Armenia - Irrigation Rehabilitation Project

Document of The World Bank Report No. 12811-AM STAFF APPRAISAL REPORT REPUBLIC OF ARNENIA IRRIGATION REHABILITATION PROJECT NOVEMBER 2, 1994 Natural Resources Management Division Country Department IV Europe and Central Asia Region  CURRENCY EOUIVALENT Currency Unit: Ruble Exchange Rate Rubles per $ March 1993 684 June 1993 1,100 October 1993 2,600 Currency Unit: Drum Exchange Rate Drums per $ November 22, 1993 14.0 (introduction) April 29, 1994 400.0 September 28, 1994 385.0 WEIGHTS AND MEASURES ha hectare knm2 square kilometer kw kilowatt kwh kilowatt hour m meter m3 cubic meter m3/sec cubic meters per second t/ha tons per hectare FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS asl above sea level Al artificial insemination DWSI Department of Water Supply and Irrigation ERR economic rate of return FAO/CP Food and Agriculture Organization Cooperative Programme FSU Former Soviet Union GDP gross domestic product HSI Hydrological Studies Institute ICB International Competitive Bidding IDA International Development Association IFAD International Fund for Agricultural Development LCB Local Competitive Bidding M&ES Monitoring and Evaluation Section MOA Ministry of Agriculture NMP net material product OME Operation and Maintenance Enterprise of the DWSI O&M operation and maintenance PCR Project Completion Report PPF Project Preparation Facility PIU Project Implementation Unit SOE Statement of Expenditure TOR Terms of Reference USDA United States Department of Agriculture WPI Water Planning Institute WUA water users' association  REPUBLIC OF ARMENIA IRRIGATION REHABILITATION PROJECT Table of Contents Page No. LOAN AND PROJECT SUMMARY .......................... i I. BACKGROUND .......................... 1 A. Introduction .......................... 1 B. The Economy ...........................1 II. THE AGRICULTURE SECTOR .5 A. Background .5 B. Agricultural Production. 6 C. Consumption and Self-Sufficiency in Agricultural Products .7 III. WATER RESOURCES AND THE IRRIGATION SUBSECTOR .9 A. Water Resources .9 B. Irrigation .11 C. Objectives and Strategy of Bank Assistance .14 D. Lessons from Previous Bank Involvement .14 IV. THE PROJECT .17 A. Project Objectives .17 B. Rationale for IDA Involvement .17 C. The Proposed Project .17 D. The Rationale for Project Design .18 E. Detailed Project Description .20 F. Project Costs .24 This report is based on the findings of an Appraisal Mission in October 1993. Members of the Appraisal team included Ezriel Brook (Task Manager), Stan Peabody (Sociologist), Camilla Brown (Operations Analyst), and Oscar Honisch (Principal Agriculturalist) from the Bank; and consultants Eli Gazit (Water Resource and Irrigation Engineer) and Richard Van Klaveren (Water Management Engineer). Editorial support was provided by Alan Zuschlag and Rebecca Kary. The project was identified by the FAO/CP in September 1992 and March 1993, and preparation was carried out by IRS/TKB consulting firm, headed by Gabriel Tibor. Data and support for the project identification, preparation, and appraisal was provided by the Armenian Water Planning Institute. Peer reviewers included Ulrich Kuffner, Joma Mohamadi, Willem Van Tuijl, and D. Jeremy W. Berkoff. The Division Chief is Geoffrey Fox (EC4NR), and the Department Director is Basil Kavalsky (EC4DR).  G. Financing ...................... 25 H. Procurement ...................... 26 I. Disbursement ....................... 31 V. PROJECT IMPLEMENTATION .............. 33 A. Organization and Management .......................... 33 B. Project Phasing .......................... 36 C. Project Monitoring, Evaluation, and Reporting ........................... 38 D. Accounts and Audit ............................................ 39 E. Bank Supervision ............................................. 39 VI. PROJECT BENEFITS, RISKS, AND ENVIRONMENTAL IMPACTS .... ......... 41 A. Project Benefits .............................................. 41 B. Economic Evaluation ........................................... 43 C. Risks ...................................................... 46 D. Environmental Impact .......................................... 47 VII. AGREEMENTS REACHED IN NEGOTIATIONS .......................... 49 ANNEXES 1 Statistical Annex ...... . ...................................... 51 2 The Agriculture Sector Review ................................... 75 3 The Water Supply and Irrigation Department .......................... 87 4 The Irrigation Rehabilitation Engineering Program ...................... 89 5 Water Management .......................................... 99 6 LCB Procedures, Contracts, and Procurement Packages .................. 115 7 Terms of Reference for the Project Implementation Unit and Consultants ... .... 121 8 Agricultural Development ..................................... 133 9 Project Implementation Plan .................................... 151 10 Proposed Project Supervision Plan ................................ 159 11 Selected Documents Available in Project File ......................... 161 TABLES IN TEXT 1.1 Armenia: Main Economic and Social Idicators .......................... 3 2.1 Development of Agricultural Production, % Shares ....................... 7 2.2 Self-Sufficiency and Per Capita Food Consumption (1985-1992) ............... 7 4.1 Project Cost Summary ......................................... 25 4.2 Financing Plan ............................................. 26 4.3 Summary of Proposed Procurement Arrangements ....................... 30 4.4 Disbursement Categories ....................................... 31 6.1 Summary of Sensitivity Analysis Cases .............................. 43 FIGURES Figure 2.1: Cultivated Land ..................................... 6 Chart 1: Project Inplementation Unit ............................ 34 Chart 2: Armenia Irrigation Rehabilitation Project-Implementation Schedule ... 37 Organogram 1: DWSI Structure .................................. 88 Box 8.1: Yield Reduction Factors ............................. 138  MAPS Project Location IBRD 25388 Irrigation Systems IBRD 25389 Irrigation Systems IBRD 25390 Storage and Pumping Schemes IBRD 25391   i ARMENIA IRRIGATION REHABILITATION PROJECT Loan and Proiect Summarv Borrower: Republic of Armenia Executing Agencv: Ministry of Agriculture (MOA) Beneficiaries: Private farmers and consumers through lowered food prices Amount: US $43.0 mnillion Ternis: Standard IDA terms, with 35 years' maturity and 10 years' grace period Project Obiectives: Assist Armenia in maintaining the level of irrigated agricultural production and improve the country's water resource management. Description: The project is comprised of four main investment components: (a) Rehabilitation of 12 irrigation schemes and the Ararat Valley groundwater network. These cover an area of about 164,700 ha (about 60% of the Armenian irrigated land). There are four types of rehabilitation works under the project: (i) Rehabilitation of the conveyance systems, including canals, aqueducts, siphons, and hydraulic structures in eight major irrigation schemes. The area covered under this category is about 151,400 ha (92% of the project area). (ii) Replacement of pumps and pressure pipelines. This category includes four pumping schemes. (iii) Rehabilitation or replacement of about 650 tubewell pumps. (iv) Rehabilitation of four dam storage schemes (reservoirs). (b) Establishment of pilot projects for improved water distribution and establishment of water users' associations. (c) Financing incremental O&M costs of the irrigation infrastructure until effective water users' associations are in place, and in the meantime to prevent further deterioration of the irrigation infrastructure. (d) Technical assistance, including establishment of a project implementation unit; assistance to update the Water Master Plan; training; preparation of the next irrigation project; and assistance to improve irrigated crop production.  ii Benefits: The proposed irrigation rehabilitation investment project would avert a collapse of the irrigation infrastructure in Armenia. A secure water supply would promote agricultural production, increase the food supply, and create employment in the rural areas. Without the project, Armenia would need to substantially increase its food imports, or decrease its food consumption. Under the project, construction work will generate employment opportunities for unemployed skilled and unskilled labor. The project would also establish the foundation for improved and rationalized water management by instituting water users' associations and water charges. Risks: The principal project risk is political. If there is a resumption of hostilities between Armenia and any of its neighbors, a reimposition of a blockade would have an adverse impact on the project implementation because of expected difficulties in importing fuel, spare parts, construction machinery, steel pipes and reinforced steel, without which large diameter pipes cannot be laid and precast concrete sections cannot be manufactured. In addition, resources needed for operation and maintenance of the irrigation infrastructure would be drained and the physical structures would be put in jeopardy as well. The Bank approval of the proposed project is therefore based on the assumption that the current framework for negotiating the international conflict in which Armenia is involved will lead to a peaceful resolution of the conflict, and that the threat of increased hostilities is no longer imminent. A second risk is that Government would not be strong enough to resist pressures to resume policies of water subsidization and/or fail to impose and collect water charges. Without sufficient funds to operate and maintain the new irrigation infrastructure, the system will deteriorate again. To safeguard against such risk the project is contributing to improvements in water management by establishing pilot projects with water users' associations and technical assistance to aid in the establishment and management of the pilot projects. A third risk is that the quality of construction would not meet accepted standards. A properly staffed and trained project implementation unit is planned to reduce that risk. A fourth risk relates to utilization of energy for irrigation. Power is at present generated mainly from hydro-electric sources and is completely subsidized for irrigation purposes. The risk is that utilization of energy for irrigation is associated with deterioration of the environment. Presently most of the generated energy comes from water originated from Lake Sevan. Over-pumping of water from the lake has caused the water level to fall which has had an adverse impact on the micro-climatic environment around the lake. Imposition of water charges that cover the full cost of operations and maintenance and energy costs is imperative to mitigate this risk.  iii Estimated Project Costs: Item Local Foreign Total % Foreign % Base . . ~~~~~~~~Exchange Cost Millions of US$ 1. Rehabilitation of 8 Conveyance 5.54 12.93 18.47 70 40.0 Schemes 2. Rehabilitation of 4 Pumping 0.89 8.57 9.46 91 20.0 Schemes 3. Rehabilitation of Tubewells 0.69 6.25 6.94 90 15.0 4. Rehabilitation of Four Dams 0.56 0.75 1.31 57 3.0 Subtotal 7.68 28.50 36.18 79 78.0 5. Pilot Projects to Improve Water 0.14 2.33 2.47 194 | 5.0 Management l l l __ Subtotal 0.14 2.33 2.47 _94 _ J 5.0 6. Incremental O&M Cost [ 2.30 2.70 5.00 54 11.0 Subtotal [2.30 2.70 5.00 54 11.0 7. Technical Assistance | - 1.10 1.10 100 2.0 8. Project Implementation Unit 1.21 1.25 1.46 86 3.0 | Subtotal [ .21 2.35 2.56 192 5.0 Base Cost 10.33 35.88 46.21 78 1100.0 [ 9. Physical Contingencies 1.61 6.45 8.06 80 17.0 10. Price Contingencies 0.66 2.22 2.88 77 6.0 Grand Total 12.60 44.55 57.15 78 1230 Financing Plan: Item Local Foreign Total Million of US$ 1. IDA 4.65 38.35 43.00 2. IFAD 1.80 6.20 8.00 3. The Government 4.15 4.15 4. End Users, Fanners 2.00 2.00 Total Project Cost [12.60 44.55 [ 57.15  iv Estimated Disbursements (US $ million): Bank FY: 96 97 98 99 Annual 4.0 11.0 16.0 12.0 Cumulative 4.0 15.0 31.0 43.0 Closing Date: June 30, 1999 Economic Rate of Return: 53% Povertv Category: N.A. Environment Categorv: "B" Map: IBRD 25388  I. BACKGROUND A. INTRODUCTION 1.1 Armenia, with a population of about 3.7 million, has the smallest territory among the former Soviet republics. About one third of Armenia's population lives in the capital Yerevan, one third in other urban centers, and about one third in the rural sector. 1.2 Before 1988, Armenia experienced relatively robust economic development, unparalleled among other former Soviet republics, which created a diversified industrial infrastructure, a flourishing agriculture, and a modem transport network. The breakup of the Soviet Union, however, has left the country with an economic structure dependent on outside sources for energy, raw materials for industry, and food for its people and livestock. The hostilities with neighboring Azerbaijan have greatly aggravated the situation. However, recently there have been several positive developments in Armenia's relations with its neighbors. Of greatest importance is the progress towards peace in the six year old Karabakh conflict. In July 1994, Azerbaijan, Karabakh, and Armenia signed an agreement formalizing the ceasefire and providing for the immediate commencement of negotiations for a comprehensive peace agreement. This development offers a real prospect of a lifting of the blockade in the near future. In addition, rapidly growing trade with Iran, and increasing stability in Georgia have significantly eased Armenia's isolation. B. THE ECONOMY 1.3 Under the former centralized economic system of the Soviet Union, Armenia was a trade- dependent economy and a producer of industrial intermediate and finished goods. Before the country's independence in 1992, it had a negative trade balance, but this has grown up sharply after 1992: in 1991 the deficit was R 2.4 billion, and in the first half of 1993, it grew to R 116.0 billion (Table 1.1). 1.4 Gross domestic product (GDP) has been declining in the last several years, and in 1992, GDP in constant 1990 prices declined by about 52% and further 15% in 1993. A somewhat more moderate declining trend also occurred with the net material product (NMP). The NMP, in constant 1983 prices, has been declining since 1987, with only one year (1989) showing positive growth. In 1992 the decline was almost 46%, and further 14% in 1993. 1.5 The economy is going through a difficult transition from a centrally planned to a market- based system; from a situation in which energy and water were practically free goods, to one in which these resources have become increasingly expensive; from a system where decision-making was in the hands of only a few top-level officials in Moscow and Yerevan, to an economic environment in which central and local decisions have to be made daily on all levels of economic activity, and in which economic efficiency and cost-effectiveness have become crucial elements. In addition to these difficulties, which are common to all Former Soviet Union (FSU) countries, the Armenian economy still has not recovered from the effects of closed borders since 1991. The traumatic effects of the blockade on its industry and employment, and years of rapid inflation that was first "imported" because the monetary system was linked to the ruble zone until the end of 1993, also contributed to the economic difficulties. When new domestic currency was later introduced, it was associated first with rapid inflation-fueled by  2 Chapter 1 uncontrolled monetary policy', but in the second half of 1994, inflation has tempered down significantly and the currency and the exchange rate have been quite stable. 1.6 Despite this difficult economic environment, significant economic reforms have been implemented in Armenia. Apart from bread, which is rationed, prices for virtually all goods have been liberalized. All agricultural land and a part of the retail sector have been privatized. State enterprises have been given more autonomy and responsibility for self accounting. There is strong commitment on the part of the Government to support the private sector and to continue privatization among most large enterprises, but a general lack of resources, as well as other practical problems, are causing delays. 1.7 Before the start of hostilities with Azerbaijan, agriculture accounted for only 18% of the NMP and for a similar percentage of the employment. With the land reform of 1991, the breakup of the large agricultural production units, distribution of land to individual farmers, and the shortage of food supplies, many people have begun to engage in farming either on a full-time or part-time basis. Increasing unemployment (about 30% in 1992) has accelerated this development. The percentage of the labor force in agriculture, which was only about 18% in 1990, grew to 23% in 1991 and to 30% in 1992. At the same time, the agriculture sector's contribution to NMP, which was 17% in 1990, grew to 32% in 1991 and to about 45% in 1992. 