The World Bank - Economic Growth

Document of
The World Bank
PROJECT APPRAISAL DOCUMENT
ONA
PROPOSED LEARNING AND INNOVATION LENDING (CREDIT)
Financial and Private Sectors Development Unit
South Caucasus Country Unit
Europe and Central Asia Region
IN THE AMOUNT OF SDR 3.90 MILLION
(USD5.0 MILLION EQUIVALENT
TO THE
REPUBLIC OF ARMENIA
FOR AN
ENTERPRISE INCUBATOR - LIL
November 27, 2001
Report No: 22607-AM

CURRENCY EQUIVALENTS
(Exchange Rate Effective 11/28/2001)
Currency Unit = Dram
US$1 = 554.1 ADR
FISCAL YEAR
January 1 -- December 31
ABBREVIATIONS AND ACRONYMS
AO - Administration and Operation
CAS - Country Assistance Strategy
CMB - Capital Markets Board
EDP - Economic Development Program
ESW - Economic Sector Work
FDI - Foreign Direct Investment
FMS - Financial Management System
FY - Fiscal Year
GOA Government of Armenia
IAS - Intemational Accounting Standards
ICB - International Competitive Bidding
ICP Implementation Completion Report
IDA - Intemational Development Association
IPR - Intellectual Property Rights
IRA - Institutional Renewal Account
IS - Intemational Shopping
ISP - Intemational Service Provider
IT - Information Technology
LAN - Local Area Networks
LIB - Limited Intemational Bidding
LIL - Leaming and Inmovation Loan
MTR - Mid-term Review
MOFE - Ministry of Finance and Economy
MOIT - Ministry of Industry and Trade
MSTQ - Measurement, Standards, Testing and Quality
NGO - Non-Governmental Organization
NS - National Shopping
OECD - Organization for Economic Cooperation and Development
PA - Project Agency
PAD - Project Appraisal Document
P?MU - Project mplnsesttntation and Monitosing Unit
pip - Project Implementation Plan
PCT - Patent Cooperation Treaty
RD - Research & Development
ROA - Republic of Armenia
SDF - Skill Development Facility
SME - Small and Medium Enterprise
SOE - Statement of Expenses
TOR - Terms of Reference
TP - Technopark
TRI - Trade Related Intellectual Property Rights
TS - Technical Support
TSF - Technology Services Foundation
TSS - Technology Support Services
VC - Venture Capital
VCF - Venture Capital Fund
Vice President: Johannes Linn
Country Manager/Director: Judy O'Connor
Sector Manager/Director: Paul Siegelbaum
Responsible Staff: Kreacic (Team Leader), Naqvi, Begloian,
Boutaev, Kirakossian (ECSPF); Kuznetsov
(Co-task Team Leader) (LCSFR)

ARMENIA
ENTERPRISE INCUBATOR - LIL
CONTENTS
A. Project Development Objective Page
1. Project development objective 2
2. Key performance indicators 2
B. Strategic Context
1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 3
2. Main sector issues and Government strategy 3
3. Learning and development issues to be addressed by the project 4
4. Learning and innovation expectations 6
C. Project Description Summary
1. Project components 8
2. Institutional and implementation arrangements 12
3. Monitoring and evaluation arrangements 14
D. Project Rationale
(This section is not to be completed in a LIL PAD)
E. Summary Project Analysis
1. Economic 15
2. Financial 15
3. Technical 15
4. Institutional 15
5. Environmental 16
6. Social 16
7. Safeguard Policies 17
F. Sustainability and Risks
1. Sustainability 17
2. Critical risks 17
3. Possible controversial aspects 18

G. Main Credit Conditions
1. Effectiveness Condition 18
2. Other 18
H. Readiness for Implementation 18
I. Compliance with Bank Policies 19
Annexes
Annex 1: Project Design Summary 20
Annex 2: Detailed Project Description 24
Annex 3: Estimated Project Costs 30
Annex 4: Financial Management 32
Annex 5: Financial Summary 35
Annex 6: Procurement and Disbursement Arrangements 36
Annex 7: Project Processing Schedule 46
Annex 8: Documents in the Project File 47
Annex 9: Statement of Loans and Credits 48
Annex 10: Country at a Glance 50
Annex 11: Armenian IT/software Sector 52
MAP(S)
Map of Armenia

ARMENIA
Enterprise Incubator - LIL
Project Appraisal Document
Europe and Central Asia Region
ECSPF
Date: November 27, 2001 Team Leader: Vladimir G. Kreacic
Country Manager/Director: Judy O'Connor, ECCO3 Sector Manager/Director: Paul Siegelbaum, ECSPF
Project ID: P044852 Sector(s): IL - Small Scale Enterprise
Lending Instrument: Learning and Innovation Loan (LIL) Theme(s):
Poverty Targeted Intervention: N
Program Financing Data
[ I Loan [X] Credit [ ] Grant [ I Guarantee [ ] Other:
For Loans/Credits/Others:
Amount (US$m): 5.00 equivalent
Proposed Terms (IDA): Standard Credit
Grace period (years): 10 Years to maturity: 40
Commitment fee: 0.50 % Service charge: 0.75%
Financing Plan (US$m): Source Local Foreign Total
BORROWER 0.45 0.00 0.45
IDA 0.00 5.00 5.00
FOREIGN PRIVATE COMMERCIAL SOURCES 2.15 0.00 2.15
(UNIDENTIFIED)
Total: 2.60 5.00 7.60
Borrower: REPUBLIC OF ARMENIA
Responsible agency: MINISTRY OF FINANCE OF THE REPUBLIC OF ARMENIA
Address: 1-Melik-Adamyan
Yerevan, 375101 Armenia
Contact Person: Bagrat Yengibaryan,
Executive Director
Foreign Financing Projects
Management Center
Tel: +374 (1) 523-471 Fax: +374 (1) 545-708 Email: info@ffpmc.am
Estimated disbursements ( Bank FY/US$m):
FY 2002 2003 2004
Annual 1.90 1.65 1.45
Cumulative 1.90 3.55 5.00_._|I
Project implementation period: 3 years
Expected effectiveness date: 02/01/2002 Expected closing date: 06/30/2005
OCS PAD Fom Rs Mesa 200

A. Project Development Objective
1. Project development objective: (see Annex 1)
A number of interlocking institutional rigidities in the labor market, educational system and business
environment are hindering the development of Armenia's human capital and hence constraining the
country's growth potential. The Enterprise Incubator (El, Incubator) project is an entry point to start
unlocking these rigidities in the IT cluster - a tiny, yet very dynamic pocket of vitality in an otherwise
stagnant economy. The project will pilot innovative private-public mechanisms for providing business
development services to nascent enterprises and continuous education and training to IT professionals. The
project is expected to have a powerful demonstration effect, triggering reforms in other sectors of the
economy.
The project has three specific monitorable objectives:
* To provide a demonstration effect of company fornation in an inhospitable business environment (the
Employment-creation/productivity objective). This will be implemented and monitored among the
beneficiary population of start-up firms (around 50 enterprises)
* To provide a demonstration effect of the positive impact of FDI in IT industry (the FDI objective)
* To pilot demand-driven mechanisms of continuous upgrading of IT skills of professionals, third year
students work force and enterprise managers and employees (the continuous skill upgrading
objective)
2. Key performance indicators: (see Annex I)
Performance indicators have been selected in consultation with the project agencies and other stakeholders.
These specific indicators are chosen because of their sensitivity to project inputs and their relevance to
project objectives. The following set of indicators would be used to monitor project progress and
achievements: (i) input indicators that ensure timely implementation; (ii) output indicators that track
immediate results in IT companies; (iii) company-level/productivity outcome indicators that measure the
project's outcome competitiveness of assisted firms (employment creation/ productivity objective); and (iv)
skill upgrading outcomes (skill upgrading objective).
Indicators to be collected for monitoring and evaluation are summarized in Table 1 below.
Table 1. Inputs, Ou uts and Outcomes of Assistance
Input Output Skills Development/Skill Upgrading Productivity/Employment Creation/
Outcomes Firm-level Outcome
Skills development Number of Number of third year students Business linkages outcomes
training for participants work force and adult Exports by firms
enterprises registered and professionals receiving top level Production and financial outcomes
graduated placements in the country Productivity
Product quality
Students admitted into Capacity
post-graduate degree programs Delivery time
in the country and abroad Backlog
Increase in sales and financial
profitability (% per employee, % of
an international benchmark)
-2 -

Input Output Skills Development/Skill Upgrading Productivity/Employment
Outcomes Creation/ Firm-level Outcome
Days of qualified Firms receiving Young IT professionals, students, Behavioral outcomes
consultants hired assistance professors and adult technicians Adoption of ISO 9000
and skills trained New products introduced
development events Professors and New clients acquired
organized teachers trained Students finding employment
within two years of graduation in: Process (buyer-supplier
Students trained . Armenian companies collaboration) outcomes
. Foreign companies in Armenia Number of buyers and
. Career positions abroad suppliers exploring common
(temporary or permanent opportunities
brain drain) Sharing of technology among
firms
Linkages with universities
and advisory institutions
New IT sector and industry
links
B. Strategic Context
1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex I)
Document number: 22111-AM Date of latest CAS discussion: 05/22/2001
The project responds to the first objective of the CAS which relates to "improving the business environment
by reducing administrative barriers to investment and new entry, especially of foreign firms, building
effective public-private consultative mechanisms, and enforcing a level playing field for new and existing
companies." This LIL is specifically directed towards the development of the most dynamic sector of the
global economy, the IT sector. Given the size, structure and natural endowment of the economy, the CAS
envisages demand-driven development of the private sector in Armenia, through the enhancement of
exports. The emerging IT/software sector will continue to be almost entirely export-driven, using its
accumulated pool of technical knowledge to export.
The project is designed to use the human capital of Armenia as a catalyst to renew investment activity
through enterprise creation and through growth in exports, as well as through fostering ties between
Armenia and global technology centers.
2. Main sector issues and Government strategy:
The unfriendly business environment, compounded by an inadequate privatization program, together with
knowledge-based constraints, have led to stagnation in the economy. The Armenian economy is still
comprised mainly of large organizations (R&D institutions, industrial, agricultural and agro-industrial
enterprises). Poor imnplementation of the 1999 privatization program (under ROA Decree #663) under
which less than 50 of the 210 intended enterprises were privatized, has led, in part, to this stagnation.
The unfriendly business environment in this relatively isolated and land-locked economy makes Armenia
even less inviting for investors. The lack of entrepreneurship in such an economy produces too little public
pressure for reforming the business environment and this perpetuates the stagnation.
- 3 -

The pockets of vitality that have managed to break through in this environment are highly concentrated.
For instance, about 1,000 employees in the Armenian diamond industry are currently responsible for
US$70 million in manufacturing exports (30% of total manufacturing exports in 1999). Another 1000
employees produce as much as US$18-20 million in software exports. While the economic impact of these
sectors on overall living standards is modest, these examples provide the greatest long-term opportunity for
Armenia to develop high value-added export oriented clusters.
Analytic work undertaken by the Bank on the determinants of economic growth in Armenia indicates that
developing business linkages (managerial, marketing and financial) between the growth segments of the
Armenian economy and the rest of the local economy and between these segments and the Westem markets
would probably be the most effective way to lift Armenia out of its economic stagnation. The Government
of Armenia (GOA) is aware of this, yet it lacks experience in devising the innovative institutional structures
required to foster these business linkages. This project aims to accelerate development of these business
linkages through support to the nascent IT cluster.
The project is prepared in parallel with two strategy documents:
* The Armenia IT Master Plan, prepared under the guidance of the private-public committee of
stakeholders and with input of intemational consultants (IC2 Institute of the University of Texas at
Austin (2001), "Master Strategyfor Armenia: Information and Communication Technology Industry"
May, 2001)
* The World Bank Information and Communication Strategy Paper (World Bank (2000), "Information
and Communication Technology (ICT) Sector Strategy Paper: Bridging the Digital Divide"
November 22, 2000, Draft). This project is consistent with the third objective of the Paper
(development of human capital)
3. Learning and Development issues to be addressed by the project:
3.1 Economic justification for the project
In Armenia, poor expectations keep investment low and the lack of investment leads to further negative
expectations. The profitability of an investment depends largely upon what happens elsewhere in the
economy. For investors this creates a sequencing problem known as "coordination failure". Although
everyone in the economy agrees that fundamentals are right yet no investment is undertaken. This is why
the first movers - firms and organizations that will make an initial set of investments - are critical for
changing expectations and attracting FDI.
For almost a decade FDI from the Diaspora was thought to be the main vehicle for lifting Armenia out of
its stagnation. Yet very little FDI materialized apart from some in infrastructure (telecom and gas
distribution) and natural resource processing. The enthusiasm for, and expectations of FDI in Armenia are
over-inflated.
As economic policies converge worldwide, FDI will be even more driven by competitiveness factors.
Modem integrated production clusters need few locations for the organization of production and core
services. This new reality, however, does not preclude the entry of new countries into high value-added
markets. But the country first needs to demonstrate its readiness and show its capabilities to implement
small projects through strategic alliances with external partners and through improvements in the business
environment.
-4 -

