Armenia - Earthquake Reconstruction Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 11964-AM STAFF APP2AISAL REPORT ARMENIA EARTHQUAKE RECONSTRUCTION PROJECT JANUARY 5, 1994 MICROGRAPHICS Report No: 11964 AM Type: OAR Infrastructure Division Country Department IV Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT Currency Unit - Ruble (R)/Dram EXCHANGE RATES: RUBLES/DRAMS PER $ (End of Period) Ruble: Dec 1991 169.2 Jun 1992 144.0 Dec 1992 400.0 Jun 1993 1000.0 Dram: Nov 22 1993 14.0 (introduction) Dec 18 1993 80.0 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS EBRD = European Bank for Reconstruction and Development EC = European Commission EQZ = Earthquake Zone EU = European Union FSU = Former Soviet Union GOA = Government of Armenia ICB = International Competitive Bidding IDA = International Development Association IFC = International Finance Corporation LCB Local Competitive Bidding MOE = Minizry of Economy MOF = Ministry of Finance PPU Project Preparation Unit PIU = Project Implementation Unit UN United Nations UNDP = United Nations Development Program USAID = United States Agency for International Development FISCAL YEAR January 1 - December 31  FOR OFMICL1 USE ONLY ARMENIA EARTHQUAKE RECONSURUCTION PROJECT Credit and Project Summary Borrower: Armenia Executing Agencies: Ministry of Economy Beneficiaries: Approximately 2,000 households will receive shelter and 2,500 workers will be employed in reconstructed factory shells. Approximately 500,000 residents of temporary housing areas will benefit from sanitary facilities (e.g., community bathhouses). Credit Amount: SDR 20.1 million. (US$28.0 million equivalent) Terms: 35 years, 10 year grace period. Project Objectives: The primary objectives are: a) to provide improved housing and living conditions to residents of the earthquake zone; b) to reconstruct basic infrastructure which will support employment creation; and c) to develop a longer term sustainable program for rehabilitation in the earthquake wone. Project Description: The project will complete the reconstruction of housing, factory shells and municipal infrastructure that could provide immediate assistance and employment to the needy population in the earihquake zone. It will also support some key reforms in housing policy (e.g., privatization, cost recovery, single family self-help housing, etc.) and help develop the overall housing reform agenda for Armenia. Additionally, it will prepare a long-term regional development strategy to rehabilitate the earthquake zone and will provide equipment to the Ear uake Engineering Institute. Benefits and Risks: Project Benefits. Benefits of the project include a major impact on poverty alleviation in the EQZ through employment creation and subsidized improved housing and other welfare infrastructure. It will also include policy development in the housing sector and promote the institutional development of a private construction industry through training, competitive procurement and improved construction supervision. The factory shells component was subject to a rigorous economic analysis. Selected factories show a weighted average rate of return on incremental project investments of 50% and an aggregate creation of 2,500 permanent jobs. Selected factories would also increase exports. A rate of return for housing is impossibl. o calculate in the absence of a housing market; however housing investments have been selected based on their efficiency lowest cost solution) and their This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not other-ise be disclosed without World Bank authorization.  - ii - contribution to sector goals (e.g. privatization, cost recovery, promotion of individual initiative in housing provision). Project Risks. This is the first time that the Bank has financed physical works in Armenia, and neither Bank staff, nor Government officials and Armenian professionals can fully anticipate problems that might occur. This difficulty has been mitigated by allowing for a review during implementation of Phase I of the project, by keeping the project small in scale and scope, and by including larger contingencies than usual. In addition, there is a blockade affecting the main supply routes into Armenia, and civil strife in Georgia can interfere with shipments. This has been mitigated by carefully reviewing transportation constraints during preparation and maximizing the use of private sector importers and suppliers, who have a better record of overcoming these problems. In other Bank operations in the FSU, it has been found that kcal unfamiliarity with Bank procurement regulations can slow implementation. The training of PIU staff, government officials and local contractors in Bank procurement procedures which has already been initiated during project preparation should reduce delays. Furthermore, a major portion of the Technical Assistance and Training program has been dedicated to this potential problem. There is a risk that changes in the project implementation staff (see Paragraph 3.3) will delay implementation of the project, although the commitment to the project the GOA has displayed suggests that all efforts will be made to reduce this risk. Finally, there is a risk that occupants might be unwilling or unable to pay for the maintenance of the units, making the housing component less sustainable than desired. However reduced design standards and costs will make the project more cost effective than its original design, and payments from beneficiaries under the project will bt larger than they will have been without the policy changes that are being attempted.  -iii- .,'Oj* Loca, _,US$ Millon J Project Locl Foreign Total Percent Land sites and infrastructures 1.7 1.7 4 j . - . 11- Construction: Sunk Costs Housing 5.9 5.9 13 Factory Shells 9.7 - 9.7 21 Construction: Incremental Costs 5.7 13.2 18.9 41 Technical Assistance 0.2 2.1 2.3 5 Design, supervision, administration 0.1 0.5 0.6 1 Base Costs 23.3 15.8 39.1 85 Physical contingencies' 1.0 2.2 3.2 7 Price contingencies (15%) 1.0 2.7 3.7 8 Total contingencies 2.0 4.9 6.9 15 Total Costs 25.3 20.7 46.0 - -- - Project Financing- State Authorities Oand, infrastructure, sunk costs) 17.3 _ 17.3 __ _ (5% of incremental local costs) 0.3 - 0.3 IDA (mcremental costs) 7.7 20.3 28.0 l Donor assistance - 0.4 0.4 Sub-total (excluding sunk costs) 8.7 20.7 28.7 Total 25.3 20.7 46.0 1 Physical contingencies are 10% on technical assistance and 15% on all other activities.  -iv- IDA DISBURSEMENT SCHEDULE (net of taxes and duties) US$ million IDA Fiscal Year Tal Annual Cumulative 1994 7.1 7.1 1995 11.5 18.6 1996 9.4 28.0 Economic Rate of Retur: Not applicable for housing, municipal and TA components; estimated at an average of 50% for factory shell completion. Poverty Category: Program of Targeted Interventions Map: IBRD Ne 23943R  STAFF APPRAISAL REPORT ARMENIA EARTIfQUAKE RECONSTRUCTION PROJECT CONTENTS CREDIf ANr PROJECT SIJMMARY .......................... * ... i-iv I.BACKGRUNDu ............. 1 II. TM PROJECr . 3 A. Rationale for IDA Involvement.. 3 B. Project Objectives.. 3 C. Project Area.. 3 D. Project Summary ..3 E. Detailed Project Description.. 4 Housing Component ....... 4 Apartment Completion Sub-component ....................... S Unit Allocation ..................................... 6 Cost Recovery ...................................... 6 Strengthening Sub-component ............................ 7 Single Family Housing Sub-component ....................... 7 Munc..pal Services. 8 Public Bathhouses Sub-componen. 8 Water and Sewer Sub-component. 8 Community acilities. 9 Factory Shells Component. 9 Technical Assistance, Training, and Equipment .10 Procurement and Construction Management .10 Housing Reform .10 Regional Development and Reconstruction of the Earthquake Zone 10 Support to the Earthquake Engineering Center .10 Evaluation of Phase I of Project Implementation and Preparation of Pe.se. 10 F. Project Costs and Financing ..11 G. Project Benefits and Risks ..13 H. Ecoromic Evaluation ..13 I. Environmental Considerations .13 m. PROJECr MLEMiENTATION .15 A. Organization Responsibilities .15 Central Government. 15 Project Implementation Unit. 15 Local Construction Firms. 15 Local Governments ..................................... 16  B. Project Phasing ............ 16 C. Procurement ............ 19 Civil Works ..... ....... 20 Goods ............ 20 Consutants ..... .... 20 D. Disbursements ......................... 21 E. Accounts and Audits ......... ...... 21 F. Project Monitoring and Supervision ............ .. ................ 22 Reporting Procedures ................. ................... 22 Implementation Performance Monitering Indicators ........ .......... 22 Supervision schedule .................. ................... 22 IV. AGREEhsiNTS, CO. IDITIONS AND RECOMMENDATIONS .... ......... 23 ANNEXES Annex 1.1 Legislative Achievements and Outstanding Issues Annex 1.2 Housing Policy Reform Statement of Intent Amnex 1.3 Housing Policy Reform: Program for External Assistance Annex 2 Cost Recovery Annex 3 Economic Justification Annex 4 Issues in Contracting and Procurement Annex S Regional Economic Study of the Earthquake Zone and Long-Term Infrastructure Investment Strategy Annex 6 Action Plan by Phase of Project and Subcomponents Annex 7 Implementation Plan Annex 8 Contents of Implementation Volume Annex 9 Organizational Structure of Project Implementation Unit Annex 10 Disbursement Schedule Annex 11 Procurement Schedule Annex 12 Implementation Responsibilities TABLES 2.1 Project Costs 2.2 Project Fmancing 3.1 Expenditures by Phase of Project and Subcomponent 3.2 Summary of Proposed Procurement Arrangements MAP IBRD 23943R Arww 2*90'~~~A ~ainwdw(I~wu Ipechisp, Con, :X 1)- ':y ' .'1wpmrrnhwmrawetaAA1ar ~.... " ~~ Son,ardl~~~~.C. 0*4 anvd C. M'_ (An. f.  -1- ARMENL1 EARTHQUAKE RECONSTRUCTION PROJECT I. BACKGROUND 1.1 In the last five years, Armenia has suffered a series of devastating shocks-the earthquake of 1988, the dissolution oV the Sovie- Union block and the current regional unrest. The earthquake of December 1988 caused extensive dam4ge to housing, factories, community facilities and infrastructurc in about one third of the country. Twenty-five to thfity thousand people died in the earthquake, approximately 530,000 persons were left homeless, and 40 % of the country's manufacturing capacity was destroyed. 1.2 Efforts to recover from the earthquake's devastation have been thwarted by the upheaval following the breakup of the Soviet Union. International rescue efforts in December 1988 and early 1989 were followed rapidly by reconstruction projects led by a committee under the Supreme Soviet of the USSR. Work continued until mid-1991, when the Soviet work crews were withdrawn to their newly independent home countries, leaving vast areas of partially completed apartment blocks, factories, and infrastructure projects. Subsequent relief measures have focused on assistance to refugees from Azerbaijan, often ignoring victims of the earthquake in the same communiti.s. 1.3 As a consequence, the Earthquake Zone (EQZ) continues to have severe shortages of shelter, basic infastructure and industrial facilities. Unemployment in the EQZ remains as high as 75%; tens of thousands of families continue to live in "container communities" comprised of adapted railroad boxcars, steel shipping containers and large fuel tanks supplied by the Soviet Union immediately after the earthquake; and one of the affected cities (Spitak) has virtually no piped water. These problems are compounded by the transport blockade imposed by the conflict with Azerbaijan which has disrupted the trade flows from Georgia and other neighboring countries and reduced energy supplies. Temporary houses are unheated and uninsulated, and temperatures inside them fall weil below zero during the winter. The temporary housing installed after the earthquake has some access to sanitary services, but there is a high risk of environmental and health problems. Finally, the long delay in finishing the reconstruction effort, combined w.t the high rate of unemployment, is weakening public confidence, and the crime rate is beginning to rise in some EQZ communities. Thus, despite the passage of 5 years since the earthquake, the population of the EQZ continues to require urgent assistance. 1.4 In spite of the difficult conditions, the Government of Armenia (GOA) has demonstrated a remarkable commitment to undertake the economic reforms necessary to restructure its economy. With respect to housing, privatization legislation has passed the first stage of review in Parliament and other housing policy reforms are being designed (see Annex l.b for Housing Policy Reform Statement of Intent). A policy to privatize industrial enterprises has strong support; the details of its implementation are being formulated with assistance of the rec,.ntly approved Institution Building Project (Loan 3585- AM). The immediate task for the government is to weather the current crises and re-build its infrastructure in a manner consistent with long-term reform goals.  -2- 1.5 lhis project seeks to alleviate the current crisis in the Earthquake zone and is being processed to start implementation during the next construction season. A Japanese grant of US$1.0 million has helped the Government prepare the project. Basic design, engineering work, cost estimates and a sociological srvey to identify the living conditions, income and priority needs of the target population have been completed. A project unit has been created and is ready to manage implementation. The GOA has displayed a strong commitment to the project and has acted rapidly to provide facilities (such as offices, staff and equipment) necessary for the preparation of tei project. The project will not solve all the problems of the EQZ; the actual volume of reconstruction necessary is well beyond the scope of a single operation. However, it will provide an opportunity for the Government to reaffirm its commitment to the reconstruction effort and provide for a coherent plan for continuing the process.  -3- HI. THE PROJECT A. Rationale for IDA Lnvolvement 2.1 Despite the passage of 5 years since the earthquake, a crisis continues to exist in the earthquake zone. At present no international or bilateral assistance programs in Armenia focus on capital investments in housing or employment, either for eat ',quake relief or to stimulate a faltering national economy. The current economic situation makes it difficult for the Government tc continue reconstruction without international financing. Financing a reconstruction program will alleviate pressirg economic and social problems and provide a unique opportunity to support implementation of basic economic reforms in housing and infrastructure. B. P-oject Objectives 2.2 The primary objectives are: a) to provide improved housing and living conditions to residents of the Earthquake Zone; b) to reconstruct basic infrastructure which will support employment creation: and c) to develop a longer term sustainable program for rehabilitation in the earthquake zone. C. Project Area 2.3 The Earthquake Zone, located in the northwest corner of Armenia contains about one third of the country's area (approximately 10,000 sq. km.). The haf million people left homeless after the quake constituted one-sixth of Armenia's total popuiaiion. The project will emphasize the three largest cities in the EQZ: Gumri (populationt 270,000), which is the second largest city in Armenia, Vanadzor (population 180,000), the third largest city, and the smaller city of Spitak (population 20,000). Gumri and Vanadzor sustained serious damage during the 1988 quaks; Spitak, which was at the epicenter of the quake, was totally destroyed. The EQZ was a major industrial area before 1988. Vanadzor alone had some 33 state owned enterprises and an additional 1,900 private business. Spitak had 33 state companies and 260 private businesses. In addition to being a major industrial area, the region has special historical and cultural significance. Gumri is the home of a number of national historical and architectural monuments; it is also a major transport nexus for rail lines from Georgia and Turkey. D. Project Summary 2.4 The project will complete the reconstruction of housing, factory shells and municipal infrastructure that could provide immediate assistance and employment to the needy population in the earthquake zone. It will also support some key reforms in housing policy (e.g., privatization, cost recovery, single family self-help housing, etc.) and help develop the overall housi"g reform agenda for Armenia. Additionally, it will prepare a long-term regional development strategy to rehabilitate the earthquake zone and will provide equipment to the Earthquake Engineering Center. 2.5 The project was prepared under Japanese Grant funding. The project will be divided into two phases. The first phase construction was initiated during 1993 and is eligible for retroactive financing; construction will continue through the 1994 construction season. The second phase will begin during the 1994 construction season and will be completed in 1995. All feasibility studies, the detailed engineering, and cost estimates for Phase I have been completed by the Project Preparation Unit and appraised by the Association. The procurement process has been proceeding since negotiations in July  -4- 1993, and the first contracts were awarded in October, 1993. Delays In starting construction have been due to the government's lack of funds in spite of being eligible for retroactive financing under the credit. Final engineering and appraisal for Phase 11 will be carried out during the course of Phase 1. Details on the breakdown by project phase are givel' in paras. 3.7-3.9. 2.6 The project will include four components, as listed below: Housing: (i) Completion of presently unfinished apartments; (ii) Repair and strengthening of damaged apartnent buildings; and, (iii) Land development and construction of serviced plots and starter houses for single family ownership and self-help expansion. Municipal Services: (i) Provision of bathhouses for temporary housing areas, some of which will incorporate solat heating; -ii) Completion of selected water supply and sewerage sub projects in Spitak, Vanadzor, and Stepanovan; and (iii) Community facilities. U;,;Tnished Factory Shells: (i) Completion of factory shells for existing profitable industries. Technical Assistance, Training, Equipment and Studies for: (i) Procurement and construction supervision (ii) Housing reform; (iii) Regional development of the Earthquake Zone; and (iv) The Earthquake Engineering Center. E. Detailed Project Description Housing Component 2.7 Housing will be provided through several subcomponents: finishing the construction of apartment buildings begun by the Soviet Union; strengthening and repair of condemned apartment buildmgs rendered uninhabitable by the earthquake; and developing single family housing suitable for progressive construction. Most of the housing construction in Phase I will be the completion of nearly constructed apartments since these can be finished at low cost and in a short time period. In Phase II, fewer nearly finished units will be available for completion; and construction will emphasize the other methods subject to endorsement in the course of the mid-term review of the project. 2.8 While the project is primarily designed to alleviate severe housing and employment conditions within the earthquake zone, it will be implemented at a crucial moment in the development  -5- of Armenia's housing policy.3 The Armenian Parliament has recently passed a law for mass privatization of housing which grants ownership of units to their occupants throughout the country at a nominal fee. In the future, the Government will not be responsible for s& -ter provision with the one exception of the Earthquake Zone where it has a strong legal and moral obligation to continue doing so. However, to set the precedent for the market-oriented housing system, individuals receiving housing in the EQZ will be required to cover at least part of the construction costs. Home owners will be in any case responsible for maintenance costs. Assistance will be provided simultaneously to the GOA to develop an action plan for (a) the legal, regulatory and institutional reforms expressed in its Housing Policy Statement of Intent; and (b) policies on sustainable targeted subsidies on a nation-wide basis.(see Annex 1.2). The Regional Study of the Earthquake Zone (see Annex 5) will coordinate the continuing effort to reconstruct the region with the development of reform policies. At negotiations it was agreed that the borrower will submit at tfhe time of mid-term review an action plan on housing policy reform as described in Annex 1.2 (para. 4.1, a). 2.9 Apartiaent Completion Subcomponent. Approximately 7,000 apartment units were originally identified as candidates for completion. From these 800 units were selected for Phase 1. The initial selection process has identified up to 700 additional units which appear suitable for completion in Phase II. The criteria for selection was: (i) A high level of existing completion (60-90%); (ii) Location in a viable neighborhood with existing infrastructure, transport and community facilities; and (iii) A high level of earthquake resistance in both the design standards and in the completed portion of the structure. Under the Reconstruction Study described in Annex 5, the remaining structures will be evaluated and a program for deciding their fate will be designed (i.e., whether to complete, sell-off, or demolish them). 2.10 'he selection of units for completion was conducted by international and Armenian Seismic engineers in cooperation with local authorities. The post earthquake norms of 14.5 square meters per person were used in the basic designs. However, as a part of project preparation, the units were significantly redesigned with cheaper standards (e.g. linoleum in place of parquet, unpainted interior walls, showers in place of bathtubs, additional units on the ground floof and attics, subdivision of large units, kerosene heaters in place of steam radiators)4 thereby more than doubling the number of units that could be completed with the samne funds. Units will cost an average of US$2,200 (before contingencies) to complete in Phase I; in Phase IJ the cost per unit will rise as starting points are at a lower level of completion. The average per unit cost throughout the project is estimated at US$3,000 before contingencies. The total base costs for the subcomponent are estimated at US$4.7 million. 3A description of the current status of Armenian housing policy, the Government's statement of intent on future policy, and the project's strategy for aiding the development of housing policy are provided in Annex 1. 'Unless the energy problem is solved before construction and district heat is again operational.  -0- 2.11 Units to be completed under the project will be used to demonstrate a series of key initiatives consistent with the progress of general housing policy reforms such as a) private ownership, b) private responsibility for maintenance, c) some cost recovery, d) the use of "sweat equity' in place of cash contibutions and e) subsidy transparency and targeting. 2.12 Unit Allocation. Following the earthquake, allocation criteria were announced in Decree # N371 of 1989 giving priority to those suffering injury or loss of family members. On this basis apartments were allocated by the local authorities, even though the units were not completed. A survey has been undertaken by the Project Preparation Unit of the families allocated to the units selected under the project. This was done to confirm that families that were selected met the announced allocation criteria. (Priority is given to invalids as a result of the earthquake, and to families who lost an income provider and have an underage child or three or more children.) The survey showed that on average 2.5 persons will occupy each bedroom. In addition, it was found that nearly all families affected by the earthquake are now experiencing severe financial difficulties (see Annex I of the Implementation volume). 2.13 The allocation process will be left intact, except for the units which are to be subdivided. In Phase I less than 5% of the new units will be created in this manner. The existing beneficiary of a unit being subdivided will be given an opportunity to occupy a newly-created apartment in an attic or ground floor, one of the apartments created from the previously-allotted unit, or be reassigned to another building. All beneficiaries will be offered the opportunity to purchase a starter home in the single family housing areas as an alternative to their apartment. This will leave additional apartments to be allocated according to the previously announced allocation criteria. At negotiations it was agreed that the allocation criteria for apartments will not be changed without prior approval of the Assec.iation (para. 4.1, b) 2.14 All apartment units will be allocated as private owner-occupied units, with a condominium arrangement for property maintenance for each building. It is anticipated that there will be little cash outlay for maintenance since the buildings are constructed from extremely resilient materials and only the most basic public services are currently being provided. In the short run, residents will be able to maintain the buildings with their own labor, a practice which is common even in state-owned housing in Armenia. USAID has agreed that the apartment buildings privatized through this project will be included in their pilot program to organize condominium associations. 2.15 Cost Removery. Incremental costs of construction will be covered by an up-front subsidy of 75% and a 25% contribution from recipients of apartment units. The up-front subsidy is consistent with the provisions of the mass privatization law for housing (para. 2.8). Recipients' contributions will be made over 25 years through monthly payments not exceeding one-fourth of the minimum wage. Loans will be denominated in dollars and monthly payments indexed to the minimum salary.5 In a limited number of cases of demonstrated need, beneficiaries may be allowed to use 'sweat equity' in lieu of cash monthly payments for up to two years. Beneficiary households will be required to surrender their temporary housing units ("domiks") but will not receive monetary compensation for them since such a program would be administratively complex and beneficiaries will be receiving subsidies. At negotations, the Government agreed to the terms and conditions of cost recovery for apartments and single family homes completed wnder the project (para. 4.1, c). 51n the sociological survey it was found that average household incomes in the EQZ approximate one minimum salary and average willingness to pay for housing falls close to 25% of this amount in current rubles.  -7- 2.16 Strengthening Subcomponient. Approximately 25,000 apartment units had to be vacated for repairs after the earthquake, with occupants moved to temporary housing areas but retaining their right to the unit. However, the process of strengthening and repair was relatively complicated compared to construction and proceeded slowly. Although little repair work has been done, the presence of scaffolding around many buildings has allowed easy access and many structures have been stripped of doors, windows and other fixtures. 2.17 Strengthening of such buildings has been studied by the Earthquake Engineering Center and the National Design Institute and found to be feasible. After strengthening, the structures will meet a new6 seismic engineering code which has been reviewed and found acceptable to the Association. Repair of the buildings will also have the advantage of preserving existing neighborhoods. The cost of this technique is estimated at approximately US$3,000 per apartment unit for strengthening and an equal amount for repairs. Such work involves non-traditional technologies and a higher level of quality control. The project will strengthen and repair about 500 units, mainly to test the technical feasibility of applying the technique on a wider scale. The units will be allocated to their previous occupants under the same terms provided by the mass privatization law for housing. 