The Role of the Government in Development of Water and Wastewater Services

THE ROLE OF CENTRAL GOVERNMENT IN FACILITATING THE DEVELOPMENT OF DECENTRALIZED WATER SUPPLY AND SANITATION (WSS) SERVICES: THE CASE OF ARMENIA (a focus on the financial dimension) Prepared by the Urban Foundation for Sustainable Development (2005)

A.

INTRODUCTION

1.

This paper was prepared under the Project “The Role of Central Governments in Facilitating the Development of Decentralized WSS Services” as a pragmatic informational paper for the Ministerial meeting to be held in November 2005, in Yerevan, Armenia. The paper concentrates on the financial dimension of the topic. Overall objective of the paper is to analyze, based on the collected empirical data, the modalities of intergovernmental transfers in Armenia as well as the principles and efficiency of the mechanisms of those transfers.

2.

For achieving its objective, the paper, in Section B, starts with a general overview of the legislation governing the budgetary relationships in Armenia, and establishing rules and mechanisms for intergovernmental transfers and budgetary loans. The Section shows that Armenia’s budgetary system has a two-tier structure – state and local community budgets.

Local communities in Armenia enjoy only limited power, with most administrative powers exercised by the central government. The central government has control over areas such as the allocation of budgetary loans, credits and guarantees, and the establishment of procedures for the collection and distribution of local taxes.

3.

Then, in its Sections C and F, the paper continues with discussion of the types, purposes and the mechanisms of intergovernmental transfers and budgetary credits and loans in Armenia. The information of the two sections highlights that the system of budgetary and inter-budgetary transfers allows the central government to exercise harmonized policies (particularly social policies), by requiring, with respect to projects proposes by local communities, they be in compliance with central government policies at national as well as regional levels. Section C concentrates also on the structure and magnitude of revenues of local community budgets. It tells that the local communities heavily depend on central government transfers, which typically account for about 50 percent of local budget revenue and are used for covering current (administrative) expenses. Local communities also receive revenue from land and property taxes, and from the sale of community property.

4.

Section D talks about the mechanisms of control over the implementation of the state and community budgets, which are generally quite effective. Together with the control conducted by local community councils, the government exercises its control via the Ministry of Finance and Economy (MFE) and Ministry’s central and regional divisions. Even though local community councils can disagree with the community budget report presented by the community head, the final decision, however, stays with the central government.

5.

Section E discusses the magnitude and structure of community expenditures. The lion’s share of community expenditures goes to current expenses, while capital expenditures are negligible.

6.

Section G gives a picture of the government’s activities aimed at the development of the WSS sector, particularly of the measures taken for financing the WSS sector. The major part of Armenia’s WSS system (covering over 65 percent of the population) is under centralized management via State Committee of Water Economy (SCWE), while the remaining 600 1

communities (with about 35 percent of the population) are under the management of local communities. During recent years, the Government has had considerable achievements in creating a sound legislative and institutional framework. Having limited budgetary resources, the government entered into active collaboration with international and foreign financial institutions for attracting funds for capital investments into the WSS system under central management. However, the state has virtually no participation in the operation, maintenance and management of WSS systems owned by local self-governments, which are in a very difficult situation due to limited financial resources and the resulting inability to make serious capital investments. In general capital investments in the WSS sector are still far from being adequate, resulting in high depreciation of assets and water losses.

7.

Section H attempts to come up with conclusions and an assessment of the efficiency of Armenia’s system of budgetary and inter-budgetary transfers.

B. LEGISLATIVE AND REGULATORY INTERGOVERNMENTAL TRANSFERS

FRAMEWORK

GOVERNING

8.

According to the law on Administrative-Territorial Division of the Republic of Armenia (RoA), Armenia is divided into ten marzes (regions) and the capital city of Yerevan, which has the status of a marz. Each marz is subdivided into rural and urban communities (of which there are 930 in total), and Yerevan is subdivided into 12 district communities. The marzes vary widely in terms of size and population. Yerevan is the smallest by far in area, at about 230 sq km, but has the largest population, at over 1 million.

9.

Marzes and city Yerevan are subject to state governance, and communities – to local self-government. The marzes are administered by marz (regional) councils, which are led by marz governors appointed by the central government and composed of the community heads from the region. The local administration in Yerevan consists of a council staffed by the heads of the districts and chaired by the city mayor, who is nominated by the prime minister and appointed by the president.

10. The Armenian government has a two-tier structure, where local administrations enjoy only limited power, with most administrative powers exercised by the central government.

Thus, according to the law on Local Self-government, communities are legal entities that are self-governed directly by their inhabitants through elected bodies. Each community has its own property as well as budget. Principles of self-governance include, among others, correspondence between the authorities exercised by the communities and financial resources necessary for exercising those authorities, and support to financially weak communities through equalizing transfers. Marzes, in fact, are subdivisions of the state administration rather than a separate tier of the public administration system, as they lack elected officials or bodies and budgets. Relationships between the central government and local self-government take place via Marz offices or Marz governors, i.e. Marz governors serve as the liaison and/or as representative of the state. The same applies also to the budgetary relationships between the central and local governments, with some exceptions. 1 11. Basic legislative acts regulating budgetary and inter-budgetary relationships include the Law on Budgetary System of the RoA and the Law on Treasury System of the RoA, plus a number of enabling government resolutions and/or ministerial orders (see Annex I).

Similarly, with the government system, the budgetary system of Armenia is a two-level system, where the first level consists of the state budget and the state insurance fund, and the second level consists of community budgets. The consolidated budget of the RoA consists of 1

Law on the Local Self-government; law on the Administrative-Territorial Division of the RoA; Presidential Orders No: NH-728, of 6 May 1997, and No: NH-727, of 6 May 1997).

2

the state budget, and of the community budget and the state insurance fund (without interbudgetary transfers). Armenia’s budgetary system is a unified system, where unified standards, classifications and procedures are applied. Another basic principle of the system is the principle of sovereignty or autonomy, which implies that the state and local selfgoverning bodies are entitled the right to make their budgetary decisions independently (including decisions on sources of income, expenditures, and sources for financing budget deficit). In practice, however, communities have limited power and are not in a position to exercise their rights. The central government has control over areas such as the allocation of budgetary loans, credits and guarantees, and the establishment of procedures for the collection and distribution of local taxes.

12.

The community budgets are prepared and the decisions related to the budget are made by the community council. However, the community head submits the budget to the marz governor, after the community council drafts and approves it.,. The community head, as a representative of the State, gives mandatory instructions regarding the methodology of budget drafting and rules for getting financing from the state budget (especially regarding the financing for functions delegated to self-government bodies by the State). The marz governor also checks the budget for its compliance with relevant requirements, incorporates it into the schedule of budgets of all communities within the administrative boundaries of the marz, and then submits it to the authorized body of the central government (the Ministry of Finance and Economy). The marz governor can disagree with the community budget, propose changes to it or make comments. In the case of agreement or disagreement, the decision for approving the community budget is made by the central government. The final approval and ratification of the consolidated budget is made by the National Assembly (Parliament) of the RoA. 13. Basic principles of formation of community budgets include: financial planning based on a three year community development program; creation of a reserve fund as a guarantee for unforeseen expenses and credit servicing; and balanced budgeting, i.e. balancing community’s revenues and expenditures; efficient and thrifty (prudent) budgeting; transparency and accuracy that allow having measurable and controllable budget performance.

