DRAFT SOL-111-10-000005 SECTION C.doc

SOL-111-10-000005

SECTION C

SECTION C - DESCRIPTION/SPECIFICATIONS/STATEMENT OF WORK

ENTERPRISE DEVELOPMENT AND MARKET COMPETITIVENESS (EDMC) PROGRAM

C.1

STATEMENT OF WORK

Purpose The Enterprise Development and Market Competitiveness (EDMC) Program (the Program) is a 5-year intervention designed to raise incomes and employment in Armenia by promoting growth in selected value chains with export potential. Value chains represent dynamic building blocks of the economy, subject to evolution and change. Focusing on the role of Small and Medium-sized Enterprises (SMEs), the Program is expected to facilitate the development of competitive enterprises and value chains by stimulating innovation, enhancing workforce skills, accelerating new enterprise formation, improving access to finance, and addressing shortcomings in the business environment. The Program will employ technical assistance, training, and grants to assist target value chains in “going global,” to reach into new and expand in existing markets. The Program is designed to be a catalyst, mobilizing additional resources from other sources to accelerate growth in the target value chains.

Problem Statement Rapid economic growth between 2000 and 2007 earned Armenia the moniker “Caucasian tiger.” Between 2003 and 2007, exports increased at an average annual rate of over 24 percent, albeit from a relatively small base. Remittances further fueled the economic expansion, contributing to a domestic construction boom. The construction sector has been the main contributor to GDP growth in Armenia since 2005, reaching 27 percent of GDP in 2008. However, in 2008, the global economic crisis slowed GDP growth to 6.8 percent, and exports declined slightly. In 2009, Armenia felt the full impact of the crisis: real GDP contracted by 14.4 percent, much of which was due to construction, and exports declined by almost a third (31.5 percent). Exports to the European Union (EU) and other European countries contracted by over 50 percent. Remittances, which quintupled in dollar terms between 2003 and 2008 (reaching almost 18 percent of GDP in 2008) collapsed by about 30 percent. Russia alone accounted for over 80 percent of them in 2008. Returning migrant workers added to the pressure in the country’s labor markets.

Still, there were some positive signs. In terms of the Doing Business rankings, Armenia actually improved its position. Between 2008 and 2009 Armenia moved from rank 50 to 43, in effect into the top 25 percent of the 183 countries rated. For “Starting a business,” Armenia’s ranking improved by 44 places, from rank 65 to 21. For “Trading across borders,” Armenia gained 34 places, from rank 136 to 102, still lagging behind its overall rating. The positive trend is also reflected in the World Bank Institute’s summary indicator of “regulatory quality,” where Armenia moved from a poor score in 1996 to above the median for all countries in 2008.

With respect to competitiveness, Armenia ranked just above the bottom 25 percent in the World Economic Forum’s Global Competitiveness Report (GCR). The country’s overall rank has remained steady over the past two years - at 97 out of the 133 (134 in 2008) countries ranked; it has actually dropped slightly from its position in 2007. Armenia scored especially low in terms of “Innovation and sophistication factors,” with a rank of 112. A recent assessment sponsored by USAID/Armenia confirmed that Armenian enterprises, and SMEs in particular, exhibit a generally low level of business sophistication. The country ranks low on the World Bank’s Logistics Performance Index (LPI): 111 out of 155 countries ranked, but relatively high on the Knowledge Economy Index (KEI), also developed by the World Bank: 56 out of 146 countries.

The largest foreign currency earnings source in Armenia is remittances, mainly from Russia. In 2008, for example, total remittances dwarfed the proceeds from commodity exports. Moreover, many of the country’s exports contain relatively little domestic value added. Precious stones (diamonds) are shipped in, cut and polished, and shipped back out. Aluminum (foil) is basically one factory, the former Kanaker aluminum smelter, now Armenal. The top five commodity categories (out of 100 commodity groups categorized by the Harmonized System) account for roughly 80 percent of total exports. And the only high-value added commodity group is beverages—primarily brandy.

As the LPI ranking suggests, Armenia faces serious potential systemic constraints regarding the infrastructure needed to support business development—telecoms, energy, and water. Constraints are further complicated by environmental issues related to the application of clean production/manufacturing principles, and the low incidence of third party certifications such as HACCP and ISO.

Since the onset of the global downturn, the Armenian authorities have swiftly implemented a range of measures to help contain the impact of the crisis. Financial support from external partners has played an important role, with Armenia receiving nearly $50 million from the World Bank for on-lending to SMEs, $500 million from Russia, and program support from a number of other donors. Despite the easing, credit growth has continued to decline, leading the government and the Central Bank to take additional measures. Bank lending rates, which have remained at around 18 percent, have not been responsive to the drop in both repo and interbank rates, which implies that the monetary transmission remains weak. The government and the Central Bank have arranged to on lend at competitive rates to SMEs and other targeted sectors through the Central Bank and commercial banks, using resources from Russia and other donors. Use of the lending facilities has been slow, however, as banks have tightened their lending standards in the face of economic uncertainty.