The El is designed as a first mover institution which would coordinate and accelerate the emergence of first
movers in other sectors of the economy by attracting local investors, donor community and FDI investors
(both from and outside Diaspora).
3.2 Economic rationale for project design
The IT cluster in Armenia represents a microcosm of the Armenian economy. That is why alleviation of
structural constraints in the IT cluster will create a powerful demonstration effect for the whole economy.
The following are some of the institutional rigidities which need to be addressed for this cluster to grow
from its current small size:
* An industry structure which discourages learning and innovation - The IT cluster is composed of three
types of companies: production units of foreign (usually Silicon Valley based) companies producing
inputs for software marketed by the head offices; companies producing for the local market and; small
informal project groups. None of these players has reached the critical mass of acquiring the
marketing, managerial and product design capabilities to capture the value-added generated by
development, marketing and sales of IT products or services. Hence the paradox of relatively qualified
human capital locked in low value-added activities.
* An educational system with few university-industry linkages and few incentives for staff to engage in
continuous leaming
Developing the human capital base
These institutional rigidities can best be overcome by developing the human capital base for the IT cluster.
The skills pyramid for software programmers has three segments:
* Top-level skills - small number of top programmers receiving a salary which is very high by
Armenian standards. This group used to be much larger, yet it was severely depleted by the recent
emigration;
* (Work Horse programmers) - These are people who undertake the basic programming tasks and they
constitute the bulk of current employment; and
* Young talent - university graduates. After a hiatus in the mid-90s, talent once again is being attracted
to careers in software programming rather than emigration or kiosk entrepreneurship. Arguably, this
youth segment constitutes the largest potential for an IT cluster development and thus this talent is the
major focus of the proposed project. Gainful employment of this segment within Armenia will likely
create a potent demonstration effect.
In order to develop the human capital base five constraints need to be ameliorated:
* Skills: emigration of people with top-level skills
* Business environment: high costs of doing business (security problems, petty corruption)
* Infrastructure: high cost of access to telecommunications (ArmenTel monopoly) and real estate
* Business linkages: lack of marketing, business contacts and expertise
* Finance: lack of commercial sources of finance to establish and run a software company
The proposed project seeks to address these constraints.
- 5 -

4. Learning and innovation expectations:
1 Economic FI Technical I Social X Participation
1 Financial 1 Institutional E Environmental X Other
a) Economic
The overarching expectation is that the project would facilitate Armenia's entry into the global
knowledge-based economy and reduce the brain drain. The project is expected to produce the following
economic effects:
Direct economic benefits: the incubator will facilitate company formation and growth and will hence
provide a demonstration effect powerful enough to attract FDI, to increase knowledge-based exports and to
reverse, or at least significantly ameliorate, the brain drain of human capital.
Indirect economic benefits: backward and forward linkages to other sectors of the economy. Increased
economic activity and FDI to the IT sector is likely to trigger restructuring in traditional sectors of
Armenian economy such as machinery, diamond-cutting and garment manufacturing.
b) Financial
The expected financial impact of the project is two-fold: (i) direct financial benefits - the companies
housed by the incubator will produce significant tax revenues; and (ii) indirect financial benefits - the
incubator would launch companies that, otherwise, would have remained in the 'informal sector' without
being accounted for in the tax base.
c) Institutional & Participation
The table below describes institutions to be piloted and related scaling up/exit strategy
Institution to be Piloted Success Factors Scaling up/ Exit strategy Strategy and
Issues
Acceleration of company Employment, investments, value The incubator grows into a private
growth through incubators added indicators sector organization upon completion of
this 3-year project. Other similar
Declining scale of public subsidies organizations emerge in other sectors of
as envisioned in the Business Plan the economy and in the IT cluster
Enterprise incubator as a Range and availability of business The incubator evolves into 'virtual
springboard for the market development services to firms incubator' or 'incubator without walls'
for business development increases. Enterprises begin to see to provide business development
services value in business development services to growing companies in the IT
consulting services cluster and to other sectors of the
economy
The incubator as a Increase in: (a) donor funds; (b) The incubator evolves into an FDI
coordination device to managerial knowledge through promotion organization and a crucial
accelerate investment of strategic alliances; and (c) FDI business link with the Diaspora and
donors, Diaspora and non-Diaspora investors
private investors
-6 -

Experience of other countries (India, Russia and Brazil) has shown that the benefits of the enterprise
development to be piloted by this project go beyond direct and indirect economic and financial effects.
Institutional benefits include:
* Creation of markets: The incubator will create a demand for business skill development services
(management consultancy services).
* Constituency for reform: The creation of a critical mass of reformed enterprises and enlightened
managers that would start reform constituencies in the areas of business environment, bankruptcy and
corporate governance.
* Youth development: IT firms would be established by young university graduates and high-paying
jobs would be created for graduates.
* Reversal of brain drain: The above four types of institutional effects are difficult to measure, yet they
are important in breaking out of the stagnation trap characterized by rudimentary institutions and
depressed private economic activity.
d) Other
It is expected that the project will have a wider social impact inducing behavioral changes in the technical
and investor commnunities. This will likely be imitated in otlher sectors of the society and the economy.
To assure that Learning and Innovations expectations are met, the project is designed to provide continuous
monitoring and evaluation feedback to the stakeholders through a set of development objective indicators.
Three sets of indicators will be monitored.
A. Productivity and skill development olutcomes: beneticiaries vs. a control group
A small survey involving both a control group of firms and firms belonging to the incubator will be
undertaken at the beginning of the project implementation and then every six months during the
implementation period. Diverging trajectories between the control group and the incubator firms (better
performance of the incubator firms) will be an indication that the incubator does provide useful business
and skill development services.
B. Demandfor, use by and cost recovery from beneficiaries of incubator's development services
The project offers an assistance package consisting of skills development and business development
services. Usage of this package and willingness of beneficiaries to pay for these services are important
indicators of success of the project. The project is designed on a matching fund principle: beneficiaries have
to pay part of the cost of the business and skills development services (managed work space is provided on
a partial cost recovery basis). Because of this link, progress in project disbursement is itself a success
indicator.
C. Leverage factor: co-investment in the incubator by' other donors, Diaspora and investors
One of the objectives of the project is the demonstration effect for donors and investors. The incubator is
designed as a collaborative model involving the private sector and the govemment/donors. The project is
designed in such a way that it is open to private financing (e.g. managed workspace) and financing of other
donors. The ability to leverage resources from other sources (USAID, Eurasia, Diaspora) is an important
indication of project success. The leverage factor: the ratio of total project costs to the Bank financing is
currently around 1.5 (7.6 divided by 5). The higher this leverage factor, the better the project performance.

4.1 Lessons learned and reflected in the project design
Lessons have been learned from the experience of incubators around the world. The following are the
factors considered critical in the success of an incubator.
In the U.S. the firms hosted in the incubator benefit not only from general business services support but
also from specific help in recruitment, marketing and legal issues. The management of the incubator thus
has to have access to a formal and informal nexus of professionals. In the developing environment, where
entrepreneurs are less familiar with basic concepts of business planning, more general business
development services are also needed.
The merit of an incubator lies in the access to the network of technology, academia, markets, suppliers and
financing that is weaved around an incubator. In the U.S. the infrastructure and the business development
part of the incubator is less important to the host companies. The real merit of establishing an incubator
lies in the credibility gained by going through the selection and screening process of entrepreneurs and by
benefiting from the business linkages of the incubator.
The performance of all the above factors depends upon the efficacy of the management of the incubator. A
lean and dynamic management team -- with the right combination of experience and entrepreneurship and
strong links to the market, technology and financial world -- is critical to the success of an incubator. Good
management is important in every business, but in the business of incubation it is critical.
A business incubator is about developing marketing and managerial linkages with customers. Hence high
intensity targeted assistance in business development is critical. The business development services that the
incubator provides need not be limited to the companies housed inside the incubator. Incubators 'with
walls' can evolve into 'incubators without walls' -- providing high-quality business development services to
any start-up firm. As an incubator evolves, it should acquire a more lean management structure,
subcontracting most of the services to a network of consultants.
The incubator in Armenia will initially host on-going enterprises instead of incubating start-up companies.
The task of the Armenian incubator will be to help in the growth of the existing companies and to try to
open to them business opportunities outside Armenia. Thus the critical factor of selection and review is
obviated and the incubator will be open to all qualified companies on a 'first come first served' basis.
C. Project Description Summary
1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost
breakdown):
There are two contrasting approaches to the design of an enterprise incubator project. One is to specify the
desired delivery mechanisms in every detail (e.g. curriculum for continuous education, the precise range
and pricing structure of business development services) and then make sure the stakeholders comply with
such detailed guidelines. The second approach is to create the "rules of the game" encouraging creativity,
experimentation and accountability on the part of the incubator management. The project design below
reflects the second approach.
-8 -

Component I: Managed Work Space - US$2.064 million.
Objective: to provide telecommunication infrastructure and office space for lease to all interested IT & high
tech. companies already operating or start-ups.
This component will finance physical rehabilitation and refurbishment of the building that would house the
incubator and: (i) Local Area Networks (LAN) with hi speed link to the Internet Service Provider (ISP)
and related communications hardware and software; (ii) hardware, software and services related to a
distance learning center; (iii) two classrooms equipped with computers and related teaching aids; (iv)
computers, cubicles and furniture; (v) 100-150 workstations; and (v) office equipment. This managed
work space facility will offer a modem office environment with the latest high speed telecommunication
links vital to the IT and software companies. Through economies of scale, the managed work space will be
able to provide the local companies with a 2 MB intemet connection which is too costly for individual
firms.
The office space will be offered to local companies that meet the criteria of: (i) ownership - preferably
local; (ii) size - small to medium; (iii) business preference - first preference to IT/software companies and
(iv) availability of business plan and managed workspace exit strategy followed by other high tech
companies. The preselected companies will be offered space on a first come first serve basis at a rental
price in line with the market conditions and at a level to make the managed work space self-sustaining at
the end of the project implementation cycle.
Component Il: Business linkages services: Business Services Center -- US$3.507 million.
Objective: to provide business development services to interested clients, mostly locally owned software
companies with typically poor management and marketing skills.
The Business Services Center will become instrumental in promoting the Armenian IT industry to potential
investors and business partners. One of the main tasks will be the establishment of business connections
between the local IT companies and foreign investors and clients. It will also counsel managers and the
specialists in the areas of business proposals development and human resources management.
The Business Services Center will also manage the Marshall Plan placement of managers and senior
specialists of Armenian owned software companies into similar IT companies and incubators in already
developed IT clusters in Europe, Asia and the U.S. This component will assure the continuation of the
current market demand for IT skills and will finance: (a) the costs of consultants who will develop the
skills of Business Services Center's staff in the area of business plan formulation and building the pipeline
of orders for Incubator tenants; (b) operating costs of the Business Services Center until such time as the
Center is self-sufficient; and (c) the costs of placement of company managers and senior staff into
countries/regions with export oriented IT sectors.
Company growth will increase the demand for management training and the need for more customers and
suppliers from more developed market economies. Successful management training, including placement of
Armenian managers into foreign companies ('Marshall Plan'), financed by this component will radically
increase effectiveness of firms' growth work and performance of companies.
In this component, the El will design, subcontract and supervise in-house training courses for selected
candidates including: study of one major commercial language, computer skills (word processing,
-9-

spreadsheet, presentation package, Internet), and basic management and business communication skills. It
is expected that approximately 100 participants will complete these introductory courses, from which
candidates will be selected for secondment to selected foreign firms to see how skills, organization and
technology are combined to respond to the continuously changing market demands. Candidates will be
required to complete a rigorous and demanding work program. To ensure transparency, the final
secondment assignments will be made by a Selection Committee representing the El, the Government,
self-regulating consulting organizations, as well as leaders of the banking and enterprise sectors. To
minimize costs and maximize the synergy effect, participants will be required, upon the completion of their
consultant training and secondment programs, to proactively contribute to disseminating their knowledge
and experience to the business community at large. Participants will be organized into groups which will
consist of up to three members visiting the same host firm. For training purposes, two to four groups can
be combined. The targeted participants are medium-to-senior-level managers of private enterprises with a
strong motivation to learn. They must have basic competency in English or another commercial language,
basic computer skills and knowledge of management techniques or they could have successfully completed
Block I training. Eligible firms willing to designate managers for the Program have to be without any
overdue obligation to the state budget, or privatized firms in the process of restructuring. The participating
firms would be expected to cover all local costs during the first and the last blocks of training.
Component III: Skil development services: SkiUs Development Facility -- US$0.906 million.
Objecdve: to provide on-demand technical training for Incubator tenants as well as for any other
interested client, including university undergraduate, and graduate students.
The primary role of the facility will be to introduce advanced models of continuing IT professional
education through organizing supplementary professional training programs. These models would ensure a
sustainable and permanent supply of qualified technicians and managers for companies. Another priority
would be to provide extensive knowledge support to newly emerging business entities. Particular attention
will be given to companies or workgroups organized by young IT professionals. In order to meet the
objective stated above, the Skills Development Facility will cooperate with both state and private
training institutions in Armenia and abroad.
This component will also provide entrepreneurship grants (pre-seed money and grants) to IT professionals
and students to help them turn their ideas into business ventures. The grants will cover the initial
investment cost of the venture and the expenses of the entrepreneur during the start-up stages of the
business.
The Skills Development Facility will target three groups of clients. The skills development/education
strategy will differ slightly for each client group depending on priorities and immnediate needs assessment:
Group A: Students of public and private training establishments
This strategy would focus on empowering future young managers and technology specialists by
creating links between groups with different (but related) professional backgrounds.
Group B: Managers and top-level technical staff of local IT companies
The incubator will provide distance education services, under which western educational
institutions will develop and deliver specific skill develop modules chosen on the basis of a local
needs assessment.
- 10 -

Group C: Qualified technicians with IT background
This client group will include adult professionals whose background and experience in the IT
related areas of technical knowledge is not currently demanded in the local market. Skill
development activities for group C will include training modules and seminars designed in
cooperation with the local and foreign private training institutions. Training modules will include
courses in;
* Algorithmic Analysis
* Computer Architecture
* Professional Practice
* Operating system and Networking
* Capstone Project
* CAD design, etc.
Component IV: IT Business Surveys - US$0.300 million
Objective: to biannually monitor the regulatory environment for the IT cluster firms. This will be done to
assure the formation of constituencies for reform in the business environment. The surveys of business
environment will cover the following main groups of indicators:
1) Business registration - cost (cost includes formal and informal types of
payments and contributions, including bribes), procedures required, delays encountered
2) Business licensing - number and type required, cost, time and payments required
3) Obtaining business premises - procedure, costs, constraints, delays
4) Import and Export regulation, Customs - procedures, costs, delays
5) Product, input and equipment certification - types, incidence, procedures, costs, delays
6) Tax administration - requirements, constraints, costs, number of taxes and forms
7) Business inspections - types (and agency responsible), costs, number, process followed
8) Patent practices
Component V: Project Implementation and Monitoring Unit (PIMU) - US$0.200 million
Objective: to provide financial, accounting and procurement support to the project. This component will
provide administrative support to the incubator units including: assistance in preparation of the Terms of
Reference (TORs), selection of consultants/experts when necessary, procurement of goods , services and
works , supervision of work progress and intermediation in case of conflict. The PIMU, - in close
collaboration with the Incubator -- will be responsible for supervising loan accounting, procurement,
disbursements, financial management reports and arranging annual project audits, as well as supplying the
auditors with all documents and reports necessary to perform their tasks.