2.18 Single Family Housing Subcompo.tent. In Armenia, the tradition of individual home ownership has survived throughout the Soviet years, especially in the rural areas. About 30% of the housing units of Armenia remains in individual ownership, including 20% of urban dwelling units. However, construction of individually owned single family housing has been discouraged in urban areas through laws and regulations. For example, town planning and building codes are geared to large apartment buildings only, current standards for plot and house size are excessive, and there are no resources for private housing finance. Moreover the shortage of energy, materials and cash, suppresses individual housing construction, making it accessible only to a small section of the population. 2.19 The Central Government and local governments in the EQZ want to revive single family hoasing in Armenia, and they requested that a subcomponent be included to demonstrate that the population can participate with its own resources and initiatives to the reconstruction of housing in the EQZ, and to the further improvement of their housing conditions in both the EQZ and in the rest of Armenia. This subcomponent will provide serviced plots and starter homes for self-help or self contracted expansion. It will test appropriate and affordable designs, offer a wider range of housing types to the public, and familiarize local people with the concept of a market-oriented urban housing supply. It will also allow an opportnity to test the technic~al feasibility of transferring temporary housing units to serviced plots. 2.20 The project will fiance the development of plots of up to 155 square meters serviced with basic infrastructure (water, sewer, electricity and gas) at a cost of US$400 per plot. Expandable starter homes of up to 30-50 square meters at an additional cost of up to US$2,400 will also be offered as an option, bringing the total cost for a plot and starter home to approximately US$2,800. Design prototypes will be constructed to show the final house after expansion. In the first phase of the project a small number (15 each) of serviced plots, plots with core houses and final, expanded house prototypes will be constructed in each city. In Phase II the program will be expanded to develop additional plots, plots with foundations and plots with core houses in each city if warranted by the experience in Phase I. Total costs for both phases are estimated at US$2.1 million. 6The new code was promulgated after the earthquake under the Soviet Union era.  -8- 2.21 Access to serviced lots or core houses will be offered as an alternative to those households having rights to apartments to be completed under the project. Beyond this group, priority for determining who can purchase a unit will be established under the same general criteria promulgated after the earthquake (i.e., loss of home, family members, etc.). The houses and land will be privately owned and land titles will be given as long-term transferrable occupancy rights until the policy for private ownership of urban land is fully established.' At negotiations, it was agreed that the criteria for allocation of single family hoa.sing would follow the current criteria and would not be changed without the prior approval of the Association (para. 4.1, b). 2.22 On equity grounds, this component will receive an up front subsidy of only 25%. A long-term policy on housing subsidies will be addressed as part of the housing policy TA component (para. 6 of Annex 1.2) in the context of sustainable macroeconomic and fiscal policies. Recipients would be required to contribute 75 % of the cost of infrastructure provision on the plot and housing construction to phase in the concept of total private responsibility for housing costs. Land would be provided for a nominal fee. As with the completed apartments, the balance to be recovered will be maintained in dollars and the monthly payment indexed to the minimum wage. At negotiations, the GOA agreed to the terms and conditions for cost recovery for single family housing (para 4.1, c). Munidpal Services 2.23 Public Bathhouses Subcomponent. The component aims at improving sanitary conditions and relieving hardships in the temporary ("domik") settlements in the Earthquake Zone by installing public bathhouses offering hot water, showers, toilets and laundry facilities. It will also support a study to evaluate how well the bathhouses constructed in Phase I fulfill community needs and what other infrastructure and sanitary facilities might improve community welfare. The bathhouses will test solar heating to supplement conventional heat in the winter and substitute for it in the summer. A study of solar heating options shows that it shouid be feasible in the project area. The bathhouses will be operated under concessionary contracts with users paying a fee towards operation and maintenance. As part of the preparation of Phase I, an evaluation of community satisfaction with bathhouse design and community demand for other facilities will be conducted. A small number of bathhouses will be constructed in Phase I, including one testing solar power. Phase II will expand the program if warranted. The total cost is estimated at US$1.1 million. At negotiations, it was agreed that the bathhouses would be operated through concessionary contracts (para 4.1 d). 2.24 Water and Sewer Subcomponent. After the 1988 earthquake, construction was initiated of several projects to restore or expand the water and sewer systems of the Earthquake Zone. Among these projects, only the pipeline restoring water supply to the city of Spitak was judged to be acceptable for financing under Phase I of this project because of the severe shortage of water in that city. Operation of the pipeline would be administered by the local water company. Detailed engineering studies produced a cost estimate of US$500,000. The feasibility studies for other proposed projects are being carried out under a grant from the Japanese government; these projects may be included in Phase H. The GOA has also agreed that financial and operating plans would be developed for the Armenian water and sewer companies. Water and sewer fees will follow the Government's general program of gradual elimination 7Current Armenian legislation does allow for allocation of land to individuals for housing construction. A policy for more wide spread privatization and private ownership or urban land will be covered under the Technical Assistance dedicated to housing policy reform.  of subsidies. 2.25 Community Facilities. The project will allocate US$600,000 as matching contributions for community facilites to meet social and environmental needs. An amount of US$200,000 would be allocated for each city. The GOA, through the PIU (see para. 3.2) will evaluate proposals submitted by the municipalities and supervise the use of the funds. Activities or projects of greater than US$50,000 would be submitted for approval by the Association during supervision. Factory Shells Component 2.26 The project will complete reconstruction of a number of factory shells that have been partially rebuilt by the Soviet Union. This component has been designated as having the highest priority by the Government of Armenia. After a survey of numerous industrial public enterprises in the EQZ, and intensive on-site reviews and interviews, four enterprises were selected as having met the following criteria: - economic viability - strong management; - rapid implementability of reconstruction of the shell (see Annex 3 for economic justification); - substantial impact on employment and exports; - ability to recover and repay costs of incremental construction. 2.27 The four enterprises selected for inclusion in Phase I are the Gumri Armelectrocondenser Plant; Spitak Clothing Plant; Vanadzor Precision Machine Tool Company; and Vanadzor Fur Factory. After the earthquake, despite immense damage, the management of several of these enterprises was resilient enough to resume limited operations within 60-90 days in temporary facilities. The total amount of the industrial component of the loan for Phase I is $5.0 million. The screening process of the remaining factories for possible inclusion in Phase II began in November 1993, and a detailed analysis will be available for the mid-term review. 2.28 Enterprises will repay the incremental construction costs. The loans will be denominated in dollars, will carry a fifteen year maturity including a three year grace period, and a variable interest rate equal to 0.5% over the World Bank lending rate. The factory shells will be property of the enterprises (and will be valued along with the land on their balance sheets) although the government will have the right under the current legal statutes to gain control of the facility in the event of non-payment. At negotiatons, the GOA agreed to the terms and conditions for cost recovery offactory shells (para. 4.1e). 2.29 Another objective-which was set at the explicit request of the Government of Armenia-is to use the program to further economic reform. To achieve this objective, enterprises with completed facilities will be encouraged to make available production space, and where possible equipment, for the use of "small enterprises." These could then be used by privately-owned small or new businesses. Enterprises will also be required to participate in the privatization plan of the Ministry to which they were subordinate. Assurance was offered at negotiations that the enterprises benefitingfrom completedfactory shells will have priority access to electricity (para. 4.1, f).  -10- Technical Assistance, Training, and Equipment 2.30 Technical assistance, training, and equipment purchases will be provided for: (i) Procurement and construction management; (ii) Housing Reform, (iii) Regional Development and Reconstuction of the Earthquake Zone and (iv) the Earthquake Engineering Center. The total cost of this component is estimated at US$2.3 million. 2.31 Procurenent and Construction Management. International consultants will be provided for managing the procurement and construction process. They will also provide significant training and technical assistance in the areas of a) procurement, b) contract supervision, and c) contract management. This assistance will be provided to GOA officials, the project implementation unit staff and to the Armenian construction industry. The cost of these international conculting services is estimated at US$1.2 million. Faculty at the American University of Armenia will assist in developing a training program for contractors interested in bidding on contracts. 2.32 Housing Reform. The GOA has demonstrated its willingness to reform its housing sector policies in the attached Statement of Intent (Annex 1.2). However, no formal sequence of steps has been devised to implement this new policy. Technical assistance and training will be provided for the development of an action plan for legislative, regulatory, financial, and institutional changes necessary to develop a market-oriented housing sector. Technical assistance in this area would cost approximately US$200,000. 2.33 Regional Development and Reconstruction of the Earthquake Zone. Efforts to reconstruct the earthquake zone to date have been primarily ad hoc. At the request of the GOA, a study will be performed to evaluate the prospects for regional development of the zone and devise policies and public investments to complete reconstruction and continue the economic and social rehabilitation of the zone. 'Te cost of the study is estimated at US $300,000. The Terms of Reference are included as Annex 5. 2.34 Support to the Earthquake Engineering Center. The Earthquake Engineering Center played a major role in the review of housing for Phase I of the project and is to have an even bigger role in the housing strengthening subcomponent programmed for Phase II. However, the Center lacks some basic equipment such as computers and electronic testing equipment it needs to perform this function. The purchase of this equipment, estimated at about US$180,000, will allow highly trained local seismic engineers to evaluate the seismic quality of structures to be repaired under the project. 2.35 Evaluation of Phase I of Project Implementation and Preparation of Phase II. Technical assistance and training will continue under the Japanese Grant to permit the evaluation of the Phase I components and the continued preparation of Phase II, including the preparation of detailed design and engineering for Phase II works. The estimated cost is US$350,000.  -11- F. Project Costs and Finandng 2.36 The project is expected to cost a total of US$46 million with US$28.7 million in incremental costs including US$20.7 million in foreign costs and US$8 million equivalent in local costs (see Table 2.1). Sunk costs of US$17.3 million equivalent, covering investments in infrastructure and partially completed housing and factory shells are included in the overall cost estimates. Incremental cost esimates are based on final designs and bills of quantity for Phase 1 (30% of total costs), and preliminary designs for Phase II. Base costs are estimated as of June 1, 1993. In view of the local inflation rate, cost esdmates have been expressed in US dollars throughout this report. Furthermore, due to rapidly shifting prices and exchange rates and the absence of good market comparators in Armenia, a physical contingency of 10% on technical assistance and 15% on other components and a price contingency of 15% have been used. 2.37 IDA would finance 98.6% of total incremental costs for an amount equal to US$28.0 million equivalent, including 100% of foreign and 95% of local costs (see Table 2.2). IDA will not finance costs resulting from taxes or duties. Grant financing of approximately US$0.35 million from Japan will fund preparation of Phase II. Additional grant financing from USAID may further expand the techiical assistance program. If such financing is found, the amount of tne IDA credit will be reduced or reallocated to increase funding of other categories. Up to 10% of the credit amount may be used for retroactive financing. Advance contracting has been proceeding in the period since negotiations.  -12- Table 2.1: Project Costs US$ Million Local Foreign Total Percent Land Sites and Infrastructure 1.7 - 1.7 4% Constuction: Sunk Costs Housing 5.9 - 5.9 13 % Factory Shells 9.7 - 9.7 21% Construction: Incremental Costs 5.7 13.2 18.9 41% Technical Assistance 0.2 2.1 2.3 5% Design, Supervision, Administration 0.1 0.5 0.6 1% Base Costs 23.3 15.8 39.1 85% Physical Contingencies 8 1.0 2.2 3.2 7% Price Contingencies (15%) 1.0 2.7 3.7 8% Total Contingencies 2.0 4.9 6.9 15% Total Costs 25.3 20.7 46.0 Table 2.2: Project Financing US$ Million Loal Foreign Total State Authorities (and, infrastructure, sunk costs) 17.3 - 17.3 (5% of incremental local costs) 0.3 - 0.3 IDA (incremental costs) 7.7 20.3 28.0 Donor Assistance9 0.4 0.4 Sub-total (excluding sunk costs) 8.0 20.7 28.7 Total 25.3 20.7 46.0 8Physical contingencies are 10% on technical assistance and 15% on all other activities. 'the US$0.4 million in donor funds listed is Japanese Grant Funds utilized for preparation of Phase II of the project.  -13- G. Project Benefits and Risks 2.38 Benefits of the project include a major impact on poverty alleviation in the EQZ through employmeuiL creation and subsidized improved housing and other welfare infrastructure. It will also include policy development in the housing sector and promote the institutional development of a private construction industry through competitive procurement regulations and improved construction supervision. 2.39 This is the first time that the Bank/IDA has financed physical works in Armenia, and neither Bank/IDA staff, Government officials, nor Armenian professionals can fully anticipate problems that might occur. This difficulty has been mitigated by allowing for a mid-term review after implementation of Phase I of the project, by keeping the project small in scale and scope, and by including larger contingencies than usual. In addition, there is a blockade affecting the main supply ioutes into Armenia, and civil strife in Georgia can interfere with shipments. This has been mitigated by carefully reviewing transportation constraints during preparation and maximizing the use of private sector importers and suppliers, who have a better record of overcoming these problems. In other operations, it has been found that local unfamiliarity with Bank/IDA procurement regulations can slow implementation. The training of PIU staff, government officials and local contractors in Bank/IDA procurement procedures which has already been initiated during project preparation should reduce delays. Furthermore, a major portion of the Technical Assistance and Training program has been dedicated to this potential problem. There is a risk that changes in the project implementation staff (see Paragraph 3.3) will delay implementation of the project, although the commitment to the project the GOA has displayed suggests that all efforts will be made to reduce this risk. Despite Armenia's lack of experience in working with the Bank/Association, the Government has completed all required steps in the preparation process on time. Finally, there is a risk that occupants might be unwilling or unable to pay for the maintenance of the units, making the housing component less sustainable than desired. However reduced design standards and costs will make the project more cost effective than its original design, and payments from beneficiaries under the project will be larger than they have been without the policy changes that are being attempted. H. Economic Evaluation 2.40 The factory shells component amounting to 23% of project costs was subject to economic analysis. Selected factories for phase I show a weighted average rate of return on incremental project investments of 50% and collective creation of 2,500 pemanent jobs. One factory has been conditionally included; it will be subject to either a reduction of scope or a replacement of another enterprise. A rate of return for housing is impossible to calculate in the absence of a housing market; therefore housing investments have been selected based on their efficiency Oowest cost solution) and their contribution to sector goals (e.g. privatization, poverty alleviation, cost recovery, promotion of individual initiative in housing provision). Annex 3 gives details of the evaluation performed. 1. Environmental considerations 2.41 The project has been placed in category "B0 in accordance with Operational Directive 4.01. All housing rehabilitation will include the provision of environmentally sound disposal of sanitary (including reconnection to sewage treatment plants) and solid wastes; this will be a significant improvement over the present post-earthquake situation. Reconstruction of water supply systems will be done in order to prevent cross-contamination with waste lines in case of future disturbances. Building standards will be reviewed to ensure public health issues are addressed and Feismic considerations are  -14- included to mitigate any potential future damage by earthquakes. The enforcement of these standards will be evaluated during supervision missions.  -15- m. PROJECT IMPLEMENTATION A. Organization Responslbilities 3.1 The general outline of responsibilities is as follows. The specific responsibilities for each component are given in Annex 12. 3.2 Cental Government. Primary responsibility for managing the project will reside with the Ministry of Economy (MOE), which has responsibility for both the earthquake reconstruction effort and policy reform. The loan proceeds will not be on-lent to other organizatioi.s; they will remain central government funds and the cost recovery proceeds will accrue to the Ministry of Finance. The Government's current Housing Policy Reform unit will be expanded under the Housing Policy Assistance Strategy outlined in Annex 1.3, and will coordinate efforts in diffeient parts of the Government in this area and will prepare the reform action plan. 3.3 Project Implementation Unit. Preparation of the project was managed by a Project Preparation Unit created within MOE. After the loan is approved by the Association and signed by the Government, this organization will become a Project Implementation Unit (PIU) which will oversee the construction process and the preparation of Phase II of the project. The Director of the PIT, who has already been appointed, will report to the Minister of the Economy. The PIU, with assistance of an international consultant, has completed an operational manual of its internal policies and procedures, and put in place a satisfactory accounting system. A competent local accountant has been recruited, and will be supported by periodic visits from an international consultant. Likewise, vxic'edures for procurement and management of contract oversight have been designed. It is expected that the staff recruited for the Project Preparation unit will largely be maintained, although contract management and construction supervision personnel will be added to facilitate implementation. Employees of the PIU are all employed as consultants, and they have had to give up Government employment or take a leave of absence in order to take the positions. The organization chart of the PIU is included as Annex 9. At negotiations it was agreed that the Borrower will maintain a Project Implementation Unit headed bv a fuil-time project manager, whose experience and qualifications shall be acceptable to the Association, and who shall be assisted by competent staff in adequate nunbers (para. 4.1, g). 3.4 Local Construction Fnrms. Given the size of the contracts to be awarded, it is likely that the majority of the works will be performed by local construction firms. There is an emerging private construction industry that will compete for contracts in the project. However, it is expected that most of the bids for contracts within this project will come from public firms.'0 Allowing state-owned firms to bid on contracts should not lessen the level of competition, since it will increase the number of fums bidding and public construction firms no longer receive any financial assistance from the Government. It is expected that the Armenian construction industry will be able to handle the anticipated 10 As a measure of the anticipated participation of public and private firms in bidding for contracts in this project, at a recent publicly announced training seminar fo- construction firms on Bid Preparation and General Conditions of Contract, one third of the firms represent.e were privately owned.  -16- level of work; a review of the state construction firms both inside and outside of the earthqtuake zone found that they possess sufficient capability to perform the tasks required and are present in sufficient number to ensure competition. Using competitive bidding procedures to create competition among publicly-owned construction firms is consistent with the government's policy reform program; the GOA has already announced that state construction firms will participate fully in the privatization prograrr. that is already underway. 3.5 International Consultants will be employed within the PIU to manage and supervise the construction process; a Contracts Manager has been recruited, and will oversee the construction contract procurement, project planning and supervision and contribute to the construction industry transformation; he will also introduce appropriate quality, quantity and cost control systems thereby assisting in the development of a competitive local consultants industry and he will advise the local consultants carrying out construction supervision on related matters. Short term international consultants will be employed far training activities and to develop specific management systems. 3.6 Local Governments. The Armenian central government still exercises considerablt; control over local governments. Nonetheless, the municipalities of Gumri, Spitak and Vanadzor already have supplied written documentation confirming their agreement with the proposed terms and conditions of the programs on cost recovery and designs. The municipalities will manage the bathhouse subcomponent and serve as the designated agent of the central government in the housing components, where they will be responsible for managing the recipients individual loan accounts. B. Project Phasing 3.7 P-oject implementation will be divided into two phases with a mid-term review at the end of Phase I. Phase I will emphasize rapidly meeting the EQZ population's needs for shelter and employment. Thus, the first phase consists primarily of completion of nearly finished apartments and initiation of factory shell construction. Pilot projects in single family housing and community bathhouses will be initiated in Phase I, to begin testing those subcomponents, and expanded in Phase II. Work will begin on the Regional Development and Reconstruction Study and the GOA will employ local long-term consultants in its Office of Housing Policy Reform to formulate the action plan, and identify topics where short term studies by international consultants might be useful. An implementation plan has been prepared for Phase I and is attached as Annex 7; also during the implementation of Phase 1, preparation of the sub components for Phase H will be conducted. The expected breakdown of components between Phase I and Phase II is shown in Table 3.1. 3.8 Preparation of Phase I has continued since negotiations. All cost estimates and designs have been completed. The first lot of contracts were awarded in early October 1993. Tendering other contracts is awaiting credit effectiveness. 3.9 A mid-term review is planned for no later than June 15, 1994 to assess the experience of Phase I, to revise procedures and cost estimates or re-design subcomponents if necessary, and to re-allocate funds between cities or components if judged desirable. Bank/IDA staff will complete the appraisal of sub components for Phase II. At negotiatons it was agreed that activities to be financed in Phase 11 wndd be subject to prior approval of the Association as a part of the mid term review of the project (vara. 4.1, h). In Phase ll, apartment units at a high stage of completion will become less prevalent and a pilot effort in strengthening and rehabilitating damaged apartmnent buildings will be initiated. More importantly, approaches which have been less traditional in the socialist housing system, such as single  -17- family housing and improvements in temporary housing areas such as the community bathhouses will be launched, Short-term studies on housing policy will be performed. In the factory shell component, a number of newly identified shells will be constructed. Work on the Reconstruction Study will continue during Phase 1I. Annex 6 shows the distribution of specific subcomponents between Phase I and Phase II.  -18- Table 3.1: ExpenditurEs by Phase of Project and Subcomponent (Excluding Land, Infrastructure and Sunk Costs) lroect Compone City Ph: I Unt Totcl Ph Unit Total Projct Total Cos USS II Cost US$000 US$000 USS 000 USS 1. HosNg8. a. Compleion Gumri 385 2400 924 350 4000 1400 2324 Spitak 102 2000 204 52 4000 208 412 Vanadzor 370 2000 740 300 4000 1200 1940 b. StrUgienns Gumri 0 0 200 3000 600 600 Spitak 0 0 3000 150 IS0 Vanadwr 0 0 160 3000 780 780 c. SingtFamily Guni D.a 89 | .A 731 820 Housing Spitak .sa 89 U.s 687 776 Vaned=zo v. 89 u.a 692 781 2. Municipal Services A. Basthouses Qumin 4 20,000 80 27 20,000 540 620 Spitak 3 20,000 60 5 20,000 100 160 Vanadzor 3 20,000 60 6 20,000 120 IS0 Solar Heaing 30,000 30 6 30,000 IS0 210 b. Infiaructars Gumui 0 500 500 SpitiStep 504 0 0 504 Vanadzor 0 500 500 c. Comunuity Faciitie 600 600 3. Factory Gumnn 2 2,114 0 0 2,114 Complete Spitak 1 507 1 1,000 1,507 Vaadwor 2 2,423 1 1,000 3,423 6. TA & T=rainng Cona. & Ptocuremnt 300 900 1,200 HousingPolcy 100 100 200 EArthquake Racon.Study ISO IS0 300 Ebrthquake Engineering Cofter 180 IS0 Evaluation of Phase V[ Phate II 350 350 7. Superviion & Adminbstation 388 632 TOTAL 9,238 12,i26 21,764 Condngercies Physical TA 10% 132 154 286 Works, ec. 15% 1,187 1,645 2,835 Price (Is%) 15% 1.583 2.149 3.732 GRANDTrOTArL 12,140 16,477 28,617 ecW2U, 199J  -19- C. Procurement 3.10 The project elements and procurement arrangements are summarized in Table 3.2. All works, equipment materials to be financed from the Association credit proceeds would be procured in accordance with the Bank/IDA Guidelines for Procurement. SUMMARY OF PROPOSED PROCUREMENT ARRANGEMENTS' (US$ million) 7able 3.2: Procurement Arrangements Procurement Method ICB LCB OTHER N.B.F.' TOTAL 1. Land Sites & Infrastruc. 