Poverty and Social Impact Assessment

1
Poverty and Social Impact Assessment

• Water Sector Reform in Armenia
• A Pilot Study

2
Department for International Development (DFID UK)

• and
• Economic Research Institute (ERI)
• An Independent Research Centre of the Ministry of
  Economy and Finance
• of the Republic of Armenia

3
Section One

• Armenia
• The Economic Background

4
Macroeconomics Poverty 1990-94

• Decline of large Soviet industries CMEA
• On-Going Effects of Earthquake
• 50 Decline in GDP
• Budget Deficit Explodes to 48 of GDP
• Inflation at 5000 per annum
• SO Huge Post-Independence fall in Livelihoods

5
Stabilisation and Reform after 1994

• Inflation to gt 10 by 1996
• GDP growth restored by 1994 (5 p.a. since then)
• Budget Deficit reduced to 3-7 of GDP
• External Balance stabilised by grants
• BUT Growth narrowly based 30 of workers
  inactive, new Exports creating few jobs
• AND Poverty Indicators remain bad (around 50
  in poverty- Gini Coefficient on Income 0.57)

6
Implications for Policy

• Many post-1994 reforms clearly necessary to
• Stabilise the macro situation
• Improve the efficiency of social support
• Establish the institutions of a market economy
• BUT the Unsatisfactory SHARING of benefits argues
  for change in emphasis involving
• More substantial ex ante analysis of Poverty
  effects of all major reforms (i.e PSIA)
• More explicit pro-poor policies and expenditures

7
Income Poverty 1996 and 1998
8
Section Two

• Choice of Topic
• Why Water?

9
Criteria

• Important macro/structural reform that involves
  significant poverty social consequences
• A still-incomplete reform. Some scope for
  influence
• Some previous work available time constraint
• Within competence of the local research team
  (ERI)
• A topic that offers the prospects of serious
  demonstration of the PSIA potential in Armenia

10
PSIA Pilot in Armenia Why the Water Sector?

• Water is prominent in the structural reform
  agenda
• Numerous social, environmental and other impacts
  low level trap (Co. finances, delivery,
  payment)
• Major macroeconomic issues. (direct transfers to
  water utilities reaching 2 of GDP in the last
  few years). FY2001 subsidies of 8 million.
• SAC V proposal to end subsidies on irrigation
  water by 2007.
• Water reliability and quality is poor and
  extremely variable - both municipal and
  irrigation water
• Seriously degraded infrastructure cost of
  necessary new investment at hundreds of millions
  of US dollars.
• Timing (almost right)

11
Declining Water Use
12
Example of Problems Water Related Disease
13
Section Three

• Methodology

14
Constraints on the Pilot

• The in-Country Team had
• One month only for the research
• So the Team
• Made extensive use of previous research.
• for municipal water made inferences based on
  the available data from 1998/1999 and 2001 HIES.
• for irrigation water undertook only limited new
  quantitative analysis using additional farm data
  (on costs/revenues)
• for both municipal and irrigation water reforms
  used new qualitative assessments and stakeholder
  analysis based on focus group.

15
Problems Gaps that Could be Filled

• Primary Econometric Analysis could give better
  insights into parameters such to Demand
  Elasticities
• But difficult to connect to a holistic view of
  the price reforms e.g. who gets more and better
  water
• Simple/Rapid Household Surveys could inform
  certain aspects of Utility Pricing Decisions
• Dynamics of Rural Change are far too complex to
  be captured by the simple methods used here
• Qualitative Discussions are needed to define
  Implementation Modalities

16
Goals of the Pilot

• To IDENTIFY possible intended and unintended
  consequences of GoA water sector reform program
  (for municipal and irrigation water)
• to DEFINE the further analytical work needed to
  complete a full PSIA
• To OUTLINE possible measures of social assistance
  programs and complementary reforms to mitigate
  the potential negative social impacts of the
  reforms
• To INFORM policy choices and implementation for
  the implementation of the reform program of the
  GoA

17
Section Four

• Key Issues and Recommendations
• Municipal Water

18
Water Sector Reform in Armenia

• Started in 1999 with the Integrated Water
  Resources Management Planning (IWRMP) Study.
• High Level Objective Development of a
  comprehensive policy framework to ensure a
  sustainable management and use of water resources
  and development of the water using sectors,
  taking into account economic, financial,
  environmental, social and institutional
  considerations.

