FAST Report

Project Number: 50146-002 May 2020

Loan

Electric Networks of Armenia CJSC

COVID-19 Working Capital Support Project

(Armenia)

This is an abbreviated version of the document, which excludes information that is subject to exceptions to disclosure set forth in ADB’s Access to Information Policy.

CURRENCY EQUIVALENTS (as of 28 April 2020)

Currency unit Armenian dram (AMD)

AMD1.00 = $0.0020853 $1.00 = AMD479.55

ABBREVIATIONS

ADB – Asian Development Bank CJSC – closed joint-stock company COVID-19 – coronavirus disease EBRD – European Bank for Reconstruction and Development ENA – Electric Networks of Armenia ESMS – environmental and social management system EUR – Euro FAST – Faster Approach to Small Nonsovereign Transactions JSC – joint-stock company LTA – lender’s technical advisor PSRC – Public Services Regulatory Commission US – United States

NOTES

(i) The fiscal year (FY) of Electric Networks of Armenia ends on 31 December.

(ii) In this report, “$” refers to United States dollars.

Vice-President Diwakar Gupta, Private Sector Operations and Public–Private Partnerships Director General Michael Barrow, Private Sector Operations Department (PSOD) Director Shantanu Chakraborty, Infrastructure Finance Division 1 (PSIF1), PSOD Team leader Wolfgang Pocheim, Investment Specialist, PSIF1, PSOD Team members Genevieve Abel, Principal Transaction Support Specialist, Private Sector

Transaction Support Division (PSTS), PSOD Rosana Aglibot-Bado, Senior Investment Officer, Office of the Director

General – Risk Analytics Unit, PSOD Narine Avetisyan, Investment Officer, Armenia Resident Mission, Central

and West Asia Department Pierre Bailet, Principal Counsel, Office of the General Counsel

Arianne Bianca Juan, Operations Assistant, PSIF1, PSOD Manfred Kiefer, Senior Economist, PSTS, PSOD Melissa Manguiat, Senior Safeguards Officer, PSTS, PSOD

Sergey Mokroussov, Investment Specialist, Portfolio Management Division, PSOD

Raneliza Samiano, Senior Social Development Officer, PSTS, PSOD Amanda Satterly, Senior Social Development Specialist (Gender and

Development), PSTS, PSOD Samia Tariq, Investment Specialist, PSIF1, PSOD Jesus Ventura, Senior Investment Officer, PSIF1, PSOD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page PROJECT AT A GLANCE INTRODUCTION 1

THE PROJECT 1

Project Identification and Description 1 Development Impact, Outcome, and Outputs 3 Alignment with ADB Strategy and Operations 3 Project Cost and Financing Plan 4 Implementation Arrangements 4 Projected Financial and Economic Performance 5

THE ADB ASSISTANCE 6

The Assistance 6 Value Added by ADB Assistance 6 Risks 6

POLICY COMPLIANCE 7

Safeguards and Social Dimensions 7 Anticorruption Policy 9 Investment Limitations 9 Assurances 9

THE PRESIDENT’S DECISION 9

APPENDIXES 1. Design and Monitoring Framework 10 2. List of Linked Documents 12

INTRODUCTION 1. This is an eligible transaction under the Faster Approach to Small Nonsovereign Transactions (FAST) framework 1 and Asian Development Bank’s (ADB) Comprehensive Response to the COVID-19 Pandemic.2 The transaction involves a loan of up to $20,000,000 to Electric Networks of Armenia Closed Joint-Stock Company (ENA) for the COVID-19 Working Capital Support Project in Armenia. 2. The proposed loan will assist ENA to relieve the financial stress caused by delayed payments of electricity bills by ENA’s private customers due to the coronavirus disease (COVID-19), which could otherwise lead to deterioration of its services and ultimately disrupt Armenia’s access to electricity.