1.7 1.7 2. Sunk Costs 15.6 15.6 3 Housing a. Completion 6.0 0.2 6.2 (6.0) (6.0) b. Strengthening 1.9 0.1 2.0 (1.9) - (1.9) c. Single Family Hous. (2.4) (0.8)# - (3.1) 4. Municipal Services a. Bathhouses (1.2) (0.4) - (1.6) b. Infrastructure (0.5) (1.5) - (2.0) c. Community Facil. (0.8) - (0.8) 5. Factory Completion (2.0)r (6.6) (0.7)3' - (9.3) 6. TA & Training - - (2.3)dI 0.5 (2.3) 7. Supervision & Admin. (0.8) _ _ (0.8) TOTAL 2.5 19.6 5.8 18.1 46.0 ________________________ (2.5) (19.6) (5.8) - (28.0) Note: Figures in parentheses are the respective amount's financed by IDA/IBRD. a/ Figures may not add to totals due to rounding. b/ Non-Bank Financed; financed 100% by the Government or other financing agency. cJ Local shopping d/ Consultancies e/ Construction materials  -20- 3.11 Civil Works. The civil works included under the project consist of: (a) completion of apartments in scattered buildings in Gumri, Vanadzor and Spitak; (b) strengthening of buildings, previously occupied but vacated after the earthquake; (c) development of single family housing, d) completion of factory shells; (e) bath houses; and (f) infrastructure. 3.12 Given that the contracts for housing (a), (b), & (c) above would entail predominantly small scale and geographically scattered works and that local contractors' prices are expected to be competitive and well below international market prices, foreign bidders are not expected to be interested. Furthermore, housing completion, strengthening, infrastructure and factory completion components are partly constructed and unsuitable for the international competive bidding procedure. Therefore, civil works conas with a contract price below US$1.5 million and a total value of US$19.6 million would be awarded through local competitive bidding. In addition, contracts for small value (price below US$80,000) shall be procured on the basis of price quotations from at least t ree local bidders and are expected to have a total value of US$2.0 million. 3.13 Bank Standard Bidding documents: "Procurement of Works (Smaller Contracts)" have been fialized for Armenia. The Russian translation for this project was approved by the World Bank's legal department. 3.14 Goods. The goods to be financed from the credit proceeds include construction materials, office and equipment and supplies, resource materials, furniture, computers, and vehicles. To the extent practical, these items would be grouped into procurement packages. Contracts for equipment and materials estimated to cost more than UF$50,000 equivalent each will be procured through ICB. Items that cannot be grouped or groups of itemns estimated to cost less than the equivalent of US$50,000 per contract, or off-the-shelf items such as office supplies and equipment, may be purchased on the basis of obtaining a minimum of three price quotations up to an aggregate value of US$700,000. Domestic manufacturers may be granted a margin of preference for ICB contracts in accordance with the guidelines. The Bank's Standard Bidding Documents for Goods, as modified to suit the project requirements, will be used for ICB. 3.15 Consultants. Consultants for technical assistance financed under the project (totalling) US$ 1.9 million) will be selected in accordance with the "Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency'. Sample formats for consultants services contracts will be used for contracting consultants. Long-term technical assistance from abroad would be contracted for the project management subcomponent. Long term local consultants would also be hired for the PIU. Other technical assistance would be short-term, individually recruited consultants, with assignments ranging from two weeks to about three months. They will be hired on the basis of comparing at least 3 CVs. There is sufficient local expertise for consulting assignments under the project. Technical assistance contracts would comprise about four contracts for US$1.6 million; about 10 contracts with individual short-term international consultants of about US$20,000 each; and about 30 contracts with local consultants average value US$3,000. Training, activities are expected to be included in TA contracts. Overseas training would be carried out through Bank/IDA procedures. Direct contracting with local and/or foreign training agencies and universities would also be used. 3.16 It is estimated that about 80 main contracts ranging from US$10,000 to about US$1.5 million will be signed during the life of the project. These contracts will cover above 90% of the loan amount.  -21- 3.17 All contracts for goods of a value exceeding US$100,0(0 equivalent and for works exceeding US$600,000 equivalent will be subject to the Association's prior review. All consultant contracts, with the exception of contracts estimated to cost less than US$100,000 equivalent, would be subject to prior review. The Association will, however, review terms of references, short lists, and consultants' profiles for local individual consultants. Selective post review of awarded contracts below the threshold level would be carried out on about one in 20 works contracts and one in four goods contracts. All procurement activities will be coordinated by the PIU. The unit presently includes one local person with procurement knowledge and a long-term project implementation consultant, Contracts Manager has been engaged to assist the Unit in this area. 3.18 Procurement information would be collected and recorded as follows: (a) prompt report of contract award information by the Borrower; and (b) comprehensive quarterly reports to the Association 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 foi individual contracts, and (iii) compliance with aggregate limits on specified methods of procurement. A procurement implementation plan is shown in Annex 11. D. Disbursements 3.19 The proceeds of the Credit would be disbursed in US dollars against: a. 100% of foreign expenditures for equipment and 80% of local; b. 100% of foreign and local expenditures, net of taxes, for civil works contracts for the housing, municipal services and factory shell components; and c. 100% of expenditures for technical assistance, training and studies. 3.20 The estimated Disbursement Schedule is given in Annex 10. It is expected that disbursements would be completed by the Credit Closing Date of June 30, 1996. 3.21 Disbursements would be made against standard Bank/IDA documentation. Disbursements for contracts, building materials, equipmeat and training with a total value of less than US$50,000 would be on the basis of statements of expenditures (SOE). In order to ensure the timely provision of funds available to finance the costs of the project, it is proposed that the Government establish a Special Account in the amount of US$3 million. Funds in the Special Account would be available to finance only eligible expenditures under the project. At negotiations, agreement was reached regarding the arrangements for establishing and operating the Special Account (para 4.1 i). E. Accounts and Audits 3.22 The project accounts will be prepared by the PIU during project implementation (para 3.3). The Project Account would identify all sources and uses of funds in carrying out the project, including a detailed accounting of the use of the proceeds of the Credit and the operation of the Special Account. The Project Account would be audited by an independent auditor acceptable to the Association and the audit reports would be submitted to the Association within 4 months of the end of the fiscal year. The audit reports would contain a separate opinion on the operation of the Special Account and the  -22- statements of expenditure (SOE) procedure, when utilized. Since the auditing profession is not yet well developed in Armenia, it is expected that a private international commercial auditing firm will carry out the audits. During negotiations, agreement was reached regarding the accounting and auditing requirements (para. 4.11j). F. Project Monitoring and Supervision 3.23 Reporting Procedures. The PIU will provide quarterly reports on the progress of implementation. In addition, the mid-term review will allow assessment of progress and adjustments to components. The government will prepare a Project Completion Report according to standard Bank/IDA policy. 3.24 Inplementation Performance Monitoring Indicators. Indicators monitoring the progress of implementation will be collected for the quarterly and supervision reports. These indicators will track the progress of construction in the vatious components, the performance of the enterprises benefiting from the finished factory shells, and the social welfare indicators as well as the progress of housing policy reform. In coordination with the long-term Housing Policy Advisor employed by USAID, indicators of progress in housing policy such as the number of units privatized, the level of state and private housing construction, and the volume and price of housing sales, have been developed. These will be updated throughout implementation both to assist the development of the Housing Policy Agenda and to provide an analytical basis for future operations. 3.25 Supervision schedule. A tentative supervision schedule is attached. The June 1994 mission coincidec, with the mid-term review. It will therefore focus on the experience as of that date and the selection of activities to be financed in Phase II. The October 1994 and February 1995 missions will focus on the experience during the second phase. The August 1995 mission will review project experience and gather d'-a for project closure activities (PCR, etc.). March 1994 Jun 1994 Oct 1994 Feb 1995 Aug 1995 Dec 1995 Task Manager x x x x x x Architect/Planner x x x x Urban Planner x Urban Economist x Industrial Economist x x Financial Analyst x l x 3.26 Because the project is with a new borrower and the components are multidimensional, a greater than usual supervision component of 25 staff weeks a year is recommended.  -23- IV. AGREEMENTS, CONDITIONS AND RECOMMENDATIONS 4.1 During negotiations, the Government confirmed the following agreements: a. That the borrower will submit an action plan on housing policy reform as described in Annex 1.3 at the time of the Mid Term review (para 2.8); b. That the allocation criteria for apartments and single family homes will not be changed without prior approval of the Association (para 2.13 and 2.21); c. Specific arrangements and terms of cost recovery for housing (para 2.15 and 2.22); d. That bathhouses will be operated as contract franchises with users paying a fee to cover operation and maintenance (para 2.23); e. That the costs of completing reconstruction of the factory sbells will be recovered from the enterprises under terms acceptable to the Association (para 2.28); f. That the Government of Armenia will be required to provide priority access to electricity supplies to the enterprises benefitting from completed factory shells (para 2.29); g. That the Borrower will maintain a Project Implementation Unit headed by a full-time project manager, whose experience and qualifications shall be acceptable to the Association, and who shall be assisted by competent staff in adequate numbers (para 3.3); h. That the specific works to be completed under Phase II will be agreed with the Association as a part of the mid term review of the project (para 3.9); L On the arrangements for establishing and operating the Special Account (para 3.21); and j. On accounting and auditing requirements (para 3.22); 4.2 There are no project specific conditions of effectiveness. 4.3 With the agreements reached above, the project is suitable for a SDR 20.1 million (US$28.0 million equivalent) credit under standard IDA terms, with 35 year maturity, to the Government of Armenia.  -24- Annex 1.1 Page I of 2 ARMENIA EARTHQUAKE RECONSTRUCTION PROJECT Housing Policy Reform Program Legislative Achievements and Outstanding Issues A. Background 1. As a member of the Former Soviet Union (FSU) Armenia's housing sector reflects the common problems found in other countries in the region. The Government of Armenia (GOA) recognizes that reform of its housing policies will be necessary to achieve the desired goal of transforming the socialist housing system into a market system. This document summarizes the current status of this reform program. 2. Privatizatilon of Housing. The privatization process has been covered by the Soviet housing privatization policy which charged a price per square meter of housing determined by a formula based on the condition of the unit. Only about 5% of the stock has been privatized in this manner. There is urently a developing market for housing sales, though it is small and informal. 3. New legislation intending to privatize the stock more quickly was passed by the Parliament on June 6, 1993. The legislation allows sitting tenants to take ownership of their units effectively free of charge (i.e., with only a nominal fee linked to the size of the unit). A two year period is allowed for filling such applications, after which ownership reverts to the municipalities. The owners of the privaized units in a building will be organized into a condominium association"; USAID has a project developing formal condominium regulations which are being tested in pilot exercises in Yerevan. The tenants association will be responsible for maintaining their units by contracting with any public or private management organization. The Department of the Economy of the Government Apparatus is responsible for developing the details of implementation. Land under the privatized buildings remains under state ownership. 4. Privathation of land. Legislation privatizing agricultural land was passed in 1991; 80 % of agricultural land has been privatized to date. There is still no general initiative privatizing urban land. Thus, urban land still falls under the statutes of the FSU in which individuals were allowed to own, buy and sell a building but not the land on which it stood although they could be granted a piece of land for individual housing construction. Work is underway to provide a legal and regulatory framework for land sales. 5. Regulation of Urban Land. Tlhe supply of urban land is controlled by a relatively rigid regulatory environment. Transformation of land from rural to urban uses is allowed only with The legal basis for condominium associations is under development, although current cooperative housing legislation provides an interim legal basis.  -25- Annex 1.1I Page 2 of 2 authorization and approvals, even in the cases where agricultural land has been privatized; in rural areas it is still only possible to build housing in designated areas unless explicit approval is obtained. City master plans designate the area available to urban uses. The role of master plans is even stronger in the earthquake zone, where reconstruction is under the jurisdiction of master plans created by outside agencies such as the national city plaming agency. Areas not covered for redevelopment in the master plan cannot be reconstructed. 6. Rent Reforms. As in other republics of the FSU, rents in Armenia all below the cost of maintaing units. Monthly "rent" payments actually cover utilities and trash removal services; this payment is approximately 5% of the amount necessary for full cost recovery. In February, 1993, the monthly payment was increased by a multiple of 6.25, an amount approximately equal to the current 600% annual inflation rate. However, the rent component was increased by only a factor of 5 and currendy falls at about R50 (ess than US$ 1) per month for a four-person household living in a 50 square meter unit. Government officials involved in the formation of housing policy recognize that the current rent policy is neither sustainable nor desirable, but under current economic conditions a rapid reform program is not implement able. However, the Government's plan is to increase rents to cover operations and maintenance and utility charges to cover costs by the end of 1994; there are also some efforts to explore rent reform at the local level as in the case of Yeravan City. 7. Housing Flnance. The very high inflation currently experienced in Armenia precludes the development of a stable, growing housing finance system. The Government is considering mechanisms to collect costs of new housing from individuals through some sort of indexed payment scheme, although it recognizes that any such scheme is bound to be imperfect in the current envirownent. A law covering credit relationships and guarantees-including mortgages was submitted to the Parliament two years ago and is expected to be approved this year. 8. Refonn of State Construction Companies. State construction companies have been included under the legislation privatizing state companies passed last year. Under this legislation, employees will get 20% of the shares-and the equivalent portion of profits-in their enterprises. Tle Government's plan is to complete the privadzation process by year's end. The government has already liberalized building materials prices.  -26- ANNEX 1.2 Page I of 2 ARMENIA EARTHQUAKE RECONSTRUCTION PROJECT Housing Policy Reform Program Housing Policy Reform: Statement of Intent" 1. The Government's basic policy objective for the housing sector is to transform the current socialist system into a market system of housing. The Government's role in a market housing system wil be to facilitate the efficient private provision of housing for all Armenians and to assist lower-income families who are not able to afford reasonable housing. Individuals should be allowed to provide themselves with the type and location of housing which meet their needs. The transformation will require constitutional changes as well as reforms of laws, regulations and institutions. 2. Istitutional Reforms. The government will restructure public agencies to adjust to their new role as facilitator in the provision of housing rather than direct providers of housing. The Government will also review the division of responsibilities between central and local government to facilitate this end. 3. Basic Framework of Property Rights. Armenia will further develop the legal basis for a basic framework of property right able to support fully the emergence of competitive housing markets by clarifying the ability of individuals and public or private institutions to buy or sell, rent, occupy and use land and housing. 4. Housing Flnance Development. The government recognizes that long-term credit such as housing finance can only exist in a stable macro-economic environment and will do everything in its power to create such an environment. Armenia also recognizes that a sustainable housing finance system will require a coherent program of financial sector reform. Armenia has begun to establish the legal framework for housing finance, including laws on real estate mortgages, property registration, foreclosure and eviction, and will continue these efforts. In the few cases, such as the Earthquake Zone, where the Government is still actively involved in the provision of new housing, credit mechanisms will continue to be used as a mechanism for cost recovery. 5. Rent Reforms. The Government is committed to raising rents in the public housing stock in order to ensure adequate resources for maintenance of the existing stock, to ensure fiscal survival of local governments and to integrate the market for new and existing housing. The Government recognizes that households may hesitate to privatize their units until rents approach :^e costs of ownership. In raising rents, however, the Government will remain committed to alleviatir, the addition burden placed on vulnerable and low income families through a temporary or permanent targeted subsidy program. 6. Subsidies. The Government recognizes that large-scale subsidies going to the housing '2Prepared by the government for the pre-consultative group meeting of May 1993.  -27- sector threaten central and local governnent fiscal stability, especially the subsidy created when the cost of operating and maintaining the state rental stock exceed rents. The current program to privatize housing is designed to address this problem. The Government also recognizes that current programs do not assure that subsidies go to the neediest households. Within the framework of a targeted social policy,  -28- ANNEX 1.2 Page 2 of 2 mechanisms will be explored to target subsidies to such households, to make the subsidies explicit and to control their impact on government finances. 7. Housing Privatization. The Govermment commits itself to implementing this Privatization Act fully during 1994 and to submit facilitating regulations and laws, such as those such as those allowing condominium associations by September 1994. 8. Building Codes and Standards. The Govermnent will review current building codes and standards to insure that they meet public health and safety needs without imposing excessive costs. Reaiistic standards meeting this principle, including seismic safety codes, will then be enforced. 9. Urban Land Polcy. Mechanisms will be created to facilitate the development a private market for land ownership and development. Use of urban land will be subject to new zoning and other land use regulations that balance public and private interests; allow participation by private parties in decisions regarding land use; and that protect health and safety, environmental and historical amenities. 10. Building Industry Privatization and Restructuring. The Government is committed to rapid progress in reducing the role of public institutions in the construction of housing, restructuring state construction companies and removing obstacles to private construction companies and building materials industries. The government will introduce competitive bidding procedures in state construction projects. 'Me Government will establish a legal and regulatory framework for a competitive building industry (such as regulations on insurance, guarantees and bonding) to assure that the public interest is protected without creating unreasonable barriers to entry for small private firms. iI. Housing Management and Maintenance. The goal of the Government will be to withdraw rapidly from direct responsibility for housing maintenance. The Government will encourage the formation of condominium associations that would shift responsibility for maintenance from public provision to the associations. The Government will amend cooperative housing laws so that they can function similar to condominiums both in terms of building management and unit sales. The Government will allow private companies to compete for maintenance contracts for the remaining state buildings. 12. Cost Recovery. The Government of Armenia intends to transfer the responsibility for the costs of housing to private individuals through three mechanismns: a. Privatization of the publicly-owned housing stock, to transfer the responsibility for maintenance costs to private individuals; b. Withdrawal of the Government from the direct construction of housing except for special cases (e.g., the Earthquake zone); and c. Using credit mechanisms to recover at least part of the costs of construction in the few cases where public construction will occur.  -29- ANNEX 1.3 Page I of 2 ARMENIA EARTHQUAKE RECONSTRUCTION PROJECT Housing Policy Reform Program Housing Policy Reform: Program for External Assistance Based on the analysis of the current status of Armenian housing reform and the Government of Armenia's Statement of Policy Intent, the Government of Armenia proposes the following outline of how a technical assistance/training program could function in parallel with the International Development Association assisted Earthquake Reconstruction Project. The TA program is oriented towards assisting the Government in implementing its general reform agenda. This assistance would be coordinated with that of other multi-lateral and bi-lateral agencies such as the EEC and USAID which may be working in the area. The Office of Housing Reform of the Russian Republic has also offered assistance in the form of sharing its experience in developing a reform agenda. a. Technical assistance will be provided in two stages, largely corresponding to the Phases I and II of the International Development Association project: (i) Phase I: Development of the Housing Reform Agenda. Long-term local consultants would be employed to assist the coordinating unit. It is proposed that these individuals be housed in a special division within the Ministry of Economy. These consultants will develop a work program for the necessary legal reforms and policies. The consultants will have backgrounds in economics, urban planning or law; their selection will be monitored by the coordinating unit. Monitoring indicators to track the pace of housing sector reform should also be identified. This work can be supplemented by the training activities described below. The Director of the Office of Housing Policy Reform of the Russian Republic has offered assistance in developing this agenda. (ii) Phase U: lnitiating Implementation of the Program. The long-term consultants will be supplemenkted by domestic or expatriate consultants to work on specific studies identified as high priorities in the Reform Agenda. It is assumed that approximately 4 studies, each with 6 staff weeks of input, will be performed. Again, the Russian Republic has offered to assist by providing copies of their proposed legislative and regulatory initiatives. b. Training. Specific training activities in support of the development of the reform agenda or its implementation will also be undertaken. These activities may include:  -30- ANNEX 1.3 Page 2 of 2 (i) Study tours to Russia, other parts of the FSU, and East and West European Countries to discuss housing reform. (ii) Participation in international conferences or training seminars on these topics. (iii) Provision of draft legislation and research materials on housing policy in reforming socialist economies. Given the reliance on local consultants, assistance mainly from the Russian Republic, the costs of the program will be low. It is estimated that the total budget will be approximately US$200,000. c. Monitoring the Reform Process. USAID's resident advisor on housing policy has agreed to assist the GOA in designing indicators to track the development of the housing sector and the housing policy reform process. These will consist of: (i) Housing Production. Housing Units finished annually; (a) Public (b) Private (ii) The government Housing Production Budget; (iii) Progress of Privatization. Number and area of Housing Units privatized annually and cumulatively; (iv) Number of condominium associations formed; (v) Hectares of urban land privatized (when land privatization law is enacted); (vi) Government housing maintenance budget, and (vii) Development of Housing Market (a) rate and average price of housing sales (b) house price to income ratio  -31- ANNEX 2 Page I of 3 ARMENIA EARTHQUAKE RECONSTRUCTION PROJECT Cost Recovery 1. Apartment Completion. According to the housing policy of the government of Armenia, new housing will no longer be provided free of charge. However, the GOA recognizes that under current economic conditions, full recovery of construction costs will be impossible and any cost recovery scheme will be imperfect. Nonetheless, the government feels that this is a crucial moment for establishing the new policy and an attempt should be made to establish the precedent through even an imperfect cost recovery program. The government has already determined that a program funded by the Government of the Russian Republic will be designed to resemble a credit program, though it will not pass through the banking system. In other words, recipients of housing units will r-ceive a credit, which they wal then be required to pay back. Both the balance and the payment will be indexed. a. Ioan Balance. 'Te initial loan balance will be calculated by applying the average cost per square meter of completing apartments by the size of the unit. The loan balance of serviced lots and single family housing will be the cost of infrastructure and core houses, since the land will be provided at only a nominal fee; b. Monthly payment calculation. The monthly payment will be determined by dividing the initial dollar value of the loan after the up front subsidy (see below) by the number of monthly payments to be made'3; C. Number of Monthly payments. Payments will be made on a monthly basis for twenty five years; d. Down payment. There would be a nominal cash down payment as established by the GOA; e. Subsidies. An up-front subsidy of 75% will be provided on equity grounds a per the provisions of the law on mass privatization of housing. The monthly payment for the average unit is 25 % of a minimum salary'4; 13 This corresponds to a real interest rate of approximately zero (or slightly negative after dollar inflation). While such an interest rate is not normally acceptable under bank policy, it is significantly higher than the current ccirnmercial rates in the FSU which are substantially negative. Thus, this system will at least be less damaging than cther systems that might be employed. 