75589 October 2012 PPIAF Assistance in Armenia Since 2001 PPIAF has been providing technical assistance to the Government of Armenia to set up a multi-sector regulatory agency. PPIAF also provided transaction support to structure the concession of Armenian Railway, which was successfully awarded to a private sector company in February 2008. In addition, PPIAF provided technical assistance to disseminate the lessons learned from the privatization of the distribution company and for the telecommunications and solid waste management sectors. Technical Assistance for the Establishment of a Multi-Sector Regulatory Agency PPIAF technical assistance to the Government of Armenia began with a request in 2001 to assist the government to determine whether it would be more cost effective and efficient to have a single regulatory agency to regulate energy, water and sewerage, and telecommunications services in the country (with a population of 3.7 million at the time) than to have separate sector regulatory agencies, and to recommend the most efficient and effective market and institutional framework for the rendering of these services. Since the adoption of the Energy Law in 1997, Armenia gained significant experience with the regulation of the electricity sector, which separated the roles for policy formulation, commercial management, and regulation. In addition, the creation of a suitable legal and regulatory framework advanced the prospects for the successful corporatization and privatization of energy sector companies. As a result, in 2001 the Government of Armenia was keen to extend its positive experience with regulation to other sectors that could benefit from competition and from private sector participation to improve the quality and efficiency of infrastructure services. After a thorough analysis, the PPIAF-funded study recommended the creation of a three-sector multi- utility regulator comprising energy, water, and telecommunications: i) based on the potential for resource sharing, ii) to build on the skills and experience of an existing energy regulatory body, and iii) due to the increased confidence and experience of a combined body. This initial study was followed by a request in 2003 for the organizational design and staffing needs of the multi-sector regulatory agency. The objective of the study was to identify what would be required to transform the existing Armenian Energy Regulatory Agency into a single regulatory agency that, in addition to regulating energy (electricity, gas, and network-based heating), would also regulate drinking water and sewerage, bulk water supply, and telecommunication services. The study identified staffing needs and skills, required funding, and organizational support for the new agency. A third, related activity in 2004 provided support for the strengthening of the recently-established Public Services Regulatory Commission and included the design of a communication strategy. Several important outcomes were achieved from the above technical assistance, thanks to PPIAF’s support: Between June 2003 to February 2004, the Law of the Republic of Armenia on the Regulatory Body for Public Services and the amendments to the Energy Law and to the Water Code were adopted, approving the transfer of regulatory functions in the drinking water and wastewater, irrigation, and telecommunications sectors to the existing Armenian Energy Regulatory Commission, transforming it into a multi-sector utility regulatory agency called the Public Services Regulatory Commission of the Republic of Armenia. The reform to the Water Code was carried out with the aim of separating the regulatory aspects, the standards setting, and the operational functions of water management, and handing them over to different independent bodies. This led to the creation of several new entities, including the National Water Council, the Dispute Resolution Commission, and the Public Services Regulatory Commission of the Republic of Armenia. In its letter of October 6, 2006 to PPIAF, the Prime Minister of Armenia indicated that “PPIAF support contributed to significant strengthening of the regulatory framework of public utilities, development of 1 regulatory policies and procedures, and raising of public awareness about the regulator. The PPIAF support was essential in fortifying the groundwork required for private sector participation in infrastructure and securing benefits for all key stakeholders.� Results of PPIAF’s Activities in Support of Armenia’s Multi-Sector Regulatory Agency Category Outputs Enabling environment reform  Institutional Framework for Regulation of Public Utilities, 2001 Analyses/assessments prepared  Development of Institutional Framework for a Multi-Sector Regulator and Legal Framework for the Water Sector, 2003 Policies prepared or legal or  Draft: Law on the Regulatory Body for Public Services, Water regulatory changes Code, Energy Law, Civil Code, Civil Service Salaries Law recommended Capacity and awareness building  Workshop to discuss with key stakeholders the legislative Workshops/seminars package prepared by the consultants for the establishment of the Public Services Regulatory Commission, 2003 Category Outcomes Enabling environment reform  Strengthening of the Armenian Energy Regulatory Commission Institutions created or transforming it into a multi-sector regulatory agency called the strengthened Public Services Regulatory Commission of the Republic of Armenia, 2004  