19
Regulatory Reform The New Structure
20
Financial Reform
GOA (Decree No.440). Reform Program to improve
the financial sustainability of the companies
responsible for the provision of drinking water
supply/ wastewater and irrigation/drainage

• introduce commercial base for the operations of
  all the water supply companies during 2001-2008.
• The final goal is to eliminate budget subsidies.
  This will require major capital investments using
  (a) loans on favourable terms and (b) increased
  receipts from billing collections. Estimated
  investments needed for the first 5 years is 200
  million.
• To achieve the above it is necessary to review
  and modernise the existing legal and normative
  fields regulating WRM implement tariff,
  institutional and administrative reforms.

21
Financial Reform Municipal Water

• Example of Yerevan WSC
• decrease water losses by up to 55 - saving
  around 165 million m3 of water volumes.
• increase in collection rate by about 62 to
  achieve a 3.2 fold increase in revenues
• reduce energy costs by about 25
• increase salaries by about 2.2 times
• improve services by increasing OM
  expenditure by about 1200 million AMD

22
Scenarios Tariffs and Collections
23
Who Fails to Pay?

• Main Conclusions
• Payments non-compliance is NOT a consequence of
  Poverty
• However, extensive non-payment today means that
  present water charges have only a minimal poverty
  impact.

24
Impact of Full Payments Compliance

• Full Payments Compliance (of Existing Tariffs)
  would
• increase the numbers of the very poor by nearly
  18 (18.7 v 15.9) and the poor by 4.6 (36.6 v
  35.0)

25
Quantitative Results Key Issues

• Tariffs
• The Price that maximises revenue to the Water
  Utilities - 5 ARD per 10 litres- would achieve
  only 40(Rural) and 65(Urban) payments
  compliance. - even with improved Water delivery.
  At higher prices both revenue and the degree of
  usage of the system decline.

26
Continued

• Arrears
• Average arrears per family at 9 represent a
  significant proportion of the minimal consumption
  basket
• Meters
• Installation Cost at 30 is very high for poorer
  families

27
Qualitative Results Selected Issues

• The policy balance between treating water as an
  economic good (private or public) versus a basic
  human need is particularly difficult and
  potentially very contentious in Armenia (social
  consensus has broken down)
• Resistance to reform is also due to (poorly
  understood) tensions between vested interests
• Getting people to pay for their actual water
  consumption is probably the most complicated part
  of the reform and is fraught with difficulties
  (e.g. problematic role for condominiums,
  perceived unfairness between upper and low floors
  of apartments, paying for the meter)

28
Proposed Mitigating Measures

• Phase in the mass installation of individual
  meters on an affordable basis with meters for the
  extremely poor being installed free of charge
• Assist poor households with (a) forgiveness of
  accumulated arrears (b) a specifically designed
  program of allowances. A block tariff, or a
  lifeline tariff, may reduce the poverty impact
  particularly for those who just fall outside the
  eligibility criteria.
• Use a public awareness campaign to (a) to
  underline the importance of the reforms (b) to
  promote the idea of fairness and transparency
  and (c) to the explain the concept and progress
  of the latter.
• Recognize explicitly that implementing the
  condominium mechanism in water delivery
  (involving collective organizations to manage
  payments and supply in apartment buildings) is
  going to be a major challenge.

29
Section Five

• Key Issues and Recommendations
• Irrigation Water

30
Irrigation Water The Problem

• 80 of Crop Production is produced using
  Irrigation
• The actual irrigated area has declined hugely
  since 1991 and the usage rate has declined to
  only 70
• Tariffs charged cover only 30-60 of costs
• Yield differences between Irrigated and Rain-Fed
  Agriculture are large
• Soviet delivery systems designed for large
  collective farms are inappropriate for todays
  smaller farms
• Availability and supply costs of Irrigation vary
  greatly by region as do yields of main crops
  (mountainous regions having higher costs and
  lower yields)
• Agricultural growth (and by implication
  irrigation) are key to the Poverty Reduction
  agenda.

31
Irrigation Decline and Poverty
32
Prospective Irrigation Tariffs
33
Identified Impacts of Higher Tariffs Improved
Collections

• Big Problem for 25 of Rural Households with zero
  Cash Income
• Variable impact on farm profitability depending
  on Marz and Crop
• Few impacts except on fodder and so livestock in
  Shirak, Armavir and Ararat
• Significant deterioration in Aragatsotn, Kotaik,
  and Sunik
• An already poor farming situation in Tavush and
  Lori would deteriorate further.