1.8 Agricultural exports accounted for roughly 12 % of total export earnings in 1990 and 23 % in 1992. This included mainly fresh and processed fruits and vegetables, brandies, champagnes, and wines. By contrast, Armenia produced only 20% of its cereal requirements, 30% of its dairy requirements, and 35% of its required meat products. Sugar and vegetable oils are all being imported. Because the blockade limits Armenia's trade with the outside world, both agricultural production and trade configurations have been changing drastically. In 1993 the land area under grain production increased by about 200,000 ha over that of 1990, while vegetable, orchard, and vineyard areas have decreased significantly. All agricultural imports and exports have been falling substantially due to the loss of foreign markets and difficulties in sustaining production caused by material and energy shortages. Because of growing food shortages, a large proportion of the new smallholders have turned to subsistence farmring with emphasis on grain and vegetables. This trend is likely to continue. I Armenia's currency until recently was the Russian ruble, and the country was in fact in the ruble zone. As inflation in Russia accelerted in 1992 and 1993, so was the inflation in Armenia. In the fall of 1993 Russia replaced the old ruble with a new ruble and Armenia issued its own currency, the drum. However, the drum depreciated rapidly, and if the exchange rate is a proxy to domestic inflation, then domestically inflation grew faster than 2,000% between November 1993 and April 1994. However, since May the drum have been relatively stable.  Background 3 Table 1.1 Armenia: Main Economic and Social Indicators Social and demographk Indicators (1993) Area 29,800 km2 Population 3.742 million Urban 2.533 million (67.7%) Rural 1.209 million (32.3%) Population Density 125.6 per km2 Life Expectancy at birth 72 years in 1993 Infant mortality rate 17.5 per thousand in 1993 Gross domestic product (GDP) (1993) 779,619 million rubles GDP per capita' 208,343 rubles 1988 1989 1990 1991 192 1993 Annual changes of real output in % Gross Domestic Product -0.7 12.4 -7.4 -10.8 -52.6 -14.8 Net material product (NMP) -2.6 14.2 -8.5 -11.8 -46.0 -9.3 Industry -1.6 2.3 0.5 -8.5 -52.5 -14.0 Agriculture 43.1 -27.7 -13.2 7.7 -8.4 -10.8 Composition of NMP In % Industry 54.6 50.2 45.4 45.9 46.3 30.5 Agriculture 18.5 14.4 17.4 27.9 39.9 56.6 Construction 10.8 21.2 25.4 15.3 5.3 4.5 Transport and Communication 4.1 3.5 4.1 2.7 1.6 0.7 Other sectors 12.0 10.7 7.7 8.2 6.9 7.7 Average prke change (1993) Wholesale price increase 3.2 12.7 4.8 219.7 -- Retail price increase 3.0 4.0 12.0 304 1341.3 Average monthly wage (real change) 3.2 12.7 4.8 47.9 -70.7 -53.3 Consumer Price Index (real change) 10.3 100 824.5 3731.9 Interrepublican and foreign trade (in billions of rubles at domestic prices) Exports 3.8 3.7 3.5 4.9 62.0 190.2 Imports 4.9 4.9 4.7 7.3 75.1 306.2 Trade balance -1.1 -1.2 -1.1 -2.4 -13.1 -116.0 Trade balance in % of GDP -13.7 -12.6 -11.4 -16.0 -22.2 -14.9 Central Government budget Revenue 4.9 4.1 4.3 15.5 183.46 Expenditures 4.7 3.5 5.7 37.6 621.14 Overall balance 0.2 0.7 -1.4 -22.1 -437.68 In percent of GDP 2.1 7.2 0.6 -37.4 -56.1 Money and credit (end of period) Total deposits 4.6 7.3 8.2 15.4 27.0 649.3 Total domestic credit 3.8 3.5 4.7 10.7 39.3 327.4 Net credit to the Government -1.0 -1.0 -0.6 0.1 12.5 251.9 'The official Bank's estimate is US $660 per annum in 1993. Source: Armenia-Country Economic Memorandum, March 24, 1993, together with updated figures of October 1994.   II. THE AGRICULTURE SECTOR A. BACKGROUND 2.1 Topography greatly influences agriculture in Armenia. (For details regarding the agriculture sector, see Annex 2) Although mountain peaks soar to 4,090 m above sea level (asl), land is cultivated between the altitudes of 600 m and 2,500 m. Only about 2% of the land, however, is located below 1,500 m elevation. Generally, the landform in the center and north comprises rocky, high mountain ranges separating narrow, fertile valleys. Towards the south, the broad, flat, and fertile Ararat Valley opens out along the left bank of the Araks River to form the border with Turkey. West and north of the centrally located Aragat Mountain, and to the east around Sevan Lake, the landform is generally rolling, but with many rocky outcrops. In the southeast, a few small, irregularly-shaped valleys are fringed by high mountain ranges on both the borders with Azerbaijan. 2.2 Climatic conditions also greatly affect agriculture in Armenia, depending on the altitude. Monthly precipitation is highest from April to June and lowest from July to September. The crop water deficit between May and August ranges from 200 mm to 700 mm. Soil moisture alone is not enough to compensate for this deficit; hence, irrigation is necessary for crop growth. Agriculture in the Economy 2.3 Before the breakup of the Soviet Union, the agriculture sector in Armenia accounted for about 18% of the NMP and a similar proportion of employment. The economy, by and large, was intertwined with the Soviet economy, which made Armenia highly dependent on outside sources for energy and raw materials for its industries, and on grain for its people and livestock. After Armenia's independence in 1992, agriculture's share in NMP increased gradually to about 46% in 1993, and the sector employed about 30% of the labor force also in 1993 because of the adverse effects of the blockade on Armenian industries and services. Two reasons account for the growth of the agriculture sector: (a) it provided critical food supplies for the population at a time when imports had been curtailed because of the blockade; and (b) the country implemented a land reform program in 1991, under which large agricultural production units were quickly broken up, and land distributed to small individual farmers. As a result, there was fresh incentive to engage in agricultural production, despite the difficulties transforming the economy into a market system. Labor Force 2.4 Total employment in agriculture was estimated at 285,000 in 1990. With privatization in 1991, the number of people employed in agriculture rose sharply. Nearly 232,000 people were recorded as living on newly established family farms, while those remaining on the other types of farms apparently fell by only 173,000. Thus, the official statistics suggest an increase in total agricultural employment of nearly 60,000 or 21 %.  6 Wpter 2 B. AGRICULTURAL PRODUCTION 2.5 Of Armenia's overall territory, about 47%, or 1.4 million ha, are cultivable or CULTIVATED LAND are used as pasture for livestock. The rest is 000 HA rocky wasteland, mountains, forest, and heathlands, suitable only for rough grazing during the few summer months. Figure 2.1 shows the distribution of cultivable land at the PerniAul CoPs end of 1992. Home 67 2.6 Historically, agriculture in Armenia has had strong dependence on irrigation; nearly 80% of total crop production is H Grzn produced with irrigation. Approximately 137 286,000 ha are at present irrigable throughout the growing season. Permanent Pastures 666 2.7 The irrigated land is 80% surface irrigated and 20% pipe irrigated. Irrigation F%ure 2.1 intensities range around 100%, but under- irrigation is practiced in most irrigation schemes because the rainfall is concentrated over a short period and because the irrigation system shows serious signs of deterioration (for example, cracks in storage tanks and dams, and collapsed canals) and because of inadequate management (pars. 3.13, 3.17, 3.21, 3.28, and 3.30), which has led to increased salinity in sizable areas. Water resources are plentiful-distribution is the problem-and would allow further expansion of irrigated agriculture. 2.8 Production efficiency and output levels are below those reached in developed countries. Agricultural output in Armenia began to decline in the second half of the 1980s when econonmc difficulties in the Soviet Union were increasing. But compounding the economic difficulties of the Soviet Union due to eruption of the conflict with Azerbaijan agricultural production fell by 28% between 1988 and 1990, more than anywhere else in the FSU. Production started to recover, however, in 1991 with implementation of the Land Reform, and continued to rise through 1993, when production was 13% below that of the 1988 level. In fact, the 1993 crop output surpassed the 1988 levels. 2.9 Crops in Armenia accounted for 45% of total agricultural production in the 1980s. Crop yields are generally low and, even accounting for harsh environmental conditions, the actual yields of most crops are believed to be barely 50 - 60% of their potential. The country's cropping structure has undergone a dramatic shift over the last three years (1991-93). The proportion of annual food crops increased substantially at the expense of forage crops, perennial crops, and industrial crops. Insufficient irrigation water is one of the main reasons for this situation. 2.10 Livestock accounted for 55 % of total agricultural production in the 1980s. This proportion has decreased substantially in recent years due to the significant contraction of the livestock sector caused by the need to import feed for pigs and poultry. In 1993, 73.59% of gross agricultural production originated from the crop sector (Table 2.1). It is likely that this proportion will decrease somewhat  The Agricultural Sector 7 further in the coming years. The livestock subsector is in a deep and unprecedented crisis. IEbIe 2.1: Development of Agricultural Production, After peaking in 1987/88, livestock production % Shares started to decline due to the combined impact Livestock Crop share % Ag. of reduced livestock populations and lower share of Ag. of Ag. Output in production intensity. Compared with 1987/88, Output Output total NMP total 1992 output of meat dropped by 38%, 1988 48.2 51.8 18.5 milk by 31%, eggs by 60%, and wool by almost 40%. Particularly hard hit was poultry 1989 55.8 44.2 14.4 meat production, down by almost two-thirds 1990 54.8 45.2 17.2 from 1991. Total 1993 meat production fell by another 30% from 1992, eggs by 40%, and 1991 46.3 53.7 32.2 wool by 10%, while milk production remained 1992 33.2 66.8 45.6 at the 1992 levels according to Ministry of Agriculture estimates. Livestock output 1993 26.5 73.5 NA declined by 45% from 1998 to 1993. Soursc: IBRD Statistical Handbook 1993, State of the FSU, and Annenian Ministry of Agriculture. 2.11 Livestock performance in the late 1980s was only about 35% to 40% of Western standards for milk and meat production. At that time, average fertility rates were 67% of those in the West. The rates have deteriorated further in the past two years. Particularly alarming are decreasing slaughter weights, unacceptably high mortality rates, long fattening periods, and feed conversion ratios two to three times lower than in the West for broiler and pig production. C. CONSUMPTION AND SELF-SUFFICIENCY IN AGRICULTURAL PRODUCTS 2.12 Armenia is far from self-sufficient in TABLE 2.2: Self-Sufficiency and Per Capita Food Consumption food production, since it (1985-1992) produces less than 30% of Self Sufficiency Consumption the flour for bread, and only % (kg per capita) % three quarters of the livestock products consumed Prducts 1985 1992 18 9n in the country. Almost half of food output by volume Bread products 27.1 28.5 134.0 130.0 -3.0 consists of fruits and Potatoes 141.8 115.4 65.0 76.0 16.9 vegetables, in which Armenia is self-sufficient Sugar 13.9 0.0 28.7 9.7 -66.2 and able to export in fresh Vegetable Oil 83.3 75.0 2.4 1.6 -33.3 and processed forms. Since per capita consumption of all Meat and Meat 65.1 76.0 49.0 20.0 -59.2 products except potatoes fell products between 1985 and 1992 Milk and Milk Products 38.0 84.1 433.0 122.0 -71.8 (Table 2.2), food import needsThave dr2fopd asmwell. EWs (pieces) 116.9 103.1 148.0 65.0 -56.1 needs have dropped as well. Armenia now meets a larger Fruits (including 232.6 292.1 47.0 44.0 -6.4 Grapes) Soirce: Ministry of Agnculture.  8 Chapter 2 share of its food consumption through domestic resources because demand for livestock products has dropped by 60% to 70%. Dependence on imported flour has not been substantially reduced. 2.13 Through 1993, cereal production amounted to about 300,000 ton per year, and imports amounted to about 450,000 to 500,000 tons per year. Before the decline in livestock production in the last two years, Armenia required an additional 400,000 to 500,000 tons per year of cereals for animal feed purposes. Because of the blockade over the last two years this requirement has not been met, and is, among other factors, the most important reason for the decline of livestock production. The net shortage of cereals for human consumption in the coming years might decrease slightly. If the price of bread, which presently is the only commodity that is subsidized, is liberalized, then cereals consumption would fall. An increase of 50% in bread prices would cause a reduction of about 10% in the estimated consumption of cereals. Potatoes are another important staple of the Armenian population. Demand and supply are approximately balanced at 250,000 tons per year or 60 kg per person. Until the 1988 earthquake approximately 20,000 tons of sugar per year were being produced domestically, and the balance of about 100,000 tons was imported. After the 1988 earthquake the sole sugar factory was dismantled and sold to Georgia. With the difficulty of import because of the blockade, sugar consumption has fallen by two-thirds. 2.14 Until 1991 local production of milk and dairy products usually met less than half of the country's needs. For meat, domestic production met almost two-thirds of consumption. The reduction of commercial imports since the start of the blockade in 1991 and the large reduction in consumer incomes have pushed up consumer prices and reduced effective demand for livestock products to much lower levels compared to the end of the 1980s. Both meat and egg production have dropped by over 60% and with low imports (or none in the case of eggs), consumption has fallen by more than 50%. Imports of dry milk powder have continued, but at such a low level that consumption of milk products has fallen by over 70%. For all these products, the combination of high income elasticity and halving of real income over the past three years has accounted for over half of the fall in demand. 2.15 In adjusting to higher prices and reduced incomes, the population has shifted its consumption to more potatoes and has maintained bread and fruit consumption close to the levels of the mid-1980s. This has been facilitated by stable or increasing outputs of potatoes and fruits, as well as increased grain production and Government priority given to negotiating and organizing the delivery of food aid, including grain shipments. Thus, the population has been able to maintain a minimum level of nutrition and caloric intake.  m. WATER RESOURCES AND THE IRRIGATION SUBSECTOR A. WATER RESOURCES The Main Sources 3.1 Armenia has limited rainfall, surface water, and groundwater. Average rainfall is about 620 mm per year, but varies considerably with altitude. The total estimated volume of annual precipitation is about 18.4 billion m3.' Surface Water 3.2 Surface water is available in 18 principal river basins. Most of the runoff, close to 60%, flows to the four largest rivers (Araks, Debed, Kasakh/Sevdjur, and Akhurian), and an additional 25% to the other three major rivers (Razdan, Arpa, and Vorotan). Water from the Araks River is shared with Turkey. 3.3 The total runoff is about 8.7 billion in3 per year. Of this amount, 1.3 billion m3 per year is useable by neighboring countries. Of the remaining 7.4 billion m3 per year, about 13 percent, or 980 million m3, is stored in 74 irrigation dams (about 1.1 billion m3 live storage). This stored water, together with 1.4 billion m3 diverted by run-of-river and pump schemes, comprises the present 2.4 billion m3 total average volume available for irrigation from surface water resources. Groundwater 3.4 Annual replenishment of groundwater is estimated at about 4.2 billion m3, of which about 1.4 billion m3 reappear in springs within the country. The rest, 2.8 billion m3, comprise three main categories: (a) Groundwater resources pumped by 2,105 irrigation and drainage wells, most of which are in the Ararat Valley. (b) Numerous industrial and municipal wells in various parts of the country. (c) Springs and aquifers reappearing outside Armenia's borders. At least 500 million m3 (18 percent) of the 2.8 billion m3 are still available, and could be used almost without causing reduction of spring or river flows. Annual water resources include the following: rainfall, 18.4 billion m3; runoff through rivers, 7.4 billion m3; groundwater, 0.5 billion m3. Water resources are not entirely mutually exclusive. Both rivers and groundwater resources originate from precipitation and, in years when precipitations are low, the stock of groundwater falls as well.  10 Chapter 3 Water Use 3.5 Annual use of water amounts to about 4.0 billion m3. Irrigation is the largest user with 2.5 billion in3, followed by public water supply (including irrigation of gardens) with about 750 million m3 and industrial water supply with 310 million m3. Substantial amounts of the utilized water is lost along the conveyance and distribution systems; therefore, the total annual consumption is far below 50% of the available water resources. Potentially, with large conservation efforts along the existing systems and the development of new, unutilized water resources, at least 100,000 more land could be irrigated than at present. Dminage 3.6 Serious drainage problems exist in the low lying, light, and medium textured soils of the Ararat Valley. The high groundwater table in these areas, some of it under artesian pressure, is causing varying degrees of soil salinity. The area affected is about 100,000 ha. Approximately half of that area has already been drained by tile and plastic pipes. Open drains have been excavated, natural drainage ways deepened, and vertical pump drainage systems installed.2 However, the operation of some drainage wells is essential to avoid resalinization of some of the reclaimed land. Of the remaining 43,000 ha requiring treatment of some sort, 23,000 ha are classified as slightly saline, 11,000 ha moderately to strongly saline, and some 9,000 ha are considered severely alkaline. Water Quality 3.7 There is a range of water quality in the country. From unpolluted springs and snow melt in the high elevations, to untreated or partially treated sewage in the Razdan River, to saline groundwater in the Ararat Valley. The quality is deteriorating; power shortages and lack of funds make it difficult to operate and maintain existing water and sewage treatment plants near cities, and to operate pumped drainage systems in agricultural areas. 