14. The types of inter-budgetary transfers and the basic principles and mechanisms of those transfers are defined by the Law on Budgetary System and the law on the Local Selfgovernment. Specific rule applied for different types of transfers (equalizing grants, other general purpose or block grants, loans, credits, and etc.) are defined by a number of government decrees and ministerial orders (see details in Sections C and D below).

C. THE SYSTEM TRANSFERS

OF

INTERGOVERNMENTAL

(INTERBUDGETARY)

15. The types of inter-governmental (inter-budgetary) official transfers and/or allocations in Armenia include equalizing grants, general purpose and block grants (conditional and nonconditional grants), and other official transfers from other sources (communities of the AR, international organizations, self-government bodies of foreign countries).

16. Communities get non-conditional equalizing grants (ex gratia payments or “dotatsia”) from the state budget for covering current expenses that a community needs for exercising its functions defined by law. The purpose of equalizing grants is to ensure harmonized development of communities thus reducing the disparity between the financial capacities of communities. These are general purpose grants with no conditions for the use, i.e. communities are free to use equalizing grants as they consider appropriate. The minimum amount of equalizing grants are defined by the Law on Financial Equalization, and the set

3

amounts to be allocated for each year are defined in the consolidated budget of the given year (or by the State Budget law of the given year).

17. The method used for the calculation of minimum amounts of equalizing grants is quite simple and straightforward. According to the Law on Financial Equalization, factors taken into account for determining the amount of the equalizing grant to each community are: a) the level of land and property taxes per capita, and b) the number of inhabitants of the community. 2 Then the law separates two types of communities based on the size of the population – communities with less than 300 inhabitants and communities with over 300 inhabitants. The amount of equalization grants to communities with less than 300 inhabitants is calculated on equal basis - the annual amount to be allocated under the above mentioned factor “a” (grant component “a”) shall not be less than the 25 percent of the proceeds from income tax, property tax and land tax of the previous year, and the amount under the factor “b” (grant component “b”) shall not be less than 10 percent of proceeds from income tax of the previous year.

18. For the communities with over 300 inhabitants, the component “a” is granted to those communities, where the per capita revenue (income) from land and property taxes and is less than the country average per capita revenue (income) from land and property taxes and from average component “a” to be allocated to communities. In short, the principle is to eliminate (reduce) the financial disparity between communities. The minimum projected amount to be allocated to each community is calculated based on the following formula (note that figures relate to communities with over 300 inhabitants): Gac = (A – R) * Pc * C, where “C” is a regulating coefficient (C = Ga / (A^-R^)*P^) and -

“Gac” is the amount of the grant component “a” to be allocated to the community;

-

“Ga” is the country total of grant component “a”

-

“A” is the country (excluding communities with less than 300 inhabitants) average per capita revenue (income) from land and property taxes and from total component “a” to be allocated to communities;

-

“A^” is the same as “A”, but for the communities with over 300 inhabitants;

-

“R” is the community per capita revenue (income) from land and property taxes;

-

“R^” is the same as “R”, but for the communities with over 300 inhabitants;

-

“Pc” is the population of the community (with over 300 inhabitants);

-

“P^” is the population of communities with over 300 inhabitants.

19. Component “b” is granted to all communities (again, this relates to communities with over 300 inhabitants). The amount to be allocated to each community is equal to the number of inhabitants of a given community multiplied by per capita component “b” (per capita component “b” equals to the total projected amount of component “b” divided to the number of inhabitants in communities with over 300 inhabitants).

20. Non-conditional grants (ex gratia payments - “dotatsia”), or those other than equalizing grants, are given from the state for the community to cover current expenses. These grants are designed to cover the budget deficits (cash flow gaps), and are not related to any specific project or expense, i.e. communities are free to use them as they consider appropriate.

21. Conditional grants (ex gratia payments - “subventsia”), or those other than equalizing grants, are given from the state to the community to cover expenses related to a specific project or expense derived from central government policy. Depending on the project, these 2

Law on Financial Equalization; Law on Budgetary System of the RoA; law on Local Self-Government.

4

types of grants can for cover both administrative as well as capital expenses. According to the law on the Budgetary System of the RoA, the Government can request back (call back) the financial resources (e.g. conditional grants) that are not used for the purpose they were approved for.

22. The community budget has two main parts: “administrative budget” and “fund budget”.

The “administrative budget” deals with issues related to current operations, while the “fund budget” deals with capital transactions and works (see details in Table 1). Likewise, transfers to the administrative budget are mainly general purpose and block grants, while transfers to the fund budget are mainly earmarked grants given for specific projects. 3 Both, the state and community budgets are prepared based on medium-term projections, specifically, three year development programs of the Government and of local communities, respectively. This is a requirement provided for by law, and, helps to increase predictability of expected revenues and planned expenditures in different levels of government, despite the fact that projected amounts of allocations are subject to changes.

Table 1. Community budget structure •

• •

Revenues

•

• •

Expenditures

• • • • • • • • • •

3

Administrative budget Tax income (land tax, property tax, and allocations from the state tax incomes (from income tax, profit tax and nature protection fees) Duties (income from notary services and registration of citizenship acts, plus local duties) Non-tax income (income from renting community and state reserve land or other property of the community, local fees, charges for administrative offenses, deductions from profits of entities subordinate to the community, funds allocated from the state budget for carrying out functions delegated by the state to the community, other fees for services provided by the community, etc.)

Official transfers (equalizing grants, other general purpose and block transfers from the state budget, official transfers from other sources, e.g. other communities, int. organizations, etc. for covering current expenses) Tax penalties collected from tax payers (land tax, property tax) Other Current expenses for: General community services Defense Public order and security Education and science Health Social security Housing and communal facilities Industry, mineral fossils (excluding oil), construction, nature protection Transport, communication and roads Other

•

• •

• • • • • • • • • •

Fund budget Non-tax incomes (income from sale of community property, income from donations, income from interests from deposits, reallocations from the community administrative reserve fund, etc.)

Incomes from capital transaction (income from sale of community property, etc.)

Official transfers (official transfers from the state budget and/or other sources e.g. other communities, int. organizations, and etc., for covering capital expenses on specific projects)

Capital expenses for: General community services Defense Public order and security Education and science Health Social security Housing and communal facilities Industry, mineral fossils (excluding oil), construction, nature protection Transport, communication and roads Other

Law on the Budgetary System of the RoA; Law on Local Self-Government.

