Afghanistan Reconstruction Trust Fund. Quarterly Report to ARTF Donors. September 23, 2009 to December 21, Prepared by the ARTF Administrator

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1 With support from: Australia Bahrain Belgium Brazil Canada Denmark European Commission Finland Afghanistan Reconstruction Trust Fund Quarterly Report to ARTF Donors September 23, 2009 to December 21, 2009 France Germany India Iran Ireland Italy Japan South Korea Kuwait Luxemburg Netherlands New Zealand Norway Poland Portugal Russia Saudi Arabia Spain Sweden Prepared by the ARTF Administrator ARTF Management Committee: Asian Development Bank, Islamic Development Bank, United Nations Development Program, World Bank Switzerland Turkey United Kingdom United States

2 Afghanistan Reconstruction Trust Fund

3 ARTF Quarterly Report: December 21, 2009 CURRENCY EQUIVALENT (Effective December 21, 2009) Currency Unit = Afghani (AFN) US$ 1 = AFN GOVERNMENT S FISCAL YEAR (SY1388) March 21, March 20, 2010 Solar Year Period SY1381 March 21, 2002 March 20, 2003 SY1382 March 21, 2003 March 19, 2004 SY1383 March 20, 2004 March 20, 2005 SY1384 March 21, 2005 March 20, 2006 SY1385 March 21, 2006 March 20, 2007 SY1386 March 21, 2007 March 20, 2008 SY1387 SY1388 March 20, 2008 March 20, 2009 March 21, 2009 March 20, 2010 Contact Information for the ARTF World Bank Kabul Office Street 15, House 19 Wazir Akbar Khan Kabul, Islamic Republic of Afghanistan Telephone: Nicholas Krafft Country Director nkrafft@worldbank.org Josie Bassinette Lead Operations Officer jbassinette@worldbank.org Hugh Riddell ARTF Coordinator hriddell@worldbank.org Paul Sisk Task Team Leader, Recurrent Cost Financing - psisk@worldbank.org Nancy Zhao Operations Advisor, Investment Financing - nzhao@worldbank.org N. K. Thondaiman Financial Management Analyst nthondaiman@worldbank.org All documents are available on: i

4 ARTF Quarterly Report: December 21, 2009 ABBREVIATIONS AND ACRONYMS AEP AFMIS AFN AISA ARDS ARTF Afghan Expatriate Program Afghanistan Financial Management Information System Afghanis Local Currency of Afghanistan Afghanistan Investment Support Agency Afghanistan Reconstruction and Development Services Afghanistan Reconstruction Trust Fund CAWSS Central Authority for Water Supply and Sewerage CDC Community Development Council CDP Community Development Plan DAB Da Afghanistan Bank EQUIP Educational Quality Improvement Program FS Fiduciary Standards GoA Government of Afghanistan IARCSC Independent Administrative Reform and Civil Service Commission IDA International Development Association IMF International Monetary Fund KfW Kreditanstalt für Wiederaufbau LEP Lateral Entry Program MA Monitoring Agent MC Management Committee MCP Management Capacity Program MDG Millennium Development Goal MEW Ministry of Energy and Water MFI Microfinance Institution MISFA Microfinance Investment and Support Facility for Afghanistan MoC Ministry of Communication MoE Ministry of Education MoF Ministry of Finance MoFA Ministry of Foreign Affairs MoPW Ministry of Public Works MRRD Ministry of Rural Rehabilitation and Development MUDH Ministry of Urban Development and Housing NEEP National Emergency Employment Program NEEPRA National Emergency Employment Project for Rural Access NGO Non-Governmental Organization NPBSE Non-pension-based Salary Expenditure NPP National Priority Program NRAP National Rural Access Program NSP National Solidarity Program O&M Operations and Maintenance PAM Performance Assessment Matrix PBSE Pension-based Salary Expenditure PFEM Public Finance and Expenditure Management PFM Public Financial Management PPU Procurement Policy Unit PRR Priority Reform and Restructuring SOE Statement of Expenditures SWAP Sector wide approach TAFS Technical Assistance and Feasibility Studies TSA Treasury Single Account UNAMA United Nations Assistance Mission in Afghanistan UNDP United Nations Development Program UNOPS United Nations Office for Project Services USAID United States Agency for International Development WB World Bank ii

5 ARTF Quarterly Report: December 21, 2009 TABLE OF CONTENTS I. Administrator s summary of Q3 SY II. The ARTF in relation to the budget and the flow of funds 5 III. SY1389 ARTF Incentive Program; Administrator s Technical Review 7 IV. Sector Wide Approach Afghanistan Readiness Assessment; Executive Summary 15 V. ARTF Recurrent Cost Financing 22 VI. ARTF Fiduciary Framework 27 STANDARD ANNEXES ANNEX 1: Status of ARTF Investment Portfolio 32 ANNEX 2: ARTF Recurrent Cost Monitoring 73 ANNEX 3: ARTF Financial Tables 80 iii

6 ARTF Quarterly Report: December 21, 2009 I ADMINISTRATOR S SUMMARY OF Q3 SY Donor funding During the third quarter of SY1388, donors paid US$246 million into the ARTF, taking total contributions for the year to US$600 million. Overall pledges for SY1388 increased to US$717 million, ARTF s highest level yet. Of this, 48 percent (US$341 million) is expected to be preferenced for ongoing national programs. $800 $700 $600 $500 $400 $300 $200 $100 $0 Figure 1: ARTF Contributions and active ARTF donors SY1381-SY1388 (projected) SY1381 SY1382 SY1383 SY1384 SY1385 SY1386 SY1387 SY1388 projected Donor resources Active donors Figure 1 above highlights the positive trend in donor contributions to the ARTF. Over the last eight years, contributions have increased on average 23 percent per annum. 2. New ARTF Financing No new ARTF financing proposals were considered by the Management Committee in Q3 SY1388 because of the delay in the completion of the SY1387 project audit reports by the Control and Audit Office (CAO). All pending audits were completed and received by the Administrator on January 21, The Management Committee will therefore resume its consideration of new ARTF funding proposals at its meeting in February With an international firm of auditors now in place, the delay in submitting audit reports should not recur. 3. ARTF portfolio review As of end Q3, active commitments for recurrent costs stood at US$1.9 billion and active investment project commitments just over US$1.0 billion. The recurrent cost window has disbursed 95 percent of the total grant value. The investment window of 19 active grants has disbursed US$770 million or 75 percent of the combined total. The total value of ARTF investments to date is nearly US$1.3 billion. For SY1388, a recurrent cost financing ceiling of US$290 million was approved by the ARTF Management Committee. This is based on the successful outcome of the first round of the ARTF Incentive Program (IP). Under the IP, recurrent costs are set to decline by an automatic US$25 million per year, but an annual top-up in the form of incentive funds are available based on the performance of the government against reform benchmarks. The US$290 million ceiling for this year reflects a baseline of US$250 million (down from US$276 million in SY1387) and additional incentive funds of US$40 million. Thus far, the 1

7 ARTF Quarterly Report: December 21, 2009 Management Committee has approved two allocations to the recurrent cost window of US$72.5 million. All of the US$143 million has been disbursed (see figure 2). The remaining half year allocation to the ARTF recurrent cost window will be made in the last quarter. Figure 2: ARTF Recurrent Cost Window commitments and disbursements since SY1382 $350 $300 $250 $200 $150 $100 $50 $0 Recurrent window commitments Recurrent window disbursements SY1382 SY1383 SY1384 SY1385 SY1386 SY1387 SY1388 ytd Twenty ARTF project investment grants totaling US$1.0 billion are under implementation. The grants are implemented by 14 line ministries, concentrated in the Ministry of Rural Rehabilitation and Development (MRRD), the Ministry of Energy and Water, and the Ministry of Education (MoE). In value terms the rural development sector, and in particular the National Solidarity Program, dominate the portfolio. Figure 3 shows the allocation of ARTF active investments by sector as of December 21, Urban Development 6% Figure 3: ARTF active investments by sector Education 9% Capacity Development 5% Justice 3% Private Sector Development 18% Energy 11% Agriculture & Rural Development 48% ARTF projects are disbursing well, as demonstrated in Figure 4 below. In SY1388, the 20 active projects have disbursed US$210 million through December 21, as compared to US$250 million for the whole of SY