Armenia now faces the challenge of recapturing the growth rates of the past decade, but diversifying its base. That goal requires a focus on building the competitiveness of the private sector. Systems for knowledge utilization exist, but the kind of innovation needed for becoming and staying competitive is the product of broad range of factors. To achieve an appreciable impact, assistance should be focused on specific products and specific markets, that is, value chains that already exist or have potential. Such a focus holds the promise of strengthening Armenia’s private sector, improve its ability to compete in both the domestic and export markets, and diversify and expand exports as the basis for a more sustainable economic future. It allows for addressing the principal factors that shape competitiveness.

The Program Environment

The U.S. Government (USG) in Armenia has assisted the development of value chains (or targeted sectors) in Armenia for some time. USAID’s Armenian Small and Medium Enterprise (ASME) and the Competitive Armenian Private Sector (CAPS) activities are key examples of these assistance interventions. The USDA has been implementing a famer to market agricultural development program for some time. In addition, USAID has been promoting and supporting systemic changes in the fiscal and financial sectors since late 90’s. Within the EDMC Program, assistance to the financial sector will be integrated into a comprehensive effort to advance the competitiveness of selected value chains in Armenia at the micro-level.

The principal counterpart of the Program will be Armenia’s private sector, such as enterprises, value chains, and business associations. However, government institutions will also play a major role, shaping the business environment, encouraging and facilitating investment in certain sectors, and carrying out some form of industrial policy. Thus, relevant Government agencies, like Ministries of Economy or Finance, the Central Bank of Armenia, institutions under the Ministry of Economy, such as the Armenian Development Agency (ADA), and the National Competitiveness Foundation may also be counterparts for the Program. Academic and research institutions, as well as think tanks may also become partners in the implementation of the Program.

Finally, the Program will be coordinated with programs/projects sponsored by other donors in areas related to improving financial sector, workforce and entrepreneurship development, business environment reforms, or strengthening of enterprise management. On the multilateral side, these donors include the World Bank, IMF, IFC, EBRD, ADB, UNIDO, UNDP, and others. On the bilateral side, they include USDA, MCA, the EC, GTZ, Swiss Development Corporation, among others.

Strategic Links, and Goals and Objectives

The Program directly supports USAID/Armenia’s Economic Growth Assistance Objective (AO) of developing “A more competitive and diversified private sector.”

The principal goal of the Program is to achieve Intermediate Result (IR) 1 under the AO:

“Increased enterprise productivity and competitiveness.”

In addition, the Program is designed to achieve a major share of IR.2 “Improved regulatory and institutional framework for financial, trade, and ICT services” and to sub IR3.2 “Reduced pollution by use of improved environmental practices.”

Productivity is the market value of the product or service relative to the value of all resources used in the production. Achieving greater productivity of selected value chains therefore means upgrading the quality of products to meet (or exceed) market standards at a competitive price. Price in turn depends on the performance of the traditional factors of production—labor, capital, and technology. The business environment can affect both product quality and the cost of production, and thereby price. The Program therefore stresses tightening governance and integration of the value chains, and improving the management of enterprises involved to meet product quality and technology standards. In addition, the Program will support initiatives to facilitate access to finance and to enhance workforce development, both for the workforce and new entrepreneurs.

The Program will also work with value chain stakeholders to tackle priority business environment reforms critical for competitiveness. The combination of technical assistance, training and grants to strengthen management, finance, workforce development and the business environment delineates the underlying strategy of the EDMC Program. Thus, after careful selection of the target value chains, based on a rigorous sectoral economic analysis, the strategic targets will define the range of the Program, and the Contractor shall achieve the following four key objectives:

Develop more productive enterprises and value chain management capacity;

Enhance workforce skills and entrepreneurial development;

Improve business environment; and

Facilitate effective financial intermediation.

These four components must work in an integrated fashion to bring about lasting changes in Armenian enterprises’ competitiveness and diversification. The implementation of the Program will stress the integration of activities across these four objectives.

Program Objectives The Contractor will increase the productivity and competitiveness of selected value chains. Throughout the life of the Program, the Contractor will continue to assess value chain opportunities and constraints to validate whether the original selections remain valid and, if not, propose interventions in different value chain(s) for USAID approval. Once the target value chains have been identified and approved by USAID, the four key objectives of the Program are further defined by their sub-objectives illustrated below. Each of the sub-objectives has an associated set of expected results and finite deliverables:

Objective A: Develop more productive enterprises and value chain management

1.

Improve management skills to raise product quality and lower costs

2.