5

Administrative budget • •

Budgetary loans from the state budget or budgets of other communities The balance (residue) of the administrative budget at the beginning of the budget year

Fund budget • • •

Sources of deficit financing

•

Credits from the state budget or other sources Proceeds from placing community securities Thirty percent of proceeds from privatization of state property (shares of the state in the statutory capital of legal entities) located in the territory of the community. Note that these funds can be used only for financing capital projects agreed with the central government.

The balance (residue) of the fund budget at the beginning of the budget year

23. According to the Law on the Treasury System, the provision of funds for the implementation of community budgets administered through the regional divisions of the State Treasury, where each community budget has its separate account number. In order to receive money, communities have to submit their requests to treasury divisions on a weekly basis. Treasury divisions inform community leaders about the budgetary situation , revenues and expenditures, on a daily basis. Communities are responsible for collecting all revenue under their authority (tax and non-tax items), and entering them into the community budget.

The State Tax Inspectorate conducts collection of the income and profit taxes as well as the administration of the proceeds.

24. In general, the volume of the community budget in Armenian is quite low, although it has been increasing over the last years. In 2004, the total community revenues comprised about USD 51 million 4, or approximately USD 54, 570 per community. The size of revenue items from local sources depends much on the land resources and the number and size of business enterprises (mainly small and medium size enterprises) within the administrative boundaries of the community. An important feature of the community budget in Armenia is the heavy dependence on state budget transfers, which typically comprise about fifty percent of local budget revenues (see Table 3). Among the types of transfers from the central government, the equalization grants are the most important. In 2003, community revenues from official transfers made USD 17.42 million, of which equalization grants transferred from the state budget to communities totaled to USD 15.82 million or about 91 percent of official transfers.

25. Due to the limited availability of detailed data, it was possible to project only the official distribution of 2004, which is actually a representative distribution for other years. In 2004, equalization grants amounted to about USD 20.06 million (or 92.4 percent of transfers), while conditional (earmarked) grants or “subventsia” transferred from the state budget to local communities comprised about USD 0.9 million (of which USD 0.042 million was used for capital repair of sport-schools; USD 0.21 million - for installation, maintenance and repair of gas lines in communities; USD 0.64 million – for maintenance, operation and capital repair of community roads). 5 The overwhelmingly large part of official transfers, about 94 percent, were for covering current expenses (administrative expenses, maintenance, etc.). Only the remaining 6 percent of revenues allocated for capital works (see Table 2).

4 5

See information on exchange rates in Annex II. Source: Ministry of Finance and Economy.

6

Table 2.

The distribution of official transfers, 2004

Official transfers, total, of which: Official current transfers, total, of which: Equalization grants Other grants (non conditional) Conditional grants for specific current operations Transfers from other sources, of which: Transfers from other communities Transfers from international organizations Other Official capital transfers, of which Conditional grants for specific capital projects Transfers from other sources, of which: Transfers from other communities Transfers from international organizations Other Non-recognized revenues

In million AMD 11,588.0

Percent of total transfers 100.0

In thousands USD 21,722.7

10,880.0 10,696.0 44.8

93.9 92.3 0.4

20,395.5 20,050.6 83.9

76.5

0.7

143.4

62.5 17.7 6.3 38.5 707.7 646.6 61.1 10.0

0.5 0.2 0.1 0.3 6.1 5.6 0.5 0.1

117.1 33.2 11.7 72.2 1,326.7 1,212.2 114.5 18.7

9.8 41.3 22.8

0.1 0.4 0.2

18.4 77.4 42.7

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Table 3.

Budgetary Revenues for 2002-2004 (Consolidated, State and Community Budgets), in million AMD 2002 Consolidated

Incomes and official transfers (mln AMD), of which: In million USD

State

2003 Community

Consolidated

State

2004* Community

Consolidated

State

Community

266,336.3 464.5 190,025.0 71.3 331.4

228,317.9 398.2 185,437.4 81.2 323.4

20,360.1 35.5 4,587.6 22.5 8.0

343,755.8 593.9 218,278.3 63.5 377.1

292,035.3 504.6 212,232.8 72.7 366.7

22,826.2 39.4 6,045.5 26.5 10.4

366,700.0 687.4 257,477.1 70.2 482.7

302,249.1 566.6 250,119.1 82.8 468.9

27,101.6 50.8 7,358.0 27.1 13.8

13,904.2 5.2 24.3 13,233.2 5.0 23.1

13,181.5 5.8 23.0 10,915.2 4.8 19.0

722.7 3.5 1.3 2,318.0 11.4 4.0

15,962.3 4.6 27.6 13,904.9 4.0 24.0

15,213.7 5.2 26.3 10,864.6 3.7 18.8

748.6 3.3 1.3 3,040.3 13.3 5.3

11,819.4 3.2 22.2 16,016.1 4.4 30.0

10,924.1 3.6 20.5 12,394.2 4.1 23.2

895.3 3.3 1.7 3,621.9 13.4 6.8

2,651.1 1.0 4.6 16,897.1

1,764.8 0.8 3.1 17,019.0

886.3 4.4 1.5 11,504.8

4,025.7 1.2 7.0 51,230.6

3,244.5 1.1 5.6 50,475.6

781.2 3.4 1.3 10,080.4

12,709.6 3.5 23.8 25,305.0

9,093.6 3.0 17.0 13,717.5

3,616.0 13.3 6.8 11,587.5

6.3 29.5 29,625.2 11.1

7.5 29.7 0.0 0.0

56.5 20.1 0.0 0.0

14.9 88.5 40,353.9 11.7

17.3 87.2 0.0 0.0

44.2 17.4 0.0 0.0

6.9 47.4 66,100.0 18.0

4.5 25.7 0.0 0.0

42.8 21.7 0.0 0.0

In million USD 51.7 0.0 0.0 69.7 0.0 0.0 123.9 0.0 Source: National Statistical Service, Ministry of Finance and Economy * Consolidated budget revenues do not include inter-budgetary transfers; community budget revenues include inter-budgetary transfers from the state budget. ** Official transfers to the state budget relate to transfers from foreign countries and international organizations.

0.0

Tax income (mln AMD) Percent of total In million USD Government (local) duties (mln AMD) Percent of total In million USD Non tax income (mln AMD) Percent of total In million USD Income from capital transactions (mln AMD) Percent of total In million USD Official transfers (mln AMD)** Percent of total In million USD Social insurance fund (mln AMD) Percent of total

8

D.

THE SYSTEM OF FINANCIAL CONTROL

26. In general, control over the community budget implementation is conducted by the community council, the National Assembly and the Government. 6 Community councils conduct audits at least once a year carried out by their members and/or a professional independent auditing agency, these services are paid for from the community budget. The community head submits quarterly and annual reports on the budget performance to the community council and then to the marz governor (or the mayor of Yerevan). Annual budget report is approved by the community council. In the case of that it is not approved the community council can put forward a proposal to dismiss the head. The final decision for approving the annual budget report lies with the central government, which can approve the budget, despite a recommendation to dismiss the community head by the community council.