8 ARTF Quarterly Report: December 21, 2009 Figure 4: Active ARTF Investments, Commitments and Disbursements $350 $300 $250 $200 $150 $100 $50 $0 Investment Window Commitments Investment Window Disbursements SY1382 SY1383 SY1384 SY1385 SY1386 SY1387 SY1388 ytd Nevertheless, the Management Committee requested the Administrator to undertake an analysis of the accumulated un-disbursed project balances. These balances reflect funds that the Management Committee has committed to projects but have not yet been disbursed. Increasing amounts of undisbursed funds could indicate that some ministries are struggling to absorb project funds. The Administrator s analysis, as presented to the Management Committee, made five main points: The ARTF project disbursement ratio at 75 percent of committed value is better than most World Bank portfolios in the region. Accumulating un-disbursed balances derive mainly the growth in ARTF allocations to investment projects over the past eight years. This growth, accompanied by an expanding range of sectors and line ministries means there are different disbursement dynamics than in previous years in particular there are now more projects in slower disbursing sectors. Of the total value of undisbursed balances 84 percent are related to projects which have more than one year remaining to complete project activities. The portfolio is quite young and projects typically implement over three to four years. Therefore the ARTF investment window can be expected to have a certain balance that is un-disbursed balance at any moment in time. In the course of regular World Bank portfolio reviews, issues related to slow disbursements or problem projects are carefully reviewed with project teams in the line ministries. Outstanding issues are brought to the attention of the Ministry of Finance. The findings of the portfolio review were summarized in the September 2009 quarterly ARTF report. Un-disbursed ARTF cash balances are managed by the World Bank treasury department. Funds are invested to match the ARTF s cash management needs, and any investment yields are returned to the ARTF to increase the funds available. This year, the Management Committee approved a plan to invest a small portion of the cash balances in higher yielding securities. It was able to approve such a plan given the extension of the ARTF through June 2020, the increasing value of the overall fund, and the ability to make some reasonable assumptions of financial sources and uses in the coming period. The Management Committee requested that the Administrator keep it informed of any problem projects that risk substantially slowing ARTF disbursements. 3

9 ARTF Quarterly Report: December 21, ARTF Quarterly Donor Meeting On November 10, 2009, the representatives of 16 ARTF donor countries met in Kabul with the Management Committee and government representatives led by the Ministry of Finance. The agenda included a status report on the ARTF, a presentation by the government on the draft ARTF Financing Strategy (to be presented in the next ARTF quarterly report), the preliminary findings of the SWAp Readiness Assessment (see section IV) and the findings of the MRRD investigation into corruption allegations under the NSP. The full meeting minutes are available on the ARTF website at 4

10 ARTF Quarterly Report: December 21, 2009 II THE ARTF IN RELATION TO THE BUDGET AND FLOW OF FUNDS 1. National budget structure The national budget is the main mechanism for translating the Afghanistan National Development Strategy (ANDS) into policy and implementation. The national budget consists of a Core Budget and an External Budget (see Figure 5 for SY1387). The Core Budget tracks those funds that flow through the government s treasury system and includes core operating expenditures and core development expenditures. The External Budget includes expenditures disbursed directly by donors outside the treasury system. The External Budget (according to the budget document) represents about seventy percent of all expenditures in the country. Even this may represent a serious underreporting of the external budget. All ARTF investments utilize the treasury system and are reflected in the Core Budget. Figure 5: Structure of the National Budget- SY1387 Actual Resources Expenditures External Budget 64% Domestic Revenues 13% Grants to Operating Budget 9% Grants/Loans to Development Budget 14% External Budget 65% Operating Expenditures 21% Development Expenditures 14% Source: Ministry of Finance 2. SY1388 Mid-Year Budget Review The SY1388 mid-year budget review was approved in the first week of January 2010 and is reflected in Table 1 below. The delay was mainly a result of the slow cabinet nomination process. The government s revenue target in the SY1388 budget was revised upwards to AFN 52.5 billion (US$1,009 million) 1 from the original budget of AFN 50.7 billion (US$972 million). The IMF s Poverty Reduction and Growth Facility (PRGF) has set a revenue target of AFN 54.5 billion (US$1,048 million) for SY1388 which will also apply for the ARTF Incentive Program s automatic revenue matching scheme. Core operating expenditures budgeted for SY1388 were increased to AFN 97.0 billion (US$1.9 billion) from the original amount of AFN 93.9 billion (US$1.8 billion). The increase was mainly for higher security sector expenditure. The budgeted core development expenditure was increased to AFN billion (US$2.3 billion) from AFN 59.1 billion (US$1.1 billion). The sharp increase occurs almost every year after including undisbursed allotments carried-forward from the previous year. 1 This section uses the government s official exchange rate as of the Mid Year Review of the Budget in 2009 of AFN52 = US$1. 5

11 ARTF Quarterly Report: December 21, 2009 Table 1: ARTF and the Core Budget: SY1381-SY1388 (US$ million) SY1381 SY1382 SY1383 SY1384 SY1385 SY1386 SY1387 SY /3 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 < Actual > MYR A. Domestic Revenues ,009 B. Expenditures ,091 1,570 1,986 2,248 4,152 Operating Expenditures ,019 1,358 1,866 Wage and Salaries n/a ,165 Goods and Services n/a Capital Expenditure n/a Other n/a Development Expenditures ,286 C. Fiscal Balance (before grants) ,312-1,434-3,142 D. Donor Grants ,845 n.a ARTF n.a Recurrent n.a Investment n.a Other 1/ ,269 n.a E. Fiscal Balance (after grants) n.a F. Financing n.a n.a External Financing (Net) n/a n.a n.a Sale of Non-Financial Assets n/a n.a n.a Domestic Financing (net, including adjustment) n/a n.a n.a Memorandum Items External Budget 1,165 1,612 2,322 4,219 3,618 9,282 4,101 n.a GDP 4,007 4,436 5,409 6,484 7,725 9,662 11,713 12,904 Exchange Rates Domestic Revenues (% GDP) 3.3% 4.7% 5.0% 6.4% 7.5% 7.0% 6.9% 7.8% Expenditures (% GDP) 8.6% 13.8% 17.8% 16.8% 20.3% 20.6% 19.2% 32.1% Fiscal Deficit (before grants, % GDP) -5.4% -9.1% -12.9% -10.4% -12.8% -13.6% -12.2% -24.4% 1/ Financing is still very preliminary Source: Ministry of Finance, World Bank, IMF 3. Preliminary results of the first nine months of SY1388 Preliminary results show that domestic revenues reached AFN 43.8 billion (US$843 million), 84 percent of the revised annual target. Domestic revenues in the first nine months were higher by 60 percent compared to the same period in SY1387, and exceeded total revenue collected in SY1387 (AFN 41.4 billion). A two percent Business Receipt Tax (BRT) on imports introduced in SY1388 and revenues related to FLGE (the Fuel and Liquid Gas Enterprise, a state fuel company under the control of the Ministry of Commerce) both contributed to the increase in domestic revenues in SY Core operating budget expenditure was AFN 58.1 billion (US$1,118 million), while core development expenditure was AFN 30.1 billion (US$594 million), representing only 26 percent of the revised development budget. The causes of low development budget execution in Afghanistan are complex, but are chiefly the result of unrealistic budget formulation, poor implementation capacity in line ministries and habitual delays in the delivery or availability of donor funds. 2 Both of these policy measures were included as benchmarks in the SY1388 ARTF Incentive Program. 6