Employ greater use of business development services (BDS) and strengthen the capacity of BDS providers

3.

Adopt clean production processes

4.

Strengthen value chain governance and employ effective mentoring schemes

Objective B: Enhance workforce skills and entrepreneurial development

1.

Develop and implement innovative solutions to overcome skills constraints through public-private partnerships and other arrangements

2.

Facilitate the formation of new sustainable enterprises

Objective C: Improve business environment

1.

Remove business environment constraints and gaps that affect value chain competitiveness

2.

Intensify public-private policy dialogue on business environment reform

3.

Strengthen national innovation and quality standards system

Objective D: Facilitate effective financial intermediation

1.

Adopt innovative practices in financial services delivery

2.

Lower financing risks

3.

Promote foreign direct investment (FDI)

Expected Results and Deliverables Value chain selection

The selection of the target value chains (VCs) will proceed on two levels, consistent with USAID/Armenia’s Economic Growth Assistance Objective, “a more competitive and diversified private sector.” With respect to competitiveness, the Program seeks to raise the competitiveness of target value chains, thereby contributing to overall competitiveness of Armenia’s private sector. The contribution of the Program to the macroeconomic element, a more diversified private sector, will depend largely on the choice of these target VCs. The initial selection of potentially competitive VCs will be preliminary and will need to be updated and deepened as part of the more detailed appraisal of choices at the beginning of the Program, based on the potential of the VCs to contribute to greater diversification of the economy and the fit of the VC selection process into the broader vision of the economic development of Armenia. The approved selection of initial VCs will lead to development of a concrete Work Plan that will guide the activities across the four Program objectives.

The Contractor will give priority to value chains that offer the greatest opportunities for innovation and absorption of new management, production and marketing technology for private enterprises. The choice of target value chains should include, at a minimum, the following elements:

A thorough end market and market channel analysis, assessing the demand trends, internal trade relationships (wholesale, retail, direct contracting), and the behavior of competitors with respect to quality and price as well as trends in market share;

a determination of the potential of candidate VCs in terms of value added, exports, income and employment gains, and backward linkages into the economy for national suppliers, in particular for SMEs, whether existing or newly created;

an assessment of constraints on candidate VCs to reach their potential in terms of the factors of production, finance/capital, workforce, technology, upstream industries (including infrastructure), transportation and logistics, and business environment elements;

an appraisal of potential leadership and governance factors, including mentoring possibilities, both on the private sector and the government side.

Access to finance issues associated with value chain growth deserve particular attention. Value chain finance (VCF) has developed its own approaches and procedures, and the appraisal and selection of VCs should reflect best practices (see http://apps.develebridge.net/amap/index.php/resources). VCF issues related to intra and inter-firm finance issues should be incorporated into the final selection of target value chains and appropriate interventions for addressing financing gaps.

More in-depth Value Chain Analysis and Work Plan

At contract inception, the Contractor shall conduct a more detailed on-the-ground economic analysis of the value chains proposed for intervention, since some of the relevant data regarding potential and constraints may not be readily available. The in-depth value chain assessment will also involve formal consultations with value chain stakeholders. This interaction will be designed to ground-truth the analysis, leverage resources, and stimulate institutional responses. The VC appraisal will be updated at least on an annual basis to review the selections, add or drop value chains, and measure progress.

The rigorous analysis of the target VCs will identify the principal constraints on competitiveness and determine priorities for intervention across the four objectives. These constraints include distortive features of the policy and institutional environment, barriers to financial market access, workforce challenges, and VC organization and management issues. These assessments will feed into a concrete Work Plan that outlines activities across the four objectives to address constraints and fill gaps. The overall Expected results from the Program and initial deliverables under the Program are as follows:

Expected overall results

A minimum average annual expansion of sales of 10 percent for the respective value chain above the industry average, starting in year 2 of the Program A minimum average expansion of market share in targeted export markets of 3 percent by year 2, 6% by year 3, 9% by year 4, and 12% by year 5. The baselines, target values for market share by assisted VC, and export markets to be defined in the Work Plan

A minimum increase in the value-added content of total exports by 3% by year 2, 6% by year 3, 9% by year 4, and 12% by year 5

A minimum decline in the percentage of exports accounted for by the top five HS categories to 3 percent by year 2, 6% by year 3, 9% by year 4, and 12% by year 5

A minimum average annual expansion of employment levels of assisted firms 1% by year 2, 2% by year 3, 3% by year 4, 4% by year 5 above the industry average.

Deliverables

A report on the selection of target value chains, their contribution to private sector diversification, their potential, their value chain connectedness, and enterprise-level constraints, including a detailed analysis of value chain finance issues. (The number of target value chains is variable, but the list of candidates should be at least twice as large as the number of targets.). The report shall be provided within 30 days of the Contract start date.

