Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: {PP2434}

PROJECT PAPER

ON A

PROPOSED GRANT

IN THE AMOUNT OF US$ 0.45 MILLION

TO THE

REPUBLIC OF ARMENIA

FOR A

ARMENIA MINERAL SECTOR POLICY PROJECT (P163060)

July 25 2017

This document has a restricted distribution and may be used by recipients only in the

performance of their official duties. Its contents may not otherwise be disclosed without

World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective)

Currency Unit = Armenian Dram

AMD 485 = US$ 1

FISCAL YEAR

July 17 - July 20

Abbreviations and Acronyms

CSO Civil Society Organization

GoA Government of Armenia

EITI Extractive Industries Transparency Initiative

FFPMC Foreign Financing Projects Management Center at the Ministry of Finance of

Armenia

NSSRA National Statistic Service of Republic of Armenia

MEDI Ministry of Economic Development and Investment

MEINR Ministry of Energy Infrastructure and Natural Resources

MoF Ministry of Finance

MoH Ministry of Health

MNP Ministry of Natural Protection

MTD Ministry of Territorial Development

PPSD Project Procurement Strategy for Development

SEA Strategic Environmental Assessment

Regional Vice President: Cyril Muller

Country Director: Mercy Miyang Tembon

Global Practice Senior Director: Riccardo Puliti

Practice Manager: Sheila Khama

Task Team Leader: Kirsten Lori Hund

REPUBLIC OF ARMENIA

ARMENIA MINERAL SECTOR POLICY

TABLE OF CONTENTS

Page

STRATEGIC CONTEXT .................................................................................................7 I.

A. Country Context ............................................................................................................ 7

B. Sectoral and Institutional Context ................................................................................. 7

C. Higher Level Objectives to which the Project Contributes ........................................ 10

PROJECT DEVELOPMENT OBJECTIVES ..............................................................10 II.

A. PDO............................................................................................................................. 10

B. Project Beneficiaries ................................................................................................... 10

C. PDO Level Results Indicators ..................................................................................... 11

PROJECT DESCRIPTION ............................................................................................11 III.

A. Project Components .................................................................................................... 11

B. Project Cost and Financing ......................................................................................... 12

IMPLEMENTATION .....................................................................................................13 IV.

A. Institutional and Implementation Arrangements ........................................................ 13

B. Results Monitoring and Evaluation ............................................................................ 14

C. Sustainability (if applicable) ....................................................................................... 14

KEY RISKS AND MITIGATION MEASURES ..........................................................14 V.

APPRAISAL SUMMARY ..............................................................................................16 VI.

Please provide one paragraph with a summary description of the main economic benefits

and costs of the project and a second paragraph summarizing the key FM,

procurement and safeguards issues. ............................................................................ 16

A. Other Safeguards Policies Triggered .......................................................................... 18

B. World Bank Grievance Redress ................................................................................... 19

Annex 2: Implementation Arrangements ..................................................................................22

DATA SHEET

Republic of Armenia

Armenia Mineral Sector Policy (P163060)

Small RETF Grant Project Paper

Europe and Central Asia

Energy and Extractives

Basic Information

Date: 10.05.2017 Sectors: Mineral Sector

Country Director: Mercy Miyang Tembon Themes: Mineral Sector Policy

Practice Manager/Global

Practice Senior Director:

Sheila Khama / Riccardo

Puliti EA Category: C - Not Required

Project ID: P163060

Instrument:

Team Leader(s): Kirsten Lori Hund

Recipient: Republic of Armenia

Executing Agency: Government of Armenia

Contact: Vace Stepanyan Title: Chief of Government Staff

Telephone No.: 37410515933 Email: Vace.Stepanyan@gov.am

Project Implementation Period:

2017-2020

Start Date: August 31st,

2017 End Date: September 30, 2019

Expected Effectiveness Date: August 31st, 2017

Expected Closing Date: September 30, 2019

Project Financing Data(US$M)

Total Project Cost: $450 000 Total Financing: $450000.00

Financing Gap: 0

Financing Source Amount(US$M)

BORROWER/RECIPIENT

Others

Financing Gap

Total

Expected Disbursements (in USD Million)

Fiscal Year 2017-2018 2018-2019

Annual $350000.00 100,000

Cumulative $350000.00 $450000.00

Project Development Objective(s)

To support the development of a Mineral Sector Policy for Armenia that focuses on strengthening of the contribution of

the mining sector to sustainable economic growth.

Components

Component Name Cost (USD Millions)

Analytical underpinnings 230,000.00

Policy Development (including consultations) 200,000

Capacity building 20,000.00

Compliance

Policy

Does the project depart from the CAS /CPS/CPF in content or in other significant respects? Yes [ ] No [ V]

Does the project require any exceptions from Bank policies? Yes [ ] No [V]

Have these been approved by Bank management? Yes [ V ] No [ ]

Is approval for any policy exception sought from the Board? Yes [ ] No [V]

Does the project meet the Regional criteria for readiness for implementation? Yes [ V ] No [ ]

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 V

Natural Habitats OP/BP 4.04 V

Forests OP/BP 4.36 V

Pest Management OP 4.09 V

Physical Cultural Resources OP/BP 4.11 V

Indigenous Peoples OP/BP 4.10 V

Involuntary Resettlement OP/BP 4.12 V

Safety of Dams OP/BP 4.37 V

Projects on International Waters OP/BP 7.50 V

Projects in Disputed Areas OP/BP 7.60 V

Legal Covenants

Name Recurrent Due Date Frequency

Description of Covenant

Team Composition

Bank Staff

Name Title Specialization Unit UPI

Kirsten Lori Hund Task Team Leader GEEX1 419057

Narine Tadevosyan Consultant GEEX1 478330

Armine Aydinyan Procurement Specialist GGO03 352759

Lousine Grigoryan Financial Management

Specialist

GGO21 496733

Satoshi Ishihara Safeguard Specialist GSU03 233666

Ruxandra Maria Floroiu Lead Environmental Specialist

GEN03 225857

Gayane Davtyan

Team Assistant

BPSEM 214083

Helen Ba Thanh Nguyen Team Assistant GEEX2 411335

Non Bank Staff

Name Title Office Phone City

Locations

Country First Administrative

Division

Location Planned Actual Comments

Armenia Government of Armenia Yerevan

7

STRATEGIC CONTEXT I.