Indicative Bank- % of
Component Sector Costs % of- ffnancing Bank-
(US$M) Total (US$M) financing
I. Managed Work Space (Private Institutional 2.06 29.5 1.00 22.7
sector development) Development
II. Business linkages services: Business Institutional 3.51 50.3 2.10 47.6
Services Center (Private Sector Development
Development)
III. Skill development services -- Skills Institutional 0.91 13.0 0.81 18.4
Development Facility (Human Development
Resource Development)
IV. IT Business Surveys (Private Institutional 0.30 4.3 0.30 6.8
Sector Development) Development
V. Project Implementation and Institutional 0.20 2.9 0.20 4.5
Monitoring Unit (PIMU) (Institutional Development
Development)
Total Project Costs 6.98 100.0 4.41 100.0
Total Financing Required 6.98 100.0 4.41 100.0
Total Financing Required excludes US$0.488 million of Physical Contingencies (7.5% of the Total Project Cost) and
US$0.098 million of Pnce Contingencies (1.5% of the Total Project Cost).
2. Institutional and implementation arrangements:
a) Flow of Funds and Legal Agreements:
The IDA credit will be provided to the GOA, represented by the Ministry of Finance and Economy
(MOFE). The credit will carry the standard IDA fees, grace period and maturity schedule. This
transaction will be documented in the Development Credit Agreement (DCA) signed by the Bank and the
GOA. The MOFE through the agency of the PIMU, an organization under the supervision of the
Executive Director, Foreign Financing Projects Management Center (FFPMC), MOFE, will pass the
proceeds of the credit on a grant basis to the EI. This transaction will be documented in the
Implementation Agreement (IA) signed between the MOFE and the authorized representatives of the El.
This document will define the objectives, role and responsibilities of the El as a recipient of the grant. This
document will also delineate the fiduciary principal-agent relationship between the El and the PIMU.
b) Project Implementation and Fiduciary Functions:
The El will be responsible for the implementation of the project as outlined in the Implementation
Agreement. The fiduciary functions of the El including procurement, disbursement, accounting, auditing
and external reporting, will be carried out jointly by the El and the PIMU in accordance with the policies
and guidelines of the Bank and as outlined in the Financial Management Procedures Manual (FMPM) and
the Project Implementation Plan (PIP). The Financial Management Procedures Manual and the Project
Implementation Plan will form an integral part of the Implementation Agreement. The PIMU will continue
to collaborate in performing the fiduciary functions of the El until the stage when the latter has developed
sufficient capacity of its own to assume these functions. At such stage, and no later than the closing of the
project, the PIMU will be releived from its fudiciary functions and all its relevant functions will be
incorporated within the El itself.
- 12 -

c) Legal Status and Structure of the Incubator:
The El will be registered as a non-profit, NGO as a 'Fund' under the civil code of Armenia. The El will
receive its charter and will be supervised by a Board of Trustees representing the stake holders in the El.
The El will be advised by an outside Board of Advisors selected among others from the international and
local academia, business and professional community. The Executive Director will carry out the day to
day functions of the Incubator including hiring and firing of the incubator staff, contracting outside
resources, maintenance of property and all other functions necessary to effectively realize the objectives of
the project.
d) Project Cycle and Project Completion:
The project is designed for a three year cycle. During the three year cycle the credit primarily finances the
initial costs of investment to refurbish and equip the physical premises of the project and the costs to
provide business and educational services (consulting costs). To sustain the activities of the incubator as
an independent entity the project also partly finances the overhead and recurring costs of the project such as
staff salaries, on-going maintenance and utilities. The user fees finance the rest of the overhead and
recurring costs. The IDA credit finances these recurring costs as a special limited-time kick-of subsidy
which is a critical part of the broader package to make the project sustainable. These recurring costs are
financed by the project only on a declining basis and at the end of the three year project cycle the incubator
is expected to cover its entire operating costs from user fees without any explicit subsidy from the GOA or
the Bank. Beyond the three year project cycle the incubator will continue its operations as a non-profit
NGO as per its charter and per the directions set by the incubator's Board of Trustees.
e) Financial Management and Auditing:
A Bank consultant working on the financial management issues visited the PIMU to carry out the financial
management assessments required under IDA/IBRD policy. The consultant discussed and explained to the
project coordinator, and to the staff of the PIMU, the IDA/IBRD policies and procedures regarding project
financial management, including accounting, reporting, project monitoring and audit. The PIMU works
under the supervision of the Executive Director, Foreign Financing Projects Management Center of the
Ministry of Finance and Economy. The latter is an established entity, and was a PIU for a number of Bank
financed technical assistance credits. The Financial Management Procedures Manual and the Chart of
Accounts for the project were compiled by the PIMU and sent to the IDAIIBRD for its 'no objection.' The
extemal audit will be contracted with an independent auditing firm acceptable to the IDA/IBRD and carried
out in accordance with Terms of Reference provided by the IDA/IBRD. As required by IDA/IBRD
Operational Policies, annual financial audit reports will be furnished to the IDA/IBRD within six months
from the end of each fiscal year. During project negotiations, the IDA/IBRD FMS staff will confirm with
the borrower's and the PIMU's representatives, the form and content of financial accounting and reporting
arrangements previously agreed with the borrower and the project implementing entities.
- 13-

WORLD BANK
GOVERNMENT OF ARMENIA
MOF
PIMU
ENTERPRISE INCUBATOR
Development Credit Agreement
Implementation Agreement
Board of Trustees -----------------
-Advisory
Management
Executive Director
Managed Work Business Skills
Space Development Development
Center Facility
3. Monitoring and evaluation arrangements:
Project Implementation Structure
Board
The El and the PIMU will supervise the project with an ICT-based monitoring and evaluation system,
which is being designed. The system has five modules: (i) management and monitoring by component; (ii)
output and impact evaluation; (iii) document management; and (iv) administrative and financial
management and (v) technical assistance and training through the use of ICT systems .
(i) Management and Monitoring by Component including collection, systematizing and analysis
of the information/status reports received from the project components, follow up on project work schedule,
- 14 -

ensuring its timely implementation and making adjustments to action plans as necessary. The El and the
PIMU will coordinate project component's operational work, ensure constant information exchange thus
creating a synergy of actions, maximizing Incubator summary impact on the IT sector as a whole.
(ii) Output and Impact Evaluation producing periodic performance reports on Skills Development,
Business Services and Managed Workspace services based on results of surveys among Incubator clients
and counterparts. The monitoring and evaluation system includes three types of reports: (a) Operational
Reports of each component to be prepared according to the performance monitoring indicators; (b) a
Mid-term Evaluation Report incorporating beneficiaries' views to be prepared at the end of the first year
and a half and disseminated to all the stakeholders, private sector and civil society; and (c) an Impact
Evaluation Report to be produced at the end of the third year consisting of results from the beneficiary
assessment and main lessons leamed that would be disseminated among national and local counterparts.
D. Project Rationale
[This section is not to be completed in a LIL PAD. Rationale should be implicit in paragraph B: 3.]
E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)
1. Economic (see Annex 4):
[For LIL, to the extent applicable]
O Cost benefit NPV=US$ million; ERR = % (see Annex 4)
O Cost effectiveness
* Other (specify)
2. Financial (see Annex 4 and Annex 5):
NPV=USS million; FRR = % (see Annex 4)
[For LIL, to the extent applicable]
3. Technical:
[For LIL, enter data if applicable or 'Not Applicable']
4. Institutional:
4.1 Executing agencies:
None expected
4.2 Project management:
None expected
4.3 Procurement issues:
None expected
4.4 Financial management issues:
None expected
- 15-

5. Environmental: Environmental Category: C (Not Required)
5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including
consultation and disclosure) and the significant issues and their treatment emerging from this analysis.
The project is not expected to have any significant impact on the environment. The incubator will adhere to
standards for environmentally sound investment criteria.
5.2 What are the main features of the EMP and are they adequate?
5.3 For Category A and B projects, timeline and status of EA:
Date of receipt of final draft:
5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA
report on the environmental impacts and proposed environment management plan? Describe mechanisms
of consultation that were used and which groups were consulted?
5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the
environment? Do the indicators reflect the objectives and results of the EMP?
6. Social:
6.1 Summarize key social issues relevant to the project objectives, and specify the project's social
development outcomes.
n/a
6.2 Participatory Approach: How are key stakeholders participating in the project?
Primary beneficiaries are exiting and potential local entrepreneurs in the IT/software sector. Similarly, the
academic community, both the teachers and the students, are the beneficiaries of the project. There are no
groups adversely effected by the project.
6.3 How does the project involve consultations or collaboration with NGOs or other civil society
organizations?
n/a
6.4 What institutional arrangements have been provided to ensure the project achieves its social
development outcomes?
n/a
6.5 How will the project monitor performance in terrns of social development outcomes?
n/a
- 16 -

7. Safeguard Policies:
7.1 Do any of the following safeguard policies apply to the project?
Policy Applicability
Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) 0 Yes * No
Natural Habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes * No
Forestry (OP 4.36, GP 4.36) o Yes 0 No
Pest Management (OP 4.09) O Yes 0 No
Cultural Property (OPN 11.03) O Yes * No
Indigenous Peoples (OD 4.20) 0 Yes 0 No
Involuntary Resettlement (OD 4.30) 0 Yes * No
Safety of Dams (OP 4.37, BP 4.37) 0 Yes * No
Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes * No
Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* 0 Yes * No
7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.
F. Sustainability and Risks
1. Sustainability:
This section is not to be completed in LIL PAD.
2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex l):
Risk Risk Rating Risk Mitigation Measure
From Outputs to Objective
Willingness and ability of stakeholders to M Complete participation and coaching of all the
learn from the project experience stakeholders through the development of IT
Cluster Master Plan
Readiness of learning and monitoring N Flexibility and simplicity of tools
tools
From Components to Outputs
Selection of advisors and general manager M Management of the project by industry
to run the project personnel until full time management is found
Sufficient participation of beneficiaries M
Overall Risk Rating M
Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)
From the financial management perspective, the El is considered a moderate-risk project. The
implementing agency has a good track record of project managements with other Bank projects. The audit
- 17 -

eports for the Private Sector Development Project and other WB projects implemented by the Foreign
Financing Projects Management Center of the Ministry of Finance and Economy were unqualified; they
revealed no discrepancies in financial reporting of the entity. Among the reasons for rating the project as a
moderate-risk are: (i) public perception of corruption in use of public funds, (ii) Government's track record
in slow and delayed award of contracts.
3. Possible Controversial Aspects:
None Expected
G. Main Credit Conditions
1. Effectiveness Condition:
1. Signing of the Implementation Agreement between the Borrower and the El.
2. Appointment of the Auditors
2. Other [classify according to covenant types used in the Legal Agreements.]
(1) Board Condition:
Establishment of the El as an independent legal entity.
(2) Disbursement Condition:
Disbursement against the following categories will be contingent upon establishment of financial
management system by the EI acceptable to the IDA/IBRD:
Works; and
Entrepreneurial Grants (Pre-seed money and grants)
(3) Audit covenants:
The Bank requires Borrowers and PIMU to submit annual audited financial statements to the
IDA/IBRD as soon as possible but normally no later than six months after the end of each fiscal year. In
addition, there are stipulated actions to be taken in the event of noncompliance, before the IDA/IBRD can
suspend disbursements (see OP/BP 10.02).
H. Readiness for Implementation
[ 1. a) The engineering design documents for the first year's activities are complete and ready for the start
of project implementation.
D2 1. b) Not applicable.
X 2. The procurement documents for the first six months' activities are complete and ready for the start of
project implementation; and a framework has been established for agreement on standard bidding
documents that will be used for ongoing procurement throughout the life of LIL
Z 3. The LIL's Implementation Plan has been appraised and found to be realistic and of satisfactory
quality.
El 4. The following items are lacking and are discussed under loan conditions (Section G):
- 18 -

1. Compliance with Bank Policies
X 1. This project complies with all applicable Bank policies.
L 2. The following exceptions to Bank policies are recommended for approval. The project complies with
all other applicable Bank policies.
Vladimir G. Kreacic Paul Siegelbaum; CSPF Judy O'Connor; ECCO3
Team Leader Sector ManagerlDirector Country ManagerlDirector
- 19-

Annex 1: Project Design Summary
ARMENIA: Enterprise Incubator - LIL
More information on Logframes
Key PerFormance Data Collection Strategy
Hierarchy of Objectives Indicators Critical Assumptions
Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)
Foster the rapid Investments, exports, Annual GOA statistics on Macroeconomic and social
development of the private employment in the economy commercial registration, stability in the country
sector exports, investments and job
creation
Follow-on Development
Objective:
Improvement of investment *Decrease of administrative Surveys of business Continuation of economic
environment and facilitation barriers for investments environment reform to improve
of economic reforms .Decrease of regulatory Surveys of stakeholders business environment
burden for enterprises (enterprises, students and Deregulation and reduction
*Increased tax receipts from other trainees) performance of administrative barriers
and job creation in existing
enterprises
*Creation of start-ups and
spin-offs
- 20 -