3.8 Water in storage reservoirs is often polluted by untreated sewage and return flows from septic tanks from villages in the watershed. Groundwater quality, except for some parts of the Ararat Valley, is generally good. The Razdan River carries flows from Lake Sevan and serves as recipient for treated and untreated sewage from Yerevan and other cities along its course. Although the river water is used for irrigation in the Ararat Valley, there have been no reports of outbreak of waterborne diseases due to water pollution, and there have been no reports of any ill effects on the quality of crops in the Ararat Valley. 3.9 Two Government ministries test the quality of water in Armenia.3 The Ministry of Environment operates five laboratories that test the quality of drinking water and nine laboratories test the quality of treated sewage. The Ministry also supervises the operation of industrial quality laboratories, 2 Some of the pumped drainage is returned to the canal systems and reused for irrigadon. 3 Water quality is tested according to four categories: (a) taste, color, etc.; (b) chemical content; (c) microbiological constituents; and (d) degree of radioactivity.  Water Resources and the Irrigation Subsector 11 which test plant effluent. The Ministry of Agriculture operates several laboratories for testing the quality of irrigation water. B. IRRIGATION The Conveyance System 3.10 Water is supplied to most of the irrigation schemes in Armenia by eight major conveyance irrigation systems. All main canals and most of the secondary canals were originally lined using different types of lining.4 Most of the canal network is in unsatisfactory condition. Due to landslides, erosion, and encroaching vegetation, unlined canals have lost their cross-sections. The condition of lined canals is not much better; in many cases long stretches of lining have deteriorated and, in some places, have completely disappeared. 3.11 In a number of locations, the reinforced concrete in large aqueducts (20-30 m3 per sec) has deteriorated, and water is leaking through the walls and floors of the structures and through cracks and joints. In some locations, the collapse of the aqueduct appears imminent, putting the entire canal system in jeopardy. 3.12 The deterioration of the conveyance system may be attributed to a combination of causes: inadequate design, lack of quality control during construction, bad and insufficient construction material, lack of maintenance, normal aging, adverse climatic conditions, and possibly corrosive water. It is estimated that more than half the water is lost between source and farm gates. Pumping Stations and Pressure Pipes 3.13 About half of the irrigated area (130,000 ha) requires some kind of pump lifts. In sprinkler-irrigated areas, the pumps draw water from gravity conduits and provide the required pressure. Other areas require pump lifts from the water source to the head of a gravity distribution network from where the water is conveyed to the command areas, or to second pumping stations to lift it to another distribution network higher up. 3.14 Altogether some 360 pumping stations, with approximately 900 pumps, provide the energy input for irrigation. The installed capacity of the electric motors is approximately 440 megawatts. Capacities of the pumping stations range from 100 liters per second to 16 m3/sec. The annual power consumption of the irrigation sector is reaching about 500-600 million kwh, a drastic cut from the more than 1.1 billion kwh that was consumed before 1992. 3.15 The condition of most of the major pumping stations is unsatisfactory. Neglect is evident everywhere. Rehabilitation and replacement of pumping equipment is required to save energy and increase the reliability of the equipment. However, despite the dilapidated condition of the stations, they seem to be operating as well as can be expected, and the rehabilitation of the pumping equipment could be 4 Cast-in-site reinforced concrete, precast sections, concrete, and paving with concrete slabs and stones.  12 Chapter 3 postponed to a later stage. 3.16 Some of the pressure pipelines that convey water from the pumping stations to the distribution systems are at the end of their useful life. Others are in critical condition because of corrosion. Approximately 54,000 ha would be affected if the pipelines fail. Design standards used for laying and maintaining steel pipes are unsatisfactory. Black steel pipes are laid on concrete supports above ground without any internal or external protection against corrosion. 3.17 A large portion of the pumping schemes, however, lift the water far above 100-150 m, which is an economic threshold limit that justifies production of typical crops grown in Armenia. Each lift of 1 m3 to 100 m consumes about 0.5 kwh. With an average gross water requirement of 12,000 in3 per ha, a 100 m lift causes power consumption to reach between about 5,000 and 6,000 kwh per ha. Lifting water beyond the threshold of about 100 m is considered an insurmountable economic burden on the farm budget. Consequently, many pumping schemes are uneconomical, and if they cannot be replaced by the gravity system, they should gradually be phased out of the irrigated commnands. Tubewells 3.18 About 1,900 wells supply 700-800 million m3 of groundwater annually for drinking, industrial use, and irrigation in the Ararat Plain.5 About half the wells are irrigation wells. All water from these wells is lifted by submersible pumps. 3.19 An inventory compiled by the Department of Water Supply and Irrigation (DWSI) in 1992 found the condition of the mechanical and electrical equipment in many of the wells unsatisfactory. Approximately, two-thirds of the pump sets were not operating. New statistics for 1993 confirm that their condition has further deteriorated. 3.20 The submersible pumps used in these wells are Russian made. Their life expectancy, under normal working and maintenance conditions, is said to be four years. This is about half the average Western standard. The actual situation observed in the field seems to be even worse. Pump sets are installed without any protective devices against power surges. As a result, motors burn out, sometimes after only a few months' service. Even with a normal supply of electricity, pumps seldom last four years; two to three years seems to be the norm. Electrical installations at the well head are also substandard. Cables from transformers to the electric motors are unprotected, which causes frequent short circuits and damages the motors. 3.21 The accelerated deterioration of pump sets is also caused by cavitation on the impellers and corrosion of metal parts. The space between the casing of the well and the well bore is left open, exposing the gravel pack around the "screen" to the intrusion of dirt and mud. Design specifications for installing wells, drawn up by the Water Planning Institute6, are sound. The problem seems to be in the construction of the well, the equipment and materials used, the shoddy workmanship, and lack of adequate maintenance. Screens are made locally of steel pipe. Holes are drilled into the pipe instead of 5 Approximately 860 wells are artesian; the balance requires pumping. 6 Under the Ministry of Agriculture.  Water Resources and the Irrigation Subsector 13 using slotted stainless steel or fiberglass screens. The screens are not made of corrosion-resistant material, and they are installed without protective devices as is normally required in other countries. 3.22 Because of a lack of control and metering equipment at the well head, the operating efficiency of the tubewells cannot be measured, and monitoring the performance of equipment is impossible. Storage Reservoirs and Dams 3.23 Water for irrigation comes from rivers and lakes and in the Ararat Plain, as well as from groundwater. Surface runoff is stored in 24 major reservoirs, which supply water to approximately 92,000 ha. These reservoirs have a storage capacity of 932 million mn3 and a live storage of 840 mnillion ni3. There are five more reservoirs storing 145 million n3 water for municipal and industrial use. An additional 54 smaller reservoirs have a total storage capacity of approximately 300 million mn3. Of the total 83 reservoirs, 74 are under the administration of the Ministry of Agriculture and have a total storage capacity of 977 million m3. The largest existing reservoir has 525 million m3 capacity (Akhurian). It provides water for about 30,000 ha in Armenia, and is shared with Turkey. 3.24 Fifteen of the irrigation dams are considered in need of major repairs, and some even require urgent attention to avoid dam failures if operated at full capacity. The causes of their precarious condition include design errors, construction faults, and lack of maintenance. On-Farm Irrigation Systems and Efficiencies 3.25 The division of collective and state farms under the 1991 land reform (para. 2.3), into some 300,000 small holdings, each with a number of farm plots, has created a serious water distribution problem. Part of the land served by the closed (pressure) systems is farmed communally, in a similar way as before the land reform. However, many of the pressure systems were abandoned because they were not able to serve the thousands of new small plots due to the lack of an effective distribution system. In many of the gravity systems, water distribution is chaotic as well. Up to now, no formal network of authority to implement on-farm infrastructure has been developed, which has resulted in the inefficient, randomly-placed installation of earthen delivery ditches. 3.26 The main difficulty is that the irrigation delivery systems were designed to service large farms which may have irrigated 50 to 400 ha from a single headgate or canal outlet. Presently, the same outlet may service 400 or more farmers, which in many cases, makes it difficult to deliver necessary irrigation water to farmers who are not in close proximity to the canal outlet. In some instances, earth ditches must be installed across one or more adjacent farm plots. Some adjacent farmers will not allow ditch easements through their plots because of seepage and/or the loss of land. The result of these kinds of conflicts is that many farms receive insufficient irrigation water during the irrigation season. Further consequences are that some farmers located even a minimal distance from the existing outlets have no way of directly receiving water; no dependable scheduling technique is used to benefit all farms. In some areas, water distribution is erratic, and many irrigators have broken concrete canals and pipes at points closer than the originally installed outlets in order to have better access to irrigation water. When they are not irrigating, they close the holes in the canal or pipe with soil or sod, which leaks. As the number  14 Chapter 3 of these of-takes in a canal system increases, the delivery efficiency decreases. 3.27 The most problematic areas of the irrigation systems are those that depend on electric pumps to lift water to gravity systems which irrigate 42% of the total fanned land in Armenia. Unpredictable blackouts and low voltage from the shortage of electricity have paralyzed much of the pumping capacity, leaving farmers in limbo or entirely without water. This past irrigation season, the Ministry of Energy, due to lack of resources, was able to supply only 46% of the electricity needed to meet the pumping requirements for crop production. This predicament left many farmers with minimal water, and farmers at the end of most pump systems had no water at all. 3.28 Despite the nominal establishment of water users' associations (WUAs), there is little evidence in the field that such organizations actually function. In reality, water users are organized by villages, with outlet boundaries corresponding to village boundaries. Last year, during the first irrigation season after privatization, the Operation and Maintenance Enterprise (OME) of the Ministry of Agriculture made agreements with each individual farm unit specifying the amount of water the unit would receive and the water fees for the season. The OME was overwhelmed by approximately 260,000 agreements, and the Government was disappointed by a collection rate of a mere 27% of the water charges in 1992. Therefore, the Government instructed OME to make agreements this year with village councils for delivery and charges. Although the Government expected the village councils to execute agreements with individual farmers and collect the water charges, this has only partially been realized. C. OBJECTIVES AND STRATEGY OF BANK ASSISTANCE 3.29 Agriculture has been recognized by the Government as one of the critical sectors in need of assistance for two reasons: (a) the sector employs about a third of the labor force (para 2.3), and (b) the sector provides food which, in the context of the country's trade configuration, is difficult to obtain tirough imports in the short to medium term. Because the agriculture sector is heavily dependent on irrigation, and because the dilapidated condition of the irrigation infrastructure constrains both development of the sector and profitability of existing production, the Bank and the Government have agreed that rehabilitation of the irrigation infrastructure is the first priority in assistance to the sector. Bank assistance would be confined to areas that would have the greatest impact on efficiency in agricultural production. Areas that have been identified are those that are irrigated by gravity or that require minimal pumping, and that under certain cropping patterns can provide for profitable production at the given border prices. D. LESSONS FROM PREVIOUS BANK INVOLVEMENT 3.30 Investments in water resources have played a major role in the Bank's efforts to help countries to reduce poverty and to upgrade living conditions7. Irrigation systems have expanded food production, improved nutrition and increased rural incomes. Bank assistance has evolved from simple project lending toward country focused support for elaborating and implementing subsectoral strategies. These strategies are developed through sector work and subsectoral reviews in which priorities are 7 See Water Resource Management: A Policy Paper, International Bank for Reconstruction and Development,R93- 14/1, may 3, 1993.  Water Resources and the Irrigation Subsector 15 articulated and performance is analyzed. The proposed Irrigation Rehabilitation Project incorporates the Bank experience in irrigation projects. Hence, special attention was paid in the project design and concept to restructuring of the operation and maintenance of the irrigation system; quality of construction; cost recovery; adequacy of the water management; the need to complete the country's water master plan that will incorporate intersectoral impact of water development investments; and environmental issues. 3.31 Two projects have been approved so far for Armenia: an institution-building project (Loan 3585-AM), approved in March 1993, and an earthquake reconstruction project (Loan 2562-AM), approved in January 1994. The institution-building project has been slow to take off mainly because the Armenians lack experience in implementing Bank-financed projects. However, recently the pace of implementation has improved due to more intensive supervision and guidance on the part of the Bank. The earthquake reconstruction project just recently became effective, and small amounts have already been disbursed. An implementation unit was established for that loan about six months before Board approval. The experience gained in establishing the implementation unit is important for future Bank projects, especially in regard to administration, accounting, and procedures. The significant success of the implementation unit was demonstrated in the adjustment of local staff to the procedures of IDA financed project requirements and in the confidence they gained in implementing a Bank-financed project. The implementation unit was initially administered and guided by an expatriate, but local staff are now managing all functions of the unit successfully, including procurement and disbursements. Of particular interest is the experience gained by the unit in preparing bids and the enormous interest shown by local state enterprises in bidding for works and supply of goods under the earthquake reconstruction project.   