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ARMENIA: COUNTRY STRATEGY EVALUATION

Final Report

Volume I

January 2006

Evaluation for the European Commission

Hildastrasse, 66

D-79102 Freiburg Germany

Aide à la Décision Economique

Belgium

France

Germany

This evaluation was commissioned by:

the Evaluation Unit common to:

EuropeAid Co-operation Office,

Directorate General for Development and

External Relations Directorate-General

This evaluation was carried out by EGEVAL

The evaluation was managed by the evaluation unit who also chaired the reference group composed by members of the services EuropeAid, Relex, DG ECFIN and the European Commission Delegation to Georgia and Armenia

The opinions expressed in this document represent the authors’ points of view which are not necessarily shared by the European Commission or by the authorities of Armenia.

ARMENIA: COUNTRY STRATEGY EVALUATION EGEVAL

Final Report - Volume I – January 2006 Table of contents

Table of contents

ACRONYMS

EXECUTIVE SUMMARY ............................................................................................................1 Scope and objectives of the evaluation .......................................................................................... 1 Context of the Commission’s co-operation with Armenia......................................................... 1 The European Commission’s strategy ........................................................................................... 1 Main findings ..................................................................................................................................... 2 Main conclusions............................................................................................................................... 3 Main recommendations.................................................................................................................... 4

1. EVALUATION FRAMEWORK AND METHODOLOGY ...........................................................1 1.1 SCOPE AND OBJECTIVES OF THE EVALUATION........................................................................ 1 1.2 METHODOLOGY........................................................................................................................... 2

1.2.1 Evaluation Questions, Judgement Criteria and Indicators ........................................... 2 1.2.2 Information and data collection ....................................................................................... 2

1.2 SCHEDULE ..................................................................................................................................... 3

2. CONTEXT OF THE COMMISSION’S CO-OPERATION WITH ARMENIA............................... 5 2.1 THE POLITICAL CONTEXT ........................................................................................................... 5 2.2 THE ECONOMIC TRANSITION ..................................................................................................... 6 2.3 THE DEVELOPMENT STRATEGY OF THE GOVERNMENT OF ARMENIA ................................ 7 2.4 INTERVENTIONS OF THE DONOR COMMUNITY IN ARMENIA ................................................ 8

3. THE EUROPEAN COMMISSION’S STRATEGY AND INTERVENTION LOGIC....................... 9 3.1 OVERALL FRAMEWORK AND PRINCIPLES OF THE EUROPEAN COMMISSION’S CO-

OPERATION WITH ARMENIA ....................................................................................................... 9 3.1.1 The Partnership and Co-operation Agreement .............................................................. 9 3.1.2 TACIS Regulations ........................................................................................................... 10

3.2 FINANCING INSTRUMENTS........................................................................................................ 10 3.3 THE COMMISSION’S INTERVENTION LOGIC ........................................................................... 14

3.3.1 From demand-driven co-operation to co-operation based on a policy dialogue............................................................................................................................... 14

3.3.2 The intervention logic proposed by the Country Strategy Paper 2002-2006........... 14 3.4 THE EUROPEAN NEIGHBOURHOOD POLICY ......................................................................... 15

4. ANSWERS TO EVALUATION QUESTIONS .......................................................................17 INTRODUCTION ..................................................................................................................................... 17 QUESTION 1: TO WHAT EXTENT DID THE COMMISSION STRATEGY ADDRESS THE MAIN

OBSTACLES FACED BY ARMENIA IN ITS TRANSITION TOWARDS A MARKET ECONOMY AND A DEMOCRATIC SOCIETY BASED ON THE RULE OF LAW? .......... 18

QUESTION 2: TO WHAT EXTENT DID COMMISSION INTERVENTIONS CONTRIBUTE TO THE DEVELOPMENT OF THE PRIVATE SECTOR AND THE INTEGRATION OF THE ARMENIAN ECONOMY INTO THE WORLD ECONOMY?.................................. 22



QUESTION 3: TO WHAT EXTENT DID COMMISSION INTERVENTIONS CONTRIBUTE TO THE DEVELOPMENT OF THE AGRICULTURAL SECTOR?......................................... 25

QUESTION 4: TO WHAT EXTENT DID COMMISSION INTERVENTIONS CONTRIBUTE TO THE DEVELOPMENT OF AN EDUCATION SYSTEM THAT MEETS THE NEEDS OF ARMENIA’S TRANSITION PROCESS TO A MARKET ECONOMY AND A DEMOCRATIC SOCIETY............................................................................................... 29

QUESTION 5: TO WHAT EXTENT DID COMMISSION INTERVENTIONS CONTRIBUTE TO MEETING ARMENIA’S ENERGY NEEDS WITH A RELIABLE, SUSTAINABLE AND SAFE ENERGY SUPPLY SYSTEM?........................................................................ 34

QUESTION 6: TO WHAT EXTENT DID COMMISSION INTERVENTIONS CONTRIBUTE TO ALLEVIATING THE SOCIAL CONSEQUENCES OF TRANSITION, IN PARTICULAR POVERTY?.............................................................................................. 37

QUESTION 7: TO WHAT EXTENT DID COMMISSION INTERVENTIONS CONTRIBUTE TO STRENGTHENING DEMOCRACY AND THE RULE OF LAW?..................................... 43

QUESTION 8: TO WHAT EXTENT DID COMMISSION’S INTERVENTIONS CONTRIBUTE TO DEVELOP REGIONAL CO-OPERATION AND, RECIPROCALLY, TO WHAT EXTENT HAS THE GEO-POLITICAL SITUATION OF ARMENIA IMPACTED ON THE EFFECTIVENESS OF THE COMMISSION CO-OPERATION? .............................. 47

QUESTION 9: TO WHAT EXTENT HAS THE COMMISSION’S STRATEGY IN ARMENIA BEEN DESIGNED SO AS TO COMPLEMENT AND CO-ORDINATE ITS ACTIONS WITH OTHER DONORS PROGRAMMES AND/OR WITH OTHER EU MEMBER STATES INITIATIVES? TO WHAT EXTENT HAS THE COMMISSION’S STRATEGY AND REALISATIONS IN ARMENIA BEEN AFFECTED BY OTHER EU POLICIES?.............................................................................................................. 51

QUESTION 10 : HOW EFFECTIVE HAVE BEEN THE IMPLEMENTATION MECHANISMS OF COMMISSION ASSISTANCE TO ARMENIA?................................................................ 54

5. CONCLUSIONS ..............................................................................................................61 5.1 INTRODUCTION .......................................................................................................................... 61 5.2 RELEVANCE OF THE STRATEGY ............................................................................................... 61 5.3 ACHIEVEMENT OF THE STRATEGY OBJECTIVES AND SUSTAINABILITY OF

OUTCOMES................................................................................................................................... 62 5.3.1 Transition to a market economy..................................................................................... 62 5.3.2 Transition to a democratic society.................................................................................. 63 5.3.3 Poverty alleviation............................................................................................................. 64 5.3.4 Sustainable economic growth.......................................................................................... 65 5.3.5 Energy sector..................................................................................................................... 66 5.3.6 Integration into the world economy .............................................................................. 66

5.4 IMPLEMENTATION MODALITIES AND DONORS CO-ORDINATION....................................... 67

6. RECOMMENDATIONS....................................................................................................69 6.1 RECOMMENDATIONS RELATIVE TO THE OVERALL CO-OPERATION STRATEGY................ 69 6.2 RECOMMENDATIONS RELATIVE TO SECTORS ........................................................................ 70 6.3 RECOMMENDATIONS RELATIVE TO IMPLEMENTATION MODALITIES ................................ 73



ANNEXES ANNEX 1 - TERMS OF REFERENCE

ANNEX 2 - SELECTED INDICATORS

ANNEX 3 - INVENTORY OF COMMISSION INTERVENTIONS IN ARMENIA 1996-2004

ANNEX 4 - THE COMMISSION’S INTERVENTION LOGIC IN ARMENIA

ANNEX 5 - BACKGROUND OF EVALUATION QUESTIONS 2 TO 7

ANNEX 6 - LIST OF PEOPLE MET

ANNEX 7 - LIST OF DOCUMENTS CONSULTED

ANNEX 8 - REMARKS ON THE EVALUATION REPORT (1ST DRAFT) AND ADE’S COMMENTS AND ACTIONS


Final Report - Volume I – January 2006 List of Acronyms / page i

List of Acronyms

ACBA Agricultural Credit Bank of Armenia AEPLAC Armenian European Policy and Legal Advice Centre AMD Armenian Dram ANRA Armenian Nuclear Regulatory Authority AP Action Programme BAS Business Advisory Service CBA Central Bank of Armenia CBC Cross-border Co-operation CIS Commonwealth of Independent States CSP Country Strategy Paper DAC Development Assistance Committee DFID Department for International Development (British Co-operation) EBRD European Bank for Reconstruction and Development EC European Commission EIB European Investment Bank EIDHR European Initiative for Democracy and Human Rights EQ Evaluation Question EU European Union EUR Euro EUSR European Union Special Representative for the South Caucasus FDI Foreign Direct Investment FSP Food Security Programme FSU Former Soviet Union GDP Gross Domestic Product GoA Government of Armenia GTZ Gesellschaft für Technische Zusammenarbeit (German Co-operation) HPP Hydropower Plant IAEA International Atomic Energy Agency IDA International Development Agency IFAD International Fund for Agricultural Development IFI International Financial Institution IMF International Monetary Fund INOGATE International Gas and Oil to Europe

INTAS International Association for the promotion of co-operation with the Scientists of the New Independent States

IP Indicative Programme IT Information Technologies MFA Macro-Financial Assistance


Final Report - Volume I – January 2006 List of Acronyms / page ii

MoA Ministry of Agriculture MoE Ministry of Energy MoEF Ministry of Economy and Finance MoES Ministry of Education and Science MIS Management Information System MoLSI Ministry of Labour and Social Issues MoU Memorandum of Understanding MTED Ministry of Trade and Economic Development NA National Assembly NAO National Observatory of Armenia NCU National Co-ordinating Unit NPP Nuclear Power Plant NSS National Statistical Service ODA Official Development Assistance OECD Organisation of Economic Co-operation and Development OSCE Organisation for Security and Co-operation in Europe PCA Partnership and Co-operation Agreement PRSP Poverty Reduction Strategy Paper PSD Private Sector Development SCC State Committee for Real Estate Cadastre SEDP Sustainable Economic Development Policy for Armenia SME Small-and-Medium Sized Enterprises SME-DNC Small and Medium Entrepreneurship Development National Centre SOE State Owned Enterprises SPP Small Policy Project TA Technical assistance TACIS Technical Assistance to the Community of Independent States TAM/BAS Turn Around Management / Business Advisory Service TEN Trans European Network TNC Trans-National Company ToR Terms of Reference TPP Thermal Power Plant TRACECA Transport Corridor Europe-Caucasus-Asia UNDP United Nations Development Programme USAID United States International Development Agency USD US dollar VET Vocational Education and Training WB World Bank WTO World Trade Organisation


Final Report - Volume I – January 2006 Executive Summary / page 1

Executive summary

Scope and objectives of the evaluation

The objective of this evaluation is to assess the European Commission’s past and current assistance to Armenia with a view of providing the Commission’s policy makers and managers with support for the implementation of the current Strategy and related Indicative Programmes, as well as for future programming. The coverage of the evaluation is: An evaluation of the Commission’s

co-operation with Armenia and of its implementation over the period 1996-2002;

An assessment of the relevance, logic, coherence and also the intended impacts of the Commission’s Country Strategy and National Indicative Programmes for 2002-2006.

Context of the Commission’s co-operation with Armenia

The Republic of Armenia is a landlocked country in the Southern Caucasus with an area of 29,800 km2 and a population of 3,1 million inhabitants. It gained its independence from the former Soviet Union in 1991. In the earlier years following indepen-dence, the Armenian economy underwent an extremely severe crisis with GDP falling by more than 50 per cent, a huge budget deficit and galloping inflation. From 1994 onwards, Armenian

authorities implemented stabilisation measures and structural reforms, which delivered positive results. Over the last four years GDP growth reached double-digit levels while budget deficit and inflation have been kept under control. A major effect of the crisis that followed independence was widespread impove-rishment of the Armenian population, which has only partly been alleviated by the subsequent recovery. To tackle this issue and provide a framework for economic and social policies, the GoA adopted in 2003 a Poverty Reduction Strategy. Support from donors is essential to the financing of development in Armenia. Over the period 1996-2002 official external assistance received by the country represented some 11.7 per cent of its GDP. The United States, the World Bank and the European Commission are the most important providers of development aid to Armenia.

The European Commission’s strategy

A Partnership and Co-operation Agreement (PCA) between the European Union and Armenia entered into force on 1 July 1999. It should induce a shift from demand-driven co-operation to co-operation based on a policy dialogue between the GoA and the Commission. The decision of the European Council in June 2004 to include Armenia in the European Neighbourhood Policy should further strengthen the policy dimension of the Commission’s co-operation with the country.



In December 2001, the European Commission adopted a Country Strategy Paper for the years 2002-2006. This document underlines that “based on the Partnership and Co-operation Agreement, the EU’s co-operation objectives are to build a relationship with Armenia in which the respect of democratic principles, the rule of law and human rights, as well as the consolidation of a market economy, are fostered and supported”. In line with the Statement of the Commission and the Council of November 2000 on the European Community’s Development Policy, it makes poverty reduction the primary focus of the Commission’s development assistance to Armenia. Two main areas of co-operation are identified: Implementation of the PCA, with a

focus on the approximation of legislation and reforms;

Alleviation of the social consequences of the transition.

Main findings

Over the period 1996-2004, the Commission’s co-operation with Armenia addressed a large variety of issues (macroeconomic policy, private sector development, agriculture, energy, transport, education, employment, social protection, civil society) and entailed use of a variety of financing instruments (Macro-financial assistance, Food Security Programme, Tacis National Programme, Tacis Regional Programme, Nuclear Safety Programme, Tempus, EIDHR, etc.). This co-operation was basically demand-driven within the broad framework of Tacis regulations. Implementation of the Country Strategy Paper 2002-2006 and of related National Indicative Programmes

only started in 20041. Furthermore, the NIPs only deal with the implementation of the Tacis National Programme, which over the last ten years accounted for only 25 to 30 per cent of total Commission commitments. This demand-driven character of the co-operation resulted in a high degree of relevance of Commission interventions, which addressed most of the priorities later identified in the PRSP. But it also led to a scattering of resources and, in some cases, to a lack of continuity that, together with a difficult economic situation and strong institutional instability during the 1990s, hampered the effectiveness and sustainability of interventions. The effectiveness of Commission interventions tend to improve over time thanks to a more stable economic and institutional environment, but also to positive developments in the Commission’s intervention mechanisms, notably the “deconcentration” of operations and the opening of a Delegation Branch Office in Yerevan. Close to one-third of the Commission’s assistance to Armenia was allocated through the Food Security Programme. The primary objective of this programme, when initiated in 1996 in a context of a large deficit of the balance of payments, was to secure the import of food products through targeted provision of hard currency to the Armenian Central Bank, the counterpart funds being transferred to specific budget lines of the Ministry of Agriculture, Ministry of Labour and Social Issues and other government institutions. With the

1 The first contracts for implementation of the NIP

2002-2004 were signed by end-2003.



relaxation of the currency constraint, the budget support dimension of the programme became predominant. This led to some changes in the management of the Food Security Programme. However this programme does not yet comply with the Commission’s approach to Sector Policy Support Programmes and budget support.

Main conclusions

Over the period 1996-2004 Commission interventions in Armenia addressed most of the issues identified by the Government as key to securing sustainable growth, favouring integration of Armenia in the world economy and combating social inequalities. Macro-financial assistance provided at a time when the Armenian government was struggling with a huge budget deficit helped the government to implement sound macroeconomic and financial policies conducive to a resumption of economic growth. Technical assistance provided in the framework of the food security programme helped the government improve the management of public resources, and hence the efficiency of public spending. Through a wide range of interventions variously supporting the reform of the institutional and legal framework governing economic activity; provision of advice and training to entrepreneurs; support to the development of a cadastre; assistance to the establishment and development of an agricultural bank; and financial and technical support for activities implemented by the Ministry of Agriculture, the Commission has made an effective contribution to the transition of Armenia to a market economy. However

deficiencies in the enforcement of the legal framework have not been addressed. The Commission has made an important contribution to securing and diversifying Armenian energy supply sources, thus relaxing a major constraint to economic growth. However it did not succeed in persuading the Armenian government to commit itself to a decommissioning of the Medzamor NPP. In spite of the blockade of borders with Azerbaijan and Turkey, Armenia’s foreign trade is rapidly developing, in particular with the European Union which grants Armenia the benefits of its GSP system. The Commission effectively supported this development through technical assistance to the GoA in the negotiations that led to Armenia’s accession to WTO in 2003, and helped the government implement post-accession commitments. The assistance provided by the Commission for the rehabilitation of transport infrastructure in Armenia and in Georgia also contributed to the development of trade. Resumption and then acceleration of economic growth from 2000 led to a significant reduction in the number of poor people. But poverty was also directly addressed by the Commission. Technical assistance projects were implemented, although with mixed results, in the health, social security and employment sectors. The Food Security Programme gave significant financial support to the Family Benefit Scheme, which has a key role in alleviating extreme poverty, and allocated substantial financial resources and technical assistance to the MoLSI in support of the design and implementation of a policy for childcare and child protection. More recently, the Commission has undertaken



to assist the Government in renovating and developing vocational education, a sector that should play a major role in tackling unemployment. Issues related to the transition of Armenia to a democratic society have only gradually gained importance in the Commission’s co-operation with Armenia. The Commission hardly made any use of its political leverage to induce the GoA to strengthen democracy and enforce the rule of law. Support for Civil Society has only recently reached a significant dimension.

Main recommendations

Besides sector specific recommendations, the main evaluation recommendations are the following:

Strengthen the link between policy dialogue and co-operation

To impact on the content and quality of co-operation, and in particular to allow a move from traditional project aid to a sectoral approach to aid and to budget support, the policy dialogue carried out in the framework of the institutions created by the PCA must be continued, consolidated and filled out with detail through permanent contacts between the Commission and government officials.

Ensure full consistency between the PRSP priorities and the Commission’s co-operation strategy

Through the PRSP, the GoA has designed for the development of Armenia over the next fifteen years a comprehensive framework which is supported by the entire donor community. The Commission was only marginally involved in the PRSP preparation process. The policy dialogue

between the GoA and the Commission should help ensure that the Commission is playing, in the implementation, monitoring and further development of the PRSP, a role commensurate with its position in the donor community.

Integrate all financing instruments in the Country Strategy and in the National Indicative Programmes and Action Programmes

In the context of dialogue-driven cooperation relying on Government-led donor co-ordination, and to ensure the coherence of Commission interventions, it is crucial that the Commission’s strategy and programmes present a comprehensive and integrated view of the total volume of resources mobilised by the Commission and of its areas of intervention. Should financial instruments other than the ENPI be used, these instruments and the objectives they are targeting should be included, or at least reflected, in the Commission’s Strategy Paper and in its programmes.

Evolve from FSP to a full-fledged sectoral approach and budget support

The conditions which led the Commission to implement a Food Security Programme in Armenia, aimed primarily at securing the import of food products, no longer exist. Indeed the FSP evolved over time towards a budget support programme, however without fully adopting the approach and procedures that the Commission applies to such programmes elsewhere in the world. There is no longer any reason for maintaining this difference.



Make democratic progress, respect for human rights and enforcement of the rule of law a priority of the Commission’s co-operation strategy

The PCA between the EU Member States, the Commission and the Republic of Armenia strongly underlines the commitment of all parties to democratic principles, respect for human rights and enforcement of the rule of law. Any

revision of the Commission’s Country Strategy for Armenia should adequately reflect the importance that the Commission gives to this issue; indeed, democracy should be considered a transverse issue to be taken into account at the identification and formulation stage of all Commission interventions.


Final Report - Volume I – January 2006 page 1

1. Evaluation framework and methodology

1.1 Scope and objectives of the evaluation

Since 1991, the EU has been supporting Armenia through a variety of instruments (TACIS, ECHO, EAGGF, Macro-Financial Assistance, the Nuclear Safety Programme, the Food Security Programme) to the tune of a total of over €330 million, excluding the TACIS Regional Programme. Based on the Partnership and Co-operation Agreement (PCA) which entered into force on 1 July 1999, the EU’s co-operation objectives are to build a relationship with Armenia in which respect for democratic principles, the rule of law and human rights, as well as the consolidation of a market economy, are supported and fostered. In December 2001 the Commission adopted a Country Strategy Paper as the strategic framework through which European Commission assistance will be provided from 2002 to 2006. This document is the first CSP ever produced by the Commission to guide its interventions in Armenia. The CSP is mainly driven by the priorities of the PCA and of the Poverty Reduction Strategy of the Government of Armenia. The Commission Services requested the Evaluation Unit of the Commission’s EuropeAid Co-operation Office to undertake an evaluation of the Commission’s Country Strategy for the Republic of Armenia. The present study is part of the 2004 evaluation programme as approved by the Board of the EuropeAid Co-operation Office. The main objective of this evaluation is to assess the Commission’s past and current assistance to Armenia and provide the Commission’s policy makers and managers with valuable support for implementation of the current Strategy and related Indicative Programmes, as well as for future programming. The main coverage of the evaluation is: An evaluation of the Commission co-operation with Armenia (even if not presented in

a formal strategy document) and of its implementation over the period 1996-2002; An assessment of the relevance, logic, coherence and intended impacts of the

commission Country Strategy and National Indicative Programmes for 2002-2006.