Amendment to Armenia’s 1997 Energy Law (as revised on April 11, 2001) on December 25, 2003, effective on February 14, Policies adopted, legislation 2004 passed/amended, or regulation  Amendments to Armenia’s Water Code of June 2002, in 2003 issued/revised  Law of the Republic of Armenia on the Regulatory Body for Public Services, January 17, 2004 Technical Assistance for Armenia’s Power Sector In 2004 Armenia’s Minister of Energy requested PPIAF support to document the lessons learned from the reforms to the power sector, and in particular on the privatization of Electric Networks of Armenia, the country’s power distribution company, as its successful privatization was one of the most important achievements of the reforms undertaken in Armenia’s power sector, including the creation of the Public Services Regulatory Commission, the independent regulator, which received PPIAF support. The privatization of Electric Networks of Armenia is remarkable as it virtually eliminated the annual financial deficit in excess of 2% of GDP prevailing in the power sector since the break-up of the Soviet Union. Also, the company was privatized in a non-conventional manner after several unsuccessful privatization attempts beginning in 1999, when the Government of Armenia sold it on October 31, 2002 to Midland Resources Holding, a steel manufacturing and trading company, after receiving an unsolicited proposal. Post-privatization, Electric Networks of Armenia achieved significant reductions in system losses, increased collection rates, was current on the payment of its debts, and increased service quality. Thus, the Government of Armenia requested PPIAF support to document the success of the privatization of Electric Networks of Armenia, which is also attributed to the adequate regulatory and institutional 2 mechanisms existing in the country at the time of the privatization. A video called SWITCH: The Story of Energy Reforms in Armenia was prepared to document and disseminate the lessons learned from this privatization process. Technical Assistance for Armenia’s Transport Sector Railways Since 2005, the Government of Armenia requested PPIAF assistance to restructure the country’s railways with the objective of developing a restructuring plan to increase private sector participation in the rail sector. Transaction support was also required to structure the concession for Armenian Railway to attract a private investor and for the corresponding road show. At the time, the company was not productive, was expensive to operate, provided an expensive service to its customers and increasingly was less competitive; it needed lots of capital to improve its operations and provide a better service. PPIAF’s extensive technical assistance in support of the country’s railways and its concession covered the following areas:  Strategy for private sector participation in Armenian Railway, analyzing the options to restructure it. The main recommendations of the PPIAF-funded study were: to reorganize the existing railway and begin implementing cost reductions, to implement cost accounting system changes to support all other efforts, to initiate a passenger services study to determine more cost effective methods to provide passenger transport services, to revise the draft railway law prepared by the Government of Armenia to permit the concessioning of the company to the private sector and to reduce regulatory burdens, to develop and implement human resources programs to mitigate the impacts from cost reductions and restructuring efforts, and to concession Armenian Railway under a full concession, as it was the modality that provided the greatest financial returns to both the Government of Armenia and the concessionaire. This study also contained a human resource plan, an analysis of freight markets, a forecast of traffic, and a plan to revise accounting to create an infrastructure cost center and passenger and freight profit centers.  Preparation of the appropriate legal framework, concession design, and design of the regime necessary for the implementation and oversight of the concession.  Support of the road show which was held in London in collaboration with the European Bank for Reconstruction and Development. The outcome of this process was the successful award by the Government of Armenia of the concession to modernize and operate Armenian Railway. On February 13, 2008, the 30-year concession agreement was signed between Russian Railway Company (RZD) and the Government of Armenia. South Caucasian Railways (SCR) was incorporated by the winning bidder to run the railway and operate the concession. RZD paid an initial concession fee of $5 million and agreed to pay annually, over 30 years, 2% of Armenian Railway revenue on freight transport services; it also agreed to invest about $400 million in railway infrastructure over 30 years and an additional $170 million to upgrade the rolling stock. Results of PPIAF’s Activities in Armenia’s Railways Sector Category Outputs Enabling environment reform Analyses/assessments prepared  Concession support documents, 2007 3 Plans/strategies prepared  Armenian Railway restructuring project, 2006  Revised draft Railway Law proposed by the Government of Armenia, to adapt it to the proposed restructuring and to Policies prepared or legal or contemplate the concession of the railway company to the regulatory changes private sector, 2006 and 2007 recommended  End-User Pricing Regulation, 2007  