IV. THE PROJECT A. PROJECT OBJECTIVES 4.1 The main objectives of this project are to assist Armenia in maintaining its level of irrigated agriculture production and to improve the country's water resource management. B. RATIONALE FOR IDA INVOLVEMIENT 4.2 The Government considers the proposed project to be a priority investment in agriculture (para 3.29). It supports the development objectives of agriculture in Armenia identified in the Bank's Agriculture Sector Report (June 1994). The key elements in this regard are to: (a) expedite completion of the transition to a market-based system, including privatization of food production, processing, and marketing; (b) change the role of Government towards the provision of research, education, extension, and market information; (c) improve the efficiency of production, processing, and distribution of food and agrieulture products; and (d) improve the competitiveness of Armenian agricultural products in international markets. Following the priorities identified in the Bank's Agriculture Sector Report (June 1994), the sector review proposed an assistance strategy that includes (a) provision of critical inputs for agriculture production; (b) support to the Ministry of Agriculture to implement a consistent transition program in food and agriculture; (c) development of institutions and support facilities needed for a market-based privatized agriculture; and (d) capital investments for the development of competitive production, processing and marketing, and related infrastructure (especially the irrigation system). Hence, investments proposed under the project are intended to enable agriculture to maintain and increase production capacity which has been eroded because of severe deterioration of the irrigation infrastructure. The project would also support increasing the role of irrigation beneficiaries in determining their water needs and their financing of the operation and maintenance of the irrigation infrastructure. Under the proposed project, the beneficiaries would gradually take over water distribution and maintenance of the conveyance networks. The Bank strategy also emphasizes the rehabilitation and protection of the environment, which has been severely damaged by the deterioration of the water conveyance systems. The environment is now threatened by a possible collapse of several irrigation dams (psra. 3.28). C. THE PROPOSED PROJECT 4.3 The project consists of four main components: (a) rehabilitation of 12 irrigation schemes and the Ararat Valley groundwater network; (b) establishment of pilot projects for water distribution and new WUAs; (c) financing incremental operations & maintenance (O&M) costs of the irrigation infrastructure; and (d) technical assistance, including the establishment of a project implementation unit, assistance to update the Water Master Plan, training, and assistance to improve irrigated crop production. The investments related to the rehabilitation program make up about 78% of the project's estimated base costs; contribution to O&M about 11 %; the water management, including pilot projects, about 5 %; and technical assistance, including the PIU, about 5%.' I Other and rounding amount to 1%.  18 Chapter 4 D. THE RATIONALE FOR PROJECT DESIGN General 4.4 The project covers an area of about 164,700 ha (about 60% of the Armenian irrigated land), located mainly in the Ararat Valley, in the western part of the country. About 15% of the project areas are also in the northwest part of the country (Map 25388). With the exception of some of the northeast areas, where some of the irrigated lands are at elevation of +1800 m as], the rest of the irrigated land is at elevation ranging from 800 to 1000 m asl. 4.5 The selection of the project areas in the Ararat Valley was an obvious choice. It is the breadbasket of Armenia and the most fertile and productive agricultural area in the country. However, the arid Ararat Valley cannot produce crops without irrigation, and the irrigation system is now in decay. The Ararat Valley is also in close proximity to the capital Yerevan, where about one third of the country's population lives, dependent on the Valley for most of their food supply. Most of the other irrigated agriculture areas of the country are at higher elevations, and do not fit into the selection criteria for the project (para. 4.6). Criteria Used in Selection of Project Components 4.6 The selection of the project's components is based on the following criteria: (a) Energy Savings. Schemes have been chosen on the basis of acceptable cost-benefit utilization of energy for pumping water. Investments that would replace pumping economically by gravity irrigation were given highest priority. (b) Water Savings. Those schemes where rehabilitation would reduce water losses are given high priority, provided the value of the lost water is larger than the investments to repair them. Based on this criterion, substantial cost savings could be realized by rehabilitating leaking canal sections and replacing large diameter pressure pipes that have reached the end of their useful life. At present, water losses in conveyance from the source of water to the farmer's field reduce the areas which can be irrigated. Leaking canal sections can damage fields, houses, and infrastructures adjacent to the structures. The rehabilitation works are located on reaches of canals where the banks and the lining are destroyed, or where there is imminent danger that old and rusted pressure pipes will burst. (c) Irrigation at the Critical Growing Period. Rehabilitation of schemes which provide supplementary irrigation is a priority because water late in the growing season is critical for plants and production. Rehabilitation of schemes that provide supplementary water is economical provided the investment cost is less than the value of reduced yields caused by insufficient irrigated water. Such cases include the supply of supplementary water to three of the Ararat conveyance schemes (Lower Razdan, Octemberian, and Artashat) through pumping from the Sevdjur River (Arevshat and Mkchian), and using return flows through pumping from the drainage collectors, as well as restoring supplementary irrigation from local boreholes. The use of water stored in reservoirs that fully dominate the nearby command areas is also essential for supplementary irrigation.  T7he Project 19 (d) Assistance to the Earthguake Reconstruction Zone. Rehabilitation works of the irrigation infrastructure in the earthquake zone around Spitak (Getik scheme) is a priority, given the vast destruction of the irrigation facilities in 1988. (e) Danger to Life and Property Downstream of Storage Dams. Rehabilitation of storage dams is a priority if they are in a significant stage of deterioration and constitute substantial danger to life and property; and if they are being used for economic purposes. Following the above-mentioned criteria, the proposed project would finance rehabilitation of four of the most seriously affected storage dams. Studies would be carried out under the proposed project to identify and appraise additional dams that constitute significant risk to life and property for inclusion in future Bank-financed projects. The recent breakup of the Artic dam illustrate the urgent need to carry out studies and rehabilitate Armenian dams. In May 1994 the embankment of the Artic dam broke across a width of 50 m, flooding two villages, killing several people and sweeping away many animals. Many other dams are in critical condition similar to the Artic dam. Considerations in the Choice of Certain Components 4.7 The following rationale was used to determine the technology and institutional organization for the project: (a) Introduction of Modern Tubewell Technology. Investment in modern tubewell technology is deemed justified if the incremental benefits are greater than the investment costs. Existing wells are badly constructed and do not follow standards established for their construction by the DWSI (for details, see Annex 3) (Annex 4, paras. 18 to 21). Motors have been installed without protection from power surges, and pump impellers wear out because they were installed without adequate filter screens in the wells. A number of these wells cannot be rehabilitated, and new wells will have to be drilled. If new electrical equipment with protective devices against voltage fluctuations is installed, the life of the pumps can be extended by four to five years. (b) Investment in Prefabricated Concrete Lining of Canals and Pump Maintenance. Given that plants and workshops that manufacture concrete lining or maintain pumps already exist in Armenia, some investments in their restructuring are justified if they do not compromise competitive procurement of the manufactured products, or if the manufactured products are cheaper than similar imported concrete linings, or if there is less need to import new pumps. (c) O&M Costs. After the breakup of the collective farming system, under which the Government was responsible for O&M of the irrigation infrastructure and its financing, it is necessary to reorganize both the O&M system and its financing. Presently the Government still manages the O&M system but it provide only a fraction of the O&M needs due to insufficient budgetary allocation. The budgetary allocation is partially dependent on revenues from collection of O&M charges from water users, but such collection is in its infancy and covers only a fraction of the budgetary needs. If financial resources for O&M provisions continue to be unsatisfactory, there is a strong possibility  20 Chapter 4 that the country would need another irrigation rehabilitation project in a short time. Hence, if the project will include a financing component to cover incremental O&M costs until water charges collection is established and able to cover the needed funds, there would likely to be substantial savings in terms of preventing long-lasting damage to the irrigation infrastructure of the country. It has been assessed that with undertaking other measures proposed under the project, there are good prospects that collection of water charges will improve and that in about five years' time, the necessary O&M costs can be recovered. (d) Project Implementation Unit. Presently, the ability of the Government to carry out imnplementation of the IDA-financed project without outside assistance is extremely limited. Assistance under the project for managing competitive bidding, construction work, procurement of equipment, contracting, supervision, and cost accounting is essential for the success of the project. It is believed that this will be more efficient if it is carried out under an autonomous project implementation unit (PIU) contracted under a single contract to an internationally renowned firm. E. DETAILED PROJECT DESCRIPTION The Irrigation Rehabilitation Program 4.8 The project consists of 12 irrigation schemes, including groundwater development (see Annex 4 for details) (US $28 million). 4.9 There are four types of rehabilitation works under the project: (a) Rehabilitation of eight major conveyance systems (US $18.5 million), including canals, aqueducts, siphons and hydraulic structures in eight major irrigation schemes: Shirak, Talin, Abovian (Kotaik), Arzni Shamiram, Lower Razdan, Octemberian, Artashat, and Getik. The area covered under this category is about 151,400 ha (92% of the project area, Map 25389 and Map 25390). (b) Replacement of gumps and pressure pipelines (US $9.5 million). This category includes four pumping schemes, of which one, the Vorotan, is an independent scheme that covers about 1,600 ha (1% of the project area). The other three-Azizbekov, Mkchian, and Arevshat-are within two of the eight major conveyance schemes to be rehabilitated (Map 25390). (c) Rehabilitation or reolacement of about 650 tubewell and pumps (US $6.9 million). These are located in the Ararat Valley, within the command areas of Octemberian, Lower Razdan, and Artashat conveyance schemes. (d) The rehabilitation of four storage schemes (reservoirs) (US $1.3 million). Three of these storage schemes-in Aparan, Mantash, and Sarnakhpiur-have their own command areas totaling about 11,700 ha (7% of the project area). One storage scheme (Karnout) is part  7he Project 21 of the larger Shirak conveyance scheme (Map 25391). 4.10 The Eight Major Conveyance Schemes (for details, see Annex 1, Table 1). The condition of much of the conveyance network is unsatisfactory (paras. 3.12 to 3.14). In the reinforced concrete aqueducts, the concrete has disintegrated and water is leaking through the walls and floor of the aqueducts. In some places enterprising farmers have made use of a free water supply, and in others the collapse of the aqueduct appears imminent. The rehabilitation works under the project include some 141.5 km of main canals, 523.2 kn of secondary canals, 1,411.0 km of tertiary canals and 548.5 km of nonpressure pipes, of which 412.9 km are made of concrete; the balance of 135.6 km is made of steel. 4.11 The Pumoing Schemes (for details, see Annex 1, Table 2). In all the four schemes proposed for rehabilitation, pressure pipelines conveying water from the pumping stations to the distribu- tion systems and some of the pumps are in critical condition. The replacement of pressure pipes and some of the pumps are included in the project. However, radical anti-corrosion steps are required to be introduced promptly, to avoid the same situations in the future, in these and other schemes. Protecting new, as well as existing pipelines that still can be recovered through lining, coating, and other anti- corrosive measures will be financed under the project. 4.12 The works required in the four pumping schemes are as follows: (a) The Vorotan Pumping Scheme. The rehabilitation works within the pumping systems and the pressure pipelines of the scheme include: (i) replacement of 2,015 m of 720 mm steel pressure pipeline, of eight mm wall thickness; and (ii) replacement or rehabilitation of three pumps. (b) The Azizbekov I and II Pumping Stations. The rehabilitation works include replacement of 2,800 m of 630 mm steel pressure pipeline, of 8 mm wall thickness. (c) The Mkchian I & II Pumping Stations. The rehabilitation works within the pumping systems and the pressure pipelines of the scheme include: (i) replacement of 18,000 m of 1,850 mm steel pressure pipeline, of 14 mm wall thickness, and 1,784 m of 1,800 mm steel pressure pipeline, of 14 mm wall thickness; and (ii) replacement or rehabilitation of 15 pumps. (d) The Arevshat I & II Pumping Complex. The rehabilitation works within the Arevshat I & II pumping systems and the pressure pipelines of the scheme include: (i) replacement of 15,800 m of 1,420 mm steel pressure pipeline, of 12 mm wall thickness; and (ii) replacement or rehabilitation of seven pumps. 4.13 The Tubewells Rehabilitation Program (for details, see Annex 1, Table 3). The proposed reconstruction and rehabilitation program would be carried out in three years and would include: (a) drilling of 150 new boreholes, in strict compliance with existing design specifications; (b) rehabilitation of 300 existing boreholes; (c) supply and installation of 250 new pump sets, including the required metering and control equipment; (d) supply of spare parts for the existing Russian pumps, to enable repair and overhaul of approximately 400 pump sets; and, (e) installation of 650 new and rehabilitated pump sets.  22 Chapter 4 4.14 Rehabilitation of Storage Dam Schemes (for details, see Annex 1, Table 4). The project would provide financing for the rehabilitation of four storage dams that are in extremely precarious condition. The rehabilitation program under the project would include repairs as follows: (a) The Aparan Storage Dam: The concrete lining of the spillway tunnel and the chute is completely destroyed in many sections. Also, in various sections along the outlet tunnel the steel lining has disintegrated and water is leaking into the tunnel; the regulation gates and their lifting gear need to be replaced and the cone valve repaired. (b) The Mantash Storage Dam: There are numerous cracks and serious deterioration of the outlet conduit, with muddy water leaking into the conduit. The accumulation of mud at the bottom of the conduit is an indication that an internal process of erosion and piping is taking place. The concrete in the intake tower, the spillway and the spillway channel also require rehabilitation. The irrigation outlet pipe is corroded, and the regulation valves should be repaired. (c) The Sharnakhpiur Storage Dam: Presently the condition of the dam requires that the spillway be reconstructed, and a stilling basin at the end of the chute provided. Strong vibrations endanger the outlet works. The intake should be redesigned and the gates and valves rehabilitated. (d) The Karnout Storafe Dam: The dam embankment is in the process of settling. The elevation of the dam crest is some 80 cm below the original construction level and only 90 cm above the maximum water level. The original wave wall has also settled. The concrete of the outlet conduit is cracked in several places and there is leakage of muddy water into the gallery. This indicates serious internal erosion (piping) in the dam structure, which is unsafe according to international standards, and which poses risk of failure. Pilot Projects to Improve Water Management 4.15 The cost of assistance to improve the water management is estimated at about US $2.47 million (Annex 1, Table 5). Presently there is no effective institution to manage the water distribution to about 300,000 farmers (paras. 