1.2 Methodology

1.2.1 Evaluation Questions, Judgement Criteria and Indicators

The evaluation methodology is based on an initial description of the principal characteristics of the co-operation context in Armenia, with a particular focus on the country’s main socio-political and economic features. The Commission’s intervention logic was then analysed so as to identify its main sectors of intervention and so derive the hierarchy of the Commission’s strategy objectives at the different levels of intervention. On that basis, Evaluation Questions were formulated of which six focus on the main sectors of Commission intervention (Private sector development; Agriculture; Education; Energy, Social issues; Democracy, human rights and the rule of law) while the four other address transverse issues (Relevance of the strategy; Regional co-operation; Co-ordination and complementarity with other donor activities; Effectiveness of implementation mechanisms). For each Evaluation Question, Judgement Criteria were selected which are more focused and explicit than the Evaluation Questions themselves and show the benchmarks against which the interventions are assessed. Finally, each Judgement Criterion is assessed on the basis of quantitative and qualitative Indicators which, as the main performance measures, are the basis for retrieving the basic data and information necessary to substantiate the corresponding Judgement Criteria. The Judgment Criteria variously reflect the general evolution (or situation) in the country, the Commission’s interventions within that context, and the contribution of those interventions to the recorded achievements. Each Judgement Criterion serves to provide a qualified answer to the Evaluation Question it refers to. The Commission’s strategy for Armenia is finally assessed on the basis of the combined overall answers to the Evaluation Questions, which were so chosen and arranged as to encompass the criteria and transverse issues mentioned above. In particular, the analysis focuses on the relevance of the Country Strategy for Armenia both to the Commission's general objectives and to the country's priorities. It also assesses the extent to which the intended outputs and results have been achieved and how far they have contributed to the operational and specific objectives within the overall national context (economic, political, sociological, cultural, environmental), taking into account the changes in the areas on which the Commission’s programmes were intended to impact.

1.2.2 Information and data collection

The information necessary to document the Indicators has been collected through two main channels: Analysis of relevant documents and statistics at the various levels of analysis (see in

Annex 4 the list of documents consulted); Direct interviews in Brussels and in the field with the parties involved in the Strategy as

actors or stakeholders: national authorities, beneficiaries, Commission Services, other donors, and international institutions and experts involved in identification, implementation, monitoring and evaluation (see in Annex 3 the list of persons met).



A sample of projects, covering the main sectors identified in the analysis of the Commission’s intervention logic, has been established and examined in detail. The purpose of the project analysis is twofold. First, information relevant for some levels of analysis can only be collected by examining projects (efficiency, effectiveness and impact in relation to operational objectives). Second, the project analysis is also meant to complement the evaluation with significant examples covering the whole sequence of design and implementation of a particular type of intervention, from the stage of pre-identification to that of evaluation.

1.2 Schedule

The evaluation was carried out in four different stages, namely (i) inception phase, (ii) desk phase, (iii) field phase and (iv) final report-writing stage. The report output from each phase was reviewed and commented on by a Reference Group composed of Commission officials. During the inception phase, the evaluation team produced a Launch Note which was approved by the Commission in August 2004. A preparatory visit to Armenia was made by the team leader from 13-17 September 2004 to collect information on the Commission’s activities in the country and on the national policy and co-operation context, as well as on the GoA’s priorities and the main issues the country is facing. An Inception Note was submitted to the evaluation Reference Group in November 2004. It included a description of the development co-operation context in Armenia, a preliminary inventory of Commission interventions, and an analysis of the TACIS regulations and of the Commission’s strategy paper for Armenia. It also contained the reconstruction of the intervention logic synthesised in a logical framework diagram. Finally, the Note introduced a set of preliminary Evaluation Questions and presented the tasks and organisation leading to the preparation of the Desk Phase Report. The Desk Phase Report, submitted by end-January 2005, further developed the content of the Inception Note. In particular it finalized the elaboration of the Evaluation Questions, Judgment Criteria and Indicators, made proposals for methods of data and information collection, methods of analysing the information and data collected, and the basis to be used for validating the Judgment Criteria and answering the Evaluation Questions. The field phase took place from 7-24 February 2005. The evaluation team proceeded with in-country data collection. In particular meetings were held with the Commission Delegation; national authorities; non-governmental organisations (NGOs) and civil society organisations; Member States and other bilateral and multilateral donors present in the country; the private sector; and beneficiaries of the Commission’s interventions. At the end of the field phase a debriefing was organised with the evaluation Reference Group. The final report-writing phase started soon after the end of the field phase and culminated in this final report.



Map of Armenia



2. Context of the Commission’s co-operation with Armenia

The Republic of Armenia is a landlocked country in the Southern Caucasus. It has an area of approximately 29,800 sq km bordered by Azerbaijan, the Naxcivan exclave, Georgia, Iran and Turkey. According to the census carried out in 2001, the country has a population of 3,1 million inhabitants. About 7 million ethnic Armenians live abroad, mainly in Russia (2 million), the United States (1,4 million), France (0,55 million), Georgia, Lebanon and Turkey. Armenia is characterized by a high degree of ethnic homogeneity, as ethnic Armenians constitute 96 per cent of the population. Armenia is a highly urbanized country, with 67 per cent of all residents living in cities or towns. The main urban area is the capital city, Yerevan, with a population of 1.45 million inhabitants. In 2003 Gross National Income per capita stood at US$3,607 at purchasing power parity2. Based on this indicator, Armenia ranks 134th out of 208 countries. It is classified by the World Bank in the group of Lower Middle Income countries. In 1988, a devastating earthquake struck the north of the country, taking the lives of about 25.000 people, leaving homeless another 500.000 people, and destroying industrial plants and part of the fuel pipeline.

2.1 The political context

Armenia gained its independence through a referendum establishing secession from the USSR on September 21, 1991. The Armenian constitution was adopted by referendum on July 5th, 1995. Executive power is the responsibility of the President and is implemented by the Prime Minister and his Cabinet, while the legislative and controlling powers rest with the National Assembly. A Constitutional Court guarantees that constitutional principles are respected. The Armenian political situation is highly influenced by the regional conflict with Azerbaijan. Both Azeris and Armenians claim historic ownership of the Karabakh region, located within the boundaries of Azerbaijan, but largely populated by Armenians. After a period of armed conflict, a ceasefire was achieved in 1994. Mediation efforts are being conducted in the framework of the OSCE/Minsk Group with strong support from the European Union, which appointed a Special Representative to the Southern Caucasus, but so far no peace agreement has been reached. As a result Azerbaijan, followed by Turkey, imposed a trade blockade on Armenia.

2 Source : World Bank, World Development Indicators.



Armenia’s foreign policy is based on developing co-operation with neighbouring countries not involved in the Nagorno-Karabakh conflict, particularly Iran and Georgia. Borders with these two countries are Armenia’s only open borders. Armenia also maintains good relations with the Russian Federation: a Friendship and Co-operation Agreement was signed between the two countries in 1997, including provisions for mutual defence. Armenia also has a free trade agreement with Russia, as it heavily depends on Russian energy supplies. A Partnership and Co-operation Agreement (PCA) between the European Union and Armenia was concluded in 1996 and entered into force on 1 July 1999. Moreover, the Armenian government has always expressed the view that European Integration is one of its major political objectives. In June 2004 the European Council offered Armenia, Azerbaijan and Georgia participation in the European Neighbourhood Policy.

2.2 The economic transition

In the years following independence, Armenia faced an extremely difficult social and economic situation. The collapse of the USSR left Armenia with a highly industrialised and specialised economy, with highly skilled people, but also with production capacities and business skills that were inadequate for the needs of a self-standing market economy. The lack of preparation of the country for integration into the world economy, together with the human, material and financial costs of the 1988 earthquake and the Nagorno-Karabakh conflict, have had a devastating impact on the economic and social situation of the country. By 1994, GDP had fallen below 50 per cent of its 1990 level. The collapse of the economy led to a sharp drop of fiscal revenues. In 1993 the budget deficit reached 55 per cent of GDP. Fuelled by a monetary financing of the budget deficit, prices soared with inflation attaining 5,000 per cent. Significant stabilisation efforts began in 1994. Armenian authorities implemented a programme of stabilisation measures and structural reforms with the support of IMF, World Bank and EBRD loans, as well as other concessional loans and grants. This policy delivered positive results. The economy started to recover from 1994 and has since grown continuously. Over the 1994-2003 period GDP grew at an average annual rate of 7.6 per cent. Recently the Armenian economy has performed remarkably well, with GDP growth reaching double-digit levels over the last three years. The budget deficit diminished and has been contained over the last three years below 1.5 per cent of GDP, while inflation receded. The development of Armenian foreign trade remains severely hampered by the blockade of the borders with Azerbaijan and Turkey as well as, until recently, the conflict in Georgia between the central government and the authorities of the western province of Abkhazia, which had cut off the Black Sea coastal railway link to Russia and Ukraine.



A major effect of the crisis that followed independence was a widespread impoverishment of the Armenian population. The impacts of this deep recession on poverty and the accompanying rise in inequality have been severe and have only partly been alleviated by the subsequent recovery. Furthermore shrinkage of national output resulted in contraction of public revenues and hence a reduction in the resources allocated to social services such as health and education. Addressing these issues is at the core of the GoA development strategy.

2.3 The development strategy of the Government of Armenia

To address the consequences of the economic and social crisis of the 1990s and increase real incomes and living standards, the government of Armenia has developed a Poverty Reduction Strategy Paper (PRSP) that was approved in 2003. A basic assumption of the strategy paper is that economic growth will continue at a high rate (an average of 5.5-6.5 per cent per annum) in the coming decade, and be the main instrument for reducing poverty. The first of the four PRSP priority sectors is the rural sector, in particular agriculture, which employs nearly half the rural population. In order to increase rural incomes and reduce rural poverty, the document outlines four types of action: measures to increase agricultural productivity; development of markets and sales institutions; facilitation of access to credit; and promotion of non-farm activities. The second pillar of the strategy relates to institutional reforms and improvement of the business environment. In relation to public administration and judicial system reforms, priorities include decentralisation of public services, an increase in salaries of civil servants, and more efficient budget management. In terms of the business environment emphasis is put on promotion of small and medium-sized enterprises, the development of which is seen as a major engine of economic growth. Ensuring better access to external financing for enterprises is a priority in this regard, along with better protection of property rights, simplification of procedures for establishing new companies and promotion of competition. Tax policy is the final item of this second pillar. Improvements in tax policy are considered particularly crucial to increasing the financial capacities of the state. The third pillar of PRSP measures relates to promoting human development. On social assistance the main priority is the use of the “family benefit system” to reduce poverty among the most vulnerable. Targeting of those in need of special protection, such as refugees and displaced people, is also emphasised. Increasing the level of pensions so as to bring them above the general poverty threshold is a major objective assigned to the social insurance system, the efficiency and sustainability of which needs to be improved. On employment, replacement of the current policies of unemployment insurance and transition to proactive employment policies is advocated. The government is committed to bringing public sector salaries to a minimum level twice that of the general poverty threshold. The need for the legally-defined minimum salary to equal the general poverty threshold is also advocated.



The second component of the human development chapter is “investment in human capital”, which focuses on health and education. As regards health, priority will be given to services to the poor, with a focus on improving access to healthcare services and an emphasis on the primary healthcare system. This will require and be associated with a significant increase in the share of the budget devoted to health. As regards education, considered the first priority for economic growth and progress, the overall objective is to improve the quality and efficiency of education services, with special attention to secondary and higher education. Here again the government is committed to significantly increasing the share of education in the budget. Other items in the “investment in human capital” chapter include development of local communities and Civil Society and an associated promotion of values such as tolerance, entrepreneurship and initiative. Infrastructure development is the last pillar of the strategy. Particular emphasis is put on water utilities, for which an increase in accessibility, availability and quality of services is a key priority; on road construction, which will help reduce the isolation of rural communities; and on the energy sector. The last chapter of the document focuses on the importance of incorporating PRSP policies and measures into Armenia’s medium term expenditure framework.

2.4 Interventions of the donor community in Armenia

Support from donors is essential to the financing of development in Armenia. Over the period 1996-2002 official external assistance received by the country, as measured by the OECD/DAC statistics, represented some 11.7 per cent of its GDP. The United States, Germany, Japan and the Netherlands are the most important bilateral providers of development aid to Armenia. Among multilateral donors, the European Commission apart3, the World Bank and the International Fund for Agricultural Development (IFAD) are playing the most important roles in the provision of finance for development. Main aid intervention sectors during 1996-2002 have been social infrastructure and services (29 per cent of the total) and economic infrastructure (25 per cent). General support, including Structural Adjustment credits, along with funds channelled to the budget by the EC-Food Security Programme, accounted for 22 per cent of total aid.

3 The information on Commission aid to Armenia available to the OECD/DAC grossly underestimates the volume of

Commission assistance. For this reason we removed the Commission from table 2. Figures on the volume of Commission aid to Armenia are presented in the following chapter.



3. The European Commission’s strategy and intervention logic

3.1 Overall framework and principles of the European Commission’s co-operation with Armenia

3.1.1 The Partnership and Co-operation Agreement

The Partnership and Co-operation Agreement between the European Union and the Republic of Armenia entered into force in July 1999. The objectives of this partnership, as stated in its article 1, are: “To provide an appropriate framework for the political dialogue between the Parties

allowing the development of political relations; To support the Republic of Armenia’s efforts to consolidate its democracy and to

develop its economy and to complete the transition into a market economy; To promote trade and investment and harmonious economic relations between the

Parties and so to foster their sustainable economic development; To provide a basis for legislative, economic, social, financial, civil scientific,

technological and cultural co-operation”. Title II of the PCA provides for the establishment of a Co-operation Council at ministerial level and of a Parliamentary Co-operation Committee at parliamentary level. Title V, devoted to legislative co-operation, expresses the willingness of the Armenian authorities to approximate Armenia’s existing and future legislation to that of the Community. The Community commits itself to providing technical assistance to that end. Economic co-operation is the object of Title VI. It states that “the Community and the Republic of Armenia shall establish economic co-operation aimed at contributing to the process of economic reform and recovery and sustainable development of the Republic of Armenia”. The PCA underlines that “special attention shall be devoted to measures capable of fostering co-operation among the Independent States of the Transcaucasus region, and with other neighbouring states, with a view of stimulating a harmonious development of the region”. It further states that “where appropriate, economic co-operation and other forms of co-operation provided for in this Agreement may be supported by technical assistance from the Community”. Co-operation through technical assistance programmes is also considered in Title VII in relation to the establishment and reinforcement of democratic institutions. This co-operation is intended “to assist inter alia in the drafting of the relevant legislation and regulations; the implementation of such legislation; the functioning of the judiciary; the role of the State in questions of justice; and the operation of the electoral system”.



3.1.2 TACIS Regulations

Launched by the Commission in 1991, the TACIS Programme consists primarily of technical assistance provided through grants to 12 countries of Eastern Europe and Central Asia that were part of the former Soviet Union. The TACIS programme is implemented within the framework of a Council Regulation. In the period 1996-2002, which is the focus of the current evaluation, two TACIS Regulations were in force4. The first one, adopted in June 1996, covered the years 1996-1999 while the second, adopted in December 1999, covers the years 2000-2006. The purpose of TACIS is defined identically in the 1996-1999 and 2000-2006 Regulations: namely to promote the transition to a market economy and reinforce democracy and the rule of law in partner States. But the current Regulation also states that “the programme shall be based on the principles and objectives set out in the Partnership and Co-operation Agreements in the context of which the Community, its Member States and the partner States work together to support initiatives of common interest” (Art.2.1). This reflects a move from “demand-driven” co-operation to “dialogue-based” co-operation. Until 2000 the programming process of TACIS activities was restricted to the preparation of Indicative Programmes for a period of two years. Since 2000 and the entry into force of most PCAs between the EU and Partner Countries, Indicative Programmes are developed within the framework of Country Strategy Papers.

3.2 Financing instruments

The Commission’s co-operation with Armenia entails use of a large variety of financing instruments. In financial terms, the most important instruments of the Commission’s co-operation with Armenia are the Food Security Programme and Macro-Financial Assistance. The EC Food Security Programme is governed by Council Regulation N° 1292/96. It aims at: enhancing food security geared to alleviating poverty in the recipient countries, reducing the recipient countries’ dependency on food aid, contributing to the countries’ balanced economic and social development. The Commission started its Food Security Programme in Armenia in 1996. From this date to 2004 €81.0 million have been allocated to this programme of which €76.5 million in the form of targeted budget support and €4.5 million for technical assistance.

4 Council Regulation (EC, Euratom) n° 1279/96 of 25 June 1996 concerning the provision of assistance to economic

reform and recovery in the New Independent States and Mongolia; Council Regulation (EC, Euratom) n° 99/2000 of 29 December 1999 concerning the provision of assistance to the partner states in Eastern Europe and Central Asia.



Food Security operations in Armenia consist of provision to the Central Bank of Armenia of foreign currency earmarked for the financing of food imports originating in the EU or in other countries of the former Soviet Union. The subsequent conversion of hard currency into Armenian drams generates counterpart funds that are used to secure financing of budgetary expenditures of the Ministry of Agriculture, the State Committee for Real Estate Cadastre, the National Statistical Service, and the Ministry of Labour and Social Issues. Release of this aid is conditional on implementation of measures listed in a Memorandum of Understanding agreed between the Commission and the GoA. Technical assistance within the programme is provided to the Ministry of Finance, the Ministry of Agriculture and the Ministry of Labour and Social Issues. Macro-Financial Assistance consists of the provision of funds to the government of the partner country in the form of a loan, a grant or a combination of both. Initially created for intra-Community balance-of-payments support, from 1990 MFA was extended to third countries with a view of supporting their political and economic reform efforts. The proceeds are disbursed in instalments to the Central Bank of the beneficiary country to strengthen its balance-of-payments situation and help finance the budget. MFA is managed by the Directorate General for Economic and Financial Affairs (DG ECFIN). Armenia has benefited from a MFA package decided by the Council in 1997 and consisting of a loan of €28 million and of a total grant amount of up to €30 million. The loan component was entirely disbursed in 1998. As for the grant, by July 2004 €28.5 million had been disbursed in five instalments. MFA is not covered by this evaluation since a specific evaluation of the implementation of this instrument in Armenia is currently being carried out by DG ECFIN. In compliance with the TACIS Regulation, the TACIS National Programme mainly finances technical assistance projects. These interventions are programmed in an Indicative Programme that typically covers a period of two years. As noted above, the 2000 TACIS Regulation furthermore stipulates that Indicative Programmes should fit into an explicit strategy of Commission co-operation with the given country, this strategy being expressed in a Country Strategy Paper. Drafting of the Country Strategy Paper and programming of Commission interventions are both the responsibility of the Directorate General for External Relations (DG RELEX). The current Country Strategy Paper for Armenia was released in December 2001 and covers the period 2002-2006. A first Indicative Programme covered the period 2002-2003. The current Indicative Programme covers the period 2004-2006. Formulation and implementation of the projects identified in the programming documents was the responsibility of EuropeAid but has recently been transferred to the Delegations as part of the so-called “deconcentration” process.



Over the period 1996-2004 financial allocations to the TACIS National Programme for Armenia amounted to €49.8 million. These resources financed interventions focusing on three main sectors: energy; institutional and legal reforms; and private sector development. Other sectors which benefited from this programme, although in smaller amounts, were education and other social sectors. Besides large technical assistance projects, the TACIS National Programme also finances small projects in various areas such as policy advice or support to establishment of trans-boundary co-operation between universities. Other specific instruments, such as the European Initiative for Democracy and Human Rights, also finance small projects. Altogether a total amount of €14.0 million was allocated to small projects in Armenia, the main sectors of concentration of these interventions being institutional and legal reforms; education; and private sector development. A TACIS regional programme based on a Commission strategy for the TACIS region complements the TACIS national programmes. It aims to assist partner countries in identifying and finding solution to problems that extend beyond national boundaries. It is therefore intended primarily to include actions best undertaken at multi-country rather than national level. TACIS Regulation 2000-2006 emphasises three areas of co-operation at regional level: promotion of networks (telecommunications, energy and transport), environmental co-operation, actions in the areas of justice and home affairs.