27. The Government exercises its control via authorized bodies (and also the marz governors as representatives of the Government) with the purpose: 1) to verify the grounds and legitimacy of budgets, 2) to assess the situation on the fulfillment of budget liabilities, 3) to ensure proper reporting, and 4) exercise control over financial activities of budgetary institutions. The Government relegations put stress on the use of earmarked transfers from the state to community budgets as well as on the use of other funds borrowed from the state budget or other sources.

28. Audits of the State Budget (including the use of financial resources transferred to communities from the State Budget) is conducted by the Department of Control and Revision which audit report is reviewed by the Ministry of Finance and Economy (BCR Department) and of the Local Bodies of Control and Revision. 7 The BCR Department is a structural unit of the Ministry. There is a Local BCR Body in each region (marz) and in Yerevan. Local BCR Bodies report directly to the BCR Department. The BCR Department and Local BCR Bodies exercise control over the collection and use of budgetary resources of the state. For exercising their functions they can conduct checks and inspections of budgetary performance also in communities as well as entities subordinate to communities.

29. , The Government of Armenia established rules on the internal audit in the state and local self-government bodies as well as in their subordinate entities. 8 According to the rules, local self-government bodies shall have an internal auditor (or a group of auditors) in their staff or can contract with private auditors, who conduct audits of financial operations in order to verify the compliance of financial transactions with the requirements set by legislation.

TAudit reports are presented for each of the audited bodies. Auditing reports are presented to the Ministry of Finance and Economy, which uses the information for making recommendations and regulorary changes for the improvement of financial activities and for auditing activities budgetary performance of local self-government bodies and their subordinate entities. Information collected during audits can be used by relevant chambers and divisions of the National Assembly and/or the President’s Office.

30. The Government audits put stress on examining the use of earmarked transfers from the state to community budgets (earmarked grants, parts of proceeds from privatization of state owned property allocated to communities, funds allocated from the state budget for carrying out functions delegated by the state to the community) as well as on the use of other funds borrowed from the state budget or other sources. According to the law on the Budgetary

6

Law on the Budgetary System of the AR; law on Local Self-Government.

Order of the Minister of Finance and Economy No: 306, of 6 August 1996, see Annex I. 8 Order of the Minister of Finance and Economy No: 934-N, of 30 December 2002; Government Resolution No: 1376-N, of 17 September 2004, see Annex I. 7

9

System of the AR, the Government can request back (call back) the financial resources (e.g. conditional grants) that are not used for the purpose they were allocated for.

31. Similarly, Government Resolution No 168, of 9 March 1998, states that in the case of deviation from the objectives of the credit the remaining (not redeemed) part of the credit and interests (on that part) due until the end of the contract period are to be paid before the due date. The Ministry of Finance and Economy controls the use of credits by law and has the right to exercise inspections and checks needed for efficient control (this right and the frequency of inspections shall be stated in the credit contract). Even stricter laws are applicable to budgetary loans to communities. Government Resolution No 164, of 9 March 1998, strictly prohibits the use of loans for purposes other than the ones stated in the contract (project). In the case of deviation from the objectives of the loan, the loan shall be paid before the due date. The Ministry of Finance and Economy controls the use of loans by objective and has the right to exercise inspections and checks needed for efficient control (this right and the frequency of inspections shall be stated in the credit contract). Credit and loan contracts (between the Ministry and the community) also establish interest rates, schedule of allocations and payments, and reporting.

32. In all cases, all the inter-budgetary transfers and allocations are conducted through a centralized and unified Treasury system. The mechanism of the implementation and control over the use of budgetary grants, loans and credits provided from by state to local communities is based on a centralized and unified treasury system. The system allows having a tight control of financial activities. There is a centralized and unified Treasury. Its central and regional divisions are unified with the Central Bank of Armenia. All financial resources of the AR and of local communities are concentrated in the central (unified) treasury account.

Similarly, all the payments are conducted through the Treasury. State entities cannot have accounts in commercial banks. Local communities are financed through regional divisions of the Treasury, where they have their individual budgetary account numbers. Communities are obliged to submit reports (through their Chief Financial Officers) to the Treasury about their financial activities as well as implementation of projects. 9 E.

THE STRUCTURE OF LOCAL BUDGET EXPENSES (EXPENDITURE)

33. A glance at the structure of the community budget reveals that the budget is used, primarily, for current expenditures, and covers, mainly, administration, pre-school education, housing communal utilities. Expenditures on housing and communal utilities, which include also water and sanitary services as one of the components, accounts for approximately 15 percent of total community expenditures. During 2002-2004, average capital expenditure of communities made around 10 percent of total expenditures of communities (see Tables 4 and 5). The available data does not allow separation of expenditures on WSS system. However, it is obvious that the level of capital expenditure in WSS sector, in absolute terms, has been very low. There is anecdotal evidence that in many rural communities capital expenditures are much less than the average, forming a small part (2-3 per cent) of the total budget.

Frequently, the low collection levels on the local taxes, together with delays in receipt of the central Government support, in either form, inhibit the ability of the local self-governments to undertake their allotted responsibilities, as defined by the law on Local Self-Government.

9

The law on the Treasury System of the AR; law on the Budgetary System of the AR; Government Resolutions No 164 and 168, of 9 March, 1998.

10

34. The law on Local Self-Governments 10 endows local governments with responsibility for the provision of the following public infrastructure services: water supply, sewerage, irrigation, gas and central heating systems, construction, maintenance and operation of roads, bridges and other engineering structures within their jurisdiction, operation of community public transport (only in medium and larger cities), construction and operation of irrigation systems, etc.

35. Procedures for financing capital works from the state budget are defined by the Government Resolution No: 141, of 23 May 1997. Plans for annual capital works to be financed from the state budget are developed by the Ministry of Finance and Economy based on Government programs and taking into account proposals from relevant ministries and other government agencies, marz offices and Yerevan Mayor’s office. Construction works included in the program of capital investments can be contracted by relevant ministries or other government agencies, marz offices, and Yerevan Mayor’s office through open tenders.

Quarterly financing schedules for construction works shall be agreed between the Ministry of Finance and Economy, the contractor and relevant government agency. Local self-governing bodies can be considered as contractors only in special cases by Prime Minister’s Decree.

10

Government of Armenia (2003) Poverty Reduction Strategy Paper, approved by the Order of the Government N994-N dated 8 August.

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Table 4.