3.25 to 3.28, and Annex 5). Over time, WUAs should be formed and given responsibility for O&M and water charge collection. A two-tiered structure should be developed, with outlet-level water user groups of 10-15 farmers, organized into a village-level umbrella association. Present conditions are unsuitable for investment in forming WUAs, as the physical structure does not support user groups, and the village councils are not suitable for the aggregating role. Nonetheless, under the pilot project, programs would be developed in about 400 villages that introduce low-cost methods of dividing command areas into manageable units, and would try different techniques and methods to determine which approach is most appropriate for Armenian farmers. Second, reorienting the Operational Maintenance Enterprise (OME) of the DWSI and village councils will create a better institutional climate for WUAs to develop. Third, as the OME gains institutional experience as a service organization, it will learn which O&M tasks can be delegated to local offices and eventually to WUAs, thus increasing the underlying rationale for such groups. Technical assistance will be structured to facilitate these processes and direct resources and attention appropriately.  The Project 23 Incremental O&M 4.16 The allocation for the incremental O&M component under the project is US $5 million (Annex 1, Table 6). The condition of conveyance structures, pumping equipment, and tubewells is very poor because of long-term neglect compounded by poor construction (paras. 4.10 to 4.13). In recent months, staff has not been paid, and maintenance materials, such as paint to protect steel pipes, could not be procured. Clearly, it is only a matter of time before large parts of the system completely fail and irrigation in many parts of the country cease. The most serious consequences of such failures would be in the Ararat valley where no crops can be grown without irrigation. 4.17 Investments in the rehabilitation of the most adversely-affected dams and canals and the procurement and installation of pipes and equipment will not be worthwhile if the rest of the system breaks down because of lack of routine maintenance. The present expenditures on staff, temporary labor, and materials for routine maintenance and small repairs, for the entire irrigation system in the country, is estimated at some US $3 million per year and additional US $2 million to US $3 million would be necessary to cover the actual needs. During project implementation, collection of water charges is expected to be better than at present through assistance to improve water management and distribution systems. Accordingly water charges to be collected would cover 40% of the O&M costs by December 31, 1995 of project implementation2, 60% by December 31, 1996, 70% by December 31, 1997, and 100% by the project's closing date. With this schedule there would be a shortfall in maintenance funds of approximately US $5 million over the four-year project period. This shortfall would be covered from project funds. At negotiations it was agreed that collection of water charges would cover the O&M costs according to the schedule mentioned above (para. 7.1 (a)). Technical Assistance for Training and for Irrigated Crop Production 4.18 A sum of about US $630,000 has been allocated for this purpose (Annex 1, Table 7). Technical assistance would be focused on subjects with which local professionals are unfamiliar and are relevant to the project success and management. All experts will be on relatively short-term assignments to enable the transfer of technology to local staff. In addition some technical assistance is required in areas of irrigated crop production, such as virology, bacteriology, and immunology, to prepare a national program of sanitation of the high-value crop areas. Assistance to Update the Country's Water Master Plan and Preparation of the Next Project 4.19 The cost of updating and modifying the master plan, including preparation of the next followup irrigation project, is about US $500,000 (Annex 1, Table 7). In June 1993 DWSI issued a preliminary draft of the water master plan for the country. The plan deals with overall water resource development in Armenia in the next 40 years. The plan assesses the water balance of both runoff and groundwater resources and compares this with the estimated increasing demand for water from all sectors of the economy. The detailed assessment under the master plan covers all administrative and hydrological levels. However, the present draft master plan is not yet based on sound economic considerations. The plan therefore needs to be scrutinized on the basis of the economic and financial realities in Armenia; 2 Including incremental costs.  24 Chapter 4 substantial modifications are likely to emerge. On the basis of the updated master plan, a followup project would be prepared under the financing of the proposed project. This would include rehabilitation of additional dams that were already identified but not yet appraised, and investments in irrigation components yielding high economic and social benefits, considered of high priority for the country. Project Implementation Unit 4.20 The cost of setting up and operating the PIU during the project implementation period is estimated at about US $1.5 million (Annex 1, Table 8). The Ministry of Agriculture would have overall responsibility for the project. It would delegate responsibilities for project implementation to an independent PIU. The PIU would coordinate planning and design work, the day-to-day supervision on the construction sites, and be directly responsible for procurement and contracting. It would be responsible for the financial management of the project, including the preparation and submission of disbursement claims, and liaison with the Bank, including reporting to the Bank. The unit would also carry out monitoring and evaluation of the project and manage the technical assistance component (see paras. 5.1 to 5.11). F. PROJECT COSTS 4.21 The proposed project is estimated to cost, based on 1993 prices, about US $57 million, including physical and price contingencies. The foreign exchange component is estimated at about US $46 million or about 78% of the total project cost. The cost of imported equipment and materials reflect current market prices of suppliers in the FSU republics. These prices are lower than international market prices, and the suppliers of the FSU are known sources to the Armenian planning authorities. Costs of civil works have been estimated from experiences of the DWSI. Physical contingencies were calculated at 20% of the investment costs because of significant uncertainty regarding the civil works costs and procurement of goods from FSU countries. Price contingencies are based on the Bank's guidelines, starting at virtual no inflation in 1994; 2% for 1995; 2.5% for 1996; 2.7% for 1997; and, 2.5% for 1998. The project cost is denominated solely in U.S. dollar terms because the instability of the ruble during appraisal made it inadvisable to quote prices in that currency. In addition, in November 1993, Armenia decided to issue its own currency, the drum. The underlying assumption is that in the medium term, the rate of inflation would be offset by the rate of devaluation, and the cost of the local component in real terms can be denominated in U.S. dollar terms without significant bias. Physical and price contingencies combined make up about 23% of the project's base cost. Import duties, taxes, and other levies are not included in project costs, since it is assumed that investments under the proposed project are exempt from import duties and taxes. Project costs are summarized in Table 4.1, and details are presented in Annex 1, Tables 10-13.  The Project 25 Table 4.1: Project Cost Summary Item Local Foreign Total % Foreign % Base Millions of US$ Exchange Cost 1. Rehabilitation of 8 Conveyance 5.54 12.93 18.47 70 40.0 Schemes 2. Rehabilitation of 4 Pumping 0.89 8.57 9.46 91 20.0 Schemes 3. Rehabilitation of Tubewells 0.69 6.25 6.94 90 15.0 4. Rehabilitation of Four Dams 0.56 0.75 1.31 57 3.0 Subtotal 7.68 28.50 36.18 79 78.0 5. Pilot Projects to Improve Water 0.14 2.33 2.47 94 5.0 Management Subtotal 0.14 2.33 2.47 94 5.0 6. Incremental O&M Cost 2.30 2.70 5.00 54 11.0 Subtotal 2.30 2.70 5.00 54 11.0 7. Technical Assistance - 1.10 1.10 100 2.0 8. Project Implementation Unit .21 1.25 1.46 86 3.0 Subtotal .21 2.35 2.56 92 5.0 Base Cost 10.33 35.88 46.21 78 100.0 9. Physical Contingencies 1.61 6.45 8.06 80 17.0 10. Price Contingencies 0.66 2.22 2.88 77 6.0 Grand Total 12.60 44.55 57.15 78 123.0 G. FINANCING 4.22 The Borrower for all components of the proposed project is the Government of Arnenia. The IDA credit in the amount of US $43.0 Million equivalent would be lent to the Government of the Republic of Armenia at standard IDA terms, with 35 years' maturity and a 10-year grace period. The share of the IDA's loan is equivalent to 75.25 % of total project cost. The Borrower would contribute US $4.15 equivalent, or about 7.25% of total project costs. End users, including farmers in the irrigated areas, would contribute US $2 million equivalent (about 3.5 % of total project costs) in the form of labor and local materials3. 3 Although it is assumed that investment costs are exempt from taxes and duties, nevertheless, they will not be financed under any circumstances by the IDA credit.  26 chapter 4 4.23 The International Fund for Agricultural Development (IFAD) has agreed to consider co-financing the project in the amount of US $8 million to cover the cost of tertiary canals and pipes in the eight conveyance schemes, pilot projects to improve water management, and monitoring and evaluation. 4.24 The financing plan for the project is presented in Table 4.2. Table 4.2: Financing Plan Item Local Foreign Total Million of US$ 1. IDA 4.65 38.35 43.00 2. IFAD 1.80 6.20 8.00 3. The Government 4.15 - 4.15 4. End Users, Farmers 2.00 - 2.00 Total Projet Cost 12.60 44.55 57.15 4.25 In March 1994 the Bank approved a PPF for this project to finance the establishment of the PIU (para. 4.20). 4.26 At negotiations, the Government confirmed to the International Development Association (IDA) of its intentions to provide appropriate contributions that are necessary to fulfill its share in the project financing of the local component and ensure adequate and timely project implementation. It is estimated that in fiscal year 1995 the Government share in the project financing would be about US $1.0 million, and the same amount would be required for fiscal year 1995. H. PROCUREMENT 4.27 Procurement of Goods and Civil Works would follow the "Guidelines: Procurement under the IBRD Loans and IDA Credits, May 1992." Domestic preferences shall be applicable to ICB contracts for goods and civil works in accordance with the Bank Guidelines. All consulting services, including the technical assistance and training would be governed under the "Guidelines: Use of Consultants by World Bank Borrowers and by The World Bank as Executing Agency, August 1981." The borrower will use IDA's recently issued standard bidding documents for Goods and Works. In the case of consulting assignments of time-based and complex nature the borrower shall use Bank/IDA's standard contract for consultants. 4.28 The project is being co-financed by IFAD (US $8 million). The procurement of goods and services for the co-financed amount will be governed under IDA's Procurement Guidelines.  The Project 27 4.29 There are several state-owned construction firms or organizations experienced in building large dams, excavating complex tunnels, and constructing large water conveyance systems and hydropower plants. Six of them are active in construction of irrigation systems under the Ministry of Agriculture. All these state-owned firms are technically qualified to undertake the proposed rehabilitation works on the eight irrigation conveyance schemes and the four pumping schemes, the tubewell drilling, the associated repair program, as well as the repair of the dams under the four storage schemes. These firms have financial and managerial autonomy and do not receive subsidies from the Government. They meet the eligibility criteria of OD 11.00 (Paras. 88 to 90). They are intended to be privatized in 1994 or 1995. At present there is only limited contracting capability in the Armenian private sector for the type of volume of the civil works required for the project. 4.30 Manufacturing of prefabricated concrete structures, gravity flow pipes, and canal lining panels for irrigation is done in four plants owned by the Ministry of Agriculture and one plant jointly owned by the private sector and the Ministry of Housing Construction. The latter, called the "Huntsman-Armenia Concrete Corporation," is a modem, efficient facility that manufactures prefabricated prestressed concrete panels for the Ministry of Construction. It is equivalent to any comparable factory in the West. There are also several concrete factories under the Ministries of Construction, Transport and Energy, most of which would qualify to participate in local bidding to supply concrete construction material for the rehabilitation works. These state-owned enterprises also meet the eligibility criteria of OD 11.00 (Parms. 88 to 90). 4.31 Repair and overhaul of submersible and other pumps is at present carried out by a few factories and workshops in Yerevan and in the Ararat Plain. Most of these workshops and factories are also financially and managerially autonomous state enterprises belonging to the Ministry of Agriculture. 4.32 Under the present circumstances in Armenia, the use of competitive bidding relying on the participation of Government-owned companies and the participation of some private sector contracting firms should be considered to provide competition as is the practice in many other FSU republics. 4.33 Procurement arrangements are summarized in Table 4.3. Details of the proposed procurement arrangements are as follows: (a) GOODS: The equipment and construction materials, i.e. steel pipes, valves for Pumping and Conveyance Schemes; concrete pipes; submersible pumps; and syphons, valves, etc., for pilot projects would be procured as follows: (i) ICB will be used for contracts of US$100,000 and above up to an aggregate of US$19.8 million. Bank's standard bidding documents for Goods will be used. (ii) LCB procedures will be used for contracts of smaller value below US $100,000 each. The local competitive bidding will be conducted in accordance with the Bank Guidelines. The total aggregate for LCB contracts is estimated to be US $8.5 million. (iii) Local Shopping procedures will be used for snall items or items that can be obtained off-the shelf, estimated to cost less than US $50,000 per contract, up  28 hapter 4 to an aggregate amount of US $1.7 million, on the basis of at least three quotations from qualified suppliers. (iv) Direct Contracting: Parts for repair of existing pumps will be procured through direct negotiations with the pump manufacturers up to an aggregate amount of US $200,000. (b) CIVIL WORKS: Contracts for civil works would include rehabilitation of dams and canals, installation of pump sets and drilling of existing and construction of new wells, etc., and would be procured in the following manner: (i) ICB will be used for contracts estimated to cost US $300,000 and above and would cover rehabilitation of dams, up to an aggregate amount of US $680,000. The borrower will use Bank/IDA's Standard Bidding Documents for Works through ICB (Smaller Contracts), June 1994. The contractors shall be prequalified. (ii) LCB procedures will be used for most of the smaller contracts which are spread over a large area and may not interest foreign bidders. LCB contracts will typically be those which are estimated to cost less than US $300,000 each and their procurement will be conducted through a locally advertised comnpetitive bidding process which will however, be open to foreign bidders if they wish to participate in bidding. The bidders for the works under Irrigation Rehabilitation program and Pilot projects to improve water management will be prequalified as provided in para. 2.10 of the IDA Procurement Guidelines (May 1992) and IDA's standard Prequalification document will be used for this purpose. The total aggregate for LCB contracts is estimated at US $9.7 million. For procurement of these contracts, the borrower shall use IDA's Standard Bidding Documents - Smaller Works through LCB, June 1994. (iii) Local Shopping: Smaller work contracts, estimated cost less than US $25,000 each may be awarded on the basis of comparison of at least three price quotations obtained from qualified contractors. The aggregate amount for such smaller contract is estimated at about US $100,000. (c) CONSULTANTS (US $1.3 million): The borrower will employ through competitive process an international consulting firm under a single contract to establish the PIU, financed under the PPF (Para. 4.25). The estimated cost for the PIU establishment is about US $1.3 million, including cost of required equipment. The borrower will nominate the Project Manager after obtaining IDA clearance. The Project Manager will be assisted by an expatriate Deputy Manager, experienced in IDA related procurement policies and other financial matters, and four qualified foreign consultants, experienced in PIU operations, to provide necessary training to local staff. The selection of the consulting firm will be on the basis of a select list which will require IDA prior review and approval. (d) TA and PILOT PROJECTS ( US$ 2.3 million): The consulting services for this component will be procured under a single contract on competitive basis to operate the Pilot  The Project 29 Projects to Improve Water Management (Para. 4.15); and for TA services (paras. 