34
Qualitative Issues

• The concept of the average farm is unhelpful.
  Strong households working well in commercial
  agriculture will have few problems adapting to
  the reforms. But the predominantly subsistence
  farms (especially in alpine and border regions)
  are already extremely distressed
• In difficult areas, focus groups expect a 30-40
  quit rate from farming in the next few years -
  higher water tariffs are just one more pressure
• The relationship issues involving Water Users
  Groups need to be solved as a precondition for a
  successful reform of irrigation
• Corruption is perceived as the root cause of the
  high incidence of non-payment. Reform objectives
  will fail unless this problem is addressed.

35
Risks of Irrigation Sector Price Reforms in some
Regions

• Increase in poverty levels, as a result of actual
  farms closures or weaker finances.
• Accelerated population movement from rural to
  urban areas, adding to social tensions in the
  latter and intensifying already uneven economic
  development
• Security risks as a result of possible
  de-population of some border areas.
• Risks from the acceleration of the already
  dangerous levels of out migration from Armenia.

36
Continued

• Social tensions as a result of increased
  polarisation of the rural community. Armenia is
  already characterised with the highest in the CIS
  Gini coefficient.
• Environmental impact, , e.g. the farmers may
  switch to extensive use of drainage water, even
  if it does not match the required standards. This
  will have knock-on effects on health status.
• Endangered food security for the poor part of
  population, as a result of increase in the price
  of agricultural goods. This will hit in the first
  instance the poor urban households ( who would
  have already experienced the impact of increasing
  burden of drinking water tariffs)

37
Mitigating Policies

• Broad-based development programmes are needed for
  the most badly affected border and alpine areas
• Provision of community level assistance aimed at
  developing infrastructure and development of
  non-farm sectors in selected rural areas.
• Assistance to poor rural households example a
  pilot programme of irrigation vouchers. The
  mechanism still needs to be developed, but could
  be managed through Water User Groups (WUGs).
• Increased support to the development of
  co-operative mechanisms in agriculture and
  especially the WUGs. Strengthening of WUGs is
  crucial for the success of irrigation sector
  reforms and the development of agriculture.
• Pilot projects in two or three specific water
  resources management areas with serious problems
  (i.e., water scarcity, drainage, water pollution)
  to develop local programs for addressing problems
  arising from the increased irrigation tariffs.

38
Section Six

• Lessons from the Armenia Pilot

39
Lessons from the Pilot

• A well connected local research group and leader
  are to be advised
• A local team where the members already have some
  substantive familiarity with the PSIA topic is
  desirable although a complete matching of skills
  with the substantive sub-topics for research is
  unlikely to be possible.
•  
• In a country where there are big gaps in basic
  data, it is unrealistic to expect a
  short-duration PSIA to correct this fact.
• A short-duration PSIA will need to rely heavily
  on existing research results and secondary
  materials that may be imperfectly attuned to the
  needs of the study.
•  

40
Lessons - continued

• However, some limited gap-filling on data and on
  primary research of a non-quantitative nature is
  quite feasible. This must be planned at a very
  early stage.
• Substantive econometric and other modelling
  approaches are unlikely to be feasible in a
  short-duration PSIA unless most of the data
  required for such models are already to hand.
• It is highly desirable to include senior
  decision-makers in the research process from the
  earliest possible stage in order to gain their
  ownership of the process and the eventual
  results, as well as their support for gaining
  access to materials and people.
• A stakeholder workshop is a good idea even if
  based on a very preliminary version of the report
  this can be a good source of additional ideas
  and comment.

41
Building PSIA Capacity in Armenia

• The Pilot demonstrated the HOLISTIC strands of a
  topic such as Water Pricing. The Armenian system
  is poorly attuned to assessing the multiplicity
  of strands
• The Pilot PSIA depended on the support of the key
  policy and sectoral ministers widening
  government ownership will have to involve a
  gradual process.
• It will be important for the Presidential
  Administration to provide a stronger lead to the
  PRSP and PSIA processes if they are to acquire
  real influence.
•  Non-state stakeholders made important
  contributions to the Pilot this is because
  much of the understanding of what is happening at
  the community level is outside government. But
  the lack of capacity in government itself is a
  key issue for future PSIA and PRSP activity

42
Continued

•  The pilot addresses quite difficult technical
  issues and so is not immediately accessible to
  non-specialists. This complicates the task of
  overcoming the serious lack of public trust as
  government agencies seek to address and solve
  problems such as those of the water sector.
• The International Finance Institutions should (a)
  recognise these capacity problems more explicitly
  (b) take a more holistic approach themselves to
  structural reforms to ensure a more sustained
  focus on poverty objectives and (c) recognise
  that domestic resources will remain limited and
  so commit to more coordinated approaches to
  commissioning PSIA