathhouses Subcomponent. The component aims at improving sanitary conditionsand relieving hardships in the temporary ("domik") settlements in the Earthquake Zone by installingpublic bathhouses offering hot water, showers, toilets and laundry facilities. It will also support a studyto evaluate how well the bathhouses constructed in Phase I fulfill community needs and what otherinfrastructure and sanitary facilities might improve community welfare. The bathhouses will test solarheating to supplement conventional heat in the winter and substitute for it in the summer. A study of solarheating options shows that it shouid be feasible in the project area. The bathhouses will be operated underconcessionary contracts with users paying a fee towards operation and maintenance. As part of thepreparation of Phase I, an evaluation of community satisfaction with bathhouse design and communitydemand for other facilities will be conducted. A small number of bathhouses will be constructed in PhaseI, including one testing solar power. Phase II will expand the program if warranted. The total cost isestimated at US$1.1 million. At negotiations, it was agreed that the bathhouses would be operatedthrough concessionary contracts (para 4.1 d).

2.24 Water and Sewer Subcomponent. After the 1988 earthquake, construction was initiatedof several projects to restore or expand the water and sewer systems of the Earthquake Zone. Amongthese projects, only the pipeline restoring water supply to the city of Spitak was judged to be acceptablefor financing under Phase I of this project because of the severe shortage of water in that city. Operationof the pipeline would be administered by the local water company. Detailed engineering studies produceda cost estimate of US$500,000. The feasibility studies for other proposed projects are being carried outunder a grant from the Japanese government; these projects may be included in Phase H. The GOA hasalso agreed that financial and operating plans would be developed for the Armenian water and sewercompanies. Water and sewer fees will follow the Government's general program of gradual elimination

7 Current Armenian legislation does allow for allocation of land to individuals for housingconstruction. A policy for more wide spread privatization and private ownership or urban land will becovered under the Technical Assistance dedicated to housing policy reform.

of subsidies.

2.25 Community Facilities. The project will allocate US$600,000 as matching contributions forcommunity facilites to meet social and environmental needs. An amount of US$200,000 would beallocated for each city. The GOA, through the PIU (see para. 3.2) will evaluate proposals submitted bythe municipalities and supervise the use of the funds. Activities or projects of greater than US$50,000would be submitted for approval by the Association during supervision.

Factory Shells Component

2.26 The project will complete reconstruction of a number of factory shells that have beenpartially rebuilt by the Soviet Union. This component has been designated as having the highest priorityby the Government of Armenia. After a survey of numerous industrial public enterprises in the EQZ, andintensive on-site reviews and interviews, four enterprises were selected as having met the followingcriteria:

- economic viability- strong management;- rapid implementability of reconstruction of the shell (see Annex 3 for economic justification);- substantial impact on employment and exports;- ability to recover and repay costs of incremental construction.

2.27 The four enterprises selected for inclusion in Phase I are the Gumri ArmelectrocondenserPlant; Spitak Clothing Plant; Vanadzor Precision Machine Tool Company; and Vanadzor Fur Factory.After the earthquake, despite immense damage, the management of several of these enterprises wasresilient enough to resume limited operations within 60-90 days in temporary facilities. The total amountof the industrial component of the loan for Phase I is $5.0 million. The screening process of theremaining factories for possible inclusion in Phase II began in November 1993, and a detailed analysiswill be available for the mid-term review.

2.28 Enterprises will repay the incremental construction costs. The loans will be denominatedin dollars, will carry a fifteen year maturity including a three year grace period, and a variable interestrate equal to 0.5% over the World Bank lending rate. The factory shells will be property of theenterprises (and will be valued along with the land on their balance sheets) although the government willhave the right under the current legal statutes to gain control of the facility in the event of non-payment.At negotiatons, the GOA agreed to the terms and conditions for cost recovery offactory shells (para.4.1e).

2.29 Another objective-which was set at the explicit request of the Government of Armenia-isto use the program to further economic reform. To achieve this objective, enterprises with completedfacilities will be encouraged to make available production space, and where possible equipment, for theuse of "small enterprises." These could then be used by privately-owned small or new businesses.Enterprises will also be required to participate in the privatization plan of the Ministry to which they weresubordinate. Assurance was offered at negotiations that the enterprises benefitingfrom completedfactoryshells will have priority access to electricity (para. 4.1, f).

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Technical Assistance, Training, and Equipment

2.30 Technical assistance, training, and equipment purchases will be provided for: (i)Procurement and construction management; (ii) Housing Reform, (iii) Regional Development andReconstuction of the Earthquake Zone and (iv) the Earthquake Engineering Center. The total cost of thiscomponent is estimated at US$2.3 million.

2.31 Procurenent and Construction Management. International consultants will be providedfor managing the procurement and construction process. They will also provide significant training andtechnical assistance in the areas of a) procurement, b) contract supervision, and c) contract management.This assistance will be provided to GOA officials, the project implementation unit staff and to theArmenian construction industry. The cost of these international conculting services is estimated at US$1.2million. Faculty at the American University of Armenia will assist in developing a training program forcontractors interested in bidding on contracts.

2.32 Housing Reform. The GOA has demonstrated its willingness to reform its housing sectorpolicies in the attached Statement of Intent (Annex 1.2). However, no formal sequence of steps has beendevised to implement this new policy. Technical assistance and training will be provided for thedevelopment of an action plan for legislative, regulatory, financial, and institutional changes necessaryto develop a market-oriented housing sector. Technical assistance in this area would cost approximatelyUS$200,000.

2.33 Regional Development and Reconstruction of the Earthquake Zone. Efforts toreconstruct the earthquake zone to date have been primarily ad hoc. At the request of the GOA, a studywill be performed to evaluate the prospects for regional development of the zone and devise policies andpublic investments to complete reconstruction and continue the economic and social rehabilitation of thezone. 'Te cost of the study is estimated at US $300,000. The Terms of Reference are included as Annex5.

2.34 Support to the Earthquake Engineering Center. The Earthquake Engineering Centerplayed a major role in the review of housing for Phase I of the project and is to have an even bigger rolein the housing strengthening subcomponent programmed for Phase II. However, the Center lacks somebasic equipment such as computers and electronic testing equipment it needs to perform this function. Thepurchase of this equipment, estimated at about US$180,000, will allow highly trained local seismicengineers to evaluate the seismic quality of structures to be repaired under the project.

2.35 Evaluation of Phase I of Project Implementation and Preparation of Phase II.Technical assistance and training will continue under the Japanese Grant to permit the evaluation of thePhase I components and the continued preparation of Phase II, including the preparation of detailed designand engineering for Phase II works. The estimated cost is US$350,000.

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F. Project Costs and Finandng

2.36 The project is expected to cost a total of US$46 million with US$28.7 million inincremental costs including US$20.7 million in foreign costs and US$8 million equivalent in local costs(see Table 2.1). Sunk costs of US$17.3 million equivalent, covering investments in infrastructure andpartially completed housing and factory shells are included in the overall cost estimates. Incremental costesimates are based on final designs and bills of quantity for Phase 1 (30% of total costs), and preliminarydesigns for Phase II. Base costs are estimated as of June 1, 1993. In view of the local inflation rate, costesdmates have been expressed in US dollars throughout this report. Furthermore, due to rapidly shiftingprices and exchange rates and the absence of good market comparators in Armenia, a physicalcontingency of 10% on technical assistance and 15% on other components and a price contingency of15% have been used.

2.37 IDA would finance 98.6% of total incremental costs for an amount equal to US$28.0million equivalent, including 100% of foreign and 95% of local costs (see Table 2.2). IDA will notfinance costs resulting from taxes or duties. Grant financing of approximately US$0.35 million fromJapan will fund preparation of Phase II. Additional grant financing from USAID may further expand thetechiical assistance program. If such financing is found, the amount of tne IDA credit will be reducedor reallocated to increase funding of other categories. Up to 10% of the credit amount may be used forretroactive financing. Advance contracting has been proceeding in the period since negotiations.

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Table 2.1: Project CostsUS$ Million

Local Foreign Total Percent

Land Sites and Infrastructure 1.7 - 1.7 4%Constuction: Sunk CostsHousing 5.9 - 5.9 13 %Factory Shells 9.7 - 9.7 21%Construction: Incremental Costs 5.7 13.2 18.9 41%Technical Assistance 0.2 2.1 2.3 5%Design, Supervision, Administration 0.1 0.5 0.6 1%

Base Costs 23.3 15.8 39.1 85%

Physical Contingencies 8 1.0 2.2 3.2 7%Price Contingencies (15%) 1.0 2.7 3.7 8%Total Contingencies 2.0 4.9 6.9 15%

Total Costs 25.3 20.7 46.0

Table 2.2: Project FinancingUS$ Million

Loal Foreign Total

State Authorities(and, infrastructure, sunk costs) 17.3 - 17.3(5% of incremental local costs) 0.3 - 0.3

IDA(incremental costs) 7.7 20.3 28.0

Donor Assistance9 0.4 0.4Sub-total (excluding sunk costs) 8.0 20.7 28.7

Total 25.3 20.7 46.0

8Physical contingencies are 10% on technical assistance and 15% on all other activities.