Model Concession Agreement, term sheet and annotated terms and conditions for the concession, June 2007 Project cycle-related assistance  Concession Support Activities Road show Report, 2007  Concession Teaser, Preliminary Information Memorandum, Transaction support Road show presentations, 2007  Final Information Memorandum, November 2007  Final Concession Agreement, November 2007 Category Outcomes Enabling environment reform Institutions created or  High-Level Ministerial Committee created to make important strengthened policy decisions regarding the concession Policies adopted, legislation  Decree 1497 of October 12, 2006 approving the privatization of passed/amended, or regulation railway activities in Armenia by way of a long-term concession issued/revised  Government of Armenia adopted recommendation for a vertical Plans/strategies adopted or concession proposed in the PPIAF-funded study and decided to implemented concession the railway company to the private sector, 2006 Project cycle-related assistance  Road Show held in London in collaboration with European Bank for Reconstruction and Development who provided logistic and technical support Transactions facilitated or  30-year concession agreement to modernize and operate supported Armenian Railway signed on February 13, 2008 between Russian Railway Company (RZD), winning bidder, and the Government of Armenia; South Caucasian Railways (SCR) is a special purpose subsidiary created to run the railway; RZD acquired all of Armenian Railway’s rolling stock Category Impacts  Upon signature of the concession, RZD indicated plans to Additional private investment in invest about $400 million in Armenian Railway infrastructure the sector over 30 years, and $170 million to upgrade rolling stock 4  RZD paid the Armenian budget an initial concession fee of $5 Fiscal impact on government million, and agreed to pay annually over 30 years, 2% of Armenian Railway gross revenue from the freight business Regional Bus Stations In November 2010 the Government established an inter-sectoral task force to involve the private sector in the operation of the bus stations, as it was keen to improve the operating and financial performance of the 1 company responsible for management of the inter-regional bus stations—Armautostation —through the involvement of the private sector. The task force was chaired by the Minister of Transport and Communication and included the Deputy Minister of Transport and Communication, Deputy Minister of Justice, Deputy Minister of Finance, Deputy Minister of Economy, and Deputy Chairman of the Department for Management of State Property under the Government. It was in this context that PPIAF assistance was requested in 2011 to develop a plan for improving the performance of bus stations operations through private sector involvement in the hope of transforming the provision of bus station services into a financially sustainable enterprise capable of providing good quality services through private sector involvement. To achieve its objectives, this activity included four main tasks:  Development of performance standards for operation of bus stations considering the investment needs. This includes defining minimum and preferred performance standards, as well as a benchmark analysis comparing with other countries.  Financial due diligence of Armautostation. This includes assessment of financial performance, inventory, and valuation of key assets; identification of potential savings; and quantification of revenues.  Improvement in the financial means to support the improved operation of bus stations. This is to assess business prospects and identify potential additional revenue sources.  Identification of the options for private sector participation in the financing and operation of bus stations. Internal consultations with all stakeholders were held after the draft reports were delivered to jointly discuss the findings and recommendations. These discussions mainly involved representatives of the stakeholder Ministries and agencies, and were held at the Ministry of Transport and Communication. During their assignment, the PPIAF-funded consultants also held consultations with bus operators and citizens. The final reports were reviewed by the inter-sectoral task force established by the Government, which included the main stakeholders in the sector. After each review, a letter was issued by the Minister or Deputy Minister of Transport and Communications summarizing the comments. All comments were addressed by the PPIAF-funded consultants in the final deliverable. The reports’ findings confirmed the viability of the proposed private sector involvement, and the Government counterparts have confirmed their continued interest in pursuing private sector involvement in the management and operations of bus stations. The World Bank is currently in discussions with the Government to help it make its final decision on the specific option for private sector involvement, the terms of the PPP, and the timing of the transaction. This may include follow-up PPIAF support. 1 A closed joint-stock company fully owned by the Government of Armenia and operated under the direct supervision of the Ministry of Transport and Communication. 