4.18 and 4.19) that would be administered under the PIU. Technical assistance would be contracted on individual basis for assignments ranging from two weeks to about three months. The selection of these individual consultants would be based on a review of CVs for each selection and the total aggregate for these contracts is not likely to exceed US $200,000 in value. The training, including overseas training, would be provided under TA contracts with local or foreign training institutions and universities in accordance with IDA Guidelines and after prior approval by IDA of short lists, TORs, Letters of Invitation, and final draft contract. The average contract value for consulting firms is likely to exceed US $100,000 each while for individual consultants it may be below US $50,000 each. (e) INCREMENTAL MAINTENANCE COSTS - 0 & M - (US$ 5 million): IDA will finance costs associated with maintenance of existing heavy works and other infrastructure and/or any future remedial activities and repairs, etc., which may be warranted to avoid further damage to these works. These costs will represent reimbursements for supply of materials and installation or repairs (Paras. 4.16 and 4.17). The PIU with Bank approval will establish the procedures for coordinating and supervising the O&M administered by the OME for the purpose of funding under the project. The PIU shall submit to the IDA every year an annual budget, likely unit costs for various categories of repairs, and the procedures for carrying out such repairs and disbursement of funds. Administrative overheads for involved departmental forces of public entities would not be reimbursed under the IDA credit. 4.34 IDA REVIEW: All ICB contracts for goods and works will be subject to IDA's prior review. Prior review would also be required for the first three LCB contracts for works regardless of their value and, subsequently, for all LCB contracts for goods and works, estimated to cost US $200,000 and above each for civil works and US $300,000 for goods. IDA would also pre-review terms of reference and consultant contracts for all consulting assignments costing more than US$100,000 for fums, and US$50,000 for individuals. All other contracts will be subject to ex-post review by IDA. 4.35 Country Procurement Assessment Report: A CPAR has not yet been completed. However, procurement proposed under the project would follow IDA's Procurement Guidelines. 4.36 Procurement Information: Information regarding procurement administration would be collected and recorded and would comprise report of contract, status, and award information by the Borrower, and quarterly reports to IDA by the Borrower. These reports would indicate: (a) revised cost estimates for individual contracts and the total project, including best estimates of allowances for physical and price contingency'; (b) revised timing of procurement actions, including advertising, bidding, contract award, and completion time for individual contracts; and (c) compliance with aggregate limits on specified methods of procurement. 4.37 Agreement was reached during credit negotiations that all procurement processes and actions under the project would follow the procedures outlined in Paras. 4.27 to 4.36 (para 7.1(b)).  30 Chapter 4 Table 4.3: Summary of Proposed Procurement Arrangements (000' US$)4 rrEM [CB LCB OTHER TOTAL 1. Works 1.1 Canals, Syphcns, Pipes and Hydraulics 4,630 130' 5.040 (3.700) (100) (3,800) 1.2 Inallam of Pump ses 1,200 1,200 (970) (970) 1.3 Drilling and Cstruction of New and Exsting Wells 5,480 5,480 (4,380) (4.380) 1.4 Rehubililatn of 850 790 1,640 Dams (680) (630) (1,310) 2. GoodB 2.1 Precut Cocrese Sectisa 8,380 8.380 (6,700) (6,700) 2.2 Steel Pipes, Valves, etc. for Pumping Schemes 6,200 700' 6,900 (5,740) (560) (6,300) 2.3 Coerete Pip 1,900 1,580 3,480 (1,520) (1,260) (2,78W) 2.4 Steel Pipes, Valves, etc. for Conveyance Schemes 10,920 900' 11,820 (9,820) (720) (10,540) 2.5 S ubnmble Pumps 1,200 1,200 (1,200) (1,200) 2.6 Spare Pan for Subnenble Pumps 280 200- 480 (280) (200) (480) 2.7 Equisent for Pilot Projects (Syphm, Valves, etc.) 1,490 500 1,990 (1,490) (300) (1,790) 2.8 Equimem for TeAniscal Assistance snd PIU 420' 420 (420) (420) 3. C _mallmejes 3.1 Cansultanemis to Establish a PIU (uwder a PPF) 1,300 1,300 (1,300) (1,300) 3.2 Teclhncal Assistance and Pilot Projects 2,300- 2,300 (2.300) (2,300) 4. 04er 4.1 leremetl Expn 5,8C0- 5,8C0 (5,000) (5,000) Toal 22,560 22,840 11,750 57,150 (20,450) (18,220) (10,600) (49,270) * Local Shopping = US $1.8 million ** Direct Contracting = US $200,000 * According to IDA Guidelines * According to Procedures approved by IDA 4 Figures in parentheses are the respective amounts financed by the IDA and IFAD loan.  The Project 31 I. DISBURSEMENT 4.38 The proposed IDA credit of US $43.0 million equivalent would be disbursed over a period of four years, and the expected project closing. date would be June 30, 1999. There is no experience yet to form a disbursement profile for Armenia, but it is estimated that the country's ability to implement the project over a four-year period is reasonable, especially given that a PIU will be set up in advance of the actual implementation of the project works. A mid-term evaluation would be undertaken by the IDA and the Borrower by April 30, 1997, or when disbursements reach 50% of the total loan amount, whichever is earlier, to examine all aspects of implementation (para. 5.28). Commitments for major contracts would be approved through October 31, 1999. The estimated disbursement during each year of project implementation is as follows: FY 96 US $ 4.0 million FY 97 US $11.0 million FY 98 US $16.0 million FY 99 US $12.0 million 4.39 The proceeds of the credit would be disbursed in U.S. dollars as shown in Table 4.4 below: Table 4.4: Disbursement Categories Disbursement Category Allocation Disbursement Basis (US $ mil.) (1) Goods: Equipment and 23.5 100% of foreign expenditures, Material 100% of local expenditures (ex factory cost) and 85% of local expenditures for other items procured locally (2) Civil Works 9.5 100% of foreign expenditures, 85% of local expenditures (3) Technical Assistance 1.0 100% (4) Operational and 5.0 100% Maintenance Costs (5) Refund Of Project 1.5 Preparation Advance (6) Unallocated 2.5 TOTAL 43.0 4.40 Direct payment procedures from IDA to suppliers will be used. Disbursements against the categories described in Table 4.4 would be made upon receipt by IDA of fully documented applisations, except for contracts valued at less than US $50,000, which would be made against certified statements of expenditures (SOE). Supporting documentation for SOE would be retained by the Borrower and made available to the IDA during supervision. Direct payment applications and applications for  32 Chapter 4 special commitments would be accepted for minimum amounts of US $20,000. To facilitate project implementation, the borrower would establish a Special Account in one of the major foreign commercial banks to cover IDA's share of expenditures. An initial deposit of US $1.5 million would be made, with the amount in the Special Account increased to the ceiling of US $2 million when total disbursements reached US $3 million. Applications for replenishment of the Special Account would be submitted monthly or when one-third of the amnount has been withdrawn, whichever occurs earlier. Documentation requirements for replenishment would follow the same procedure as described above. In addition monthly bank statements of the Special Account which have been reconciled by the borrower would accompany all replenishment requests. At negotiations, agreement would be sought that disbursement arrangements willfollow the procedures described in paras. 4.38 to 4.40 andfor establishing and operating the Special Account as described above (para. 7.1 (c) and (d)). 4.41 Disbursements against withdrawal applications to cover incremental O&M expenditures would be subject to prior agreement with IDA on annual budget requirement by the Government for O&M operations as described in para. 4.33(v). Such agreement will have to be reached prior to every fiscal year and will stipulate the extent of the annual IDA disbursement for that category. Agreement for such arrangement was reached during Credit negotiations (para. 7.1 (e)).  V. PROJECT IMPLEMENTATION A. ORGANIZATION AND MANAGEMENT 5.1 The management, administration, and coordination of the project will be the responsibility of the PIU (para. 4.20 and Chart 1), which the Government has decided to establish through PPF financing by the Bank (para. 4.25). The Ministry of Agriculture (MOA), would have overall responsibility for the project. The MOA has already nominated a Project Board of Management, chaired by a Deputy Minister. Other members of the board are the Director of DWSI, Director of the OME, Director of the Economic Department in the MOA, a second Deputy Minister, and a representative from the Ministry of Economy. The Board of Management makes policy decisions and provides general guidance to the project implementation staff. Micro-management of the project has been delegated to the PIU which will report directly to the project's Board of Management. 5.2 The objectives of the PIU are as follows: (a) coordination of project implementation, including planning and design works, direct responsibility for procurement and contracting, and supervision on the construction sites; (b) financial management of the project, including the preparation and submission of withdrawal applications, and liaison with the Bank, including reporting to the Bank; and (c) coordinating preparation of a follow-up project. 5.3 In accordance with project objectives, the PIU would have four sections: Engineering, Services, Monitoring and Evaluation, and Technical Assistance. 5.4 The EnRineering Section would: (a) complete the detailed planning and preparation for the project; (b) approve the designs, specifications and bills of quantities, and prepare contract documents. It would manage tendering procedures and award contracts in accordance with the Loan Agreement and with the Guidelines for Procurement of IDA in order for the contracts to be eligible for financing from the project; (c) schedule and conduct the purchasing process; and (d) provide on-site supervision, approve contractor and supplier payments, and preparation withdrawal applications. 5.5 The Services Section would be responsible for translations, recruitment of personnel, transportation, communication, disbursement (including payments to contractors and suppliers), accounting and auditing. The section would also be responsible for preparing bi-annual reports to the Bank and the Government on the PIU operations and progress in project implementation.  Chart 1: Project Implementation Unit W l ProjePt. t P l Auditl"g | D^rJ ~ ~ ~~~~~ai edPrle lstr ls Tsll- . udi X4 ..I wa. Pla *wr X* _e . i a m 2, Contreat~~~~~~~~~~~~~~  Project Implementation 35 5.6 The Technical Assistance Section would principally be responsible for three tasks: (a) to design activities that would enhance the development of the WUAs and repayment of water charges; (b) to provide consultation to the Water Planning Institute in improving and updating the Water Master Plan; and (c) organizing training activities connected with implementation of the project and for specific management systems and irrigated crop production. The training seminars would be conducted by Bank Staff and consultants, with emphasis placed on-the-job training provided by expatriate consultants. 5.7 The Monitoring and Evaluation Section would report directly to the Project Board Management (paras. 5.21-5.25). It would be responsible for collecting and analyzing information on project implementation, and its impact on agricultural production. The monitoring system would alert management to emerging problems and draw up periodic progress reports. 5.8 In view of the Government's lack of familiarity with the establishment and operation of a PIU, the Government has agreed with the Bank to contract with an international consulting firm to establish and manage the PIU. Such a contract was signed with a foreign company in October 1994. Under this arrangement the Armenian Government retained the right to nominate the Project Manager to head the PIU, and this nomination was approved by the Bank. The PIU will initially be staffed by 4 qualified expatriate consultants, in addition to the Project Manager. One of them, the Deputy Manager of the PIU, will train and assist the Project Manager to assume full responsibility for the PIU operations. The other expatriate consultants will have responsibility for establishing the PIU procedures, policies, and accounting, and in collaboration with the Project Manager, for recruiting local counterpart staff who they will train to assume their functions in the project implementation management. The length of stay for the expatriate staff is dependent on the transfer of appropriate technology to the recruited local staff and to the Project Manager. 5.9 In addition to coordinating and administering project implementation, the PIU would also be responsible for coordinating the preparation of a follow-up project. 5.10 The responsibilities of the PIU in terms of procurement are as follows: (a) coordinate detailed plans for procurement, including the packaging of goods into specific contracts; scheduling of purchases and deliveries; designation of responsibilities for conducting the procurement process, and determination of signature authority for each contract; (b) ensure that appropriate arrangements are made for advertising contracting opportunities; preparation and issuance of bidding documents; conducting public bid openings where required; and evaluation and comparisons of offers to select the lowest evaluated bidders; (c) obtain the required approvals from Government and IDA for bidding documents; make recommendations for bidder selection and contract award; and prepare the final contract document; (d) verify that contract conditions for the supply and delivery of goods and services have been met and that contracts are eligible for payments from the Credit; and (e) monitor the progress of procurement and its compliance with the terms of the Credit.  36 Chapter 5 5.11 At negotiations an agreement was reached that the PIU will be organized and operate along the lines of the program described in peas. 5.1-5.10 (para. 7.1 (f)). A condition for effectiveness of the proposed Credit will be the establishment of a PIU with an adequate number of suitably qualified staff as indicated in para. 7.2. B. PROJECT PHASING 5.12 Project implementation is anticipated to take about three and a half years from loan effectiveness, and another six months to loan closing (Chart 2, for details on the project implementation plan see Annex 9). The relatively long project schedule is attributed to the fact that most of the construction infrastructure has been idle for a number of years, and has to be geared up to carry out construction activities over a wide geographical area.' 5.13 Completion of the design and the tender documents is crucial to the prompt initiation of project implementation. Many engineers of the Planning Institute have been temporarily suspended, but the Institute is now gearing up to re-employ them. 5.14 The construction which could be started in the first season is cast-in-situ concrete work such as the construction of parts of the Getik Main Canal, and rehabilitation works on canals where precast sections cannot be used. All these works, however, have first to be designed. 5.15 Procurement of imported items is the most urgent project activity. Specifications would be prepared immediately after the PIU has been set up, and the necessary expertise is available to discuss design and procurement issues with the Planning Institute of the DWSI. Tender documents would be prepared simultaneously with work on specifications. 5.16 Imported goods could be available in Yerevan eight to ten months after tendering. The constraining factor in this timetable is the establishment of the PIU and the recruitment of expatriate experts. Actual implementation of the project can start about six to eight months from establishment of the PIU. 5.17 Replacement of steel pressure pipes requires the importation of pipe sections. These could be available for field work eighteen months after tendering. 5.18 A shorter period would be required for implementation of main, secondary, and tertiary canals which require concrete sections. Most of the concrete manufacturing plants can start operations inmmediately, following LCB procedures to select the lowest evaluated bidder, though provision of some concrete products are contingent on modernization in a plant that is anticipated to be complete before the end of the second year of operations. 