12 ARTF Quarterly Report: December 21, 2009 III THE ARTF INCENTIVE PROGRAM SY1389 Each year, the Administrator is responsible for delivering a technical review of the government s performance under the ARTF Incentive Program. The technical review of the SY1388 Incentive Program was delivered in the June 2009 quarterly report. In this quarter, the Administrator completed the second technical review and has delivered that and its recommendation to the Management Committee for the recurrent cost window ceiling in SY1389. The Administrator s Technical Review is reproduced below for the information of all donors. ADMINISTRATOR S TECHNICAL REVIEW Preamble 1. In December, 2008, ARTF Donors agreed with the Government of Afghanistan to establish the ARTF Incentive Program within the Recurrent Cost (RC) Window of the ARTF. The objective of the Incentive Program is to support the Government s reform agenda, in particular progress toward fiscal sustainability. The Incentive Program offers incentive funds to top-up the ARTF RC Window baseline financing for SY1389 in the amount of US$60 million. The funding is allocated through two schemes: a structural reform scheme (accounting for three quarters of the available incentive funds) and the revenue matching grant scheme (accounting for one quarter of the available incentive funds). 2. Following a series of Working Group discussions with donors, the Ministry of Finance and the World Bank (as Administrator) signed a Memorandum of Understanding (MoU) on August 1, The MoU included the SY1389 benchmarks and the review protocol. It stipulated that all supporting evidence for the fulfillment of the structural reform benchmarks would be delivered to the World Bank not later than November 30, The Technical Review would be delivered to the ARTF donors of the Working Group 3 before being presented to the Government of Afghanistan within 15 business days after the submission of all supporting evidence for all benchmarks or no later than mid-december This Technical Review has been undertaken by the World Bank as Administrator, with support of sector experts from ARTF donors. Part I of this Technical Review describes in detail the assessment for the SY1389 structural reform program based on the evidence provided. Part II of this Technical Review summarizes the recommendation to the ARTF Management Committee with regard to the amount of the top-up of the SY1389 ARTF RC window ceiling. Part I: Performance Assessment against SY1389 Benchmarks 4. This Technical Review provides the performance assessment against the SY1389 structural benchmarks of the ARTF Incentive Program only. Structural reforms for the SY1389 Incentive Program tracked government commitments under three reform areas (with three respective benchmarks under 3 EC, US, UK, Italy & Germany. 7

13 ARTF Quarterly Report: December 21, 2009 each theme): A. Enhancing Domestic Revenue Generation, B. Improving Public Sector Governance and C. Enabling Private Sector Development. 5. All verification material to demonstrate the fulfillment of structural benchmarks was submitted by the Government, as per the agreed schedule. The delivered evidence was then assessed by experts of the ARTF donors and the World Bank and in some cases went through several rounds of clarification and adjustment. The benchmarks were negotiated with close involvement of the relevant line ministries/agencies and the Working Group of donors. Line agencies involved included the Ministry of Finance, the Ministry of Transport and Civil Aviation, the Ministry of Commerce and Industries, the Ministry of Mines, the Independent Administrative Reform and Civil Service Commission, the High Office of Oversight and Anti-Corruption (HOO) and the Board of the Da Afghanistan Breshna Sherkat (DABS). 6. The Administrator s Technical Review assessed, based on the evidence received, that the Government of Afghanistan met all SY1389 ARTF structural benchmarks, as described in Table 2 below. On the benchmark: progress on the DABS corporatization and governance a revised plan - approved by the DABS Board - to reduce commercial and technical losses, including a timetable and action plan for the establishment of commercial activities and better customer services (see Annex II), is expected to be provided to the ARTF donors by end-march Part II: Recommendation on Incentive Fund Allocation for SY The Administrator s Technical Review recommends that the ARTF Management Committee increase the SY1389 ARTF recurrent cost window ceiling from the baseline of US$225 million to US$270 million, reflecting an additional US$45 million for the Incentive Program structural benchmarks agreed in the MoU. 8. The assessment and recommendations based on the calibrated schedule of the Revenue Matching Grant Scheme will take place once actual revenue numbers are confirmed by the Treasury - i.e., after the close of the solar year (around March 20). This means the Revenue Matching Grant will be calculated and confirmed only after the SY1389 budget is passed by Parliament. 8

14 Met. Met. ARTF Quarterly Report: December 21, 2009 Table 2: SY1389 Structural Reform Matrix with Evidence Assessment Theme A: Enhancing Domestic Revenue Generation a Benchmarks Met. Monitoring and Evaluation Evidence Status Assessment A1. Customs reforms: (i) The customs department at MOF reports quarterly on an agreed set of key output indicators, which will allow better assessment of general progress made within customs administration b, and (ii) ASYCUDA roll-out to Sher Kahn Bandar. The Afghan Customs Department (ACD) will provide the World Bank team with the quarterly reports of the defined output indicators and together with the World Bank Customs Experts will calculate the customs performance indicators. These indicators will be posted on the ACD webpage. Evidence received. ACD provided the World Bank with the quarterly reporting on key output indicators to calculate customs performance indicators. The World Bank assesses the data as satisfactory. The indicators were posted on the ACD webpage and a link to the web-page was provided. A2. Tax and Non-tax revenue transparency: (i) A MOU on revenue collection is signed between MOF and Ministry of Transport and Civil Aviation (MOTCA); (ii) Publication and posting on the MOF/ACD webpage of all fees and processing charges at the Revenue and Customs Offices; (iii) Monthly posting of detailed customs collection data (by customs station c ) on the MOF/ACD web-page. A3. Improving tax compliance: The number of companies that are non-compliant with the Business Receipt Tax (BRT) or Income Tax at the start of SY1388 is The MOF/ACD will track the ASYCUDA rollout to Sher Kahn Bandar. It will provide the World Bank with a progress report on the roll-out. The MOF will provide the World Bank with a copy of the signed MOU between MOF and MOTCA. The World Bank will verify the posting of fees and processing charges and the monthly detailed customs collection data on the MOF/ACD web-page. The MOF/Afghan Revenue Department (ARD) will provide the World Bank with a list of compliant companies (with blacked out names) for the beginning of 1388 and Evidence received. The official letter from DM Revenue and Customs informing us that the ASYCUDA system is fully operational and implemented as of November 19, 2009 at the Sher Khan Customs station (with the first electronic processed customs declaration attached). Evidence received. Copy of the MOU received in English and Dari. Evidence received. Web-site links were provided for fees and processing charges and for monthly detailed customs collection data. The World Bank assessed the data as satisfactory. Evidence received. Lists which identify newly compliant companies from LTO and MTO, amounting to 106 newly compliant companies (out of 634) or a 17 percent 9

15 Met. Met. ARTF Quarterly Report: December 21, 2009 reduced by 10 percent by the third for Q to allow for verification of quarter of SY1388. d increase in compliant companies. increase in the number of compliant companies. Theme B: Improving Public Sector Governance Benchmarks Monitoring and Evaluation B1. Asset declaration: (i) Asset declaration roll-out (with no less than 60 percent of the current Cabinet Ministers submitting their asset declarations), and (ii) A draft implementation strategy for asset declarations (including verification procedures) is developed for Cabinet approval and shared with donors. The HOO confirms in a formal signed statement to the World Bank team how many Cabinet members provided an asset declaration by November 30, 2009, if possible it lists the respective Cabinet members. The HOO will circulate to ARTF donors and World Bank Experts a draft implementation strategy for asset declarations (including verification procedures). The World Bank Experts will stand ready for assistance in developing and refining the strategy. Evidence received. World Bank received Dari copies of 18 asset declarations from Cabinet ministers, accompanied by a cover letter from HOO in Dari and English, detailing that those reflect complete asset declarations from 72 percent of all Cabinet members. Evidence received. A revised draft strategy on asset declaration implementation was transmitted and went through several comment rounds from DFID and World Bank. Although some suggestions of the DFID and World Bank were incorporated in the current version of the implementation strategy, other suggestions, like on public disclosure, remain to be included. Also, it is expected that some recommendations, particularly in regard to sanctions, will be addressed in future versions, through changes in the Anticorruption Law and in the context of clarifying the overall role of the HOO (Annex I). B2. Strengthening GOA s Internal Audit function: Reinstatement of Article 61 of the Public Expenditure and Financial Management (PEFM) Law regarding MOF s government-wide purview over Internal Audit through a Presidential Decree. The MOF will provide the World Bank with a copy of the Presidential Decree on the reinstatement of Article 61 of the PEFM Law. 10 Evidence received. A letter from the MOJ in Dari (with English translation) was received confirming the validity of Article 61 of the PEFM Law.

