New Loan, or Auditing the Old? Armenia’s Finance Ministry Must Investigate Money Trail of Millions in World Bank Education Loan

08:56, 8 June, 2017

In Armenia, a state agency may borrow millions of dollars giving approximate and inflated promises, not implement them and not be subjected to any liability. 

In this case, it’s Center for Education Projects (CEP), an arm of Armenia’s Ministry of Education and Science.

The Armenian government took out a $30 million loan from the World Bank and handed it over to the CEP to implement the Education Improvement Project in Armenia launched in 2014.  

The inflated promise made by the CEP was that the money would go to renovating 17 high schools in Armenia. So far, work on only five has started. 

The Ministry of Education and Science and its subordinate Center for Education Projects deem the rehabilitation of the remaining twelve schools with the existing funds impossible. 

They’ve recalculated expenses and now say an additional $19 million is needed to complete the program. 

The World Bank, the education ministry, and the CEP all have arguments at the ready to explain the problem. 

All of them say that the precise number of schools to be renovated was never specified. 

 "The final number of schools receiving support for rehabilitation was not specified during the evaluation of the project document," said Vigen Sargsyan, External Affairs Officer of the World Bank Yerevan, in reply to one of our queries. 

Contracts with 90% deviation from the average price 

According to the Education Improvement Project, $18 million of total financing was to go towards the rehabilitation of 17 high schools in Armenia. In other words, the average price of each school’s rehabilitation was about $1 million in the pre-approved budget. 

Despite this, Center for Education Projects has signed three contracts out of five with 45-90% deviation from the average price. 

In particular, the high school rehabilitation contract in Martouni, Gegharkounik Province, was signed for about 700 million AMD, the one for the school # 2 in Metzamor, Armavir province - for about 918 million AMD, and for the one in Ararat town, Ararat province - 722 million AMD. 

All three contracts, ranging from $1.14-$1.9, exceeded the average cost of about $1 million. 

Since the Center for Education Projects is directly responsible to the Ministry of Education and Science, Hetq sent a query to the ministry, asking whether they had conducted any audit to clarify why the contracts were signed with more than 50% deviation from the average price. 

The ministry replied that for five high schools the design documents had been prepared in the beginning, which calculated the repair costs without considering the costs associated with the seismic construction component. 

Ministry of Education and the World Bank justify the illegal calculations 

Hetq sent a query to the World Bank's main office in Washington D.C. We asked whether the World Bank had ever audited the expenses under this loan project. If so, why didn’t they realize that the loan wouldn’t be enough. 

“...Higher cost estimates may relate to the wider scope of the rehabilitation work due to the poor physical conditions of facilities, seismic reinforcement that requires extensive strengthening of foundation, wall and pillar support with significant amounts of steel and concrete, as well as wide surface areas of school sites which include more site development and reconstruction of large enclosure of walls or fences," the World Bank replied. 

During our interview with one of the draftsmen, he revealed that the schools cannot be rebuilt without increasing their seismic resistance.  

According to Decision N 87 by Armenia’s Minister of Urban Development dated March 24, 2014, the minimum acceptable level of educational institutions rehabilitation (schools, colleges, vocational education and training institutions, etc.) involves increasing their seismic stability. Thus, these works should always accompany the rehabilitation works. (See Annex 1). 

This means that the seismic stability expenses are factored in from the start and shouldn’t lead to such increases in the project costs. 

“In your opinion, doesn’t it mean that those who presented the financing project were not professional in their calculations?” we asked in our second query sent to the WB main office. 

The WB’s Washington office readdressed the query to Yerevan office again, which expressed the hope that the issues raised have already been clarified. The Yerevan office suggested we contact the CEP’s Project Implementation Unit (PIU) for more details. 

The World Bank offices in the U.S. and Yerevan justify the illegal transaction, made without seismic construction component calculations, and the loan project based on it, while it’s contrary to the norms of Armenian urban development. 

More than 38 million AMD spent unproductively and no criminal case 

Official documents of the World Bank show that Engineer League LLC was paid 7,656,998 AMD by the Center for Education Projects for preparing the initial drafts of five high schools. 

On the other hand, the Ministry of Education and Science didn’t provide us with any information about this company when we asked which firms had prepared the initial drafts of schools to be rehabilitated. Thus, we couldn’t find anything about this payment in the ministry’s and the CEP’s PIU’s reports.