.ierarchy of Objectives Key Performance Data ColectIon Strate9y
H!i iarch of Objectives Indicators I Critical Akssumptions
Project Development Outcome I Impact Project reports: (from Objective to Goal)
Objective: Indicators:
To provide demonstration Business linkages outcomes Yearly survey of business Development of coalitions for
effect of company Exports by firms environment for firms df IT economic reform
development in inhospitable Productivity outcomes cluster
business environment. Increase in export and FDI . Yearly surveys of performance Insulation of the enterprise
(Employment-creation/ Number of contracts signed of assisted firms incubator from government
productivity objective). with foreign companies. Yearly surveys of Business interference
Number of CCMM certified Services Center clients
companies
Increase in sales and financial
profitability (% per employee,
% of an international
benchmark)
Adoption of ISO 9000
standards
Behavioral outcomes
New products introduced
New clients acquired
Process (buyer-supplier
collaboration) outcomes
Sharing technology among
firms
Linkages with universities
and advisory institutions
Business Linkages with
non-IT companies
To attract FDI in IT-related Amount of FDI
manufacturing Number of visits by potential
foreign investor
To pilot demand-driven Skill upgrading impact:
delivery of IT-related services Number of self-starters
of continuous upgrading of students/company trainees
skills (skills upgrading receiving placements in the
objective country.
Career positions of re-trained
adult professionals, and young
start-ups and:
Government
Management in Armenian
companies
Management of foreign
companies in Armenia
Carrier positions abroad
(temporary brain drain)
- 21 -

Key Perforimance Data Collection Strategy
Hierarchy of ObIectIves J Indicators Critical Assumptions
Output from each Output Indicators: Project reports: (from Outputs to Objective)
Component:
Establishment of Managed Occupancy rate per sq. Yearly activity reports. Readiness of learning and
Work Space for companies meter Audited financial monitoring tools (enterprise
Occupancy rate per number statements. surveys, surveys of business
of companies Progress report from the environrnent)
Percentage of income monitoring unit.
coming from non-tenants
Formation of the Business Number of firms received Audited accounts of the Willingness and ability of
Services Center assistance managed work space and key stakeholders (enterprise
communications unit managers, educational
Ratio of training and organizations and the
consultancy services Result reports from the government) to learn from
received financed by Business Services Center the project experience and
beneficiaries. detailing successful act on the lessons learned
investment, contracts, and
Beneficiaries per programs personnel secondment
activities
Number of beneficiaries of
twining arrangements
abroad, percentage of
beneficiaries returned
Establishment of the Skills Measure of excess demand:
Development Facility number of applicants per
available skills development
slot.
Setting up of Project
Implementation and
Monitoring Unit (PIMU)
Number of trainees
Persons trained by types of
programs.
- 22 -

Hierarchy of Objectives
Key Performance
Indicators
Data Collection Strategy
I Critical Assumptions
Project Components I lnputs: (budget for each Project reports: (from Components to
Sub-components: component) Outputs)
I. Managed Work Space US$2.064 million Disbursement reports Selection of advisors and
general manager to run the
center
2. Business Development
Center
US$3.507 million Project reports
3. Skills Development US$0.906 million Audit reports Sufficient participation of
Facility Audited financial statements beneficiaries
4. IT Business Surveys US$0.300 million Quarterly supervision
reports
5. Project Implementation US$0.200 million
and Monitoring Unit
(PIMU)
- 23 -

Annex 2: Detailed Project Description
ARMENIA: Enterprise Incubator - LIL
The Enterprise Incubator will focus on nascent companies engaged in high value added activities with a
particular emphasis on the software cluster. This is a very dynamic, growing and constantly changing
cluster. The Enterprise Incubator will be able to rapidly stimulate growth to satisfy the current high
demand of IT specialists, and help level the playing field between the domestic and foreign owned software
SMEs. The client base of the Enterprise Incubator will consist of two types of companies: IT companies
and other technology companies which meet the criteria for participation.
The project components primarily finance the initial costs of investment to refurbish and equip the physical
premises of the project and the costs of providing business and educational services (consulting costs). To
sustain the activities of the Incubator as an independent entity the project also partly finances the overhead
and recurring costs of the project such as staff salaries, on-going maintenance and utilities. The user fees
finance the rest of the overhead and recurring costs. The IDA credit finances these recurring costs as a
special limited-time kick-of subsidy which is a critical part of the broader package to make the project
sustainable. These recurring costs are financed by the project only on a declining basis and at the end of
the three year project cycle the Incubator is expected to cover its entire operating costs from user fees
without any explicit subsidy from the GOA or the Bank.
The project consists of four components: (i) Managed Work Space; (ii) Business Services Center; (iii)
Skills Development Facility; and (iv) Project Implementation and Monitoring Unit.
By Component:
Project Component 1 - US$2.06 million
Managed Work Space
Objective: to provide telecommunication infrastructure and office space for lease to all interested IT
companies - domestic and foreign, already operating or start-ups.
This component will finance physical rehabilitation and refurbishment of the building facilities as well as
(i) the Local Area Network (LAN) with hi -speed connection to the Intemet Service Provider (ISP) and
related communications hardware and software; (ii) hardware, software and services related to distance
learning center; (iii) two classrooms equipped with computers and related teaching aids; (iv) computers,
cubicles and furniture; (v) workstations and (v) office equipment. This managed work space facility will
offer a modem office environment with the latest high speed telecommunication links vital to IT and
software companies. Through economies of scale, the managed work space will be able to provide the
local companies a 2 MB internet connection which is currently too costly for individual firms.
The office space will be offered to local companies that meet certain preferential criteria: (i) locally owned
companies; (ii) small to medium in size; and (iii) IT/software companies given first preference, firms in
other high tech fields will be considered on a space available basis. The companies selected to participate
will be offered space on a first come, first serve basis at a rental price in line with market conditions and at
a level to make the managed work space self-sustaining at the end of the project implementation cycle.
The Managed Work Space Component will be made up of two sub-components: Administration &
Operations (AO) and Technical Support (TS). In the initial stage of the project, AO will rehabilitate and
maintain building and facilities with the procurement function to be performed in accordance with the
technical requirements developed in consultation with the TS specialists, given the nature of the project and
- 24 -

necessity to accommodate high technology equipment in the workspace. At the later stages of the project,
AO will be responsible for procurement, office maintenance and logistics support to all other components
of the Incubator and will process financial transactions related to the activities implemented by all
Enterprise Incubator components. This will include liaising with banks and other financial structures as
necessary, and produce financial and asset control reports. Disbursement monitoring of AO will be done in
the Project Management Component.
The TS sub-component will incorporate a wide range of activities related to the technical establishment,
maintenance and administration of the LAN, the high speed data connection and web activities both for
the Enterprise Incubator and client companies if necessary. TS will have an advisory role in procurement
issues related to the acquisition of EDP and office equipment, and in such other areas where technical
expertise is required
Project Component 2 - US$3.50 million
Component II: Business Services Center - business linkage services
Objective: to provide business development services to interested clients, primarily to locally owned
software companies which lack sufficient management and marketing skills.
The Business Services Center shall become instrumental in promoting the Armenian IT industry to
potential investors and business partners. One of the main tasks will be the establishment of business
connections between local IT companies and foreign investors and other potential clients, as well as
counseling of managers and leading specialists of LITC in the areas of business proposals development and
human resources management.
An important part of this component will be the establishment of a dual connection between Armenian IT
industry members and Westem partners to find a suitable marketing niche for Armenian IT products
(supply - demand conversion ) and to orient IT companies towards products highly demanded by the clients
(demand - supply conversion).
The Enterprise Incubator will ensure sufficient public awareness of all activities of this project, and
coordinating media publicity to ensure potential partners are reached. This will be done through the Web
site, and public events including conferences, round table discussion, workshops and job fairs, and through
the use of the print and broadcast media. The promotion and marketing program will be coordinated with
similar activities co-funded by the private sector to maximize synergy and output. Incubator shall work
towards the maximum. For this purpose the Incubator shall undertake the fundraising activites among
foreign investors / Diaspora venture funds with the aim to create Venture Fund for local IT start ups
/ exisiting companies, as well as for establishment of overseas representation for promotion of
Armenian software producers.
The Business Services Center will also manage the Marshall Plan placement of managers and senior
specialists of Armenian owned software companies into similar IT companies and incubators in already
developed IT clusters in Europe, the US and Asia. This component will assure continuation of the current
market demand for IT skills and will finance: (a) the costs of consultants, who should train Business
Services Center staff to develop business plans and build the pipeline of orders for Incubator tenants; (b)
operating costs of the Business Services Center until such time as the Center is self-sufficient; and (c) the
costs of placement of company managers and senior staff into countries/regions with export oriented IT
sectors. The following is a sample model summarizing the Marshall Plan activities.
- 25 -

Notes Actions/Steps
Target: Managers/ owners of local IT Trip 1: Secondment to IT Incubator
Companies. (duration 4 weeks)
Preferable to send groups of 3-4 people focusing WEEK #1: Two-day induction course, including
on a different spheres of IT. an introduction to Incubator activities,
Prerequisites: information on the general situation in IT
English - good command. industry in the country.
Computer skills - Excel, Word, Power Point. The entire group will receive:
At least one year managerial experience. a briefing about the IT sector, areas of specialization
Each manager will submit a company information in the country, existing players; and
package and draft proposal to potential partners. a three-day Business Ethics course.
Characteristics of trips: WEEK #2: Entire group receives an
I st trip - educational. introduction to IT companies belonging to the
2nd - educational/business. relevant specialization, and will spend at least
3rd - business. one full day in each company.
Between trips: WEEK #3: Training courses in management,
Consulting services will be provided to each marketing, finance, law and benchmarking.
company from the Business Services Center. WEEK #4: Practical work on a business
Companies will have time to seek clients through proposal, as well as inteming in the marketing
internet and incubator links, and if necessary staff department of one of the IT companies.
should receive training via the training facility. Deliverables:
[Contacts acquired through the Web will be utilized Business proposal, company information
in planning the third trip.] package,
Company should work to develop a web-page Knowledge Sharing Round Tables at Business
with banners on websites. Center.
Funding by the Business Services Center: Trip 2: Secondment to IT Company
I trip - All expenses covered except (duration 2 weeks)
transportation, travel tickets. Intemship, briefings about current activities,
2m trip - Intemship fee to IT Company, Incubator strategies.
fee for presentation organization and Additional activity: Two types of presentations
accommodation. of business proposal packages to a number of
3 rd trip - Incubator fee. IT Companies and to potential customers.
Type of companies for internship: Negotiations, feedback.
Second trip intemships will be at larger companies Trip 3: Partner Incubator (duration: 2
in order to teach organizational, financial and weeks)
managerial skills along with technical skills and Partner Incubator and local Business Center will
develop contacts. design a program to fit each Manager:
Marketing presentations of company and its
products to various firms, potential clients and
consumer groups to secure contracts for
products and/or services.
Deliverable:
By completion of the third trip, the company
manager should have a clearly defined marketing
strategy.
- 26 -

Project Component 3 - US$ 0.91 million
Component III: Skill Development Facility - skill development services
Objective: to provide on-demand software development training for Incubator tenants as well as for any
other interested client, including university undergraduate and graduate students.
The primary role of the facility will be to introduce advanced models of continuing IT professional
education through organizing supplementary professional training programs This models would
work towards ensuring a sustainable and permanent supply of qualified technicians and managers for
companies. Another priority direction would be providing extensive knowledge support to newly emerging
business entities. Particular attention will be given to companies or workgroups organized by the young IT
professionals. In order to meet the objective stated above, the Skills Development Facility will cooperate
with both state and private training institutions in Armenia and abroad.
The Skills Development Facility will target the three groups of clients. The skills development/education
strategy will differ slightly for each client group depending on priorities and immediate needs assessment.
Group A: Students/postgraduates of technical and economics departments of universities
This strategy would focus on empowering future young managers and technology specialists by
creating links between groups of different (but related) professional backgrounds (e.g. economists
and programmers) via joint skills development events, seminars and round tables as well as other
suitable activities. Another challenge would be involving young specialists in on the-spot business
activities organized jointly with either the University, the Business Linkages Service or IT
companies. These events would be hosted by the Incubator. As part of the continuous education
concept aimed at promoting University-Business links, new educational modules will be introduced
at the Skills Development facility for inclusion into the regular university curriculum to build up
Incubator clients' professional skills. Training modules might in due course be accepted at public
and private educational institutions for inclusion in their training programs.
Group B: Managers and top-level technical staff of Local IT companies
The Facility will provide distance education services, under which western educational institutions
will develop and deliver specific skills development modules chosen on the basis of a local needs
assessment. The Facility will invite experts to teach certain skills like team building, business
planning, proposal writing, etc. to local specialists. Members of Group A may also participate in
these training sessions.
Group C: Qualified adult technicians with the IT related background in need of retraining
University professors and lecturers and other teacher/trainers
This client group will include adult professionals whose background and experience in the IT related areas
of technical knowledge is not currently demanded in the local workforce market. Professors and lecturers
of educational and training institutions will participate in sessions for "training trainers". These sessions
will help upgrade skills of local teachers/trainers so they can eventually replace international experts. Skill
development activities for group C will include training modules and seminars designed in cooperation with
- 27 -

the local and foreign private training institutions. Training modules will be organized starting from the
beginner level. At the advanced stage group C clients will participate in the activities conducted for groups
A and B. Wherever possible, SDF will cooperate with local IT learning centers. SDF will develop
innovative training modules, no previously available in Armenia. The selection of innovative topics will
take place in consultation with the foreign experts in IT training areas and bearing in mind the current
knowledge of Armenian technicians. During the initial phase the curriculum of the Skills Development
Facility will consist of several core IT course including:
* Algorithmic Analysis
* Computer Architecture
* Professional Practice
* Operating system and Networking
* Capstone Project .
* CAD Design
etc.
Advanced studies courses will have narrower focus and will be offered to homogeneous groups of
trainees sharing the same background. The advanced courses will be organized at the request of local IT
companies and will be team-taught , utilizing one person (trainer) from the Skills Development Facility
and an invited expert.
On a regular basis the Skills Development Facility will offer courses in the areas of network architecture
and organization, programming, graphics and visual computing, etc. The Facility will also make its
classrooms and training facilities available for lease to clients (software companies) for specific in-house
training, as well as organize competitive grant programs to provide seed money for university graduates to
set up companies. The costs of this will be financed out of the resources of this component, which will
include costs of short-term training courses, distance education leaming programs, compensation for
lecturers, and management of the seed grant program.
Project Component 4 - US$0.30 million
Component IV: IT Business Surveys
Objective: to biannually monitor the regulatory environment for IT cluster firms. This will be done to
assure the formation of constituencies for reform of the business environment and to supply them with
relevant information. The survey of business environment will cover the following main groups of
indicators (full description of the survey methodology available in project file):
1) Business registration - cost (cost includes formal and informal types of
payments and contributions, including bribes), procedures required, delays encountered
2) Business licensing - number and type required, cost, time and payments required
3) Obtaining business premises - procedure, costs, constraints, delays
4) Import and Export regulation, Customs - procedures, costs, delays
5) Product, input and equipment certification - types, incidence, procedures, costs, delays
6) Tax administration - requirements, constraints, costs, number of taxes and forms
7) Business inspections - types (and agency responsible), costs, number, process followed
8) Patent procedures
- 28 -

