Afghanistan Reconstruction Trust Fund Report to Donors

Transcription

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

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3 CURRENCY EQUIVALENT (Effective September 22, 2005) Currency Unit = Afghani ( AFN) US$ 1 = AFN GOVERNMENT FISCAL YEAR (SY ) March 21 - March 20 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

4 ABBREVIATIONS AND ACRONYMS AACA ADB AFMIS AKDN ARDS ARTF CAWSS CCFO CGAP DFID ECEPWP 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 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 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

5 Table of Contents I. HIGHLIGHTS... 1 II ARTF IN RELATION TO THE BUDGET AND FLOW OF FUNDS The ARTF and the National Budget Sources and Uses of ARTF Funds... 5 III ARTF RECURRENT COSTS WINDOW (TF ) Recurrent Window Operations Recurrent Budget Execution ARTF Funding of Recurrent Costs by Line Ministries Trends of the Eligibility of Submitted Expenditures Financial Management in the National Government IV 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 SUPPORT TELECOMMUNICATIONS PROJECT STRENGTHENING FINANCIAL CAPACITY OF THE GOVERNMENT KABUL CITY ROADS AND DRAINAGE SYSTEM 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) iii

6 ANNEX 2: ARTF FINANCIAL TABLES iv

7 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 Costs Window) and priority reconstruction programs and projects the Investment Window). Since its commencement of 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 first and second quarter (March 21 September 22, 2005), ARTF finances remained relatively sound. Pledges for SY1384 total US$462 million of which, US$169 million (37 percent) has been paid in. The ARTF Administrator is following up individually with Donors to ensure timely receipt of remaining pledged amounts for SY1384. Recurrent Window: Disbursements under the ARTF Recurrent Window are budgeted at US$280 million for SY1384. During the first half of SY1834, a total of US$145 million has been disbursed for recurrent expenditures. Investment Window: There are currently 12 active investment projects funded by the ARTF investment window, with a total commitment of US$203 million. During the first half of SY1384, the ARTF Management Committee approved additional allocations of US$68.5 million comprising US$20.3 million for Microfinance (TF052452); US$22.2 million for NSP (TF053939); US$21 million for Urban Water & Sanitation (TF054729); and US$5 million for Rural Water Supply (TF055447). 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 discussions 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 At the request of the government to be a part of the Management Committee, 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 1

8 in MC meetings as an observer and will attend up to four donor committee meetings in Kabul annually. Fiduciary Controls At the request of the World Bank s South Asia Vice Presidency, the Internal Audit Department conducted an audit of the ARTF. Areas of concern raised by the audit included rates of ineligible expenditures and consultant contracting procedures. The Administrator has completed follow up on all actions and, in addition, plans to brief Donors on the fiduciary control structure in place, noting also the risks that remain in managing an operation of this type. 2

9 II ARTF IN RELATION TO THE BUDGET AND FLOW OF FUNDS 1. The ARTF and the National Budget SY1383 Core 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. Domestic revenues in SY1383 (2004/05) are estimated at US$269 million (compared to a budget estimate of US$309 million) while expenditures are estimated at 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 is estimated at US$606 million, of which US$285 million has been financed from the ARTF (US$235 million under the recurrent window, and US$50 million disbursed under the investment window). Table 1: ARTF and the Core (Treasury) Budget SY (2002/ /08) (US$ million) SY /03 SY /04 SY /05 SY /06 SY /06 SY /07 SY / Estimates Budget Projections A. Domestic Revenues B. Expenditures ,885 1,300 1,500 1,775 Operating Expenditures Wages and Salaries Goods and Services Capital Expenditure Other Development Expenditures , C. Fiscal Deficit (before grants) , ,000 1,175 D. Donor Grants , ARTF Recurrent Investment Other E. Fiscal Deficit (after grants) F. Financing External financing (net) Domestic financing (net, including adjustments) 39 (191) 1 (30) 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): Domestic revenues in SY1384 are budgeted at US$333 million while expenditures are estimated at US$1,885 million (US$678 million of budgeted ordinary expenditure and US$1,207 million of development 3