Community Budgetary Expenditures by Functional Classification for 2002-2004, in million AMD

2002 Perecent of total expenditure

In tousands USD

18,220.70 4,314.40 5.10 2.20 2,829.10 2.30 349.70 1,593.20 2,654.10 4.20 0.30

100.00 23.68 0.03 0.01 15.53 0.01 1.92 8.74 14.57 0.02 0.00

31,779.37 7,524.90 8.90 3.84 4,934.33 4.01 609.92 2,778.76 4,629.11 7.33 0.52

29.90 142.00 6,294.10

0.16 0.78 34.54

52.15 247.67 10,977.76

In million AMD Total community expenditure by functional classification of which: General community services Defence Public order and security Education Health Social security Culture, sports and religion Housing and communal facilities Fuel and energy system Agriculture, forestry, aquaculture, fishery Industry, mineral fossils (excluding oil), construction, and nature protection Transport, communication and roading Other

2003

2004

Perecent of total expenditure

In tousands USD

21,415.50 6,095.80 4.60 3.10 3,287.80 3.90 408.80 1,620.20 3,358.10 0.10 0.20

100.00 28.46 0.02 0.01 15.35 0.02 1.91 7.57 15.68 0.00 0.00

37,001.75 10,532.34 7.95 5.36 5,680.67 6.74 706.33 2,799.38 5,802.13 0.17 0.35

0.30 164.30 6,468.30

0.00 0.77 30.20

0.52 283.88 11,175.94

In million AMD

Perecent of total expenditure

In tousands USD

26,037.40 8,457.00 21.19 4.30 4,327.50 17.20 634.70 1,927.80 5,497.90 118.60 108.80

100.00 32.48 0.08 0.02 16.62 0.07 2.44 7.40 21.12 0.46 0.42

48,809.45 15,853.41 39.72 8.06 8,112.29 32.24 1,189.80 3,613.83 10,306.31 222.33 203.96

44.30 635.70 4,242.10

0.17 2.44 16.29

83.04 1,191.68 7,952.20

In million AMD

Source: National Statistical Service, Ministry of Finance and Economy

12

Table 5.

Community Budgetary Expenditures by Economic Classification for 2002-2004, in million AMD

2002 Perecent of total expenditure

In thousands USD

18,220.70 16,612.10

100.00 91.17

31,779.37 28,973.75

6,183.10 0.00 94.80 2,953.50 7,380.70 1,608.30 402.10 1,206.20 0.30

33.93 0.00 0.52 16.21 40.51 8.83 2.21 6.62 0.00

10,784.16 0.00 165.34 5,151.30 12,872.94 2,805.09 701.32 2,103.78 0.52

In million AMD Total expenditure by economic classification of which: Current expenses, of which: Wages of employees of local self-government bodies, and budgetary institutions under these bodies Interest payment Subsidies Current transfers Acquisition of goods and services Capital expenditures: of which Capital investments Capital repairs Net crediting (Crediting minus repayment)

2003

2004

Perecent of total expenditure

In thousands USD

21,415.50 18,794.70

100.00 87.76

37,001.75 32,473.52

26,037.40 21,462.30

100.00 82.43

48,809.45 40,233.01

6,778.90 3.00 244.40 3,221.50 8,546.90 2,589.10 852.10 1,737.00 31.70

31.65 0.01 1.14 15.04 39.91 12.09 3.98 8.11 0.15

11,712.60 5.18 422.27 5,566.11 14,767.35 4,473.45 1,472.26 3,001.19 54.77

8,177.70 0.05 685.60 4,149.04 8,449.89 4,575.18 2,050.15 2,525.03 0.00

31.41 0.00 2.63 15.93 32.45 17.57 7.87 9.70 0.00

15,329.83 0.09 1,285.22 7,777.75 15,840.08 8,576.59 3,843.19 4,733.40 0.00

In million AMD

In million AMD

Perecent of total expenditure

In thousands USD

Source: National Statistical Service, Ministry of Finance and Economy

13

F. THE SYSTEM OF INTERGOVERNMENTAL LENDING (CREDITS AND LOANS)

(INTERBUDGETARY)

36. Communities can get interest-bearing budgetary loans (credits) 11 from the state – funds transferred to community and/or Yerevan budgets on terms of repayment (within a specified time limit), interest service and maturity - for implementing specific projects for the development of community infrastructures, with the agreement of the State Authorized Body.

With the consent of the Authorized Body communities can also issue securities for attracting additional funds. 12 All the communities are eligible and have equal opportunities for getting budgetary credits and issuing securities. Note, there is no practice of issuing securities by communities yet. Resources from credits and/or securities shall be directed only to the fund budget of a community. Only incomes of the community budget and government guarantees can be used as collateral for getting credits. Communities can get a new credit only after paying up the previous credit. Credits may, among others, take also the form of: a) purchase of securities in the secondary market on the account of the state budget (for policy purposes, but not for gaining income); b) in kind credits; c) liabilities accruing as a result of payments for budgetary guarantees, etc.

37. In order to get a credit a community shall submit an application to the marz governor, which shall include information on the purpose of the credit, timing of proposed works, financial situation of the community, implications of the proposed project for the community as well as state budget, etc. The marz governor discusses the application with the relevant ministry or other state agency which is responsible for regulating the field to which the proposed investment relates. An application can be rejected if, the purpose of the credit applied for does not comply with the regional policy conducted by the Government at the time of the project. After examination and acceptance of the application (within one month after the application is made), the marz governor, as a liaison or intermediary, passes the application to the Ministry of Finance and Economy. The interest rate of the credit and its duration are agreed on between the Ministry and the community in a credit contract, and depend on the nature, objectives and the duration of the proposed project. 13 Government Resolution no 168 does not specify the interest rates and the duration of budgetary credits.

The Ministry makes its decision within one month after the receipt of the application from the marz governor, after which it is submitted to the Government for final approval. Control over the implementation of the credit projects is carried by the Ministry of Finance and Economy.

38. Interest-free budgetary loans 14 – funds transferred to community and/or Yerevan budgets on terms of repayment (within a specified time limit) and maturity - are given for financing individual projects or specified expenses and are usually given for covering gaps in current expenses necessary for conducting community’s mandatory functions or operations.

Loans can also be used for financing capital investments. Budgetary loans given to the community budget shall be repaid within six months and during the same budget year.

Communities can get no more than two loans per year.

39. For getting an interest-free loan the community head shall submit an application to the relevant marz governor, who submits it to the Ministry of Finance and Economy (the 11

Law on the Budgetary System of the AR; Government Resolution No: 168, of 9 March 1998, see Annex I. Note: The amount of liabilities accruing due to redemption of credit and/or securities (including interest payments) for a given year shall not exceed 20 percent of the revenues to the fund budget of the community of that year.

13 To get an idea, during 2002, for example, some communities got budgetary credits at 1 percent annual interest rate for different periods (up to 25 years).

14 Law on the Budgetary System of the AR; Government Resolution No: 164, 1998, see Annex I. 12

14

Ministry shall consider and make its decision within 10 days). In the case if the application is acceptable, a loan contract is signed between the community head and the Ministry. After signing the contract, money can be transferred to the community within 15 days. Control over the implementation of the loan contract is conducted directly by the Ministry.

G.

WATER SUPPLY AND SANITATION (WSS) SERVICES

40. Before turning to the financial aspect of the WSS services system, let have a quick look at the structure and management of the system and also the recent developments in the sector.