Project Component 5 - US$0.20 million
Component V: Project Implementation and Monitoring Unit - PIMU
Objective: to provide financial , accounting and procurement support to the project.This component will
provide administrative support ot the incubator units including: assistance in preparation of the Terms
of Reference, selection of consultants/experts when necessary procurement of goods, services and works
, supervision of works.progress and intermediation in case of conflict. The PIMU in close
collaboration with Incubator will be responsible for supervising loan accounting , procurement,
disbursements , financial management reports and arranging annual projects audits , as well as
supplying auditors all documents and reports necessary to perform their tasks.
This component will provide administrative support to the Incubator units including: assistance in
preparation of Terms of Reference (TORs), selection of consultants/experts when necessary, supervision
of work progress and deliverables and intermediation in cases of conflict. The Project Implementation and
Monitoring Unit will be responsible for loan accounting, disbursements, financial management reports and
arranging annual project audits, as well as supplying auditors with all documents and reports necessary to
perform their tasks.
The Project Implementation Management Unit (PIMU) will use an innovative ICT-based monitoring and
evaluation system, which is being designed. The system has five modules: (i) management and monitoring
by component; (ii) output and impact evaluation; (iii) document management; (iv) administrative and
financial management; and (v) technical assistance and training through the use of ICT systems. To
maximize leaming for all participants, a project web page is being designed to provide information on
project advances and lessons leamed, and to address technical, financial and management issues that have
arisen during implementation. There will also be a mid-term evaluation and workshop to discuss the
progress, problems, and lessons of the project. The design of the planned mid-term review by component is
provided below.
Midterm Evaluation of Skills Upgrading and BSC Components. A midterm evaluation will be held to
determine the actions needed to strengthen the BSC component's institutions, products, and activities, and
expand the outreach of the extension facility. This evaluation will include a comparison of original
projections and actual levels of achievement in terms of the number of active clients, dropouts, adjusted
profitability, and the implementation of new financial management and control systems for each institution.
Baseline information will be collected upon project launch through a survey
Reports
The monitoring and evaluation system includes three types of reports: (a) Operational Reports of each
component to be prepared according to the performance monitoring indicators; (b) a Mid-term Evaluation
Report incorporating beneficiaries' views to be prepared at the end of the first year and a half and
disseminated to all the stakeholders, private sector and civil society; and (c) an Impact Evaluation Report to
be produced at the end of the third year consisting of results from the beneficiary assessment and main
lessons learned that will be disseminated among national and local counterparts.
- 29 -

Annex 3: Estimated Project Costs
ARMENIA: Enterprise Incubator - LIL
Project Costs by Component (US$ million) Local Foreign* Total
1. Managed Workspace $0.450 $1.614 $2.064
a) Acquisition and renovation of office space, Refurbishment $0.450 $0.786 $1.153
of office space with; (i) Local Area Network (LAN) with optical
cable link to the Internet Service Provider (ISP) and related
communications hardware and software; (ii) hardware, software
and services related to distance learning center; (iii) two
classrooms equipped with computers and related teaching aids;
(iv) computers, cubicles and furniture; (v) 100-150 workstations;
and (v) office equipment including furniture, fixtures, copy
machines, phones, faxes, PBX exchange, vehicles, and video
equipment, (vi) vehicle and maintenance
b) Intemet access $0.250 SO.250
c) Management and non-management salaries, travel, $0.578 SO.578
communication, utilities, security, building maintenance,
equipment and network maintenance, stores and supplies,
municipal taxes and miscellaneous operating expenses
2. Business Services Center $3.507 $3.507
a) Marshall Plan secondments to overseas institutions (100 $0.500 $0.500
trips)
b) Entrepreneurship seminars S0.180 $0.180
c) Intellectual property protection consulting $0.144 $0.144
d) Industry certification programs (ISO & CCMA) S0.342 $0.342
e) General business and management consulting S0.540 $0.540
f) Quality control and project management consulting, business $0.972 $0.972
planning and investment promotion ( assistnace to companies in
preparing business plans and in all aspects of investor relation
management).
g) Web site maintenance, conferences, workshops, industry $0.130 $0.130
advocacy and advertisement.
h) Rent, management and non-management salaries, travel, S0.699 $0.699
communication, utilities, security, building maintenance,
equipment, goods and network maintenance, stores and supplies,
municipal taxes and miscellaneous operating expenses
3. Skill Development Facility $0.9061 $0.906
a) Local and international training staff, officers and consultants $0.298 $0.298
b) Distance learning courses $0.120 $0.120
c) Grants to trainees $0.090 $0.090
d) Competitive incentives $0.105 $0.105
- 30 -

Project Costs by Component (US$ million) Local Foreign* Total
e) Rent, management and non-management salaries, travel, $0.293 $0.293
communication, utilities, security, building maintenance,
equipment, goods and network maintenance, stores and supplies,
municipal taxes and miscellaneous operating expenses
4. IT Industry Business Environment Surveys $0.300 $0.300
a) Conducting of survey and result compilation and publication $0.300 $0.300
5. Project Implementation and Monitoring Unit $0.200 $0.200
a) Administrative support and audit $0.200 $0.200
Total Baseline Cost $0.450 $6.528 $6.978
Physical Contingencies (at 7.5%) $0.488 $0.488
Price Contingencies (at 1.5%) $0.098 $0.098
Total Project Costs $0.450 $7.114 $7.563
* Note: Foreign incudes revenues and international donors cofinancing
- 31 -

General
Annex 4 Financial Management
ARMENIA: Enterprise Incubator - LIL
A review of the project's Financial Management System was undertaken in February - May 2001, to (i)
determine the presence of the necessary elements for a sound project financial management system such as
intemal controls, project accounting, project staffing and audit arrangements, (ii) prepare a time-bound
action plan aimed at strengthening the financial management system and developing a chart of accounts,
project financial management manual and operational manual.
Project Management and Coordination
The proposed Learning and Innovation Loan (LIL), the Enterprise Incubator, is a $7.1 million operation
with five components. The project is designed to pilot innovative private-public mechanisms for providing
business development services to IT cluster enterprises and continuous education/training to students and
professors. The funds advanced to the GOA under the LIL will be made available to the Incubator on a
grant basis. The Enterprise Incubator will be registered as a non-profit Fund.
The Enterprise Incubator is the implementing agency for the Project. However the PIMU will be
responsible for loan accounting, disbursements, financial management reporting, and arranging annual
project audits during the three years of project operation. Foreign Financing Projects Management Center
(FFPMC) has implemented a total of eleven World Bank financed projects. As the Enterprise Incubator
develops its financial reporting and procurement capacity, it will take over project financial management,
accounting, procurement and disbursement functions from the PIMU, subject to World Bank's positive
assessment of such capacity and approval of new arrangements for project management.
Staffing
Employees of the PIMU will be paid with LIL funds on a marginal basis, proportionate to their
contribution to the LIL project. FFPMC has two experienced accounting/financial management staff who
have worked on financial management and disbursement of a number of World Bank financed projects.
There will be two full time accounting and two full time procurement staff whose salary will be
covered by project resources.
Project Accounting System and Financial Reporting
The accounting staff of the PIMU will maintain the accounts for the project in accordance with the key
internal control mechanisms on the application and use of funds satisfactory to the World Bank, based on
double-entry bookkeeping principles, in accordance with the borrower's regulations and the Bank's
guidelines. A Chart of Accounts for the Project will be developed based on the classification of
expenditures and sources of funds indicated in the PAD. The Chart of Accounts shall enable data to be
captured in such a manner as to facilitate financial reporting of project expenditures by (i) project
components, (ii) expenditure categories, (iii) disbursement categories, and (iv) funding donors. In addition
to project accounting, the PIMU accounting staff will cover project budgeting, management of a Special
Account and a project bank account.
- 32 -

FFPMC uses I C+, a computerized accounting system generating financial reports, which are summarized
into quarterly reports in compliance with the World Bank requirements. The computerized system was
purchased from a vendor in Russia, and was later modified by a local programmer, based on specific
project needs. The system entry screens will incorporate cost categories of the project Chart of Accounts
within two weeks after finalizing the Chart of Accounts.
Project expenditures will be recorded and reported by the PIMU's accountant, based on the accounts
maintained by him/her and the information from project components. The annual financial statements will
include the following documents: (i) a Summary of Sources and Uses of Funds, (ii) Uses of Funds by
Project Activity, (iii) summaries of the Special Accounts activities and of SOE disbursements, and (iv)
notes to the financial statements.
Audits
The external audit will be contracted with an independent auditing firm acceptable to the Bank and carried
out in accordance with terms of reference provided by the Bank. As required by Bank Operational Policies,
annual financial audit reports will be furnished to the Bank within six months from the end of each fiscal
year.
Financial Management Manual
The PIMU accountant has developed a financial management manual for the project acceptable to the IDA
(See the action plan below). The manual covers: (I) the financial management system proposed under the
project, with special emphasis on accounting and auditing policies, standards and internal controls, (ii) the
role of the financial management system in Project management and implementation, (iii) the accounting
arrangements required for project managements, the format for and content of project financial reporting,
(iv) the auditing arrangements that will be used during project implementation, and (iv) project budgeting
and planning. During project negotiations, the Bank's financial management consultant will confirm and
finalize with the borrower's and the PIMU's representatives the form and content of financial accounting
and reporting arrangements.
Disbursements and the Special Account
It is expected that the proceeds of the Loan will be disbursed over a period of three years. Disbursements
from the IDA loan will be made on the traditional system, through reimbursements with full documentation,
against Statements of Expenditure (SOE), and through direct payments, if required. To facilitate timely
project implementation, the Government will establish, maintain and operate, under terms and conditions
acceptable to the Bank, a Special Account and a Project Bank Account. Funds flow arrangements for the
grant to the Enterprise Incubator and its components shall be detailed in the Project Financial Manual.
Financial Risks
From the financial management perspective, the Business Incubator LIL is considered as a moderate-risk
project. The implementing agency has a good track record of project management with other Bank
projects. The audit reports for the Private Sector Development Project and other WB projects implemented
by the Foreign Financing Projects Management Center of the Ministry of Finance and Economy were
unqualified; they revealed no major discrepancies in financial reporting of the entity. Among the reasons
for rating the project as a moderate-risk are: (i) public perception of corruption in use of public funds, (ii)
Government's track record in the award of contracts.
- 33 -

Conclusion and the Action Planfor the PIU
It is concluded that the PIMU currently satisfies the Bank's minimum financial management requirements.
However, in order to ensure that the project will have a sound financial management system in place, the
following time-bound Action Plan is presented:
Action Deadline Status
1. Completion of draft financial management manual by PIMU May 25, 2001 Completed
accountant and submission to the IDA. The manual will include:
* Accounting Policies and Procedures,
* Designing accounting flows and controls,
* Flow of information/documents,
* Flow of money,
* Internal controls,
* Frequency of transactions and controls,
* Budgeting and planning.
2. Completion of draft Chart of Accounts by PIMU accountant May 31, 2001 Completed
and submission to the IDA.
3. Finalize the financial management manual 1 week after Completed
appraisal mission
4. Finalize the Project's Chart of Accounts 1 week after after Completed
IDA will finalize
project cost
categories -
appraisal mission
5. Short-list of auditing companies submitted to the Bank By negotiations
6. Audit TOR agreed with the Bank By negotiations
- 34 -