Instead, the company’s name can be found in the 2016 Annual Report of Armenia’s Control Chamber (CC). 

The CC revealed that the PIU didn’t accept the draft designs prepared by the Engineer League, "due to some changes that schools are not being repaired but reconstructed. It turns out that the design work, for which the PIU already paid 80% of the contract amount to the company, does not meet the requirements for reconstruction, and new designs are needed." 

7,656,998 AMD, according to the CC, is only 20% of the contract amount signed. The full amount of the contract, according to the report, was around 38 million AMD, 80% of which was paid not from the loan but from the grant for the loan preparation. 

7.6 million AMD, composing 20% of the contract, should have been paid by the PIU after accepting the drafts presented by the company. The PIU didn’t accept the drafts but paid the remaining 20%. 

World Bank documents also show that Engineer League not only received the money, but also signed a contract with the PIU without any tender. The single-source selection procurement method was applied. 

"Single-source selection of consultants does not provide the benefits of competition in regard to quality and cost, lacks transparency in selection, and could encourage unacceptable practices. Therefore, single-source selection shall be used only in exceptional cases” -  this is an extract from the World Bank procurement procedures. 

Thus, signing a single-source selection contract with Engineer League was an exceptional case. There is no data about the company’s shareholders in the State Corporate Registry. 

Arevik Khachatryan, Head of the Department of Information and Public Relations of Prosecutor's Office, told Hetq that there were some studies regarding the CC’s revelations about the Education Improvement Project, but no criminal case has been initiated. Instead, the Prosecutor's Office reported to the Ministry of Education and Science about the recorded allegations, asking to "eliminate them and report to the Prosecutor’s Office about it". 

Three contracts resulting from one tender: Did the PIU pay twice for the same service? 

Hetq sent a query to the Ministry of Education and Science to obtain copies of the contracts signed for the draft designs of 17 high schools. 

The ministry provided us only with copies of contract notices published on the World Bank website. The answer was prepared by the PIU. We talked to an employee there, who promised to check with the manager about sending us the copies of the contracts, but we did not receive them. 

The PIU sent us notifications of the award of the three contracts. 

According to them, one of the contracts was signed on August 10, 2015, with Babayan-Lat Nakhagitz and Modul 2015 LLCs for the preparation of 5 high school drafts (companies participated in the tender jointly). Contract value amount was 81,639,960 AMD. We tried to find the same contract in the database of World Bank’s signed contracts.

 See agreements with Armenia under the code P130182 

It turned out, however, that there are two contracts signed on August 10, 2015, with Babayan-Lat Nakhagitz and Modul 2015 LLCs. We can confidently say that these contracts are different, because they have different numberings and contract amounts. 

One of the contracts is named “Finalizing the designs for five schools under the Education Improvement project”, with a contract amount of $170,723, the second one is “Finalization of architectural and technical designs for rehabilitation of 5 high schools”, with a contract amount of $171,584. 

The WB documents show that the PIU paid the above-mentioned LLCs twice for the same purpose. 

One more contract with Babayan-Lat Nakhagitz and Modul 2015 LLCs was signed the following month, “For conducting author’s monitoring of 5 high-schools’ civil works”. The contract amount was $28,820. 

All these three agreements were signed by the PIU within one tender. 

Hetq sent a written request to the Ministry of Education and Science for copies of the tender announcements. Apparently, the tender, which the LLCs won, was intended for review and study of five high school draft project documents. The company that won the tender, according to the requirements, should have included the author's monitoring of works in the services. It shouldn’t have become a separate contract with additional cost of $28,820. 

The Ministry of Finance has never checked Education Improvement loan project costs 

None of Armenia’s oversight bodies, not the Prosecutor’s Office or the Ministry of Finance has ever subjected the PIU to any liability. 

Neither have they suspended the project, nor did they conduct an audit to find out why the budget was incorrectly calculated or where the spent funds have gone. 

The Ministry of Finance told Hetq that its Financial and Budget Control Inspectorate didn’t carry out any checks on the CEP’s PIU for the Education Improvement loan project during 2013-2016. 

The Ministry of Finance also mentioned in their reply that in the second half of 2017, by a decision of the prime minister, they plan to review the loans and grants given to Armenia by foreign countries and international organizations, as well as the accuracy and objectivity of the funds allocated from the state budget. 

The ministry doesn’t specify when these reviews will take place. It is not known whether they will precede the government's new loan application to World Bank for around $ 19 million, if such a decision is taken.