At present, Armenia conducts, both, centralized and decentralized management of WSS and irrigation services sectors. Until 2001, supervision of the WSS sector in Armenia was shared among various ministries, but in February 2001, a State Committee for Water Economy (SCWE) was established, covering water economy management and irrigation. SCWE carries out its WSS functions via two major water and wastewater utilities in Armenia -Yerevan Water and Sanitation Company (YWSC) covering the capital city service area (about 33 percent of the national population) and Armenia Water and Sanitation Company (AWSC) initially covering about 45 percent of the national population and 300 communities. Both YWSC and AWSC state closed joint stock companies (SCJSC) with all shares owned by the State. In fact, SCWE is the representative of the State, to which the Government delegated the management and operation of the two utilities. The remaining over 600 communities (with about 35 percent of the population), mostly villages, have self-operated water services.

41. During the recent four years the Government of Armenia undertook comprehensive institutional and legal reforms aimed at revitalization and sustainable development of the WSS sector. Armenia has developed and continuously improved its legal framework, including the Water Code, the law on the Management of Multi-Apartment Buildings (Condominium law), Civil Code, Privatization law and the law on Foreign Investment, that improves the management of the WSS services, enables delegated management of public utilities, establishes clearer procedures for tariff setting and revision, and provides a basis for managing water services in apartment buildings.

42. An important measure undertaken by the Government was the Household Arrears Restructuring Program 15, the implementation of which allowed: a) increasing significantly the tariff collection rate, thus, facilitating financial recovery of WSS utilities; b) mass installation of water meters which increased the collection rate as well as public confidence and transparency in the WSS service sector.

43. Since late 2003, the regulation of WSS tariff has been the responsibility of the Public Service Regulatory Commission. The commission sets and revises tariffs, and also conducts technical and financial monitoring. In the case of any deviation the Commission can initiate tariff revision process.

44. Recognizing the important role that the private sector can play in the development of the country’s WSS sector, the Government decided to allow participation of private companies in WSS sector management. The management of YWSC and AWSC was transferred to international companies in 2000 (for a 5 year period) and 2003, respectively.

15

The legal basis for the program included: a) the law on Providing Privileges With Respect to The Payment of Liabilities (Arrears) for WSS and Irrigation Water Supply Services, adopted on 6 November 2002, No: HO-441N (Water Arrears Restructuring law) ; b) Government Resolution No: 1950-N, of 13 December 2002, on Priority Measures Necessary for the Implementation of the Water Arrears Restructuring law; c) number of Government Resolutions moving the deadlines for the implementation of the Resolution No: 1950-N; d) Government Resolution No: 130-N, of 22 January 2004, that defined the rules on WSS services and replaced the Resolution No: 149.

15

Currently, the Government considers more advanced private sector involvement in the form of lease contracts.

45. Despite the fact that the financial position of the two main WSS utilities improved considerably during the recent years (thanks to increased water tariff collection rate resulting and private sector participation), the WSS utilities are still facing serious financial difficulties. Tariffs are formed based on operational costs and minor depreciation. Current water and wastewater tariffs and the collection rate do not allow covering ? costs of the WSS utilities. WSS utilities are not yet in a position to make major investments out of their proceeds, and hence need significant financial support, though tariffs were increased during recent years. As a result of low capital investments the depreciation of the WSS infrastructure remains very high and increasing. This in turn results in a very high level of water losses – from 70 to 80 percent. Expert opinions tell that the estimated amount of investment needed for the reconstruction and rehabilitation of only YWSC range from USD 400 million to 500 million, and for Armenia’s whole WSS – twice as much.

46. The Government provides financial support to WSS services sector through: a) provision of budgetary subsidies for covering cash flow gaps (in current accounts or operating costs), mostly for covering debts of WSS utilities (YWSC and AWSC) to electricity suppliers (Table 6); b) state investment projects in the sector, aimed at improving the efficiency of WSS utilities (YWSC and AWSC) via reduction of operational and maintenance costs and water losses as well as improvement of the management of WSS utilities. State support to the WSS sector is concentrated on the YWSC and AWSC, i.e. the part of the WSS system under centralized Government management. At the current stage of reforms in the WSS sector, the remaining part of the WSS system (i.e. 600 communities that is out of the coverage of YWSC and AWSC) is managed and maintained only by the communities. In its program of medium term expenditures 16 the Government of Armenia plans to implement gradual reduction of subsidies to WSS utilities (by 49.5 percent in 2004 compared to the level the previous year, by 56.2 percent in 2005, and by 13 percent in 2006).

Government subsidies to the sector were 0.42 percent of total budget expenditure in 2002, and less than 1 percent in 2004. State investment programs in the WSS sector are implemented mostly with financing (at quite concessional terms) from international and foreign financial institutions (Tables 7 and 9). Investment projects in the WSS sector are implemented via SCWE, and local communities, in fact, do not participate in the preparation and implementation of investment projects.

16

Government Resolution No: 1030-N, of 14 August 2003.

16

Table 6.

State Budget Subsidies to WSS utilities and Water Tariffs 2002

CJS Companies under the SCWE Tariff

Armenia WSC Yerevan WSC Nor Akounk WSC Shirak WSC Lori WSC

AMD

USD

49.6 56.0 100.0

0.09 0.10 0.17

2003

Subsidy m. m.

AMD USD 1229.0 270.0

2.14 0.47

Tariff AMD

USD

48.5 56.0 100.0

0.08 0.10 0.17

2004 Tariff (retail)

Subsidy m. m.

AMD USD 810.0 1935.0

1.40 3.34

AMD

USD

100.4 90.2 150.2 120.1 121.2

0.19 0.17 0.28 0.23 0.23

Subsidy m.

AMD m.USD 952.0 756.0

1.78 1.42

Source: SCWE Table 7.

Capital Investments in WSS System (in million AMD) 1999 million AMD

million USD

2000 million AMD

million USD

2001 million AMD

million USD

YWSC Total capital investment, of which 187.9 0.35 1586.0 2.94 1386.5 2.50 Government investment programs 187.9 0.35 321.0 0.59 125.1 0.23 Own funds 0.0 0.00 0.0 0.00 0.0 0.00 IFIs 0.0 0.00 1264.0 2.34 1243.4 2.24 AWSC Total capital investment, of which 543.0 1.01 0.0 0.00 0.0 0.00 Government investment programs 543.0 1.01 0.0 0.00 0.0 0.00 Source: Borrowed from Institute of Urban Economics, “Review of Key Reforms in Urban WSS Sector of the AR”,

2002

2003

million AMD

million USD

million AMD

million USD

1914.0 250.0 0.0 1664.0

3.34 0.44 0.00 2.90

4799.4 278.0 0.0 4521.4

8.29 0.48 0.00 7.81

0.0 0.00 0.0 0.00 Moscow, 2004

341.0 341.0

0.59 0.59

17

Table 8.