Total Financing Required
Project Costs
Investment Costs
Managed Workspace 1.236 1.236
Total Investment Costs
Annex 5: Financial Summary
ARMENIA: Enterprise Incubator - LIL
Half Years Ending June 30 and December 31
Implementation and Operational Period
Total HY0 HY 1 | HY2 | HY3 1 HY4 1 HY 5 HY6 HY7
On-Going Costs
Managed Workspace 0.828 0.156 0.126 0.126 0.106 0.106 0.106 0.102
Business Services Center 3.507 0.613 0.613 0.518 0.480 0.428 0.428 0.428
Skills Development Facility 0.906 0.123 0.123 0.139 0.145 0.149 0.149 0.078
IT Business Surveys 0.300 0.050 0.050 0.050 0.050 0.050 0.050
PIMU 0.200 0.033 0.033 0.033 0.033 0.033 0.033
Total On-Going Costs
Total Project Costs 6.977 0.975 0.944 0.866 0.814 0.766 0.766
Price Contingencies 0.098 0.016 0.016 0.016 0.016 0.017 0.017
Physical Contingencies 0.488 0.080 0.080 0.082 0.082 0.082 0.082
Total Financing Required (A) 7.563 1.236 2.046 1.985 1.830 1.726 1.631 1.631 0.608
Financing
IBRD/IDA 5.000 1.614 1.000 0.950 0.900 0.750 0.700 0.700
Government
Co-financiers
0.450 0.450
User Fees/Beneficiaries
Others
2.143 0.302 0.309 0.319 0.385 0.414 0.414 0.684
Total Financing Available (B) 7.593 2.064 1.302 1.259 1.219 1.135 1.114 1.114 0.684
Surplus (Shortfall) (B-A) 0.030 0.828 -0.744 -0.726 -0.611 -0.591 -0.517 -0.517 0.076
Main Assumptions:
Project Financing Plan ( 2002 -2005) in US $ millions.
- 35 -

Procurement
Annex 6: Procurement and Disbursement Arrangements
ARMENIA: Enterprise Incubator - LIL
Procurement of goods financed by the Association under the project would be carried out in accordance
with the Bank's Guidelines: Procurement under IBRD Loans and IDA Credits, published in January 1995
(revised January/August 1996, September 1997 and January 1999). Consultant services would be
procured in accordance with the Guidelines: Selection and Employment of Consultants by World Bank
Borrowers published in January 1997 (revised in September 1997 and January 1999), and the provisions
stipulated in the Credit Agreement. General project procurement (an initial GPN and subsequent annual
procurement notices) and special procurement actions will be advertised in appropriate U.N. Development
Business media and/or suitable trade journals as agreed with the IDA.
Project structure
The project components primarily finance the initial costs of investment to refurbish and equip the physical
premises of the project and the costs to provide business and educational services (consulting costs). To
sustain the activities of the Enterprise Incubator (El) as an independent entity, the project also partly
finances the overhead and recurring costs of the project such as staff salaries, on-going maintenance and
utilities. The user fees finance the rest of the overhead and recurring costs and identifiable local taxes. The
IDA credit finances these recurring costs as a special limited-time, kick-off subsidy which is a critical part
of the broader package to make the project sustainable. These recurring costs are financed by the project
on a declining basis, as indicated in Table "C", and at the end of the three year project cycle, the El is
expected to cover its operating costs from user fees without explicit subsidies from the GOA or the IDA.
The project consists of five components: (i) Managed Work Space (US$2.06 million); (ii) Business
Services Center (US$3.5 million); (iii) Skills Development Facility (US$0.90 million); (iv) IT Industry
Business Surveys (US$0.3 million); and (v) Project Implementation and Monitoring Unit (US$0.2 million).
Physical and price contingencies of about US$600,000 are included in the budget.
Project procurement arrangements
The procurement management will be a joint responsibility of the El and PIMU which will carry out
these activities in close coordination with the El. The procurement activities will be managed by the
Procurement Specialist (PS) of the PIMU. The El and PIMU will prepare Terms of Reference and define
their requirements, technical specification, etc. in detail. The El and PIMU will implement all procurement
activities, such as planning, announcement of tenders, collection of expressions of interest from
firms/institutions, preparation of specifications, bid documentation and sample contracts, administering
evaluation activities, and preparing correspondence with the Bank and participating firms. The Evaluation
Committee established by the Credit Board will carry out Technical and Financial evaluations according to
the requirements of IDA/IBRD, in conformity with procurement method in the applicable IDA/IBRD
Procurement Guidelines.
The phases of procurement activities and the responsibilities of the involved bodies of the El and the PIMU
are clearly outlined in the Financial Management Procedures Manual prepared in collaboration with the
PIMU. This manual and terms of the Credit Agreement and Guidelines will be used for guiding and
- 36 -

controlling the procurement, disbursement and financial management activities of the project.
Implementation administration capacities of the PIMU and the El
The Enterprise Incubator is an executing agency for the project. Under the supervision of the
Executive Director, Foreign Financing Projects Management Center (FFPMC) of the Ministry of Finance
and Economy, the PIMU will be responsible for procurement, credit accounting, disbursements, financial
management, reporting, and arranging annual project audits. FFPMC has implemented a total of eleven
World Bank financed projects thus far and is viewed as having the capacity, as augmented by indicated
staff, to concurrently administer the projected Incubator activities..
Staffing
In the existing structure of FFPMC, and under the same director, relevant procurement and administrative
staff will be added to create the PIMU to exclusively handle the Incubator project. The employees of the
PIMU will be financed with the LIL funds within the agreed PIMU operating costs and as indicated in
Table "C" hereof. FFPMC already has number of experienced procurement and accounting/financial
management staff who have worked on a number of World Bank-financed projects. Considering the size of
the project, the reduced portfolio of the PIMU (currently manageing four World Bank projects and a Lincy
Foundation project), it is recommended that two procurement staff shall be added to support procurement
administration within this project. Employees of the PIMU will be paid with LIL funds on a marginal basis,
proportionate to their contribution to the LIL project. FFPMC has two experienced accounting/financial
management staff who have worked on financial management and disbursement of a number of World
Bank financed projects.
Procurement Risks
From the procurement management perspective, the Enterprise Incubator LIL is considered as a moderate
to high risk project. The implementing agency has a good track record of project management with other
Bank projects. However, this activity includes a number and range of technical assistance procurements,
has an ambitious schedule, and its pilot nature aggregates to a higher level of implementation / management
risk.
Conclusion and the Action Plan for the PIMU
The latest 1999 audit report for the Enterprise Development Project implemented by the Foreign Financing
Projects Management Center of the Ministry of Finance and Economy was unqualified. It revealed no
major discrepancies in procurement management and financial reporting of the entity. Given the PIMU's
demonstrated capacity up to now, it is concluded that, with projected strengthening of procurement staffing
and adequate procurement planning, the PIMU would be able to also cover this project and meet the Bank's
minimum procurement administration and management expertise requirements. However, the overall
procurement risk rating is concluded as "high" given the pilot character of the LIL and the fact that the
project activities would need higher than average management support and supervision to efficiently
accomplish the projected procurement actions.
- 37 -

Procurement methods (Table A)
Table A: Project Costs by Procurement Arrangements
(US$ million equivalent)
Procurement Method
Expenditure Category ICB NCB Other N.B.F. Total Cost
1. Works 0.00 0.40 0.00 0.50 0.90
(0.00) (0.28) (0.00) (0.00) (0.28)
2. Goods 0.26 0.00 0.14 0.07 0.47
(0.26) (0.00) (0.14) (0.00) (0.40)
3. Services 0.00 0.00 3.39 0.48 3.87
a. Consultant Services (0.00) (0.00) (2.91) (0.00) (2.91)
b. Training / Study Tours
(0.80 out of total 3.39 &
.755 out of total 2.96)
4. Miscellaneous 0.00 0.00 0.10 0.00 0.10
Entrepreneurship Grants (0.00) (0.00) (0.1 0) (0.00) (0.1 0)
5. Technical Services 0.00 0.25 0.10 0.00 0.35
(0.00) (0.22) (0.09) (0.00) (0.31)
6. Operating Costs 0.00 0.00 1.68 0.20 1.88
(0.00) (0.00) (1.00) (0.00) (1.00)
Total 0.26 0.65 5.41 1.25 7.57
(0.26) (0.50) (4.24) (0.00) (5.00)
' Figures in parenthesis are the amounts to be financed by the IDA Credit. All costs include contingencies.
D Includes civil works and goods to be procured through national shopping, consulting services, services of
contracted staff, training/study tour stipends-costs , technical services, and incremental operating costs
related to managing the project.
"NBF" = Not Bank-financed.
- 38 -

Procurement Administration:
A. Procurement of Works - Design of the Project envisions the securing of a building by the
Govenmment which will be used as the Business Incubator center wherein participants would have access to
basic office facilities, including internet connections, work stations, training areas, etc. so they could begin
the process of organizational and business linkages development. The proposed building would be
structurally and functionally renovated by a qualified contractor, with other service firms likely providing
the upgrading/installation of HVAC, network / cabling options and other needed improvements. Office
fitout would also be a part of the renovation scope. Such works are expected to use about US$350,000. of
the Credit, and would be procured using National Competitive Bidding procedures, as allowed in the
Guidelines, paragraph 3.3. Tendering and contracting procedures and documentation would follow
previous IDA/IBRD-approved works activities in Armenia. Guidance thereabouts can be provided by
Resident Mission procurement specialists.
B. Procurement of Goods -- Goods purchased to complete the Incubator office complex would
include, e.g., computers, software, copiers, FAX and other office machines, LAN and
telecommunications-PBX equipment. Office fumiture and fixtures and a vehicle are also contemplated in
the Incubator fitout. The estimated Credit expenditure for goods to complete the Center is about
US$350-400,000. Depending upon the available sourcing / packaging options, the procurements are
expected to be several in number and because of their smaller value, be implemented through a combination
of Intemational Shopping, National Competitive Bidding and National Shopping. Bidding and contracting
documentation would be consistent with those developed and approved previously by the IDA/IBRD for
use in Armenia. The project also envisions the procurement of various technical services, such as contracts
for annual internet access, advertising and website maintenance. These services would be procured using
National Competitive Bidding or because of lower value, e.g., National Shopping. The total expected
Credit allocation for such technical services is about US$300 - 350,000. They are indicated separately in
the following tables since the IDA funding therefore may differ from goods purchased.
C. Procurement of Consultant Services (firms) -- Consultant services are the primary object of
funding under the proposed Incubator LIL Credit. The largest portion of the Credit would finance
consultant services by firms for, e.g., business planning and management, quality control, industry
certification techniques. These services could be procured under several contracts using the QCBS method
and are estimated to involve about US$ 1.4 to 1.5 million in Credit resources. Other consultant services are
envisioned to be procured using the Consultant's Qualifications method for, e.g., distance leaming,
business environment surveys / analyses and reports. The total estimated Credit allocation for CQ methods
purchases is about USS275,000. Annual audit services are expected to be procured using the Least Cost
method.
D. Procurement of Consultant Services (individuals) -- the Project's components envisions the
engagement of a variety of expatriate and local consultants for smaller activities and those, such as
training, where an individual would be more likely a better service provider than a firm. The project
includes the procurement of consultants for a variety of skills development / 'training of trainers' services
in subjects that could develop individual, potential business managers up to the development of course
content for local university applications. This program element would also engage ational consultants to
develop, expand and/or adapt skills development courses for Center and/or local applications. The
estimated total Credit funding for individual Consultants is projected at about US$450,000.
- 39 -

E. Training / Study Tour Stipends, Incentives, Fund and Operating Expenses -- The Business
Incubator project also includes Credit funding (about US$750,000.) of direct overseas travel / training -
study tours expenses and, e.g., local training stipends / costs; and a Competive Incentives fund
(US$100,000) for encouraging new business activities.
Procurement Plan -- A draft Project Procurement Plan is included in the draft PIP developed for this
project. A detailed Procurement Plan will be prepared by PIMU procurement staff, as the Project
Effectiveness date becomes evident, as part of their initial operations planning activities. The Procurement
Plan will be submitted to the Association for its review, as indicated in the Credit Agreement, prior to the
initiation of Credit-funded procurements.
Prior Reviews -- The PIMU will be applying standard Bank / ECA Region works, goods and services
procurement documentation, adjusted as appropriate for implementation within Armenia. Association
reviews of procurement actions will be effected as outlined in Table "B" below. Prior reviews would
include: a) ay ICB or QCBS procurement; and the first two contracts above the following: b) Works
(NCB) above US$400,000.; c) Goods (NCB and IS) above US$100,000., and (NS) above US$50,000; d)
Consultant Services (CQ and LCS) above US$100,000., and Consultant Services (Individuals) above
US$50,000. Prior review procedures would also apply to any contract amendment which would cause a
new contract total to eclipse the foregoing review threshold levels. PIMU operating plans and budgets,
which would indicate, e.g., office expenditures, staff salary, utilities, office equipment / communications
services, procurements would be reviewed and approved by the IDA on a prospective, annual basis.
Frequency of Procurement Supervision -- In addition to the above indicated prior review actions, it is
recommended that procurement supervisoin include a Project Launch orientation and training session as
part of an initial, extended project supervision mission. Such a start-up activity would ideally take place
within the first two months of Credit Effectiveness to ensure completion of procurement administration
preparations. Procurement supervision, including periodic 'post review' samplings of other procurement
transactions, should be effected at least annually. "Post Review" activities should cover at least 10%,
randomly selected, of purchases subject thereto that took place within the previous year.
Table Al: Consultant Selection Arrangements (optional)
(US$ million equivalent)
Selection Method
Consultant Services
Expenditure Category QCBS QBS SFB LCS CQ Other N.B.F. Total Cost
A. Firms 1.66 0.00 0.00 0.10 0.32 0.00 0.00 2.08
(1.41) (0.00) (0.00) (0.08) (0.27) (0.00) (0.00) (1.76)
B. Individuals 0.00 0.00 0.00 0.00 0.00 0.52 0.00 0.52
(0.00) (0.00) (0.00) (0.00) (0.00) (0.45) (0.00) (0.45)
Total 1.66 0.00 0.00 0.10 0.32 0.52 0.00 2.60
1 (1.41) (0.00) (0.00) (0.08) (0.27) (0.45) (0.00) (2.21)
1\ Including contingencies
-40 -