At least annual updates of the initial VC appraisal to assess progress (or lack thereof) and recommend any changes in the set of target VCs. The annual updates shall be provided within 30 days after each year or earlier.

Objective A: Develop more productive enterprises and value chain management capacity The background analysis for the Program conducted by USAID identified inadequate business sophistication and the lack of management capacity of business owners and managers as one of the major constraints on the competitive performance of Armenia’s economy and its value chains. Armenia’s business leaders agreed: the 2009 Global Competitiveness Report ranked the country 112th (out of 133 countries) on “business sophistication.” The principal challenge is to promote innovation and increase export orientation among the enterprises in different stages of the value chain. The goal is to access new markets, but also to deepen the reach of the value chain by upgrading to capture additional value added.

A.1:

Improve management skills to raise product quality and lower costs The Contractor will assist private companies in the target VCs to improve business management capacity. Enhanced business sophistication can help develop more effective and sustainable linkages and collaboration along the target value chain. The Contractor will develop approaches that will increase the capacity of business owners/managers, business associations, marketers and service providers to upgrade management among the new and existing companies that participate (or strive to participate) in the target VCs. Business management capacity includes, among others, the ability to assess end markets and to address constraints in sourcing, operation/production, marketing, quality control, use of new technology, workforce, and finance.

One important determinant regarding access to finance is the bankability of enterprises. The enterprises in target VCs need to have a clear understanding of their end market demands, and hence have an adequate view of the corresponding financing needs and targets. The adoption of modern financial management techniques—cash flow management, financial leverage indicators, and indebtedness management—by enterprises in the target VCs therefore becomes an important target. The Contractor will therefore need to work with both sides to lower barriers to access to finance.

Expected results

Increased adoption of international quality standards for production by enterprises in the target VCs (3% annual increase starting year 2)

At least 80% of the enterprises in the assisted VCs adopt modern financial management procedures by the end of year 4

Improved score for Armenia on “business sophistication” in the Global Competitiveness Report (improvement by 1 each year starting year 2) Deliverables

A training strategy and curriculum for SME owners and managers in target VCs to build their capacity to address various constraints

Annual surveys of business practices that demonstrate improved capacity among enterprises in target VCs A.2:

Employ greater use of business development services (BDS) and strengthen the capacity of BDS providers Armenia has a history of developing the market for BDS. The relevant functions include knowledge and information management, marketing and logistics, production and operation, accounting and finance, development of bankable business plans, or concrete market development plans or strategies. A network of local consulting firms capable of providing technical assistance and training support have already been identified in previous programs and studies. Some of these firms are fully capable, while others lack the breadth of experience that would allow them to become a driver of the pursuit of competitiveness in the target VCs. The Contractor will update the existing information, and develop a training-cum-technical assistance approach to advance the capabilities of the existing BDS firms that provide services to the selected VC stakeholders.

The Contractor will also seek ways to make the BDS sector commercially sustainable, and to stimulate supply responses where they are not being provided at present. Matching grants to target enterprises to procure BDS are often thought to assist in market-making, but the experience on the whole is not encouraging. The Contractor will use a graduated matching system—for example, 50 percent for the first order, and 25 percent for the second. The Contractor is also expected to suggest innovative, alternative strategies for building a sustainable market for BDS.

Expected results

At least 10% percent of the assisted enterprises in the target VCs have used business development services using some or all of their own resources by year 2, 15% by year 3, 10% by year 4, and 15% by year 5

A least 50 percent of the clients of BDS providers become repeat customers of BDS providers in each year starting year 2

Deliverables

Annual directory of BDS providers in Armenia, with an assessment of the strengths and weaknesses of each

Customized training programs that cover sourcing, operation/production, marketing, quality control, use of new technology, workforce, and finance, and 20 training sessions on product development and marketing delivered targeting BDS providers

A.3:

Adopt clean production processes

The adoption of clean production processes has become a major determinant of global competitiveness. For example, GlobalGAP standards also encourage sustainable agricultural production techniques, including those for aquaculture. Other certifications essential for exports include HACCP and ISO. The Contractor will examine best practices for clean production in the target VCs, including any technical regulations or voluntary standards. Based on that assessment, an action plan for promoting the adoption of clean production techniques will be discussed with VC stakeholders. The action plan should include incentives and support for enterprises that desire to obtain the necessary certifications, including training.