16 Met. Met. ARTF Quarterly Report: December 21, 2009 B3. Progress in P&G implementation: A progress report of P&G implementation is prepared covering MOF, Ministry of Rural Rehabilitation and Development (MRRD), Ministry of Education (MoE) (including teachers), Ministry of Justice (MoJ) and Ministry of Agriculture, Irrigation and Livestock (MAIL), featuring: (a) progress of P&G by line ministry as of October 31, 2009, including analysis on re-grading; (b) comparison with the timetable for that ministry set earlier; and (c) action plan for each ministry implementing P&G for the remainder of the year The Independent Administrative Reform and Civil Service Commission (IARCSC) will deliver the P&G implementation progress report to the World Bank and will work closely with the World Bank Public Administration Reform Team during the preparation of the report. Evidence received. A full report detailing all requirements, i.e. a description of progress on P&G implementation in the five ministries, an explanation of experienced challenges and delays, a section on overall lessons learned and with action plans for finalizing P&G implementation at the ministries during the remainder of Evidence was commented on and reviewed by the World Bank team and deemed satisfactory. Theme C: Enabling Private Sector Development Benchmarks Monitoring and Evaluation C1. Progress in DABS corporatization and governance reforms: The DABS Board approves a plan to reduce commercial and technical losses within the next two years; including a timetable and action plan for the establishment of commercial activities and better customer services, including the Kabul region, previously known as the Kabul Electricity Directorate, KED. The DABS Board will provide to the World Bank the approved plan and the minutes of the Board Meeting during which the plan was approved alternatively a signed cover letter with the approved plans attached is acceptable. The World Bank Power specialist will review the plans and, upon request, assist DABS during the drafting period. Evidence received. Copies of a revised first summary plan for DABS to reduce technical and commercial losses and of the DABS Board Resolution (from the DABS Board meeting of November 23, 2009) endorsing the plan were transmitted. It incorporates most of the suggestions from the World Bank who reviewed the plan and provided inputs to the DABS team for improving the plan. Agreement was reached with DABS that the basic principles of a business plan and forecast are in the plan, but that further improvements are needed within the next months (mainly by making sure better reporting data will become available and will be incorporated; a spread-sheet based monitoring system will be prepared) (see Annex II). It was agreed that the revised plan 11

17 will be adopted by the DABS Board by March a. Theme A is complemented by the automatic quantitative revenue scheme in SY1388. The quantitative scheme is based on SY1388 revenue performance, according to the previously agreed schedule. b. This will lead to a regularly monitored set of performance indicators used as: (1) a management tool, (2) a basis for comparisons, and (3) a way of measuring productivity gains, which will also provide a better basis for customs resource discussions and decisions. c. The report will be listed by customs station, for some locations there is combined reporting. d. The number of non-compliant companies (those who have not filed a required return) in both MTO and LTO reached 680 at the beginning of The Government will work with all companies, but expects to achieve the largest increase with restaurants, airlines and wedding halls. Met. Met. ARTF Quarterly Report: December 21, 2009 C2. Roll-out of the Central Business Registry to provinces: A pilot Central Business Registry will be launched in Jalalabad. C3. Improvement of the regulatory framework and transparency in the mining sector: (i) The Minerals Law and the revised Hydrocarbon Law (Petroleum Law) are enacted through gazetting; and (ii) A fully-costed and timed action plan for EITI implementation is endorsed by a multistakeholder working group and submitted to the EITI secretariat. The Ministry of Commerce and Industry will confirm in a formal letter the opening of the Central Business Registry in Jalalabad. The government will provide the World Bank with the Gazettes of the Minerals Law and the revised Hydrocarbon Law. The government will provide the World Bank with a copy of the submission letter to the EITI secretariat, including the endorsed action plan of the multi-stakeholder working group. The World Bank Mining Team will work closely with the government and provide advice as needed. Evidence received. A letter from the Minister of Commerce confirms the establishment of the CBR in Jalalabad. USAID confirmed CPR establishment. Evidence received. Gazettes are transmitted in hard-copy to the World Bank (plus scanned cover-page of Gazette). Evidence received. A copy of the official application letter of Afghanistan for becoming an EITI candidacy country sent to the EITI secretariat in Oslo with all candidacy requirements / evidence attached (action plan and budget adopted by the informal multi-stakeholder group, including minutes of the meeting on November 17, 2009). Feedback from the EITI Secretariat is expected. 12

18 Annex I Recommendations to strengthen the asset declaration implementation strategy The revised draft asset declaration implementation strategy has been received and commented on, but the World Bank notes that the strategy still remains relatively weak in the area of public disclosure. In particular, there is concern about possible delays in the public disclosure of assets. Compared to earlier versions the draft strategy has been changed and says now that after declarations are received and examined by the HOO then it will disclose the information. It is suggested that the strategy will be further clarified to include: (i) (ii) A description of the examination process conducted by HOO; and The timeframe for the examination process, starting from the time of receipt of the asset declaration (e.g. the HOO will publicly disclose the information within 1 month of receiving a declaration). Looking ahead, the strategy should include a clear vision and commitment to make the HOO independent and able to enforce the asset declaration scheme. This requires also greater clarity on the assignment of sanction power to the HOO (including, sanctions applying to the failure to submit a required asset registration form and the submission of a false or misleading declaration). It was understood that this could not be addressed yet, given that the strategy is based on the current legal framework, which would need to be adapted. The HOO role and status as an independent agency with more implementation power will be addressed during the revision of the Anti-corruption Law, currently under discussion. Annex II Further expectation for the revision of the plan on reducing losses at DABS The plan prepared by the DABS team for reduction of commercial and technical losses is well drafted and sets out the basic framework for implementation on the ground. However, it is requested that the DABS considers the following comments for a revised plan. It is expected that this revised action plan will be approved by the DABS Board and re-submitted to the ARTF Administrator by end-march The following new components are expected to be part of the plan: a) The timetable and action plan for the establishment of commercial activities and better customer service will be revised and updated. b) The plan would need to be backed by an Excel based spread sheet, providing recent information and a forecast for the next 5 years. As part of its technical support, the World Bank had provided and helped DABS staff become familiar with an excel based 'Decision Support Tool' to understand the impacts of power procurement deals. This model should help DABS prepare the Excel sheet required for this benchmark. It is recognized that the initial spreadsheet would be based on non-verified data (from erstwhile DABM planning department) and based on information for some of the provinces. However, this would be useful for monitoring the actions planned by DABS and focus on the high impact actions first. This can be updated in the next six months or before, by when better quality information would be available. The DABS team has agreed with the World Bank to provide the spreadsheet model. 13

19 c) It is also suggested that the plan may include the following measures, which would require small scale investments, but would help meet the objectives of this benchmark: i) Formulation and implementation of a plan to increase absorption of NEPS power in the Kabul system, with clear defined quarterly targets. ii) Formulation and implementation of a plan to maximize use of hydro resources and minimize use of diesel plants. This would require a well prepared model for forecast of water inflows under different scenarios and the optimization of water use and available storage capacity at Naghlu vis a vis expansive diesel plant operation. iii) Identify over-loaded feeders (substation and Junction stations) in Kabul and Mazar and implement measures for load balancing, with quarterly targets. d) The loss reduction forecast need to be revised by using energy (MWh) as a basis rather than demand (MW). e) It is suggested that DABS identifies a team to implement the plan with clear responsibilities for specific tasks and also create a monitoring system to review and report on progress. The World Bank team stands ready to review the template for monitoring of the intermediate and final outcome indicators. 14