'the US$0.4 million in donor funds listed is Japanese Grant Funds utilized for preparation of PhaseII of the project.

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G. Project Benefits and Risks

2.38 Benefits of the project include a major impact on poverty alleviation in the EQZ throughemploymeuiL creation and subsidized improved housing and other welfare infrastructure. It will alsoinclude policy development in the housing sector and promote the institutional development of a privateconstruction industry through competitive procurement regulations and improved construction supervision.

2.39 This is the first time that the Bank/IDA has financed physical works in Armenia, andneither Bank/IDA staff, Government officials, nor Armenian professionals can fully anticipate problemsthat might occur. This difficulty has been mitigated by allowing for a mid-term review afterimplementation of Phase I of the project, by keeping the project small in scale and scope, and byincluding larger contingencies than usual. In addition, there is a blockade affecting the main supply ioutesinto Armenia, and civil strife in Georgia can interfere with shipments. This has been mitigated bycarefully reviewing transportation constraints during preparation and maximizing the use of private sectorimporters and suppliers, who have a better record of overcoming these problems. In other operations,it has been found that local unfamiliarity with Bank/IDA procurement regulations can slowimplementation. The training of PIU staff, government officials and local contractors in Bank/IDAprocurement procedures which has already been initiated during project preparation should reduce delays.Furthermore, a major portion of the Technical Assistance and Training program has been dedicated tothis potential problem. There is a risk that changes in the project implementation staff (see Paragraph 3.3)will delay implementation of the project, although the commitment to the project the GOA has displayedsuggests that all efforts will be made to reduce this risk. Despite Armenia's lack of experience inworking with the Bank/Association, the Government has completed all required steps in the preparationprocess on time. Finally, there is a risk that occupants might be unwilling or unable to pay for themaintenance of the units, making the housing component less sustainable than desired. However reduceddesign standards and costs will make the project more cost effective than its original design, and paymentsfrom beneficiaries under the project will be larger than they have been without the policy changes thatare being attempted.

H. Economic Evaluation

2.40 The factory shells component amounting to 23% of project costs was subject to economicanalysis. Selected factories for phase I show a weighted average rate of return on incremental projectinvestments of 50% and collective creation of 2,500 pemanent jobs. One factory has been conditionallyincluded; it will be subject to either a reduction of scope or a replacement of another enterprise. A rateof return for housing is impossible to calculate in the absence of a housing market; therefore housinginvestments have been selected based on their efficiency Oowest cost solution) and their contribution tosector goals (e.g. privatization, poverty alleviation, cost recovery, promotion of individual initiative inhousing provision). Annex 3 gives details of the evaluation performed.

1. Environmental considerations

2.41 The project has been placed in category "B0 in accordance with Operational Directive4.01. All housing rehabilitation will include the provision of environmentally sound disposal of sanitary(including reconnection to sewage treatment plants) and solid wastes; this will be a significantimprovement over the present post-earthquake situation. Reconstruction of water supply systems will bedone in order to prevent cross-contamination with waste lines in case of future disturbances. Buildingstandards will be reviewed to ensure public health issues are addressed and Feismic considerations are

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included to mitigate any potential future damage by earthquakes. The enforcement of these standards willbe evaluated during supervision missions.

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m. PROJECT IMPLEMENTATION

A. Organization Responslbilities

3.1 The general outline of responsibilities is as follows. The specific responsibilities for eachcomponent are given in Annex 12.

3.2 Cental Government. Primary responsibility for managing the project will reside withthe Ministry of Economy (MOE), which has responsibility for both the earthquake reconstruction effortand policy reform. The loan proceeds will not be on-lent to other organizatioi.s; they will remain centralgovernment funds and the cost recovery proceeds will accrue to the Ministry of Finance. TheGovernment's current Housing Policy Reform unit will be expanded under the Housing Policy AssistanceStrategy outlined in Annex 1.3, and will coordinate efforts in diffeient parts of the Government in thisarea and will prepare the reform action plan.

3.3 Project Implementation Unit. Preparation of the project was managed by a ProjectPreparation Unit created within MOE. After the loan is approved by the Association and signed by theGovernment, this organization will become a Project Implementation Unit (PIU) which will oversee theconstruction process and the preparation of Phase II of the project. The Director of the PIT, who hasalready been appointed, will report to the Minister of the Economy. The PIU, with assistance of aninternational consultant, has completed an operational manual of its internal policies and procedures, andput in place a satisfactory accounting system. A competent local accountant has been recruited, and willbe supported by periodic visits from an international consultant. Likewise, vxic'edures for procurementand management of contract oversight have been designed. It is expected that the staff recruited for theProject Preparation unit will largely be maintained, although contract management and constructionsupervision personnel will be added to facilitate implementation. Employees of the PIU are all employedas consultants, and they have had to give up Government employment or take a leave of absence in orderto take the positions. The organization chart of the PIU is included as Annex 9. At negotiations it wasagreed that the Borrower will maintain a Project Implementation Unit headed bv a fuil-time projectmanager, whose experience and qualifications shall be acceptable to the Association, and who shall beassisted by competent staff in adequate nunbers (para. 4.1, g).

3.4 Local Construction Fnrms. Given the size of the contracts to be awarded, it is likelythat the majority of the works will be performed by local construction firms. There is an emergingprivate construction industry that will compete for contracts in the project. However, it is expected thatmost of the bids for contracts within this project will come from public firms.'0 Allowing state-ownedfirms to bid on contracts should not lessen the level of competition, since it will increase the number offums bidding and public construction firms no longer receive any financial assistance from theGovernment. It is expected that the Armenian construction industry will be able to handle the anticipated

10 As a measure of the anticipated participation of public and private firms in bidding for contractsin this project, at a recent publicly announced training seminar fo- construction firms on BidPreparation and General Conditions of Contract, one third of the firms represent.e were privatelyowned.

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level of work; a review of the state construction firms both inside and outside of the earthqtuake zonefound that they possess sufficient capability to perform the tasks required and are present in sufficientnumber to ensure competition. Using competitive bidding procedures to create competition amongpublicly-owned construction firms is consistent with the government's policy reform program; the GOAhas already announced that state construction firms will participate fully in the privatization prograrr. thatis already underway.

3.5 International Consultants will be employed within the PIU to manage and supervise theconstruction process; a Contracts Manager has been recruited, and will oversee the construction contractprocurement, project planning and supervision and contribute to the construction industry transformation;he will also introduce appropriate quality, quantity and cost control systems thereby assisting in thedevelopment of a competitive local consultants industry and he will advise the local consultants carryingout construction supervision on related matters. Short term international consultants will be employedfar training activities and to develop specific management systems.

3.6 Local Governments. The Armenian central government still exercises considerablt;control over local governments. Nonetheless, the municipalities of Gumri, Spitak and Vanadzor alreadyhave supplied written documentation confirming their agreement with the proposed terms and conditionsof the programs on cost recovery and designs. The municipalities will manage the bathhousesubcomponent and serve as the designated agent of the central government in the housing components,where they will be responsible for managing the recipients individual loan accounts.

B. Project Phasing

3.7 P-oject implementation will be divided into two phases with a mid-term review at the endof Phase I. Phase I will emphasize rapidly meeting the EQZ population's needs for shelter andemployment. Thus, the first phase consists primarily of completion of nearly finished apartments andinitiation of factory shell construction. Pilot projects in single family housing and community bathhouseswill be initiated in Phase I, to begin testing those subcomponents, and expanded in Phase II. Work willbegin on the Regional Development and Reconstruction Study and the GOA will employ local long-termconsultants in its Office of Housing Policy Reform to formulate the action plan, and identify topics whereshort term studies by international consultants might be useful. An implementation plan has beenprepared for Phase I and is attached as Annex 7; also during the implementation of Phase 1, preparationof the sub components for Phase H will be conducted. The expected breakdown of components betweenPhase I and Phase II is shown in Table 3.1.

3.8 Preparation of Phase I has continued since negotiations. All cost estimates and designshave been completed. The first lot of contracts were awarded in early October 1993. Tendering othercontracts is awaiting credit effectiveness.