Expected results

At least 5 percent of assisted manufacturing enterprises in target VCs have adopted clean production techniques each year starting year 2, as determined by an environmental audit

At least 5 percent of eligible enterprises assisted by the Program obtain the appropriate certification each year starting year 2 (such as HACCP, ISO 9000 or 14000, and/or other relevant international certifications)

Deliverables

Action plan for promotion of clean production techniques in target VCs, based on best practices, developed with VC stakeholders

At least one workshop for stakeholders in each target VC each year of the life of the Program on the benefits of adopting clean production technology

Provision of at least 10 strategic, seed grants as capital for investments related to adoption of clean production techniques or acquisition of appropriate certifications over the life of the Program A.4:

Strengthen value chain governance and employ mentoring schemes

To enhance the quest for competitiveness, Armenia’s value chains, both domestic and the local portions of global commodity chains, require a more effective performance of governance structures. Exporters, network orchestrators, or the dominant links in global value chains need to establish standards and provide guidance up and down the value chain in reaching those standards. For example, supermarkets can provide advisory services for growers of fresh fruits and vegetables. Assemblers are dependent on the ability of suppliers to comply with detailed specifications.

In addition, value chain governance can be supplemented by advice from related value chains provided under some form of corporate social responsibility (CSR). In particular, there have been initiatives to leverage the experience available in the Armenian diaspora to upgrade the performance of elements of value chains. Business executives in the US with an Armenian background may be recruited to advise Armenian enterprises participating, or interested in participating, in target value chains.

Expected results

Increased adoption of international quality standards for production by enterprises in the target VCs (3% annual increase starting year 2)

All enterprises that have adopted international quality standards will also have adopted some system of internal mentoring to ensure compliance with such standards over the life of the Program (as evidenced by survey and/or observation)

Improved linkages of national to global VCs evidenced by export or other verifiable linkages

Greater availability of mentoring opportunities for new entrepreneurs in target VCs. At least 5 international or domestic mentoring relations established each year

At least 5 volunteer advisers for target VCs among the Armenian diaspora recruited and assisted enterprises in Armenia each of the five years Objective B: Enhance workforce skills and entrepreneurial development To achieve VC competitiveness, the workforce in the target VCs must possess the skills to meet quality standards. As management improves, new demands for workforce skills ensue. Ensuring that workers have these required skills depends in part on the ability of the educational system, especially its technical and vocational education and training (TVET) component, to respond adequately to the demand of industry. It also depends on the private sector to articulate its needs, and to work with the TVET system to teach those skills. There are efforts under way to address these issues, such as the UNDP-funded VET program, and special efforts by the Armenian universities to equip its graduates with skills needed by a knowledge economy. These skills should be brought to market.

At the same time, many of the graduates are also potential entrepreneurs themselves, needed to reinforce existing value chains and contributing to the formation of new ones. Workforce development efforts, in particular at the level of the higher education system, need to be complemented by initiatives to familiarize prospective graduates with opportunities and to provide them with support, advice, and guidance with respect to markets, finance and management.

B.1:

Develop and implement innovative solutions to overcome skills constraints

The basic insight for successful programs in developing skills is the critical nature of the interaction between supply (the TVET system) and demand (industry). Dual systems combine the resources of both sides by having trainees learn and work part-time. It is possible that such solutions have been developed for Armenia, but certainly not on a system-wide basis. While certain results can be identified, the Contractor will conduct a basic appraisal of the existing system of bringing skills to market for the target value chains. That assessment will serve as the basis for any further intervention.

Expected results

Improved workforce skills in target VCs (as determined by annual survey evidence)

A minimum of 5 technical courses for skills needed in target VCs implemented by BDS providers each year

At least one specialized course for skills required in at least one target VC incorporated into the general TVET system each year

Deliverables

Report on best practices in developing workforce skills in target VCs

Assessment of TVET providers in Armenia

A workforce development and training strategy aimed at target VCs

Curriculum for at least one training course for Armenia’s TVET system linked to the needs of enterprises in any of the target VCs each year

• At least one tracer study for TVET programs’ graduates in target VCs at the end of year 2

B.2:

Facilitate the formation of new sustainable enterprises

While Armenia has taken steps to facilitate the formation of new enterprises, as reflected in the score for the “Starting a business” indicator of Doing Business, the pace of the creation of viable new ventures with global aspirations has not been satisfactory. The available evidence does not allow for a direct assessment of attitudes toward entrepreneurship, but it suggests that Armenian entrepreneurs are quite active: the average age of firm is under ten years, compared to 14 years for the average enterprise in Eastern Europe and Central Asia, or in the new members of the EU. Thus, the findings of a baseline survey will determine whether the basic concept of private enterprise requires marketing.

The promotion of new enterprise formation will be linked directly to opportunities created within or by the target value chains. The initial appraisal should identify gaps that provide real opportunities for new (as well as existing) enterprises. The work with the VCs will also seek to develop markets for national suppliers, again creating opportunities. New enterprises can respond directly to these opportunities, allowing for targeted promotion of investments in new (as well as existing) firms.