5 Results of PPIAF’s Activity for Regional Bus Stations Category Outputs Enabling environment reform  Report on service performance standards: “Advisory Study for Private Sector Involvement in Operation of Bus Stations Serving Inter-Regional Bus Routes - Task 1 - Development of the performance standards for operation of bus stations� (April 2012)  Report on financial due diligence: “Advisory Study for Private Sector Involvement in Operation of Bus Stations Serving Analyses/assessments prepared Inter-Regional Bus Routes - Task 2 – Financial Due Diligence� (April 2012)  Report on improvement of financial sustainability of operations: “Advisory Study for Private Sector Involvement in Operation of Bus Stations Serving Inter-Regional Bus Routes - Task 3 - Improvement in the financial means to support improved operation of bus stations� (May 2012)  Report on PPP options: “Advisory Study for Private Sector Involvement in Operation of Bus Stations Serving Inter- Regional Bus Routes - Task 4 - Identification of the options for private sector participation in financing and operation of Plans/strategies prepared bus stations� (June 2012). This report includes a high-level action plan for tendering private sector delivery of bus station operation services and reaching financial close of the transaction. Category Outcomes Enabling environment reform  The Government has confirmed its continued interest in pursuing private sector involvement in the management and Plans/strategies adopted or operations of bus stations, and is currently in discussions with implemented the World Bank to help it make its final decision on the specific option for private sector involvement, the terms of the PPP, and the timing of the transaction, 2012 Technical Assistance for Armenia’s Solid Waste Management Sector Feasibility Study for an Integrated Solid Waste Management Plan through PPPs in Yerevan City In 2008 the Government of Armenia requested PPIAF assistance to develop a solid waste management system for the city of Yerevan with the participation of the private sector. The PPIAF-funded consultants prepared a feasibility study for developing an integrated solid waste management system for the city of Yerevan that incorporates private sector participation. A working group was formed and initial studies were prepared. We will follow up to assess if the Government of Armenia acts upon the recommendations of the study. 6 Results of PPIAF’s Activity for an Integrated Solid Waste Management Plan in Yerevan City Category Outputs Enabling environment reform  Advisory Study on the Municipal Solid Waste Management in Analyses/assessments prepared Yerevan, October 2009 Capacity and awareness building  Plenary Meeting of the Working Group on the study for the Workshops/seminars development of a solid waste management system for the city of Yerevan, January 21, 2009 Support to the Armenia Water and Sewerage Company for the Design of the Enhanced Management Contract Private sector participation is seen by the Armenian Government as a key element of their water sector reform strategy. Armenia Water and Sewerage Company (AWSC) was performing well, and under a management contract arrangement, an increased understanding of service and cost issues was obtained. However, arrangements for providing water and wastewater services under the existing management contract for AWSC were coming to an end, and an informed decision on how to proceed was needed. The deteriorating asset base required further investment, and the tariff—a potential source of revenue— was inadequate. Under the circumstances, the Government made a decision to extend the current management contract until 2013, to allow for a smooth transition to a lease contract in 2014. In the meantime, specific actions needed to be taken by the Government related to the extension of the management contract to allow for the smooth transition. It was in this context that PPIAF assistance was requested in 2011 to support and guide the Government of Armenia in designing the enhanced management contract for 2011–2013 for the AWSC service area by providing advice and guidance to the State Committee on Water Economy (SCWE) on the design of the enhanced management contract. This included direct negotiation with the incumbent operator (SAUR), as well as guidance on ways to ensure compliance with the overall long-term economic and financial goals of the sector. This also included the following components:  Preparation of a detailed investment plan, which includes a road map to cover all rural communities in the country and defines rationale for prioritized investments  Creation of a business plan and a joint annual business plan review process  Updating of key performance indicators during the period of extension, including an alignment with the proposed investment plan  Creation of an asset management and maintenance plan, which includes specific requirements for the creation of district metering areas and relevant sectorization of the network, as well as specific maintenance planning and execution  Implementation of capital investment program provided by international financial institutions A beneficiary survey was carried out to assess public perception of PPPs in Armenia's water sector and assess progress made in delivery of water services. Information collected and lessons learned from this exercise was used to set the right performance targets and enabling environment for private participation at that stage (with the enhanced management contract) and will help mitigate possible risks in the transfer of the utility to lease arrangement in 2014, after completion of the enhanced management contract. An analysis of