THE PROJECT

Project Identification and Description 3. Project identification. On 16 March 2020, the Government of Armenia declared a state of emergency in the country, restricting operations of non-essential businesses and ordering citizens to stay at home. Under these circumstances, many of ENA’s private customers have been unable to pay their electricity bills because of (i) restrictions on their movement within the country; (ii) limited access to banks and points of payment; (iii) overloaded online payment systems; and (iv) financial stress, which is affecting a majority of residents and small businesses. 4. ENA’s services 3 are considered essential, and its regulator—the Public Services Regulatory Commission (PSRC)—has requested that ENA continue to supply energy to its private customers during the period of the state of emergency, even in the case of non-payment of electricity bills. Although customers became obligated to pay their electricity bills on time as of 22 April 2020 those users most affected by the crisis lack the means to do so. Given the critical nature of electricity, ENA, to the extent possible, intends to continue uninterrupted power supply even to its most vulnerable consumers despite a lack of timely payment for its services. The economic effects of the pandemic on ENA’s business are expected to worsen for a minimum of several months. During this time, ENA will have to absorb the cost of serving its non-paying customers and continue its operations to provide an uninterrupted supply of electricity throughout Armenia. This will add significant stress to ENA’s liquidity position during the rest of 2020. 5. Project design. As a response to ENA’s financial stress, ADB’s proposed assistance will fund increased working capital needs arising from deferred payments by ENA’s customers. There is a clear need to provide sector-wide assistance to address some of the economic constraints caused by the COVID-19 pandemic; ADB's involvement, which is the first of its kind in Armenia, will establish a precedent and help mobilize private sector interventions in response to the crisis. 6. The proposed project involves an emergency working capital facility for ENA. The facility will be used to fund ENA’s day-to-day operations and assist ENA to meet anticipated shortfalls in liquidity resulting from deferred bill payments by its customers for a tenor of up to 1 year. ENA is an existing ADB client, and is currently implementing the Distribution Network Rehabilitation,

1 Asian Development Bank (ADB). 2015. Faster Approach to Small Nonsovereign Transactions. Manila. 2 ADB. 2020. ADB’s Comprehensive Response to the COVID-19 Pandemic. Manila. 3 ENA is the sole entity responsible for operation, maintenance and expansion of the energy distribution network in

Armenia. ENA purchases electricity from all Armenian power producers and provides services to more than 1 million customers.

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Efficiency Improvement and Augmentation Project, funded by ADB and the European Bank for Reconstruction and Development (EBRD).4 The ADB and EBRD loans have been fully disbursed and project implementation is fully on track. 7. Borrower. ENA is 70% owned by Tashir Capital Closed Joint-Stock Company (CJSC) (incorporated in Armenia) and 30% owned by Liormand Holdings Limited (100% owned by Tashir International Holding Limited incorporated in Cyprus). Both Tashir Capital (Armenia) and Tashir Holdings (Cyprus) are ultimately owned by Mr. Samvel Karapetyan and his family, making Mr. Karapetyan and his family the 100% beneficial owners of ENA. 8. Tashir Capital CJSC was incorporated in 2016. Liormand Holdings was incorporated in 2010 and is a company within the Tashir group of companies owned by Samvel Karapetyan. Founded in 1999, Tashir group is one of the largest groups of diversified industrial and construction companies operating across several industrial sectors in the Russian Federation. Based in Moscow, the group includes more than 200 companies and employs more than 45,000 people. The Tashir group’s areas of business include finance, manufacturing, construction, development, energy, retail and catering. 9. ADB conducted integrity due diligence on ENA, its beneficial owners, managers and significant contracting entities.5 (Confidential information redacted.)

10. (Confidential information redacted.) 11. ADB conducted enhanced tax integrity due diligence.6 (Confidential information redacted.)

Development Impact, Outcome, and Outputs 12. Impact. The project is aligned with the Armenian Government’s plan to improve social and economic resilience to the COVID-19 crisis.7 13. Outcome. The project’s outcome is ensured continuity of ENA’s electricity supply and distribution. 14. Outputs. The outputs are (i) continuity of electricity generation payments by ENA ensured, (ii) ENA’s female staff supported during the COVID-19 crisis, and (iii) flexibility of ENA’s work arrangements increased.

4 ADB. 2017. Report and Recommendation of the President to the Board of Directors: Proposed Loan to Electric

Networks of Armenia CJSC for the Distribution Network Rehabilitation, Efficiency Improvement, and Augmentation Project in Armenia. Manila.