20 IV SECTOR WIDE APPROACH READINESS ASSESSMENT During the third quarter of SY1388, the World Bank and DfID led a study of the readiness of certain sectors in Afghanistan to adopt SWAps as part of their programming. The assessment was a response to the ARTF independent evaluation and to the ARTF Financing Strategy which seeks a more programmatic or sectoral approach to funding and financing in the ARTF. The findings of the assessment were disseminated in four sector workshops, bringing together government officials with technical experts in the international community, as well as at the ARTF quarterly donor meeting. The executive summary of the report is reproduced below. EXECUTIVE SUMMARY The background for this report is the discussions that have taken place during 2009 between the Government of Afghanistan (GoA) and donors about the possibility and suitability for applying Sector- Wide Approaches (SWAps) in development assistance to Afghanistan. Since SWAps would be a new concept in Afghanistan, it was decided to carry out a two-phased assessment of SWAp readiness: Phase I Clarification of an overall approach and general review based on discussions with the GoA and donors, and an overall assessment of eight central-level preconditions for a possible future introduction of SWAps. Phase II Detailed assessment of a number of sectors and ministries/agencies regarding their specific status based on readiness criteria, and the preparation of a generic model for preparing sectors and entities for SWAps. The assessments and activities related to Phase I were carried out in July-August 2009 and presented in a report (9 September 2009). This report comprises the findings and recommendations of Phase II of the SWAp readiness assessment, which has focused on the following four sectors and seven institutions of the GoA: Education Sector Ministry of Education (MoE), Ministry of Higher Education (MoHE) and the National Skills Development Programme (NSDP) under the Ministry of Labour, Social Affairs, Martyrs & Disabled (MoLSAMD) Health Sector Ministry of Public Health (MoPH) Agriculture and Rural Development Sector Ministry of Agriculture, Irrigation, and Livestock (MAIL) and Ministry of Reconstruction & Rural Development (MRRD). Public Financial Management Sector Ministry of Finance and (MoF) Control & Audit Office (CAO). The sectors were selected in consultations between GoA and donor representatives based on which sectors and institutions would be likely to be relatively SWAp-ready and which would potentially benefit the most from SWAps, including from an aid effectiveness perspective. The sector assessments are based on the study of sector documents and reviews, and extensive consultations with representatives from the GoA, donors, UN agencies and multilateral organisations as well as advisors and project consultants. Assessment Framework The assessments of the SWAp-readiness of sectors are based on a set of factors that encompass the aspects that influence and determine the possibilities for institutions to successfully implement and facilitate SWAps. The following six factors were selected based on international experience and best 15

21 practice (including based on OECD/DAC and EC guidelines) as well as taking into account the context of Afghanistan: Sector Policy and Strategy Institutional Framework Sector Budget and Public Financial Management (PFM) Sector Performance Monitoring Sector and Donor Coordination Donor Support Options and Harmonisation The specific assessment factors may function as preconditions, but it should be stressed that a decision about if and when to initiate SWAp processes due to their nature and the possibilities they offer for developing and improving overall conditions should be a matter of consideration by the government and donors, rather than based only on a technical-level decision. Although the relative importance of the factors has not been ranked, some have a more fundamental character than others and thus can constitute a minimum threshold. These fundamental factors are a functioning sector policy and strategy in place, the existence of a sector budget and basic PFM capacities, and a properly working donor coordination mechanism. Assessment of the Education Sector The assessment shows that the education sector as a whole is not currently ready for a SWAp due to the following findings: Sector policy and strategy: The existing ANDS education sector strategy is not currently functional, but both the MoE and the MoHE are developing new ministry-level strategies, which could be used as a basis for a revised sector strategy, or for sub-sector SWAps (e.g. for the primary and secondary education sub-sector); however, there is currently no Technical and Vocational Education and Training (TVET) sub-sector strategy. Institutional framework: The institutional frameworks of the ministries are weak with regard to internal coordination and decision-making as well as technical capacities, especially for the MoHE, but initiatives are being taken to improve their functioning. Sector Budget and PFM: There is no sector budget and budgeting procedures are somewhat undeveloped; PFM capacities are largely reliant on TA staff in the MoE and generally very weak in the MoHE; core development budget execution rates are very low, which indicates inadequate planning and budgeting procedures, and problems with implementation capacity and procurement. Sector performance monitoring system: There is currently no sector performance monitoring system; the M&E capacity of the MoE is weak, but is being developed, whereas M&E in the MoHE is very deficient; the results framework may eventually be used for the sector although it does not currently include the National Skills Development Program (NSDP) of the MoLSAMD. Sector and donor coordination process: A sector coordination mechanism is not yet in place, but may emerge from the MoE-donor Education Development Board (EDB) initiative, which is wellfunctioning and has helped to strengthen policy dialogue and donor coordination within the MoE. Donor support options and harmonisation: There seems to be willingness among key donors to coordinate closer with the education sector ministries in the selection of aid modalities, but this will require better strategies, more planning and mutual discipline; several donors might be able to provide sector budget support if PFM capacities and the governance environment is improved. Given these findings, the education sector as a whole is currently not deemed to be SWAp ready. This is due to the lack of a functioning education sector strategy with a corresponding budget and to the fact 16

22 that a sector-wide donor coordination mechanism is currently not in place. To make the education sector ready for initiating a SWAp, the following would be required: Strategy Prepare a new or revised sector strategy, including for the TVET sub-sector Sector Budget and PFM Prepare a sector budget aligned with the strategy; improve PFM capacities and functioning Coordination Create a functioning sector-wide donor coordination mechanism If these factors are properly addressed, an appropriate sector focus can develop, which would make the education sector SWAp ready. Other identified areas for improvements including institutional frameworks and sector performance monitoring could be addressed after a SWAp process has been initiated, which also would apply to the aspects related to donor support options and harmonisation. However, given the current situation making the whole education sector SWAp ready may be both difficult as well as inopportune (it seems likely, taking past experience into account, that it would require at least two-three years to make the full sector SWAp ready). It should therefore instead be considered to either: a) Postpone any decisions and activities for making the whole education sector SWAp ready until after the MoE and the MoHE have successfully started the implementation of their new strategies (i.e. revisit the possibilities after, say, one year); or, b) Focus on the primary and secondary education sub-sector for a SWAp since the MoE will soon have a new strategy and sub-sector budget, and already has both a well-functioning sector and donor coordination mechanism (as well as a monitoring system). Assessment of the Health Sector The assessment shows that the health sector overall is not currently SWAp ready. This is based on the following findings: Sector policy and strategy: The health sector and the MoPH has a comprehensive sector strategy in place, although it can be improved with budgetary and costing information. Institutional framework: The MoPH s institutional framework is well-developed with regard to senior-level management and generally has a high level of capacity; however, some organisational entities do not yet have strong capacity, and some aspects of internal budget management require significant improvements. Sector Budget and PFM: There is a sector budget although ⅔ of the funding goes through the external budget; PFM and programme budgeting capacities are generally considered high, but the applied procedures for preparing and executing the operating budget need to be significantly improved, including for procurement; core development budget execution rates have generally been low. Sector performance monitoring system: The M&E of the MoPH is comprehensive, and is being further developed, for example, in the Provincial Public Health Offices (PPHOs). Sector and donor coordination process: The MoPH needs to improve donor coordination to increase the effectiveness and impact of TA support and to ensure that capacity development reaches all relevant entities. Donor support options and harmonisation: There appears to be willingness among donors to coordinate closer with the MoPH in the selection of aid modalities, but the outcome of this is likely to depend on closer and better collaboration, including improved donor coordination from the side of the MoPH. 17

