Armenia: Infrastructure Sustainability Support Program (Phase 2)

Horizontal Tabs

Lessons

Focusing on the core elements of government reform agendas strengthens ownership and the success potential of Asian Development Bank (ADB) policy-based loans (PBLs)

This program significantly contributed to strengthening Armenia’s key institutions and improving public financing in the road, water supply, and power sectors. It played a critical role in building consensus among relevant government agencies on sector reform directions and succeeded in putting in place the key policies that would immediately bring about palpable results in improving operational efficiencies, services delivery, and the sustainability of public finances in the three targeted sectors. Drawing on this program’s experience, ADB must work closely with government counterparts to ensure that future PBLs focus on the core elements of the government reform agendas. While aligning the PBLs to developing member country needs, such a focus will also promote government ownership and continued support for the typically long and gradual process of effecting reforms.

Project Cycle Stage:

Preparation

Technical assistance (TA) strengthens the capacity of government to ensure the timely completion and sustainability of reforms.

Aside from the PBL, ADB supported this phase of Armenia’s Infrastructure Sustainability Support Program with a $500,000 capacity development technical assistance (CDTA) grant, which was instrumental in developing adequate implementation capacity in government. Building on the results of the TA provided under phase 1, the CDTA was particularly useful in providing technical advice and training government in results−based management that helped ensure the continued progress, timely completion, and sustainability of the phase 2 policy and institutional reforms. Providing TA to address knowledge and capacity constraints should be considered in future PBLs to promote their success and enhance the sustainability of the reforms.

Project Cycle Stage:

Preparation

Intensive consultation and knowledge sharing among ADB relevant units enhances program/project preparation and implementation.

As with the earlier phase, the preparation of this project benefited from and provides a model for the consultation process undertaken by the various infrastructure divisions in ADB’s Central and West Asia Department to support program formulation. The consultations provide a platform for the discussion of lessons and exchange of knowledge from similar interventions, consideration of which improved the design and processing of this project. Replication of this practice could enhance the design as well as implementation of ADB-assisted programs/projects.

Project Cycle Stage:

Preparation

Implementation

Successful reform programs transcend political considerations.

Government commitment to reforms, which transcended short−term political considerations, was crucial to the success of this project. Commitment to the reform process by other key stakeholders, developed through a comprehensive consultation process and sustained dialogue, was also vital. Future PBLs should devote resources to obtain continuing feedback, ensure participation, and institutionalize the ownership of reform programs by all relevant stakeholders.

Project Cycle Stage:

Preparation

Implementation

There is a need to determine if public financial management reforms should be undertaken within the context of sector investments or separately.

The successful implementation of a set of PFM reforms in three sectors where ADB was making significant investments raises the question as to whether such reforms should be included in the investment loans or undertaken separately. The answer will depend on the country situation and the reforms required. However, this program demonstrates the effectiveness of pursuing the reforms as a separate, but parallel operation. One issue which may arise on the ADB side is that of team leadership. Sector specialists may be more likely to limit the extent of policy reforms during project design to those falling more strictly within the sector— road maintenance issues, for example—whereas a PFM specialist would more likely seek to identify systemic issues across infrastructure sectors. These can be addressed at the level of the country office business plan to make an appropriate choice of modality.

Project Cycle Stage:

Preparation

Project Identification/ Preparation

Due Diligence

The introduction of a lease contract for water service delivery was innovative in the Armenia and former Soviet Union state context, which provides a model for other countries to consider.

The government’s direct role in the economy is relatively small compared with other former Soviet Union states, enabling Armenia to innovate in a way that can be showcased to other Central and West Asian countries. Signing of the lease contract for water service delivery with a private sector provider was an achievement, exhibiting the government’s political will to address poor service quality by the best means possible; and on circumstances that made such an investment attractive to a private international company. These included the gradual improvement in Armenia’s investment climate, its commitment to maintaining macroeconomic stability, previous involvement of the private sector in energy generation and distribution, and prior and concurrent investments by development partners in the water sector.

Background

Following the recession triggered by the 2009 global financial crisis, Armenia’s infrastructure public spending fell sharply, contributing to further deterioration of the country’s road and water assets and services. To help address the situation, the Asian Development Bank (ADB) approved in August 2014 a $49 million concessional loan from the Asian Development Fund for Armenia’s Infrastructure Sustainability Support Program (ISSP). The program successfully implemented policy and institutional reforms that streamlined and improved the cost-efficiency of government operations in the water and road sectors.

To continue with the institutional and financial management reforms, made even more pressing by the surging fiscal deficit during project conceptualization, ADB approved in November 2016 another $90 million loan, this time from ADB’s ordinary capital resources, to finance ISSP-phase 2 (ISSP 2). The loan was to be disbursed in two tranches, following the completion of 16 policy actions for tranche 1 and 18 policy actions for tranche 2. At government’s request, ISSP 2 was designed to also support ongoing power sector reforms. ISSP 2’s expected impact was improved service delivery in the three targeted sectors. Its expected outcome was improved management and sustainability of the road, water supply, and power sectors. It had four planned outputs: (i) improved public financial management and utility regulation, (ii) improved road sector financing and operations, (iii) improved water sector financing and operations, and (iv) increased power sector competitiveness and revenue generation.

Under output 1, methodologies and guidelines to fully introduce program budgeting were prepared; budget structures were modified, and new key performance indicators and costing guidelines were developed; and the operation of the Public Services Regulatory Commission as a professional and independent regulatory body was strengthened.

Under output 2: road sector planning and financing and transparency and accountability were strengthened. The concepts of “middle” or midterm repair and “bad” roads were introduced in Armenia’s budgeting system and road maintenance program. Road surveys were conducted and traffic count stations were installed on all major highways to support sound traffic management and investment and maintenance decision-making.

Under output 3: an action plan to reduce nonrevenue water (NRW) was prepared; and a government lease contract agreement with a single private water supply operator was enhanced through the development and inclusion of specific performance provisions regarding water supply duration, NRW, water quality, and annual maintenance expenditure levels. Further water sector institutional and legal reforms were also supported.

Under output 4: government efforts to move away from the previous monopsony power purchase model, which led to suboptimal energy use and pricing, were assisted. These efforts included the adoption of (i) a new grid code regarding the transfer of power between generators and purchasers, (ii) market rules for the sale of power to purchasers, and (iii) preliminary amendments to the Energy Law, all of which were necessary to allow competition, direct market transactions, and cross-border and interstate trade to flourish in the energy sector.

Successful delivery of the planned outputs enabled the project to achieve its intended outcome. Economic benefits have consequently been realized mainly through (i) increased revenues and government savings on major rehabilitation works and sector subsidies, (ii) reduced transportation costs for road users, and (iii) more reliable water and power services for consumers. Strengthened regulation, increased competition in the power sector, and reforms on power export have had a broader positive impact on inclusive growth.

The Ministry of Finance, the executing agency, supervised program implementation across five government agencies.

Project Information

Project Name:

Infrastructure Sustainability Support Program (Phase 2)

Report Date:

August, 2018

Main Sector:

Energy

Public Sector Management

Transport

Water and Other Urban Infrastructure and Services

Country: