Afghanistan Reconstruction Trust Fund Report to Donors

Transcription

1 With Pledged Support From: Afghanistan Reconstruction Trust Fund Report to Donors Third Quarter of the Afghan Fiscal Year 1384 September 23, 2005 to December 21, 2005 Prepared by the World Bank ARTF Administrator ARTF Management Committee: Asian Development Bank, Islamic Development Bank, United Nations Development Program, World Bank

2 CURRENCY EQUIVALENT (Effective December 21, 2005) Currency Unit = Afghani ( AFN or AFA) US$ 1 = AFN GOVERNMENT FISCAL YEAR (SY1384 ) March 21, March 20, 2006 Solar Year Period SY 1381 March 21, 2002 March 20, 2003 SY 1382 March 21, 2003 March 19, 2004 SY 1383 March 20, 2004 March 20, 2005 SY 1384 March 21, 2005 March 20, 2006 SY 1385 March 21, 2006 March 20, 2007 i

3 ABBREVIATIONS AND ACRONYMS AACA ADB AFMIS AFA AFN AKDN ARDS ARTF CAWSS CCFO CGAP DFID ECEPWP GIRA IARCSC IDA IDB IDP IMF IRA JPMU KfW LOTFA MC MCAT MFI MISFA MIWRE MoC MoF MoFA MoPW MRRD MUDH MWE MWP NEEP NEEPRA NGO NPP NSP O&M PRR SDR SIDA SOE TAFS UN UNAMA UNDP UNHCR UNOPS USAID Afghan Assistance Coordination Authority Asian Development Bank Afghanistan Financial Management Information System Afghanis Afghanis Aga Khan Development Network Afghanistan Reconstruction and Development Services Afghanistan Reconstruction Trust Fund Central Authority for Water Supply and Sewerage Counterpart Chief Financial Officer Consultative Group to Assist the Poor Department for International Development Emergency Community Empowerment and Public Works Program Government of the Islamic Republic of Afghanistan Independent Administrative Reform and Civil Service Commission International Development Association Islamic Development Bank Internally Displaced Persons International Monetary Fund Islamic Republic of Afghanistan Joint Program Management Unit Kreditanstalt für Wiederaufbau Law and Order Trust Fund for Afghanistan Management Committee Ministry of Civil Aviation and Tourism Microfinance Institution Microfinance Investment and Support Facility for Afghanistan Ministry of Irrigation, Water Resources and Environment Ministry of Communication Ministry of Finance Ministry of Foreign Affairs Ministry of Public Works Ministry of Rural Rehabilitation and Development Ministry of Urban Development and Housing Ministry of Water and Environment Ministry of Water and Power National Emergency Employment Program National Emergency Employment Project for Rural Access Non-Governmental Organization National Priority Programs National Solidarity Program Operations and Maintenance Priority Reform and Restructuring Special Drawing Rights Swedish International Development Agency State Owned Enterprise Technical Assistance and Feasibility Studies United Nations United Nations Assistance Mission in Afghanistan United Nations Development Program United Nations High Commissioner for Refugees United Nations Office for Project Services United States Agency for International Development ii

4 Table of Contents I. HIGHLIGHTS... 1 II THE ARTF IN RELATION TO THE BUDGET AND FLOW OF FUNDS The ARTF and the National Budget Sources and Uses of ARTF Funds... 5 III THE ARTF RECURRENT COST WINDOW (TF ) Recurrent Cost Window Operations Recurrent Budget Execution ARTF Funding of Recurrent Costs by Line Ministries Trends of the Eligibility of Submitted Expenditures Payroll-based Payroll Financial Management in the National Government IV THE ARTF INVESTMENT WINDOW Allocations Approved for Investment Projects Portfolio Status ANNEX 1: STATUS OF INVESTMENT PROJECTS AFGHANISTAN CIVIL SERVICES CAPACITY BUILDING PROJECT TECHNICAL ASSISTANCE AND FEASIBILITY STUDIES NATIONAL EMERGENCY EMPLOYMENT PROGRAM MICROFINANCE FOR POVERTY REDUCTION TELECOMMUNICATIONS PROJECT STRENGTHENING FINANCIAL CAPACITY OF THE GOVERNMENT IMPROVEMENT OF POWER SUPPLY TO KABUL NATIONAL SOLIDARITY PROGRAM EMERGENCY POWER REHABILITATION PROJECT (Naghlu HPP) URBAN WATER SUPPLY AND SANITATION EDUCATION QUALITY IMPROVEMENT PROGRAM (EQUIP) RURAL WATER SUPPLY AND SANITATION ANNEX 2: ARTF FINANCIAL TABLES iii

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6 I. HIGHLIGHTS The Afghanistan Reconstruction Trust Fund (ARTF) was established in May 2002 to serve as a coordinated financing mechanism for the Government s recurrent budget (the Recurrent Cost Window) and priority reconstruction programs and projects (the Investment Window). Since commencing operation, the ARTF has successfully mobilized US$1.3 billion in grant contributions from 24 bilateral donors and is the primary instrument for financing the civilian operating budget. SY 1384 Financial Picture During the third quarter (September 22 December 21, 2005), ARTF finances remained relatively sound. Pledges for SY1384 total US$470 million of which, US$288 million has been paid in (61%). The ARTF Administrator is following up individually with Donors to ensure timely receipt of remaining pledged amounts for SY1384. Recurrent Cost Window: Disbursements under the ARTF Recurrent Window are budgeted at US$280 million for SY1384. During the first nine months of SY1834, a total of US$176 million has been disbursed for recurrent expenditures. Investment Window: There are currently 12 effective investment projects (of which 11 are disbursing) funded by the ARTF, with a total commitment of US$267.6 million. Of this amount the ARTF Management Committee approved funding of US$88.7 million during the first nine months of SY1384: US$20.3 million for Microfinance Investment Support; US$22.2 million for the National Solidarity Program; US$21 million for Urban Water & Sanitation; US$20.2 million for the National Emergency Employment Program; and US$5 million for Rural Water Supply & Sanitation. Building on the ARTF Evaluation The ARTF evaluation presented to donors and the government in April 2005 noted the scope for enhancing policy coordination into the management of the recurrent window of the fund, and also to find ways to more strategically target investments. These recommendations are now being followed up in discussion with donors and the government to make progress towards a sustainable medium-term fiscal framework and tighter fiduciary standards and to eventually align investments with the government s National Development Strategy which is currently under preparation. An initial draft of policy benchmarks was shared with donors in September and is being reviewed for further discussion. Changes in the ARTF Governance Structure In response to the request of the government to be a part of the Management Committee (MC), the Administrator held discussions with the Management Committee and the Donors Committee on this topic. Welcoming the opportunity for greater ownership by government and the potential for improved coordination, donors agreed that the government will now be included in MC meetings as an observer and will attend up to four Donor Committee meetings in Kabul annually. 1

7 Fiduciary Controls The ARTF Donor Committee in Kabul received a briefing from the Administrator at a meeting in November This briefing provided detailed information on the fiduciary control structure for the ARTF and specifically the recurrent window. The briefing described the process of monitoring and detailed explanation of the complexity of ineligible expenditures identified by the fiduciary control system in place. Donors saw evidence of great improvements of government s adherence to fiduciary standards and also were also briefed on the risks that exist in managing an operation of this type. The donor meeting also provided the Administrator the opportunity to summarize findings of an audit of the ARTF conducted by the World Bank s Internal Audit Department, of which all follow up actions have been completed. Going forward, donors can expect ARTF reports to provide a more detailed articulation of issues related to determination of eligibility. 2

8 II THE ARTF IN RELATION TO THE BUDGET AND FLOW OF FUNDS 1. The ARTF and the National Budget The core budget records all transactions that are channeled through the Treasury including domestic revenues, expenditures from the Ordinary Budget and expenditures from international donors that use the Treasury system. However, it excludes expenditures that are made directly by donors outside the Treasury system (which are referred to as external budget, Table 1). SY1383 Core Budget ( ): Domestic revenues in SY1383 (2004/05) are estimated to have reached US$269 million (compared to a budget estimate of US$309 million) while expenditures are estimated to have reached US$874 million (US$558 million of ordinary expenditure and US$317 million of development expenditure, much below budget estimates). As a consequence, the core budget deficit was estimated at US$606 million, of which US$285 million was financed from the ARTF (US$235 million under the recurrent cost window, and US$51 million disbursed under the investment window). Table 1: ARTF and the Core (Treasury) Budget SY (2002/ /08) (US$ million) SY1381 SY1382 SY1383 SY1384 SY1384 SY1385 SY / / / / / / / Estimates Rev. Budget Projections A. Domestic Revenues B. Expenditures ,725 1,250 1,450 1,725 Operating Expenditures Wages and Salaries n/a Goods and Services n/a Capital Expenditure n/a Other n/a Development Expenditures , C. Fiscal Deficit (before grants) , ,125 D. Donor Grants ARTF Recurrent Investment Other E. Fiscal Deficit (after grants) F. Financing External financing (net) n/a Sale of Non-Financial Assets n/a Domestic financing (net, including adjustments) n/a 39 (191) (181) (47) - 25 Memorandum Item External budget 503 1,226 2,503 3,180 2,000 1,800 1,600 GDP 4,084 4,585 5,975 7,130 7,330 8,800 10,200 Exchange rate Domestic revenues (% GDP) Expenditures (% GDP) Fiscal deficit (before grants, % GDP) Source: MoF, IMF, Staff projections. SY1384 Core Budget (March 21, March 20, 2006): In October 2005, the government, after reviewing budget implementation at mid-year, approved a revised budget for SY1384. Domestic revenues are budgeted at US$386 million (plus the expected proceeds of new telecom licenses) while expenditures are estimated at US$1,725 million (US$693 million of ordinary expenditure and US$1,032 million of development expenditure). As a consequence, the SY1384 core budget deficit is budgeted at US$1,339 million, of which the ARTF is expected to finance almost a third (US$280 million under the recurrent cost window 3

9 and US$124 million under the investment window). The projection under the recurrent cost window is set at a level that ensures that the government can finance its operating expenditures without recourse to domestic financing (the government has a no-overdraft policy ): in the budget, operating expenditures are fully financed by domestic revenues, the ARTF recurrent cost window, and LOTFA. The revised budget also introduced a multi-year reserve to anticipate the financing requirements of ongoing multi-year projects. The first eight months of SY1384 show a significant increase in domestic revenues (42% over the same period last year), mainly resulting from a significant increase in customs collections and a large payment of overflight fees (see Table 2). Operating expenditures are also higher than the previous year: while the wage bill is largely stable, non-salary expenditures increased sharply. The rate of spending of the development budget is more satisfactory than in the previous year. Overall, this has led to a fiscal deficit before grants larger than last year. The ARTF has largely contributed to finance this increase, with disbursements that are larger than the previous year, both on the recurrent cost and investment windows. However the estimated disbursements for the year are in line with amounts agreed with the Government at the beginning of SY1384. Overall the cash situation of the Treasury has improved with a small fiscal surplus after grants. Table 2: Percentage Change in Core Budget (Treasury) and ARTF First Eight Months of SY1384 (US$ million) 2004/ /06 Increase First 8 months (%) A. Domestic Revenues B. Expenditures Operating Expenditures Wages and Salaries Goods and Services Capital Expenditure Other Development Expenditures C. Fiscal Deficit (before grants) D. Donor Grants ARTF Recurrent Investment Other E. Fiscal Deficit (after grants) 51 (6) (112) Source: MoF, IMF, ARTF. Projections: Projections for SY1384 (2005/06) suggest that, despite progress, constraints to the implementation of the development budget remain. As a result, there would be a shortfall in the development budget (see Table 1). The fiscal deficit before grants would be only US$860 million, of which the ARTF would finance about half. For the medium term, the government has recently adopted a Medium-Term Fiscal Framework, notably indicating its objective to take measures to mobilize more domestic revenues. Domestic revenues are expected to reach US$500 million in SY1385 (2006/07) and continue to increase afterwards. The government will in fact aim to increase revenues beyond this target. Disbursements from the ARTF are expected to stabilize around US$400 million per annum (US$300 million from the recurrent window and US$100 million from the recurrent cost window). 4

10 2. Sources and Uses of ARTF Funds Analysis of SY1384 (started on March 21, 2005): Paid-in contributions to the ARTF during the nine months of SY1384 amount to US$289 million while an additional US$238 million was carried over from previous years (Table 3). Disbursements amount to US$239 million US$176 million through the recurrent cost window and US$60 million through the investment window. The cash balance after 9 months is US$290 million, of which US$78 million is committed to the recurrent cost window, US$91 million to the investment window, and US$3 million committed for the fees of the Monitoring Agent, leaving US$118 million available for transfers. Out of this amount, US$46.2 million has been committed to investment programs, and US$50 million has been approved for recurrent costs, leaving US$21.8 million available for new investments. Table 3: ARTF Sources and Uses of Funds (US$ million), as of Dec. 21, 2005 SY1381 SY1382 SY1383 SY1384 SY / / / / / Actual months Projections SOURCES OF FUNDS (A+B) A. Net Donors contributions (A1-A2) A.1. Donors contributions A.2. IDA fees minus Investment income (1.6) - B. Cash carried-over from previous year (item D) USES OF FUNDS (C+D) C. Disbursements (C1+C2+C3+C4) C.1. Recurrent window a/ Wages O&M Other C.2. Investment window C.3. Pass-through to LOTFA (UNDP Police) C.4. Fees to monitoring agent D. Cash Balance (end-of-period) (A+B-C=D1+D2) D.1 Committed Cash Balance To recurrent window b/ Undisbursed investment window balance c/ To monitoring agent fees D.2 Uncommitted Cash Balance a/ Based on National Budget. b/ Assumes a cushion of US$125 set aside at the end of SY1384 (2005/06). c/ Assuming a total of US$157 million of new commitments approved in SY1384 (2005/06). Projections for SY1384 (2005/06): The Administrator and the Management Committee manage the ARTF based on projections of contributions from donors and resource needs, as agreed with the government. For cash flow management, the Management Committee has adopted a practice of ensuring a funding cushion for the recurrent window at a level equal to (i) the estimated disbursement for the current quarter plus (ii) a reserve equal to the next quarter requirements. This way, should there be delays in donors making payments to the ARTF, resources are still available to cover recurrent costs. This practice is particularly important to ensure sufficient funds are available to meet the recurrent costs financing requirements for the first quarter of the following year, as donor contributions to the ARTF tend to come in later during the fiscal year. 5

11 With the working assumptions that (a) all current pledges are paid in during SY1384; (b) disbursements for the recurrent window match budget projections of US$280 million; (c) allocations to the investment window in SY1384 reach the projected level of US$157 million and (d) a US$125 million is allocated to the recurrent window at the end of the year (to provide a cushion to cover recurrent costs at the beginning of SY1385), the ARTF would end SY1384 with an unallocated cash balance of US$43 million. 6

12 III THE ARTF RECURRENT COST WINDOW (TF ) The ARTF recurrent cost window finances salaries and wages of about 266,000 nonuniformed civil servants over half of whom are working outside the city of Kabul, and government s operating and maintenance expenditures (including bulk purchases of essential supplies) outside of the security sector. 1. Recurrent Cost Window Operations Allocations and Disbursements As of December 21, 2005, a total of US$763 million has been made available to the government for financing the recurrent budget, of which US$734 million has been disbursed (US$59 million in SY1381, US$214 million in SY1382, US$235 million in SY1383, and US$176 million in SY1384, plus a standing advance of US$50 million for working capital), leaving a balance of US$ 29 million in the recurrent cost window. The volume of quarterly disbursements from the recurrent cost window displays an increasing trend over the last eight quarters. This upward trend reflects government s ability to execute rising ARTF contributions (Figure1). Figure 1 - Quarterly Disbursements of ARTF Recurrent Cost Window Compared to Investment Window (US$ million) $120 $100 $80 $60 $40 $20 $0 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 (Source: World Bank) Funding Requirements for 4 th Quarter 1384 In SY1384, the Administrator, Government and donors have agreed to provide US$280 million in recurrent budget financing through the ARTF. In addition to this sum, for the first quarter of SY1385, the projected financing requirements for recurrent costs are US$75 million. To meet these requirements, US$ 150 million must be available in the recurrent cost window in the last quarter of SY

13 Table 4: Recurrent Cost Window (TF ) Funding Requirements ( US$ millions) Estimate for 1384 Year to Date (Dec 21,2005) 4 th quarter Estimate Opening Fund Balance Less: 1) Recurrent Expenditures to be funded by ARTF 2) Reserve for following quarter Transfer from Parent Required (Source: World Bank) Recurrent Budget Execution Table 5 presents total budget and actual expenditure for SY1384 (to December 21, 2005) under the government s recurrent budget. After adjusting budget and actual expenditures to remove ineligible ministries/offices, the eligible budget and eligible actual expenditure are shown. Actual expenditure for eligible ministries totals AFN12.1 billion (79% of approved budget). This rate reflects an execution of 76% of the payroll budget and 86% of the annual operation and maintenance budget. Actual payroll cost is on budget at 75% thus far this year (nine out of twelve months). Actual year-to-date costs contain the Ramadan (annual) bonus but not the provincial payroll costs of month 9, as the latter has yet to be recorded in the Afghanistan Financial Management Information System (AFMIS) or reimbursed by the ARTF. Execution of Operation and Maintenance expenditure (AFN4.308 billion) in eligible ministries represents 86% of the annual budget (more than budget). The distribution between central and provincial operations is 76% central and 24% provincial, indicating the persistence of difficulties in provincial level operations. 8

14 Table 5: SY1384 Budget versus actual expenditures to Dec 21, 2005 (Source: Monitoring Agent 3 rd Quarter 1384 Report) Cost Category Distribution According to the official ARTF agreement, the fund will finance expenditures in two categories - Payroll and O&M. From a monitoring standpoint, these categories are further subdivided and monitored as follows: under Payroll: Payroll-based salary expenditure (PBSE) 1 and Non-payroll-based salary expenditure (NPBSE) 2 ; under O&M: O&M expenditure excluding pensions (OM-P) 3 and Pensions (P) 4. The distribution of total expenditures year-to-date of AFN21,054 billion among cost categories is presented in Figure 2 below. 1 PBSE comprises all payroll based salary expenditures including gross salary, food allowance, education level allowance, PRR payments and bonus payrolls. 2 NPBSE comprises all expenditure classified in AFMIS as wages and payroll that are supported by documents other than payrolls. Examples include assistance payments to employees and transportation expenses. 3 OM-P comprises all recurrent expenditures recorded in AFMIS not included in one of the other categories 4 comprises pension payments by both the Ministry of Martyrs and Disabled 9

15 Figure 2 Expenditures by Main Category (Source: Monitoring Agent 3 rd Quarter 1384 Report) Head Count & Average Salary Level Staffing and average monthly salary levels for the central ministries and provincial civil service of SY1383 are presented below against those of Quarter 1 and 2 of SY The rise in average costs for the Central Government reflects the implementation of the Priority Reform and Restructuring program (PRR) which has created new positions at higher salaries. Provincial average salary declined because the expansion includes mostly teachers at the lower end of the scale. Table 6: Head Count and Salary Costs SY1383 Average SY 1384 Qrt 1 SY 1384 Qrt 2 Central Government No. Employees 74,151 76,532 75,136 Payroll ( x1,000 AFN) 322, , ,910 Average salary (AFN./month) 4,344 4,660 4,976 Provinces No. Employees 167, , ,542 Payroll ( x 1,000 AFN) 456, , ,761 Average salary (AFN/month) 2,732 2,476 2,531 Total No. Employees 241, , ,678 Payroll (x 1000 AFN) 778, , ,671 Average salary (AFN/ month) 3,215 3,114 3,220 5 Quarter 3 averages are affected by outstanding payrolls so these will be presented following complete input gathering. 10

16 3. ARTF Funding of Recurrent Costs by Line Ministries To date, US$180 million of eligible expenditures have been included in requests for repayment through the ARTF recurrent cost window (US$169 million after adjustments to the submissions). Table 7 compares the distribution of recurrent cost funding (as adjusted) among line ministries in SY1384 and SY1383. The distribution pattern has not changed since SY1383. At December 21, 2005, 62% of total disbursements of payroll and non-payroll expenditures from the ARTF were related to 5 line ministries and independent budget agencies (out of 46). Disbursements in SY1384 have increased by 30% compared to disbursements in SY1383 (disbursements excluding adjustments related to previous years). This increase arises partly from the impact of the Payroll Restructuring Reform (PRR) program on payroll costs which have accelerated since the end of SY1383. Table 7: ARTF Funding of Recurrent Costs by Line Ministries Ministry USD % USD % Ministry of Education 67, % 103, % Ministry of Foreign Affairs 14, % 17, % Ministry of Public Health 12, % 14, % Ministry of Labor &Social Affairs 10, % 12, % Ministry of Higher Education 7, % 7, % Ministry of Martyrs & Disabled 7, % 7, % Ministry of Agriculture 5, % 7, % Administrative Affairs 4, % 2, % Presidents Office 3, % 6, % Others 46, % 64, % 180, % 243, % (Source: Monitoring Agent report Sonbola 1384) Figure 3 Disbursements by Ministry ARTF Disbursements by Ministry - SY1384 Education 38% 37% Foreign Affairs Public Health Labor and Social Affairs Higher Education 4% 6% 7% 8% Other 11

17 4. Trends of the Eligibility of Submitted Expenditures Eligibility Under the recurrent cost window, the ARTF provides budget support to the government of Afghanistan for expenditures which meet the criteria that are set by the Government of the Islamic Republic of Afghanistan (GIRA) and also those stipulated by the ARTF Administrator under the ARTF Grant Agreement. Moreover, the Ministry of Finance has agreed with the ARTF Administrator to additional requirements called Fiduciary Standards. Criteria for eligibility are set out in the box below. GIRA Regulations The Annual Budget Decree. Since the ARTF provides budget support to GIRA, expenditures can be found eligible only if they are included in the yearly budget; this early budget has to be approved by the ARTF Management Committee. Other. All goods and services must be procured and accounted for in accordance with GIRA law and regulations. If expenditure does not comply with local regulations it will not be considered eligible for financing by the 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 Current Amendment number 15 dated September 13, All military expenditures are ineligible for financing. Procurement. Capitalized goods and works must be procured in accordance with the World Bank procurement guidelines. Fiduciary Standards Fiduciary Standards (revised as at 20 December 2004). In addition to the GIRA laws and regulations, an addition set of requirements were agreed upon related to the timeliness of reporting and the efficiency of cash management of eligible expenditures. Current Performance Table 8 compares total submitted expenditures to total approved expenditures, broken down by type of expenditure, over the life of the ARTF. Eligibility rates (the ratio of approved expenditure divided by submitted expenditure) encompass all causes of ineligibility as explained in the Eligibility section above. Quarterly eligibility rates are skewed due to seasonal factors. More monitoring is done later in the year when more transactions are available to review and as conditions allow more site visits. The performance of the government in submitting expenditures which meet stringent rules on eligibility can be best seen from the year-to-date rate of 89% against 88% for the whole of SY1383. This year-to-date rate comprises an eligibility rate of 90.3% on payroll which has been over 90% in the past 3 years and 86.9% on O&M which has shown a steady improvement since SY1382. O&M eligibility in SY1384 was significantly affected in the first quarter by the rejection of a contract which did not meet procurement procedure requirements. The related contract and disbursement were subsequently transferred to the Development Budget in the third quarter, correcting eligibility statistics and yielding the eligibility rate of 177.6% for O&M in 12

18 Quarter. 3. Had this error not occurred, the eligibility rates in Quarter1 and Quarter3 would have been 91% and 79%, respectively. This peak in ineligibility (i.e., the 79%), as analyzed in Causes of Ineligibility, arises from the Monitoring Agent s concentrating in Quarter 3. on procurement procedures in the Ministry of Public Health and Education where exceptions to the required bidding in significant contracts was found. Payroll eligibility appears to decline over the 3 quarters to date in 1384 but this trend arises due to the nature of the applicable fiduciary standard and the timing of monitoring. Payroll reporting fiduciary standards are not applicable before 4 months after the payroll month, moreover, the review of supporting documentation only begins in the second quarter of the year. Table 8: Trends in Eligibility (% of Eligible expenditures) Summary Statements of Expenditures (Amounts in USD 1,000) Dec 21, 2005 Submitted by MoF to MA Approved by MA and disbursed 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% Q1 17,499 17,734 35,233 7,153 16,222 23, % 91.5% 66.3% Q2 19,050 63,594 82,644 15,155 62,474 77, % 98.2% 93.9% 1383 Q3 15,481 64,395 79,876 15,291 61,848 77, % 96.0% 96.6% Q4 (*) 30,134 56,314 86,449 23,789 49,167 72, % 87.3% 84.4% 1384 Total Q1 Q2 Q3 Total 82, , ,202 61, , , % 93.9% 88.4% 23,626 31,420 55,047 13,222 31,420 44, % 100.0% 81.1% 20,103 50,806 70,909 18,406 47,808 66, % 94.1% 93.4% 7,076 36,465 43,541 12,568 31,809 44, % 87.2% 101.9% 57, , ,590 50, , , % 90.3% 89.3% Causes of Ineligibility Table 9 displays total ineligible expenditures year-to-date for SY1384. Ineligible expenditures are broken down by cost category of expenditure (by row PBSE (payroll), NPBSE (Payroll, Non Payroll Based Salary), O&M, and Pensions), and by the related set of compliance standards or rules (by column - Government of Afghanistan, ARTF Grant Agreement and Fiduciary Standards. 13

19 As highlighted in Table 9 and Figure 4 below, the largest source (50%) of all ineligibility is the failure to comply with Fiduciary Standards, namely, not reporting Payroll on time and exceeding headcounts caps set in the approved staffing plans (Tashkeel). Of AFN527 million rejected for non-compliance with fiduciary standards, AFN494 million relate to headcount caps excesses (of which AFN293 million originate in the Ministry of Education). Additionally, AFN50 million of payroll ineligibility arises from the submission of security personnel costs in the expenditures in one office. The largest second source is in O&M due to non-compliance with the government s procurement rules (21%). Table 9: Total Ineligibility by Main Category of Expenditure and Related Rules Figure 4 - Total Ineligibility by Main Cause Cumulative SY 1384 Monitoring Total budget expenditures year-to-date in SY1384 come to AFN21.1 billion and are presented by cost category of expenditure in Figure 2 (page 10). In the following sections, the monitoring work performed by the Monitoring Agent on each cost category is explained. Coverage, in terms of the percentage of the value of transactions reviewed of the total expenditures submitted, is given. 14

20 Payroll-based Payroll From the outset, the work of the Monitoring Agent considered the various controls applied to payroll: centralized control of authorized posts, centralized head count data base and the verified payroll program. These arrangements contributed to a relatively lower level of ineligible expenditures detected in payroll payments. As presented in the following box, the Monitoring Agent reviews payroll expenditures through site visits and from the Ministry of Finance through statistical samples drawn from the expenditures for the whole year. The lower coverage of government rules compliance relates to the examination of individual salary payments which are too voluminous to cover in large percentage and is supported by the results of tests of eligibility which indicate a high degree of compliance. For the test on employment limits under Fiduciary Standards, payroll costs are compared to a head count data base derived from payrolls prepared on an accrual basis by the budget entities. The costs of the head count data base is compared to payrolls actually paid by the Ministry of Finance and the two sources were reconciled for the first 9 months of SY1384. Additionally, payroll for 18,700 civil servants from 16 ministries in Kabul are witnessed by a team including an official from the Central Bank. It is clear that through the monitoring work, great assurance is obtained (as detailed in the box below 6 ) that only authorized payroll of eligible ministries is funded. 6 PM ( pro memory) used for the expenditures that we have been monitored but the related total expenditures for the cost category not available from AFMIS. 15

21 Table 10: Monitoring Compliance for Payroll-based Payroll 16

22 Non-payroll-based Payroll Non-payroll based payroll payments are similar in nature to O&M expenditures in that they are not supported by payrolls and payroll systems. Consequently, a higher degree of review of supporting documentation is performed by the Monitoring Agent (23 % against 3% in payroll). Table 11: Monitoring Compliance for Non-payroll-based Payroll O&M Excluding Pension Considering the diverse nature of ineligibility with the O&M expenditure, the Monitoring Agent invests more time in the review of supporting documentation and the procurement process of these expenditures through the site visits than is necessary with payroll costs. The experience from the site visits determines the frequency and extent of future visits to budget units, thus the sampling is risk-based. Similarly, material O&M items may be queried depending on the history of ineligibility of the budget entity submitting the expenditure Additionally, all expenditures over a prescribed threshold (i.e., equivalent of US$70,000) are selected for testing; individual expenditures in round figures are selected for testing since the round figure may be an indication of improper expenditures. This risk-based approach is designed to reduce the possibility of ineligible expenditures being funded through the unmonitored part of expenditures, though it does not eliminate the possibility. Nevertheless, to date at least 46 % of transactions have been reviewed for all risks and 100% for eligibility of the ministry and for proper allotment of funds. This coverage will only increase through the Quarter 4 when most of the site visits occur. 17

23 Table 12: Monitoring Compliance for O&M Expenditures Pension Individual pension transactions are of a very small amount. Fortunately these operations lend themselves to statistical sampling and analysis because they arise in a single control framework. However, the results of the sampling underway are not complete so they are not present in the box below. The review of pension costs did ensure that military pensions are excluded. Table 13: Monitoring Compliance for Pension 18

24 5. Financial Management in the National Government Audit of SY1383 The financial statements of the ARTF Recurrent Cost Trust Fund and the National Budget were completed and presented to the external auditors on a timely basis. The audit field work was affected by recent security concerns around the parliamentary elections but the draft report is being translated to Dari and will be issued by the end of January Public Financial Management Over the last three years the Government of Afghanistan established a new framework for Public Finance Management comprising: the national budget as the main policy instrument, a commitment to transparency and a centralized computerized system, the Afghanistan Financial Management Information System (AFMIS), to issue checks and record revenues and expenditures of the ordinary and development budgets. Parallel improvements have been made in the DAB payment systems. The government also established a Treasury Single Account (TSA) which ensures strong fiduciary controls (including regular sweeping of revenues to the center and bank reconciliations). The external audit capacity was also developed; consequently, the 2003/04 financial statements of the ARTF and IDA grants have been audited to international standards. The government established a central facility for procurement that has processed more than 350 contracts, with a total value above US$1 billion, using internationally accepted standards. Most recently, work has started to establish an effective government-wide internal audit function operating under the Ministry of Finance. These advances will be consolidated by the implementation of the recently approved Public Finance and Expenditure Management (PFEM) and Procurement Laws. A major review of Public Finance Management (PFM) is near completion. One output of the PFM review is the PFM Performance Report which presents an initial performance assessment for Afghanistan based on a set of critical objectives for a PFM system and a standard set of high-level PFM indicators. The main findings of the initial assessment suggest that: Strong progress has been made on fiscal discipline. There remain significant fiscal risks, however, due to the lack of a more explicit multi-year framework and also because some risks are poorly monitored, such as those associated with state-owned enterprises and municipalities. Progress has also been strong in terms of collecting adequate information. The challenges are mainly related to flows of information with provinces, and information flows on donor-implemented operations. Budget policy remains constrained by weak capacity. Although making the budget the central instrument of policy and reform is a key objective of the government, the policy orientation of the budget remains constrained by the government s weak capacity and the very large external budget funded directly by donors and executed outside government budgetary channels. The budget process is orderly, but more remains to be done to link the budget more closely to the government s development strategy and to a medium-term perspective. At the aggregate level, the government has presented realistic budgets for operating expenditures. However, the distribution across ministries and functions fluctuates 19

25 significantly, and the development budget has often been based on less realistic assumptions, reducing the usefulness of the budget as an instrument to implement the government s policies. The annual budget for the national government, the reporting on budget execution, and the information published on the government s website are satisfactory in terms of transparency and comprehensiveness. Public disclosure of financial information on state-owned enterprises and municipalities, as well as on audit findings, is extremely limited, however. 20

26 IV THE ARTF INVESTMENT WINDOW Allocations Approved for Investment Projects As of December 21, 2005, cumulative approvals by the ARTF Management Committee for investment projects amount to US$ million. Table 14 provides the yearly breakdown of these allocations. Of this amount, during the first nine months of SY1384, the ARTF Management Committee approved US$88.7 million to projects:: US$20.3 million for Microfinance (TF052452); US$22.2 million for National Solidarity Project (TF053939); US$21 million for Urban Water & Sanitation (TF054729); US$20.2 million for the National Emergency Employment Program; and US$5 million for Rural Water Supply (TF055447). Table 14: ARTF Management Committee Approvals for Investment Projects, as of December 21, 2005 (US$ million) Total Rural Development TF National Emergency Employment Program TF052452/5208 Microfinance TF National Solidarity Program TF Rural Water Supply & Sanitation Infrastructure TF Kabul Roads & drainage System TF Telecom & Microwave Link TF Kabul Power Supply TF Urban Water Supply and Sanitation TF Emergency Power Rehabilitation Project TA & Capacity Building TF Technical Assistance & Feasibility Studies TF Strengthening the Financial Capacity TF Civil Service Capacity Building Others TF Education Quality Improvement Project The allocations to the investment portfolio align with Afghanistan s development priorities accorded to rural development; rehabilitation and development of basic infrastructure (roads, power, water supply and telecommunication); and capacity building. These allocations also take into account availability of support from the international community for the other sectors such as education and health, as well as donor expressions of preferences. The relative shares of the three clusters in the overall resource allocation are shown below: 21

27 Table 15: Composition of Resource Allocation under the ARTF Investment Window Total Allocation Distribution Rural Development % National Emergency Employment Program % Microfinance % National Solidarity Program % Rural Water Supply & Sanitation % Infrastructure % Kabul Roads % Telecom & Microwave Link % Kabul Power Supply % Urban Water Supply & Sanitation % Emergency Power Rehabilitation Program % TA & Capacity Building % Technical Assistance and Feasibility Studies Facility % Strengthening the Government Financial Capacity % Civil Service Capacity Building % Others % Education Quality Improvement Project % % Portfolio Status As of December 21, 2005, the ARTF investment portfolio comprises 12 effective projects (of which 11 are active and disbursing) with a combined commitment of US$267.6 million, of which US$130.6 million (49%) have been disbursed. Basic information is given in Table 16. More detailed project-specific information is given in Annex I. The grants supporting National Solidarity Project, National Emergency Employment Program and Microfinance are disbursing very fast compared with the infrastructure projects which have a disbursement period of about three years. Figure 5 presents the quarterly disbursement of the investment portfolio. Table 16: ARTF Investment Portfolio, December 21, 2005 (active projects) Commitment Disbursed TF No. TF Name Effective Closing US$ m US$ m Rural Development National Emergency Employment Prog. 3/14/03 3/31/ Microfinance for Poverty Reduction 7/10/03 6/30/ National Solidarity Program 9/30/04 6/30/ Infrastructure Telecommunications 7/10/03 12/31/ Improvement of Power Supply to Kabul 2/2/04 6/30/ Urban Water Supply & Sanitation 2/21/05 12/31/ Emergency Power Rehabilitation 2/13/05 1/31/ Rural Water Supply & Sanitation 12/15/05 6/30/ TA & Capacity Building TA & Feasibility Studies Facility 3/8/03 2/28/ Strengthening Financial Capacity 11/19/03 2/28/ Civil Service Capacity Building 6/15/05 2/28/ Other Educational Quality for Improvement 6/1/05 3/31/ Subtotal:

28 Figure 5 - Quarterly disbursements of the ARTF Investment Window (US$ million) $30 $25 $20 $15 $10 $5 $ Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 (Source: World Bank) 23

29 Table 17: Status and Ratings of Active and Disbursing ARTF Investment Projects as of December 21, 2005 (amounts in US$ million) Civil Service Capacity Building TA and Feasibility Study Project NEEP Emergency Telecom-- munication Strengthening Financial Capacity Kabul Power Supply National Solidarity Program Microfinance Emerggency Power Rehab. Urban Water and Sanitation Education Quality Improvement Program Approved Grant Amount Amount Disbursed Amount Available Start Date 05/13/02 03/08/03 03/14/03 06/04/03 07/10/03 11/19/03 02/02/04 04/05/04 02/13/05 02/13/05 06/01/05 Closing Date 02/28/10 02/28/10 03/31/08 06/30/06 12/31/06 02/28/06 06/30/06 06/30/06 01/31/09 12/31/08 03/31/09 Achievement of Grant Objectives MS MS S S S U S S MU S MU Implementation MS MS S S S U S S MU S MU (S: MS: Moderately, MU: Moderately Unsatisfactory, U: Unsatisfactory) 24