Young, well-educated people obviously represent a recruitment reservoir for promoting entrepreneurial engagement, suggesting a focus on graduates of higher general and technical education institutions. The Contractor shall prepare an outreach and follow-up plan to stimulate interest and subsequently work with prospective young entrepreneurs.

Armenia’s experience with an incubator/business accelerator in the IT sector makes a strong case for the role of an incubator or business accelerator as a support mechanism for new enterprise formation (and survival). A business accelerator is designed to create an entrepreneurial “eco-system,” and can provide seed capital funding to start-up companies. It can be physical, providing administrative support, shared equipment and business development services for new enterprises in a given location, or virtual, providing the required support services to qualified SMEs. The business accelerator could also sponsor an annual business plan competition, targeted primarily at young entrepreneurs.

Expected results

Identification of new enterprise opportunities and effective markets in target VCs

At least one functioning business accelerator for a target VC created by year 2

At least 20 prospective entrepreneurs from the target groups participate in an initial entrepreneurship development training each year

At least 20 new enterprises established by these graduates by year 5

Improved access to finance for these 20 new enterprises by securing an alliance(s) with a US business accelerator by year 5 A young entrepreneurship scholarship program to attract graduates to the introductory course (minimum of 75 candidates)

Annual business plan competitions for prospective entrepreneurs conducted

Seed capital granted to 20 new enterprises by year 5

A monitoring program for new enterprise performance developed and implemented by year 2

Deliverables

A feasibility study for an incubator/business accelerator, newly established or an upgrade of existing initiative

Development of a curriculum for introductory course on entrepreneurship (and delivery to at least 20 prospective entrepreneurs each year) Objective C: Improve business environment The Government of Armenia has embraced the regulatory reform spirit and the country has made progress in terms of its Doing Business rankings. The Government is working with the IFC on a program to advance even further, although progress is reportedly slow. It also expects to put in place a system allowing for registration, licensing, permits, and tax payments on an on-line basis. The country’s top-down reforms are moving forward.

However, the competitiveness impacts of top-down reforms are often difficult to trace. The value chain perspective allows for realistic estimates of the impact of priority reforms on competitiveness. The notion is to turn to the private sector to identify the most binding constraints or gaps in the business environment that undermine competitiveness. That assessment serves as the basis for estimates of the impact of removing or reducing constraints and filling gaps in the business environment on competitiveness at different VC stages. That assessment in turn provides the basis for a focused advocacy campaign championed by the private sector.

Efficient and competitive value chains depend on sound logistics. In the 2009 rankings by the Global Competitiveness Report, Armenia recorded its lowest ranking (116/133) on “Goods market efficiency.” According to the World Bank’s Logistics Performance Indicator, Armenia ranks 111th out of 155 countries. Internal market channels need to function smoothly to ensure the needed collaboration among different stages of any value chain.

Competitiveness, especially in export markets, also depends on Armenia’s quality infrastructure. Quality infrastructure relates to all fields of metrology, standardization and testing, quality management and certification and accreditation (also see Objective A). Access to information on standards and technical regulations for the full range of products is critical. The Contractor will assess the performance of the current system, and provide assistance to the relevant agencies to improve their performance.

C.1:

Remove business environment constraints and gaps that affect value chain competitiveness

Working with VC stakeholders, the Contractor shall identify the most burdensome laws, regulations, and administrative practices that hinder competitiveness. The Contractor shall conduct at least two workshops each year with stakeholders in each of the target VCs to identify business environment constraints, review estimates of the effect on competitiveness, and adopt an advocacy strategy. Assessing the magnitude of the impact on competitiveness will help private sector players prioritize and advocate for reform.

One particular issue, related to an export-oriented strategy, is the low ranking of Armenia on the “Trading across borders” of the Doing Business assessment. The Government has already initiated some reforms, but the effort continues.

Expected results

At least one constraint removed or gaps filled each year with respect to the business environment in each of the target VCs

Time for business registration and licenses for target VCs reduced by 30% by year 4 (as determined through the survey of owners and managers)

Procedures for exports and imports streamlined each year, as reflected in the Doing Business score and survey

A minimum of 10% improvement in the goods market efficiency score in the Global Competitiveness Report from 3.7 to 4.1 by the end of year 3 and 10% thereafter each year (The score combines 15 questions in the Executive Opinion Survey.)

Deliverables

Reports on the impact of principal business environment (BE) barriers to the competitiveness of target VCs, identifying the two “top” constraints or gaps for each target VC

Diagnostic study of factors affecting logistics of exports and imports, including an assessment of current reforms on the “Trading across border” indicator (Doing Business)

Action plan for reducing burden of registration, reporting, and licensing for target VCs

Action plan for improving goods market efficiency for target VCs C.2:

Intensify public-private policy dialogue on business environment reform

Engaging VC stakeholders in the identification of the binding constraints and glaring gaps in the business environment forms part of a broader strategy to strengthen the policy dialogue between the private sector, especially SMEs, and government authorities. Businesses, individually and in associations, and relevant NGOs need to become part of the policy making process. They must therefore have access to all laws and regulations on the books, and to be able to access drafts of new laws or general or technical regulations to be able to comment. The Contractor shall deliver at least three training courses on business advocacy for business and trade associations.