14 This amount is only slightly above the average of willingness to pay cited by residents of the EQZ surveyed in the sociological survey conducted by the Project Preparation Unit.  -32- ANNEX2 Page 2 of 3 f. Indention method. Loan balances will include a dollar value maintenance clause. Monthly payments will be indexed to the minimum wage; 8. bLan Collateral. The households receiving the units will own them. However, in the short run, the government will retain title as a form of collateral. As soon as the legal framework currently under consideration in the Parliament is passed, title will be passed to the nouseholds and a format mortgage registe -d; h. Owner Occupancy. Recipient households would be required to occupy their units for five years. After that date, they could sell to any other individual willing to assume the debt; and i. Specl Conditions. Beneficiary households will be required to surrender their temporary housing unit and any rights to its location. Beneficiary households which were not able to meet the monthly payment could perform community service (e.g. landscaping, painting, work in community centers, etc.) for up to 2 years. The program would be administered by the municipality. 2. Single Family Housing. Cost recovery for single family housing will employ a mechanism similar to that of apartment completion with the following modifications: a. Amount of Loan. The initial amount of the loan will be the cost of providing services to the lot and of constructing the coi house. Land will be provided in accordance with existing legislation, i.e., at a nominal fee; b. Subsidies. Subsidies not exceeding 25% of the loan amount will be provided on equity grounds as per the provisions of the law on mass privatization of housing; c. Owner Occupancy. Recipient households will be required to occupy their unit for at least three years, after which it may be sold to any individual wi1ling to assume the loan; and d. Special Conditions. Recipients of serviced plots without core houses will be allowed to transport their temporary housing units to the site allocated to them. Otherwise they will surrender the unit. Al! recipients must surrender any rights to the current location of their temporary housing unit. Community service will not be allowed in lieu of payment. 2. Factory Shells. Since the enterprises chosen to participate in the project were selected according to their profitability (among other factors) they will be required to cover all the incremental costs of construcdon. 'he loan agreement will be signed by the enterprise prior to signing the contract fir construction of the shell and will include the following terms:  -33- ANNEX 2 Page 3 of 3 a. Amount of Loan. Full incremental costs of construction expressed in dollar value; b. Term. The loan will have a 15 year term including a three year grace period during which interest will be capitalized. The enterprise will be required to sign the loan agreement before the initiation of construction, although the loan itself, and the accrual of interest, will not begin until completion of construction; c. Interest rate. The loan will have an interest rate 0.5 % above the World Bank lending rate; d. Monthly Payment. Will be made in any currency with a dollar maintenance clause; and e. Collateral. Title to the unit would be held by the government unti the enterprise is privatized, at which point a mortgage would be registered. The GOA has confinned its agreement with each of the terms and procedures outlined above.  -34- ANNEX-3 Page I of 3 ARMENIA EARTHQUAKE RECONSTRUCTION PROJECT Summary of Economic Justification's 1. Housing component. Several factors in the Armenian environment make calculation of a classic economic rate of return analysis difficult if not impossible for the housing sub components. Calculation of the costs of the program can be performed relatively easily, however, benefits are more difficult to calculate. The Government has only begun its housing reform program, so rents have yet to be raised to a level which will allow them to be used as the shadow price of housing. A housing sales market is developing, but is still to small to serve this purpose. 2. Nonetheless, it is possible to demonstrate that the subcomponents pursue the project's objectives with as high a level of economic efficiency as is possible in the environment (see para 2.10). Subcomponents have been selected so as to use the least costly methods of supplying the population of the earthquake zone with housing as rapidly as possible. Table 1: Average Cost of Finishing Uncompleted Apartments Avg. Cost-Phase I Avg. Cost-Phase II Housing Completion US$2200 US$4000 Housing Strengthening US$3000 Single Family Housing US$2835 3. Factory Shell Component. Completion of the factory shells was subjected to a financial analysis and the economic viability of the component can be demonstrated in two manners. 4. Economic Rate of Return. First, the completion of the shells can be analyzed according to classic economic rate of return analysis. In this case, the estimated incremental profits after completion of the shells was counted as benefits while the incremental costs of completion was counted as costs. Ideally, project benefits and costs would be calculated using shadow prices reflecting their real economic values. However, given the wide array of price distortions on both the cost and benefit sides, accurate calculation of shadow prices may not be possible. As a consequence, future profits were subjected to a sensitivity analysis where it was assumed (Scenario 2) that they would only be 75% of projections and (scenario 3) that they would only be 50% of projections. 5 Detailed data on cost estimates for all components and financial projections for the factory shell component are included in the project files.  -35- ANNEX 3 Page 2 of 3 5. As can be seen, the Gumri Textile Factory"6 falls below the accepted rates of return in all scenarios while the Gumri Armelectrocondenser Factory falls below acceptable rates in the more stringent scenarios. All other rates of return are high and robust across scenarios. Table 2: Rate of Return Analysis - Factory Completion Shell Component Enterprise Scenario I Scenario 2 Scenario 3 Gumri Textile 3% -1% -6% Gumri Armelectrocondenser 12% 7% 1 % Spitak Clothing 38% 28% 17% Vanadzor Precision Tool 47% 35% 22% Vanadzor Fur 70% 52% 34% 6. Debt Service Capability. In addition, eacn factory was analyzed to determine whether it could service the debt incurred to finish the shell under the terms negotiated for thk leases (and the implicit sub-loans). For a loan at 8.5%, 15-year term, and 3-year grace period, an enterprise must repay R150,977 yearly for each R1,000,000 borrowed. The total funding required by each enterprise, their annual loan payment, and projected annual after-tax profit are shown in the table below: Table 3: Enterprise Profit and Annual Loan Payments Total Funding Annual Loan Proj. Annual Enterprise Required (Rubles) Service Payment Profit Gumri Textile R1,576,800,000 R238,060,530 R131,695,000 Gumri Armelectrocondenser R537,600,000 R81,165,235 R81,740,000 Spitak Clothing R507,200,000 R76,575,534 R135,771,000 Vanadzor Precision R1,440,000,000 R217,406,880 R445,175,000 Machine I_I_I Vanadzor Fur R983,200,000 R148,44e,580 R523,621,000 16 A reduced alternative that seem to meet all selection criteria is presently subject to cost estimates and preparation for inclusion in Phase II.  -36- AN-NEX 3 Page 3 of 3 As in the rate of retum analysis, It was found that the Spitak and Vanadzor were more than sufficiently profitable to service a loan to finish their factory shells. The Gumri Armelectrocondenser was also able to service the loan, though by a less impressive margin. The Gumri Textile Factory can not service the level of debt requested. 7. Condusion. On this basis it was determined that completion of the factory shells for all but the Gumri Textile plant was economically justifiable. In that case, discussions have been opened with the factory's management to determine whether the size of the shell can be reduced or another enterprise can be found to share the facility and part of the cost. As a consequence, this factory shell has been tentatively included at its original cost until the detailed information about the reduced alternative is available. If no satisfactory arrangement can be reached in which the loan can be serviced, the funds will be re-allocated to other components at the time of the mid-term review.  -37- ANNEX 4 Page I of 2 ARMENIA EARTHQUAKE RECONSRUCTION PROJECT Issues in Contracting and Procurement A. Issues in Contracting and Procurment 1. hnportation of Construction Materials. A high proportion of the materials needed to finish constuction-wood, windows, doors, glass, reinforcement steel, plumbing fittings, etc.-niust be imported. Interviews with numerous building materials importers have shown that creative solutions are being employed to bring such materials in through the blockade. These importers report that the time from order to delivery is approximately one month."7 Contractors bidding on construction contracts will be expected to arrange for the importation of the materials they require. The tender documents will request information on the techniques they intend to employ. 2. Currency Provisions. Because of recent inflation and currency turmoil, all bids for ICB and LCB contracts will be expressed in hard currency, as has been agreed with GOA. 3. Price Adjustment. There will be no price adjustments. 4. Advance Payments. A maximum of 20% advance payment to successful contractors is proposed to provide initial cash for the start-up of works. 5. Alternative proposals. Alternative proposals will not be invited. The limited scope of work and experience of the bidders create difficulties in evauating other proposals. If required, modifications can be made as variation orders. 6. Bidding procedures. The bidding period for LCB contracts will be 30-45 days, depending upon the size of the contract. The bidding procedures have been discussed with the Ministry of the Economy. Subsequently, bids will be submitted for opening in public as stipulated in the tender documents. The bid evaluation will be undertaken by the Project Office with assistance by consultants. The post qualification of contractors will form an important part of the bid evaluation. Award of LCB contracts will be proposed by the Project Manager, an evaluation report will be sent to the Association task manager for review before award of contract. 17 In fact, a large quantity of materials traded between Russia and Iran apparently still travel via Armenia.  -38- ANNEX 4 Page 2 of 2 B. Technical Assistance and Training in Procurement 7. Training. Two training seminars have been planned as part of the start up of the project. The first, which took place in June 1993, was a four day seminar designed to make Armenian contractors familiar with how a competitive construction industry works and in particular how to prepare bid proposals. The course was conducted in Armenian with assistance from the American University of Annenia. Representatives of over 20 construction firms, 7 of them private firms, attended and the course was well received. A second training seminar in World Bank/IDA procurement techniques will be offered to GOA staff expected to be involved in procurement for this or other Bank or IDA financed projects. 8. Technical Assistance. While the use of competitive bidding procedures to award construction contracts is consistent with the GOA's goal of privatizing the construction industry, there is little experience with such mechanisms and no experience with World BankIIDA procedures. An experienced international consultant has been employed, as a contracts manager who will ensure correct and efficient bidding and, with the assistance of the American University of Armenia, will provide technical assistance contributing to development of a competitive construction industry in Armenia. He will also be responsible for advising on the quality and quantity control within the project. All direct project supervision of the individual projects will be carried out by local consultants, and the Contracts Manager has already introduced proper quality and quantity control systems and he will monitor the local consultants, thereby contributing to the development of an efficient local consulting industry.  -39- ANNEX 5 Page 1 of 4 ARMENIA EARTHQUAKE RECONSTRUCTION PROJECT Regional Economic Study of the Earthquake Zone and Long-Term Infrastructure Investment Strategy Terms of Reference 1. Background. Northern Armenia has suffered two devastating blows. First, the 1988 earthquake destroyed much of the economic capital, infrastructure and housing. Then, the breaking up of the Soviet Union stopped the massive reconstruction effort started shortly after the earthquake, while the accompanying economic and political changes have isolated Armenia from its traditional markets and supplies. Energy supplies in particular have been reduced to a trickle. The earthquake zone is now experiencing severe social and political distress which, together with massive unemployment, has induced some emigration. 