30 ANNEX 1: STATUS OF INVESTMENT PROJECTS 25

31 1. AFGHANISTAN CIVIL SERVICE CAPACITY BUILDING PROJECT TF P Contact: Ms. Jalpa Patel Approved: 02-May-05 Effective: 15-Jun-05 Closing: 28-Feb-10 Allocated: US$8 million Committed: US$5.43 million Disbursed: US$0.51 million Available: US$7.49 million Objective: to meet the short-term capacity needs of the Afghan Civil Service. The project consists of two inter-related programs: the Afghanistan Expatriate Program (AEP) and the Lateral Entry Program (LEP). Component 1: AEP s objective is to recruit senior-level expatriate Afghan advisers through merit-based procedure to work in government ministries and agencies to enhance the capacity for institutional and policy reform. The program is implemented by the Independent Administrative and Civil Service Commission (IARCSC) with the assistance of International Organization for Migration (IOM). Component 2: Lateral Entry Program (US$3 million) The LEP aims to recruit up to 1500 Afghans to work in middle- and senior-level civil service line positions in Kabul and at sub-national level for a period of up to three years to help implement administrative reforms and mentor other civil servants. Implementation Progress & Highlights of Achievements Component 1: Recruitment of Afghan expatriates began in Aug 2004 and virtually all funds have been committed one year ahead of schedule. 76 positions have been filled to date and experts have been contracted to work in a total of 21 different ministries and agencies. Experts are placed very selectively, through a reasonably robust evaluation of requests by ministries and agencies. Their performance and outputs are being evaluated.. Appointments are made on the basis of merit; the IARCSC has been able to effectively resist pressure from Ministries for appointments based on patronage. A World Bank review was conducted in May/June 2005, focusing on overall implementation, policies and procedures, procurement and financial management. Implementation progress is satisfactory; experts are making an impact on the overall reform effort and are helping to build capacity where they have been appointed. Outstanding procurement related issues including providing basic documentation (Terms of Reference, CVs and signed contracts) and requesting WB prior No Objection for contracts over $50,000 have now been resolved. Component 2: The Lateral Entry Program commenced in August, To date around 30 lateral entrants have been recruited through open competition to work in a range of ministries. Major Procurement Contracts and Status Date Type US$ million Contractor Country Status Jul04 Consulting Services 5 IOM Kabul Switzerland Ongoing Issues and Actions An internal World Bank review of the Afghan Expatriate Program was conducted in May/June Recommendations arising from this review have been discussed with IARCSC and IOM. No major risks to project sustainability were identified Million $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 May-05 Sep-05 Disbursement rate: 6% Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May Sep-08 Jan-09 May-09 Sep-09 Jan-10 Achievement of Objectives: Implementation: Project Management: Financial Management: Procurement: Monitoring & Evaluation: Moderately Moderately Moderately Moderately Moderately

32 2. TECHNICAL ASSISTANCE AND FEASIBILITY STUDIES TF P Contact: Ms. Nancy Zhao Approved: 08-Mar-03 Effective: 08-Mar-03 Closing: 28-Feb-10 Allocated: US$18.5 million Committed: US$16.7 million Disbursed: US$8.82 million Available: US$9.68 million Objective: To assist the Government in developing local technical and professional capacity to define reconstruction and development projects Component 1: Feasibility Studies and Implementation Support (US$10 million) aims to identify and prepare projects for financing and implementation at a further stage. This component supports the recruitment of specialized firms to undertake the feasibility studies. Component 2: Recruitment of Individual Consultants (US$8.5 million) The specialists recruited help guide the preparation and supervision of reconstruction and development activities, and to supervise the feasibility studies on behalf of the government Implementation Progress & Highlights of Achievements Component 1: a total of five contracts have been awarded (Ministry of Power and Ministry of Urban Development), for a total of US$7.3 million. Out of this amount, US$2.3 million has been disbursed and US$5 million is still committed. Bid opening for the Aynak Copper Tender (ministry of Mines & Industry) is expected by February Component 2: There were three new recruitments during the quarter, totaling 7 experts working in line ministries and government institutions at the quarter's end. From Sept 2003 until December 2005, 67 consultants plus 14 supporting staff for the ANDS were engaged for various durations with combined commitments of US$5.3 million, of which US$4.4 million have been paid. Adding the management fee charges of the two management firms and the operating costs of TAFSU, the total commitment amounted to US$ 6.8 million, with US$ 5.9 million disbursed. Major Procurement Contracts and Status Date Type US$ Million Contractor Country Status Jul-03 Management Firm for TAFSU 2.7 Crown Agents UK completed May-04 Consulting services for MWP 2.3 DECON GmBH Germany ongoing Jun-04 Management Firm for TAFSU 0.1 Altai Consulting Afghanistan completed Oct-04 Consulting Services for MUDH (water supply) 0.8 Beller GmBH Germany ongoing Jun-05 Baghdara Hydro Power Project Fichtner GmBH & 3.8 Feasibility Study for MWP CoKG Germany ongoing Dec-05 Kabul municipality Technical Support 2.6 SMEC Australia ongoing Issues and Actions A supervision mission was conducted during the first afghan quarter, in order to re-assess the effectiveness of the project Million $20.00 $18.00 $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 Disbursement Rate: 48% Mar-03 Jul-03 Nov-03 Mar-04 Jul-04 Nov-04 Mar-05 Jul-05 Nov-05 Mar-06 Jul-06 Nov-06 Mar-07 Jul Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Achievement of Objectives: Implementation: Project Management: Financial Management: Procurement: Monitoring & Evaluation: Moderately Moderately Moderately Moderately Moderately