5.19 Well drilling will be delayed until the necessary equipment is imported (well screens and other equipment), and the hydrogeological studies are completed. The earliest date well drilling can start will be the second construction season. Each reach of canal which has to be repaired and each pipe section which has to be replaced is a separate building site.  I HaWIj;l,3is - - . - .* - - . . ... . . - -*&- - ^+-& - +6+ ................ - -.- .... - --.^+ ... s.- - +s- **+6w+.- ....... ww-6 .. 00- 0 +. - . - - - - - +.- - +. ... .......... .....+ . . i - ~~~~~~~~..... ....... ..... . -.. * . . . . ..... ......... . .... . ... ..... . ...... .. .. .......... - -- :: - s - - .- ::::::::::::::::::::::::::-:::::::::::::::::::-:::.:........... . :::. ..:....:.......................................... .. _ ~~~~~~~~~~~~~~~~~.. ..............._____.._. _.. ................. .-. ............. ... ............... ........... .. .......... _~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~...... ............ . ...... . ... '.'.'.'..'.-;.X . . .. . .. '.'..-.....' . ..... ... .... ... . .......... .. . .. . ...'. -- ............... . . .... ....... . ...... ...........-:::.: - . ..... I.- ..............::::.| :::: .......-:.: : :-::: . .. ... ..... :::- .::::::::::::: :: ...... ...........:: ::-::::: .1 ..... ::::::':' _-~~~~~~~~~~~~~~~~~~~~.. ..........................._ _ _ __. l....._._..._._...._. ....._ .... ........... .. .... .. : ......... . L *......... ........ - I , , , .. , , .. , .. ; ~~~~~~~~. . ._...... ............ . .-- 9 - .. ........ , .. . ........ I..............I........ ..... .... . , i ==~~~~~~ ....... ...... .......c : .- .: - .... ... .... .. ..... ......... . . . ............... ... .........v ................... ..................... .. : r.: ::. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,,,,, . ~ I mmqmC .. ................ . ...... . ......... ......... .. ............... ............... ............ . ......... U . .. .............. ................................. ... ~ ~ ~ ~ ~ ~ ~ ~ ~ - .. ..... . .......... ...... . ........ . ........................... .- -~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~- ...... ...... .. ......I. . .... .......- .. ........ .. .......... ..~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.  38 Chapter 5 5.20 The planning and design of dam rehabilitation works, starting from establishment of the PIU, will last at least a year. Construction activity on the four sites will therefore start only towards the middle of the second construction season. C. PROJECT MONITORING, EVALUATION, AND REPORTING 5.21 A monitoring and evaluation section (M&ES), would report directly to the Project Management Board, though administratively it would be serviced and supervised by the PIU (para. 5.7). The M&ES would establish the types of information to be prepared under the project and its evaluation. Broadly this will be divided into three categories: (a) information pertaining to physical implementation and services provided by the project, together with relevant financial records. Key indicators would include progress in implementation of the various irrigation schemes, procurement, establishment of pilot projects for improved water management, and technical assistance; (b) information pertaining to the use of the structures and the services by the targeted population and the initial consequences of that use. Key indicators would include information on the beneficiaries of the various project components, to the extent possible the impact of the project on the beneficiaries income; and (c) information on the social, economic, or environmental reasons for any unexpected reaction by the target population that is revealed by the information about the use of the structures and services. 5.22 The M&ES would provide annual progress reports to the Project Management Board and to IDA in an agreed format. 5.23 The M&ES would collect and analyze data on costs, benefits, and financial viability of main investments on the basis of suitable sampling. The evaluation objectives would be to: (a) critically review, in light of subsequent developments, the project design and rationale stated in the appraisal documents; (b) assess the ongoing economic efficiency of the project. This would require the following: (i) analysis of the project design and determination of its adequacy to overcome the identified constraints in agriculture and thus to promote the desired changes; (ii) comparison of actual attainments with the targets set and identifying the reasons for shortfalls or better than anticipated achievements; and (iii) assessment of the efficiency of project implementation procedures and quality of managerial performance. (c) determine the effects and impact of the project; and  Project Implementation 39 (d) present the lessons learned and the recommendations that follow from them. 5.24 The M&ES would also be responsible for preparing information regarding procurement to be collected and recorded as follows: (a) prompt reporting of contract awards information by the Borrower; and (b) comprehensive quarterly reports to the Bank by the Borrower (assisted by consultants) indicating: (i) revised cost estimates for individual contracts 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 completion time for individual contracts; and (iii) compliance with aggregate limits on specified method of procurement. 5.25 Annual evaluation reports will be submitted by the M&ES to the Project Board Management and to IDA. The M&ES would also prepare a project completion report not later than six months after closing date. During negotiations agreement was reached that M&ES will: (a) follow the monitoring and evaluation procedures as outlined in paras. 5.22-5.25 above; (b) submit to IDA the periodic reports; (c) prepare a project completion report (para. 7.1 (h)). D. ACCOUNTS AND AUDIT 5.26 The project accounts will be managed by the PIU during project implementation. The project accounts would identify all sources and uses of funds in carrying out the project, including detailed accounting of the use of the proceeds of the Loan and the operation of the Special Account. The project account would be audited by an independent auditor acceptable to IDA, and the audit reports would be submitted to the Project Board Management and to the Bank within four 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 statement of expenditure (SOE) procedure, when utilized. Since the auditing profession is not yet well developed in Armenia, it is anticipated that an international auditing firm will carry out the audits. During negotiations agreement was reached regarding the accounting and auditing requirements as outlined above (para. 7.1 (i)). E. BANK SUPERVISION 5.27 The project would require an intensive supervision, with visits by IDA staff at least twice a year (for details concerning proposed supervision plan see Annex 10). With the intention of following  40 Chapter S up this project with wider investment in irrigation, supervision would be combined with project preparation in the last year of the project. It is estimated that project supervision in the first and second year would require about 22 staff weeks each year. In the third year because of the mid-term review, the project would require 25 staff weeks. In the fourth year the project would require about 12 staff weeks, and in the last year together with preparation of a completion report, the project would require about 18 staff weeks. 5.28 At negotiations agreement was reached for a mid-term review of the project by a joint team from IDA and the MOA (para. 4.38). The expectation of the mid-term review is that there would already be significant progress in the implementation of all the project components, and that the master plan of irrigation and water supplyfor the country would already be substantially updated (para. 7.1 (j).  VI. PROJECT BENEFITS, RISKS, AND ENVIRONMENTAL IMPACTS A. PROJECT BENEFITS Project Impact 6.1 The proposed investment of about US $57 million over a four year implementation period would finance the rehabilitation of irrigation systems in the major agricultural production areas and would have profound impact on productivity of the agriculture sector; on the well being of the beneficiaries; and on the country's economy. A secure water supply would promote agricultural production, increase the food supply, and create employment and raise incomes in the rural areas. Without the project, Armenia would need to increase its food imports, or decrease its food consumption substantially. Under the project, construction work will generate employment opportunities for about 2,000 unemployed skilled and unskilled workers. The project would also establish the foundation of improved and rationalized water management by creating WUAs and a national system of water charges designed to recover the costs of O&M at a minimum. Basic Assumptions 6.2 The project implementation is predicated on the assumption that there is no economic blockade and the transport constraint has been removed. However, based on the Country Economic Memorandum for Armenia from March 1993, there are two possible scenarios after lifting the blockade. Under the less optimistic one, the country would continue to be hampered by further economic deterioration in the FSU Countries, with a continuing depreciation of its currency. Under this scenario Armenia is anticipated to gradually reorient its trade towards Westem customers. As the economic situation becomes more settled, foreign investments will resume, and a large proportion of idle production capacity will be reactivated. The economic situation should stabilize in about two years after lifting the blockade. In the last years of the decade real growth would reach about 5% per year. 6.3 Under the optimistic scenario, immediately after the blockade is lifted trade and the payments system would stabilize, and the local currency slide halted. This would lead to a rapid growth in production as existing capacity is brought back into use. Following the immediate impact of lifting the blockade, there would be some slowing down in growth while investment capital would continue to flow in. There would be substantial changes in the composition of output and some degree of macroeconomic stabilization should occur. Toward the end of the century growth is anticipated to be 7 % to 8 % per year, leading to a restoration of the 1989 output level by the year 2000. 6.4 Under either scenario, importation of fuel, chemicals, and fertilizers are to be unrestricted, which implies that the project implementation can restore the production capacity of the pre-project level in irrigated areas, and can yield additional benefits from increased demand due to growth in income.  42 Chapter 6 Production and Pricing 6.5 Without project. Rehabilitation of the conveyance systems and the tubewells would most affect the low-lying areas, where rainfall is inadequate for crop production. The assumption was that without the project the system would not completely fail, but only that water losses would gradually increase. As less water reaches the fields, yields would diminish, followed by changes in the cropping patterns. For economic analysis it was assumed that water supply will decrease by about 5 % per annum and reach about 20% of the pre-project supply in the seventeenth year if no rehabilitation measures are taken. 6.6 Farmers' first response to a growing water shortage would be to under-irrigate. First the cereals and forage would get less water, followed by orchards and, finally, potatoes and vegetables. Wheat crops, now irrigated three or four times, would receive two and eventually only one irrigation. This would reduce yields to about 2.5 t/ha with two irrigations, and 1.5 t/ha with one irrigation. Lucerne could no longer be grown: farmers would revert to a single cut of cereal hay, irrigated once, yielding about 2.0 t/ha. 6.7 In the storage dam rehabilitation component, the assumption has been that without rehabilitation the dams would cease to function. Apart from the physical and environmental damage, their command areas would be left without water, or at best with much reduced supplies from run-of-the-river flows. These limited quantities would only be used for the home plots. Since most of the command areas are at medium and high elevations, crops grown would be rainfed cereals for grain and fodder. The cereals grown for grain would yield about 1.5 t/ha, and fodder yields would be about 2.0 t/ha. 6.8 With Project. The repair of the dams and conveyance structures would ensure that agriculture production will not fall. Present yields, now affected by a shortage of water, would increase somewhat, and farmers would be more willing to invest in purchased inputs and land cultivation. This would eventually raise average yields to levels now achieved by the more successful farmers. It is unlikely, however, that the irrigated areas would expand significantly. Water distribution arrangements between new land owners, resulting from the land reform, are not going to be completely resolved during project implementation, though the project would contribute to its improvement. 6.9 Increased agricultural production would be associated with increased demand for food due to expected increase of income and reopening of the trade routes, mainly to Russia and other FSU republics. In recent years trade was severely restricted due the blockade on Armenia. Before the imposition of the blockade, Armenia exported significant quantities of canned fruits and vegetables. However, the blockade caused the agroindustry subsector to be almost completely paralyzed. Lifting of the blockade on Armenia would cause gradual restoration of production of processed fruits and vegetables for export and also import of needed inputs. The increased production resulting from the project is, therefore, not likely to be difficult to be disposed either domestically or through exports. 6.10 Prices. Prices of agriculture products and food in Armenia are liberalized, with the exception of bread. Prices of wheat paid to farmers are lower than the world market price; but despite a price of only 70 to 80% of world prices, wheat is still one of the most profitable crops. However, with normalizing trade after lifting of the blockade, wheat production is likely to fall because fruits and vegetables which were unable to be exported due the restricted trade will stop overhanging the market and would become more profitable to produce. Producer prices that were used to estimate the "with" and  Project Benefits, Risks, and Environmental Impacts 43 "withoutw project scenarios were on the conservative side; they were either those paid by Government or the free market prices, where Government prices were not established or not available. All prices of inputs, which have to be imported, are based on, or close to, world market prices. Fertilizer was costed at US $120 per ton, with an average nutrient rate of 30 %; pesticide prices were estimated at US $10 per kg or liter; one hour of tractor work at about US $8.30; and a combine hour at US $10.80. Cost of water was calculated on the basis of US $0.015/kwh, and a consumption of 0.5 kwh/m3 of 100 m lift. 6.11 The returns to forage (Lucerne and Esparcet), of about US $19 per ha in the lowlands and US $4 in the midlands, are calculated up to the point of hay production. Translated into animal production, one ha of forage produces, in the lowlands, yields about 195 kg of dressed weight of beef (at US $0.83 per kg-a return of US $162.5 per ha), or about 3,210 liter of milk (at US $0.165 per I-a return of US $535 per ha). In the midlands 1 ha of forage generates about 2,570 liter of milk (US $429 per ha), or 156 kg of beef (US $130/ha). 6.12 Transport cost estimates are based on ARMPLODORODIE' charges which are: US $1.25 for a tractor or trailer up to 5 km distance, and US $2.5 for the same up to 10 km. Diesel operated truck (Kamaz 8, 10, 12 t) transport is charged at 16 to 21 cents per km . B. ECONOMIC EVALUATION Benefits and Justification 6.13 As indicated above, economic benefits from the project realized by the country and beneficiary farmers would be: (a) avoiding a decrease in production and thus a decrease in farmers' incomes resulting from deterioration of the irrigation infrastructure system; (b) improvement in yields and changes in the cropping pattern that result in optimizing return; (c) reducing the foreign exchange expenditures on imported food as necessitated by decreased production if the project is not implemented; (d) increased employment on construction during project implementation; (e) improvement in the water management and distribution system which would contribute to an increase in production; and, (f) energy savings through more gravity irrigation and less energy dependent pumping resources. The main indirect project benefits would include an increase in employment opportunities for auxiliary The state enterprise in charge of input distribution.  44 Chapter 6 services, such as development of cement lining of steel pipe, and increase in production of concrete pipes (instead of steel pipes). 