3.9 A mid-term review is planned for no later than June 15, 1994 to assess the experience of PhaseI, to revise procedures and cost estimates or re-design subcomponents if necessary, and to re-allocatefunds between cities or components if judged desirable. Bank/IDA staff will complete the appraisal ofsub components for Phase II. At negotiatons it was agreed that activities to be financed in Phase 11wndd be subject to prior approval of the Association as a part of the mid term review of the project(vara. 4.1, h). In Phase ll, apartment units at a high stage of completion will become less prevalent anda pilot effort in strengthening and rehabilitating damaged apartmnent buildings will be initiated. Moreimportantly, approaches which have been less traditional in the socialist housing system, such as single

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family housing and improvements in temporary housing areas such as the community bathhouses will belaunched, Short-term studies on housing policy will be performed. In the factory shell component, anumber of newly identified shells will be constructed. Work on the Reconstruction Study will continueduring Phase 1I. Annex 6 shows the distribution of specific subcomponents between Phase I and PhaseII.

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Table 3.1: ExpenditurEs by Phase of Project and Subcomponent(Excluding Land, Infrastructure and Sunk Costs)

lroect Compone City Ph: I Unt Totcl Ph Unit Total Projct TotalCos USS II Cost US$000 US$000USS 000 USS

1. HosNg8.a. Compleion Gumri 385 2400 924 350 4000 1400 2324

Spitak 102 2000 204 52 4000 208 412Vanadzor 370 2000 740 300 4000 1200 1940

b. StrUgienns Gumri 0 0 200 3000 600 600Spitak 0 0 3000 150 IS0Vanadwr 0 0 160 3000 780 780

c. SingtFamily Guni D.a 89 | .A 731 820Housing Spitak .sa 89 U.s 687 776

Vaned=zo v. 89 u.a 692 781

2. MunicipalServices

A. Basthouses Qumin 4 20,000 80 27 20,000 540 620Spitak 3 20,000 60 5 20,000 100 160Vanadzor 3 20,000 60 6 20,000 120 IS0Solar Heaing 30,000 30 6 30,000 IS0 210

b. Infiaructars Gumui 0 500 500SpitiStep 504 0 0 504Vanadzor 0 500 500

c. ComunuityFaciitie 600 600

3. Factory Gumnn 2 2,114 0 0 2,114Complete Spitak 1 507 1 1,000 1,507

Vaadwor 2 2,423 1 1,000 3,423

6. TA & T=rainng Cona. & Ptocuremnt 300 900 1,200HousingPolcy 100 100 200EArthquake Racon.Study ISO IS0 300Ebrthquake EngineeringCofter 180 IS0Evaluation of Phase V[Phate II 350 350

7. Superviion &Adminbstation 388 632

TOTAL 9,238 12,i26 21,764Condngercies

PhysicalTA 10% 132 154 286Works, ec. 15% 1,187 1,645 2,835Price (Is%) 15% 1.583 2.149 3.732

GRANDTrOTArL 12,140 16,477 28,617

ecW2U, 199J

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C. Procurement

3.10 The project elements and procurement arrangements are summarized in Table 3.2. Allworks, equipment materials to be financed from the Association credit proceeds would be procured inaccordance with the Bank/IDA Guidelines for Procurement.

SUMMARY OF PROPOSED PROCUREMENT ARRANGEMENTS'(US$ million)

7able 3.2: Procurement Arrangements

Procurement Method

ICB LCB OTHER N.B.F.' TOTAL

1. Land Sites & Infrastruc. 1.7 1.7

2. Sunk Costs 15.6 15.6

3 Housinga. Completion 6.0 0.2 6.2

(6.0) (6.0)b. Strengthening 1.9 0.1 2.0

(1.9) - (1.9)c. Single Family Hous. (2.4) (0.8)# - (3.1)

4. Municipal Servicesa. Bathhouses (1.2) (0.4) - (1.6)b. Infrastructure (0.5) (1.5) - (2.0)c. Community Facil. (0.8) - (0.8)

5. Factory Completion (2.0)r (6.6) (0.7)3' - (9.3)

6. TA & Training - - (2.3)dI 0.5 (2.3)

7. Supervision & Admin. (0.8) _ _ (0.8)

TOTAL 2.5 19.6 5.8 18.1 46.0________________________ (2.5) (19.6) (5.8) - (28.0)

Note: Figures in parentheses are the respective amount's financed by IDA/IBRD.a/ Figures may not add to totals due to rounding.b/ Non-Bank Financed; financed 100% by the Government or other financing agency.cJ Local shoppingd/ Consultanciese/ Construction materials

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3.11 Civil Works. The civil works included under the project consist of: (a) completion ofapartments in scattered buildings in Gumri, Vanadzor and Spitak; (b) strengthening of buildings,previously occupied but vacated after the earthquake; (c) development of single family housing, d)completion of factory shells; (e) bath houses; and (f) infrastructure.

3.12 Given that the contracts for housing (a), (b), & (c) above would entail predominantlysmall scale and geographically scattered works and that local contractors' prices are expected to becompetitive and well below international market prices, foreign bidders are not expected to be interested.Furthermore, housing completion, strengthening, infrastructure and factory completion components arepartly constructed and unsuitable for the international competive bidding procedure. Therefore, civilworks conas with a contract price below US$1.5 million and a total value of US$19.6 million wouldbe awarded through local competitive bidding. In addition, contracts for small value (price belowUS$80,000) shall be procured on the basis of price quotations from at least t ree local bidders and areexpected to have a total value of US$2.0 million.

3.13 Bank Standard Bidding documents: "Procurement of Works (Smaller Contracts)" havebeen fialized for Armenia. The Russian translation for this project was approved by the World Bank'slegal department.

3.14 Goods. The goods to be financed from the credit proceeds include construction materials,office and equipment and supplies, resource materials, furniture, computers, and vehicles. To the extentpractical, these items would be grouped into procurement packages. Contracts for equipment andmaterials estimated to cost more than UF$50,000 equivalent each will be procured through ICB. Itemsthat cannot be grouped or groups of itemns estimated to cost less than the equivalent of US$50,000 percontract, or off-the-shelf items such as office supplies and equipment, may be purchased on the basis ofobtaining a minimum of three price quotations up to an aggregate value of US$700,000. Domesticmanufacturers may be granted a margin of preference for ICB contracts in accordance with the guidelines.The Bank's Standard Bidding Documents for Goods, as modified to suit the project requirements, willbe used for ICB.

3.15 Consultants. Consultants for technical assistance financed under the project (totalling)US$ 1.9 million) will be selected in accordance with the "Guidelines for the Use of Consultants byWorld Bank Borrowers and by the World Bank as Executing Agency'. Sample formats forconsultants services contracts will be used for contracting consultants. Long-term technical assistancefrom abroad would be contracted for the project management subcomponent. Long term local consultantswould also be hired for the PIU. Other technical assistance would be short-term, individually recruitedconsultants, with assignments ranging from two weeks to about three months. They will be hired on thebasis of comparing at least 3 CVs. There is sufficient local expertise for consulting assignments underthe project. Technical assistance contracts would comprise about four contracts for US$1.6 million; about10 contracts with individual short-term international consultants of about US$20,000 each; and about 30contracts with local consultants average value US$3,000. Training, activities are expected to beincluded in TA contracts. Overseas training would be carried out through Bank/IDA procedures. Directcontracting with local and/or foreign training agencies and universities would also be used.

3.16 It is estimated that about 80 main contracts ranging from US$10,000 to about US$1.5million will be signed during the life of the project. These contracts will cover above 90% of the loanamount.

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3.17 All contracts for goods of a value exceeding US$100,0(0 equivalent and for worksexceeding US$600,000 equivalent will be subject to the Association's prior review. All consultantcontracts, with the exception of contracts estimated to cost less than US$100,000 equivalent, would besubject to prior review. The Association will, however, review terms of references, short lists, andconsultants' profiles for local individual consultants. Selective post review of awarded contracts belowthe threshold level would be carried out on about one in 20 works contracts and one in four goodscontracts. All procurement activities will be coordinated by the PIU. The unit presently includes onelocal person with procurement knowledge and a long-term project implementation consultant, ContractsManager has been engaged to assist the Unit in this area.

3.18 Procurement information would be collected and recorded as follows: (a) prompt reportof contract award information by the Borrower; and (b) comprehensive quarterly reports to theAssociation by the Borrower (assisted by consultants) indicating (i) revised cost estimates for individualcontracts and the total project, including best estimates of allowances for physical and price contingencies,(ii) revised timing of procurement actions, including advertising, bidding, contract award, and completiontime foi individual contracts, and (iii) compliance with aggregate limits on specified methods ofprocurement. A procurement implementation plan is shown in Annex 11.