23 The health sector is not deemed to be SWAp ready as it lacks a fully functioning donor coordination mechanism and the MoPH lacks a full overview regarding TA provision. To make the health sector ready for initiating a SWAp, the following would be required: Coordination Create a fully functioning donor coordination mechanism Since the MoPH has a comprehensive strategic framework in place and generally is otherwise wellfunctioning, it should be possible for the MoPH to establish fully functioning donor coordination within a relatively short period of time. Other aspects that also require improvements e.g. the operating budget management and core development budget execution as well as the involvement of the PPHOs in M&E can be taken forward as part of a SWAp process. Assessment of the Agriculture and Rural Development Sector The assessment shows that the agriculture and rural development sector is not currently ready for a SWAp. This is based on the following findings: Sector policy and strategy: The agriculture and rural development sector does not yet have a functioning comprehensive sector strategy. Institutional framework: The institutional frameworks of the MAIL and the MRRD differ very significantly. That of the MRRD is generally well-functioning, while the MAIL has initiated reform initiatives that over time should lead to a better institutional functioning. Sector Budget and PFM: There is no sector budget that covers the whole agriculture and rural development sector; the MRRD has a high level of PFM and budgeting capacity, whereas MAIL s capacity in this area is weak and requires support; the development budget execution rates of both ministries are very low which suggest planning, budgeting and procurement problems. Sector performance monitoring system: There is no sector-wide monitoring system in place although the sector results framework may provide a basis for this in the future; the MRRD has a central M&E function in place although it to some extent overlaps with those of projects and programmes; MAIL s M&E is very weak, but being developed. Sector and donor coordination process: There is no functioning sector-wide donor coordination mechanism in place, and the existing approaches of the MAIL and MRRD function very differently. Both are well-functioning although that of MAIL still needs to be fully institutionalised. Donor support options and harmonisation: Donors are prepared to engage with the ministries in discussions about aid modalities and other aspects related to their support; however, views on whether SWAp should apply to one or both ministries differ among donors and GoA representatives. Given these findings, the agriculture and rural development sector as a whole is currently not deemed to be SWAp ready. This is due to the lack of a functioning sector strategy with a corresponding budget and the absence of a sector-wide donor coordination mechanism. To make the agriculture and rural development sector ready for initiating a SWAp, the following would be required: Strategy Prepare a new or revised sector strategy Sector Budget and PFM Prepare a sector budget aligned with the strategy; improve PFM capacities and functioning in MAIL Coordination Create a sector-wide donor coordination mechanism If these aspects were addressed, the agriculture and rural development sector could thus become SWAp ready. However, given that at present there are significant differences between the specific SWAp readiness of the two ministries (in terms of capacity, staffing, internal functioning, systems set-up, etc.) 18

24 and more importantly that the MAIL and the MRRD cover fundamentally different areas and have different approaches to development,, it is questionable whether the two ministries should be considered together for one inclusive SWAp. The MRRD is already a successful ministry with relatively high capacity, a capacity development approach that has showed good results in terms of transferring tasks to national consultants an to civil servants, and the MRRD has a good track-record in terms of service delivery. A SWAp process would therefore seem to have limited value-addition for the MRRD, and may in fact only lead to the complication of an otherwise well-functioning structure. However, a SWAp process could support the implementation of the MRRD s planned change management process, and the two could therefore potentially be mutually reinforcing. In contrast, the MAIL appears to be a much more relevant candidate for a SWAp given its new strategic approach, need for capacity strengthening, and (until recently) lack of donor support. This means that a sub-sector SWAp for the agriculture sub-sector could be considered. However, the MAIL is not currently SWAp ready it is in a transformation process where its strategic framework is still being developed and implemented, and new donor coordination mechanisms and approaches are yet to be institutionalised and pursuing becoming SWAp ready may therefore may therefore add an additional workload that the MAIL is currently not be ready to undertake. Instead, the MAIL and donors should continue with the ambitious change management process and other new activities, and then reassess the possibilities and readiness for a sub-sector SWAp at a later stage (say, after one-two years) when conditions may be more conducive. The Public Financial Management Sector It must be noted that the PFM sector is different from the other three sectors and therefore has been assessed differently. This is because the MoF is part of the executive structure and the CAO should function as an independent external audit institution. A SWAp with an overall and inclusive sector strategy and one sector budget would therefore not be practicable for the sector or the institutions. The PFM sector was therefore instead assessed with a focus on each of the two institutions separately, but also with a view to identify areas where coordination could be useful. The assessment showed that within the PFM sector neither the MoF nor the CAO is currently ready for a SWAp. This is based on the following findings: Sector policy and strategy: Both the MoF and the CAO have developed institutional strategies, which for the MoF needs to be applied as a management tool and for CAO needs to be operationalised in a work plan. Institutional framework: The institutional frameworks are relatively well-developed, especially for the MoF, but both institutions require improvements and further development, esp. CAO. The MoF has set up a task force and working groups to address some shortcomings and problems for the functioning of the Revenue and Customs Departments. Sector Budget and PFM: The MoF has good PFM capacity, but its internal budget procedures need to be revised, and both institutions must improve their execution rates. Sector performance monitoring system: The MoF undertakes regular monitoring, but does not have a formal performance assessment framework; the CAO collects activity data, but needs to measure performance on the basis of an operationalised strategic plan. Sector and donor coordination process: There is currently no overall donor coordination mechanism in place for the PFM sector, but this could be advantageous for both institutions and donors as a means to discuss and coordinate policy recommendations. Donor coordination would be 19

25 especially relevant for the MoF, which currently has nine donors, while it in itself would not be required for the CAO, which is currently supported mainly by the World Bank. Donor support options and harmonisation: Improved coordination and interaction between the MoF and donors could lead to more focused and effective support in line with GoA priorities. The MoF would not currently be ready for a sub-sector SWAp since it does not have a donor coordination mechanism, which would thus first need to be established and institutionalised. However, it does not appear that a SWAp would be necessary for the MoF since the issues related to donor coordination and the sustainability of operations in some departments could be addressed within the context of a donor coordination mechanism. It is instead recommended to consider setting up a pooled funding mechanism for TA support to the MoF, which could help to increase MoF s ownership and management control, lead to a more effective allocation of TA resource across the MoF and make the MoF more accountable to donors for the activities and results of TA staff. For the CAO, a sub-sector SWAp is not currently relevant since it has only one donor, which means that a SWAp process would not be an appropriate process to apply for addressing its development needs. However, the issues and challenges that the CAO currently faces operationalisation of the strategic plan, capacity building of staff and the development of a formal M&E system should be addressed and would likely gain from an increased level of donor support. For the PFM sector as a whole, it would seem both relevant and beneficial if the MoF and the CAO (and possibly also the Ministry of Economy (MoEc) if it continues to be responsible for M&E related to the ANDS) together with their donors were to consider establishing a sector-wide coordination mechanism e.g. in the form of a PFM Advisory Group. Such a mechanism could also be used to ensure discussion of and, in particular, follow-up on the implementation of policy recommendations in the PFM sector as well as more general considerations regarding the professionalisation of relevant professions (e.g. for accountants and auditors). Recommendations for the Piloting of SWAps and Next Steps Based on the assessments, it is recommended that one or both of the following two areas are considered for the piloting of SWAps: The health sector (MoPH) The primary and secondary education sub-sector (MoE) Both ministries and key donors have during the consultations and the debriefing meetings confirmed their interest in undertaking the piloting of a SWAp for their respective area. If the GoA and donors prefer to select only one sector/sub-sector for the piloting of a SWAp, some guiding principles for selection should be considered, e.g. based on which ministry is most likely to deliver a successful implementation and facilitation process (this and other guiding principles are further discussed in chapter 9 below). While having two pilots would benefit two ministries, the resource constraints should also be taken into account and could be an argument for selecting only one sector/sub-sector. If it is decided to initiate a SWAp, a Memorandum of Understanding should be signed by the GoA and the participating donors, which outlines the general agreement about the process. On this basis a detailed roadmap must be prepared as a reference document for both the GoA and the involved donors both for making the sector/sub-sector SWAp ready and for the actual SWAp implementation process 20