5 ADB. 2003. Enhancing the Asian Development Bank's Role in Combating Money Laundering and the Financing of Terrorism. Manila. Further information is provided in Integrity and Tax Due Diligence (accessible from the list of linked documents in Appendix 2).

6 ADB. 2016. Anticorruption Policy: Enhancing the Role of the Asian Development Bank in Relation to Tax Integrity. Manila. Further information is provided in Integrity and Tax Due Diligence (accessible from the list of linked documents in Appendix 2).

7 Statements of the Prime Minister of Armenia on 10 April 2020.

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Alignment with ADB Strategy and Operations 15. Consistency with ADB strategy and country strategy. The project is aligned with two operational priorities under ADB’s Strategy 2030:8 operational priority 2 (accelerating progress in gender equality) and operational priority 4 (making cities more livable). Ensuring the supply of electricity will enable economic activity across the country and enhance the resilience of Armenian cities to sustain and support an effective response to the pandemic and limit its negative externalities. Access to electricity is a basic human need and all households and businesses across Armenia will benefit from the supply of uninterrupted electricity in all cities. This loan has no climate change impact. It therefore does not qualify as climate mitigation or adaption financing and no emission reduction effect can be attributed to it. 16. The project addresses the strategic priorities of ADB’s country partnership strategy for Armenia, 2019–2023 by supporting diversified growth and wider inclusiveness with nonsovereign financing for a priority infrastructure investment in energy. The proposed loan is also aligned with priority areas of ADB’s country partnership strategy for private sector development, as it will support a commercially viable private sector solution during the crisis.9 17. Consistency with sector strategy and relevant ADB operations. The proposed project is in line with ADB’s operational plan for Private Sector Operations 2019–2024,10 as well as ADB’s Energy Policy,11 as it supports a private sector utility in energy which is a strategic operational priority and it focuses on energy security and countrywide access to electricity. The policies encourage ADB to help its developing member countries provide reliable, adequate, and affordable energy for inclusive growth in a socially, economically, and environmentally sustainable way. 18. Lessons from previous operations. This is ADB’s second transaction with ENA. The previous project with the borrower improved ADB’s understanding of the regulatory framework for the sector. Similarly, working with ADB as a senior lender has improved ENA’s corporate governance structure in terms of its operational, environment and social and legal documentation aspects. These lessons will help identify and mitigate some of the key inherent risks in the sector and further improve governance of the energy sector through ENA.

Project Cost and Financing Plan 19. (Confidential information redacted.) 20. (Confidential information redacted.) 21. (Confidential information redacted.)

Implementation Arrangements 22. (Confidential information redacted.)

8 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific.

Manila. 9 ADB. 2019. Armenia: Country Partnership Strategy, 2019–2023. Manila. 10 ADB. 2019. Operational Plan for Private Sector Operations, 2019–2024. Manila. 11 ADB. 2009. Energy Policy. Manila.

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Projected Financial and Economic Performance 23. (Confidential information redacted.) 24. (Confidential information redacted.) 25. (Confidential information redacted.)

THE ADB ASSISTANCE

The Assistance 26. ADB’s assistance will comprise a secured loan of up to $20 million from its ordinary capital resources.

Value Added by ADB Assistance 27. ADB adds value by providing critical support to address short term liquidity constraints at a time of crisis when local commercial banks are unable to. Only a few international banks are active in the country; given the political, security, and regulatory uncertainties related to the COVID-19 pandemic, banks have become more risk-averse. ADB support is crucial to ensure business continuity for Armenia’s sole electricity distributor and largest employer. Through prior existing relationships as well as the proposed loan, ADB has been able to foster a strong relationship with ENA that will help facilitate increased focus on gender equality, even during this crisis.

Risks 28. (Confidential information redacted.) 29. (Confidential information redacted.) 30. (Confidential information redacted.) 31. (Confidential information redacted.) 32. (Confidential information redacted.) 33. (Confidential information redacted.)