The regional programme contributed €33.1 million to Armenia, the main beneficiary sectors being energy and transport, and also, although to a much lesser extent, institutional and legal reforms, environment protection, private sector development and agriculture. Safety problems raised by the nuclear sector in the former Soviet Union induced the Commission to create a regional programme specifically devoted to this issue, the Nuclear Safety Programme. Through this programme alone €21.0 million were devoted by the Commission to safety improvements in the civil nuclear sector of Armenia. Emergency assistance provided through the ECHO programme is not specific to the TACIS region. This programme was heavily involved in the alleviation of the social problems raised in Armenia by the earthquake of 1988, the Nagorno-Karabakh war and natural disasters. Since 2002 no new ECHO intervention has taken place in Armenia. Table 3.1 on the following page provides a breakdown by instrument and by sector of the Commission’s co-operation with Armenia over the period 1996-2004. As can be seen from this table, more than 50 per cent of total Commission financial assistance to Armenia was provided through the Food Security Programme and Macro-Financial Assistance. Excluding small projects, the TACIS National Programme financed only 18 per cent of Commission interventions in Armenia, the bulk of this assistance having been allocated to the energy sector, private sector development and support to institutional and legal reforms.



Table 3.1- Commission intervention in Armenia by instrument and by sector (1996-2004)

Source: Data provided by the Armenian National Co-ordinating Unit.

SECTOR INSTRUMENTTacis National Regional

Programme

Small Projects Nuclear Safety Other

instrumentsECHO Total %

MACROECONOMIC MANAGEMENT 56,500,000 56,500,000 20.8%

ENERGY 16,964,140 12,489,626 20,987,784 50,441,550 18.6%

INSTITUTIONAL REFORMS 12,072,957 3,448,354 4,830,627 2,300,000 22,651,938 8.4%

PRIVATE SECTOR 12,804,153 1,697,652 3,034,886 17,536,691 6.5%

TRANSPORT 10,564,611 10,564,611 3.9%

EDUCATION 3,698,976 77,721 4,503,008 8,279,705 3.1%

OTHER SOCIAL SECTORS 3,232,730 630,847 35,300,000 39,163,577 14.4%

ENVIRONMENT 2,761,905 368,167 3,130,072 1.2%

AGRICULTURE 1,000,000 1,350,000 349,666 43,400,000 46,099,666 17.0%

CIVIL SOCIETY 731,189 302,290 1,033,479 0.4%

EMERGENCY AID 15,630,000 15,630,000 5.8%

TOTAL 49,772,956 33,121,058 14,019,491 20,987,784 137,500,000 15,630,000 271,031,289 100.0%

% 18.4% 12.2% 5.2% 7.7% 50.7% 5.8% 100.0%



3.3 The Commission’s intervention logic

3.3.1 From demand-driven co-operation to co-operation based on a policy dialogue

Until 2000, the identification process for Commission interventions in Armenia, at least for those financed from the TACIS National Programme, relied heavily on the National Co-ordinating Unit, a government institution located within the Ministry of Finance but benefiting from financial and technical support from the Commission. The NCU proposed to the Commission a list of projects prepared through consultations with the various government agencies. Indicative Programmes were designed on the basis of this list, taking into account the priorities identified by the Armenian side, the concentration areas of the TACIS programme as stated in the TACIS Regulations, the comparative advantage of Commission co-operation and the resources allocated to the National Programme. The entry into force of the PCA in July 1999 induces a shift from demand-driven co-operation to co-operation based on policy dialogue between the GoA and the EU. The decision of the European Council in June 2004 to include Armenia in the European Neighbourhood Policy5 should further strengthen the policy dimension of the Commission’s co-operation with the country.

3.3.2 The intervention logic proposed by the Country Strategy Paper 2002-2006

On 27 December 2001, as required by the TACIS Regulation, the European Commission adopted a Country Strategy Paper defining the strategic framework within which the Commission’s co-operation with Armenia will develop over the period 2002-2006. This document underlines that “based on the Partnership and Co-operation Agreement, the EU’s co-operation objectives are to build a relationship with Armenia in which the respect of democratic principles, the rule of law, and human rights, along with the consolidation of a market economy, are supported and fostered ”. It defines Armenia as a developing country and consequently, in line with the Statement of the Commission and the Council of November 2000 on the European Community’s Development Policy, it makes poverty reduction the primary focus of the Commission’s development assistance to Armenia. Based on these principles, the Country Strategy Paper states: “The EU/EC will: Continue to work on the implementation of the PCA, with a focus on the

approximation of legislation and reforms;

5 Press release of the 2590th Council Meeting, General Affairs and External Relations, Luxembourg, 14 June 2004.



Contribute to creating the conditions for poverty reduction and sustainable economic growth, raising deteriorating social standards and improving the living conditions over the longer term”.

These principles are reflected in the National Indicative Programmes for 2003/2004 and 2005/2006. The Country Strategy Paper deals with all Commission interventions in Armenia, regardless of the financing instrument on which they rely, and stresses the need for close co-ordination between these various instruments. But the National Indicative Programme is restricted to those interventions financed from the National TACIS programme except for the technical assistance provided to the Ministry of Agriculture and the Ministry of Labour and Social Affairs under financing of the Food Security Programme. Other instruments such as macro-financial assistance, budget support provided by the Food Security Programme, the Nuclear Safety Programme, the Regional Programme and EIDHR are not included in the National Indicative Programme, although aggregated financial allocations to these instruments widely exceed those of the national programme.

3.4 The European Neighbourhood policy

From 2007 co-operation between the European Commission and Armenia will make use of a new financial instrument, the European Neighbourhood and Partnership Instrument (ENPI)6, thus reinforcing the policy-driven character of the Commission’s co-operation with Armenia. The Regulation establishing the ENPI states (Article 2) that “Community Assistance under the Neighbourhood and Partnership Instrument shall promote enhanced co-operation and progressive economic integration between the European Union and the partner countries and, in particular, the implementation of partnership and co-operation agreements (…)”. The Regulation underlines that the ENPI shall rely on the principle of co-financing and shall be based on a partnership with beneficiaries. Article 4 states in this respect that:

(a) Community assistance (…) shall normally complement or contribute to corresponding national, regional or local measures;

(b) Community assistance (…) shall normally be established in partnership between the Commission and the beneficiaries. The partnership will involve, as appropriate, national, regional and local authorities, economic and social partners, civil society and other relevant bodies;

(c) The beneficiary countries shall associate the relevant partners as appropriate, in particular at regional an local level, in the preparation, implementation and monitoring of programmes and projects;

(d) Community assistance (…) shall normally be co-financed by the beneficiary country through public funds, contributions from beneficiaries or other sources.

6 Proposal for a Regulation of the European Parliament and of the Council laying down general provisions establishing

a European Neighbourhood and Partnership Instrument, 29.09.2004, COM(2004) 628 final.



The new instruments shall be used to support a variety of measures (Article 15). In particular, it may be used “for sectoral and budget support if the partner country’s management of public spending is sufficiently transparent, reliable and effective, and where it has put in place properly formulated sectoral and macroeconomic policies approved by its principal donors including, where relevant, the international financial institutions”. In its comments on the Regulation project, the Commission points out that “concern for results, namely the political and economic reforms in the partner countries, leads the Commission to suggest, where possible, moving further financial and technical assistance from projects towards sector programmes, budget support and macro-financial assistance”. But the Commission also underlines that “the provision of assistance shall take into account, for those partner countries that are developing countries, the principles and objectives of the Community development policy”, that is poverty alleviation as the overarching objective, achievement of which implies sustainable economic development, integration into the world economy, and a campaign against inequalities.



4. Answers to Evaluation Questions

Introduction

The evaluation is structured around 10 Evaluation Questions covering different aspects of the Commission’s strategy for Armenia. They were compiled on the basis of the documents analysed during the Desk Phase, information collected from interviewees and the reconstructed intervention logic presented in the preceding section.

N° Question

1 To what extent did the Commission strategy address the main obstacles faced by Armenia in its transition towards a market economy and a democratic society based on the rule of law?

2 To what extent did Commission interventions contribute to the development of the private sector and the integration of the Armenian economy into the world economy?

3 To what extent did Commission interventions contribute to the development of the agricultural sector?

4 To what extent did Commission interventions contribute to the development of an education system that meets the needs of Armenia’s transition process to a market economy and to a democratic society?

5 To what extent did Commission interventions contribute to meeting Armenia’s energy needs with a reliable, sustainable and safe energy supply system?

6 To what extent did Commission interventions contribute to alleviating the social consequences of transition, in particular poverty?

7 To what extent did Commission interventions contribute to strengthening democracy and the rule of law?

8 To what extent did Commission interventions contribute to develop regional co-operation and, reciprocally, to what extent has the geo-political situation of Armenia impacted on the effectiveness of the Commission co-operation?

9 To what extent has the Commission’s strategy in Armenia been designed so as to complement and co-ordinate its actions with other donors programmes and/or with other EU member States initiatives? To what extent has the Commission’s strategy and realisations in Armenia been affected by other EU policies?

10 How effective have been the implementation mechanisms of Commission assistance to Armenia?

The object of this chapter is to present the answers to the Evaluation Questions and their related Judgment Criteria. The analysis is based on the information gathered from interviews and documents during the Desk Phase and the Field Mission.



Background information relevant to question 2 (Private Sector); question 3 (Agriculture); question 4 (Education); question 5 (Energy); question 6 (Social issues), question 7 (Democracy and the rule of Law) is presented in annex 5.

Question 1: To what extent did the Commission strategy address the main obstacles faced by Armenia in its transition towards a market economy and a democratic society based on the rule of law? As stated in the TACIS Regulations, promoting the transition to a market economy and reinforcing democracy and the rule of Law in the partner States are the two main goals of the Commission’s co-operation with the New Independent States. Achieving these objectives implies implementing activities that target the main constraints to economic transition and democratic progress and support the driving forces behind such changes. Comparing the priorities of the PRSP with the Commission’s areas of intervention reveals that the Commission addressed most of the key issues involved in Armenia’s transition to a market economy. Less attention and efforts were devoted to transition to a democratic society in which the rule of law is respected.

Judgment Criterion 1: Commission interventions targeted the main obstacles faced by Armenia in its transition process towards a market economy

The table presented below lists, in the first two columns, the priorities of the Poverty Reduction Strategy of the Armenian government and the means being considered by the GoA to achieve the strategy objectives; and in the last column, the main activities implemented by the Commission in its co-operation with Armenia during the 1996-2004 period covered by this evaluation. When making such a comparison between the PRSP priorities and the Commission’s activities in Armenia, one must keep in mind that the economic and social situation in Armenia has undergone dramatic changes over the last 15 years. Economic activity, cut by more than 50 per cent in the earlier years following independence, has been on a positive trend since 1994, and has accelerated in the early 2000s to double-digit rates of growth. Rising fiscal revenues are allowing an increase in public expenditures and at the same time a reduction in the budget deficit to a sustainable level. Poverty, which still affected a majority of the population in 1999, has started to recede. These developments have inevitably implied changes in the nature and content of the Commission’s co-operation strategy with Armenia. Furthermore the Poverty Reduction Strategy was only adopted in 2003. Prior to this date the Commission was not provided by the Government with a policy document within which to frame its co-operation.



Despite such arguments, the comparison demonstrates a high level of consistency between the priorities identified by the PRSP and the activities implemented by the Commission.

PRSP Priorities Implementation means Commission interventions

Securing sustainable economic growth

Sound fiscal and monetary policies Macro-Financial Assistance

Increased agricultural productivity FSP financial and technical support to the MoA

Development of agricultural markets

Improved access of farms and rural enterprises to credit

Support to the establishment and development of ACBA FSP financial support to the SCC

Alleviation of rural poverty

Promotion of non-farm activities Support to regional administrations

Decentralisation Support to regional administrations

Increased salaries in the public sector

More efficient budget management FSP technical assistance to the MoEF, MoA and MoLSI

More effective tax policy Promotion of small and medium enterprises

Support to SMEs

Better access of enterprises to credit Support to the establishment and development of ACBA

Institutional reforms and improvement of business environment

Institutional and legal environment conducive to the development of enterprises

AEPLAC

Targeted family benefits FSP support to the MoLSI More efficient and sustainable social insurance system

FSP support to the MoLSI

Pro-active employment policy Support to the employment policy

Improved access to healthcare services

Support to the health sector

Improved quality and efficiency of education

Support to higher education and to vocational education

Human development

Development of local communities and of Civil Society

Support to regional administrations EIDHR

Improved access to safe water Construction of rural roads Support to regional

administrations

Infrastructure development

Secure energy supply INOGATE, TRACECA, Nuclear Safety Programme



At a time when the GoA was struggling with a huge budget deficit and was unable to service its foreign debt, the Commission, in close co-operation with the IMF, contributed through its macro-financial assistance to easing the financial constraints while supporting the Government’s endeavours to implement sound macroeconomic policies. The Commission was one of the first donors to identify the importance of the agricultural sector for addressing the poverty issue and to support the development of this sector through its contribution to the establishment and development of an agricultural bank, its strengthening of the State Committee for Real Estate Cadastre (SCC) and its financial and technical assistance to the Ministry of Agriculture. Its interventions to strengthen the capacity of regional administrations to design and implement local development plans should also have a positive impact on the economic and social situation in rural areas. Job creation by private enterprises, primarily by SMEs, is key to the alleviation of poverty. The Commission directly supported the development of the private sector though the establishment of Business Support Centres. Indirect support to enterprise development is provided by the Armenian-European Policy and Legal Advice Centre (AEPLAC), which assists the Government in the design and implementation of reforms aimed at making the institutional and legal framework conducive to the development of enterprises and to facilitating the integration of Armenia into the world economy. In the field of institutional reforms, other developments planned by the PRSP include improvements in public finance management and implementation of a decentralisation policy through a three-tier system: central government, regions (marzes) and communities. Technical assistance provided through the Food Security Programme to the Ministry of Economy and Finance, the Ministry of Agriculture and the Ministry of Labour and Social Issues addresses public finance management, while the technical assistance provided to regional administrations supports the implementation of the decentralisation policy. The Food Security Programme made a substantial contribution to the financing of the Family Benefit Scheme, which is the government’s main instrument for tackling extreme poverty, and supports Government endeavours to improve the effectiveness and efficiency of its social security system. Other objectives of the PRSP include increasing public expenditure in social sectors and improving the efficiency of public services. Commission projects have assisted the Government in its attempts to improve the effectiveness of employment policy and also to reform the health sector with the aim of providing the entire Armenian population with affordable primary healthcare services. Other projects targeted the higher education and vocational education systems inherited from the Soviet Union, which were poorly adapted to the needs of a market economy and have been severely affected by credit shortages. Finally the Commission met another important objective of the PRSP through its support, through a variety of financing instruments, for the rehabilitation of major infrastructure in the transport sector, and to the rehabilitation and development of hydropower and thermal electricity generation capacities.



Judgment Criterion 2: Commission interventions supported the driving forces of economic change

Most beneficiaries of Commission interventions are government agencies. However the Commission, through the establishment of Business Support Centres, provided information, training and advice to new entrepreneurs and contributed to the development of local capacity for business consultancy. It is also worth noting that the Steering Committee of AEPLAC includes, besides representatives of the main relevant ministries, representatives of entrepreneurial organisations.

Judgement Criterion 3: Commission interventions targeted the main obstacles faced by Armenia in its transition process towards a democratic society

In Armenia, as in all countries of the former Soviet Union, democracy is a new development. Even if progress has been registered, democratic institutions remain fragile and under threat of nepotism and corruption. This issue was directly addressed through a TACIS project aimed at strengthening the National Assembly. Regional development projects could also make a contribution to democratic consolidation if they succeed at promoting a participatory approach to decision-making at regional level, and even more so if the decentralisation policy leads to elected regional governments. The European Initiative for Democracy and Human Rights programme implemented projects at both regional level and, more recently, at national level in support of NGOs’ activities, and the Commission contributed to the financing of initiatives implemented by the Council of Europe. But the Commission’s strategy in Armenia did not assign to the goal of transition to a democratic society the level of importance that the TACIS Regulations, and still more the Partnership and Co-operation Agreement, would have led one to expect.

Judgment Criterion 4: Commission interventions supported the driving forces of the transition to democracy

Limited attempts were made to strengthen the capacity of Civil Society to play an active role in the consolidation and progress of democracy. More comments on this issue are presented below under Evaluation Question 7.



Question 2: To what extent did Commission interventions contribute to the development of the private sector and the integration of the Armenian economy into the world economy? Development of the Armenian private sector, in particular of SMEs, has been very dynamic, and trade is growing extremely fast. The Commission made a positive contribution to these developments through two different and complementary activities. On the one side, through the AEPLAC project the Commission provided, and is still providing, technical assistance to the Government for the establishment of an institutional and legal framework conducive to the development of the private sector and to the integration of Armenia into the world economy. On the other side, through the establishment of advisory units providing business support services, the Commission assisted a significant number of small and medium enterprises in the earlier stages of their development, while contributing to the strengthening of local capacities in the field of business consultancy services. However, development of the private sector still suffers from serious deficiencies in the enforcement of the legal framework. This situation, aggravated by the political instability in the region, the persistent conflict between Armenia and Azerbaijan, and the blockade of Armenia’s borders with Azerbaijan and Turkey, are factors explaining the relatively low level of foreign direct investment.

Judgment Criterion 1: Commission interventions contributed to the establishment of an institutional and legal environment conducive to the development of the private sector and to the integration of the Armenian economy into the world economy

Assisting the GoA in establishing an institutional and legal framework conducive to the development of the private sector and integration of the Armenian economy into the world economy is the core objective of AEPLAC. The project ToR indicate that “priorities for legislative adaptation should be selected on the basis of what can best and most rapidly improve Armenia’s prospects for faster and better development”. Key areas mentioned in AEPLAC ToR are: company law; bankruptcy legislation; competition, trade and investment; financial services and accounting; customs and standardisation; protection of intellectual property; public procurement. The Centre is governed by a Steering Committee in which both the Government and the private sector are represented. AEPLAC’s Steering Committee is co-chaired by the Head of the Economic Department in the Prime Minister’s Office and the Deputy Minister of Trade and Economic Development. Other members represent the Ministry of Economy and Finance, the Ministry of Foreign Affairs, the Armenian Development Agency, the Association of Industrialists and Entrepreneurs, the Union of Banks of Armenia and the EU Chamber of Commerce in Armenia.



AEPLAC has played an important role in preparing Armenia’s accession to the World Trade Organisation, which finally took place in 2003, and subsequently in assisting the government in fulfilling its post-accession obligations. On 29 April 2004 the Government issued a decree “On organising the activities on elaborating a National Programme for implementation of the Partnership and Co-operation Agreement concluded between the Republic of Armenia, the European Community and its Member States”. The deadline for completion of a draft National Programme is 1 October 2005. The decree establishes a Co-ordinating Committee for the elaboration of the National Programme under the chairmanship of the Prime Minister7. It states that the Co-ordinating Committee should “order the Armenian-European Policy and Legal Advice Centre to assist the Co-ordinating Committee in the work on elaborating the programme”. Indeed, AEPLAC plays a key role in the preparation of the National Programme. In particular, it has undertaken a comparative mapping of Armenian and European legislation, and is providing information and methodological support to the 24 thematic working groups established by the Co-ordination Committee. Besides these main activities, AEPLAC plays to some extent the role of a ministerial cabinet, providing advice at short notice to ministries and government agencies on legal issues in the field of trade and economic affairs. AEPLAC also publishes a quarterly review - “Armenian Trends” - presenting analyses of economic and social developments in Armenia. Copies of the review include an economic databank on CD-ROM. Some Government officials tend to downplay the role of AEPLAC. They acknowledge that the Centre’s contributions may be useful, but stress that ministries have sufficient in-house capacities to deal with the issues addressed by the Centre. This reticence towards AEPLAC seems to be linked to tensions that arose under AEPLAC II between the government and the management of the Centre because of attempts by the AEPLAC team to push forward reforms and initiatives that did not reflect the views of the government. These tensions have eased under AEPLAC III. Nevertheless the question of AEPLAC’s position is still sensitive. On the one side the government sees AEPLAC as a government agency8 and considers that involvement of the private sector should be restricted to providing advice on draft laws and decrees prepared by the Centre at the request of the government. On the other side representatives of the private sector in the Steering Committee complain that they do not have a voice in the formulation of the work agenda of the Centre, and that the Centre does not pay enough attention to issues that are crucial for entrepreneurs such as enforcement of laws, practices of the tax administration and of the customs, corruption, etc.

7 Initially chairmanship of the Co-ordinating Committee was ensured by the Minister of Economy and Finance. A

further decree entrusted the Prime Minister with this responsibility. 8 As noted above, the decree relative to the elaboration of the National Programme for PCA implementation « orders »

AEPLAC to assist the Co-ordinating Committee.