A. Country Context

Since independence, and until 2008, Armenia had been featured as one of the pre-eminent

reformers among the former Soviet Republics. Indeed, over a number of years, the country

displayed a record of sustained growth, economic stability, low inflation, modest deficits and

external debt, rising remittances from migrant workers abroad, and sharply falling poverty rates.

However, many analysts pointed out at the time that the continuation of this development path

required deepening reforms to sharpen the competitive framework of the economy, achieving

closer integration with international trade and capital markets, building financial markets, and

creating the conditions for the absorption of knowledge that leads to higher technological

sophistication.

Almost a decade since 2008, Armenia’s economy finds itself in radically different and

challenging circumstances, with a low growth - low investment environment and stalled poverty

reduction. A rapidly increasing public debt has left the country with no fiscal space to

manoeuver. The country also has one of the highest unemployment rates (18.5 percent) in the

Europe and Central Asia region largely stemming from low job creation, and a mismatch of

workers’ skills and jobs. The country grapples with falling remittances, deteriorating external

conditions, stalling poverty reduction, unfinished reforms in critical areas and worsening

demographics that will soon pose fundamental constraints.

Going forward the main challenge is to reinforce macroeconomic stability and uncover new

sources of stable and shared growth, anchored in a well-integrated and competitive economy. On

the macroeconomic front, imports remain significantly higher than exports, and there is

continued reliance on private and official transfers. Public debt has increased, limiting options in

terms of external borrowing for financing growth. The fiscal consolidation in recent years has

been marked by large increases in current spending and falling public investment. The primary

scope for strengthening public finances is therefore through revenue mobilization. In terms of

strengthening competitiveness, Armenia has secured better market access to Russia and other

large countries (such as Kazakhstan) through its EEU membership, but the dynamics in those

markets have contributed to a decline in exports. Critical gaps in the business environment such

as low incentives for entrepreneurs and high logistics costs, are important constraints on

productivity and growth, as is the need for more market contestability.

B. Sectoral and Institutional Context

Armenia has an abundance of mineral resources such as copper, gold, silver and zinc, as well as

industrial minerals such as diatomite, gypsum, limestone, perlite and rhenium salt. In 2011, it

ranked 7th in the world in molybdenum production. Based on the existing calculations, it is

estimated that the lifeline of existing operations will be rather extensive: Copper-molybdenum –

100 -120 years

Gold – 25-30 years

Zinc and lead – 20-25 years

Non-metal estimated reserves are:

8

Volcanic slag – 345 million cubic meter

Perlite and obsidian – 165 million cubic meter

Pumice – 100 million cubic meter

Clays – 435 million cubic meter

Basalt – 334 million cubic meter

Armenia’s economy has undergone major structural changes since independence, changing from

an industry-based economy to increasingly becoming an economy based on agriculture and

trade. The minerals sector represents one of few industrial sectors that have developed in an

economically positive way, and it is seen by the Government as having an important role in

further development of the country's economy. In the past 5 years, inflows from sector exports

have been in the country of USD 500 million annually, making it Armenia’s top sector in terms

of export and inflow of foreign exchange. Mining companies are significant job providers,

especially as they offer formal jobs in more rural areas. However, the potential for large-scale,

short-term economic gains through investment in the sector often overshadows its likely impact

on the environment and local communities.

The mining sector is one of the largest contributors to GDP and exports. In 2016, the mineral

industry made up 17.9% of total industrial production and grew by 8.3% from the previous year

reflecting expansion in late 2014 at the Teghut copper mine, the country’s second largest

mine. Mining of metal ores dominated the mineral industry, accounting for around 98% of the

production value in this sector. In 2016, the country’s mining sector exports were valued at $471

million and declined by 1.3% over 2015. Overall, exports of minerals accounted for 26.4% of the

country’s export revenue in 2016. Armenia’s main export partners are Russia and China and

recently Canada.

Mining, although a potential engine for growth, is also a contested subject in Armenia. There is

strong suspicion of mining activities by parts of the population, and in particular civil society.

This distrust is largely fueled by a lack of information and dialog between stakeholders, and the

fact that most metallic mines were developed in the Soviet era under weak environmental and

social standards. To address that lack of trust and improve the investment climate, the Armenian

government, supported by the World Bank, has been considering the Extractive Industries

Transparency Initiative (EITI) process for several years. On July 28, 2015, the Government of

Armenia made a public announcement that they intend to seek EITI candidacy, and nominated

the Minister-Chief of Staff of the Government, as the person to lead the implementation of the

initiative. In August 2016 a Multi Stakeholder Group was formed and worked out the EITI

priorities for Armenia as well as the action plan. Armenia submitted an EITI candidacy

application in December 2016. March 9, 2017 Armenia was accepted as an EITI Candidate

country.

It is clear that the mining sector's future development has to be accompanied by a strong and

transparent dialog on the future of the sector, between the government, the private sector, civil

society and the communities affected by mining activities. In 2015-2016, The World Bank, under

the Extractive Industries-Transaction Advisory Facility Multi Donor Trust Fund (EI-TAF

9

MDTF), supported the undertaking of a Strategic Mineral Sector Sustainability Assessment1. It

showed that whereas mining is important to the Armenian economy, individual operations are

not generally contributing sufficiently to the longer term sustainable development of the nation.