26 afterwards. The roadmap should outline how the work will be organised, its specific activities and the necessary resources to support the SWAp process, including for a dedicated SWAp project team (to be funded by donors). The roadmap would serve as the design of the SWAp process and thus be the basic project document and implementation plan. The specific formats as well as examples of the technical content and focus of roadmaps for the MoPH and the MoE are provided in chapter 9. Within the context of SWAp planning it should be considered how in the longer term the ARTF can develop and evolve into an integrated funding mechanism to support and further SWAps. The starting point could be to: 1) review the relevant existing ARTF-funded project of the relevant sector/sub-sector in terms of the areas that it supports, 2) discuss coordination among supporting donors and how the support could be broadened in alignment with the relevant strategy, and 3) under which conditions more donors will provide more funding to the project. The next steps could then be considered as follows: Assessing and planning how to move from investment (capital cost) funding towards broader thematic packages by using a mechanism that would likewise fund recurrent expenditures (maintenance and operations). Identifying a practical method that would help to avoid double-funding for recurrent funding (since a share of the GoA s recurrent budget is already funded through the ARTF s recurrent window). Considering how to move from the existing input-based budgeting to a results-oriented (output- and outcome-based) budgeting framework. The latter aspect would, however, be a fundamental shift that will only be possible in the longer term given that to give up direct control of funding (e.g. through existing special accounts and related procedures) and over procurement (e.g. by the current application of donor procurement procedures donors are likely to expect further improvements in government s systems, procedures and capacities. The different findings and elements would then need to be combined into a new ARTF funding mechanism and be formalised in a programme document with a detailed outline of the implementation arrangements, which would be presented to and approved by the ARTF Management Committee. In terms of timing it should be noted a new ARTF funding mechanism for SWAps could not practically start operations before the fiscal year 2011/12 (SY1390). It is overall recommended that the GoA and the donors first of all discuss whether or not they in principle agree to initiate a SWAp process on a pilot-basis, and if so then to identify the target sector(s) and/or sub-sector(s). This should, as outlined above, be followed by the signing of a general agreement in the form of a Memorandum of Understanding and the preparation of a detailed and sector-specific roadmap to initiate the SWAp process. ARTF donors have formed a technical working group with the government to review the findings and recommendations of the study and to propose a way forward at the next quarterly ARTF donor meeting in April

27 IV. ARTF Recurrent Cost Financing 1. Introduction This section of the report provides a summary of the details of recurrent cost financing, as monitored by the Monitoring Agent, under World Bank supervision. The ARTF, through recurrent cost financing, helps finance salaries and wages of over 260,000 nonuniformed civil servants (approximately 70 percent of whom are working outside Kabul), and government s operating and maintenance (O&M) expenditures outside of the security sector. As of December 21, 2009, a total of US$1.9 billion had been made available to the government over seven and a half years for recurrent cost financing. Of this, US$1.86 billion has been disbursed. As noted in Section I, US$290 million will be assigned to the government for recurrent cost funding in SY1388. This ceiling includes US$40 million for meeting the SY1388 ARTF Incentive Program benchmarks. As of December 21, 2009, US$145.0 million has been committed and US$143.1 million has been disbursed. 2. SY1387 & SY1388 Operating Budget Execution Table 3 presents budgeted and actual operating expenditures for SY1387 and for SY1388 (as of December ). The table is adjusted to exclude those ministries ineligible for ARTF financing. The eligible budgeted and actual expenditures are reflected in bold text below. Table 3: Budget versus Actual Expenditures Payroll O&M SY1388 SY1387 AFN m AFN m AFN m AFN m Initial Budget SY1388 (1) 65,091 28,862 93,953 65,359 Add: Mid year budget review (2) ,470 Defense, Interior, National Security, Presidential -37,053-10,627-47,680-28,139 Protection Services Budget Ministries qualified for financing 28,038 18,235 46,273 45,691 Actual expenditures for year 42,254 14,402 56,656 69,026 Defense, Interior, National Security, Presidential -23,820-2,366-26,186-31,985 Protection Services Advances and other unqualified codes ,882-3,743-2,285 Expenditures Ministries qualified for financing 17,573 9,154 26,727 34,756 Actual expenditures in percentage of adjusted 62.7% 50.2% 57.8% 76.1% budgeted expenditures Remaining budget 10,465 9,081 19,546 10,935 Remaining budget in percentage of initial budget 37.3% 49.8% 42.2% 23.9% (1) Ordinary budget for the SY1388 Source: Monitoring Agent 3 rd Quarter SY1388 Report 22

28 3. SY1388 Distribution among Cost Categories Figure 6 presents the distribution of AFN 26,727 million (US$552 million) in eligible expenditure for SY1388 among the four cost categories financed by the ARTF. Payroll expenditures are divided into Payroll-based salary expenditure (PBSE) comprising all payroll based salary expenditures including gross salary, food allowance, education level allowance, Priority Reform and Restructuring (PRR) payment and bonus payrolls. Non-payroll-based salary expenditure (NPBSE) comprises all expenditures classified in AFMIS as wages and payroll but supported by documents other than payroll, such as assistance payments to employees and transportation expenses. O&M expenditures are broken into O&M expenditure excluding pensions (OM-P) comprising all recurrent expenditures recorded in AFMIS not included in one of the other categories, and Pensions (P) comprising pension payments by the Pension Department and Martyrs and Disabled Department of the Ministry of Labor and Social Affairs. Figure 6: SY1388 Non-security Expenditures by main category (US$m) Pension $40 7% O&M excluding pension $149 27% Payroll-based salary $346 63% Non payrollbased salary $16 3% Source: Monitoring Agent 3 rd Quarter SY1388 Report 4. Recurrent Costs by Line Ministry As of December 21, 2009, 68 percent of total disbursements of payroll and O&M expenditures were related to 6 out of 49 line ministries and independent budget agencies as shown in Figure 7 below. The Ministry of Education accounted for 37 percent of non-security spending, mainly for teachers salaries. Teachers represent almost half of all Afghan civil servants. Figure 7: SY1388 Disbursements by Ministry 4.6% 4.5% Ministry of Education 5.7% 6.3% 10.1% 36.9% Ministry of Martyrs, Disabled and Social Affairs Administrative Affairs Ministry of Public Health Ministry of Higher Education Ministry of Foreign Affairs Source: Monitoring Agent 3 rd Quarter SY1388 Report 23