Judgment Criterion 2: Commission interventions contributed to the creation and development of competitive private enterprises

The Armenian business community has a very positive assessment of the Commission projects in direct support of SMEs. This applies in particular to the Armenian Business Support Centre implemented in 1998/2000 as well as to the TAM/BAS project implemented in 2003/04 through a co-operation between the Commission and the EBRD. The TAM/BAS project established in Yerevan a Business Advisory Service providing information, training and advice to SMEs, while at the same time developing the know-how and capacity of local consultancy firms. The BAS closely co-operated with the National Centre for Small and Medium Entrepreneurship Development (SME DNC) and with Chambers of Commerce, which were represented on its Advisory Board. Over 400 SMEs have been visited by the BAS team and 300 projects have been assessed. Altogether 167 development projects have been implemented in SMEs9 with the assistance of 38 local consultancy companies. Projects were implemented in Yerevan and in the regions. An analysis carried out on a sample of 34 completed projects shows that employment in beneficiary enterprises increased by 27 per cent, from 1,900 to 2,416, and sales by 53 per cent in comparison with the situation prior to the provision of support. It is worth noting that the BAS office was appointed by the Ministry of Trade and Economic Development as a member of the Council for SME support. The Yerevan BAS also provided support to a similar structure established in Tbilisi (Georgia). The TAM component of the programme focused on larger enterprises with 200-1,000 employees. It provided tailor-made consultancy to five companies, assisting them in such activities as reform of their organisational structure, development of their marketing capacity, acquisition of western licences and know-how, and so on. In addition to their contribution to the development of those enterprises that have directly benefited from their services, the Commission’s SME projects have supported the creation and development of a market for business support services in Armenia. On the one side they raised the awareness of Armenian entrepreneurs of the usefulness of such services, while on the other side they developed the capacity of local consultancy companies. However critics point out that these projects distorted the market for business services since their services were subsidised. To date the market for business services remains quite small and mainly restricted to the outsourcing of accounting and auditing. Consultancy companies are however confident that new branches will develop in such areas as IT/MIS, ISO certification, market analysis, development planning, feasibility studies, and partner search.

9 The project overcame its target which was limited to 125 development projects.



Judgement Criterion 3: Commission interventions contributed to the integration of the Armenian economy into the world economy

External trade developed very rapidly between 1993 and 2003, exports and imports of goods growing at an average annual rate of 16.0 per cent in dollar terms. Total exports and imports grew even faster by 28 and 21 per cent per annum respectively10. In parallel the share of EU-15 in exports of Armenian goods increased from 10.6 per cent in 1993 to 38.0 per cent in 2003 and its share in imports from 14.0 per cent to 29.3 per cent. Development of foreign direct investments has been much less satisfactory. From US$25.3 million in 1993, FDI jumped to US$232.4 million in 1998, but has stagnated since 2000 at slightly above US$100 million per year, that is approximately 4.5 per cent of GDP. It was noted above that the AEPLAC project and its predecessor have played an important role in preparing Armenia’s accession to the WTO, and then at assisting the GoA in meeting related commitments. Support given to SMEs, as well as to smaller projects aiming at establishment of links between Armenian professional organizations such as Chambers of Commerce and their counterparts in the EU, have very likely had a positive impact on the development of trade and, more widely, of Armenia’s international economic relations. However, the main obstacle by far to the development of external trade and economic relations is the blockade of Armenia’s borders by Azerbaijan and Turkey.

Question 3: To what extent did Commission interventions contribute to the development of the agricultural sector? The Commission targeted the agricultural sector through two main interventions: technical assistance to the establishment and development of the Agricultural Credit Bank of Armenia (ACBA) and financial and technical support to the Ministry of Agriculture (MoA) and the State Committee for Real Estate Cadastre (SCC). Thank to the quality of Armenian partners, but also to the coherence and continuity of the Commission’s assistance, the ACBA projects successfully equipped the Armenian agricultural sector with a much needed credit institution, which plays a key role in the development of the sector. Financial support given to the SCC together with limited technical assistance contributed to the development of an effective and nowadays self-sustainable cadastre.

10 Calculated from the AEPLAC economic database.



The Food Security Programme started in the mid-1990s as a programme aimed at securing food imports through the provision of foreign currency to the Armenian Central Bank with counterpart funds transferred to the MoA, the SCC and the Ministry of Social Issues. The programme is gradually evolving towards a budget support programme similar to those implemented by the Commission in other regions. It is providing financial and technical support to the activities implemented by the ministry in support of agricultural production. It contributed to rationalising the ministry activities and to improving public finance management. A more effective contribution of the programme to a market-oriented development of the agricultural sector would require that a policy dialogue between the Government and the Commission leads to the design and implementation of a comprehensive development strategy for the sector as a whole.

Judgment Criterion 1: Commission interventions contributed to the establishment and development of family farms

Commission interventions in support to the development of the agricultural sector did not directly target farmers, but may have had an indirect impact on structural developments of the sector. Financial resources provided to the State Committee for Real Estate Cadastre through the Food Security Programme, together with technical assistance and financial resources provided by several other donors11, have allowed development of an effective land cadastre administration12, which by the end of 2004 had completed the mapping and registration of all land plots in rural and urban areas. The SCC is currently dealing with contentious situations such as illegally-occupied land plots and illegal constructions. It plans to have property titles handed over to all landowners by the end of 2005. This should allow development of the land market13, thus favouring a gradual restructuring of a highly fragmented agricultural sector, and making possible development of medium-term mortgage loans. A working group on mortgage credit is currently meeting under the chairmanship of the Head of the SCC to prepare the appropriate legislative framework.

Judgment Criterion 2: Commission interventions improved the access of farmers to agricultural inputs and credit

Support to the Agriculture Credit Bank of Armenia is one of the Commission’s most striking achievements in Armenia. Through four successive projects, the first one having been launched in 1992 and the last one completed in 1999, the Commission accompanied the bank from the pre-feasibility study stage to the development of bank operations. It furthermore managed to use its political leverage on the Armenian government to persuade them to allocate the equivalent of US$2.0 million of counterparts funds to constitute the initial capital of the bank. 11 Other donors that have supported the State Committee for Real Estate Cadastre are the World Bank, USAID, the

Swiss Co-operation and the Finnish Co-operation. 12 In the World Bank survey of business conditions in 2004 Armenia ranks 9 out of 145 countries as regards the

effectiveness of its land property registration system. 13 There had been 18,000 transactions on the land market in 1998; the State Committee for Real Estate Cadastre expects

this number to reach 100,000 in 2005.



Nowadays ACBA is the first bank in Armenia with respect to shareholder equity, real-sector loan investments, agricultural loan investments and interest incomes. It is the sixth Armenian bank in terms of its total assets. While it has developed a large range of products and extended its activity to micro and small enterprises in the trade, production and service sectors and to consumer credits, ACBA remains by far the most active bank in the Armenian agricultural sector. It has branches in eight provinces and relies on a network of 586 Agricultural Co-operative Village Associations14 with a total of 20,491 members. Most credits granted to farmers by ACBA are short-term credits, but the bank has undertaken to support the mechanisation of agriculture through the leasing of farm equipment. Since the beginning of its operations in 1997, the bank has put in place a network of advisers who provide training to farmers in the fields of accounting and farm management. However, the PRSP points out that in 2001 only 18 per cent of rural households were making use of borrowed funds.

Judgement Criterion 3: Commission interventions contributed to a market-oriented development of the agricultural sector

The land reform implemented in 1991 led to the creation of small farms whose main orientation was towards ensuring self-subsistence of the farmer households. This situation is changing only slowly. The marketed share of agricultural production is estimated at 40 per cent of total output and consists to a large extent of direct sales by farmers at local level. The output of the food processing industry grew between 1999 and 2003 at a relatively modest rate of 3.1 per cent in real terms15, a rate of growth that was insufficient to prevent further losses of jobs in the sector from 14,300 in 1999 to 11,600 in 200316. A more encouraging indication is provided by external trade figures, which show an increase of the exports of agricultural and food products from US$10.7 million in 1993 to US$81.2 million in 2003, while imports of agricultural and food products stagnate since 1998 at about US$220 million. The Agriculture Credit Bank of Armenia contributes to the development of a market-oriented agriculture to the extent that it facilitates the creation at village level of micro and small enterprises involved in wholesale trade and in processing of agricultural products. Support given to the Ministry of Agriculture by the Food Security Programme might have an important contribution to a market-oriented development of the agricultural sector. Originally, the FSP, started in 1996, aimed at securing the import of food products through the provision of hard currency to the Central Bank of Armenia17, the counterpart funds being allocated to specific budget lines in the MoA, the SCC and the Ministry of Labour and Social Issues. As the hard currency shortage relaxed, the budget support dimension of 14 Altogether there are in Armenia 871 rural communities. 15 Source : AEPLAC – Armenian trends. Over the same period the real output of the whole manufacturing sector grew

at an annual rate of 4.7 per cent. 16 Source : National Statistical Service. 17 Still today the disbursement of FSP funds is conditional to the provision by the GoA of evidence that the country has

imported food and agricultural products for a total value at least equivalent to the FSP allocation.



the programme became predominant. This change in the programme focus should have induced the Commission to apply to it the principles that guide its sectoral budget support programmes in other regions18. This would have implied in particular a move from one- year to three-year programmes; entering into a dialogue with the GoA on its agricultural and rural development policy; promoting Government-led donor co-ordination in the sector; and linking budget support to the MoA to the achievement of outcomes commonly agreed between the GoA and the Commission. This however only partly took place19. The FSP remained on an annual basis until 2005, when it was extended to two years (budget years 2005 and 2006); it was only in the 2002 MoU (budget year 2003) that the Commission stipulated, as a condition for FSP funds disbursement, that the MoA should elaborate a development strategy for the sector. A strategy document was eventually released in 2004. Conducting the policy dialogue with the MoA was left to the consultants in charge of managing the FSP. No attempt was made to enhance donor co-ordination. Disbursement of FSP funds remained contingent on the adoption of policy measures rather than performance-oriented.

Judgment Criterion 4: Commission interventions contributed to an increased productivity of the agricultural sector

The Ministry of Agriculture’s main activities focus on preserving agricultural production potential through maintenance of irrigation20 and drainage infrastructure; increasing yields through selection of more productive plant varieties and animal breeding; and preventing production losses through vaccination campaigns and actions against crop predators. These activities contribute to an increase in plant and animal yields. But they only have a limited impact on the productivity of agricultural labour, and therefore on farmers’ income. Activities implemented by the MoA are supported by the Commission through financial support and technical assistance provided to the ministry by the FSP. Permanent technical assistants at the MoA and short term consultancies on technical issues aim at enhancing the effectiveness and efficiency of ministry expenditures. Through the design and implementation of pilot programmes they assist the MoA in putting in place programming and monitoring systems for veterinary services, plant protection services, the maintenance of drainage systems, and so on. They supported the move of the MoA towards medium-term programme-based budgeting, thus contributing to enhancing the transparency and efficiency of public expenditures.

18 See European Commission, Guidelines for European Commission Support to Sector Programmes, February 2003. 19 The Evaluation of the Commission’s Country Strategy in Ethiopia made a similar observations. It pointed out that

the Commission’s Food Security Programme in this country “is completely at odds with the recent development in budget support approaches and procedures”. WH-ECDPM-ODI, Evaluation of the European Commission’s Country Strategy for Ethiopia, May 2004.

20 Responsibility for the maintenance of irrigation infrastructure, which rested with the MoA, has been recently transferred to a State Committee for Water.



Judgment Criterion 5: The outcomes of Commission interventions in the agricultural sector are sustainable

As pointed out above, the Agricultural Credit Bank of Armenia is strongly established and is developing quite satisfactorily. The management of the SCC considers that the institution is now able to develop on its own without further support from foreign donors. In both cases the sustainability of Commission interventions is therefore fully assured. Contributions of the FSP to more effective public expenditures at the MoA through the implementation of programming and monitoring systems and through programme-based budgeting are also likely to be durable. The FSP has helped the MoA formulate a strategy21 which is a first and important step towards more consistent intervention by the government in the development of the agricultural sector. However this strategy narrowly focuses on the MoA areas of intervention, leaving outside its scope all sectors upstream and downstream of agricultural production. Whereas the main challenge is to move from a self-subsistence to a market-oriented agriculture, the expected results of the strategy are expressed, in the old manner, in terms of yields and physical outputs by products and regions. Hopefully planned revisions and updating of the strategy will allow correction of these weaknesses. Finally examination of the MoA budget suggests that agriculture might not be given by the government the attention that it deserves, considering its potential role in poverty alleviation. Budget resources planned for the Ministry of Agriculture in the Medium Term Expenditure Framework 2005-2007, at about 1.5 per cent of total budget expenditures, are extremely modest. Furthermore one-third of these expenditures is financed from project aid provided by two foreign donors, the World Bank and IFAD.

Question 4: To what extent did Commission interventions contribute to the development of an education system that meets the needs of Armenia’s transition process to a market economy and a democratic society Through a series of small Tempus projects the Commission has effectively supported the development of new curricula in universities, improvement of their management, the establishment of links between universities and the economy. But the scarcity of budget resources allocated to universities puts at risk the sustainability of these achievements. Since 2003 the Commission has undertaken support for vocational education, which had remained untouched since independence and was in an extremely poor state. This involvement of the Commission in VET is fully consistent with the priority given by the Commission’s country strategy to poverty alleviation for vocational education is key to the reduction of unemployment and an important factor in enhancing the competitiveness of the Armenian economy. 21 Republic of Armenia, Ministry of Agriculture, Agricultural Sustainable Development Strategy, 2004.



A Commission-funded project contributed to the design of a strategy for the sector. The Commission is currently supporting the implementation of this strategy on a pilot basis. This ambitious project faces difficulties that are easily explicable considering the dire situation in which the sector has been left. These difficulties, as well as the budget allocation priorities of the GoA which will only shift towards VET from 2009 onwards, make continued foreign support desirable if the momentum created by the Commission’s projects is to be maintained.

Judgment Criterion 1: Commission interventions contributed to improving the adequacy between supply and demand of high level qualifications on the labour market

The Commission is the main donor supporting higher education. Tempus projects addressed a variety of issues: Development of curricula in such sectors as agricultural economics, banking, civil

engineering, energy economics, environment, law, medicine, translation and interpretation, transport, social work, tourism;

Establishment of a distance learning service; Restructuring of university management and administration; Development of links between universities and industries; Creation of a student career centre.

These projects are assessed positively by all stakeholders. Tempus projects, being implemented through co-operation between an Armenian university and a European university, give the former an opportunity to benefit from the experience accumulated by European universities in adjusting the services they offer to the needs of a market economy. Together with mobility grants, these projects contribute to establishing between Armenian universities and their counterparts in the EU relations that are continued once the projects are over. Furthermore, several of these projects also involved a Georgian university, thus contributing to the development of co-operation between universities at regional level. Besides these positive features some weaknesses of the Tempus approach can be pointed out. First, each application is independent from the others and there is no explicit mechanism for ensuring that applications are consistent with government or institutional priorities. The situation in Armenia is especially problematic in this regard for up to now there did not exist a government strategy for the development of higher education. Second, Tempus is mainly providing technical assistance and revenue income, whereas the most acute need of universities is for capital investment in scientific instruments, laboratories and workshop facilities. Third, Tempus is supporting the teaching activity of universities while co-operation in the field of scientific research is promoted by INTAS22, an 22 The International Association for the promotion of co-operation with the scientists of the New Independent States

(INTAS) is an independent association formed by the European Community, the EU member States and like-minded countries. The European Commission provides financial support to the association.



independent association financially supported by the Commission. This divide between education and research is unhelpful as in universities research and teaching are inextricably linked. Vocational education is key to addressing the unemployment issue - and consequently the poverty and emigration issues - and to improving the competitiveness of the Armenian economy. A survey carried out by the UNDP Office in Armenia23 reveals a positive impact of vocational and higher education on the level of employment and on the income of young people. However during the 1990s government and employers underestimated the strategic importance of vocational training, for on the labour market there was an abundant supply of technicians and qualified workers made redundant by the collapse of the former State-owned large enterprises. This situation is gradually changing. There are already examples of Armenian enterprises having to recruit abroad, mainly in Russia, the qualified labour force which they cannot find locally24. A TACIS project contributed to the elaboration of a strategic document on VET25, which was adopted by the GoA in 2004. This document presents a dire picture of the current state of VET in Armenia. It points out that this sector of the education system has severely suffered and still suffers from serious deprivation of financial resources. Expenses for reconstruction of premises, procurement of modern furniture and equipment, training of management and professors, procurement of new training and methodological literature handbook are not funded. In the 2001/02 academic year only 46.5 per cent of the revenue of public middle vocational education institutions came from the state budget against 51.4 per cent funded by tuition fees and the remaining 2.1 per cent from other revenue sources. In spite of the dramatic changes that have taken place in the industrial structure and the distribution of enterprises by size, the document notes that “the system continues to prepare one and the same specialists in one and the same amount and the same quality of skills”. No framework exists for involving employer organisations and trade unions in the management of the system. On the demand side vocational education also suffers from numerous handicaps. On a labour market characterised by a high level of unemployment, employers tend to recruit university graduates to occupy technician-level positions, thus devaluating vocational education; the relatively high level of tuition fees prevents children from poor families from applying; male students of VET institutions are not granted, as are university students, a deferment of military service, so that many of them are compelled to interrupt their studies, which many do not resume later26; there does not exist any possibility for graduates of VET institutions to continue their studies in universities.

23 UNDP Armenia, Education, Poverty and Economic Activity Survey (EPEAS), 2001. 24 Another example quoted by several interviewees is the one of the company in charge of constructing the American

embassy in Yerevan, which did not find on the labour market the qualified workers it needed and was compelled to establish its own training centre.

25 Republic of Armenia, Ministry of Education and Science, Strategy of preliminary (craftsmanship) and Middle Professional Education and Training of the Republic of Armenia, 2004. The strategy was adopted by the GoA on the 6 May 2004.

26 This constraint also reflects in a large majority of women (66 per cent) among the students of VET institutions.



The VET strategy document provides a clear diagnosis of the situation, identifies the challenges to address and makes concrete proposals for reforms. It lists 12 issues to be tackled by the reform of the VET system, from creating an open and democratic VET system to meeting the need for lifelong learning. For each of these tasks, it details the following points: substantiation of the problem; ways of solving the problem; responsible body; legal provision for the solution and measures to implement it; time schedule; financial requirement; and sources of financing. A Law on VET building on this document is currently under discussion. Some representatives of the private sector however regret that the strategy document does not take apprenticeship into consideration, whereas in Armenia it is a traditional way of accessing a job and acquiring a qualification. Giving apprenticeship official recognition and integrating this training channel in the VET policy would ensure that apprentices are given the appropriate combination of knowledge and skills, and have their qualification certified. The TACIS project “Support to the development of an integrated vocational education and training system (VET) in Armenia” is a logical follow-up of the assistance given by the Commission to the design of a VET strategy. This project aims to help the Armenian government implement the VET strategy, that is develop a quality, cost-effective VET system flexible enough to respond to the changing needs of industry and commerce. The project addresses the VET system at three levels: policy design and implementation; relevance and quality of the training delivered by VET institutions; linkages between VET institutions and the labour market. The relevance of this project is indisputable, but its implementation reveals design weaknesses and faces practical difficulties. Most stakeholders in the administration as well as in the enterprise sector consider that the project, with some 38 outputs expected from 63 different activities, is overambitious and puts too high a pressure on the limited capacities of the sector. Furthermore implementation of the project is made especially complicated because financing and management of the VET sector is scattered between various ministries - the Ministry of Education and Science, which is the main beneficiary of the project, but also other line ministries (Agriculture, Energy, Health, Youth Affairs) – the co-ordination of which on these issues leaves much to be desired. It would have been logical to identify skill shortage areas and to work with the employers to determine priority sectors before developing the relevant curricula and finally purchase the required materials and equipment. However, because of the length of the procurement process and the relatively limited duration of the project (2.5 years), purchase of equipment was undertaken as early as 2004 on the basis of a best guess of which sectors would be identified. Eventually four professions or specialisations were selected for which the project is developing curricula; developing assessment and evaluation standards; training of teachers; provision of learning materials and equipment; involvement of social partners. The professions are: (i) decorative art and crafts, art metal working, jewellery; (ii) land



management; (iii) clothes production technology; (iv) technical servicing and maintenance of motor vehicles. According to interviewees the selection of these professions is more the result of a compromise between the main players in the field than of a scanning of actual labour market needs.

According to the ToR, piloting of the new approach should have been focused on rural areas. In practice, compromises led to a concentration of efforts on Yerevan and on two provinces (Ijevan and Vandzor), which are not those where the Commission is supporting the elaboration of development plans.

Judgment Criterion 2: The outcomes of Commission interventions in the education sector are sustainable

The links established through Tempus projects between Armenian universities on the one side, and European and Georgian universities on the other side, are likely to be durable. But sustainability of Tempus contributions to the enhancement of higher education and to its adjustment to the needs of the economy is under threat of a lasting shortage of resources. The MTEF 2005-2007 plans an extremely limited increase of 2.1 per cent a year of the budget resources allocated to higher education, the share of which in the total budget for education will accordingly fall from 12.4 per cent in 2003 to 6.1 per cent in 2007. The private-public financing model of higher education puts pressure on the universities and has, in some cases, led to lowering of standards, the buying of degrees by students, bribery and so on. The Commission’s aid needs to focus on quality control measures if the degree programmes it funds are to maintain credibility. Furthermore, as noted above, Tempus funding leaves unsolved the problem of a very much needed renovation and upgrading of the research equipment of universities.

Armenia is suffering from a large emigration flow of its labour force. There is no data that would allow an assessment of whether this emigration flow also includes university graduates. Interviewees suggest that such a risk is especially acute when Armenian scientists are given a research fellowship by foreign universities or research institutions. According to informants, this concerns the Commission’s co-operation less than bilateral co-operation between Armenia and the EU Member States.

