Report No. PIC3212 Project Name Armenia-Education Financing and (@) Management Reform Project Region Europe and Central Asia Sector Education Project ID AMPA8281 Borrower Government of Armenia Implementing Agency Ministry of Education and Sciences Kchorenatsy St.,Yerevan, Armenia Tel/Fax: 374-2-151651 Contact Point Ministry of Education and Sciences Karine Haratunian Kchorenatsy St.,Yerevan, Armenia Tel/Fax: 374-2-151651 Environment Category C Date This PID Prepared April 23, 1997 Projected Appraisal Date April 28, 1997 Projected Board Date September 14, 1997 1. Country Background: A landlocked country with a land area of 29,800 square kilometers and a population of 3.75 million, Armenia has few natural resources and its people have survived through strong traditions of education and entrepreneurship. Following the breakup of the former Soviet Union (FSU) and its independence in 1991, Armenia inherited a distorted, inefficient and obsolete national economy strongly affected by the collapse of the central planning system and disruption of traditional trading arrangements within the FSU. The consequent economic and social problems were compounded by the devastation caused by the 1988 earthquake, and by a virtual economic siege which resulted from the political conflicts in Georgia and the dispute with Azerbaijan over Nagorno- Karabakh. These conditions precipitated a catastrophic decline in output (estimated to have dropped by 52 percent in 1992 and a further 15 percent in 1993) accompanied by hyperinflation which accelerated to 900% in the last two months of 1993. 2. Since 1994 Armenia has made huge strides in reforming its economy and in establishing a suitable policy framework. The stabilization program, sustained since early 1994, reduced the budget deficit to 7 percent of GDP in 1996, less than one sixth of the 1993 figure. Annual inflation has fallen to less than 10 percent. After two years of collapse, GDP grew by 5.4 percent in 1994 (when per capita GNP was estimated at US$ 670), by nearly 7 percent in 1995 and, according to preliminary estimates, by a further 6.3 percent in 1996. The core of the Government's reform program has been stimulation of the private sector. Privatization has proceeded quickly, with over 4000 small enterprises and about 1000 medium and large enterprises privatized to date. Prices have been liberalized, and most consumer subsidies, including that on bread, have been removed. Clearing trade arrangements have been eliminated, and the foreign exchange and trade regime liberalized. Despite these improvements, inequities which have been growing fast since 1991, are remaining high. The impact of these improvements are also not yet felt in the social sectors which need to be restructured. 3. Sectoral Background: With a literary heritage dating back more than 1600 years, education has long been regarded by Armenians as the main factor in maintaining national identity. The Armenian education system was one of the strongest in the FSU, and the proportion of university graduates in the Armenian population is higher than in many OECD countries. Armenia has inherited a comprehensive basic education system which comprises some 1,070 pre-school, and 1,470 primary-secondary schools serving 606,000 registered students. After up to four years of pre-school, children enter primary school at the age of seven. Funding for pre-school education comes from a combination of State funds and parental contributions, while primary-secondary schooling, comprising ten grades, is compulsory and free of charge, at least in principle. The country also has a number of boarding and special schools, as well as schools offering specialized instruction in music, art and sports. A declining minority of children leave school at grade 8 to attend separate technical vocational schools. Public funding for education has collapsed since independence. In the late 1980s, education expenditure was supported by the general budget of the Soviet Union at an estimated average unit across all levels equivalent to approximately US$500-600. The first budget of independent Armenia, for 1992, was based on a per student allocation for general education of a mere US$24. In 1997, it is still very low at about US$30. 4. Main issues in the sector: (i) The decline in the quality of education: reversing the decline will require an increase in the allocation of funds in the State budget: investment in facilities furniture and equipment are grossly inadequate after six years of negligible funding for repair, replacement or upgrading. Teachers' pay and incentives are also grossly inadequate; they have been receiving only nominal salaries, equivalent to US$ 12 per month in 1996. Failure of the system for provision of textbooks has become a particularly critical issue. The Social Assessment has revealed that only 309 of pupils had access to textbooks. A further challenge is the need to adapt curricula and teaching and assessments methods to the needs of students in a market economy; (ii) Low efficiency of the system: in the short and medium term, there is a crucial need to address the widespread inefficiencies in the system, in particular the unsustainably generous distribution of facilities and personnel, and to reallocate funding to priority areas such as teachers' salaries and training and school maintenance. Under the existing structure of school finance and management, which is based on central control through line item budgeting, there is little room for flexibility and innovation at the school level; (iii) Increasing inequities in access to -2 - education: there is a real danger that lack of access to education for those experiencing "transitional" poverty could become the major factor in the emergence of structural poverty in Armenia over the medium and long term. 5. Project Objectives: The primary objectives of the project are: (i) to facilitate improvements in school performance by promoting school level initiatives and improving the supply of textbooks and teaching materials; (ii) to help build the necessary institutional framework and capacity, at the central, marz and school levels, for more efficient and sustainable operation of the basic education system. 6. Project Description: The project would provide, over five years, assistance for institutional strengthening through technical assistance, local and external training, as well as financing the purchase of textbooks, equipment, computer equipment and hardware and software, vehicles, furniture and incremental recurrent costs. The project components follow. 7. Improve Textbook Production and Distribution (US$8.9million). The component will support the introduction of publishers' competitions for textbook procurement, the payment of rental fees by parents for book loans, the accumulation of these payments in revolving funds at the school level, and the shift to a demand- based system in which schools make their own decisions concerning textbook priorities. 