the successes and challenges of the PPPs in Armenia’s water sector was conducted. The analysis consists of lessons learned from past private sector participation experiences in the water sector, 7 what worked and what didn't, and the key factors affecting these processes. This knowledge product provides a good opportunity to share Armenia's successful experience in PPPs with other governments interested in involving the private sector in the management of water resources, and it is being greatly 2 promoted. This grant financed transaction advisory support to: i) carry out current situation review and sector development prospects; ii) review the initial draft contract; iii) prepare a time-bound contract program that includes milestones on key decisions and tasks by the Client and other stakeholders; iv) provide support for negotiations with the operator SAUR; and v) carry out consultations with all stakeholders on the PPP matters. However, by the time the activity started, the Bank had completed an Economic and Sector Work for Armenia’s water sector to provide the Government with strategic policy advice on key issues related to water sector status and performance, resource allocation, fiscal sustainability, geographic responsibility of utilities, accountability, and options for strengthening PPP arrangements. The resulting sector note included a review of the current situation and sector development prospects. In addition, by the time the consultants were on board, the Government had made a decision to directly negotiate with the incumbent operator. Hence, the consultant's task was to immediately work on the draft enhanced management 3 contract and support the Government during negotiations. The main recommendations from this task were: i) introducing a Total Management Plan to ensure the long-term sustainability of the water or wastewater utility; ii) re-defining Key Performance Indicators; and iii) finalizing approaches to various terms and conditions of the draft Enhanced Management Contract. These activities were a major and critical ingredient for the success of managing water supply and sanitation through a PPP approach, which is the cornerstone of the country’s sector development strategy. The activities under the project sought to promote institutional reforms that result in good governance, accountability, and transparency in managing the utility. This should further result in improved efficiency, sustainability of the sector, and increased accessibility to water supply services. An enhanced management contract for 2011–2013 was signed between the SCWE and the private operator SAUR, effective October 21, 2011, for two years. The enhanced management contract is viewed as a first milestone in the process of transferring the utility to a lease arrangement. As stated above, additional performance indicators were included in the enhanced management contract, as described in the Water Sector Policy Note, and agreed to with the counterparts. The next step is to transfer the utility to a lease contract starting in 2014 –2015. The Government intends to formally request follow-up PPIAF support to help the SCWE design the lease contract for the utility's service area, and provide the transaction advisory support to engage the private sector in the management of the utility under the lease arrangement. The Bank team will explore grant funding to provide transaction advisory support to develop the more ambitious PPP arrangement for AWSC. Estimates indicate that short-to-medium term investment requirements during the period 2012–2016 in AWSC service area amount to $100 million. With the World Bank’s support and role in leading donor coordination efforts under the Sector Note framework, the Government of Armenia managed to leverage a $85 million parallel financing program from active international financial institutions in the sector (World Bank with the recently processed Municipal Water Project, European Bank for Reconstruction and Development, and Asian Development Bank) to continue the reform agenda and address challenges. With strong Government commitment to the sector, a supplemented $15 million counterpart funding was allocated from the state budget to bridge the financing gap. 2 The analysis was funded by the grant, while publication of the brochure is financed through the Municipal Water Project BB. 3 As the two sub-tasks i) and iii) were not required to be performed, the consultant worked fewer days than initially planned, which led to savings under the Grant. 8 Results of PPIAF Activity to Support the Armenia Water and Sewerage Company Category Outputs Enabling environment reform  Two reports summarizing results of beneficiary surveys to assess public perception of PPPs in Armenia’s water sector and assess progress made in delivery of water services: 1) Analyses/assessments prepared “Yerevan Djur: End-line Assessment� and 2) “Armenia Water & Sewerage Company: End-line Assessment� (January 24, 2012) Project cycle-related assistance  Enhanced Management Contract drafted as contract extension. The draft contract includes several annexes, including an annex to introduce the Total Management Plan and one to define key performance indicators.  