Commission interventions have contributed to equipping Armenia with a strategy for the development of its VET sector and is currently supporting the implementation of this strategy on a pilot basis. The MTEF 2005-2007 demonstrates commitment of the Armenian government to developing the education sector. But the GoA is currently giving priority to general secondary education, and it is only from 2009 that the focus will be put on vocational education and higher education. The MTEF plans an increase of budget allocations to initial and secondary vocational education of 13.1 per cent a year between 2003 and 2007, a figure which is slightly below the overall growth rate of the education budget. But the tasks to be carried out to renovate a sector which has basically remained untouched since Soviet times, and whose image in the population is deeply devalued, are huge. Massive investments in the development of human and physical capacities are needed if the impulse given by the Commission project is to be maintained. According to most interviewees, there is a risk that the impact of the current Commission project will be dissipated if aid is withdrawn at the end of the current pilot phase in 2006.



Question 5: To what extent did Commission interventions contribute to meeting Armenia’s energy needs with a reliable, sustainable and safe energy supply system? The Commission devoted considerable resources to the Armenian energy sector with a view to allowing early decommissioning of the Medzamor NPP.

Commission-funded studies investigated the potential for new sources of energy. Feasibility studies for hydropower plants were carried out. These proposed projects have currently been submitted by the GoA to those donors and international banks most likely to finance them.

Through provision of equipment and implementation of capacity-building projects, Commission interventions have very likely made an important contribution to risk reduction in the nuclear sector. Safety of gas supply was improved by Commission-funded projects aimed at improving the Armenian leg of the gas pipeline and the Abovian gas storage facility.

Finally, capacity-building projects at the Ministry of Energy, and still more the establishment of the Energy Strategic Centre, enhanced the capacity of the Armenian authorities to assess the situation in their energy sector and plan its future development.

However, as long as new production units have not been completed, the Armenian energy system remains vulnerable and the Commission did not succeed in persuading the GoA to take on the commitment of closing the Medzamor NPP.

Judgment Criterion 1 : Commission interventions contributed to secure the satisfaction of Armenia’s energy needs

Studies financed by the Commission have contributed to identifying potential developments in the energy supply system through construction of hydropower stations and rehabilitation and development of the gas transport and storage infrastructure. Once operational, these projects would reduce the vulnerability of the system, and could make possible closure of the Medzamor Nuclear Power Plant without jeopardising the ability of Armenia to meet its energy needs. But for the time being, except for the refurbishment of the Vorotan cascade under Commission financing and a first step in the rehabilitation of the Abovian gas storage facility, the projects identified have not been completed. The Medzamor NPP, with a 40 per cent share in electricity generation, still has a major role in the provision of Armenia’s energy needs.



Furthermore the Armenian energy system remains vulnerable because: The NPP is subject to temporary shut downs as a consequence of technical incidents as

was for instance the case in December 2002-January 200327; Armenia has currently one single supplier of gas, the Russian company Gasprom.

Furthermore the Georgian leg of the pipeline bringing in Russian gas is in very bad condition with gas arriving at Yerevan at a pressure of 22 bars against a design pressure of 35 bars. Although in a better condition, the Armenian leg of the pipeline is in need of renovation;

Units 1, 2, 3 and 4 of the Hrazdan thermal plant, which is the second largest producer of electricity in Armenia after Medzamor, have not been adequately maintained. Actual capacity is 680 MW against a design capacity of 1,110 MW. Construction of unit 5 with a potential capacity of 440 MW was stopped in 1996 when it appeared that the loan granted by the EBRD was not sufficient to complete the project;

The Yerevan thermal plant is very old and in bad condition; The production of the Sevan cascade, the main hydro-electricity plant with a theoretical

capacity of 550 MW, is in practice limited by the need to restore the level of water in the lake after a period of severe depletion due to over-exploitation when production from the nuclear power plant was suspended28.

The establishment of peaceful relations between Armenia and Azerbaijan would considerably ease this situation. Armenia would be able to import from Azerbaijan large quantities of gas and to secure its electricity supply against production incidents through connection of its grid to the Azeri grid29. The opening of the border with Turkey and consequently interconnection of grids between Armenia and Turkey would also be beneficial to both countries as the Eastern provinces of Turkey suffer from electricity shortages30. A settlement of the Karabkh conflict would necessitate a complete reassessment of the energy situation in the region.

Future developments of electricity demand remain unclear. Most available forecasts31, including official forecasts, assume a GDP annual growth rate of about 8 per cent for the next eight to ten years, then of 6 per cent for the following years, and an elasticity of electricity consumption in relation to GDP growth of one. However, GDP has doubled between 1994 and 2003 without inducing any increase in electricity consumption. Indeed metered consumption increased from 3.4 GWh in 2002 to 3.96 GWh in 2004, but this reflects a reduction in commercial losses32 following the privatisation of distribution rather than a real growth in electricity consumption. 27 This incident coincided with an interruption of the supply of gas due to an accident on the pipeline. Gas reserves

were however sufficient to compensate for this interruption and allowed a substitution of nuclear electricity through thermal electricity. Production of the NPP was once again interrupted between April and July 2003, this time because of a shortage of nuclear fuel.

28 Because of safety fears the NPP, which had been shaken by the Spitak earthquake in December 1988, was phased out in February 1989. Unit 2 was allowed to restart in November 1995 after extensive renovation and additional measures for safety upgrading. Unit 1 is definitely closed.

29 HV transport lines exist although needing renovation. 30 Actually RAO-UES is considering to export electricity from Armenia to Turkey. 31 By Sogin, Sofreco, IAEA. 32 Unpaid electricity consumption because of the absence of meters or of illegal connexion to the grid.



Judgment Criterion 2: Commission interventions improved the sustainability of the Armenian energy supply system

The economic and financial situation of the energy sector has improved quite dramatically during the last few years. The energy system has been privatized to a large extent. Energy prices are determined by a Public Services Commission on a cost plus fee basis. Consumers pay their bills under the threat of suspension of deliveries. There are no more “quasi” deficits. Two less positive aspects of these changes must be pointed out: Electricity prices paid by consumers have largely increased; The energy system has not been made competitive. It is now made up of juxtaposed

monopolies. Prices are calculated as in a vertically integrated system. Consumers may switch, notably for heating, from electricity to gas, but there is no competition within either the gas or the electricity sectors. The whole gas system is under the control of a monopoly, and the electricity system is dominated by a single operator (RAO-UES), which currently controls close to 75 per cent of production and might further extend its control to the distribution network.

The Commission was not involved in the financial restructuring of the energy sector, which was mainly supported by the World Bank and USAID.

Judgement Criterion 3: Commission interventions contributed to reducing the risks linked to the energy supply system

Compliance of Medzamor with international safety standards cannot be assessed without an in-depth analysis by international experts, taking into account the design, the quality of construction, the dedication of the operators, the credibility of the Nuclear Safety Authority, the quality and regularity of maintenance, the existence of realistic emergency procedures in case of an accident, and so on. The Energy and Nuclear Power Planning Study for Armenia released by the IAEA in July 2004 does not address the security issue. It is however very likely that the safety equipment, on-site assistance and personnel training provided by the Commission to the NPP, as well as the capacity-building projects implemented by the Commission at the Armenian Nuclear Regulatory Authority, have contributed to reducing the risks associated with the Armenian nuclear sector. It is nevertheless worth noting here that the efficiency of the assistance provided to ANRA might be partly jeopardised by a recent development in the reorganisation of the sector. ANRA has been put under the supervision of the Ministry of Nature Protection. In consequence, salaries of the ANRA staff are now well below those of the NPP, a situation that has led several staff members to leave the organisation. The “Gas Security of Supply” project, following several earlier projects dealing with security issues in the gas sector, represents a major contribution to bringing the Armenian gas system (transport and storage) up to international safety standards. But no contribution has so far addressed the gas distribution network.



Question 6: To what extent did Commission interventions contribute to alleviating the social consequences of transition, in particular poverty? The Commission addressed the social consequences of transition, in particular poverty, through technical assistance projects financed from the TACIS national programme and through a financial and technical support to the MoLSI provided via the FSP. TACIS technical assistance projects fell short of fully delivering their expected outcomes. They suffered from being implemented in a context of institutional instability and financial crisis during the second half of the 1990s and the early 2000s, and at a time when the GoA had not yet designed its Poverty Reduction Strategy. But these weaknesses are also attributable to a lack of continuity of Commission interventions, which addressed several issues (employment, health, social security) with ambitious projects which, however, were neither allocated adequate resources nor followed up by subsequent projects that might have consolidated their results. The FSP gave a significant although not determining level of support to the financing of the Family Benefit Scheme, which has a key role in alleviating extreme poverty. The FSP also allocated substantial financial resources and technical assistance to the MoLSI in support of the design and implementation of a policy for childcare and child protection; contributed to improvements in budget preparation and execution; and supported innovative approaches of service delivery. The PRSP and the 2005-2007 MTEF reflect the commitment of the GoA to further strengthening of the social assistance system and improving its targeting.

Judgment Criterion 1: Addressing the poverty issue was an explicit objective of Commission interventions

Poverty alleviation was not an explicit objective of the TACIS projects implemented in the social sector in the 1990s and the early 2000s. These projects had been identified prior to the adoption by the Commission of a Country Strategy Paper, which makes poverty alleviation the core objective of the Commission’s co-operation. They also preceded the adoption by the GoA in 2003 of a Poverty Reduction Strategy. As a consequence, during the 1990s poverty issues were mainly addressed through humanitarian aid. Interventions in the social sector focused on helping key institutions to: develop legislation, build capacity for policy-making, develop human resources through training of staff, put in place and upgrade management and information systems.



The emphasis was largely on supporting reforms at central level and, where applicable (for example in the ‘Supporting the Decentralisation of the Social Security System’ project), helping to roll-out reforms to local and regional bodies, in line with the new territorial divisions. The overall objective of the TACIS project in support of health sector reform was “to assist the Ministry of Health of Armenia in the implementation of the health care system reform by improving its planning and management capacity”. The poverty issue was indirectly addressed in the project ToR, which stressed that the health system should be “responsive to the health needs and at the same time affordable to the general Armenian population”. The transition process has led to significant increases in unemployment, resulting in many families falling below the poverty line. Outdated approaches to vocational education and training and a lack of mechanisms to ensure coherence between education policy and the changing labour market led to an EU focus on enhancing the capacity of key bodies to track and analyse labour market developments and develop new approaches to vocational education and training. While not explicitly aimed at poverty alleviation, these projects had the potential for creating a capacity for formulating and implementing policy responses. Since 1996, the Commission’s principal poverty alleviation tool has been the FSP. It is useful here to state the objectives of the programme as they are currently defined33: “The overall objective of the Food Security Programme is in tune with the Armenian PRSP and aims to contribute to the overall effort by Government and society to reduce poverty through sustainable economic growth and development. The specific objective (purpose) of the FSP is to assist GoA improve the design, management, delivery and effectiveness of State programmes and services in agriculture and social protection that are aimed at reducing food insecurity. The FSP also aims at improving the policy framework in the aforementioned sectors of interventions as well as at strengthening public expenditure management.” In the social sector the FSP has focused on two areas over the last three years: a) budget support to the Family Benefit system; and b) ‘targeted budget support’ and technical assistance to the MoLSI. More precisely, the European Commission and the GoA agreed to focus their co-operation at the MoLSI on the issues of childcare and child protection. FSP contributions to the financing of the Family Benefit scheme have remained stable at AMD 2.0 billion between 2001 and 2004, representing about 15 per cent of total expenditures for the scheme. Financial contributions from the FSP to the MoLSI budget have increased from AMD 348 million in 2001 to 1.0 billion in 2003 and 2004; they represented a relatively large share – up to 58 per cent in 2002 - of total Ministry expenditures.

33 Source : Draft Financing Agreement 2005-2006.



Disbursement of funds was contingent on fulfilment of two types of conditions34: Conditions relating to public expenditure management and budget execution (e.g.

amendment of the Budget Methodological Instructions to ensure that they appropriately assist line agencies in the drafting of their annual budgets and communicate to the line agencies Government policy priorities on MTEF);

Conditions specific to the social sector (outsourcing of the implementation of the programme “assistance to the graduates from the country’s orphanages network”; preparation of a national framework for welfare standards for orphanages; and appointment of a Supervisor of Orphanages directly accountable to the Minister of Labour and Social Issues).

Targeted beneficiaries of Commission projects TACIS projects have focussed primarily on improving the capacity of the central, and to a more limited extent (at least in the social sector) local and regional, administrations to address poverty alleviation. Smaller programmes such as LIEN have provided limited finance to NGOs working directly with vulnerable groups and have therefore been explicitly linked to poverty alleviation, if only on a small scale. The FSP directly targeted the poor through budget support to the Family Benefit scheme. It further benefited three distinct categories: 1) children in orphanages and boarding schools; 2) the central administration in terms of promoting sound financial management and use of a ‘contracting out’ mechanism for service delivery; and 3) building an NGO capacity to manage and implement government programmes. Regional focus of Commission Projects Earlier TACIS interventions focused mainly on the central level, with only limited interventions at local level, mainly in the form of pilot sites or offices. The comparatively recent focus on regional development saw the successful implementation of a Regional Development project for Lori Marz. The 2003 Action Programme included a roll-out of the Lori Marz regional development approach to two other marzes (Vayots Dzor and Ararat) with the specific objective of poverty alleviation through regional development strategies. But because other donors were already active in the poorest regions, the three regions targeted by Commission projects are not among those facing the most severe poverty problems although they may include pockets of poverty.

Judgment Criterion 2: Commission interventions supported the development of a targeted and sustainable social assistance system

TACIS projects have made only a limited contribution to the design of the social protection system. TA interventions directly targeting social security and assistance (“Support to Decentralisation of Social Security” and the “Social Insurance Identification Number”) were concluded some time ago and the legal and institutional environments have changed considerably. 34 Examples are taken from the FSP 2002 (Budget Year 2003).



No information other than the ToR was available on the ‘Support to Decentralisation’ project. However from discussions it appears to have focused mainly on providing management information systems and training for local social security officers, rather than assisting with design of the decentralisation process or related policies. The ‘Social Insurance Identification Number’ achieved its objective of setting out a framework for the numbering system, as well as transferring the experience of Member States and pre-accession countries in this regard. Social insurance cards are now compulsory and the system is in the final stage of implementation with USAID support. An estimated 2.4 million of Armenia’s 3.2 million population will be issued with cards. The insurance card system is a first step in ensuring linkage between payments to pension and social insurance funds and benefits from them. The project in support of a health sector reform was effective in the general area of development of management training curricula and delivery of training (particularly training of trainers). Towards the end of the project, a School of Health Care Management (within the National Institute of Health) was established involving one of the core group of trainers who had participated in the project. The new School, initially at least, made use of the materials and curricula developed under the project. But the project completion report also highlights a significant number of problems encountered during implementation. Of note is the conclusion that whereas the original ToR focused on ongoing decentralisation and delegation, the activities were focused on the central level. Furthermore the MoH itself did not share the emphasis on regional activities. Problems were also experienced regarding the use of a participatory approach which did not suit the MoH’s “strong autocratic administrative heritage”. The timeframe was too short to bring about a change in attitudes (and was reduced from 24 to 14 months without changing the objectives). Frequent institutional changes (and corresponding changes in counterparts) adversely affected continuity. The core focus of the original project in support of the employment policy was on capacity-building for policy development at what was then the Ministry of Social Security and the Central and Regional Offices of the Labour and Employment Services. The Completion Report for the original project highlights the fact that results were strongest in the Central Office of the Employment Service. Problems were encountered with the commitment and level of involvement of MoLSI, and the project was subsequently reoriented to focus on the Employment Centres themselves. By re-orienting the project to regional offices of the Employment Service, an important element of the project, namely capacity-building at Ministry level, was lost. The extension project focused on finalising the original main project components including: a) training management of the Republican and Local Employment Centres; b) procurement and implementation of additional computer hardware; c) readjustment and debugging of the SEVAN database designed to track the labour market and generate labour-market-related statistics. The FSP has had an important contribution to the design and implementation of social policy in the area of childcare and child protection. Co-operation between the European Commission and the MoLSI resulted in implementation of the following measures:



Policy statement in the PRSP and the MTEF about the acute problems in society regarding institutionalisation of children and a Government commitment towards developing rational policy to improve the situation. The latter includes also an indicator for de-institutionalisation with a target to be reached by the end of 2007;

Strategy for the rationalisation of childcare institutions in the country and development of appropriate criteria for entry by type of institution (Government Decree adopted in March 2005);

Timetable for the development of a new and comprehensive child protection system at national and regional level, replacing the problematic post-Soviet commissions on guardianship delinquency (Government Decree adopted in December 2004);

Development and adoption of minimum welfare standards for children in line with the Vienna Convention on the rights of the child to be implemented in childcare institutions and serve as general guidelines for the welfare of all vulnerable children (Government Decree adopted in August 2004);

Development of a strategy offering alternatives to institutionalised care; the relevant Government Decree is expected before September 2005;

Rationalisation of the mandate of the department of Family, Women and Children to work in a complementary fashion with the newly created post of Supervisor of Orphanages and Childcare towards achieving the objectives outlined above (Ministerial Orders issued in March 2004);

Development of a pilot social assistance service (programme) “State Assistance to the Graduates from Childcare Organisations in the Republic of Armenia” included in the State budget in 2003. Implementation of this programme has been outsourced to a local NGO for implementation and has served as a clear exercise on how social service delivery can, and should be outsourced to professional organisations in civil society.

The FSP also contributed to rationalisation of budget preparation and execution. Funding the Household Survey is another noteworthy input by the FSP, which provides a good picture of current poverty trends and is therefore a solid basis for policy development. As already noted when dealing with agriculture35, the FSP, while moving towards a budget support programme, does not yet not comply with the approach and procedures developed by the Commission for the provision of sectoral budget support.

Judgement Criterion 3:The outcomes of Commission interventions are sustainable

TACIS projects in support of reforms of the social security system and of the health sector, as well as in the field of employment policy, faced difficulties linked to the instability of the institutional context in which they were implemented. Furthermore these projects were implemented at a time when the GoA was still confronted with severe budgetary constraints, a situation which was not propitious for the implementation of structural

35 See above Evaluation Question 3, Judgment Criteria 3.



reforms, whatever their potential contribution to the alleviation of financial constraints. As a consequence, the sustainability of these project outcomes was limited: a draft Labour Code prepared by the employment policy project is still awaiting approval; the SEVAN database on employment statistics is not fully operational; the Management Information System prepared by the Health Reform project has not been completed; and it is unclear whether the insurance card system currently implemented with the assistance of USAID is based on that set up via the TACIS project, or uses the US model. The FSP contributed to establishing good working relationships with the Commission at ministerial level, thanks to the presence of full-time technical assistants financed via the FSP in the Ministry. The programme is perceived as strongly demand-driven, with the MoLSI actively involved in identifying the budget lines to be supported and the conditionalities to be applied. The FSP contributed to the design and implementation of a policy framework for childcare and child protection. It contributed to improving public finance management practices and assisted the MoLSI in moving to a programme-based budgeting process. It helped to introduce a new model of service delivery via an NGO. These outcomes of the programme are likely to be sustainable. The MTEF 2005-2007 expresses the GoA’s commitment, increasing the budget allocated to the Family Benefit scheme from AMD 12.5 billion in 2003 to 26.8 billion in 2007. The average benefit per eligible family would more than double at AMD 17,875 per month in 2007 against AMD 7,642 in 2003, while at the same time the number of eligible families is expected to decrease by 10 per cent from 139,000 in 2003 to 125,100 in 2007 because of a diminishing number of poor people and tighter targeting of the Family Benefit scheme on the neediest. In 2003 Family Benefit expenditures accounted for 1.2 per cent of GDP. According to the World Bank Public Expenditure Review of April 2003, the resources allocated to this scheme need to be raised to 1.4 per cent of GDP if levels of extreme poverty are to be alleviated. Children homes and boarding houses are mentioned in the MTEF as among the priorities of the government in the social sector. Budget resources allocated to these institutions, which have been increased from AMD 558.8 million in 2003 to 594.1 million in 2004, should be further increased by 50 per cent to AMD 898.8 million in 2005 and then stabilise at that level until 2007.



Question 7: To what extent did Commission interventions contribute to strengthening democracy and the rule of law? Even if some progress has been recorded, the situation in Armenia as regards democracy, human rights and the rule of law is far from satisfactory. But although transition to a democratic society is one of the two objectives of the TACIS programme, and although the PCA puts a strong emphasis on democratic progress, these issues have only gradually gained importance in the Commission’s co-operation with Armenia. The Commission scarcely made any use of its political leverage to induce the GoA to strengthen democracy and enforce the rule of law. It missed an opportunity to play a role in the PRSP preparation process, which represented an innovative attempt to open a public debate on major economic and social issues. Support to the Civil Society has only recently reached a significant dimension. However the achievements of TACIS projects demonstrate that, although the political climate may not be as favourable as would be desirable, possibilities exist for donor interventions aimed at strengthening democracy. The capacity-building project implemented at the National Assembly delivered positive results, as did the regional development projects, although the uncertainties that still surround the decentralisation process and the scarcity of financial resources allocated to local government put at risk the sustainability of their outcomes.