This is in spite of a range of past and ongoing initiatives taken by the regulators to reform the

sector. The current situation of low mineral prices is a fortuitous time for mining policy

development, to ensure that when the next wave of development and investments arrives with an

increase in mineral/metal prices, Armenia will be well prepared to manage the various challenges

and opportunities that such times entail. The Report’s main recommendation is to urgently

embark on developing a national mining policy, as it has never had one, and couple this with the

efforts that are being made to make Armenia an EITI compliant country. The main point of

having such a sector policy is that it will help ensuring the sustainable development and

regulation of the sector, and its contribution to the achievement of an overall vision for national

development.

A publicly available stand-alone Mineral sector policy is a useful regulatory tool that serves two

important functions:

1. it provides the mineral industry with a clear statement of the government's expectations and

intent towards the industry,

2. it provides lawmakers and regulators and other stakeholders with broad guidance; and helps

coordinate between different agencies.

The development of a National Mining policy through an inclusive multi-stakeholder process

will help establish the appropriate policy framework for mineral sector governance in Armenia,

while making sure the sector will develop according to the highest social and environmental

standards. With several mining projects in early development stages and a limited amount of

exploration taking place, now is an excellent time to develop a long term vision for the sector.

The Development of a Mineral Sector Policy will help Armenia determine what it wants the

sector to look like in the future, and how to make sure that a mining sector in Armenia will be a)

using modern technologies; b) operating in technically, economically, environmentally and

socially responsible manner, taking into account both the rights of the most vulnerable people

and the challenges posed by climate change; c) based on strong linkages to local businesses.

An effective sector policy will frame broad based reforms in the mining sector in Armenia; the

policy will include an action plan for legislative and institutional reforms in line with the policy.

Furthermore, the approach and methodology for development of a strong Mineral Sector Policy

in Armenia can inform neighboring countries, in particular Georgia, that still, to a large extend,

operate under Soviet-era standards and policies.

In order to launch the development of a Strategy for the sector, a Working Group has been set up

by the Prime Minister’s Decree No. 1092-A, dated November 23, 2016, which has developed the

Concept Paper for Development of the Mining Sector. The Concept Paper (non - official

translation is attached) identified main problems of the sector and areas where deep assessments

1 http://documents.worldbank.org/curated/en/289051468186845846/Armenia-Strategic-mineral-sector-

sustainability-assessment

10

are necessary. It was shared with related ministries for review and comments. It was also made

publicly available in the Government web-site.

C. Higher Level Objectives to which the Project Contributes

The Project is aligned with the 2013-2017 Country Partnership Strategy, which places private

sector led job creation at the center of its Strategy, focusing on I) supporting competitiveness and

job creation and ii) improving efficiency and targeting of social services, with ‘‘Improving

governance and anti-corruption measures in public services as a cross-cutting theme, with a

specific focus on the impacts on gender’’.

PROJECT DEVELOPMENT OBJECTIVES II.

A. PDO

To support the development of a Mineral Sector Policy for Armenia that focuses on

strengthening the contribution of the mining sector to sustainable economic growth.

B. Project Beneficiaries

The main beneficiaries of the project are the Government of Armenia, represented by The Prime

Minister’s Office as well as its different line Ministries: the Ministry of Energy Infrastructure

and Natural Resources (MEINR), the Ministry of Natural Protection (MNP), the Ministry of

Territorial Development (MTD), the Ministry of Economic Development and Investment

(MEDI), and the Ministry Of Finance (MO), the Ministry of Health, as well as the key

stakeholders: Civil Society Organizations, mining companies and communities directly or

indirectly impacted by mineral extraction; making sure that a gender sensitive approach is taken

in the consultation process, and all vulnerable groups are effectively included.

Mining sector related activities and strategy of the Republic of Armenia are specified in the GoA

2017-2022 Government Program. Supported by the recommendations by the Mineral Sector

Sustainability Assessment, the Government initiated the development of a Mineral Sector

Strategy/Policy, which will be led by the Prime Minister’s office, in close coordination with the

Ministry of Energy Infrastructure and Natural Resources (MEINR). They will lead the

development of the policy, as well as the necessary assessments, supported by an inter-

ministerial working group in which all key ministries are represented.

The project aims to ensure ownership of the process by each of these constituencies; by creating

a better understanding of both the current state of the mining sector in Armenia and international

good practices in mineral sector management, so that the different parties can decide together

how to bridge that gap and come to a shared long term vision about the future of the sector, as

well as a strategy on how to implement this.

Project stakeholders will be the various groups represented in the EITI Multi-Stakeholder Group:

the different government line Ministries, CSO: principally environmental and transparency

focused organizations, academia and research institutes with a strong interest in responsible

mining, and the various mining companies with operations in Armenia, and their constituencies,

as well as the communities which are directly impacted by the mining industry. All stakeholders

11

will be actively involved throughout the project through interviews, focus groups discussions

within mining regions as well as in Yerevan, and individual meetings.

C. PDO Level Results Indicators

A Mineral Sector Strategy/Policy is developed, based on solid analytical work and through

an inclusive multi stakeholder process that is in line with good international practices and

standards for sustainable mineral sector governance.

Representatives from communities affected by mining (both men and women) participate

actively in a dialog on the future of the sector.

A permanent dialog forum for key stakeholders in the mining sector (communities, civil

society, companies and government agencies) is put in place, and allows better knowledge

and access to information on the key characteristics, impacts, benefits and future strategy for

the Armenian mining sector.

PROJECT DESCRIPTION III.