Support for Negotiations with the Operator – Support services Transaction support to assist the Government with discussions and negotiations with the operator, and a review/evaluation of the contract terms with recommendations for the Government. This mainly entailed round-table discussions with the working group (main stakeholders in the Government) at both a technical level and with higher-level government officials. Capacity and awareness building  Report on “lessons learned� analyzing the successes and Knowledge products produced or challenges of PPPs in the water sector in Armenia: “Armenia disseminated Takes on Water Management Challenges: Public-Private Partnerships in Water Sector� (June 2012) Category Outcomes Project cycle-related assistance  Enhanced Management Contract for 2011–2013 signed Transactions facilitated between the SCWE and the private operator SAUR, effective October 21, 2011 Capacity and awareness building  Increased capacity of SCWE, particularly in dealing with the Technical capacity enhanced enhanced management contract Category Impacts  The Bank has managed to secure over $85 million financing from other multilateral partners for the Armenia Water and Additional private investment in the Sewerage Company service area. The institutional reforms to sector be supported by PPIAF are a cornerstone for the sector reforms in general, and the investment program is designed around the PPP. 9 Technical Assistance for Armenia’s Telecommunications Sector Over the past decade the Government of Armenia has been actively pursuing private sector participation in all infrastructure sectors. Telecommunication services were among the first to be privatized in 1997 with the competitive sale of 90% of the shares of the incumbent operator ArmenTel to the Greek telephone operator Hellenic Telecommunications Organization (OTE). Despite the improving situation in the telecommunications sector and the gradual increase of competition due to the entry of two new mobile operators and anticipated expiration of the exclusive service provision rights of ArmenTel in 2013, universal access was unlikely to materialize unless the Government of Armenia and the Public Services Regulatory Commission (established with PPIAF support, see above) devised mechanisms to finance the universal service provision costs of telecommunication companies. This was because private network operators and/or other telecommunication service providers were reluctant to make telecommunication services available to people who may not afford to pay. In 2006 the Government of Armenia requested PPIAF assistance in support of universal accessibility of basic telecommunication services throughout the country with the involvement of the private sector. The Law on Electronic Communications of 2005 had authorized the regulatory commission to establish the Universal Services Obligation (USO) to meet this objective of universal access. Thus PPIAF support was requested to review Armenia’s USO policy for the telecommunications sector, to review the proposed design for its Universal Services Fund (USF), to draft the founding documents for the Public Services Regulatory Commission to implement the USO policy and USF, and to identify a pilot project to test the USO and USF. The PPIAF-funded study finalized in 2009 identified the purpose of a universal access and service policy (i.e., to ensure equitable access to telecommunication services for households that cannot afford access and for households in rural areas without coverage), and made recommendations for the services that could be provided under that policy (i.e., voice telephony and internet), the minimum level of services suggested and whether technologies should be basic or advanced, the scale of the subsidy needed and the intended beneficiaries, the cost to provide the services under the universal access policy, and how the subsidy should be administered and delivered. The report recommended the best options based on international good practices, reviewing universal access and service policies in more than thirty countries. As of this date the government decided to postpone the decision to establish the USF, because underserved populations are expected to benefit from a proposed new nationwide high-speed broadband backbone network, which is expected to significantly improve the coverage of telephony and Internet services, and from the market-led mobile expansion due to investments in mobile telecommunication infrastructure from the three mobile operators in the country, including from the third mobile operator Orange France Telecom, which recently started operations in Armenia. We will continue monitoring the evolution of the telecommunications market and the government’s decision related to the USF. Results of PPIAF’s Activities in Armenia’s Telecommunications Sector Category Outputs Enabling environment reform  Operationalization of the Universal Services Fund for Analyses/assessments prepared Telecommunications Sector of the Republic of Armenia, 2009  Draft amendments to the 2005 Law on Electronic Communications relating to the Universal Access and Service Policies prepared or legal or policy and fund, 2009 regulatory changes  Draft Universal Access and Service Policy, 2009 recommended  Universal Access and Service (UAS) regulations establishing the UAS Fund and UAS Fund Administrator, to be passed by the Public Services Regulatory Commission, 2009 10 Project cycle-related assistance  Bidding documents to be used by the Universal Access and Service Fund administrator to procure Universal Access Transaction support Service operators, 2009  Review of output-based aid contracts in the telecommunications sector, 2009 11