POLICY COMPLIANCE

Safeguards and Social Dimensions 34. ADB has categorized the investment in compliance with ADB’s Safeguard Policy Statement (2009) as follows: environment (category C), involuntary resettlement (category C), and indigenous peoples (category C).12

12 ADB. Safeguard Categories.

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35. ADB has undertaken due diligence and reviewed the potential environmental and social impacts of the project and the measures to avoid, minimize, mitigate, and compensate for any adverse impacts in the safeguard reports and plans. The environmental and social measures and the institutional capacity and commitment of ENA to manage the project’s social and environmental impacts are deemed adequate. 36. (Confidential information redacted.) 37. Operational assets of ENA have been rehabilitated, improved and expanded under the existing ADB loan.13 The environmental and social impacts related to ENA’s operational assets are managed through ENA’s existing environmental and social management system (ESMS), which was prepared in 2017 in compliance with ADB’s Safeguard Policy Statement requirements. ENA has established an Integrated Management System and Audit Department to undertake routine monitoring on all of ENA’s sites and reports on their ESMS compliance. Each branch of the company has an assigned staff member responsible for addressing occupational safety and health and environmental issues within its network of operations. 38. ENA holds International Organization for Standardization 14001 certification, which requires annual independent audits to maintain certification. A lender’s technical advisor (LTA) was separately engaged to supervise the implementation of the existing loan on a 6-monthly basis, including implementation of the corporate environmental and social action plan and the project’s Environmental and Social Management and Monitoring Plan. (Confidential information redacted.)

39. ENA will continue to (i) apply ADB’s prohibited investment activities list, (ii) comply with ADB’s Safeguard Policy Statement, and (iii) abide by national laws and regulations. ENA will comply with national labor laws and, pursuant to ADB’s Social Protection Strategy (2001), will take measures to comply with the internationally recognized core labor standards. ENA will report regularly to ADB on (i) its compliance with such laws and (ii) the measures taken. Information disclosure and consultation with affected people, if needed, will be conducted in accordance with ADB requirements. 40. Some gender elements. The impact of COVID-19 is worse for women and girls simply by virtue of their sex.14 The economic impacts felt by women and girls are compounded, as they generally earn less, save less, and hold insecure jobs or live close to the poverty line. Women in Armenia have lower access to financial services than men which reduces their ability to withstand the financial and social shocks associated with the COVID-19 crisis. According to the 2017 Global Findex database,15 while 48% of adults in Armenia have a bank account, the proportion of women with accounts is 15 percentage points less than men. In addition, only 25% of women compared with 38% of men saved money in 2016, and 20% of women compared with 27% of men received domestic remittances. Women below 51 years old have limited access to bank transfers, with the responsibility belonging to male members of the family. With limited access to bank accounts, less savings and no credit history women have limited opportunities for emergency loans from banks much needed during this time. The health of women generally is also adversely impacted through the reallocation of resources and priorities, including sexual and reproductive health services. Unpaid care work has increased because children are not in school, while older persons

13 ADB. 2017. Report and Recommendation of the President to the Board of Directors: Proposed Loan Electric

Networks of Armenia CJSC Distribution Network Rehabilitation, Efficiency, Improvement and Augmentation in Armenia. Manila.

14 United Nations. 2020. Policy Brief: The Impact of COVID-19 on Women. 15 World Bank. The Global Findex Database 2017.

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have heightened care needs, and health services are overwhelmed. (Confidential information redacted.) Currently 12% of ENA’s 6,867 staff are women. ENA commits to implement measures to promote gender equality and/or women’s empowerment in its business activities following ADB’s Policy on Gender and Development (1998). Key features of the gender action plan are as follows: ENA’s Collective Agreement,16 which regulates staff benefits and working conditions, will be amended (i) such that all female employees are allowed to work from home on full pay during the COVID-19 crisis if they have either children under 14 years of age or family members either with health issues or over 65 years of age; all female and male staff are provided access to psychological assistance to help them cope with stress, anxiety or depression; and all female staff may avail of a staff loan (equal to 3 months’ salary) to address financial needs during the COVID-19 crisis; and (ii) to formalize flexible work arrangements for staff post COVID-19 crisis. ENA will submit periodic reports on implementation of these gender measures to ADB.