Judgment Criterion 1: Commission interventions supported the establishment and strengthening of democratic institutions

It is likely that democratic issues are raised by representatives of the Commission and of the EU Member States at the meetings of the Co-operation Council established by the PCA. But having been denied access to the minutes of these meetings36, the evaluators are not able to confirm this assumption. Issues related to democracy and human rights are debated in the framework of the EU-Armenia Parliamentary Co-operation Committee also established by the PCA. But the statements and recommendations of this consultative body are not binding on the GoA. Conditions attached to the Food Security Programme relate either to public finance management or specifically to the activities supported by the programme. They do not make provision for conditions related to democratic issues. The same is true of the conditions attached to the Macro-Financial Assistance programme.

36 Evaluators were told that the Commission cannot communicate these documents without prior formal agreement of

the Armenian party.



The Terms of Reference of the Armenian European Policy and Legal Advice Centre (AEPLAC) contain no reference to improvements in the legal and institutional framework supporting progress towards democracy. The Centre only deals with economic and trade issues, and to a lesser extent with social issues. Finally, the National Indicative Programme 2004-2006 mentions the word “democracy” only once, but does so in relation to the country background, and not when setting out the objectives to the promotion of which Commission interventions should contribute. Nonetheless a few Commission interventions supported the strengthening of democratic institutions and processes at the central and local level, as outlined below. The TACIS project “Support to the National Assembly (NA)” aimed at strengthening the capacity of the NA to manage the legislative process and develop its institutional role of control of the Executive. It was implemented from September 2002 to July 2004. The project objectives were: Identify and assist in addressing the organisation and administrative problems faced by

the National Assembly as an institution; Upgrade the skills of the Assembly staff to perform their duties in the different stages

of the legislative process; Facilitate and strengthen the co-operation between the Armenian National Assembly

and EU Member States’ national Parliaments; Assist in confidence-building between the National Assembly and NGOs and other

groups of interest. After a difficult start the project delivered its expected outputs effectively. Positive changes took place at the NA: restructuring and reorganisation of NA operations; reform of the personnel management system; establishment of a Management Information System allowing in particular permanent follow-up of on-going legislative projects; establishment of co-operation relations between the Armenian Parliament and some of its counterparts in the EU, notably the German Parliament and the European Parliament. The project benefited from the adoption of a Law on State Service in the National Assembly (to the preparation of which it had contributed), which clarified the position of the NA’s staff while protecting them against the possible consequences of changing political majorities. For its implementation the project largely resorted to working groups; at the end of the project many participants in these groups were appointed to leading positions in the NA administration, thus ensuring the sustainability of the project’s outcomes. During an interview with the evaluators the NA Head of Staff underlined that the project had contributed to a very significant improvement in staff motivation, and hence to the effectiveness of its work. The specific objective of the Lori Marz development project implemented in 2000/01 was “to strengthen the Development Planning functions of the public administration by developing an institutional framework at the Marz and local level”. The five project components were: To build institutional capacity to design and implement a Marz Development

Programme and contribute to the design of this programme;



To develop a Management Information System and establish information centres; To develop and implement a coherent human resources training and development

policy; To ensure that laws and regulations facilitate efficient public administration at marz and

municipal level; To elaborate a communication strategy.

Project implementation was unanimously considered successful. Through in-depth discussions and consultations, the project managed to involve all levels of society in the production of a Manual for Regional Development. The communication strategy component of the project effectively contributed to a reshaping of relations between administration and the public towards a customer-friendly, service-oriented organisation of public services. This success led the Commission to launch in September 2003 similar projects in two more marzes, Ararat and Vayots Dzor. It must however be noted that regional development planning and project implementation remain constrained by the slow progress in the decentralisation of administrative and government functions37. Furthermore marzes and local government lack the financial resources needed to implement regional development plans, which therefore are at risk of remaining theoretical exercises38.

Judgement Criterion 2: Commission interventions contributed to strengthen the civil society and to ensure an effective freedom of expression

During the years 1996-1998 a few small projects related to democratic issues were financed from the TACIS National Programme. Other interventions related to democracy were financed either from the budget line of the European Initiative for Democracy and Human Rights (EIDHR) or, in the years 1996/97, from a Regional Democracy Programme. Projects financed through EIDHR prior to 2003 were regional projects with a total budget of €454.000. Armenian NGOs were not much involved in these projects because they implied an involvement of partners in all three South Caucasian countries. But activities involving Armenians and Azeris can only take place in Georgia, with the result that these regional projects generally benefited Georgian more than Armenian organisations39. There are however counter-examples such as the €128,000 project signed in 1997 with the Yerevan Press Club to prepare the media for surveying elections.

37 Source: Lori Marz project completion report (August 2001) and monitoring reports of the regional development

projects. 38 The Inception Report of the Regional Development project (March 2004) notes in this respect that, because of a lack

of resources, the Regional Development Manuel developed by the Lori Marz project “was effectively shelved and a great deal of its value dissipated and weakened since much of the capacity building and training have remained in the realm of theory”.

39 Asked if they had any knowledge of these projects, the EC Delegation staff answered that these regional projects had very probably not done more than covering the transport and accommodation costs of a few Armenian NGO representatives participating in meetings in Tbilisi.



In 2003/04 Armenia became a focus country of EIDHR with a budget of €500,000 for the financing of micro-projects. An appeal for proposals was launched, which led to 40 applications among which 11 projects were selected for the allocation of a grant. These projects are intended to focus on one of the two following areas: Support to the fight against torture and impunity and the promotion and protection of

human rights; Support to strengthen democratisation, good governance and the rule of law.

The selected projects address a wide range of issues such as awareness-raising at community level on human rights and on national and international protection mechanisms; introduction of the European Charter on local Self-Government in Armenian legislation; avoidance of the use of stereotypes by journalists dealing with Armenia-Azerbaijan relations; diffusion in Armenia of techniques for conflict prevention and management; and others. Such projects help organise Civil Society and strengthen the capacity of NGOs to raise popular awareness of issues related to democracy, human rights and the rule of law. NGOs, whose resources are extremely limited, welcome this support. However the volume of resources allocated to this activity is quite small considering the importance that the Commission and EU Member States attach to the progress of democracy and human rights, in particular in the countries of the former Soviet Union which have no tradition in these matters. Furthermore each NGO develops its project independently of the others, thus limiting the potential aggregate impact of these activities. A new EIDHR programme for Armenia is under preparation for 2005-2006. The Commission’s activities in the field of democracy, human rights and the rule of law also include Joint Programmes with the Council of Europe. These consist in the organisation of seminars, training programmes, expert meetings and study tours. Both organisations share the cost of these activities, generally on a 50/50 basis. In 2004, the focus of these activities in Armenia was on judiciary issues. In Armenia the role of the Commission in such activities is mainly restricted to its financial contribution; implementation is ensured by the Council of Europe through its local representation. It may be noted in this respect that the visibility of the Commission in relation to democratic issues is low. When evaluators raised questions on the contribution of the Commission to democratic progress, answers frequently referred to the Council of Europe. Even representatives of NGOs currently implementing a EIDHR project and with consequently close contacts with the EC Delegation do not differentiate clearly between the two institutions.

Judgment Criterion 3: Commission interventions supported a participatory approach to policy decision-making

Involving representatives of Civil Society in policy-making activities is not a tradition of the GoA, but it may be said in its defence that organisation of Civil Society is still very weak. The Agricultural Sustainable Development Strategy, for instance, was prepared by the MoA without any involvement of farmer organisations. A reason for this may be that, in spite of



an attempt by the Commission in 1996/97 to foster the creation of a farmer’s union, no representative farmers’ organisation currently exists in Armenia. Given this situation, the adoption of a participatory approach for the preparation of the PRSP was extremely innovative. This process started in November 2001, led to the production of a draft PRSP in October 2002, and then to the final document in May 2003. It was carried out under the leadership of a Steering Committee chaired by the Minister of Economy and Finance and including representatives of line ministries, Parliamentary standing committees, political parties, NGOs and the donor community. Day-to-day activities were co-ordinated by a Working Group in which the World Bank, UNDP and GTZ represented the donor community. The draft PRSP was disseminated to all local communities, and almost half of them responded with comments and recommendations. Numerous round tables took place in the provinces as well as in Yerevan. NGOs played an active part in discussion on the document when participating in events organised by the Working Group or on their own initiative. It is regrettable that the Commission was only marginally involved in the formulation of the PRSP, and until very recently remained aloof from the PRSP process. Only in December 2004, at the request of the Ministry of Economy and Finance, did the Yerevan Office appoint one of its staff members to the PRSP Co-ordination Unit.

Question 8: To what extent did Commission’s interventions contribute to develop regional co-operation and, reciprocally, to what extent has the geo-political situation of Armenia impacted on the effectiveness of the Commission co-operation? Armenia’s economic and social development has been and remains seriously impaired by political tensions in the southern Caucasus region. In particular, the blockade of Armenia’s borders with Azerbaijan and Turkey is a major obstacle to the development of trade and the integration of Armenia into the regional and world economy. Political troubles in Georgia, notably in the Abkhazia and South Ossetia regions, as well as until recently in the Azara region, further contributed to the isolation of Armenia. The Country Strategy Paper released by the Commission in December 2001 stresses that “the EU/EC has an interest in Armenia developing in the context of a politically stable and economically prosperous southern Caucasus. In this respect, the conflict with the Republic of Azerbaijan over Nagorno-Karabakh remains a major impediment to development in Armenia and in Azerbaijan and contributes to regional instability”. Regional projects implemented by the Commission made possible maintenance of contacts at higher level between officials of the three southern Caucasus countries and Turkey on energy and transport issues. But they did not succeed at re-establishing in these areas co-operation between Armenia on the one hand and Azerbaijan and Turkey on the other hand, which would be highly beneficial to all parties.



The regional geo-political situation hampers the effectiveness of the Commission’s interventions in such areas as energy, transport, direct and indirect support to the private sector, and democracy and human rights, to the extent that, on the one hand, Armenia is generally unable to reap the full potential benefits of these interventions or, on the other hand, the interventions were specifically designed to take account of the Nagorno-Karabkh conflict, resolution of which would profoundly change the situation.

Judgment Criterion 1: Commission’s interventions contributed to facilitate peaceful relations between the countries of South Caucasus

Regional co-operation has primarily a political dimension. The European Union and Member States are strongly supportive of the endeavours of the OSCE/Minsk Group to assist the governments of Armenia and Azerbaijan in finding a peaceful solution to the Nagorno-Karabakh conflict. In the framework of Partnership and Co-operation Agreements the Union carries out a political dialogue with all countries of the South Caucasus. In July 2003, the European Council appointed a European Union Special Representative for the South Caucasus with a mandate to ensure co-ordination, consistency and effectiveness of the EU’s action in the South Caucasus. The European Commission is fully associated with these endeavours. On several occasions, the Commission made clear that it stands ready to assist with post-conflict reconstruction following peace settlements. Through the TACIS regional programme and other smaller programmes the Commission implements at regional level activities that aim at supporting development of peaceful relations between the countries of the South Caucasus. Armenian officials often complain that they did not benefit much from the TACIS regional programme. The figures do not confirm this assessment. Over the period 1996-2004 expenditures from the TACIS regional programme in the form of technical assistance, studies and investments amounted to €33.1 million, which is 12.2 per cent of the Commission’s total resources allocated to Armenia. This figure, calculated from the project database of the Armenian National Co-ordinating Unit, only includes the Armenian component of projects involving several countries. Energy and transport were the two sectors that benefited most from this support through the INOGATE and TRACECA programmes respectively. INOGATE is an international co-operation programme aimed at promoting regional integration of the pipeline systems for the transport of gas and oil within the NIS countries and between these countries and Europe. Twenty-one countries have joined the programme by signing or acceding to the INOGATE Umbrella Agreement in force since 2001. Armenia is party to the Agreement as are three countries with a common border with Armenia, namely Georgia, Azerbaijan and Turkey. The INOGATE programme has made an important contribution to securing gas supplies to Armenia, in particular through such projects as a feasibility study for a satellite monitoring system for the security of gas transport and storage; construction of a gas metering station; equipment for emergency and laboratory units; and renovation work on



the gas pipeline that brings Russian gas to Armenia through Georgia and on the Abovian underground gas storage facility. These projects also benefited Georgia, which collects a transit fee on Armenian gas imports. However, the conflict with Azerbaijan precluded restoration of Azeri gas supplies to Armenia, which would allow diversification of Armenia’s gas supply sources. Co-operation between the countries participating in the TRACECA programme is enshrined in an Inter-Governmental Commission established in 1998 on the basis of a Multilateral Agreement. Armenia, Georgia, Azerbaijan and Turkey are parties to the Agreement. Iran is currently in the process of joining the Agreement. The Inter-Governmental Commission meets once a year in a member country. The third annual meeting of the Commission, in 2003, took place in Yerevan with participants at higher level from Azerbaijan and Turkey, but Armenia was not represented at the Fourth Conference which took place in Baku (Azerbaijan) in April 2005. Meetings of the Inter-Governmental Commission are prepared by a Secretariat located in Baku, which co-ordinates the activity of the National Secretariats. National Secretariats hold joint meetings between once and three times a year. Armenia is not on the main routes targeted by the TRACECA programme but has still benefited directly and indirectly from the programme. This was notably the case with the feasibility study for the rehabilitation of the Yerevan-Tbilisi road, which is currently the only route for Armenian trade with Europe through the port of Poti. Construction work was financed by the World Bank and has been completed. Another important TRACECA project in which Armenia was involved together with Kyrgyzstan and Kazahstan aimed at facilitating the development of containerised transport through the instalment of heavy equipment for container handling. Within the framework of this project intermodal and terminal equipment was installed at Yerevan-Karmir Belur rail cargo terminal. Finally Armenia, Georgia and Azerbaijan were involved in a TRACECA project which led to the instalment of an optical cable system for railway communications. This equipment enhances railway safety but can also be used to improve telecommunications.

Although not implemented in Armenia, TRACECA projects in Georgia and westwards to Ukraine, Romania, Bulgaria and Turkey benefit Armenia. Cargo from and to Armenia transits on TRACECA-improved infrastructure such as Georgian railways and the ports of Poti, Batumi, Illychevsk and Varna.

Besides these investment projects, Armenia also benefited from technical assistance projects aimed at facilitating transport between NIS, as well as from training programmes for civil servants and private operators in the transport sector.

To be endorsed by the Inter-Governmental Commission, TRACECA projects must be proposed by at least two member countries. For Armenia, this is not much a problem for technical assistance projects in which all TRACECA member countries participate. But for regional investment projects, Georgia is the only possible partner for Armenia. Indeed, the optical cable project mentioned above gave rise to two distinct proposals, one presented by Georgia and Armenia for the Yerevan-Tbilisi-Poti railway line, the other presented by Georgia and Azerbaijan for the Baku-Tbilisi line. In a situation of competition between member countries for the funds allocated to the programme, this puts Armenia in a rather uncomfortable and weak situation.



Other sectors in which the Commission attempted to promote regional co-operation are the environment, through financing of a Regional Environment Centre; Democracy and Human rights, though regional activities of the European Initiative for Democracy and Human Rights and a financial contribution to activities carried out at regional level by the Council of Europe; and Justice and Home Affairs, notably through the financing of a programme for the fight against drug trafficking – South Caucasus Anti-Drug (SCAD) – implemented by UNDP.

Judgment Criterion 2: The effectiveness of Commission interventions was hampered by the geo-political situation in the Caucasus

As pointed out above, the European Commission managed to have Armenia participating with Azerbaijan and Turkey in regional policy-making bodies and benefiting from investments and technical assistance activities of regional interest. However the effectiveness of the Commission’s interventions in Armenia has been hampered by the lasting conflict between Armenia, Azerbaijan and Turkey. This is particularly evident in the energy sector. As pointed out under Evaluation Question 5, a reopening of the borders between Armenia, Azerbaijan and Turkey, making possible interconnection of the electricity networks of the three countries and enabling Armenia to import gas from Azerbaijan, would require a complete reassessment of the energy situation of Armenia, and hence of investments already made or currently planned. The situation is similar in the transport sector since the reopening of borders would offer Armenian trade with Russia and Europe with alternative road and rail routes to transit through Georgia. When addressing democracy and human rights under Evaluation Question 7, it was noted that EIDHR regional projects have had a limited impact in Armenia because their main activities could only be implemented in Georgia. It may also be observed that the regional political situation can easily be used by the Armenian government to justify an authoritarian exercise of power. The benefits that the Armenian economy can derive from WTO accession and from improvements to the institutional and legal framework for business and trade, both aims strongly supported by the Commission, are seriously weakened by the physical obstacles that hamper foreign trade, and by the political and military risks that deter foreign investors.



Question 9: To what extent has the Commission’s strategy in Armenia been designed so as to complement and co-ordinate its actions with other donors programmes and/or with other EU member States initiatives? To what extent has the Commission’s strategy and realisations in Armenia been affected by other EU policies? Foreign donors have made an important contribution to the economic and social development of Armenia40. Over the period 1996-2002 their assistance represented close to 12 per cent of GDP. The United States is the main donor, ahead of the World Bank and the Commission. Other important donors are Germany, Japan and the Netherlands. Donor co-ordination in Armenia suffers from serious weaknesses, notably because of a lack of leadership on the side of the Government. Attempts to compensate for this problem rely on monthly meetings of the heads of donor representation offices, on the setting-up by donors of ad hoc working groups such as took place in the energy sector, and on the organisation by the Commission of round tables at the pre-programming stage of its action programmes. Nevertheless the Commission managed to implement in most sectors activities that complemented those of other donors. When there happened to be a risk of duplication between projects, this was avoided, thanks to the initiative of project implementation agencies and to co-ordination between project teams. Nonetheless this situation leaves unsolved problems related to the overall policy framework within which projects are implemented. Two such cases are decentralisation policy, which is a key issue for projects supporting regional administrations, and reform of public finance management.

Judgment Criterion 1: Commission interventions in Armenia are co-ordinated with those of other donors

There exist examples where the Commission successfully co-operated with other donors. One is the rehabilitation of the Yerevan-Tbilisi road where the Commission financed the feasibility study, while the World Bank financed the construction work. The Commission also co-operated with the EBRD on the implementation of the TAM/BAS business support scheme. However all donors agree that the general situation regarding donor co-ordination is unsatisfactory. There are monthly meetings of the heads of donor offices in Yerevan. These meetings are alternately chaired by the World Bank, IMF, USAID and UNDP. But participants state that these meetings, even if they allow an exchange of information on political, economic and 40 See above Chapter 2, paragraph 2.4.



social developments in Armenia and on donors’ planned and on-going activities, do not contribute effectively to co-ordination of donor interventions. A more effective, albeit occasional, co-ordination process consists of round table meetings held at the initiative of Commission officers during project identification missions. These round tables particularly ensure that the Commission and EU Member States arrive at common views on international aid priorities and co-ordinate their interventions. An informal working group also meets periodically to co-ordinate donor interventions in the energy sector. Donors complain that the GoA does not play in donor co-ordination the leading role which is expected of them. However a proposal by UNDP and the Commission to invite representatives of the Government to monthly donor meetings was rejected by other participants. And it is far from certain that all donors agree on the co-ordination scheme they would like implemented. The situation is made more difficult by the lack of a clear definition within the Government of who is in charge of liaising with donors. The Ministry of Economy and Finance is one of the donors’ main interlocutors. But there is also a Department for International Co-operation at the Ministry of Foreign Affairs. The Armenian delegation in the Co-operation Committee, established in the framework of the Partnership and Co-operation Agreement between the EU and the Armenian Republic, is headed by the Minister of Trade and Economic Development. Proposing projects to the Commission for financing by TACIS is a responsibility of the National Co-ordinating Unit at the Ministry of Finance. But Indicative Programmes, Action Programmes and Financing Agreements are signed by the Ministry of Foreign Affairs and ratified by the Head of State. The Government declined the donors’ request for a single co-ordination body. This situation may lead duplication of donor interventions. An example is the simultaneous implementation at the National Assembly in 2002-2004 of two capacity-building projects sharing the same objectives and expected to develop similar activities, one financed by the Commission and the other by USAID.