29 5. Eligibility of Expenditures ARTF finances recurrent cost expenditures which meet the criteria set by the government, the ARTF Grant Agreement and the Fiduciary Standards (additional requirements agreed to by the Ministry of Finance and the Administrator). Criteria for eligibility are set out in the box below. ARTF Eligibility Criteria Government Regulations The Annual Budget Decree: Since ARTF provides budget support to the government, expenditures can be found eligible only if they are included in the yearly budget; ARTF s share of financing for the yearly budget was approved by the ARTF Management Committee. Other. All goods and services must be procured and accounted for in accordance with government law and regulations. If expenditure does not comply with local regulations it will not be considered to be eligible for financing by ARTF. It is important to note that the Afghan procurement law allows for procurement to conform to donor requirements (article 50 sub 1). ARTF Grant Agreement All military and security related expenditures are ineligible for financing. Procurement. Capitalized goods and works need to be procured in accordance with the World Bank procurement guidelines. Fiduciary Standards Fiduciary Standards (revised as at 20 December 2004). In addition to the Afghan laws and regulations, an additional set of requirements was agreed on the timeliness of reporting and efficiency of cash management of eligible expenditures. 6. Eligibility Performance For each category of recurrent cost, Table 4 presents comparative data on submitted expenditures and actual approved expenditures, over the life of the ARTF. Payments are deemed ineligible according to the criteria described in the box above. The expenditure and eligibility figures for SY1384 and SY1385 were restated taking into account the final deductions based on the auditors findings for these years. Audit findings for SY1386 are not yet reflected in the SY1386 eligibility ratios. 4 Payroll eligibilities for the last three years were 92.5 percent (SY1385), 89.2 percent (SY1386) and 88.4 percent (SY1387). Reporting on O&M and non payroll-based compensation eligibility in SY1387 presents a challenge. Amendments made to the public procurement law in July 2008 rendered it inadequate as a basis for eligibility of O&M and non payroll-based compensation under the ARTF. As a result ARTF reimbursed no O&M expenditure and no non-payroll based compensation in SY1387. Although acceptable provisions were restored in December 2008 the Administrator decided not to reimburse O&M expenditures through the end of SY1387 in order to minimize the risk of reimbursing and ineligible expenditures. This explains the low approval ratios of 15.3 percent for O&M and 88.4 percent for payroll presented in Table 4. 4 See Annex 2 on Audit. 24

30 Table 4: SY ytd Summary of Statements of Expenditure: Submissions and Approvals (US$ thousands) Submitted by MoF to MA Approved by MA and by WB O&M Payroll Total O&M Payroll Total O&M Payroll Total USD USD USD USD USD USD % % % 1381 Total 42,239 87, ,157 27,318 87, , % 99.7% 88.4% 1382 Total 300, , ,682 41, , , % 92.5% 36.4% Total 82, , ,202 61, , , % 92.2% 87.1% Total 104, , ,958 75, , , % 84.9% 80.9% Q1 13,704 35,961 49,665 13,290 35,961 49, % 100.0% 99.2% Q2 41,219 80, ,945 36,403 77, , % 95.4% 93.0% 1385 Q3 35,089 69, ,251 25,971 62,973 88, % 91.1% 85.3% Q4 58,172 94, ,626 20,024 83, , % 88.2% 67.7% Total 148, , ,487 95, , , % 92.5% 82.9% Q1 18,415 40,710 59,125 18,415 40,710 59, % 100.0% 100.0% 1386 Q2 41,315 91, ,859 33,853 87, , % 96.0% 91.6% Q3 45,135 88, ,428 38,437 74, , % 84.7% 84.8% Q4 73, , ,309 20,150 85, , % 82.8% 59.7% Total 178, , , , , , % 89.2% 79.5% Q1 43,555 79, ,296 43,555 79, , % 100.0% 100.0% Q2 55,595 93, ,876-24,055 83,710 59, % 89.7% 40.1% 1387 Q3 64, , ,199 10,958 99, , % 95.1% 65.4% Q4 98, , ,488 9, , , % 75.5% 47.8% Total 261, , ,859 40, , , % 88.4% 60.0% Q1 41,001 96, ,175 41,001 96, , % 100.0% 100.0% 1388 Q % 0.0% 0.0% Q3 37,040 46,829 83, n.a. n.a. n.a. Total 78, , ,043 41,001 96, ,175 n.a. n.a. n.a. Grand total 1,195,929 1,798,179 2,994, ,123 1,588,151 2,081, % 88.3% 69.5% Source: SoE submitted to World Bank Table excluding deductions for reaching the yearly budget cap as agreed between donors and GIRA. Source: SoEs submitted to the World Bank Notes: 1. Table excluding deductions for reaching the yearly budget cap as agreed between donors and GIRA. 2. Negative figure for O&M in the second quarter of SY1387 is the result of recovery of expenditures reimbursed in the first quarter. Due to changes in procurement law O&M expenditure relating to SY1387 is not reimbursable. The net figure USD 36.5m for O&M comprises expenditures on pensions. 3. SY1387 figures do not currently reflect eligibility ratios consistent with prior years since all O&M and non payroll based compensation were not qualified for reimbursement under ARTF due to amendments made to public procurement law which made it not acceptable. This is explained in detail above. It should be noted that if the basis for eligibility were calculated as compliance with the existing laws (despite their weakness as mentioned above) then the eligibility ratio would in fact be higher. This calculation would be the ratio of ineligible expenditures (based on monitoring activities) to total O&M and non payroll-based compensation submitted by the MoF to the Monitoring Agent. According to this alternative basis of calculation, the eligibility ratio in SY1387 would be 75.6 percent (for both Payroll and O&M) compared to 60.0 percent as currently presented in Table 4. 25

31 For payroll related expenditures the main cause of ineligibility in SY1387 was non-compliance with government regulations and the Fiduciary Standards. A lack of adequate supporting documents for expenditures associated with the Ministry of Foreign Affairs embassies was one of the major causes of ineligibility. In O&M expenditure, non-compliance with local regulations was the major cause of ineligibility in SY1387. Most line ministries make direct purchases from state enterprises; this is not permitted under the local law. While monitoring for SY1388 is still underway, a unique transaction significantly influences the O&M ineligibility figure in Table 5. AFN 850 million recorded at the Ministry of Agriculture related to a transfer to the Agriculture Cooperative of the Ministry of Agriculture for the purchase of an estimated 100,000 tons of wheat from local farmers. This is an ineligible expenditure and is the main cause of increase in ineligibility to AFN 1,552 million, an increase of 120 percent compared to the corresponding quarter in the previous year. The difference in ineligible amounts between data presented in Table 4 and Table 5 below is due to the fact that the ineligibilities identified in Table 5 are based on site visits and the ineligibilities due to statistical sampling. These are not yet fully reflected in Table 4. The final results of monitoring for a particular year are usually available in the second quarter s report of the following solar year. Table 5: SY1388 Ineligibility by main cause and category of expenditure on alternative basis AFN million GIRA ARTF FS Total PBSE NPBSE Payroll O&M Pension ,552.7 Pension O&M ,552.7 Total 1, ,815.8 % 62.0% 34.5% 3.5% Source: Monitoring Agent 3 rd Quarter SY1388 Report Figure 8: SY1388 ineligibility by cause Figure 9: SY1388 ineligibility by category of expenditure Government regulations ARTF Grant Agreement O&M excluding pension Payroll-based salary Fiduciary Standards Source: Monitoring Agent 3 rd Quarter SY1388 Report 26

32 VI. ARTF Fiduciary Framework Section VI provides a summary of the fiduciary framework for ARTF funds. This note was circulated to donors as part of the preparation for the London ARTF meeting in January Further details are provided in Annex II. 1. Introduction The advance of public financial management (PFM) reforms and the performance of the PFM arrangements in Afghanistan have been widely analyzed and reported. Achievements include control of the broad fiscal aggregates as well as establishing effective systems and processes. The Government s commitment to transparency and fiscal discipline drove the institutional improvements and capacity development which together with positive public expenditure outcomes provided confidence to donors resulting in the mobilization of high levels of external support for the national budget, particularly through the Afghanistan Reconstruction Trust Fund (ARTF). According to the 2008 PEFA-led assessment 5, Afghanistan s PFM performance compares very favorably to the experience in other postconflict countries. Afghanistan s ratings are better than the average of a sample of other low-income countries and in some areas, better than the average of a sample of middle-income countries. As depicted in the graph below, policy-based budgeting, predictability and control in budget execution, accounting, recording and reporting as well as external scrutiny and audit perform particularly well with low and middle income countries. 2. Corruption Risk Notwithstanding these achievements, the Transparency International 2009 Report rated Afghanistan as the second most corrupt country in the world. This perception of a high incidence of corruption is supported by media reports, the Government s own acknowledgement that corruption is a major 5 See more details in Afghanistan Public Financial Management Performance Assessment World Bank and DFID, June