D. Disbursements

3.19 The proceeds of the Credit would be disbursed in US dollars against:

a. 100% of foreign expenditures for equipment and 80% of local;

b. 100% of foreign and local expenditures, net of taxes, for civil works contractsfor the housing, municipal services and factory shell components; and

c. 100% of expenditures for technical assistance, training and studies.

3.20 The estimated Disbursement Schedule is given in Annex 10. It is expected thatdisbursements would be completed by the Credit Closing Date of June 30, 1996.

3.21 Disbursements would be made against standard Bank/IDA documentation. Disbursementsfor contracts, building materials, equipmeat and training with a total value of less than US$50,000 wouldbe on the basis of statements of expenditures (SOE). In order to ensure the timely provision of fundsavailable to finance the costs of the project, it is proposed that the Government establish a SpecialAccount in the amount of US$3 million. Funds in the Special Account would be available to finance onlyeligible expenditures under the project. At negotiations, agreement was reached regarding thearrangements for establishing and operating the Special Account (para 4.1 i).

E. Accounts and Audits

3.22 The project accounts will be prepared by the PIU during project implementation (para3.3). The Project Account would identify all sources and uses of funds in carrying out the project,including a detailed accounting of the use of the proceeds of the Credit and the operation of the SpecialAccount. The Project Account would be audited by an independent auditor acceptable to the Associationand the audit reports would be submitted to the Association within 4 months of the end of the fiscal year.The audit reports would contain a separate opinion on the operation of the Special Account and the

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statements of expenditure (SOE) procedure, when utilized. Since the auditing profession is not yet welldeveloped in Armenia, it is expected that a private international commercial auditing firm will carry outthe audits. During negotiations, agreement was reached regarding the accounting and auditingrequirements (para. 4.11j).

F. Project Monitoring and Supervision

3.23 Reporting Procedures. The PIU will provide quarterly reports on the progress ofimplementation. In addition, the mid-term review will allow assessment of progress and adjustments tocomponents. The government will prepare a Project Completion Report according to standard Bank/IDApolicy.

3.24 Inplementation Performance Monitoring Indicators. Indicators monitoring theprogress of implementation will be collected for the quarterly and supervision reports. These indicatorswill track the progress of construction in the vatious components, the performance of the enterprisesbenefiting from the finished factory shells, and the social welfare indicators as well as the progress ofhousing policy reform. In coordination with the long-term Housing Policy Advisor employed by USAID,indicators of progress in housing policy such as the number of units privatized, the level of state andprivate housing construction, and the volume and price of housing sales, have been developed. Thesewill be updated throughout implementation both to assist the development of the Housing Policy Agendaand to provide an analytical basis for future operations.

3.25 Supervision schedule. A tentative supervision schedule is attached. The June 1994mission coincidec, with the mid-term review. It will therefore focus on the experience as of that date andthe selection of activities to be financed in Phase II. The October 1994 and February 1995 missions willfocus on the experience during the second phase. The August 1995 mission will review projectexperience and gather d'-a for project closure activities (PCR, etc.).

March 1994 Jun 1994 Oct 1994 Feb 1995 Aug 1995 Dec 1995

Task Manager x x x x x x

Architect/Planner x x x x

Urban Planner x

Urban Economist x

Industrial Economist x x

Financial Analyst x l x

3.26 Because the project is with a new borrower and the components are multidimensional,a greater than usual supervision component of 25 staff weeks a year is recommended.

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IV. AGREEMENTS, CONDITIONS AND RECOMMENDATIONS

4.1 During negotiations, the Government confirmed the following agreements:

a. That the borrower will submit an action plan on housing policy reform asdescribed in Annex 1.3 at the time of the Mid Term review (para 2.8);

b. That the allocation criteria for apartments and single family homes will not bechanged without prior approval of the Association (para 2.13 and 2.21);

c. Specific arrangements and terms of cost recovery for housing (para 2.15 and2.22);

d. That bathhouses will be operated as contract franchises with users paying a feeto cover operation and maintenance (para 2.23);

e. That the costs of completing reconstruction of the factory sbells will be recoveredfrom the enterprises under terms acceptable to the Association (para 2.28);

f. That the Government of Armenia will be required to provide priority access toelectricity supplies to the enterprises benefitting from completed factory shells(para 2.29);

g. That the Borrower will maintain a Project Implementation Unit headed by afull-time project manager, whose experience and qualifications shall be acceptableto the Association, and who shall be assisted by competent staff in adequatenumbers (para 3.3);

h. That the specific works to be completed under Phase II will be agreed with theAssociation as a part of the mid term review of the project (para 3.9);

L On the arrangements for establishing and operating the Special Account (para3.21); and

j. On accounting and auditing requirements (para 3.22);

4.2 There are no project specific conditions of effectiveness.

4.3 With the agreements reached above, the project is suitable for a SDR 20.1 million(US$28.0 million equivalent) credit under standard IDA terms, with 35 year maturity, to the Governmentof Armenia.

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Annex 1.1Page I of 2

ARMENIA


Housing Policy Reform Program

Legislative Achievements and Outstanding Issues

A. Background

1. As a member of the Former Soviet Union (FSU) Armenia's housing sector reflects thecommon problems found in other countries in the region. The Government of Armenia (GOA)recognizes that reform of its housing policies will be necessary to achieve the desired goal of transformingthe socialist housing system into a market system. This document summarizes the current status of thisreform program.

2. Privatizatilon of Housing. The privatization process has been covered by the Soviethousing privatization policy which charged a price per square meter of housing determined by a formulabased on the condition of the unit. Only about 5% of the stock has been privatized in this manner.There is urently a developing market for housing sales, though it is small and informal.

3. New legislation intending to privatize the stock more quickly was passed by theParliament on June 6, 1993. The legislation allows sitting tenants to take ownership of their unitseffectively free of charge (i.e., with only a nominal fee linked to the size of the unit). A two year periodis allowed for filling such applications, after which ownership reverts to the municipalities. The ownersof the privaized units in a building will be organized into a condominium association"; USAID has aproject developing formal condominium regulations which are being tested in pilot exercises in Yerevan.The tenants association will be responsible for maintaining their units by contracting with any public orprivate management organization. The Department of the Economy of the Government Apparatus isresponsible for developing the details of implementation. Land under the privatized buildings remainsunder state ownership.

4. Privathation of land. Legislation privatizing agricultural land was passed in 1991; 80% of agricultural land has been privatized to date. There is still no general initiative privatizing urbanland. Thus, urban land still falls under the statutes of the FSU in which individuals were allowed to own,buy and sell a building but not the land on which it stood although they could be granted a piece of landfor individual housing construction. Work is underway to provide a legal and regulatory framework forland sales.

5. Regulation of Urban Land. Tlhe supply of urban land is controlled by a relatively rigidregulatory environment. Transformation of land from rural to urban uses is allowed only with

The legal basis for condominium associations is under development, although current cooperativehousing legislation provides an interim legal basis.

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Annex 1.1IPage 2 of 2

authorization and approvals, even in the cases where agricultural land has been privatized; in rural areasit is still only possible to build housing in designated areas unless explicit approval is obtained. Citymaster plans designate the area available to urban uses. The role of master plans is even stronger in theearthquake zone, where reconstruction is under the jurisdiction of master plans created by outsideagencies such as the national city plaming agency. Areas not covered for redevelopment in the masterplan cannot be reconstructed.

6. Rent Reforms. As in other republics of the FSU, rents in Armenia all below the costof maintaing units. Monthly "rent" payments actually cover utilities and trash removal services; thispayment is approximately 5% of the amount necessary for full cost recovery. In February, 1993, themonthly payment was increased by a multiple of 6.25, an amount approximately equal to the current600% annual inflation rate. However, the rent component was increased by only a factor of 5 andcurrendy falls at about R50 (ess than US$ 1) per month for a four-person household living in a 50 squaremeter unit. Government officials involved in the formation of housing policy recognize that the currentrent policy is neither sustainable nor desirable, but under current economic conditions a rapid reformprogram is not implement able. However, the Government's plan is to increase rents to cover operationsand maintenance and utility charges to cover costs by the end of 1994; there are also some efforts toexplore rent reform at the local level as in the case of Yeravan City.

7. Housing Flnance. The very high inflation currently experienced in Armenia precludesthe development of a stable, growing housing finance system. The Government is consideringmechanisms to collect costs of new housing from individuals through some sort of indexed paymentscheme, although it recognizes that any such scheme is bound to be imperfect in the current envirownent.A law covering credit relationships and guarantees-including mortgages was submitted to the Parliamenttwo years ago and is expected to be approved this year.