A. Project Components

The Grant to the government of Armenia for the development of a national mineral sector policy

consist of the following components:

Component 1: Analytical underpinnings

To support the development of a long- term Strategy, this project will support the undertaking, in

a participative manner, of a series of diagnostic studies, as recommended by, and building upon

the findings of, the Armenia Strategic Mineral Sector Sustainability Assessment (Worldbank,

2016). Key areas where knowledge gaps exist that have been identified are:

a) An economic assessment, assessing the economic viability/ advisability of the different types

of mining investments for Armenia, (including a cost-benefit analysis for different scales of

mining operations) considering their (potential) contribution to local, regional and national

development, and the potential to develop stronger economic linkages along the supply chain.b)

Environmental and health analysis: assessing, building upon existing studies, risks mineral sector

development poses to local communities, with a particular focus on health and safety for both

communities and workers, and the existing standards, capacity and institutions to effectively

address this through a mineral sector policy. Where possible, this study will also look at the

impacts of climate change on the mining industry and vice versa.

c) An institutional review, assessing the relevance and effectiveness of current institutional tasks

and practices in light of common goals of sustainable minerals sector development.

These studies will fill the existing knowledge gap, and will identify, together with the already

existing analytical work on the mining sector in Armenia, priorities, means and measures for

achieving the policy, that will be translated in an action plan.

12

The undertaking of these studies will also be used as a capacity building opportunity. While

national and International experts will be hired to undertake the studies, this will be done in close

collaboration with the different government entities, training them in both the analytical skills as

well as deepening their sector knowledge. This will be an explicit part of the Terms of

References of the studies.

Component 2: Policy development, Outreach and consultation:

Policy discussions should involve all stakeholders and be based on multi-stakeholder dialog and

consultations. Individual meetings, focus groups and roundtables with all stakeholders -

government representatives, mining companies, CSOs, affective communities, ect. - will be

organized in the different mining regionsemphasizing in particular the participation of women

and vulnerable groups such as youth and the elderly. The objective of these consultations will be

to develop a shared vision of the future of the mining sector in Armenia, which will feed into in

the policy. The EITI Multi Stakeholder Group will be actively involved in these processes, and

the intention is for these consultations to result into a more permanent dialogue forum about the

role of extractive industries into the development of Armenia.

The policy will be based on literature review, studies and consultations’ results making it

acceptable for all stakeholders.

Component 3: Capacity Building for the relevant line ministries, in particular the MEINR and

the MNP will be inherent in every stage of the project. Development of a capacity building plan

for effective policy implementation, and conducting the early phase of training on policy

implementation, focusing on environmental and social sustainability of the sector is an important

part of the project. As indicated under component 1: government officials will be part of the

studies as well as the consultation process, in order to ensure ownership as well as a transfer of

knowledge and skills.

Based on Component 1, 2 and 3, a policy and implementation plan for the mining sector in

Armenia will be finalized. This policy will provide clear guidance towards the development of a

sound, sustainable and equitable mining sector. The policy would set objectives for the minerals

sector laying out the appropriate guiding principles across the legal, contractual, institutional,

fiscal, environmental and socio-economic dimensions. The Implementation plan will define a

timeline with associated priorities and responsibilities.

B. Project Cost and Financing

The total cost of the project is $450000.00. The Government of Armenia will co-finance taxes. The

Government will also take responsibility for the financing of the operational and fiduciary costs of

project, including the interministerial task force that is overseeing the development of the policy.

Project Components Project cost Grant

Financing % Financing

13

1. Consultancy Services (including audit)

2. Training

Total Baseline Costs

$430000.00

$20000.00

$450000.00

$430000.00

$20000.00

$450000.00

100 (exclusive)*

100 (exclusive)*

100 (exclusive)*

Total Project Costs

Interest During Implementation

Front-End Fees

Total Financing Required

$450000.00

$450000.00

$450000.00

$450000.00

100 (exclusive)*

100 (exclusive)*

*The Government of Armenia will take responsibility for the payment of taxes for all project

costs,

IMPLEMENTATION IV.

A. Institutional and Implementation Arrangements

(See annex II for details)

As the dedicated EITI Champion and policy lead on the mining sector, the Prime Minister’s

office of the Government of Armenia will be the main counterpart for policy dialogue, supported

by the relevant line Ministries; in particular, the MEINR and the MNP. The MTD will be

responsible to work with affected communities and regional and local authorities, organizing

assessments and ensuring communities’ participation in the strategy/policy development process.

The MEDI will be involved in financial and economic assessment of the sector as well as in the

strategy/policy development process, especially in economic and investment part of it. The

MNP, because of its focus on environmental protection, is one of the main stakeholders of the

development and implementation of the strategy/policy. The MoH active participation in the

Environmental and Health review will be essential. Other Ministries will be involved in various

steps and activities within the assessments and strategy/policy development. They also will give

their comments and recommendations about the strategy/policy as members of GoA. Financial

oversight and project management will be coordinated by the MoF.

The fiduciary function (procurement and financial management) under the Project will be

assigned to the FFPMC which will be responsible for all the procurement activities, as well as

for the planning and budgeting, accounting, financial reporting, flow of funds, internal controls,

and coordinating of external audits. They are ready to start implementation.

The project activities include several analytical assessments and consultations, the actual mineral

sector policy development as well as capacity building activities, which will be outsourced to

experienced consultants. The Prime Minister’s office, in close collaboration with line ministries

and FFPMC will develop the ToRs for these services.

Specialized consulting companies will be selected to assist the Prime Minister’s office to develop

a mineral sector policy, assess environmental and health problems of the sector, analyze financial

and economic situation of the sector, as well as review institutional challenges. The development

of the mineral sector Policy will include several multi-stakeholder consultations. The

14

consultations will involve representatives of affective communities, sector related CSOs, mining

business representatives, EITI multi-stakeholder group, and sector related ministries. Based on

the literature review and consultations the consultants, in close coordination with the GoA, will

develop a mineral sector policy, which will include an Action Plan. A draft of the policy will be

publicly available on: www.e-draft.am for comments. At the same time, it will be distributed

among the ministers for review. The final version of the Policy will incorporate relevant

comments. The final stage is the Government approval of the Policy.