8. Improve Efficiency and School Management (US$1.9). This component aims to support detailed design, piloting and implementation of two key elements of the government's strategy for improving efficiency in the general education system: (i) increasing efficiency through consolidation of schools and rationalization of staffing; and (ii) improving efficiency and school performance by granting legal and financial autonomy to schools. The component has three sub-components: (1) A Pilot School Consolidation Program (US$ 0.3 million.) This sub-component will support: (i) the development of an Education Management System; (ii) pilot the application of the MIS in the development of regional rationalization plans, including school consolidation and revised staffing norms; (iii) pilot the implementation of these plans in two regions (Marz). (2) A Pilot School Improvement Program (US$ 1.5 million). This sub-component will make grant funds available to qualifying individual schools on the basis of expenditure priorities determined by their elected parent teacher boards. (3) Capacity Building for School Autonomy (US$ 0.13). This sub-component will finance training of principals and school board members in their new financial and management functions and TA and training to build capacity at the Marz level in monitoring of school performance. 9. Support for Project Implementation (US$ 0.6 million). The -3 - project will finance a Project Management Unit (PMU) in the Ministry of Education and Sciences. The PMU will provide support to departments in charge of the implementation of the different components of the project and will have responsibility for procurement, disbursement, maintaining the project accounts and monitor project implementation. 10. Project financing. The proposed IDA Credit of US$8 million would finance about 70% of project costs. The National Contribution to the project is estimated at US$800,000 equivalent to 6% of total project cost. Other donors have been approached to provide grant financing for purchase of textbooks involving about US$ 3.2 million. 11. Project Implementation. The Ministry of Education and Sciences will be responsible for project implementation. In order to facilitate implementation, a Project Management Unit (PMU) will be set up in the MoES. The PMU will be an extension of the existing Project Preparation Unit which is, at the moment, in charge of project preparation. The PMU will be reporting to the Project Steering Committee and will be responsible for the timely implementation, monitoring and evaluation of project activities. The Project Steering Committee will be set up with representatives of the ministerial departments directly involved in project implementation and representatives of the Ministries of Economy and Finance. The Pilot School Improvement Program will be managed by a separate small unit attached to the PMU. The two working groups will be set up in the MoES during Project Preparation, one for the preparation of the textbook strategy and the other for the preparation of the education management and financing strategy. These working groups will continue their tasks of refining strategies and monitoring their implementation under the project. 12. Project Sustainability: The textbook component has been designed to ensure sustainability through revolving funds for textbook rentals. After the end of the projects, the schools should have enough funds to reorder textbooks after four years. Capacity in the Ministry will be strengthened to manage the ordering system. The School Consolidation Program should permit reallocation of funds within the Government budget to increase recurrent financing for schools, enhancing the sustainability of general education as a whole. School autonomy and involvement of the community in school management should permit better use of resources at the school level and increase the level of community contribution to schools, increasing their efficiency. 13. Rationale for Bank Involvement: The project supports the objective of the new Country Assistance Strategy for Armenia which puts human resources development at the core of proposed Bank support. The poverty assessment emphasizes the crucial role of the basic education sector in meeting the human capital needs for economic growth, in limiting the danger of longer term structural poverty in Armenia, and in promoting social cohesion. The 1996 social assessment of health and education revealed the strength of public concern about the deterioration in basic education services: 50% of respondents in the household survey named education as the - 4 - number one problem facing the country, while 83% placed education in the top three problems; within education, the biggest concern was overwhelmingly that of textbook supply. The project is closely linked to the Structural Adjustment Credit (SAC) . The specific measures described in the letter of development policy for the SAC provide the policy framework for the project. The government's strategy for education reform is ambitious and would be virtually impossible without external resources. 14. Lessons Learned from Past Bank Experience: Armenia is implementing six investment projects under IDA and one under IBRD. Experience from implementation of recent IDA projects shows that the Government has the capacity to administer and implement a project in a satisfactory manner and within an agreed timetable. However, the MoES has very little experience with project implementation because very few donors are active in the sector. The Project Preparation Unit (PPU) is implementing a PPF and a PHRD grant successfully at the moment. The project will strengthen the implementation capabilities of the Ministry of Education and Sciences. 15. Poverty Aspects: The project does not target specifically the poor; however, it will contribute to a decrease in the cost of textbooks, making them more affordable to the poor and support a system of provision of free textbooks to the most vulnerable children through targeting of State subsidies. 16. Environmental Aspects: The project will have no negative environmental impact, and has been approved for category C rating. 17. Participatory Approach: Project preparation involved a wide range of stakeholders, through interministerial working groups set up to design project components, through national and regional workshops and through consultations with school principals. A social assessment was also conducted in the summer of 1996. Contact Point: Alexandre Marc, Task Manager. The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending June 20, 1997. - 5 -