8. Refonn of State Construction Companies. State construction companies have beenincluded under the legislation privatizing state companies passed last year. Under this legislation,employees will get 20% of the shares-and the equivalent portion of profits-in their enterprises. TleGovernment's plan is to complete the privadzation process by year's end. The government has alreadyliberalized building materials prices.

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ANNEX 1.2Page I of 2

ARMENIA



Housing Policy Reform: Statement of Intent"

1. The Government's basic policy objective for the housing sector is to transform the currentsocialist system into a market system of housing. The Government's role in a market housing systemwil be to facilitate the efficient private provision of housing for all Armenians and to assist lower-incomefamilies who are not able to afford reasonable housing. Individuals should be allowed to providethemselves with the type and location of housing which meet their needs. The transformation will requireconstitutional changes as well as reforms of laws, regulations and institutions.

2. Istitutional Reforms. The government will restructure public agencies to adjust to theirnew role as facilitator in the provision of housing rather than direct providers of housing. TheGovernment will also review the division of responsibilities between central and local government tofacilitate this end.

3. Basic Framework of Property Rights. Armenia will further develop the legal basis fora basic framework of property right able to support fully the emergence of competitive housing marketsby clarifying the ability of individuals and public or private institutions to buy or sell, rent, occupy anduse land and housing.

4. Housing Flnance Development. The government recognizes that long-term credit suchas housing finance can only exist in a stable macro-economic environment and will do everything in itspower to create such an environment. Armenia also recognizes that a sustainable housing finance systemwill require a coherent program of financial sector reform. Armenia has begun to establish the legalframework for housing finance, including laws on real estate mortgages, property registration, foreclosureand eviction, and will continue these efforts. In the few cases, such as the Earthquake Zone, where theGovernment is still actively involved in the provision of new housing, credit mechanisms will continueto be used as a mechanism for cost recovery.

5. Rent Reforms. The Government is committed to raising rents in the public housing stockin order to ensure adequate resources for maintenance of the existing stock, to ensure fiscal survival oflocal governments and to integrate the market for new and existing housing. The Government recognizesthat households may hesitate to privatize their units until rents approach :^e costs of ownership. Inraising rents, however, the Government will remain committed to alleviatir, the addition burden placedon vulnerable and low income families through a temporary or permanent targeted subsidy program.

6. Subsidies. The Government recognizes that large-scale subsidies going to the housing

'2Prepared by the government for the pre-consultative group meeting of May 1993.

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sector threaten central and local governnent fiscal stability, especially the subsidy created when the costof operating and maintaining the state rental stock exceed rents. The current program to privatize housingis designed to address this problem. The Government also recognizes that current programs do not assurethat subsidies go to the neediest households. Within the framework of a targeted social policy,

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ANNEX 1.2Page 2 of 2

mechanisms will be explored to target subsidies to such households, to make the subsidies explicit andto control their impact on government finances.

7. Housing Privatization. The Govermment commits itself to implementing thisPrivatization Act fully during 1994 and to submit facilitating regulations and laws, such as those such asthose allowing condominium associations by September 1994.

8. Building Codes and Standards. The Govermnent will review current building codesand standards to insure that they meet public health and safety needs without imposing excessive costs.Reaiistic standards meeting this principle, including seismic safety codes, will then be enforced.

9. Urban Land Polcy. Mechanisms will be created to facilitate the development a privatemarket for land ownership and development. Use of urban land will be subject to new zoning and otherland use regulations that balance public and private interests; allow participation by private parties indecisions regarding land use; and that protect health and safety, environmental and historical amenities.

10. Building Industry Privatization and Restructuring. The Government is committed torapid progress in reducing the role of public institutions in the construction of housing, restructuring stateconstruction companies and removing obstacles to private construction companies and building materialsindustries. The government will introduce competitive bidding procedures in state construction projects.'Me Government will establish a legal and regulatory framework for a competitive building industry (suchas regulations on insurance, guarantees and bonding) to assure that the public interest is protected withoutcreating unreasonable barriers to entry for small private firms.

iI. Housing Management and Maintenance. The goal of the Government will be towithdraw rapidly from direct responsibility for housing maintenance. The Government will encouragethe formation of condominium associations that would shift responsibility for maintenance from publicprovision to the associations. The Government will amend cooperative housing laws so that they canfunction similar to condominiums both in terms of building management and unit sales. The Governmentwill allow private companies to compete for maintenance contracts for the remaining state buildings.

12. Cost Recovery. The Government of Armenia intends to transfer the responsibility forthe costs of housing to private individuals through three mechanismns:

a. Privatization of the publicly-owned housing stock, to transfer the responsibilityfor maintenance costs to private individuals;

b. Withdrawal of the Government from the direct construction of housing except forspecial cases (e.g., the Earthquake zone); and

c. Using credit mechanisms to recover at least part of the costs of construction inthe few cases where public construction will occur.

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ANNEX 1.3Page I of 2

ARMENIA



Housing Policy Reform: Program for External Assistance

Based on the analysis of the current status of Armenian housing reform and theGovernment of Armenia's Statement of Policy Intent, the Government of Armenia proposes the followingoutline of how a technical assistance/training program could function in parallel with the InternationalDevelopment Association assisted Earthquake Reconstruction Project. The TA program is orientedtowards assisting the Government in implementing its general reform agenda. This assistance would becoordinated with that of other multi-lateral and bi-lateral agencies such as the EEC and USAID whichmay be working in the area. The Office of Housing Reform of the Russian Republic has also offeredassistance in the form of sharing its experience in developing a reform agenda.

a. Technical assistance will be provided in two stages, largely corresponding to thePhases I and II of the International Development Association project:

(i) Phase I: Development of the Housing Reform Agenda. Long-termlocal consultants would be employed to assist the coordinating unit. Itis proposed that these individuals be housed in a special division withinthe Ministry of Economy. These consultants will develop a workprogram for the necessary legal reforms and policies. The consultantswill have backgrounds in economics, urban planning or law; theirselection will be monitored by the coordinating unit. Monitoringindicators to track the pace of housing sector reform should also beidentified. This work can be supplemented by the training activitiesdescribed below. The Director of the Office of Housing Policy Reformof the Russian Republic has offered assistance in developing this agenda.

(ii) Phase U: lnitiating Implementation of the Program. The long-termconsultants will be supplemenkted by domestic or expatriate consultantsto work on specific studies identified as high priorities in the ReformAgenda. It is assumed that approximately 4 studies, each with 6 staffweeks of input, will be performed. Again, the Russian Republic hasoffered to assist by providing copies of their proposed legislative andregulatory initiatives.

b. Training. Specific training activities in support of the development of thereform agenda or its implementation will also be undertaken. These activitiesmay include:

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ANNEX 1.3Page 2 of 2

(i) Study tours to Russia, other parts of the FSU, and East and WestEuropean Countries to discuss housing reform.

(ii) Participation in international conferences or training seminars on thesetopics.

(iii) Provision of draft legislation and research materials on housing policy inreforming socialist economies.

Given the reliance on local consultants, assistance mainly from the Russian Republic, the costsof the program will be low. It is estimated that the total budget will be approximatelyUS$200,000.

c. Monitoring the Reform Process. USAID's resident advisor on housingpolicy has agreed to assist the GOA in designing indicators to track thedevelopment of the housing sector and the housing policy reform process. Thesewill consist of:

(i) Housing Production. Housing Units finished annually;

(a) Public(b) Private

(ii) The government Housing Production Budget;

(iii) Progress of Privatization. Number and area of Housing Unitsprivatized annually and cumulatively;

(iv) Number of condominium associations formed;

(v) Hectares of urban land privatized (when land privatization law is enacted);

(vi) Government housing maintenance budget, and

(vii) Development of Housing Market

(a) rate and average price of housing sales(b) house price to income ratio

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ANNEX 2Page I of 3

ARMENIA


Cost Recovery

1. Apartment Completion. According to the housing policy of the government of Armenia,new housing will no longer be provided free of charge. However, the GOA recognizes that under currenteconomic conditions, full recovery of construction costs will be impossible and any cost recovery schemewill be imperfect. Nonetheless, the government feels that this is a crucial moment for establishing thenew policy and an attempt should be made to establish the precedent through even an imperfect costrecovery program. The government has already determined that a program funded by the Governmentof the Russian Republic will be designed to resemble a credit program, though it will not pass throughthe banking system. In other words, recipients of housing units will r-ceive a credit, which they wal thenbe required to pay back. Both the balance and the payment will be indexed.

a. Ioan Balance. 'Te initial loan balance will be calculated by applying theaverage cost per square meter of completing apartments by the size of the unit.The loan balance of serviced lots and single family housing will be the cost ofinfrastructure and core houses, since the land will be provided at only a nominalfee;

b. Monthly payment calculation. The monthly payment will be determined bydividing the initial dollar value of the loan after the up front subsidy (see below)by the number of monthly payments to be made'3;

C. Number of Monthly payments. Payments will be made on a monthly basis fortwenty five years;

d. Down payment. There would be a nominal cash down payment as establishedby the GOA;

e. Subsidies. An up-front subsidy of 75% will be provided on equity grounds a perthe provisions of the law on mass privatization of housing. The monthlypayment for the average unit is 25 % of a minimum salary'4 ;

13 This corresponds to a real interest rate of approximately zero (or slightly negative after dollarinflation). While such an interest rate is not normally acceptable under bank policy, it issignificantly higher than the current ccirnmercial rates in the FSU which are substantially negative.Thus, this system will at least be less damaging than cther systems that might be employed.