Expected results

Stakeholders in target VCs participate in a regular debate of business environment issues

Representative business and trade associations fully engaged in broader development policy dialogue

An inventory of all existing laws and regulations relevant to the selected VC stakeholders

An action plan outlining support for reducing such business barriers affecting the VC stakeholders

C.3:

Strengthen the national innovation and quality standards system In their own appraisal, Armenia’s business leaders feel that the country lags behind its competitors in terms of “technological readiness” (GCR rank 105 out of 133 countries) and “innovation” (GCR rank 108). Part of that gap is likely to reflect limited access to standards and technical regulations. Part of it is due to an inadequate quality infrastructure (metrology, standards, etc.) needed for world-class economic performance.

Expected results

Enhanced access to market and technology information for enterprises in target VCs. Systems in place for each VC to access market information locally, regionally and internationally, as applicable, by year 3

Armenia improves its standing on relevant indicators related to technological readiness and innovation in the Global Competitiveness Report and other cross-country comparisons, including the World Bank’s Knowledge Economy Index (KEI)

Deliverables

An action plan for technology acquisition, developed with VC stakeholders for each target VC.

Databases on VC-specific standards and technical regulations accessible to firms in the target VCs

Recommendations on a strategy for addressing any gaps in the current quality infrastructure

Objective D: Facilitate effective financial intermediation

Improving the performance of financial services providers to support the quest for competitiveness in target VCs is a major challenge. Generally, financial sector performance reflects perceived risk. The tools for managing risk include better information, risk sharing, and diversification. Activities linked to Objective D incorporate all of these tools. The focus will be on innovation in terms of structuring financial services, creative risk mitigation efforts, and leveraging ideas to stimulate investment, in particular foreign direct investment (FDI). The leveraging idea reflects the notion that the Program will act as a catalyst, developing innovative policies to promote the competitiveness of target value chains. Any systemic development challenges in the financial sector will be addressed by another mechanism outside this Program and/or other donors. The Contractor will coordinate closely with Mission’s other programs and/or other donors’ projects.

D.1: Adopt innovative practices in financial services delivery

The key to an improved contribution from the financial sector to upgrading competitiveness in the target value chains is innovation. Armenia’s financial sector comprises a broad range of service providers—banks, commercial credit organizations, microfinance institutions, leasing operations, venture capital firms, and investment funds. As a result of recent efforts in product development (as well as improved supervision), often with active USAID support, the Armenian financial system today has access to a broad range of financial products.

Financial innovation therefore is less an issue of developing new products, but primarily one of creativity in putting together custom packages that meet the needs of the different stages of the target VCs. Financial innovation thus aims at developing the appropriate combinations to enable value chains to grow. Even so, there may also be instances where innovation can extend the range collateral, such as increased use of purchase order financing or factoring of current assets. The Contractor shall establish a forum of lenders and enterprises in the VCs where through periodic meetings financial intermediation gaps are identified and solutions are facilitated

The Contractor shall facilitate a larger role for investment funds. These funds might provide medium and long-term financial resources in a form of seed capital, equity investment and debt financing, especially for SMEs seeking to expand. Such funds could be designed to attract both domestic and international capital, including Diaspora resources. For each target VC, the Contractor shall prepare a Value Chain Finance (VCF) map, identifying bottlenecks in financial management within the VC, and present an action plan incorporating best practices for addressing these issues.

Finally, IT-based solutions can offer new options for streamlining financial service delivery. These solutions could increase the availability and use of financial services through introduction of new ways of interaction between financial institution and client, such as mobile banking, Internet banking, etc.

The Contractor shall provide at least eight training sessions annually for financial service professionals on VCF issues for the target VCs – two session each year for each VC Expected results

A minimum of $100 million in additional investment/financing resources leveraged from lending institutions, equity investors or from own sources for enterprises in the target VCs by the year 5

Officers in financial institutions are more familiar with techniques and approaches of Value Chain Finance as evidenced by annual survey

Enterprises in the target VCs are covered by credit information systems to allow for automated credit scoring and use of credit rating – 20% by year 2, 35% by year 3, 50% by year 4, and 65% by year 5

At least one challenge grant per target VC made to trigger equity investment in a new or existing enterprise

Deliverables

Assessment of the need for outside equity for enterprises in the target value chains

Curriculum for a training course on VCF services for financial services professionals

Periodic (at least annual) surveys of enterprises in target VCs—“customer satisfaction surveys”

An annual report regarding the financial interaction of the financial sector with target VCs

Summary report or recommendations for more flexible supervision related to innovative packages for target VCs

D.2:

Lower financing risks Better information about borrowers through credit reporting systems is one way to mitigate the risk of lending to SME borrowers. Another way involves schemes to reduce the risk to lending organizations through such devices as loan guarantees. In addition, there are also other types of credit enhancements, such as lower-interest lines of credit for on-lending to particular client groups. As a rule, it is important that these kinds of risk-sharing arrangements are designed in ways that do not distort the market.