6.14 From a national point of view, the project would support the rural poor, who comprise a significant portion of the country's population.2 It would contribute to the stabilization of their income by guaranteeing that the water resource infrastructure is maintained and rehabilitated. 6.15 A separate financial analysis is not warranted since as mentioned previously (para. 6.10), prices of agriculture products and food are liberalized in Armenia. By and large there is no difference between economic and financial costs. The price of grains paid to farmers, however, is lower than world market prices (para. 6.10), which makes the net value of production lower by about 4.5 % than if farmers were paid the world market price. The impact of paying the financial price of grains on the economics of the project is treated in the sensitivity analysis (para. 6.17). The cost of pumping water is subsidized. However, about 82% of the project area is irrigated by gravity. Since the cost of water in areas irrigated by power generated sources constitutes about 22.6 % of the operating cost, the impact of water generated by electricity on the total project operating cost is about 4%, which is relatively insignificant (Annex 8).3 Economic Rate of Return 6.16 The economic rate of return for the project is estimated at 53% (Annex 1, Table 14). The economic rate of return calculations are based on the following assumptions: (a) agricultural production based on the development of the irrigated area in four years and a production period of 20 years; (b) without the project, agricultural production in the project area would decline by about 5 % per year up to year 17 and then would remain at 20% of the pre-project level; (c) increases in agricultural production would begin in project year 4.4 In that year about 60% of the fall in the production is restored due to rehabilitation of the irrigation infrastructure under the project. From the fifth year it is assumed that agriculture production would reach the pre-project level; (d) production costs were priced at local October 1993 constant market prices (Annex 8, Table A.3); 2 It is estimated that at least 30% of the farmers do not receive sufficient water, due to failing and mismanaged irrigation infrastructure. As a result the income of these farmers is adversely affected. 3 According to Annex 8, Tables A.8 and A.9 operating costs per hectare in lowlands are Rubles 4,583,980; and operating costs per hectare in the midlands are Rubles 4,432,390. Given that there are 134,600 ha in the lowland and 30,100 ha in the mid lands, total operating costs in million of Rubles are: (134,600 x 4583.98/1000) + (30,100 x 4432.3911000) = 750,418.65. The share of the operating cost of water in the midland is 22.6%, hence: .226 x (30,100 x 4432.39/1000) / 750,418.65 = 0.04 It is likely that the impact can materialize sooner than the fourth year. However, it was preferred to use a conservative assumption.  Project Benefits, Risks, and Envronmental Impacts 45 (e) economic prices for wheat were based on Bank projections, but adjusted to the farm gate, prevailing farm gate prices were used for other products (nontradeable, Annex 8, Table A.3); (f) with the project, production would start in command areas of pressure pipeline and tubewell replacement in year three and in year four in areas which will benefit from conveyance system rehabilitation; (g) as a result of rehabilitation of the irrigation infrastructure and increased availability of water there would be a gradual improvement of yields and changes in the cropping pattern. In the Low Lands areas such changes would continue until the twelfth year, and in the Mid Lands areas until the tenth year (Annex 8); (h) depreciation of project elements were based on the following assumptions: for pump sets and mechanical equipment eight years, wells 15 years, and canals and pipelines 25 years. Since some budget allocation has been appropriated for O&M for the existing infrastructure, only 2 % of the investment cost was considered as incremental O&M costs and included in the calculation of the rate of return analysis; and (i) all project works, equipment, technical services, and physical contingencies were included in investment costs. Sensitivity Analysis 6.17 The results of a sensitivity analysis to test the effects of cost overruns and delays or shortfalls in benefits on the rate of return are presented in Annex 1, Table 14 and summarized in Table 6.1. As can be seen, substantial impact on reduction in the rates of return are attributed to delays in Table 6.1: Summary of Sensitivity Analysis Cases CASE RATE OF RETURN 1. Benefit down by 20% 47% 2. Benefit down by 20% and cost up by 20% 43% 3. Benefit down by 50% and cost up by 20% 33% 4. Improved water efficiency from 35 to 50% 61% 5. Paying farrners less than the world price for cereals 52% (current practice, a proxy for FRR) 6. Delay project implementation by one year 48% 7. Delay project implementation by two years 41% 8. Delay project implementation by three years 35% implementation. The reason for such a significant decrease in the rate of return is twofold. First, the opportunity cost of delay equals the net value of production that is lost in the year(s) that the project  46 Chapter 6 originally yielded benefits'; second, the infrastructure is progressively deteriorating and it is assumed that investment requirements rise by about 10% for every year of delay in the rehabilitation works. C. RISKS 6.18 The principal project risk is political. If there is a resumption of hostilities between Armenia and any of its neighbors, a reimposition of a blockade would impact the project adversely because of expected difficulties to import fuel, spare parts, construction machinery, steel pipes and reinforced steel, without which large diameter pipes cannot be laid and precast concrete sections cannot be manufactured. In addition, resources needed for operation and maintenance of the irrigation infrastructure would be drained and the physical structures would be put in jeopardy. 6.19 Some of the benefits associated with the project relate to implementation of reforms leading to a market economy. Such benefits are the imposition and collection of water charges that would recover the full cost of energy. It is also critical for the project that water subsidies would be gradually reduced and that beneficiaries will eventually assume full responsibility for operation and maintenance. The risk is that if the Government will not be strong enough to resist pressure to resume past policies of water subsidies and lax collection of water charges, the irrigation infrastructure in the country would again deteriorate. To safeguard against such risk, any additional assistance by the Bank in the agriculture sector, as well as in other sectors, should consider Government's progress in reducing subsidies for water in agriculture as planned under this project. 6.20 Based on existing modes the quality of construction will not meet internationally accepted standards and the project lifetime would be less than estimated. This has been the case with most of the existing irrigation infrastructure. A properly staffed and trained project implementation unit would mitigate this risk. 6.21 Power is at present generated mainly from hydroelectric sources and is completely subsidized for irrigation purposes. The risk is that utilization of energy for irrigation is associated with deterioration of the environment. Presently most of the generated energy comes from water originated from Lake Sevan. Over-pumping of water from the lake have caused the water level to fall which resulted in adverse impact on the micro climate environment around the lake. Imposition of water charges that cover the full cost of operations and maintenance and energy costs is imperative to mitigate this risk. 6.22 Armenia is in a seismically active zone. Conservative designs for the rehabilitation of dams were adopted to mitigate this risk. For example: without debay project benefits start when there is avoidance of a decline in the net value of production at the completion of the investment works, say, in year 4. If the project is delayed by I year, a decrease in net value of production in year 4 is not avoided.  Project Benefits, Risks, and Environmental Impacts 47 D. ENVIRONMENTAL IMPACT 6.23 The project has been placed in category "B" in accordance with Operational Directives. 6.24 The proposed rehabilitation works on the conveyance structures, the tubewells in the Ararat Plain and on storage darns, would have positive environmental consequences. They would reduce waterlogging and erosion near the conveyance structures and protect reclaimed areas in the Ararat Plain, and would eliminate the threat to life and property downstream of the dams. To sustain these improvements in the long term requires adequate maintenance of the rehabilitated structures and careful monitoring of the environmental effects. Within the first six month of the project effectiveness the M&M&ES will define environmental indicators to determine the cost of neglect in infrastructure maintenance. 6.25 Leaking canals and hydraulic structures, if not repaired, would cause environmental damage in the immediate neighborhood of the leaks. Bursting pumping stations and/or their pertinent pressure pipes can destroy infrastructure in the vicinity of the pipeline, and can cause serious soil erosion. 6.26 A delay in the rehabilitation of tubewells in the Ararat Plain will cause an adverse impact on the environment as well. High groundwater levels have been controlled by pumped drainage in the low lying areas of the plain. When drainage wells cease to pump, groundwater will gradually rise and destroy land reclaimed over the last decades. 6.27 The most serious threat to the environment, which the project would protect against, however, is posed by storage dam classified as high risk. According to data collected by the DWSI, a breach in any one of the high risk dams will pose a serious threat to life and property along the probable flood path. 6.28 The approximate number of people living in villages, in the approximate area of the probable flood path of the four storage dams slated for rehabilitation under the project are: Aparan 163,000 Karnout 4,000 Mantash 9,000 Sarnakhipur 8,000 These people are living at significant risk though there are no quantitative estimates as to the likelihood of floods or the loss of life, but such numbers could be astounding. Project would reduce such risk to a reasonable level. 6.29 The DWSI has prepared estimates of material damage which will be caused by dam failures in downstream areas of Armenia. The damage estimates in dollar terms (based on 1991 Ruble) range from about US $3 million for the Aparan Dam to less than US $100,000 for the Karnout Dam. 6.30 Another serious impact of a possible breaching of the Mantash Dam would be the loss of drinking water for a population of about 25,000. The dams also control flooding in the downstream areas.  48 Chapter 6 6.31 The investment program under the proposed project would affect rivers that are international waterways in accordance with OD 7.5, para. 2(a)(i) and (ii), i.e., rivers and tributaries that ultimately flow to and/or are shared with other riparian countries. However, the project is exempt from notification requirements, pursuant to OD 7.5, para. 8, because it finances strictly rehabilitation works. The nature of the planned investments-replacing corrosive pipes, repairing lined canals, replacement of tubewells and repairing leaking dams-should not have negative impacts on either the quantity or the quality of present and future flows. More specifically: (a) all investments under the proposed project satisfy the criteria which require: first, that they will have no adverse effect on the quantity of water flows to any other riparian countries, since they will involve no increase in water extraction. In fact there might even be a slight decrease in the amount of water being extracted due to improved water management and distribution. Second, water quality will not be adversely affected because the replacement of tubewell pumps under the project, may assist in reducing the water table and averting water salinity, which otherwise finds its way to international waterways; (b) for any study to be undertaken in regard to future investments under a separate project that may involve international waterways, the terms of reference for such studies will include examnination of potential riparian issues, in accordance with OD 7.5, para. 8 (b). 6.32 Finally, a review of known international agreements or arrangements that exist between Armenia and other riparians on the sharing of international waters that might be affected by this project has shown that none of these agreements would require notification for the activities contemplated by this project.  VII. AGREEMENTS REACHED IN NEGOTIATIONS 7.1 During negotiations the following agreements were reached: (a) collection of water charges to cover operation and maintenance costs will increase according to the schedule proposed in para. 4.17; (b) procurement procedures will be applied in accordance with the Bank and IDA guidelines and in accordance with conditions stipulated in paras. 4.27 to 4.36. (c) disbursement procedures will follow the arrangements described in paras. 4.38 to 4.41; (d) a special account will be established and operated as described in para. 4.40; (e) agreement will be reached prior to every fiscal year, but not later than October 31 of each year, on an O&M Government budget and the extent of IDA disbursements for incremental O&M as described in para. 4.41; (f) the Government will establish a PIU operating along the program described in paras. 5.1-5.10; (g) a monitoring and evaluation unit will be established by December 31, 1995 that will operate along the outlines described in paras. 5.21-5.25; (h) accounts and audits of the project will be carried out as outlined in para. 5.26 and audited project accounts for the project be submitted to IDA for review within four month of the end of each fiscal year; and (i) a mid-term review of the project will be carried out by April 30, 1997 by a joint IDA and MOA review team. The review will be timed toward the end of the second year of the project implementation, as mentioned in para. 5.28; 7.2 A condition for effectiveness of the proposed Credit will be the establishment of a PIU with an adequate number of suitably qualified staff as mentioned in para. 5.11. 7.3 Subject to the above assurances and conditions, the project will be suitable for an IDA credit of US $43.0 million made to the Government of the Republic of Armenia, at the IDA standard terms, including 35 years' maturity and 10 years' grace period for repayments.   ANNEX 1: STATISTICAL ANNEX LIST OF TABLES Table 1. Conveyance Systems Table 2. Rehabilitation of Pumping Schemes Table 3. Tubewell Rehabilitation Table 4. Rehabilitation of Storage Dam Schemes Table 5. Water Management Pilots and Field Works Table 6. Contribution to Operation and Maintenance Table 7. Technical Assistance Table 8. Project Implementation Unit Table 9. Project Cost Summary Table 10. Project Components by Year-Investment/Recurrent Costs Table 11. Expenditure Accounts by Years-Base Costs Table 12. Expenditure Accounts by Components-Base Costs Table 13. Expenditure Accounts Breakdown Table 14. Cost/Benefit Analysis  - eA IRRITION EIU,UTfATION PRJC r TA 1, Cogmac Sdhs USs ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~e. Paurneteis [in %I * ~~~~~~Phy. Quwntls Uni Base Cost Cond. For. Gross Uni loss lose tso1 11op Total coe 19tr 11s98s 199o 113 Tolal Rate Etch. Tax RPae L knvhuawnd Costs A. Coneance Sdcms la 1. ShIak IV-LC KM 0.9 1.8 2.1 1.2 6.0 6.3 5.7 11.3 13.2 7.6 3705 20.0 70,0 0.0 IV-CC KM 0.1 0.3 03 0.2 0.9 21.5 2.9 5.8 6.e 39 194 20.0 700 0.0 IV-AO KM 0.0 0.1 0.1 P.0 0.2 9.07 0.3 0.6 0.7 0.4 20 20.0 *- 70.0 0.0 Subteol Mia Cana 6.9 17.7 20.7 11.6 59.1 b. Secondary Cana V-LC KM 0.9 1.8 2.1 1.2 5.9 5.24 4.6 9.3 10.8 6.2 309 20.0 70 0 0.0 VI-C KM 0. 1.6 1e 1.0 5.2 2.64 2.2 4.4 5.2 30 14.6 200 700 0.o VI-CC Cl 2.6 5.3 6.2 3.5 17.6 7.23 19.1 36.2 445 254 127.2 20.0 70.0 0.0 Subtoala seesda" CMan 25.9 51.9 80.5 34.6 1729 c. TwdbyCank KM 25.1 50.1 56.5 43.4 167.0 2.3 57.6 115.2 134.4 76.6 364.1 200 700 0.0 g. ofabRplc .1Prsure PII. v-.s.p tr KM 0.1 0.1 0.1 0.1 0.4 107.6 6.5 12.9 15.1 8.6 430 20.0 70.0 0.0 VW-SP-Pp" KM 1.? 3.3 3.9 2.2 11.0 21 34.7 69.3 80.9 46.2 231.0 200 70.0 00 VNACPPip 9 5.P 30.9 36.1 2PA 103.1 6. 102.1 204.1 2362 1361 660.5 20.0 700 0.0 Subtotal Reabfh*Mlace of Pesuwe Pipe 143.2 2066. 334.1 190.9 054.5 SU lli93 2! 412 5497 114 70 1 2.Tdl a. MUS Cana *-LC MA 4.2 6.4 9.8 P 26.0 9.6 41.2 62.3 96.0 649 274.4 20.0 70.0 0.0 b. Secondawy Cana VU KM 3.3 0.5 7.0 A.4 21.8 5.24 17.1 34.3 40.0 22.8 114.2 200 700 00 Vt-LC KM 6.3 126 14.7 p.4 42.0 2.84 17.9 36.6 41.7 23.9 119.3 20.0 700 0.0 V-CC KM 3.6 7.3 6.5 4.9 24.3 11.51 42.0 3.9 97.9 55.9 279.7 20L0 700 0.0 VI-cC KM 10.5 20.9 24.4 13.9 66.7 7.23 75.0 151.2 175.4 100. 5039 20.0 70.0 0.0 SuMtotal SecOndary Canad 152.6 30.1 356.0 203.4 1.017.1 cY aTeay CalS KIU 36.7 7313 65.5 4JO 244.4 2.3 84.3 168.6 195.7 112.4 562.1 20.0 70.0 0.0 d. Rstsabfitsplac Praeas PIpe VI-SP PIp KM 1.7 3.4 4.0 2.3 11.3 21 35.6 71.2 63.1 47.5 237.3 20.0 70.0 . 0.0 a~Ii ma 0L2 fU 12 f 2.uKotalhTg M L L 01 a. Momn Candl IV-LC kln 0.4 0.6 1.0 0.0 2.8 6.3 2.0 5.3 6.2 3.5 17.6 20.0 70.0 00 I-A() km 0.C 0.0 0.0