2. Objectives of the Study a. To Develop a Regional Economic Plan to reduce disparities between the earthquake zone and the rest of Armenia in income per capita and rate of employment by enhancing employment, exports and productivity; b. to identify the sectors/subsectors in which the region has or could develop a comparative advantage or potential for growth, together with an implementation strategy; and c. to design a public investment program for long-term reconstruction of urban, technical and community infrastructure, supporting the Regional Economic Plan. 3. hnplementation. The study will be carried by Armenian specialized institutions and individuals, with assistance and supervision by the Project Implementation Unit. It is anticipated that a considerable amount of preliminary data review and preliminary interviews with knowledgeable individuals will be necessary before any primary data collection can be started. Hence it is suggested that the study be undertaken as soon as possible after approval of the project loan. The total duration of the study is estimated at approximately nine months. An intermediate report showing preliminary results of data collection (regional economic audit and urban/infrastructure survey), and preliminary work on the regional economic plan and investment program, should be submitted by August 1994, and the final report should be completed by January 1995. 4. Regional Economic Audit. It is crucial to identify clearly the region's existing economic strengths. Therefore, a regional audit will be undertaken to identify sectors in which the region has, or could have, factor advantages or growth opportunities, such as specific comparative advantages, scale economies, export-based growth or import substitution. [Examples could include, depending on the sector, strong human capital resources, cost advantages or indigenous raw materials].  -40- ANNEX 5 Page 2 of 4 5. It will also be important to identify the obstacles to growth in the selected sectors. Examples could include inadequate infrastructure, rigidity of economic/industrial structures (e.g. monopolies), or the lack of favorable environment for start-up businesses and SMEs. 6. The consultant will review existing data on economic activity in the region, conduct interviews with policy makers, academicians and other knowledgeable informants, and carry out surveys where necessary. The goal will be to assess the viability of specific industry sectors in the market economy in which Armenia will be functioning in the future - given the likelihood that it will have more diversified trading partners than under the Soviet system. 7. Regonal Urban and Infrastructure Survey. In parallel, an overall survey of the regon's urban, technical and community infrastructure will be conducted. It will include (i) a comprehensive inventory of existing infrastructure and earthquake damages, together with current plans for reconstruction, completion or new investment, and (ii) an assessment of the adequacy of existing infrastucture and proposed investments in supporting an enhanced level of economic activity in a profoundly modified environment. In particular, the survw y will investigate the following: a. a brief review of the region's sLdtlement and population patterns and its urban hierarchy, as modified by recent events (unemployment, population displaced by the earthquake, political refugees and emigration); b. a review of the urban and regional master plans and of the related regulatory framework, in particular where they affect the allocation )f land and facilities for industrial, commercial and residential use; plans for duMaged residential and industrial buildings (repair, reconstruction or demolition with rezoning and redevelopment of the site) will also be reviewed; c. a review of the housing situation (e.g. damaged or destroyed housing, temporary 'domik' settlements, resulting housing needs, new types of housing, land development requirements); d. technical infrastructure and services (e.g. energy supply, roads, railways, public transportation, water and sewerage, international and national telecommunications); e. identificaion of possible environmental issues (e.g. industrial pollution, treatment plants, energy wastage); f. higher educational facilities and research institutions; and g. other social-cultural infrastructure such as health facilities, prinary and secondary schools, recreational and cultural failities; Where feasible, the findings of the survey will be illustrated with maps.  -41- ANNEX5 Page 3 of 4 8. Regional Economic Plan and Investment Program. The Plan to be developed by the consultant will include the following overall elements: a. Identification of priority sectors/subsectors as discussed above; b. Recommended criteria for allocation of infrastructure investment; c. A strategy for the removal of obstacles to growth, and measures to stimulate growth; and d. Development of an approach for vectoring donor assistance to the region. The Plan should recommend specific actions in the three categories detailed below: 9. Policy Measures. This category includes components which can be established by governmental action and which have the result of improving the business climate or otherwise stimulating eonomic activity in the region. Examples of such actions are: e Regionally discriminating credit or taxation policies based on sectoral analysis; e Priority access to energy or other supplies; e Priority access to credit or equity capital; a Facilitation of access to land and other facilities through mastwr plans and land use regulations; and - Measures to promote foreign direct investment or Joint ventures. 10. Infrastructure Investments. Investments in infrastructure should stimulate economic activity in the, region, support the actions recommended in the regional economic plan and, by relieving hardship, provide the region's population with a more positive outlook for the future. The consultant will develop the elements of an investment strategy, including: a. a method for the evaluation of proposed investments b. a set of criteria for deciding the priority and timing of investments; c. a list of infrastructure investments in the different areas reviewed in the infrastructure survey (see E above), including existing and new proposals; and d. a ten-year investment strategy, justified in view of the overall objective, including investment projects recommended, evaluated and prioritized by the consultant, together with preliminary cost estimates.  -42- ANNEX 5 Page 4 of 4 Examples of possible investments that could be considered, in addition to essential reconstruction needs, are: e Strengthened communications infrastructure, e.g. to facilitate interaction between research/educational institutions in Yerevan and enterprises in the region; * Development of solar energy for industrial and domestic hot water production; * Construction of enviromnentally safe sewerage systems for priority industrial zones; * Residential land development for owner-builders, and upgrading of "domik" settlements, providing employment in public works and small-scale private building firms; and * Small hydro-electric dams; 11. Training, Technical Assistance and Business Support. A third category of actions, requiring investment, could include: * Locally-available management/entrepreneurship training and consultative assistance (eg, help with procoss and product technologies); * Export promotion, potentially provided along with other needed business support services: X Alliances between research/educational institutions and enterprises; and * Technical assistance with enterprise restructuring or enterprise business strategy;  43- ANNEX 6 Page I of 2 ARMENIA EARTHQUAKE RECONSTRUCTION PROJECT Action Plan by Phase of Project and Subcomponents Pre-Implementation Phase I Phase U Housing Unit All cost estimates and design Construction of initial Construction of Phase Completion studies; Tendering process and projects; Selection of units for II contract awards Phase U and preparation of l ___________ ________________________ tendering documents Strengthening Engineering, feasibility and Selection of units and finalized Construction of pilot cost studies cost estimates; tendering and strengthening projects. contracting. Single Family Design studies and cost Initial phase of construction to Construction of Housing estimates test concept; Tendering and expanded pilot proj,.ct I ________ ___________________ contracting for Phase n I r___________ Municipal Services l Bathhouses Design studies and cost Initial construction projects; Expanded construction estimates; tendering and evaluation of suitability to contracting of Phase I community needs; tendering and contracting for phase II l Water and ICB contracting of engineering Contracting of Construction of sewer study Stepanovan/Spitak project; Stepanovan/Spitak Design studies for other Water project possible projects Factory Shells Design and cost studies; Begin construction of small Finish construction evaluation of beneficiaries; shells; small shells; start tendering and contracting construction large shells TA, Training, Consultancies Housing Selection of long term TORs for short tern Policy consultants; Preparation of consultancies; action plan completion of studies  -44- Pre-Implementation Phase I Phase n Regional TOR for study Star study Finish study economic sWtdy Procurement Training in tendering and Long-term contract manager Long-term contract general procurement; select in place; manager; long-term consultants  -45- Page I of 2 ARMENIA EARTHQUAKE RECONSTRUCTION PROJECT IMPLEMENTATION PLAN ACTIITY START COMPET BY IN CHARGE LO I OF PASE I (World ft procrencw appmv4l, lcal compedwv bidding) HOUSE COMPLETION. SPUAX WATER PIPE DESIGN & COST ESTDMATES 1993, 07.01 JP DD DOC ENGLISH) 07.01 AB RUSSIAN TRANSLATION 07.01 AB BID DOC1PROC. APOVAL 07.15 FS BID ADVERTISEMENT PREPARE 07.15 TM BID ADVERTISEMENT APPROVAL iM7.20 FS ID ADVERTISEMENT PUBLISH 07.23 M. BC. BIDDING 08.30 PD 9ID OPENING 08.30 TM BID EVALUATION & REPORT 09.22 PD/M. BC. BID EVAL. APPROVAL WB 10.08 CoMactor I AWARD OF CONTRACr 10.10 CONTRACTOR MOBIIZATION 11.01 CONTRUCnION PERIOD Vari LO 2 OF PHSE I (main wnber qfcnaucu) BATH-HOUSES HOUSE COMPLETION, SINGLE FAMILY HOUSES, FACTORY SHELL DESIGN & COSr ESTIMTES I 1993. 08.01 PD BID ADVERTISEMEN PREP. & PUBLISH 10.08 PS Bi OPENING 1125[ MIN. EC LOT3 OFPMSE I PACTORY SHELLS LCB DESIGN AND COST ESTIMATES 1993, 11.01 PD BID ADVERTISEMENT PREPARATION & 11.22 PD PUBLISH 12.17 M. EC BID OPENING CONSULTANTS, INTRNATIONAL CONTRACTS MANAGER PREP OF TERMS OF REFERENCE 199,06.30 TM PREPARATION OF ADVERTISEMENT 0630 USAID SUBMISSION OF PROPOSAL 0730 EVALUAIION OF PROPOSALS USAIDA1M CONTRACTING 11.15 USAJD MOBIL1ZATION 11.20 CONSULTANTS LOT4 PHASE I RETENDERING  46- _______ - = ACTIVITY START COMPLETE BY IN CHARGE BDW DOCUMENTS 1993 11.01 BID ADVERTISEMENT, PUBLISH 1994 01.03 PD BIDDING 01.03 01.31 Contractor BID OPENING 01.31 MIN. ECON. BID EVALUATION & RBPORT 01.31 02.15 PD BID EVALUATION, NO OBJECTION 02.16 02.25 TM AWARD OF CONTRACT 02.25 Min. Econ CONTRACrOR MOBILIZATION 03.01 03.10 Contractr CONSMRUCTION 03.10 Vanes To be done as pant of ptoject preparation for Phasc 1993,09.01 1994,05.01 PDtTM FACTORY SHEllS SBLBCTIONCRnE" REVIEW 1993,11.15 1994, 01.1S Consultant FACTORY SCREENING 11.15 01.15 PDItTM DETAIE ANALYSIS 02.01 03.01 Consultant DESIGN REVIEW 03.01 04.01 CM "BD)DOCUhBIS I 04.01 05.01 CM  47- ANNEX 8 ARMENIA EARTHQUAKE RECONSTRUCTION PROJECT Contents of Implementation Volume Annex 1: Social Survey of Residence of Temporary Housing Areas Annex 2: The Construction industry Annex 3: Water Supply and Sewerage Subcomponent Annex 4: Local Governments and Housing Management Bureaus Annex 5: Housing Completion Subcomponent Annex 6: Seismic Strengthening and Repair Annex 7: Single Family Housing Subcomponem Annex 8: Community Bathhouses Subconiponent Annex 9: Factory Shells Subcomponent Annex 10: Disbursement Schedule Annex 11: Procurement Schedule Annex 12: Implementation Responsibilities  Kn ; i i~~~~~~I - 8t -~~I *~~~~~~~I 6f ;:lll  -49- ARA EARTHQUAKE RECONSTRUCTION PROJECT E;timated Schedule of Disbursments of the IIDA Credit ____ __________ _____________ i___,._._,_,,_(U SS m illion) IDA Fiscal Year Semester Disbursements Cumulative Cumulative % of Semester Disbursements FY94 June 94 7.1 7.1 25 FY95 December 94 5.5 12.6 45 l__________ June 95 6.0 18.6 66 FY96 December 95 6.5 25.1 90 June 96 2.9 28.0 100  -50- ANNEX II ARMENIA EARTHQUAKE RECONSTRUCTION PROJECT Procurement Schedule Component Phase I Phase II ICB LCB OTHER ICB LCB OTHER HQUSIN.G Avg Avg Avg Av Avg Avg Num Amt Num Amt Num Amt Num Amt Num Amt Num Amt Completion = 7 270 9 300 4 50 | Strengthening _ _ 10 150 6 50 Single Family 6 45 10 200 5 50 Bathihouses 1 130 4 15 2 400 5 S0 Infiutructure 1 500 6 300 Comm. Fac. 2 150 6 50 FACTORY 5 900 6 50 4 500 iSHEI1 _LLS TA & 5 200 5 200 TRAINING S. PERVISION 30 15 30 20 MATERIAIS 4 604 60O_  -51- ANNEX 12 Page 1 of 2 ARMENIA EARTHQUAKE RECONSTRUCTION PROJECT Implenentation Responsibilities COMPONENT SUBCOMPONENT ACTIVIVy RESPONSIBLE Housing Apartment Completion Design PPUIPIU Contracting MOEPIU Construction Construction Firms Supervision Consultants Cost Recovery Municipal Office of Housing and Communal ________________ _ _Services/MOF Strengthening Design EEC/PIU| Contracting PIU/MOE Supervision EEC/PIU Single Family Housing Design PIU Allocation Municipalities Contracting PIU/MOE Construction Private contractors Supervision Consultants Cost Recovery Municipalities/MOF  -52- Annex 12 Page 2 of 2 Factory Shells Selection of Factories PPUIIBRD Contracting PIU/MOE Construction Private contractors Supervision Consultants Cost recovery MOF Water and sewer Demand study International consultant Organization and mgnt Min. Communal study Serviceslconsultant/PlU Contracting MOEIPW Construction Private contractors Supervision Consultants Operations and Min. Communal Services maintenance Cost recovery Municipality Bathhouses Design Consultants -Contracting construction MOE/PIU Supervision of Consultants construction Management Private concession contractors Contracting of mgmt Municipalities/PIU concessions Supervision Municipalities Cost recovery Managers (fees)/Municipalities (contract bids) Community facilities Preparation of proposals Municipalities Evaluation of proposals Consultants Approval of proposals MOEIMOF  GEORGIA lbSI.ooosb L 4rOSsbl 4r IBRD 23943R1 r 0dnkohOtli;GEORGIA om,k 7 8 u,h A, ~~~~ rO Omani rgoI Ty l oliil GEORGIA 4 ATo oalkrkioj 0 Gryosyon <" T n T K740kh |tiItibjuli / ( | Aton dzhBokh GU fZ5\t ROVAKAN. y ' Gelkeno lbtYo, f~t~r 9~t hondckhso , fsvashen hlb 2Mn AtiJ,;k C -,Krosnoserhd SOYOO. '- To (rb~Kdobek A-oaets oiik }~~~~2 / TShom\ o A R M NA7< } yf tMeri~Tdlin / t /i ^Zi t t t!; z + j --9a