Expenditures in WSS and Irrigation (in million AMD) 2004* mln AMD 12288.1 8751.7 3536.4

2005* mln USD 23.04 16.4 6.63

mln AMD 10492.9 6716.8 3776.1

2006* mln USD

mln AMD 12046.1 6074.2 5971.9

mln USD

Capital expenditure, of which: WSS** Irrigation** Currency expenditure (O&M 6487.1 12.16 4187.5 4753.9 expeses), of which: WSS** 3679.5 6.9 2079.4 2460.2 Irrigation** 2807.6 5.26 2108.1 2293.7 Source:* Planned figures according to the Government program on medium-term expenditures (Gov. Resolution No: 1030-N, 14 August 2003) ** Own calculations based on the data provided in the Gov. Resolution No: 1030-N, 14 August 2003

18

47. During recent years the Government of Armenia, in order to attract financing for major investments in the WSS services sector, implemented and is implementing number of projects with international and foreign financial institutions such as the World Bank, German KfW bank (see Table 7).

Table 9.

Investment Projects With International and Foreign Financial Institutions Project

Municipal Development Program (World Bank (WB) loan)

Municipal Water Supply and Wastewater Collection Program (World Bank loan)

Water Sector Rehabilitation in Armavir Region of the AR (Armenian-German investment project) Water Sector Rehabilitation in Lori and Shirak Regions of the AR – (Armenian-German investment project)

Project objectives and components

Financing

- creation of a basis for private sector participation with a view to improving the management of YWSC - improvement of the water supply system with a view to reducing costs and water losses and to phasing in round-the-clock water supply - enhancing the performance of the WSS sector and ensure its financial stability

USD 35.55 million, of which: - the WB loan - USD 30 million - share of the Government - USD 5.55 million

- rehabilitation of the WSS system (AWSC) in a number of communities (in 43 cities and 320 villages) with a population of about 1 mln - structural and organizational reform of AWSC - recovery and improvement of WSS services in the city Armavir and neighboring eleven communities - decentralization of WSS services - institutional and technical assistance - recovery and improvement of WSS services in the city Armavir and neighboring eleven communities - decentralization of WSS services - institutional and technical assistance

USD 23.0 million

Euro 14.1 million, of which: - German KfW bank - Euro 12.75 million - share of the Government Euro1.35 million Euro 26.3 million, of which: - German KfW bank - Euro 23.7 million - share of the Government Euro 2.6 million

48. Programs implemented with financing from the German KfW bank are positive attempts towards step by step decentralization of the management of WSS services (of AWSC) in three regions of Armenia – Armavir, Lori and Shirak regions. Step by step approach was considered to be important from the point of view of increasing the readiness and the capacity of communities. The project finances the development of three new utilities (closed joint-stock companies), formerly in AWSC's service area, that will cover about onethird of the national population. The Government represented by the SCWE owns 51 percent of the company shares, and the remainder of the shares is owned by the communities (the company operates in). As reforms envisaged by the project are implemented, it is expected that the government shares will be fully transferred/sold to respective communities. The management is performed by the companies themselves in close cooperation with two German consulting entities selected at an international tender, which provide institutional and technical assistance.

49. Coming back to those over 600 communities that have self-operated WSS services, according to Armenia's law on Local Self-government, communities are responsible, among others, for drinking WSS services within their administrative boundaries. In these communities the WSS systems are owned by local self-governments, and the State has virtually no participation in the operation, maintenance and management of WSS 19

systems. In fact, local communities have been exposed to a very difficult situation due to limited financial resources and resulting inability to make serious capital investments in social infrastructures, including the WSS system. Naturally, the capital investment level in the WSS sector of the mentioned communities is negligible. However, it is important to note that the low level of investments in the WSS system of these communities is not a policy option, but a result of limited budgetary resources, prioritization of short term urgent needs, and is a matter of timing.

50. The lack of data does not allow making accurate estimates of investments made in WSS systems of these communities. However, anecdotal evidence tells that during the recent five year period most of the investments were made within the framework of different projects implemented by international organizations in these regions or communities (e.g. Save the Children, KfW, and WFP), which, with very rough estimate, could make about USD form 5 to 6 million. Again, according anecdotal evidence, during the same period, investments in the WSS infrastructure financed from the state budget made roughly USD 0.1 million.

51. In parallel to the above mentioned, it has to be noted that under current circumstances the domestic private sector (that could be an alternative source of financing) avoids from investing in WSS services sector, the main reasons being the low water tariffs (and the difficulty to increase tariffs to economically sound levels) and the bad financial position of WSS utilities.

H. THE EFFICIENCY OF MECHANISMS (INTERBUDGETARY) TRANSFERS

OF

INTERGOVERNMENTAL

52. Having said all the above, lets talk about the implications of Armenia’s existing system of intergovernmental budgetary relationships. First, Armenia’s system of budgetary and interbudgetary relationships allows the central government to exercise harmonized policies (particularly social policies), by a) putting the requirement, with respect to projects proposes by local communities, to be in compliance with central government policies at national as well as regional levels; and b) by exercising the principle of budget planning based on three year development program. Second, the existing system allows exercising a relatively effective control over the implementation of state and local budgets. Third, the system also helps local communities to be successful in running balanced budgets, as required by law.

Forth, to some extent, the system motivates local communities to cooperate with and assist the central government agencies in their tax collection activities.

53. However, Armenia’s budgetary system and the mechanisms of inter-budgetary transfers and lending impose number of problems. First, local communities (self-government bodies) in Armenia enjoy only limited power and capabilities, with most administrative powers exercised by the central government. This relates, particularly, to the financial standing of local communities, which is very weak and does not allow independent decision making and prioritization of expenditures. Local communities have limited abilities to raise funds from local revenues sources, and, thus, heavily depend on central government transfers (especially, equalizing grants) to the local communities accounting for more than 50 percent of local budget revenue.

54. The problem is that a wide range of responsibilities were disaggregated to the local communities, without ensuring suitable financial resources would be available to allow the latter to fulfill their mandates. Poor financial position does not allow making required capital investments in social infrastructure (including WSS system and environmental protection).

The lion’s share of local budget expenditure is used to cover only current administrative expenses on local administrations. Capital investment level is negligible. In many of the 20

communities, there are very real limits to what can be generated through local taxes and fees, suggesting that consolidation of the administrative units is something that needs policy consideration. In addition, in most cases capital works financed from the state budget are contracted and implemented not by communities, but by relevant government agencies.

Overall, the existing situation does not create a sound incentive framework for communities to take the initiative in addressing issues of long-run social and economic development.

55. Second, despite the fact that local self-governments are entitled to attract funds from alternative sources (international financial institution, self-governing bodies of foreign countries, private sector), they are not in a position to exploit these possibilities. The reasons for this are, particularly: a) practically limited decision making power; b) poor financial standing as borrowers; c) lack of human capacities necessary for project design and implementation; and d) lack of knowledge and skills necessary for cooperation with international and foreign organizations.

56. Third, even though Armenia made considerable progress in improving the budgetary regulatory and procedural framework, there are still problems in implementation of laws and regulations. Thus, frequently, the low collection levels on the local taxes, together with delays in receipt of the central Government support, and burdensome procedures for getting budgetary transfers or credits and loans inhibit the ability of the local government to undertake their allotted responsibilities, as defined by the law on Local Self-Government. To continue with, practice demonstrates that limited administrative power and poor financial standing of communities create serious impediments for effective planning of the social and economic development of regions as well as for getting needed finances from the state budget and/or other sources.

57. Turning to the issues regarding WSS system, the Government of Armenia has made considerable progress in improving the financial standing as well as operations of the system.

However, the major WSS utilities (YWSC and AWSC) are not yet able to cover their O&M costs. At the same time limited budgetary resources put serious constraints for the Government in making necessary capital investments. Capital investments in the WSS sector are financed mostly via attracting necessary financing from international and foreign financial institutions (e.g. World Bank and German KfW bank). Still, the investment level remains far from being adequate for the recovery and sustainable development of the WSS sector. It is important to note that the projects cover only the centrally managed segment of the system.

58. The situation is worse with regard to the decentralized part of the WSS system (600 communities), which is owned by communities. This part is, in fact, out of the coverage of the implemented projects and gets actually no support (or negligible support) from the state.

Limited administrative powers and low financial capabilities make it hardly possible for the communities to appropriately maintain and/or operate their WSS systems. It is extremely difficult for most of the communities to attract money from the state or the private sector due to the existing strict budgetary discipline and the fact that the WSS sector is still not attractive for the private sector.

21

ANNEX I THE LEGAL BASIS GOVERNING BUDGETARY RELATIONSHIPS AND INTERGOVERNMENTAL FINANCIAL TRANSFERS AND LENDING IN THE REPUBLIC OF ARMENIA (AR)

1.

The law on the Local Self Government

2.

The law on the Administrative-territorial Division of the AR

3.

Presidential Order No: NH-728, of 6 May 1997, on State Governance in Marzes of the AR

4.

Presidential Order No: NH-727, of 6 May 1997, on State Governance in City Yerevan

5.

The law on the Budgetary System of the AR

6.

The law on the Treasury System of the AR

7.

The law on Financial Equalization

8.

Laws on the State Budget adopted for each budgetary year

9.

Government Resolutions on the provision of equalizing grants adopted for each year

10.

Government Resolution No: 141, of 23 May 1997, on the Rules regarding the Design, Approval and Financing of Capital Investment Projects on the Account of (Financed from) the State Budget

11.

Government Resolution No: 164, of 9 March 1998, on the Rules on Provision of Loans to Local Self-government Bodies from the State Budget

12.

Government Resolution No: 168, of 9 March 1998, on the Rules on Provision of Credits from the State Budget

13.

Government Resolution No: 380, of 18 June 1998, on Approving the Rules on Provision of State Budget Guarantees (Guarantees on the Account of the State Budget)

14.

Government Resolution No: 400, of 25 June 1998, on Approving the Rules on Submission of Applications for Budgetary Financing and on Solving Disagreements Between the Ministry of Finance and Economy and Applicants with regard to Applications

15.

Government Resolution No: 404, of 10 June 1999, on Approving the Rules on Servicing, Counting and Controlling Off-budget Resources of State and Other Entities

16.

Government Resolution No: 48, of 18 January 2002, on Approving the Rules of the Implementation of State and Community Budgets

17.

Government Resolution No: 750-N, of 29 May 2003, on the Organization of Calculations and Payments of proceeds from Property Tax and Land Tax by the Local Self-governing Bodies

18.

Government Resolution No: 1376-N, of 17 September 2004, on Approving the Strategy of the Development of Internal Audit System of State Bodies, Local Self-governing Bodies, and Their Subordinate Entities as well as of State and Community NonCommercial Organizations

22

19.

Order of the Minister of Finance and Economy No: 930-N, of 30 December 2002, on Approving the General Conditions Regarding the Preparation, Submission and Summing up of the Reports on Financial Activities of Local Self-governing Bodies and Their Subordinate Entities, as well as the List and Specifics of Different Types of Reports

20.

Order of the Minister of Finance and Economy No: 934-N, of 30 December 2002, on Approving the Rules on the Internal Audit in the State and Local Self-Government Bodies as well as in Their Subordinate Entities

21.

Order of the Minister of Finance and Economy No: 306, of 6 August 1996, on Approving the Charter of the Department of Control and Revision over the Implementation of the State Budget of the Ministry of Finance and Economy and of the Local Bodies of Control and Revision over the Implementation of the State Budget

22.

Order of the Minister of Finance and Economy No: 194-N, of 5 March 2004, on Approving the Format of a Model Community Budget and the Instructions Regarding the Completion of Separate Parts of the Model

23.

Order of the Minister of Finance and Economy No: 292, of 30 July 1999, on Approving the Details of Budgetary Classifications and the Rules on Their Use

24.

Others

THE LEGAL BASIS GOVERNING THE WSS SERVICES SECTOR IN THE REPUBLIC OF ARMENIA (AR) 25.

The Water Code, adopted on 4 June 2002

26.

No: 92, of 9 February 2001, On Reforms in the System of water Economy Management

27.

Government Resolution No: 440, of 17 May 2001, on Measures for the Improvement of the Operations and Management of Companies Under SCWE, and on Financial Flows for 2001-2005

28.

The law on Providing Privileges With Respect to The Payment of Liabilities (Arrears) for WSS and Irrigation Water Supply Services, adopted on 6 November 2002, No: HO441-N (Water Arrears Restructuring law)

29.

Government Resolution No: 1950-N, of 13 December 2002, on Priority Measures Necessary for the Implementation of the Water Arrears Restructuring law

30.

Number of Government Resolutions moving the deadlines for the implementation of the Resolution No: 1950-N

31.

Government Resolution No: 81-N, of 9 January 2003, on Approving the Rules on Delegated Management of State Owned WSS Systems

32.

Government Resolution No: 245-N, of 30 January 2003, on Approving the Rules on Transferring the Right for the Use of State Owned WSS Systems Under Conseccional Agreements

33.

Government Resolution No: 1693-N, of 6 November 2003, on Financial Rehabilitation of YWSC and AWSC and CJSCs of the Irrigation System for 2003-2007, and on the Forecasts on the Financial Flows for 2003-2007

23

34.

Government Resolution No: 130-N, of 22 January 2004, that defined the rules on WSS services and replaced the Resolution No: 149

35.

Law on the Basic Principles of National Water Program, Adopted on 3 May, 2005

36.

Decree of the Public Services Regulatory Commission No: 33-N, of 5 April 2005, on Approving the Methodology of the Formation of tariffs on WSS Services

37.

Decree of the Public Services Regulatory Commission No: 97-N, of 9 August 2004, on the Rules on Establishing and Reviewing the Tariffs in the Water System of the AR

38.

Others

24

ANNEX II National currency: Armenian Dram (AMD) Annual Average Exchange Rates: 1 USD = AMD (1999-2004) 1999

2000

2001

2002

2003

2004

535.06

539.52

555.07

573.35

578.77

533.45

Source: National Statistical Service

25