Judgment Criterion 2: Commission interventions in Armenia complement those of other donors

It first must be noted that the Commission, which in the 1990s intervened in a large number of sectors, has undertaken to concentrate its assistance on two main issues: support to the reform of the institutional and legal framework, and alleviation of the social consequences of the transition process. In particular the Commission withdrew from direct support to private sector development, in which several other donors are involved. However there remain several fields of activity in which the Commission intervenes in concert with other donors. Donor interventions in the energy sector complemented each other with the Commission investigating the potential for hydroelectricity and other renewable energies; financing the rehabilitation of a hydro-power plant; and assessing the renovation and development needs of gas transport and storage; with USAID, the EBRD, Germany and Japan concentrating



on Thermal Power Plants; and with the World Bank and USAID assisting in the financial restructuring of the sector. The US Department of Energy is involved together with the Commission in safety improvements to the Medzamor NPP. As noted above, donors have established a working group to co-ordinate their activities in this sector. In regional development the Commission and DFID are implementing similar projects aimed, albeit by different methods, at strengthening the capacities of regional administrations. The Commission selected the Lori Marz, and then in a subsequent project the Ararat and Vayots Dzor marzes, all three in the south; DFID implement their project in the Tavush and Gegharkunik marzes in the north. A mechanism was set up between the two teams for information sharing and co-ordination41. As regards the sustainability of these projects, the Commission project monitoring reports point out that “one of the important factors influencing the project sustainability can become the real attitude of central government and centralised regional administrations to the issues of decentralisation, particularly regarding delegation of fiscal power and infrastructure regulation to local self-government bodies”. This suggests a need for a closer co-ordination on the overall issue of decentralisation between the Commission and DFID, as well as with the World Bank which is going to launch a Public Sector Modernisation Project with implications for sub-national government organisations. USAID and GTZ are active at municipality level. Developing the Information Technology sector is a priority of GoA’s industrial policy, for which they are requesting donor assistance. The Commission project in support of IT development aims at enhancing IT teaching capability in higher education, particularly in the European Regional Institute of Information and Communication in Armenia (ERRICTA), an institution founded with financial assistance from the French and German co-operation programmes. The project also contributes to the development of an e-Government pilot project at the Ministry of Foreign Affairs. These activities complement those of other donors, notably USAID, which focus more directly on the development of IT enterprises. In the framework of its 2004-2005 AP, the Commission plans to implement at the MoLSI a project aimed at the introduction of alternative childcare models within the social assistance policy. This project will be able to build on previous assistance from UNICEF to the GoA in developing policies for de-institutionalising children currently in residential institutions. It should also take advantage of the lessons learnt from a pilot of “daycare centres” currently implemented by the GoA and the World Bank with the financial support of the Japanese government. The FSP has made significant contributions to improvements in public finance management. As a follow-up to the Country Financial Accountability Assessment it carried out in 200442, the World Bank intends to address public expenditure management and procurement in the framework of the Public Sector Modernisation Project. This is one

41 However, the DFID team regretted that the EC team did not participate in the seminar it organised in February 2005

to present and discuss their project outcomes. 42 It is regrettable that the Commission, which provides budget support to the GoA, and which is therefore legitimately

interested in a quality assessment of public expenditure management, was not involved in the CFAA.



more area in which donor interventions could easily complement each other if properly co-ordinated. At project level, whenever there was a risk of duplication between projects, the implementing agencies managed to have the project concerned develop its activities in a complementary manner. This was the case with the National Assembly projects mentioned above. The State Committee for Real Estate Cadastre is another example of an institution which succeeded at making the best of potentially conflicting donor-funded projects.

Judgement Criterion 3: Achievements of Commission co-operation objectives are not hindered by other EU policies

Evaluators did not find any indication that the achievement of the Commission’s co-operation objectives in Armenia might have been hampered by other EU policies. On the contrary, one can observe in this respect that the EU grants to Armenia the benefit of its GSP system, thus facilitating the development of Armenian exports to the EU.

Question 10 : How effective have been the implementation mechanisms of Commission assistance to Armenia? Commission projects implemented in Armenia up to the end of the 1990s, in particular in the social sectors, suffered from the institutional instability as well as from the extremely difficult economic and social situation that prevailed in the country. In many cases they were unable to deliver fully their expected outcomes, whose sustainability was furthermore not assured. The situation changed significantly from the beginning of the 2000s. As demonstrated by the monitoring reports, most projects which were recently completed or are still under implementation in Armenia are showing good results in terms of efficiency and effectiveness, and are likely to deliver sustainable outcomes. This progress is due to some extent to a more favourable environment with an improvement in the economic and social situation and more stable institutions. But it also reflects developments in the Commission’s implementation mechanisms. The establishment in Yerevan in December 1999 of a Branch Office of the EC Delegation allows much closer relations between the Commission and project implementation agencies, as well as closer follow-up of project implementation. Deconcentration, which took place from 2004, results in faster and more appropriate responses to problems that arise during the course of project implementation. The effectiveness of Commission interventions may also be related to Commission managers’ demonstrated capacity to make use, in a complementary manner, of the different financial instruments available to them. But it must be regretted in this regard that local Commission staff have hardly any information on projects still managed from the Brussels Headquarters.



The move from a demand-driven approach to a policy-based approach to co-operation between the Commission and Armenia is still an on-going process. Should it achieve its full extension, with a permanent policy dialogue taking place between the Delegation’s staff and government agencies, the usefulness of the National Co-ordinating Unit would then become questionable.

Judgment Criterion 1: Policy dialogue within the framework of the PCA and co-operation are closely articulated

The policy dialogue between the Armenian government and the Commission takes place through several channels. The Partnership and Co-operation Agreement established a Co-operation Committee, which meets once a year alternatively in Yerevan and in Brussels. The Minister of Trade and Economic Development leads the Armenian delegation, which includes representatives at minister or deputy-minister level of the Ministry of Foreign Affairs and of the line ministries involved in co-operation programmes with the Commission: MoEF, MoA, MoLSI, MoE, and so on. The European delegation, led by the Director for CIS and Balkans of DG Relex, includes Ambassadors of the EU Member States represented in Armenia, the Head of the EC Delegation to Georgia and Armenia, the acting Head of the EC Branch Office in Armenia and Commission headquarters staff from Brussels in charge of various aspects of co-operation with Armenia. This committee may discuss all issues addressed in the PCA. A sub-committee on trade and economic affairs also meets once a year to discuss more technical issues related to the economic development of Armenia and to trading relations between Armenia and the EU. The Steering Committee of the Food Security Programme is another channel for the policy dialogue between the GoA and the Commission. This Committee meets periodically under the chairmanship of the Minister of Economy and Finance. Participants on the Armenian side are higher-level representatives in the line ministries and government agencies involved in the FSP (MoFE, MoA, MoLSI, National Statistical Service, State Committee for Real Estate Cadastre). On the Commission side, participants in these meetings include the acting Head of the EC Branch Office in Yerevan, and the European technical assistants in the programme. The regional co-ordinator of the FSP has also participated in these meetings since the establishment of the post. The main objective of these meetings is to examine the development of the programme and to make sure that appropriate measures are taken to fulfil the conditions attached to it. Similar meetings to those of the FSP Steering Committee are organised, with the same participants, to discuss the findings of the mid-term and final reviews of the programme. Finally, occasional meetings take place between the Armenian government, usually represented by the Minister of Economy and Finance, and Commission officers in charge of co-operation with Armenia. Such meetings particularly take place when officers of DG Relex or of EuropeAid come to Yerevan on a mission for the programming or follow-up



of the co-operation programme. Officers of the EC Delegation to Georgia and Armenia, in particular the Head of Operations, and the acting Head of the EC Branch Office in Yerevan, usually participate in these meetings. These various exchanges between the GoA and the Commission should ensure that co-operation is based on policy dialogue between the two parties. In practice, linking policy dialogue and co-operation is an on-going process that evolved from a situation in which Commission assistance was basically demand-driven. Reform of the institutional and legal framework relative to business and trade is an area in which the two parties share the same views as reflected in the PCA. The Commission co-operation, through AEPLAC, supports the endeavours of the Armenian government to align its legislation with that of the EU. A difficult policy dialogue took place on energy issues, which led to the conclusion that the views of the two parties could not be reconciled. But the evaluators have not found evidence that the Commission’s co-operation with Armenia in such areas as education, agriculture, the fight against poverty, or democracy, human rights and the rule of law, consistently supports a policy actively debated between both parties.

Judgment Criterion 2: Organisation and practice of the Commission Services are supportive of an effective implementation of the projects/programmes

As noted above43, the Commission’s co-operation with Armenia employs a variety of instruments, in particular Macro-financial Assistance, the Food Security Programme, the TACIS National Programme for Armenia, the TACIS Regional Programme, and the Nuclear Safety Programme. All these instruments are managed by the Commission’s Brussels Headquarters, except for the TACIS National Programme which, as a consequence of “deconcentration”, has since 2004 been managed by the EC Delegation to Georgia and Armenia. About €5.0 million is allocated annually to the National Programme against €10 millions to the FSP and about €5 million more to other centrally managed instruments. During the period covered by the evaluation, the Commission’s capacity to ensure a follow-up of its co-operation activity in Armenia and to carry out a policy dialogue with the Government was continuously enhanced. The Commission opened a Branch Office in Yerevan in December 1999. In the Spring of 2005 this office was granted recognized diplomatic status, but remains under the responsibility of the Head of the Tbilisi-based Delegation to Georgia and Armenia. For about one year the Commission’s office in Yerevan has been headed by a senior Commission official. Previously it had been managed by staff members recruited under time-bound contracts. In addition to the acting Head, the EC Branch office in Yerevan currently employs a small team of five task managers, of which two are European expatriates. These task managers

43 Chapter 3.



have an in-depth knowledge of Commission procedures and are highly committed to their tasks. With the support of the Head of Operations of the Delegation in Tbilisi, who is actively involved in TACIS co-operation activities in Armenia, the Branch office in Yerevan ensures close follow-up of the projects implemented under the TACIS National Programme and provides assistance, as far as needed, to both beneficiaries and contractors. Both Commission staff and beneficiaries consider that deconcentration has made possible faster and more adequate responses to implementation difficulties, thus impacting positively on project effectiveness. The fact that financial management of the contracts is the responsibility of the Finance and Contract Unit of the Delegation in Tbilisi is not considered a problem. Thanks to frequent contacts between the Food Security technical assistance team and the staff of the EC Branch office, the latter also has good knowledge of the FSP and of its activities. But it does not have any precise information on activities carried out under the TACIS Regional or Nuclear Safety Programmes.

Judgement Criterion 3: Organisation and practice of the GoA services are supportive of an effective implementation of the Commission projects/ programmes

Comments have already been made above on the weaknesses of the co-ordination process between GoA and donors44. With the financial and technical support of the Commission, the GoA established within the MoEF a National Co-ordinating Unit, whose role it is to assist the Minister in his capacity as National Co-ordinator of the Commission’s assistance. The NCU’s main activity is to contribute to the pre-programming and programming of the Commission assistance in which it intervenes as an intermediary between, on the one hand, the national stakeholders in Commission projects and programmes, line ministries and agencies, and on the other hand the Commission Services. The NCU collects and co-ordinates national inputs for the Indicative Programmes and Action Programmes, discusses these elements with the EC Branch office, and then at a later stage ensures the Government’s approval of the IPs and APs45. The NCU also has a role in informing the staff of ministries and agencies involved in project implementation on the detail of Commission procedures. To carry out these tasks effectively the NCU has set up a network of “contact points” in those line ministries and agencies that are actual or potential beneficiaries of Commission projects. The NCU additionally provides Commission project contractors with such services as tax and customs exemptions, free-of-charge visas, and so forth. The NCU’s responsibility is restricted to the TACIS National Programme. However it has managed to collect information on projects implemented under other instruments, and has accumulated a rich collection of project reports. The NCU maintains a project database

44 See above Evaluation Question 9. 45 IPs, APs and the related Financing Agreements are signed by the Minister of Foreign Affairs and the President of the

Armenian Republic.



which is the most comprehensive source of information on Commission interventions in Armenia to date. The role of the NCU was perfectly clear at the time when Commission assistance was demand-driven as a matter of course. The NCU identified Armenian ministries’ and government agencies’ technical assistance needs, helped them formulate their needs in the form of a project, presented and discussed these project proposals with the Commission Services, and ensured the adoption by the Government of Indicative and Action Programmes. It was then at its most useful, given that until 2000 there was no Commission representation in Yerevan. Whether a NCU is still useful for the programming of policy-based co-operation is debatable, given that its approach to programming remains basically demand-driven. In 2003 the NCU requested its contact points to prepare proposals for projects in the context of the preparation of the 2004-2005 Action Programme,. These proposals were later presented and discussed between the various contact points, in the framework of two seminars which were also attended by task managers from the EC Branch Office. This project identification process does not differ from that which prevailed in the 1990s. To the extent that the NCU acts as an intermediary between ministries and the Commission’s staff, it might prevent the development of direct relations between the two parties. Another weakness of the NCU is that its role in the programming process is restricted to Commission interventions, and furthermore solely to the TACIS National Programme within those interventions, whereas there is a need for Government-led co-ordination involving all donors. However, as long as the government turns downs proposals that it should take the lead in donor co-ordination, the NCU remains, for the EC Branch Office and the Delegation’s Head of Operations, a convenient interlocutor and facilitator with a network of correspondents in line ministries and agencies and an in-depth knowledge of Commission procedures.

Judgment Criterion 4: The various instruments available to the Commission co-operation with Armenia are utilised in such a manner that the overall effectiveness of Commission interventions is enhanced

As can be seen from the inventory of projects (see Annex 3) and as was pointed out above in the context of some Evaluation Questions, the Commission’s interventions in a given sector frequently utilised several of the instruments available to Commission managers. This is particularly true of the utilisation of the TACIS National Programme, with projects financed from the small budget lines frequently complementing large projects. Such examples can be found in the area of private sector development in which Business Support Centre projects were complemented by small projects such as assistance to the MTED in the elaboration of a SME development strategy; establishment of arbitration courts at the regional Chambers of Commerce; development of legislation for the acquisition of licences; and so on. AEPLAC contributions to reforms of the institutional and legal framework were complemented by small capacity-building projects in several government agencies. Education is one more sector where different instruments were



utilised in a complementary manner, particularly with extensive use of the Tempus programme. Assistance to the energy sector resorted to the TACIS National Programme (Identification of alternative sources of energy, Creation of the Energy Strategy Centre, Technical assistance to the Ministry of Energy), to the Nuclear Safety Programme (Safety improvements and on-site assistance to the Medzamor NPP, Support to the Nuclear Regulatory Agency), and to the INOGATE and TRACECA components of the Regional Programme (investments in the renovation of gas transport and storage infrastructure). Except for a small pilot project financed from the TACIS National Programme at the State Committee for Real Estate Cadastre, the FSP has remained up to now relatively disconnected from other interventions. But the 2004-2005 Action Programme includes TACIS projects aimed at supporting activities initiated by the FSP at the Ministry of Agriculture and the Ministry of Labour and Social Issues and at enlarging their scope. Macro-Financial Assistance is the only programme that was implemented without any explicit direct linkage to other Commission interventions.



5. Conclusions

5.1 Introduction

The conclusions are organised so as to provide a global assessment of the Commission’s strategy for Armenia. They are based on the analysis of the co-operation context, on the Commission’s co-operation strategy and on the answers to the Evaluation Questions provided in the previous chapters. The conclusions focus first on the relevance of the strategy both to the Commission’s overall objectives and to the country’s priorities. The analysis then turns to the extent to which the various objectives of the strategy – transition to a market economy and a democratic society; poverty alleviation; sustainable economic growth; integration into the world economy – have been attained, and examines the sustainability of the intervention outcomes. Finally, aspects related to implementation and co-ordination with other donors are discussed. Numbers between brackets following each conclusion refer to the relevant chapters and sub-chapters of the report. The acronym EQ stands for Evaluation Question.

5.2 Relevance of the strategy

1. During the period covered by the evaluation, Commission interventions in Armenia lacked a clear country-specific strategy (Sub-chapter 3.3)

The Commission’s Country Strategy Paper for Armenia was released in December 2001. In practice this strategy paper oriented the programming of Commission interventions starting with the 2002-2003 Action Programme, the implementation of which began in the last months of 2003. Commission interventions implemented prior to that date have been guided by the overall objectives stated in the TACIS Regulations which apply to all the NIS – support to the transition to a market economy and a democratic society – and were identified in the context of a basically demand-driven approach. This demand-driven identification and programming process may explain why, during the period 1996-2004 covered by the evaluation, Commission interventions addressed a large variety of sectors without always endowing its interventions with the size and continuity required to secure their effectiveness and the sustainability of their outcomes46. It may also explain why poverty alleviation, identified in the Country Strategy Paper as a priority of the Commission’s co-operation with Armenia, was not an explicit objective of most projects implemented during the period covered by the evaluation.

46 This was notably the case of TACIS interventions in social sectors. See Chapter 4, Evaluation Question 6.



Finally it must be pointed out that the Country Strategy Paper, where it makes reference to other financing instruments, only deals with the TACIS National Programme which, along with small projects, represented during the 1996-2004 period less than 25 per cent of the Commission’s total financial involvement in Armenia47. In consequence, the adoption of the Country Strategy Paper hardly reduced the overall diversity of Commission interventions during the period.

2. Despite the lack of a clear co-operation strategy, Commission interventions during the period 1996-2004 addressed the main issues involved in the transition of Armenia to a market economy. But they targeted a large number of sectors or issues with limited resources and lack of continuity (Chapter 4, EQ 1)

Commission activities addressed most of the issues identified by the Government as key to securing sustainable growth and tackling poverty: alleviation of rural poverty; institutional reforms; improvement of the business environment; human development; and infrastructure development. All these activities are consistent with the TACIS objective of supporting the transition to a market economy. But considering the limited volume of resources allocated to the TACIS National Programme for Armenia – about €5 million per year - the Commission addressed too large a number of sectors or issues, thus rendering itself unable to give its interventions the continuity required to ensure the sustainability of their outcomes.

3. Transition of Armenia to a democratic society governed by the rule of Law has not been a priority of the Commission’s interventions (Chapter 4, EQ 1 and 7)

Although supporting the transition of the NIS to democratic societies is one of the two major objectives of the TACIS programme, and although the PCA between the European Union, Commission and Armenia explicitly mentions democracy and human rights as an area for co-operation, the Commission did not make these issues a priority of its strategy.

5.3 Achievement of the strategy objectives and sustainability of outcomes

5.3.1 Transition to a market economy

4. Commission interventions have made a positive contribution to the development of the private sector (Chapter 4, EQ 2)

The Commission supported the development of the private sector through assistance to the GoA in design and implementation of institutional and legal reforms aimed at creating an environment conducive to enterprise development, and through direct support to SMEs. It is also worth mentioning that the contribution of the Commission to the

47 Excluding macro-financial assistance and humanitarian aid from this calculation bring this percentage to 32.1 per

cent.



establishment of a cadastre for a clear identification of ownership rights on land is an important condition for the development of enterprises. All three activities have been effective and have made a positive contribution to the dynamism of the SME sector that is currently evident in Armenia. The Commission has decided to withdraw from direct support to SMEs, a field of co-operation in which several other donors are involved. But it plans to continue its contribution to improvement of the business environment, a priority of the PRSP.

5. Deficiencies in enforcement of the legal environment have not been addressed (Chapter 4, EQ 2)

If the institutional and legal framework governing economic activity and foreign trade in Armenia can be assessed as relatively sound, there are serious deficiencies in the enforcement of this framework. Corruption and lack of independence of the judiciary are frequently mentioned as major obstacles to the development of enterprises and to foreign direct investment. These issues have not been addressed by the Commission.

6. Commission interventions have made a positive contribution to the development of agriculture (Chapter 4, EQ 3)

The agricultural sector, which in the earlier years of an independent Armenia played the role of a social safety net, has begun to develop. The Commission, one of the few donors intervening in the sector, has made a positive contribution to this end. Projects financed from the TACIS programme contributed to equipping Armenia with an agricultural credit bank which is the main supplier of credits to farmers and to small and medium enterprises in rural areas. The Food Security Programme supported the State Committee for Real Estate Cadastre, creating the conditions for development of an agricultural land market and of mortgage credit. The FSP largely financed the activities of the Ministry of Agriculture, and through its technical assistance component promoted improvements in the management of public finance at the MoA, enhanced the effectiveness of MoA activities, and contributed to the elaboration of an agriculture development strategy. Capacity-building projects at regional level could make a positive contribution to improvements in public equipment and services in rural areas.

5.3.2 Transition to a democratic society

7. Commission interventions in support of democratic institutions can deliver positive and sustainable results (Chapter 4, EQ 7)

The project implemented by the Commission at the National Assembly has significantly and durably strengthened the capacity of this institution to provide effective assistance to the Legislator. Regional development projects enhance the capacity of regional administrations to design and implement infrastructure plans and deliver public services. These projects might make



a contribution to democratic progress if they promote a participatory approach to policy-making at regional level, and if the decentralisation process leads to the formation of elected regional governments.

8. The volume and effectiveness of interventions aimed at strengthening Civil Society have been limited (Chapter 4, EQ 7)

Because of the conflict between Armenia and Azerbaijan, which makes co-operation between Armenian and Azeri citizens extremely difficult, EIDHR regional projects have had limited impact in Armenia. Since 2004 Armenia has been a focus country of EIDHR, thus allowing projects at national level. Lack of co-ordination between the micro-projects supported by the Commission puts a limitation on their global impact.

5.3.3 Poverty alleviation

9. The Commission was not actively involved in the PRSP preparation process (Chapter 4, EQ 7)

The Commission was only marginally involved in the preparation process for the Poverty Reduction Strategy, a likely explanation for which is that the Commission did not have in Armenia at that time the capacity required for active involvement in this process.