Note: QCBS = Quality- and Cost-Based Selection
QBS = Quality-based Selection
SFB = Selection under a Fixed Budget
LCS = Least-Cost Selection
CQ = Selection Based on Consultants' Qualifications
Other = Selection of individual consultants (per Section V of Consultants Guidelines),
Commercial Practices, etc.
N.B.F. = Not Bank-financed
Figures in parenthesis are the amounts to be financed by the Bank Credit.
- 41 -

Prior review thresholds (Table B)
Table B: Thresholds for Procurement Methods and Prior Review
Contract Value Contracts Subject to
Threshold Procurement Prior Review
Expenditure Category (US$ thousands) Method (US$ millions)
1. Works Less than US$ 400,000 NCB First two contracts
2. Goods Over US$100,000 ICB All
Up to US$ 100,000 NCB First two contracts
Up to US$50,000 IS / NS First two contracts
3. ServicesConsultant Consultant firms up to CQ First two contracts, plus
Services and Training US$100,000 and individual reviews will include all
consultants more than Indivs. TORs, budgets,
US$50,000 procurement methods
Consultant firms more QCBS All elements / stages of
than US$100,000 proc. actions
LCS
Auditors (Same as CQ)
4. Miscellaneous
5. Miscellaneous _
6. Miscellaneous
Total value of contracts subject to prior review:
Overall Procurement Risk Assessment
Frequency of procurement supervision missions proposed: One every 12 months (includes special
procurement supervision for post-review/audits)
Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement
Documentation" and contact the Regional Procurement Adviser for guidance.
High
-42 -

Disbursement
Allocation of credit proceeds (Table C)
The proposed allocations of the loan is shown in Table C. The IDA Credit will disburse over a period of
three years (2002 through 2004) with a closing date of December 31, 2004. Disbursements from the IDA
loan will be made in accordance with procedures outlined in the Bank's Disbursement Handbook, through
reimbursements with full documentation, against Statements of Expenditure (SOE), and through direct
payments, if required. To facilitate timely project implementation, the Government will establish, maintain
and operate, under terms and conditions acceptable to the Bank, a Special Account and a Project Bank
Account for counterpart funds. Funds flow arrangements for the grant to the Enterprise Incubator and its
components have been detailed in the Financial Management Procedures Manual. Disbursements will be
made against project costs, which are incurred and caused by the Project activities during the
implementation of the Project. The Project Disbursements will be made against seven Categories. These
are:
1. Works
2. Goods
3. Consultants' services
4. Training and Study Tours
5. Entrepreneurial Grants (Pre-seed money and grants)
6. Technical Services
7. a) Operating Costs of PIMU
b) Operating Costs of El
The costs of procurement which have been foreseen in the PAD and the Project Budget such as the
machinery and equipment, the computer hardware and software, office fumiture and equipment, office
supplies, software, vehicles and equipment (Goods), acquisition and renovation of the office space
(Works), consulting and advisory services (Consultants' Services), training activities and secondments
(Training), technical services, such as website maintenance and intemet access (Technical Services), and
small cash grants to students and entrepreneurs to start their companies and to develop their ideas
(Entrepreneurial Grants; Pre-seed money and grants).
The "Operating Costs" are the operational expenses related to the implementation of the Project which
have been foreseen in the PAD and the Project Budget and which, among others, include salaries of the
project staff, acquisition of office supplies, office equipment, utilities, operational and maintenance costs of
the motor vehicles, commnunication, local travel, training activities, travel expenses, small refurbishment
costs and audit costs. The proceeds of the credit would be disbursed in accordance with the guidelines in
the "Disbursement Handbook". The project has been designed to be carried out over a period of three years,
and credit funds are expected to be fully disbursed within nine quarters after the expected effectiveness date
of January 31, 2002. The project completion date is December 31, 2004 with a credit closing date of June
30, 2005.
- 43 -

Table C: Allocation of Credit Proceeds
Expenditure Category Amount in US$million Financing Percentage
Works 0.25 90% excluding VAT and local taxes
Goods 0.30 100% of foreign expenditures.
100% of local expenditures (ex-factory).
85% of local expenditures for other items
procured locally.
Consultant Services 2.00 100 % (excluding VAT and local taxes)
Training, Stipends-Study Tour Costs 0.75 100%
Entrepreneurial Grants (also referred to 0.10 100%
as pre-seed money and grants)
Technical Services 0.30 100% & 100% of local expenditures
excluding VAT and local taxes
Operating Costs (split between the 1.00 100%
PIMU and the El at 20-80%)
Unallocated 0.30
Total Project Costs 5.00
Total 5.00
The percentages have been calculated to r easonably ensitre that taxes are not financed on the whole.
Use of statements of expenditures (SOEs):
Disbursement arrangements under the project will include the use of SOE procedures. The SOE threshold
should match procurement prior review thresholds for different expense categories. The required
supporting documentation and other records, including framework agreements between the PIMU and El,
would be retained by the PIMU and El for at least five years after the receipt by the World Bank of the
audit report for the year in which the last disbursement was made. This documentation will be made
available for review by the independent auditors and by the visiting World Bank staff upon request. The
processing, disbursement and monitoring of the allocations of the proceeds of the World Bank Credit,
Borrower and other donors/sponsors counterpart financing contributed by or through the GoA and not
directly received by the El would be managed by the PIMU in coordination and consultation with the
Ministry of Finance and Economy and/or Credit Board.
- 44 -

Special account:
To facilitate timely project implementation, the Borrower will establish, maintain and operate, under terms
and conditions acceptable to IDA, a Special Account for the PIMU, denominated in US Dollars, in the
Central Bank of Armenia (CBA) or a commercial bank acceptable to the Association. Payment of eligible
and accepted expenditures (works, goods, services, operating costs and miscellaneous) should be made by
the PIMU out of the Special Account. The Account would be replenished on quarterly basis or when the
undisbursed balance falls below an amount equal to 10 percent or less of the initial deposit, whichever
occurs first. The amount of initial deposit is $ 0.5 million.
Replenishment applications will be submitted on a monthly or quarterly basis and will be accompanied by
full documentation, including monthly bank statements of the Special Account, for all items except those
eligible for disbursement on the basis of the SOEs. All other applications for direct payment or issuance of
Special Commitments must be for an amount not less than 20 percent of the Special Account allocation.
The financing of Project Activities will be carried out by the PIMU through direct transfers to the accounts
of suppliers and contractors, upon acceptance of expenditures.
Accounts signatories
The signatories to PIMU accounts are the Executive Director and the Chief Financial Officer/Chief
Accountant. Other staff members of the PIMU may be officially designated as signatories to the accounts
when necessary, through a written authorization signed by the Minister of Finance and Economy of the
Republic of Armenia.
Account's audit
All Project Accounts will be autonomous and will be audited annually by an accredited auditing firm
acceptable to IDA/IBRD. Copies of annual audit reports and management letters will be submitted to the
World Bank within six months from the end of each fiscal year.
- 45 -

Annex 7: Project Processing Schedule
ARMENIA: Enterprise Incubator - LIL
Project Schedule Planned Actual
Time taken to prepare the project (months) 10 12
First Bank mission (identification) 09/01/2000 10/20/2000
Appraisal mission departure 05/16/2001 06/23/2001
Negotiations 10/01/2001 10/24/2001
Planned Date of Effectiveness 02/01/2002
Prepared by:
Ministry of Finance and Economy, The Republic of Armenia
Preparation assistance:
N/A
Bank staff who worked on the project included:
Name Speciality
Vladimir Goran Kreacic Project Team Leader, Co-task Manager
Yevgeny Kuznetsov, Co-task Manager, project design, preparation of PAD
Shoiab Raza Naqvi Economic analysis, preparation of background documents and business
plan
Yuri Boutaev Liaison with the Government, project preparation and implementation
plans
Anush Begloian Project design, liaison with private sector stakeholders
Gohar Abajyan Project Financial Management Issues
- 46 -

A. Project Implementation Plan
Annex 8: Documents in the Project File*
ARMENIA: Enterprise Incubator - LIL
- "Financial Management Procedures Manual" (Foreign Financing Projects Management Unit of
the Ministry of Finance of the Republic of Armenia, July, 2001)
B. Bank Staff Assessments
C. Other
- "Information and Communication Technology (ICT) Sector Strategy Paper: Bridging the Digital
Divide - Draft" (World Bank, November, 2000)
- "Master Strategy for Armenia: Information and Communication Technology Industry" (IC2
Institute of the University of Texas at Austin, May, 2001)
- "Prospects for Information Service Exports from the English-Speaking Caribbean" (World Bank
Latin America and Caribbean Region, March, 1996)
- "Mauritius: Towards and Information Based Economy" (Joint Study by the World Bank and the
Government of Mauritius, June, 1995)
- "Republic ofArmenia - ICTAssessment" (USAID, July, 2000)
- "Feasibility Study - Technological Incubators Armenia" (Ben Shahar Associates, October, 2000)
- "Armenian Software Industry - Analysis of Sectoral Trends" (Consultant Report by A.
Poghossian, September, 2000)
- "Technopolis Armenia" (The Eurasia Foundation, January, 2001)
Including electronic files
- 47 -

Annex 9: Statement of Loans and Credits
ARMENIA: Enterprise Incubator - LIL
Difference between expected
and actual
Orginal Amount in US$ Millions disbursements
Project ID FY Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd
P055022 2002 IRRIG DEVT -AM 0.00 24.86 0.00 25.31 0.00 0.00
P065189 2001 SAC4 0.00 50.00 0.00 33.70 5.17 0.00
P057838 2001 JUOICIAL REFORM 0.00 11.40 0.00 10.40 -0.32 0.00
P044829 2000 TRANSPORT 0.00 40.00 0.00 30.66 -7.50 0.00
P057952 2000 SIF II 0.00 20.00 0.00 19.15 -1.18 0.00
P064879 1999 IRRIG DAM SAFETY 0.00 26.60 0.00 19.02 3.34 0.00
P057560 1999 TITLE REG -AM 0.00 8.00 0.00 4.68 2.26 0.00
P008276 1999 ELECTRANSM&DISTR 0.00 21.00 0.00 17.34 12.31 292
P008281 1998 EDUCATION 0.00 15.00 0.00 2.61 2.30 000
P035805 1998 MUN DEVT 0.00 30.00 0.00 19.20 7.49 0.00
P035806 1998 AGR REF SUPPORT 0.00 14.50 0.00 2.13 1.29 0.00
P050140 1998 HEALTH 0.00 10.00 0.00 3.91 3.94 000
P051026 1998 SATAC2 0.00 5.00 0.00 1.69 1.94 070
P008279 1997 ENT DEVT 0.00 16.75 0.00 0.82 1.98 0.00
Total: 0.00 293.11 0.00 190.61 33.01 3.62
- 48 -

ARMENIA
STATEMENT OF IFC's
Held and Disbursed Portfolio
May-200 1
In Millions US Dollars
Committed Disbursed
IFC IFC
FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic
Total Portfolio: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Approvals Pending Commitnent
FY Approval Company Loan Equity Quasi Partic
2000 Hotel Armenia 0.00 3.60 0.00 0.00
Total Pending Commitment: 0.00 3.60 0.00 0.00
- 49 -

Annex 10: Country at a Glance
ARMENIA: Enterprise Incubator - LIL
Europe &
POVERTY and SOCIAL Central Low-
Armenia Asia income Development dlamond
1999
Population, mid-year (millions) 3.8 475 2,417 Life expectancy
GNP Per capita (Atlas method. US$) 490 2,150 410
GNP (Atlas method, US$ billions) 1.9 1,022 988
Average annual growth, 1993-99
Population (%) 0.2 0.1 1.9
Labor force (%) -1.5 0.6 2.3 GNP Gross
per -. primary
Most recent estimate (latest year available, 1993-99) capita ' enrollment
Povertv (% of Population below national Poverty fine) 55
Urban population (% oftotafpoPulation) 67 67 31
Life expectancy at birth (years) 73 69 60
Infant mortality (per 1,000 live births) 15 22 77
Child malnutrition (% of children under 5) 3 8 43 Access to safe water
Access to improved water source (% of population) 85 64
Illiteracy (% of population age 15+) 1 3 39
Gross Primary enrollment (% of school-age Population) 90 100 96 Armenia
Male 88 101 102 Low-income group
Female 93 99 86
KEY ECONOMIC RATIOS and LONG-TERM TRENDS
GDP (US$ billions)
1979 1989 1998
19
1999
1.8
Economic ratios.
Gross domestic investment/GDP 191 19.5
Exports of goods and services/GDP 19.0 21.0 Trade
Gross domestic savinqslGDP -14.2 -9.3
Gross national savinqs/GDP -4.8 3.1
Current account balance/GDP -21.3 -16.6 D
Interest pavments/GDP 0.8 m0.8 D Investment
Total debt/GDP 42.2 47.2 Savigs
Total debt service/exports 8.9 14.6
Present value of debUGDP 29.9 30.7
Present value of debUexports 120.5 126.9
Indebtedness
1979-89 1989-99 1998 1999 1999-03
(average annual prowth)
GDP -3.2 7.2 3.3 5.6 Armenia
GNP per capita -3.0 6.3 3.0 5.3 Low-income group
Exports of qoods and services -18.2 -0. 1 17.6 11.0
STRUCTURE of the ECONOMY
1979 1989 1998 1999 Growth of Investment and GDP (%)
(% of GDP)
Agriculture 34.0 28.7
Industry 30.8 32.6
Manufacturing 21.9 23.0 97 93 99
Services 35.3 38.7 -'105*8
Private consumption 103.6 98.5 -20
General qovernment consumDtion 11.1 10.7 GDI GDP
Imports of goods and services 52.8 49.7
1979-89 1989-99 1998 1999 Growth of exports and Imports (%)
(average annua/ growth)
Agriculture 12.6 1.3 60
Industry 1.0 5.9 3
Manufacturinq -2.7 5.2
Services 5.6 3.0
Private consumption 4.3 0.4 -30
General government consumption -2.4 -0.7 7
Gross domestic investment 5.0 1.1 -60 l
Imports of goods and services -4.4 0.1 -Exports :Impsrts
Grdss national product 6.5 2.7
Note: 1999 data are preliminary estimates.
The diamonds show four kev indicators in the country (in bold) compared with its income-grouo averaqe, If data are missing, the diamond will
be incomplete.
- 50 -