14 This amount is only slightly above the average of willingness to pay cited by residents of theEQZ surveyed in the sociological survey conducted by the Project Preparation Unit.

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ANNEX2Page 2 of 3

f. Indention method. Loan balances will include a dollar value maintenanceclause. Monthly payments will be indexed to the minimum wage;

8. bLan Collateral. The households receiving the units will own them. However,in the short run, the government will retain title as a form of collateral. As soonas the legal framework currently under consideration in the Parliament is passed,title will be passed to the nouseholds and a format mortgage registe -d;

h. Owner Occupancy. Recipient households would be required to occupy theirunits for five years. After that date, they could sell to any other individualwilling to assume the debt; and

i. Specl Conditions. Beneficiary households will be required to surrender theirtemporary housing unit and any rights to its location.

Beneficiary households which were not able to meet the monthly payment could performcommunity service (e.g. landscaping, painting, work in community centers, etc.) for up to 2 years. Theprogram would be administered by the municipality.

2. Single Family Housing. Cost recovery for single family housing will employ amechanism similar to that of apartment completion with the following modifications:

a. Amount of Loan. The initial amount of the loan will be the cost of providingservices to the lot and of constructing the coi house. Land will be provided inaccordance with existing legislation, i.e., at a nominal fee;

b. Subsidies. Subsidies not exceeding 25% of the loan amount will be provided onequity grounds as per the provisions of the law on mass privatization of housing;

c. Owner Occupancy. Recipient households will be required to occupy their unitfor at least three years, after which it may be sold to any individual wi1ling toassume the loan; and

d. Special Conditions. Recipients of serviced plots without core houses will beallowed to transport their temporary housing units to the site allocated to them.Otherwise they will surrender the unit. Al! recipients must surrender any rightsto the current location of their temporary housing unit.

Community service will not be allowed in lieu of payment.

2. Factory Shells. Since the enterprises chosen to participate in the project were selectedaccording to their profitability (among other factors) they will be required to cover all the incrementalcosts of construcdon. 'he loan agreement will be signed by the enterprise prior to signing the contractfir construction of the shell and will include the following terms:

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ANNEX 2Page 3 of 3

a. Amount of Loan. Full incremental costs of construction expressed in dollarvalue;

b. Term. The loan will have a 15 year term including a three year grace periodduring which interest will be capitalized. The enterprise will be required to signthe loan agreement before the initiation of construction, although the loan itself,and the accrual of interest, will not begin until completion of construction;

c. Interest rate. The loan will have an interest rate 0.5 % above the World Banklending rate;

d. Monthly Payment. Will be made in any currency with a dollar maintenanceclause; and

e. Collateral. Title to the unit would be held by the government unti theenterprise is privatized, at which point a mortgage would be registered.

The GOA has confinned its agreement with each of the terms and procedures outlined above.

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ANNEX-3Page I of 3

ARMENIA


Summary of Economic Justification's

1. Housing component. Several factors in the Armenian environment make calculation ofa classic economic rate of return analysis difficult if not impossible for the housing sub components.Calculation of the costs of the program can be performed relatively easily, however, benefits are moredifficult to calculate. The Government has only begun its housing reform program, so rents have yet tobe raised to a level which will allow them to be used as the shadow price of housing. A housing salesmarket is developing, but is still to small to serve this purpose.

2. Nonetheless, it is possible to demonstrate that the subcomponents pursue the project'sobjectives with as high a level of economic efficiency as is possible in the environment (see para 2.10).Subcomponents have been selected so as to use the least costly methods of supplying the population ofthe earthquake zone with housing as rapidly as possible.

Table 1: Average Cost of Finishing Uncompleted Apartments

Avg. Cost-Phase I Avg. Cost-Phase II

Housing Completion US$2200 US$4000

Housing Strengthening US$3000

Single Family Housing US$2835

3. Factory Shell Component. Completion of the factory shells was subjected to a financialanalysis and the economic viability of the component can be demonstrated in two manners.

4. Economic Rate of Return. First, the completion of the shells can be analyzed accordingto classic economic rate of return analysis. In this case, the estimated incremental profits after completionof the shells was counted as benefits while the incremental costs of completion was counted as costs.Ideally, project benefits and costs would be calculated using shadow prices reflecting their real economicvalues. However, given the wide array of price distortions on both the cost and benefit sides, accuratecalculation of shadow prices may not be possible. As a consequence, future profits were subjected to asensitivity analysis where it was assumed (Scenario 2) that they would only be 75% of projections and(scenario 3) that they would only be 50% of projections.

5 Detailed data on cost estimates for all components and financial projections for thefactory shell component are included in the project files.

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ANNEX 3Page 2 of 3

5. As can be seen, the Gumri Textile Factory"6 falls below the accepted rates of return in allscenarios while the Gumri Armelectrocondenser Factory falls below acceptable rates in the more stringentscenarios. All other rates of return are high and robust across scenarios.

Table 2: Rate of Return Analysis - Factory Completion Shell Component

Enterprise Scenario I Scenario 2 Scenario 3

Gumri Textile 3% -1% -6%

Gumri Armelectrocondenser 12% 7% 1 %

Spitak Clothing 38% 28% 17%

Vanadzor Precision Tool 47% 35% 22%

Vanadzor Fur 70% 52% 34%

6. Debt Service Capability. In addition, eacn factory was analyzed to determine whether it couldservice the debt incurred to finish the shell under the terms negotiated for thk leases (and the implicitsub-loans). For a loan at 8.5%, 15-year term, and 3-year grace period, an enterprise must repayR150,977 yearly for each R1,000,000 borrowed. The total funding required by each enterprise, theirannual loan payment, and projected annual after-tax profit are shown in the table below:

Table 3: Enterprise Profit and Annual Loan Payments

Total Funding Annual Loan Proj. AnnualEnterprise Required (Rubles) Service Payment Profit

Gumri Textile R1,576,800,000 R238,060,530 R131,695,000

Gumri Armelectrocondenser R537,600,000 R81,165,235 R81,740,000

Spitak Clothing R507,200,000 R76,575,534 R135,771,000

Vanadzor Precision R1,440,000,000 R217,406,880 R445,175,000Machine I_I_I

Vanadzor Fur R983,200,000 R148,44e,580 R523,621,000

16 A reduced alternative that seem to meet all selection criteria is presently subject to cost estimatesand preparation for inclusion in Phase II.

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AN-NEX 3Page 3 of 3

As in the rate of retum analysis, It was found that the Spitak and Vanadzor were morethan sufficiently profitable to service a loan to finish their factory shells. The GumriArmelectrocondenser was also able to service the loan, though by a less impressive margin. The GumriTextile Factory can not service the level of debt requested.

7. Condusion. On this basis it was determined that completion of the factory shells for allbut the Gumri Textile plant was economically justifiable. In that case, discussions have been opened withthe factory's management to determine whether the size of the shell can be reduced or another enterprisecan be found to share the facility and part of the cost. As a consequence, this factory shell has beententatively included at its original cost until the detailed information about the reduced alternative isavailable. If no satisfactory arrangement can be reached in which the loan can be serviced, the funds willbe re-allocated to other components at the time of the mid-term review.

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ANNEX 4Page I of 2

ARMENIA

EARTHQUAKE RECONSRUCTION PROJECT

Issues in Contracting and Procurement

A. Issues in Contracting and Procurment

1. hnportation of Construction Materials. A high proportion of the materials needed tofinish constuction-wood, windows, doors, glass, reinforcement steel, plumbing fittings, etc.-niust beimported. Interviews with numerous building materials importers have shown that creative solutions arebeing employed to bring such materials in through the blockade. These importers report that the timefrom order to delivery is approximately one month."7 Contractors bidding on construction contractswill be expected to arrange for the importation of the materials they require. The tender documents willrequest information on the techniques they intend to employ.