To be sure that MEINR and MNP relevant staff had necessary capacity to implement the Policy,

capacity building activities will be organized, involving international experts.

B. Results Monitoring and Evaluation

The short-term local expert will provide bi-monthly progress reports in line with the results

indicators for Project Development Objectives, and the Bank will carry out twice-yearly

supervision missions. The project will be subject to independent evaluation on completion.

All reports produced during the project will be reviewed by the relevant line ministries, EITI

multi-stakeholder group, the World Bank experts and other stakeholders. Comments and

recommendations from them should be addressed in the Policy or clarify reasons of non-

acceptance.

C. Sustainability (if applicable)

The Mineral Sector Policy/Strategy is means to provide a long term vision for the sector. The

implementation plan that will be developed in line with the Policy, as well as the planned

training and capacity building activities, will ensure its’ implementation. The continuous

cooperation with the World Bank on technical assistance will ensure sustainability.

KEY RISKS AND MITIGATION MEASURES V.

Risk Category Rating

1. Country Risk Moderate

2. Technical design of project or program low

3. Institutional capacity for implementation

and Sustainability

moderate

4. Fiduciary Low

5. Environment and Social Moderate

6. Stakeholders Moderate

7. Other Moderate

Overall Moderate

1. Country risks: Domestic political developments can impact project implementation progress

and result in delays.

15

Mitigation measures: a detailed planning process will precede the start of the project.

Responsibilities will be divided between different groups of stakeholders, in close coordination

with the EITI Multi-Stakeholder group, so as to not be completely dependent on one government

entity.

Risk rating with mitigation: Moderate

2. Project/technical risk: Limited capacity of stakeholders with regards to the development of a

mineral sector policy, and limited language skills, which make access to good practices from

elsewhere complicated.

The project design will help alleviate this constraint through a strong pool of international and

local experts to support and work alongside Ministry staff. Translation of all relevant

documentation in Armenian will be organized.

Risk rating with mitigation: Moderate

3. Implementation risk: Inactive Ministry staff participation in, and managing off, project

activities.

The project builds on the Governments demand and long World Bank experience of engagement

with the government as well as with other key stakeholders, and its implementation will be

regularly supported by the Bank’s Task Team. Capacity building will be part of the project from

the very beginning.

The public procurement environment in Armenia is in the medium- to high-risk category, the

fiduciary risk could be downgraded up to “Moderate”, providing that the fiduciary functions

within the Project is appointed to the FFPMC. The FFPMC has successfully implemented more

than thirty projects financed by the IDA Credits, IBRD Loans and various grants. Procurement

Specialists of the FFPMC continuously attend trainings organized by the World Bank locally,

regionally and internationally. Only couple of contracts for consultant services will be

envisaged under the Project Components. None of the Project’s Components will finance the

salary/remuneration of the Recipient’s civil servants.

Risk rating with mitigation: Moderate

4. Fiduciary: The FFPMC has acceptable financial management (FM) arrangements for the

project implementation. Particularly: (i) adequate accounting software utilized by FFPMC; (ii)

the audits of the active World Bank-financed projects (and TF grants) implemented by the

FFPMC revealed no major issues, and (iii) the Interim un-audited Financial Reports (IFR) on the

active projects (and TF grants) were always received on time and in general found to be

acceptable to the World Bank.

Risk rating: Low

5. Environmental and Social:

16

The Environmental Assessment category assigned to the project is ‘Category C’, as the project is about

long term policy development, and does not involve any physical activities concerning mineral extraction.

Similarly, social risks due to the project are also low, as the focus of the project is on enhancing public

dialogue around extractives. Nevertheless, mining is a contested topic in Armenia. Both the public

dialogue and expectations on both sides will have to be well managed, in order to ensure the, to be

developed, policy indeed focuses on the development of a sector that is socially and environmentally

sustainable.

Risk rating with mitigation: Moderate

6. Stakeholders: Limited engagement from affected communities in the project.

The project will keep monitoring communication activities targeting communities order to

improve their participation in the development of the policy and ensure a transparent decision

making process.

Risk rating with mitigation: Moderate

7. Reputational risk for the WBG: Mining is a polarizing topic in Armenia. Any support for

more sustainable management of the sector will attract criticism from those that want to

completely stop all mining in Armenia.

The project will develop an engagement and communication strategy to ensure that the

objectives of the project are clearly communicated, and that all concerns expressed during the

course of the project will be adequately addressed and transparently documented.

Risk rating with mitigation: Moderate

Overall Risk: Moderate

APPRAISAL SUMMARY VI.

Please provide one paragraph with a summary description of the main economic benefits

and costs of the project and a second paragraph summarizing the key FM, procurement

and safeguards issues.

The proposed project is a technical assistance project to support the GoA in the development of a Mineral

Sector Policy. Therefore, benefits are not easily quantifiable, making it difficult to accurately carry out a

traditional cost benefit analysis. The Armenia Mineral Sector Policy project is expected to support

to the sustainable economic development of Armenia. Mining is one of the important sectors of

the economy. It is also a sector that can have a large social and environmental footprint. At the

moment, the sector lacks a long term vision that would help to a) make it more attractive for

responsible investments, and b) address damage done by the sector in the past. The policy

development will be based on strong analytical work and intensive multi-stakeholder

consultations, making it a comprehensive document. Development of the Policy will help clarify

the future of the mineral sector, strengthen the positive steps in mineral sector governance

already taken by Armenia in joining the EITI process, guide actions that will address the sectors

sustainable development, and overall improve the investment climate for responsible

investments.