Anticorruption Policy 41. ENA was advised of ADB’s policy of implementing best international practice relating to combating corruption, money laundering, and the financing of terrorism. ADB will ensure that the investment documentation includes appropriate provisions prohibiting corruption, money laundering, and the financing of terrorism; and remedies for ADB in the event of noncompliance.

Investment Limitations 42. (Confidential information redacted.)

Assurances 43. Consistent with the Agreement Establishing the Asian Development Bank (the Charter),17 ADB will proceed with the assistance upon establishing that the Government of Armenia has no objection to the assistance to Electric Networks of Armenia CJSC. ADB will enter into suitable finance documentation, in form and substance satisfactory to ADB.

THE PRESIDENT’S DECISION 44. The President, acting under the authority delegated by the Board, has approved the loan of up to $20,000,000 from the ordinary capital resources of the Asian Development Bank to Electric Networks of Armenia CJSC for the COVID-19 Working Capital Support Project in Armenia, and hereby reports this action to the Board.

16 The Collective Agreement is negotiated by ENA’s Staff Council Committee and regulates wages, benefits, and duties

of ENA’s employees. 17 ADB. 1966. Agreement Establishing the Asian Development Bank. Manila.

7 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Impact the Project is Aligned with The Armenian Government’s plan to improve social and economic resilience to the COVID-19 crisis.

a

Results Chain Performance Indicators with

Targets and Baselines Data Sources and Reporting Risks

Outcome Ensured continuity of ENA’s electricity supply and distribution

By mid-2021 a. Number of active customers connected not less than 1,025,000 (2019 baseline: 1,041,852) b. Collection ratio has recovered to 100% in July 2021 (April 2020 baseline: 65%)

a-b. ENA’s annual development effectiveness monitoring report

Prolonged CОVID-19 crisis delays the restart of the Armenian economy. The economic recovery fails to meet expectations because of prolonged national emergencies or force majeure declared by the Government of Armenia.

Outputs 1. Continuity of electricity generation payments by ENA ensured

1. By end of 2020 ENA’s PPA obligations are 100% met (2019 baseline: 100%)

1-3. ENA’s annual development effectiveness monitoring report

2. ENA’s female staff supported during the COVID-19 crisis

2. ENA’s Collective Agreementb is amended to include the following by Q2 2021: (i) all female employees are

allowed to work from home on full pay during COVID-19 crisis if they have either children under 14 years of age or family members either with health issues or that are over 65 years of age;

(ii) all female and male staff are provided access to psychological assistance to help them cope with stress, anxiety or depression; and

(iii) all female staff may avail of a staff loan in case of financial need during the COVID-19 crisis equivalent to an amount of 3 month’s salary.

(2019 baseline: not available)

3. Flexibility of ENA’s work arrangements increased

3. ENA’s Collective Agreementb amended to include a Flexible Work Arrangement for staff that will apply post COVID-19 crisis by Q2 2021 (2019 Baseline: no policy)

8 Appendix 2

Key Activities with Milestones

1. ADB executes loan agreement with Electric Networks of Armenia by June 2020 2. Loan disbursed by June 2020 Inputs

ADB: $20 million (loan)

(Confidential information redacted.) Assumptions for Partner Financing

Provision of parallel loan from EBRD ADB= Asian Development Bank, COVID-19 = coronavirus disease, EBRD = European Bank for Reconstruction and Development, ENA = Electric Networks of Armenia, PPA = power purchase agreement, Q = quarter, SDG = sustainable development goal. a Statements of the Prime Minister of Armenia on 10 April 2020. b The Collective Agreement is negotiated by ENA’s Staff Council Committee and regulates wages, benefits, and duties

of ENA’s employees. Source: Asian Development Bank.

Appendix 1 9

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/FastReport/?id=50146-002

1. Sector Overview 2. Client Information 3. Details of Implementation Arrangements 4. Contribution to the ADB Results Framework 5. Financial Analysis 6. Economic Analysis 7. Country Economic Indicators 8. Summary Poverty Reduction and Social Strategy 9. Integrity and Tax Due Diligence