10. Commission projects in the health sector, social security and employment services did not fully deliver their expected outcomes (Chapter 4, EQ 6)

Between 1997 and 2002 the Commission implemented a series of projects of various sizes, first in the health sector, then in the social security administration, and finally in employment services. These projects did not fully deliver their expected outputs, nor were all their outcomes sustainable. They suffered from institutional instability (social security, employment) or of a lack of ownership of the project objectives by the beneficiary (health, employment), but also from being allocated too limited resources in terms of time or budget and from a lack of continuity in the Commission’s interventions.

11. Commission interventions in the education sector delivered positive results whose sustainability is however not fully ensured (Chapter 4, EQ 4)

Tempus projects effectively helped universities to be more responsive to the needs of a market economy. These interventions however lacked a policy framework and the scarcity of resources available to the sector puts at risk the sustainability of their outcomes. The Commission has had a key role in raising awareness of the GoA on the importance of vocational education in addressing unemployment and poverty. Sustained efforts will be required to put right the situation of a sector which has severely suffered from more than ten years of neglect.



12. Commission interventions in support of the social assistance policy have been effective (Chapter 4, EQ 6)

The largest part of the FSP funds allocated to social assistance was channelled to the Family Benefit scheme which is the main instrument of the GoA for tackling extreme poverty. The remaining funds financed current activities of the MoLSI. The conditions attached to this financial support are of two types: those relating to public expenditure management and budget execution contributed to significant progress in this area; those specific to the social sector supported the design and implementation of a childcare and child protection policy.

13. Commission interventions addressed the issue of rural poverty (Chapter 4, EQ 3)

At a very early stage the Commission identified agriculture as a focal sector in the fight against poverty. Hence the important financial support allocated through the FSP to the MoA and the SCC, and the Commission’s decisive contribution to the establishment and development of the Agricultural Credit Bank of Armenia.

5.3.4 Sustainable economic growth

Commission interventions supporting development of the private sector and of agriculture as mentioned above have made an obvious contribution to the achievement of sustainable economic growth.

14. Commission interventions supported the implementation of macroeconomic and sectoral policies favouring sustainable economic growth (Sub-chapter 3.2 and Chapter 4, EQ 1)

Evaluating the Commission’s macro-financial assistance to Armenia is the object of a separate evaluation and therefore not in the mandate of the current study; but it is worth noting here that this assistance, closely co-ordinated with the IMF, was provided at a time when the GoA was struggling with a huge budget deficit, and aimed at helping the Government implement sound macro-economic policy measures.

15. Commission interventions effectively supported the development of energy and transport infrastructure (Chapter 4, EQ 5 and 8)

In the energy sector TACIS projects identified new non-nuclear electricity generation capacities and supported their development, enhanced the safety of gas transport and storage, and provided the GoA with strategic studies for the development of the energy sector in the context of a decommissioning of Medzamor. They strengthened the capacity of GoA agencies to analyse the energy sector and design appropriate policies. In the transport sector, the Commission financed the feasibility study on rehabilitation of the Yerevan-Tbilisi road. Rehabilitation work has been financed by the World Bank and was completed in 2004. Other important and successful projects have been the supervision of the instalment of an optical cable along the Yerevan-Tbilisi-Poti railway line, and the



instalment of terminal equipment for container handling in Yerevan. Furthermore, Armenian exports and imports benefited indirectly from Commission projects aimed at improving transport infrastructure in Georgia.

5.3.5 Energy sector

16. The Commission did not succeed in persuading the government to commit itself to early decommissioning of the Medzamor NPP (Chapter 4, EQ 5)

Besides the overall objectives of its co-operation with Armenia, the Commission’s interventions in the energy sector aimed at a specific objective: persuading the GoA to close, as early as possible, the Medzamor NPP which, in the Commission’s view, presents an unacceptable level of risk. This objective was not attained. The GoA refused to take on any commitment to close the NPP as long as the alternative capacity required to replace its electricity production is not in place and the increased costs induced by a more expensive electricity supply are not compensated for.

5.3.6 Integration into the world economy

17. Commission interventions effectively supported the development of trade (Chapter 4, EQ 2)

The Commission has made a positive contribution to the development of Armenian foreign trade. The European Union grants Armenia the benefits of its GSP system. The Commission provided technical assistance to the GoA in the negotiations which led to Armenia’s accession to the WTO in 2003 and helped the Government implement post-accession commitments. Support given to SMEs through Business Support Centres included assistance in the development of exports and foreign partner search. Links were established between Armenian enterprise organisations, such as Chambers of Commerce, and their counterparts in the EU. Finally, Commission interventions in transport infrastructure enhanced the effectiveness and safety of trade-related transport.

18. In spite of the Commission’s endeavours to promote regional co-operation the geo-political climate remains a major obstacle to integration of Armenia into the world economy (Chapter 4, EQ 8)

Although diplomatic relations between Armenia on the one hand, and Azerbaijan and Turkey on the other hand, are broken, the Commission has attempted, with considerable success, to have the three countries participate jointly in its regional programmes for transport and energy. However, projects implemented in the framework of these programmes were either bilateral investment projects involving Armenia and Georgia, or technical assistance projects involving all countries participating in the programmes. Armenian borders with Azerbaijan and Turkey remain closed, creating severe obstacles to development of Armenian trade; co-operation in the energy sector, which would be beneficial to all three countries, cannot materialise under current conditions.



5.4 Implementation modalities and donors co-ordination

19. Linkage between policy dialogue and co-operation is in progress (Chapter 4, EQ 10)

Policy dialogue between the Commission and the GoA relies on several channels: the Co-ordination Committee established in the framework of the PCA; missions carried out in Armenia by Commission officials from the Brussels Headquarters and from the Delegation to Georgia and Armenia; and meetings of the FSP Steering Committee. There is in Armenia evidence of linkages between policy dialogue and co-operation activities in the areas of institutional and legal reforms and of energy. However ensuring that policy dialogue and co-operation are mutually supportive implies that the policy dialogue conducted at high level in the framework of periodic meetings is complemented by more permanent and closer dialogue between the Delegation and government agencies. The opening in Yerevan of a Delegation Branch Office has created more favourable conditions in this regard.

20. An improved environment, but also changes in the implementation modalities of the Commission’s interventions, impacted positively on their effectiveness and sustainability (Chapter 4, EQ 10)

The effectiveness and sustainability of the Commission’s projects implemented in the second half of the 1990s and the early 2000s left something to be desired. But performance of projects recently completed or still under implementation has significantly improved on both counts. This is partly due to a more stable financial and institutional environment, but is also related to changes in the implementation modalities of the Commission’s co-operation programmes. The opening in Yerevan of a Delegation Branch Office has made possible closer contacts between Commission staff, project implementation agencies and contractors. Deconcentration has also been welcomed by contractors and beneficiaries as it is making possible faster and fuller responses to problems arising during project implementation.

21. The Commission managed relatively well to use the various financing instruments at its disposal in a complementary manner (Chapter 4, EQ 10)

The Commission’s co-operation with Armenia made use of a variety of financing instruments. The Commission managed relatively well to use these instruments in a complementary manner. This is especially true of the TACIS National Programme in which the budget lines for small projects were used to complement activities carried out through large projects in such areas as private sector development, institutional reforms or education. Interventions in the energy sector combined projects financed from the TACIS National Programme, from the TRACECA and INOGATE components of the Regional Programme, and from the Nuclear Safety Programme, each in compliance with its specific objectives. The FSP had remained until now relatively disconnected from other Commission interventions, but the 2004-2005 Action Programme plans to complement



FSP support to the MoA and the MoLSI with technical assistance projects financed from the TACIS National Programme.

22. Donors co-ordination remains unsatisfactory (Chapter 4, EQ 9)

All co-operation agencies in Armenia agree that donor co-ordination is unsatisfactory overall and they put the blame on a lack of leadership by the Government. Indeed the responsibility for discussions with donors is spread over several government bodies, and the adoption of the PRSP did not lead to a structured dialogue between the Government and the donor community. Monthly meetings of the Heads of donor representation offices in Yerevan and occasional meetings between Commission officials and their counterparts in other donor organisations attempt to ensure some co-ordination between donor interventions, but even so cases of duplications still occur.



6. Recommendations

Before presenting the recommendations derived from the evaluation conclusions, it must be recalled that from 2007 co-operation between the European Commission and Armenia will make use of a new financial instrument, the European Neighbourhood and Partnership Instrument (ENPI)48. Against this background, recommendations are organised in three groups addressing respectively the overall Commission Strategy, the sectors of intervention, and the co-operation implementation modalities. Numbers between brackets following each recommendation refer to the conclusions presented in the previous chapter. Evaluators consider as priorities the three following recommendations: Ensure full consistency between the PRSP priorities and the Commission’s

co-operation strategy; Make democratic progress, respect for human rights and enforcement of the rule of

law a key priority of the Commission’s strategy; Strengthen the link between policy dialogue and co-operation. Implementation of these recommendations is however to a large extent contingent on an integration of all financing instruments in the Country Strategy and in the National Indicative Programme and Action Programmes, and also on due attention to those recommendations that deal with implementation modalities, notably enhancement of the status and strengthening of capacity of the Commission’s office in Yerevan, a switch from FSP to full-fledged budget support, and progress in donor co-ordination.

6.1 Recommendations relative to the overall co-operation strategy

1. Ensure full consistency between the PRSP priorities and the Commission’s co-operation strategy (C.1, C.2 & C.9)

Commission interventions over the last ten years have been broadly consistent with the PRSP priorities. But these interventions targeted a large number of sectors and issues, not always with the desirable continuity. The Commission itself acknowledges that it should avoid spreading limited resources too thinly. When preparing its Strategy Paper for co-operation with Armenia in the years 2007 and beyond, the Commission should make sure that its co-operation strategy is fully consistent with the GoA’s Poverty Reduction Strategy. This implies that the Commission should enter into a policy dialogue with the GoA to examine how the Commission could play a more active part in development of the poverty reduction strategy and best contribute to its implementation.

48 See above Chapter 3 § 3.4.



2. Make democratic progress, respect for human rights and enforcement of the rule of the law a priority of the Commission’s co-operation strategy (C.3)

The PCA between the European Union, the Commission and the Republic of Armenia strongly underlines the commitment of all Parties to democratic principles, respect for human rights and enforcement of the rule of law. Any revision of the Commission’s strategy should adequately reflect the importance given in the PCA to democracy, human rights and the rule of law. More practical recommendations are presented below (recommendation 7) in relation to this issue.

3. Integrate all financing instruments in the Country Strategy and in the National Indicative Programme and Action Programmes (C.21)

The Commission’s Strategy Paper, Indicative Programmes and Action Programmes deal solely with the TACIS National Programme, which over the last ten years represented only 25-30 per cent of the total amount of resources mobilised by the Commission for its co-operation with Armenia. This puts the Commission itself and still more its Armenian partners at risk of having a distorted vision of the Commission’s involvement. Furthermore in the context of dialogue-driven co-operation relying on donor co-ordination led by the Government, it is crucial that Commission officials present a comprehensive view of the total volume of resources mobilised by the Commission and of its areas of intervention. Should financial instruments other than the ENPI be used in the co-operation between the European Commission and Armenia, these instruments and the objectives they are targeting should be included in the Commission’s Strategy Paper. Even if separate indicative and actions programmes have to be elaborated for some of these instruments, such as for example the Nuclear Safety Programme, reference should be made in the National Indicative and Action Programmes to the volume of resources allocated to these instruments and to the activities they support.

6.2 Recommendations relative to sectors

4. Restrict Commission interventions to a limited number of concentration areas (C.1 & C.2)

The PCA addresses a wide range of issues which, given the limited volume of resources available, carries the risk of a scattering of effort and a lack of continuity. A focus of the Commission’s assistance to Armenia on a limited number of restrictively-defined areas of concentration is desirable with a view of ensuring that the interventions are consistent with a sectoral approach49, and that they are underpinned by a continuous policy dialogue with the government. 49 Sectoral approaches aim at overcoming the weaknesses of traditional project aid: a focus on inputs, insufficient

attention given to institutional issues, a short time scale, no contribution to structural changes. They imply to insert interventions in a global analysis of the relevant sector in order to make sure that their effectiveness and/or sustainability will not be impaired by factors outside their reach.



With this view, and taking into account achievements of the Commission’s co-operation to date, issues that could be addressed are: Approximation of the Armenian legislation relative to economic activity and trade to

that of the EU; Poverty alleviation through support to agricultural and rural development policy and to

social policy; Education with a focus on vocational training.

Support to democratic progress should be primarily seen as a transverse issue to address through all Commission interventions.

5. Streamline democratic progress into the Commission’s interventions and support the structuring of Civil Society (C.7 & C.8)

Democracy should be treated as a transverse issue. All Commission interventions should be examined in their relation to democracy and their design adjusted so as to enhance their contribution in this respect. In particular, as provided for by the ENPI Regulation, attention should be devoted to establishment of partnership with beneficiaries of Commission interventions, including local authorities, civil society, economic and social partners. This may also imply specific interventions aimed at helping Civil Society to structure itself in such sectors as agriculture, education, or social protection where the Commission is actively involved. Finally, interventions could be developed along the line of the EIDHR micro-projects. To enhance the impact of such projects it would be desirable that they are organised in clusters of projects and contribute to developing co-operation between the NGOs involved in their implementation.

6. Support the National Programme for implementation of the PCA, and promote enforcement of the legal framework (C.4 & C.5)

The GoA has undertaken to draw up a National Programme for implementation of the PCA whose core component will be an approximation of Armenian legislation relative to economic activity and trade to that of the EU. Supporting the preparation of this programme will ensure that its implementation is fully consistent with the objectives of the European Neighbourhood Policy. But attention should also be devoted to the proper enforcement of the legal framework. This issue could be addressed through interventions aimed, on the one hand, at strengthening the judiciary, and on the other at developing the capacity of enterprise organisations to follow up on legal issues and to assist their members in legal actions50.

50 The project of establishing of a European and International Law chair at the Yerevan University, included in the

Action Programme 2004/05, is a positive step in that direction.



7. Agriculture and rural development: frame Commission interventions in the sector in a policy dialogue with the government (C.6)

Agriculture is a sector to which the Commission has devoted a substantial amount of resources through a mechanism close to budget support and in which it has nearly ten years’ experience of co-operation with the government. Development of the sector, and more generally of rural areas, is key to the alleviation of poverty. The existence of a Sustainable Agricultural Development Strategy is an asset on which the Commission can build to further deepen its dialogue with the government with a view to helping the MoA to adopt a more comprehensive approach to the sector, involving activities upstream and downstream of agricultural production; to enlarge its perspective to the whole rural sector; and to take into account the various public and private stakeholders of the sector and the role they may have in its development. In line with the ENPI Regulation the principles of sectoral budget support should replace those of the FSP (See below Recommendation #12).

8. Social sectors: frame Commission interventions in a policy dialogue with the government (C.10 & C.12)

The logic of this recommendation is similar to that presented above on the agricultural sector. Social assistance is a key priority of the Government which is committed to tackling extreme poverty and has in fact had some success in that regard, in particular through the institution of the Family Benefit scheme. The Commission has devoted substantial resources to this sector and has contributed to the design and implementation of a childcare and child protection policy. Conditions are met for a move from FSP to budget support and to expand the coverage of the policy dialogue with the government to the whole social security and social assistance system in such a way that Commission interventions can take place within a sectoral approach to social protection.

9. Education: Provide continuous support to the renovation and development of vocational education

Thanks to Commission interventions steps have been taken to redress the situation of the VET sector, which is key to addressing unemployment and poverty but had been neglected for more than 10 years. Considering the low capacities in the sector and the budget priorities of the Government which will switch to VET only from 2009, continuous support from the Commission is needed to maintain the momentum created by its earlier interventions.



10. Energy: Pursue the dialogue on the Medzamor issue and support the GoA’s endeavours to diversify energy supply sources and reduce the country’s dependency on imported energy (C.15 & C.16)

Closing the Medzamor NPP will remain a key objective of the Commission co-operation with Armenia. Support to the GoA endeavours to diversify sources of energy supply and reduce the country’s dependence on imported energy, while being an objective in itself, also contributes to creating conditions for decommissioning the NPP.

Dialogue with the GoA on the closure of Medzamor is currently in a deadlock and the Commission does not have much choice but to continue its interventions aimed at reducing the level of risk associated with the NPP operation51. However the development of new hydro and thermal electricity generation capacities, which has been favoured by Commission-funded studies and which is currently taking place, will gradually reduce the vulnerability of the Armenian electricity supply system, thus lending strength to the arguments of the Commission and other donors for a closure of the NPP. In this respect, the project planned in the 2004/05 Action Plan to design a “roadmap” covering all aspects (technical, financial, normative) of the decommissioning of Medzamor will shed useful light on the implications of the NPP closure. A safety check of the NPP and an assessment of the capabilities of ANRA by a specialised institution such as the IAEA or the West European Nuclear Regulatory Authority52 could also be envisaged as a joint donor initiative.

Obviously the close co-ordination which currently exists between all donors involved in the development of the energy sector should be maintained.

6.3 Recommendations relative to implementation modalities

11. Strengthen the link between policy dialogue and co-operation (C.19)

To complete the move, initiated since the entry into force of the PCA in 1999, from demand-driven to policy-based co-operation, it is necessary to strengthen the link between policy dialogue and co-operation. Several channels already exist for policy dialogue between the Commission and the Armenian government: the Co-operation Committee established by the PCA; the FSP Steering Committee; the meetings held by Commission officials from Brussels and from the Tbilisi Delegation during missions to Yerevan; contacts between staff members of the Delegation Branch Office in Yerevan with government officials. But to impact on the content and quality of co-operation, and in particular to allow a move from traditional project aid to a sectoral approach to co-operation and to budget support, the policy dialogue initiated through these periodic meetings must be continued, consolidated and filled out with detail through permanent contacts between the Commission and government officials.

51 The Nuclear Safety Indicative Programme 2004-2006 includes a €7.0 million provision for operational safety

improvements, continued training of Armenian operators and support to the regulatory authority. 52 The most recent safety review of the NPP goes back to 1992.



12. Evolve from FSP to full-fledged sectoral approach and budget support (C.6 & C.12)

The FSP evolved over time from a programme primarily aimed at securing the import of food products to a programme which is nowadays closer to budget support as implemented by the Commission in other third countries. This process is however not complete. In compliance with the Commission guidelines for budget support, moving from FSP to sectoral budget support implies ensuring, among other conditions, that the programme (i) is partnership based; (ii) is linked to the national or a sectoral strategy; (iii) encompasses institutional development objectives; (iv) involves adequate donor co-ordination; and (v) aims at the achievement of results assessed through performance indicators. Furthermore, contrary to the FSP, which is managed by a dedicated Service at the Commission’s Brussels Headquarters and is not included in the national programme, budget support is deconcentrated53 and is most often a key component of the national programme implemented by the Commission in the partner country. A Commission budget support programme for Armenia could be in the first place general, and then supportive of PRSP implementation. However, considering the close working relations already established through the FSP between the Commission on the one hand, and the MoA and MoLSI on the other hand, it seems more appropriate to start with sectoral budget support programmes focusing on agriculture and rural development, and on social protection and assistance.

13. Enhance the status and strengthen the capacity of the Delegation’s Branch Office in Yerevan (C. 20 & 21)

The Delegation’s Branch Office in Yerevan has recently been granted diplomatic status by the Armenian government. But if it is to be entrusted with the responsibility of conducting a permanent policy dialogue with the Government in the form suggested above, it should be given, as requested by the Parliamentary Committee established in the framework of the PCA, the full status of a Delegation. Enlargement of the office’s responsibilities, notably as a consequence of deconcentration, also implies a strengthening of its capacity with the appointment of staff members possessing technical qualifications in the areas targeted by the Commission’s strategy.

14. Adopt a pro-active attitude on the issue of donor co-ordination (C.23)

Donor co-ordination in Armenia is acknowledged by all donors to be unsatisfactory. Lack of leadership by the government has an important bearing on this situation which could hamper the effectiveness of donor support in implementation of the PRSP and hence jeopardise achievement of the PRSP objectives.

53 Except for the decision to release funds, which lies with the EuropeAid relevant unit.



The Commission should make every effort to contribute to improvements in this regard. Concrete measures that could be envisaged include, as a first step, more active participation by the Commission in all activities related to PRSP implementation and its monitoring and evaluation, since this is where a global view of government needs and expectations and of donors responses can best be taken. Another initiative could be the organisation on the model of the Energy working group, but on a more permanent basis, of meetings of those donors involved in assistance to sectors in which the Commission has a leading role, such as agriculture and rural development, social assistance or education. Relevant officials of the government could be invited to participate in these meetings, thus creating the possibility of government-donor dialogue on sectoral policy issues. Finally, a switch by the Commission to budget support could be an opportunity to involve other donors, in particular the EU Member States, in co-ordinated support for sectoral policies.

Documents

Final Report Volume I January 2006 - OECD.org · TPP Thermal Power Plant TRACECA Transport Corridor Europe-Caucasus-Asia ... USD US dollar VET Vocational Education and Training WB