2. Currency Provisions. Because of recent inflation and currency turmoil, all bids for ICBand LCB contracts will be expressed in hard currency, as has been agreed with GOA.

3. Price Adjustment. There will be no price adjustments.

4. Advance Payments. A maximum of 20% advance payment to successful contractors isproposed to provide initial cash for the start-up of works.

5. Alternative proposals. Alternative proposals will not be invited. The limited scope ofwork and experience of the bidders create difficulties in evauating other proposals. If required,modifications can be made as variation orders.

6. Bidding procedures. The bidding period for LCB contracts will be 30-45 days,depending upon the size of the contract. The bidding procedures have been discussed with the Ministryof the Economy. Subsequently, bids will be submitted for opening in public as stipulated in the tenderdocuments. The bid evaluation will be undertaken by the Project Office with assistance by consultants.The post qualification of contractors will form an important part of the bid evaluation. Award of LCBcontracts will be proposed by the Project Manager, an evaluation report will be sent to the Associationtask manager for review before award of contract.

17 In fact, a large quantity of materials traded between Russia and Iran apparently still travel viaArmenia.

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ANNEX 4Page 2 of 2

B. Technical Assistance and Training in Procurement

7. Training. Two training seminars have been planned as part of the start up of the project.The first, which took place in June 1993, was a four day seminar designed to make Armenian contractorsfamiliar with how a competitive construction industry works and in particular how to prepare bidproposals. The course was conducted in Armenian with assistance from the American University ofAnnenia. Representatives of over 20 construction firms, 7 of them private firms, attended and the coursewas well received. A second training seminar in World Bank/IDA procurement techniques will beoffered to GOA staff expected to be involved in procurement for this or other Bank or IDA financedprojects.

8. Technical Assistance. While the use of competitive bidding procedures to awardconstruction contracts is consistent with the GOA's goal of privatizing the construction industry, thereis little experience with such mechanisms and no experience with World BankIIDA procedures. Anexperienced international consultant has been employed, as a contracts manager who will ensure correctand efficient bidding and, with the assistance of the American University of Armenia, will providetechnical assistance contributing to development of a competitive construction industry in Armenia. Hewill also be responsible for advising on the quality and quantity control within the project. All directproject supervision of the individual projects will be carried out by local consultants, and the ContractsManager has already introduced proper quality and quantity control systems and he will monitor the localconsultants, thereby contributing to the development of an efficient local consulting industry.

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ANNEX 5Page 1 of 4

ARMENIA


Regional Economic Study of the Earthquake Zoneand Long-Term Infrastructure Investment Strategy

Terms of Reference

1. Background. Northern Armenia has suffered two devastating blows. First, the 1988earthquake destroyed much of the economic capital, infrastructure and housing. Then, the breaking upof the Soviet Union stopped the massive reconstruction effort started shortly after the earthquake, whilethe accompanying economic and political changes have isolated Armenia from its traditional markets andsupplies. Energy supplies in particular have been reduced to a trickle. The earthquake zone is nowexperiencing severe social and political distress which, together with massive unemployment, has inducedsome emigration.

2. Objectives of the Study

a. To Develop a Regional Economic Plan to reduce disparities between theearthquake zone and the rest of Armenia in income per capita and rate ofemployment by enhancing employment, exports and productivity;

b. to identify the sectors/subsectors in which the region has or could develop acomparative advantage or potential for growth, together with an implementationstrategy; and

c. to design a public investment program for long-term reconstruction of urban,technical and community infrastructure, supporting the Regional Economic Plan.

3. hnplementation. The study will be carried by Armenian specialized institutions andindividuals, with assistance and supervision by the Project Implementation Unit. It is anticipated that aconsiderable amount of preliminary data review and preliminary interviews with knowledgeableindividuals will be necessary before any primary data collection can be started. Hence it is suggested thatthe study be undertaken as soon as possible after approval of the project loan. The total duration of thestudy is estimated at approximately nine months. An intermediate report showing preliminary results ofdata collection (regional economic audit and urban/infrastructure survey), and preliminary work on theregional economic plan and investment program, should be submitted by August 1994, and the finalreport should be completed by January 1995.

4. Regional Economic Audit. It is crucial to identify clearly the region's existing economicstrengths. Therefore, a regional audit will be undertaken to identify sectors in which the region has, orcould have, factor advantages or growth opportunities, such as specific comparative advantages, scaleeconomies, export-based growth or import substitution. [Examples could include, depending on thesector, strong human capital resources, cost advantages or indigenous raw materials].

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ANNEX 5Page 2 of 4

5. It will also be important to identify the obstacles to growth in the selected sectors.Examples could include inadequate infrastructure, rigidity of economic/industrial structures (e.g.monopolies), or the lack of favorable environment for start-up businesses and SMEs.

6. The consultant will review existing data on economic activity in the region, conductinterviews with policy makers, academicians and other knowledgeable informants, and carry out surveyswhere necessary. The goal will be to assess the viability of specific industry sectors in the marketeconomy in which Armenia will be functioning in the future - given the likelihood that it will have morediversified trading partners than under the Soviet system.

7. Regonal Urban and Infrastructure Survey. In parallel, an overall survey of theregon's urban, technical and community infrastructure will be conducted. It will include (i) acomprehensive inventory of existing infrastructure and earthquake damages, together with current plansfor reconstruction, completion or new investment, and (ii) an assessment of the adequacy of existinginfrastucture and proposed investments in supporting an enhanced level of economic activity in aprofoundly modified environment. In particular, the survw y will investigate the following:

a. a brief review of the region's sLdtlement and population patterns and its urbanhierarchy, as modified by recent events (unemployment, population displaced bythe earthquake, political refugees and emigration);

b. a review of the urban and regional master plans and of the related regulatoryframework, in particular where they affect the allocation )f land and facilities forindustrial, commercial and residential use; plans for duMaged residential andindustrial buildings (repair, reconstruction or demolition with rezoning andredevelopment of the site) will also be reviewed;

c. a review of the housing situation (e.g. damaged or destroyed housing, temporary'domik' settlements, resulting housing needs, new types of housing, landdevelopment requirements);

d. technical infrastructure and services (e.g. energy supply, roads, railways, publictransportation, water and sewerage, international and nationaltelecommunications);

e. identificaion of possible environmental issues (e.g. industrial pollution,treatment plants, energy wastage);

f. higher educational facilities and research institutions; and

g. other social-cultural infrastructure such as health facilities, prinary and secondaryschools, recreational and cultural failities;

Where feasible, the findings of the survey will be illustrated with maps.

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ANNEX5Page 3 of 4

8. Regional Economic Plan and Investment Program. The Plan to be developed by theconsultant will include the following overall elements:

a. Identification of priority sectors/subsectors as discussed above;

b. Recommended criteria for allocation of infrastructure investment;

c. A strategy for the removal of obstacles to growth, and measures to stimulategrowth; and

d. Development of an approach for vectoring donor assistance to the region.

The Plan should recommend specific actions in the three categories detailed below:

9. Policy Measures. This category includes components which can be established bygovernmental action and which have the result of improving the business climate or otherwise stimulatingeonomic activity in the region. Examples of such actions are:

e Regionally discriminating credit or taxation policies based on sectoral analysis;e Priority access to energy or other supplies;e Priority access to credit or equity capital;a Facilitation of access to land and other facilities through mastwr plans and land use

regulations; and- Measures to promote foreign direct investment or Joint ventures.

10. Infrastructure Investments. Investments in infrastructure should stimulate economicactivity in the, region, support the actions recommended in the regional economic plan and, by relievinghardship, provide the region's population with a more positive outlook for the future. The consultant willdevelop the elements of an investment strategy, including:

a. a method for the evaluation of proposed investments

b. a set of criteria for deciding the priority and timing of investments;

c. a list of infrastructure investments in the different areas reviewed in theinfrastructure survey (see E above), including existing and new proposals; and

d. a ten-year investment strategy, justified in view of the overall objective, includinginvestment projects recommended, evaluated and prioritized by the consultant,together with preliminary cost estimates.