17

Procurement

The public procurement environment in Armenia is in the medium- to high-risk category. The

country procurement risk for Armenia based on the country’s public procurement legislation,

practices, and overall procurement environment is rated as Substantial and is expected to remain

unchanged for this project. Procurement will be carried out by the Foreign Financial Project

Management Center FFPMC. The project is subject to the New Procurement Framework. The

Borrower will be guided the Procurement Regulations for IPF Borrowers (July, 2016). The STEP

tool will be used for implementation of procurement procedures.

A Procurement Plan shall be prepared by the GoA staff/FFPMC and agreed with the World

Bank. The selection method and approach for each activity, the time schedule of

procurement/selection procedures, as well as the Bank’s review method are specified in the

Procurement plan. Taking into account the value of envisaged contracts and procurement risk

level all the contracts will be subject to the Bank’s post review.

Financial Management

FFPMC has acceptable financial management (FM) arrangements for the project

implementation. Particularly: (i) adequate accounting software utilized by FFPMC; (ii) the

audits of the active World Bank-financed projects (and TF grants) implemented by the FFPMC

revealed no major issues, and (iii) the Interim un-audited Financial Reports (IFR) on the active

projects (and TF grants) were always received on time and in general found to be acceptable to

the World Bank (with a few isolated cases of exception). In addition, the FFPMC’s FM staff has

significant experience in implementing World Bank-financed projects. FFPMC will also update

its TF grants’ Financial Management Manual (FMM) prior to the project implementation to

reflect the activities under this project.

Project management-oriented Interim Un-audited Financial Reports (IFRs) will be used

for the project monitoring and supervision. FFPMC has significant experience in IFR

preparation, and the IFRs of projects implemented by FFPMC were always received on time and

found to be in general acceptable to the World Bank (with a few isolated cases of exception).

FFPMC will be producing a full set of IFRs to the end of the project. These financial reports will

be submitted to the World Bank within 45 days of the end of each calendar semester.

FFPMC will establish and manage a Designated Account (DA), in USD, specifically for this

project in the Treasury Single Account of the Ministry of Finance (MoF) at the Central Bank of

Armenia, which is holding almost all DAs for ongoing World Bank projects in Armenia. The

project’s DA will be managed by FFPMC. The “Statement of Expenditure” (SOE) based

disbursement method will be applied for the project.

The Project funds will flow from the Bank, either: (i) via the DA to be maintained in the

Treasury, which will be replenished based on SOEs or full documentation; or (ii) based on direct

payment withdrawal applications and/or special commitments, received from the FFPMC.

Withdrawal applications documenting funds utilized from the DA will be sent to the Bank at

18

least every three months. The following disbursement methods may be used: Reimbursement,

Advance, and Direct payment. The DA ceiling is proposed to be established at USD 60,000.

Detailed instructions on withdrawal of the project fund proceeds are provided in the

Disbursement Letter. The government funding, if any, will be made via the State Treasury

through normal budget allocation procedures initiated by the implementing agency in accordance

with standard Treasury and Budget execution regulations.

Transparency International’s Corruption Perception Index 2015 identified corruption as

an issue. The Public Expenditure and Financial Accountability (PEFA) 2013 report found that

despite the reforms initiated in Public Financial Management (PFM), some critical PFM

elements as well as PFM institutions are still weak. The World Bank supported the strengthening

of the country’s PFM reforms including strengthening the country’s Supreme Audit Institution as

well as the public sector financial reporting reforms. In particular, the Treasury system is being

used to maintain the designated accounts of World Bank-financed projects including this project,

which plans to open the designated account in the Treasury. The country budget system will be

also used for this project. For all the other FM elements under the project the FFPMC’s

respective systems are going to be used.

FFPMC’s current auditing arrangements are satisfactory to the World Bank. It has thus

been agreed that similar audit arrangements will be adopted for the project. The audit of the

project financial statements will be conducted (i) by independent private auditors acceptable to

the World Bank, on terms of reference (TOR) acceptable to the World Bank and procured by the

FFPMC, and (ii) according to the International Standards on Auditing (ISA) issued by the

International Auditing and Assurance Standards Board of the International Federation of

Accountants (IFAC).

The audit of the project financial statements shall cover the entire period during which

withdrawals from the Grant account were made. The audited financial statements will be

provided to the World Bank within six months since the end of such period. The Recipient

will disclose the project audit reports within one month of their receipt from the auditors and

acceptance by the World Bank, by posting the reports on its web site (www.ffpmc.am) or other

official websites of the Recipient or FFPMC. Following the World Bank's formal acceptance of

these reports, the World Bank will make them publicly available according to the World Bank

Policy on Access to Information.

A. Other Safeguards Policies Triggered

The OP 4.12 is triggered even though the Grant will only support upstream analytical works and

the development of a Mineral Sector Policy which will not be directly linked to follow-up

physical investments, in order to ensure that social risks involved in the upstream works are

addressed in line with the policy requirement. The TOR of the consultants who will develop and

provide technical inputs to and carry out assessments as part of the upstream analytical works

will address requirements under OP 4.12. Separately, efforts will be made so that a participatory

and open forum will be developed as part of the development of the Sector Policy to allow a

participation of broad stakeholders in the development process.

Per OP 4.01 Environmental Assessment, the proposed project is classified as a Category C

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B. World Bank Grievance Redress

17. Communities and individuals who believe that they are adversely affected by a World Bank

(WB) supported project may submit complaints to existing project-level grievance redress

mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints

received are promptly reviewed in order to address project-related concerns. Project affected

communities and individuals may submit their complaint to the WB’s independent Inspection

Panel which determines whether harm occurred, or could occur, as a result of WB non-

compliance with its policies and procedures. Complaints may be submitted at any time after

concerns have been brought directly to the World Bank's attention, and Bank Management has

been given an opportunity to respond.For information on how to submit complaints to the

World Bank’s corporate Grievance Redress Service (GRS), please visit

http://www.worldbank.org/GRS.For information on how to submit complaints to the World

Bank Inspection Panel, please visit www.inspectionpanel.org.