Another option is to develop a Public Private Partnership (PPP) mechanisms for addressing specific shortcomings in the commodity chain. For example, Armenia recently created the “Armenian Cheese” network orchestrator for the production and marketing of cheeses for export as a PPP. Cheese producers and the government (through the Armenian Development Agency) own half of the entity.

The Contractor will employ incentive grants (in appropriate circumstances to be agreed with USAID) to lower the amount to be financed, thereby reducing risk.

Expected results

A minimum increase of 25 percent in the use of credit guarantee funds for enterprises in target VCs over industry averages by year 5

Creation of at least two PPPs for a target VC to fill gaps and tighten linkages in target VCs – one by year 2 and another by year 4

Deliverables

Survey of available credit guarantee and credit enhancement programs and their utilization (baseline for improved use)

Action plan for increasing access to credit guarantee and credit enhancement programs for enterprises in the target value chains D.3:

Promote foreign direct investment (FDI) Although Armenia has benefited from significant volumes of FDI in the past, the data from the 2009 World Investment Report published by UNCTAD show little change between 2002 and 2007 in the stock of FDI. That is, there has been little progress in expanding the role of FDI. And business leaders responding to the World Economic Forum’s EOS ranked “FDI as a source of technology transfer” low, just a little ahead of the overall ranking (97 out of 133 countries).

FDI promotion is one of the three pillars of the Government’s new approach to the process of fostering more competitive investments. It is needed to fill and strengthen linkages in value chains, to provide new technology, to act as a conduit to global value chains, and to establish a basis for demand for national suppliers.

The Contractor shall coordinate with and guide the work of some of the governmental and non-governmental entities that are mandated to stimulate economic growth, such as the Armenian Development Agency (ADA), and National Competitiveness Foundation (NCF). The Government has mooted a plan to combine these agencies into a single entity, “Enterprise Armenia,” which might emerge as the single counterpart agency. In any case, the renewed emphasis on market analysis, program management to respond to identified opportunities, and related FDI promotion is fully compatible with the approach outlined under the Program.

Particular attention shall be paid and additional effort shall be made to facilitate and attract Armenian diaspora investment from overseas.

Expected results

At least a 20 percent increase in FDI in the target VCs over the trend for the respective industries by year 5

At least a 10-percent increase in the score for questions related to FDI in the World Economic Forum’s EOS by year 5

At least one foreign-invested enterprise providing mentoring to enterprises in their respective value chains each year

Action plan for FDI promotion for target VCs, in coordination with the Armenian Development Agency

At least two road shows for foreign investors focusing on the needs of the target VCs Cross Cutting Tasks

Implementation of training and commodity procurement Capacity building in target VCs as well as in government agencies responsible for actions that affect competitiveness is a key component of the Program. Training, primarily in-country, will therefore be a major component of the Program.

The Contractor shall provide training sessions for owners and managers, to BDS providers, and staff in the financial services sector, and possibly for government agencies that have significant impact on the competitiveness of target VCs. Training also includes outreach activities to prospective young entrepreneurs, and ad hoc sessions with them in preparing business and financial plans. Training would also include the preparation of curricula for the workforce development programs and their pilot tests. Off-shore training, such as study tours to analyze similar VCs in other countries, may be provided upon demonstration of probable benefits commensurate with the higher costs.

USAID/Armenia does not foresee any major commodity procurement under the Program. However, there may be times when small procurements of IT equipment or similar items may be needed to complete a particular task.

Grant Administration The Contractor will provide grants as a tool for program implementation. The grants will be relatively small, and need to be awarded in a “market-neutral” fashion. Potential recipients of grants may include:

SMEs, on a matching basis, to finance some portion of their purchases from BDS providers, or to enhance their management systems. The Contractor will develop a sliding scale for such grants that reflects the ability of SMEs to pay.

Enterprises in the US that would enter into joint ventures with Armenian firms in the VC;

Investors targeting specific gaps in target value chains; for example, in logistics; these small investment incentive grants would be awarded on a competitive, results-oriented basis to support the achievement of the overall results envisioned by the Program Young entrepreneurs to take courses related to business and financial plan development (training scholarships or launch grants);

Winners of the…