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ANNEX 5Page 4 of 4

Examples of possible investments that could be considered, in addition to essentialreconstruction needs, are:

e Strengthened communications infrastructure, e.g. to facilitate interaction betweenresearch/educational institutions in Yerevan and enterprises in the region;

* Development of solar energy for industrial and domestic hot water production;* Construction of enviromnentally safe sewerage systems for priority industrial zones;* Residential land development for owner-builders, and upgrading of "domik" settlements,

providing employment in public works and small-scale private building firms; and* Small hydro-electric dams;

11. Training, Technical Assistance and Business Support. A third category of actions,requiring investment, could include:

* Locally-available management/entrepreneurship training and consultative assistance (eg,help with procoss and product technologies);

* Export promotion, potentially provided along with other needed business supportservices:

X Alliances between research/educational institutions and enterprises; and* Technical assistance with enterprise restructuring or enterprise business strategy;

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ANNEX 6Page I of 2

ARMENIA


Action Plan by Phase of Project and Subcomponents

Pre-Implementation Phase I Phase U

Housing

Unit All cost estimates and design Construction of initial Construction of PhaseCompletion studies; Tendering process and projects; Selection of units for II

contract awards Phase U and preparation ofl ___________ ________________________ tendering documents

Strengthening Engineering, feasibility and Selection of units and finalized Construction of pilotcost studies cost estimates; tendering and strengthening projects.

contracting.

Single Family Design studies and cost Initial phase of construction to Construction ofHousing estimates test concept; Tendering and expanded pilot proj,.ctI ________ ___________________ contracting for Phase n I

r___________ Municipal Services l

Bathhouses Design studies and cost Initial construction projects; Expanded constructionestimates; tendering and evaluation of suitability tocontracting of Phase I community needs; tendering

and contracting for phase II l

Water and ICB contracting of engineering Contracting of Construction ofsewer study Stepanovan/Spitak project; Stepanovan/Spitak

Design studies for other Water projectpossible projects

Factory Shells

Design and cost studies; Begin construction of small Finish constructionevaluation of beneficiaries; shells; small shells; starttendering and contracting construction large

shells

TA, Training, Consultancies

Housing Selection of long term TORs for short ternPolicy consultants; Preparation of consultancies;

action plan completion of studies

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Pre-Implementation Phase I Phase n

Regional TOR for study Star study Finish studyeconomicsWtdy

Procurement Training in tendering and Long-term contract manager Long-term contractgeneral procurement; select in place; manager;long-term consultants

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Page I of 2

ARMENIA EARTHQUAKE RECONSTRUCTION PROJECTIMPLEMENTATION PLAN

ACTIITY START COMPET BY IN CHARGE

LO I OF PASE I (World ft procrencw appmv4l, lcal compedwv bidding)

HOUSE COMPLETION. SPUAX WATER PIPE

DESIGN & COST ESTDMATES 1993, 07.01 JPDD DOC ENGLISH) 07.01 ABRUSSIAN TRANSLATION 07.01 ABBID DOC1PROC. APOVAL 07.15 FSBID ADVERTISEMENT PREPARE 07.15 TMBID ADVERTISEMENT APPROVAL iM7.20 FS

ID ADVERTISEMENT PUBLISH 07.23 M. BC.BIDDING 08.30 PD9ID OPENING 08.30 TMBID EVALUATION & REPORT 09.22 PD/M. BC.BID EVAL. APPROVAL WB 10.08 CoMactor IAWARD OF CONTRACr 10.10CONTRACTOR MOBIIZATION 11.01CONTRUCnION PERIOD Vari

LO 2 OF PHSE I (main wnber qfcnaucu)

BATH-HOUSES HOUSE COMPLETION, SINGLE FAMILY HOUSES, FACTORY SHELL

DESIGN & COSr ESTIMTES I 1993. 08.01 PDBID ADVERTISEMEN PREP. & PUBLISH 10.08 PSBi OPENING 1125[ MIN. EC

LOT3 OFPMSE IPACTORY SHELLS LCB

DESIGN AND COST ESTIMATES 1993, 11.01 PDBID ADVERTISEMENT PREPARATION & 11.22 PDPUBLISH 12.17 M. ECBID OPENING

CONSULTANTS, INTRNATIONALCONTRACTS MANAGER

PREP OF TERMS OF REFERENCE 199,06.30 TMPREPARATION OF ADVERTISEMENT 0630 USAIDSUBMISSION OF PROPOSAL 0730EVALUAIION OF PROPOSALS USAIDA1MCONTRACTING 11.15 USAJDMOBIL1ZATION 11.20 CONSULTANTS

LOT4 PHASE IRETENDERING

46-_______ - =

ACTIVITY START COMPLETE BY IN CHARGE

BDW DOCUMENTS 1993 11.01BID ADVERTISEMENT, PUBLISH 1994 01.03 PDBIDDING 01.03 01.31 ContractorBID OPENING 01.31 MIN. ECON.BID EVALUATION & RBPORT 01.31 02.15 PDBID EVALUATION, NO OBJECTION 02.16 02.25 TMAWARD OF CONTRACT 02.25 Min. EconCONTRACrOR MOBILIZATION 03.01 03.10 ContractrCONSMRUCTION 03.10 Vanes

To be done as pant of ptoject preparation for Phasc 1993,09.01 1994,05.01 PDtTM

FACTORY SHEllS

SBLBCTIONCRnE" REVIEW 1993,11.15 1994, 01.1S ConsultantFACTORY SCREENING 11.15 01.15 PDItTMDETAIE ANALYSIS 02.01 03.01 ConsultantDESIGN REVIEW 03.01 04.01 CM

"BD)DOCUhBIS I 04.01 05.01 CM

47-

ANNEX 8

ARMENIA


Contents of Implementation Volume

Annex 1: Social Survey of Residence of Temporary Housing Areas

Annex 2: The Construction industry

Annex 3: Water Supply and Sewerage Subcomponent

Annex 4: Local Governments and Housing Management Bureaus

Annex 5: Housing Completion Subcomponent

Annex 6: Seismic Strengthening and Repair

Annex 7: Single Family Housing Subcomponem

Annex 8: Community Bathhouses Subconiponent

Annex 9: Factory Shells Subcomponent

Annex 10: Disbursement Schedule

Annex 11: Procurement Schedule

Annex 12: Implementation Responsibilities

Kn ;

i i~~~~~~I

- 8t -~~I*~~~~~~~I 6f ;:lll

-49-

ARA


E;timated Schedule of Disbursments of the IIDA Credit

____ __________ _____________ i___,._._,_,,_(U SS m illion)

IDA Fiscal Year Semester Disbursements Cumulative Cumulative % ofSemester Disbursements

FY94 June 94 7.1 7.1 25

FY95 December 94 5.5 12.6 45l__________ June 95 6.0 18.6 66

FY96 December 95 6.5 25.1 90June 96 2.9 28.0 100

-50-

ANNEX II

ARMENIA


Procurement Schedule

Component Phase I Phase II

ICB LCB OTHER ICB LCB OTHER

HQUSIN.G Avg Avg Avg Av Avg AvgNum Amt Num Amt Num Amt Num Amt Num Amt Num Amt

Completion = 7 270 9 300 4 50

| Strengthening _ _ 10 150 6 50

Single Family 6 45 10 200 5 50

Bathihouses 1 130 4 15 2 400 5 S0

Infiutructure 1 500 6 300

Comm. Fac. 2 150 6 50

FACTORY 5 900 6 50 4 500iSHEI1 _LLS

TA & 5 200 5 200TRAINING

S. PERVISION 30 15 30 20

MATERIAIS 4 604 60O_

-51-

ANNEX 12Page 1 of 2

ARMENIA


Implenentation Responsibilities

COMPONENT SUBCOMPONENT ACTIVIVy RESPONSIBLE

Housing Apartment Completion Design PPUIPIU

Contracting MOEPIU

Construction Construction Firms

Supervision Consultants

Cost Recovery Municipal Office of Housingand Communal

________________ _ _Services/MOF

Strengthening Design EEC/PIU|

Contracting PIU/MOE

Supervision EEC/PIU

Single Family Housing Design PIU

Allocation Municipalities

Contracting PIU/MOE

Construction Private contractors


Cost Recovery Municipalities/MOF

-52-

Annex 12Page 2 of 2

Factory Shells Selection of Factories PPUIIBRD

Contracting PIU/MOE



Cost recovery MOF

Water and sewer Demand study International consultant

Organization and mgnt Min. Communalstudy Serviceslconsultant/PlU

Contracting MOEIPW



Operations and Min. Communal Servicesmaintenance

Cost recovery Municipality

Bathhouses Design Consultants

-Contracting construction MOE/PIU

Supervision of Consultantsconstruction

Management Private concessioncontractors

Contracting of mgmt Municipalities/PIUconcessions

Supervision Municipalities

Cost recovery Managers(fees)/Municipalities(contract bids)

Community facilities Preparation of proposals Municipalities

Evaluation of proposals Consultants

Approval of proposals MOEIMOF

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44° ' 4y 45' 47' 4S

JANUARY 1994

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