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Annex 1: Results Framework and Monitoring

Armenia: Armenia Mineral Sector Policy

Project Development Objective (PDO):

To support the development of a Mineral Sector Policy for Armenia that focuses on strengthening of the contribution of the mining sector to sustainable

economic growth.

PDO Level Results Indicators* C

ore

Unit of

Measure Baseline

Cumulative Target Values** Frequency

Data Source/

Methodology

Responsibility

for Data

Collection

Description

(indicator

definition etc.) YR 1 YR 2 YR3 YR 4 YR5

Indicator One: A Mineral

Sector Strategy/Policy is

developed through an

inclusive multi

stakeholder process that

is in line with good

international practices

and standards for

sustainable mineral

sector governance.

Yes/no No Yes Annual Policy

document,

analytical

reports

GoA

Indicator Two: Representatives from

communities affected by

mining (both men and

women) participate

actively in a dialog on

the future of the sector.

Nr and

gender of

people

participating

0 At least

30% of

affective

community

representati

ves

participate

in dialog

Annual Reports and

participants

lists from

consultation

meetings

GoA

Indicator Three: A

permanent dialog forum

for key stakeholders in

the mining sector

(communities, civil

society, companies and

government agencies) is

put in place, and allows

better knowledge and

Yes/ no No Yes Annual Minutes from

meetings,

website,

media reports

GoA

21

access to information on

the key characteristics,

impacts, benefits and

future strategy for the

Armenian mining sector.

*Please indicate whether the indicator is a Core Sector Indicator (see further http://coreindicators)

**Target values should be entered for the years data will be available, not necessarily annually

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Annex 2: Implementation Arrangements

1. Project Institutional and Implementation Arrangements

As the dedicated EITI Champion and policy lead on the mining sector, the Prime Minister’s

office of the Government of Armenia will be our main counterpart for policy dialogue, supported

by the relevant line Ministries; in particular, the MEINR and the MNP. The FFPMC in the MoF

executes the fiduciary and procurement functions on behalf of a number of World Bank grants,

and is ready to undertake this function for the EGPS grant as well.

The Mineral Sector Policy project has three main components: analytical underpinnings, Policy

development and capacity building for the line ministries’ staff. The Policy development

component includes also specific assessments to identify gaps and find solutions that will be

transferred to the policy. Assessment topics are different and relevant consulting companies will

be involved for them. For the high effectiveness of the project some activities will happen

parallel. At the same time when consulting firms will do above mentioned assessments the

Government with the consulting company responsible for the Policy development consultations

will have meetings with various stakeholders and do desk review. As soon as the assessment

reports will be available and accepted by the Government, the Policy development will go

further. The draft of the policy will be shared with the EITI multi-stakeholder group to get more

inputs. The Mineral Sector Strategy/Policy will go under Strategic Environmental Assessment

(SEA) in accordance with the RA Law No HO-110-N on "Environmental Impact Assessment

and Expertise" dated 21 June, 2014.

During the project, based on the desk review and assessment results, will be identified topics for

training. Relevant experts will do trainings or a group of public servants will participate in the

study tour.

Financial Management, Disbursements and Procurement

1. Budgeting and Planning

FFPMC is capable of preparing relevant budgets. The financial manager prepares the project

annual budget in co-operation with procurement specialists based on the schedule of annual

activities submitted by NSSRA. The project annual budget is based on the procurement plan,

which is regularly updated by the procurement specialist. The budget is classified by categories,

components, and sources of funds. All changes in procurement plan are agreed in advance with

the World Bank and with MOF, and only then the changes are incorporated in the annual budget.

Once reviewed and endorsed by the MOF, the project budget is included into the State Budget.

2. Accounting Policies, Procedures, Information System and Staffing

For reporting purposes FFPMC follows cash basis International Public Sector Accounting

Standards (IPSAS), and accrual basis for accounting purposes is applied. The chart of accounts

used for the other ongoing projects implemented by FFPMC can be adapted to be used for this

project. The accounting policies and procedures are documented the TF grants’ FMM, which

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will be updated for this project as well. FFPMC utilizes Armenian Software (AS) accounting

software, which is used by several entities in Armenia and found to be adequate.

FFPMC have adequate FM/accounting staffing for the project implementation. The

FM/accounting staff currently in place at FFPMC consists of a financial manager, a chief

accountant, a financial specialist/accountant and an accountant. The financial manager, the chief

accountant and the financial specialist/accountant have significant experience in the World

Bank-financed projects and knowledge in the World Bank FM/Disbursement policies and

procedures.

3. Financial Reporting

Project management-oriented Interim Un-audited Financial Reports (IFRs) will be used for the

project monitoring and supervision. FFPMC has significant experience in IFR preparation, and

the IFRs of projects implemented by FFPMC were always received on time and found to be in

general acceptable to the World Bank, (with a few isolated cases of exceptions).

The format of the IFRs includes: (i) Project Sources and Uses of Funds, (ii) Uses of Funds by

Project Activity, (iii) Designated Account Statements, (iv) A Statement of the Financial Position,

and (v) SOE Withdrawal Schedule.

FFPMC will be producing a full set of IFRs every calendar semester throughout the life of the

Project. These financial reports will be submitted to the World Bank within 45 days of the end of

each calendar semester.

4. Internal Controls

The internal controls at FFPMC are found to be adequate and capable of safeguarding assets,

recording transactions, ensuring effectiveness and efficiency of operations and compliance with

applicable laws/regulations, and providing reliable and timely information on projects.

All the payments for operating expenses are authorized by the director and then processed by the

finance specialist based on the financial manager’s or chief accountant’s approval. The office

manager then follows up with the procurement of the goods supplied. No petty cash is held at

FFPMC.