PRICES and GOVERNMENT FINANCE
Domestic prices 1979 1989 1998 1999 Intlation (%)
Armenia
(% chanqe) 5,000
Consumer prces .. . 8.7 0.7 4.000
Implicit GDP deflator .. 10.8 0.0 3,000
2,000
Government finance 1,0oo0
(% of GoP, includes current grants) 0
Current revenue .. .. 17.1 18.9 94 gs 96 97 9s g9
Current budget balance .. .. 1.2 -0.1 -GDP defator ' CPI
Overall surplus/deficit .. .. -4.3 -6.1
TRADE
(US$ moillions)
(US$millions) 1989 1998 1999 |Export and Import levels (US$ mill.)
Total exports (fob) .. .. 221 232 800
Copper mineral, concentrate .. .. 9
Molybdenum mineral, concentrate .. .. 8 . 00-
Manufactures .. . 102
Total imports (cif) .. .. 806 697 400
Food . .. 201 129 00
Fuel and enerqy 203
Capitalgoods .. .. 80 8113 -
Export prce index (1995=100) ..
93 94 99 99 97 99 99
Import price index (1995=100) .. . .. .. * Exports * Imports
Terms of trade (1995=100) ..
BALANCE of PAYMENTS
(USS millions) 1989 1998 1999 Current account balance to GDP (%)
Exports of goods and services .. .. 360 383 0
Imports of goods and services .. .. 1,000 919
Resource balance .. . -640 -536 5
Net income .. .. 60 55 -10
Net current transfers .. .. 177 174 l l
Current account balance -403 -307 20
Financing items (net) .. . 406 312
Changes in net reserves .. . -4 -5 .25
Memo:
Reserves including gold (US$ millions) .. .. 292 305
Conversion rate (DEC. local/US$) .. .. 504.5 535.0
EXTERNAL DEBT and RESOURCE FLOWS
1979 1989 1998 1999
(US$ millions) Composition of 1998 debt (USS mill.)
Total debt outstanding and disbursed 800 871
IBRD 10 G:45 A:10
IDA 293 352
Total debt service 42 65
IBOD 1 1
Composition of net resource flows
Official grants 50 103 | D: -
Official creditors 85 97
Private creditors .. .. 0 0
Foreign direct investment .. .. 232 96
Portfolio equity .. .. c: 190
JeM B: 293
World Bank program
Commitments .. .. 125 48 A -IBRD E - Bilateral
Disbursements .. 43 66 B -IDA D -Other mulblateral F -Private
Principal repayments . .. 0 0 C -IMF G -Short-term
Net flows . .. 43 66
Interest payments 2 3
Net transfers 40 63
Development Economics 9i'7/2000
- 51 -

Background
Additional
Annex 11
Armenian IT/software Sector
The development of the IT sector in Armenia could be divided into three main stages:
Stage 1. Emergence of the IT sector (1957-1970s): The first in the Soviet Union Institute of
Mathematical Machines, the so-called Mergelyan Institute, was set up in Yerevan in 1957. A rapid
establishment of the IT sector was necessary for military purposes.
* Stage 2. Global automation and computerization (late 1970s-1990). In the early 1970s,
Information Technology started to serve civil needs as well. Automation departments were established in
many scientific institutions, as well as in most of the educational entities. In the mid-80s, the secondary
schools' computerization program was put in place. However, by 1990, only 5-6% of schools were
equipped with computer classes.
* Stage 3. Software development in independent Armenia.. The first private software engineering
company was established in 1987, a year after the Soviet Law on Co-Operatives was enforced. Due to the
very limited size of the local market, the number of private software companies before 1991 was very
small. The following energy crisis of 1992-1995 obviously did not contribute to the development of the
sector. An emigration of IT specialists started in that period.
Present Situation
The number of officially registered firms in founding charters in which there is a reference to "computer,
software and related activities" is about 300, however the number of active companies developing software
on a regular basis is about 35.
From the ownership point of view, only five out of thirty five are controlled by government agencies
(mainly in the form of daughter companies). Among the 35 noted above 12 are foreign and 23 are local.
Among local companies, 16 are producing for the local market and 7 are working for the Russian market
and trying to enter other European markets.
Local companies focusing on the local market are typically small-sized. Their main products are
accounting systems for banks and enterprises, related Management Information Systems, entertainment
language teaching and orthographical packages. Almost all of them carry out other activities including
trading in hardware and software, networking and computer systems maintenance. Clients include both
state and private organizations. Currently these companies are experiencing difficulties in terms of
growing competition in the local market, declining profitability and high employee turnover. One of the
major problems is the fact that many specialists leave their companies and join expanding or newly set up
subsidiaries of foreign firms which offer several times higher pay rates and better working conditions. For
exporting they will need to adapt their existing products to foreign standards, to focus on new products that
enjoy high demand in foreign software markets, and implement intemational marketing. These will require
substantial financial resources.
Local companies focusing on export markets. These companies mainly produce leaming courseware and
- 52 -

implement Web page design. Learning courseware includes computer literacy courses, language teaching
courses and electronic texts on various subjects for secondary education. Products are mainly sold to the
Russian market. Trade links with Russia are based on relationships established under Soviet times.
Russian partners are usually companies related to major educational and research centers. In some cases
Armenian and Russian companies have common shareholding. Armenian companies are also trying to enter
European markets. A particular emphasis is placed on the Armenian Diaspora and its interest in learning
the mother language. Companies mention possible contracts with Americans on flash animation and
AutoCAD based programming. Successful marketing will boost their sales abroad. Companies need
funding to hire qualified staff and to train young graduates.
SW Products. Almost half of the products (in value) are ones oriented toward business applications. The
proportion of Internet and E-Commerce packages will probably rise in the future.
Subsidiaries offoreign companies. These are mainly owned by American companies. There are no
significant contacts with other software centers (India, Israel, Poland, Malaysia, Philippines, or Bangladesh) yet.
They receive orders from parent companies on implementation of particular projects and are not involved in
selling their products. The major advantage for parent companies is substantially low labor costs. For the
latter ones, the advantage is the availability of funds from parent companies and hence the possibility to
hire the best specialists in the Armenian market. There is a dangerous trend, however, that such companies
are "absorbing" the best specialists of the local market, thus transforming the local software firms into
"training centers" for themselves. They do not encourage emigration of their staff.
The total number of IT-related specialists is more than 15,000 in Armenia, even given the recent emigration
trends. 4,000-6,000 of them are software specialists, who are either unemployed, employed by other
institutions or businesses (banks, "Armentel", Academy of Science etc.), or involved in other activities.
550-650 specialists are employed by local private companies and 400-450 - by subsidiaries of foreign
companies.
The demand for qualified software specialists in local market is already exceeding the supply and industry
specialists predict that this gap will be widening. Annual incremental demand for software specialists is
approximately 200, and in the near future this figure will grow substantially due to the expected expansion
of existing foreign owned companies and the establishment of new ones. On the supply side, the main
source for recruitment is young graduate programmers. Annually Armenian education centers generate on
average 300 graduates who are directly related to software programming. According to local companies,
only 30% of them are worthy for recruitment. It is a common practice for companies to invite
undergraduate students to work for them on a part-time basis for small compensation but they receive
on-the-job training. After graduation, companies recruit them as full time specialists.
In addition some 15-20 of the best university tutors give private lessons on software to those who can
afford them 2-3 times a week. The students that take such private training courses are either those who are
preparing to emigrate or those willing to get employment with one of the foreign software companies in
Armenia. Another source for recruitment is older generation specialists, who used to work in the industry
during the Soviet era. Most of these specialists have not worked for the last eight to ten years and are far
behind in recent developments in programming and information technologies. Local companies estimate
that it will be much more expensive to recruit and retrain these specialist than young graduate
programmers. The supply of specialists from this source is estimated to be 30 to 50 people per annum.
Figure 3. presents the estimates on recent trends in human capital movements.
The average wages in the industry vary from USD150400/month in local software firns, and from
USD300-1,200/month in foreign companies.
- 53 -

Figure 3. Human capital trends (1987-2000)
1200 -
1100
., i l1 !
Brue by SW mSi
U) 900
Om800
f70 ~Emyd by bcW SWfirrrr
IA- 600pd~ ybiiS~
500
L- ~~~~~~~~~~~~~~EmpkM
by al SW1imr.
E 400 -Enaldi hye
z 3 0 0
200 -
100 . o
0
r- C 0 N U (0 .r C O 0 0
CO 10 o ax o o o a
0 0 0 0 0 0 0 0 , 0 N
Year
Sales. By the end of 2000, estimated total annual sales in the IT sector amounted to USD 18-20 million.
Annual software sales by local companies amounted to USD2-2.5 million. While sales of the subsidiaries
of foreign companies comprise 100%, the sales of Armenia companies comprise only 10 to 50 percent of
exports content. The sector provides for about 5% of the total official Armenian export at the moment.
Figure 4. presents the estimated growth of the local and foreign SW firms' turnover since 1987.
Estimates for growth also are considered from two perspectives: growth of software industry with and
without foreign owned companies. In the first case, the annual average growth rate for the period of
1997-99 is estimated to be about 100%. Annual growth rates of sales by local companies over the same
period is much lower and represents 30-40% on average.
- 54 -

Figure Figue
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un, affects the country's potential to develop a strong IT industry. The following factors induce young IT
specialists to leave: permanent problems with finding and/or retaining a well-paid steady job, problems with
military service, and the open-door policy in Western countries for IT specialists. It is estimated however
that the "break-even point" of monthly stable compensation to a standard software programmer should be
at least USD750 so that he/she stops actively seeking a job overseas.
Insufficient level of education. The local universities, and particularly IT related departments, are not
able to deliver up-to-date knowledge in the field. In most cases, even the best graduates need several
months of updating to their qualifications and on the job training. Companies are forced to closely
supervise recently graduated students.
Market. Limited domestic market. All sources of domestic demand for IT work, such as banks,
enterprises, other software companies, public agencies, NGOs, mass media, and others, both separately and
altogether, are very small. The market is being shrunk even more by the availability of many software
product. (off-the-shelf) for very cheap prices, and also by the fact that many local businesses and
organizations that could potentially express interest in local software firms' products have retained and/or
developed their own automation/software departments.
Marketing, market research and product promotion. Very few IT companies have a marketing specialist
who would be responsible for product promotion, new market niche identification, etc. Branches of foreign
companies in Armenia are not involved in marketing matters at all, because their function is typically
enLineerivg rather than entrepreneurial.
f'inance. Most of the managers/owners of local software companies had not accumulated significant
personal savings to invest in the start-up capital of their firms. In many companies, software products were
developed without proper costing and a revenue stream to cover such costs For this type of firm it is very
difficult to leverage their equity, since their capital is intellectual rather than material, and banks would not
be eager to extend loans to such companies.
Legal and administrative barriers. Protection of property right. For any investor in a high technology
business the precondition for making investments would be (i) the existence and (ii) proper enforcement of
the intellectual property rights (IPR) protection. The Law on Intellectual Property grants companies the
exclusive right to use work undertaken by employees. However, that right is limited to 10 years only, after
which the right of use is forcibly passed back to the authors-individuals, irrespective of any prior contracts
signed between the firm and its employees. This means that an employee, after 10 years, may claim back
all rights to the company's product. The enforcement mechanisms are very weak. This reflects the
activities of local companies oriented mainly in the domestic and CIS market. Some companies lose
significant amounts of profits due to piracy of their popular products and have to invest much effort, time,
and resources to develop security codes and keys. But most PC users in Armenia, including most of
software firms, widely use pirated versions of software packages to develop their products.
Red tape. Although the registration procedures have been, and are constantly simplified, in practice it still
takes more than a month to complete the registration of a company with limited liability, and even longer in
the case of a joint stock company. Another factor is the system of "tips" to bureaucrats for performing
valid legal actions. This layer of corruption is a barrier for potential foreign investment. The usual
inability of a private company to get wrongly collected taxes back is one example of the red tape that has to
be overcome..
Armentel's monopoly. Armentel telecommunication company has the legal rights to act as monopolist
- 56 -

for 15 years. "Armentel" was first set up as a joint venture with an unknown offshore company in 1995,
and then the control package of shareholding was sold to OTE-a Greek State-owned telecommunication
company. "Armentel" is currently offering poor levels of service and communication quality, and
arbitrariness in providing Internet channels, etc. Small software firms do not usually have resources, and
they have to use Dial-Up service via ordinary phone lines. Thus, apart from problems with Internet speed,
they often have problems in getting connected to the ISPs' modems.
There are presently 15 active Internet Service Providers (ISPs) in Armenia. They cannot effectively
compete with one another, since they all have to use "Armentel" channels.
Other Factors! Organizations affecting the Industry. Persons of Armenian origin -- the Diaspora -- are
quite actively involved in the IT sector in North America and Europe. Almost all companies with foreign
capital are branches of much larger and stronger Western IT companies owned/managed by Armenians.
The initiatives might be of both a philanthropic and a purely business nature.
There are a number of locally registered NGOs active in Armenia. They organize various seminars and
issue promotional materials on the Internet, software, and IT in general. No major results have been
reported yet. However, the trend to unite for some reasons, as opposed to purely compete for the local
software firms, is positive.
- 57 -

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