FFPMC developed separate FMMs for each project and a single FMM for all the TF grants under

its implementation, which are updated regularly. FFPMC will update its TF grants’ FMM prior

to the project’s implementation.

FFPMC regularly (before each WA is prepared or at least once a quarter) reconciles the projects’

accounting records with the WB disbursement data via the Client Connection system.

The project SOEs are extracted from the accounting software and are finalized in Excel

spreadsheets by the financial manager, and reconciled by the chief accountant. The controls over

SOE preparation are adequate. The financial manager reviews the treasury statements, reconciles

them to the project accounting records. Stocktaking is performed annually. All fixed assets (FAs)

of FFPMC are on the balance sheet of the MOF. FFPMC maintains lists of FAs assigned to each

employee and FAs registration cards. FAs have electronic tags attached. The backup of all

accounting data is made on the server’s external hard drives on a daily basis and once a month on

CDs.

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The responsibility for contract management is with the project managers at the implementing

agencies (line ministries or the government staff), who accept the deliverables under the

contracts, as well as with FFPMC procurement specialists, who regularly monitor the specific

deadlines for the contracts (such as contract closing dates, suspensions, delays, etc.). Considering

the small size of the FFPMC, no internal audit function exists or is required. In parallel, the

MOF’s internal audit unit covers the projects implemented by FFPMC in its audit universe.

5. External Audit

There are no pending audits for the projects implemented by FFPMC. The auditors issued

unmodified (clean) opinions on the financial statements of the active and recently closed projects

implemented by FFPMC, with no critical recommendations in the management letters. FFPMC’s

current auditing arrangements are satisfactory to the World Bank. It has thus been agreed that

similar audit arrangements will be adopted for the project. The audit of the project financial

statements will be conducted (i) by independent private auditors acceptable to the World Bank,

on terms of reference (TOR) acceptable to the World Bank and procured by the FFPMC, and (ii)

according to the International Standards on Auditing (ISA) issued by the International Auditing

and Assurance Standards Board of the International Federation of Accountants (IFAC).

The audit of the project financial statements shall cover the entire period during which

withdrawals from the Grant account were made. The audited financial statements will be

provided to the World Bank within six months since the end of such period. The Recipient will

disclose the audit reports for the Project within one month of their receipt from the auditors and

acceptance by the World Bank, by posting the reports on its web site (www.ffpmc.am) or other

official websites of the Recipient or FFPMC. Following the World Bank's formal acceptance of

these reports, the World Bank will make them publicly available according to the World Bank

Policy on Access to Information.

6. Disbursement/ Funds flow arrangements

FFPMC will establish a Designated Account (DA), in USD, specifically for this Project, in the

Treasury Single Account of the Ministry of Finance (the MOF) at the Central Bank of Armenia

(CBA), which is holding almost all DAs for ongoing World Bank-financed projects in Armenia.

The Project’s DA will be managed by FFPMC. The SOE based disbursement method will be

applied for the Project.

The project funds will flow from the World Bank, either: (i) via the DA to be maintained in the

Treasury, which will be replenished on the basis of SOEs or full documentation; or (ii) on the

basis of direct payment withdrawal applications and/or special commitments, received from the

FFPMC. Withdrawal applications documenting funds utilized from the DA will be sent to the

World Bank at least every three months. The following disbursement methods may be used:

Reimbursement, Advance, and Direct payment. The DA ceiling is proposed to be established at

USD 60,000. Detailed instructions on withdrawal of the grant proceeds are provided in the

Disbursement Letter. The government funding, if any, will be made via the State Treasury

through normal budget allocation procedures initiated by the implementing agency in accordance

with standard Treasury and Budget execution regulations. The government counterpart funding

of the Armenian portfolio of the World Bank-financed projects is assessed to be adequate for a

number of years.

7. Procurement

25

The selection of consultant services have/has been implemented in line with the agreed rules

and provisions. The procurement filing system conducted by the FFPMC is satisfactory. The

established Public Sector Reform Commission inter alia will approve the of Procurement plans,

annual budgets, financial management and procurement documents, ensure that adequate budget

provisions for the Project etc. It is expected that the level of involvement of the FFPMC’s

procurement staff in contract administration will be improving.

The activities under the Grant project will be subject to the New Procurement Framework. All

rules and procedures for procurement will be in line with the “Bank Directive” (July, 2016) and

“Procurement Regulations for IPF Borrowers” (July, 2016). The procurement and contract

management processes will also be tracked through the Systematic Tracking of Exchange in

Procurement (STEP) system.

To ensure that Bank funds are used only for the purposes for which the financing was granted,

the Bank will carry out its procurement functions, including implementation support, monitoring

and procurement oversight, under a risk-based approach (thresholds applicable since November,

2016). The current risk has been assessed by the Bank during parent project preparation and will

be reassessed and updated during project implementation. The procurement performance is

Satisfactory. More details on procurement arrangements are provided in Project Procurement

Strategy for Development (PPSD).

8. Environmental and Social (including safeguards)

In order to ensure that the upstream analytical works supported under the Grant will meet the

requirements of the OP 4.12, the TOR of the consultants to be developed will be reviewed by the

Bank social safeguard specialists who will ensure all upstream works will be conducted in line

with the OP 4.12. The Bank safeguard specialists will also provide guidance so that a

participatory and open forum will be developed as part of the development of the Sector Policy

to allow a participation of broad stakeholders in the development process.

9. Monitoring & Evaluation

The short-term local expert will provide monthly progress reports in line with the results

indicators for Project Development Objectives, and the Bank will carry out twice-yearly

supervision missions. The project will be subject to independent evaluation on completion.

All reports produced during the project will be reviewed by the relevant line ministries, EITI

multi-stakeholder group, the World Bank experts and other stakeholders. Comments and

recommendations from them should be addressed in the Policy or clarify reasons of non-

acceptance. The Policy besides that will go under SEA.