10 expenditure). As a consequence, the SY1384 core budget deficit is estimated at US$1,552 million, of which the ARTF is expected to finance about a third (US$280 million under the recurrent window and US$184 million under the investment window). The projection under the recurrent window is set at a level that ensures that the Government can finance its operating expenditures without recourse to domestic financing (the Government has a nooverdraft policy ): in the original budget, operating expenditures are fully financed by domestic revenues, ARTF recurrent window, and LOTFA. The first four months of SY 1384 show a significant increase in domestic revenues (75 percent over the same period last year), in part due to a large payment of overflight fees (Table 2). Operating expenditures are also higher than the previous year, in part owing to improvements to issue allotments (which give spending authorization) for the first quarter in a timely manner. The implementation of the development budget has also started much faster than in the previous year. This has led to a larger fiscal deficit in the first part of the year than last year. ARTF has contributed to finance it, with disbursements that are larger than the previous year, both on the recurrent and investment windows. This also in part reflects that low disbursements in early 2004/05 were due to the introduction of a new process in MoF to control cash advances. Table 2: Percentage Change in Core Budget (Treasury) and ARTF First Four Months of SY1384 (US$ million) 2004/ /06 Increase 4 months 4 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 (4) E. Fiscal Deficit (after grants) (27) (33) 21 Source: MoF, IMF, ARTF. Projections: Projections for 2005/06 suggest that the Government could raise more revenues than in the budget, while actual disbursements under the core development budget are unlikely to reach the budgeted level (Table 1). The fiscal deficit before grants would be only US$810 million, of which ARTF would finance about half. In the medium term, the authorities indicated their objective to take measures to steadily increase domestic revenues. Domestic revenues are expected to reach US$500 million in 4

11 SY1385 (2006/07) and continue to increase afterwards. 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 window). 2. Sources and Uses of ARTF Funds Analysis of SY1384 (started on March 21, 2005): Paid-in contributions to the ARTF during the first half of SY1384 amount to US$169 million while an additional US$241 million was carried over from previous years (Table 3). Disbursements amount to US$192 million US$145 million through the recurrent window and US$47 million through the investment window. The cash balance after 6 months is US$220 million, of which US$60 million is committed to the recurrent window, US$85 million to the investment window, and US$4 million committed for the fees of the Monitoring Agent, leaving US$71 million unallocated, of which US$50 million was transferred in October 2005 to the recurrent window to meet the recurrent costs financing requirements of the third quarter. Table 3: ARTF Sources and Uses of Funds (US$ million), as of Sept 22, 2005 SY /03 SY /04 SY /05 SY /06 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 (1.7) - 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/ Based on current portfolio of approved investment projects. 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 the recurrent costs financing requirement for the current quarter and the following quarter. This way, should there be delays in donors making payments to ARTF, resources are still available to cover recurrent 5

12 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. 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 projected level of US$157 million and disbursements from the investment window at US$112 million, the ARTF would end SY1384 with an allocated cash balance of US$34 million. 6

13 III ARTF Recurrent Costs Window (TF ) The ARTF recurrent window finances salaries and wages of about 220,000 non-uniformed civil servants, over half of whom are working outside the city of Kabul, and Government s operating and maintenance expenditures outside of the security sector, including bulk purchases of essential supplies. 1. Recurrent Window Operations Allocations and Disbursements As of September 22, 2005, a total of US$713 million has been made available to the government for financing the recurrent budget, of which US$703 million has been disbursed (US$59 million in SY1381, US$214 million in SY1382, US$235 million in SY1383, and US$145 million in the first half of SY1384, plus a standing advance of US$50 million for working capital), leaving a balance of US$9.5 million in the recurrent costs trust fund. Figure 1 shows the quarterly disbursement trend of the recurrent cost window. Figure 1: Quarterly disbursements of ARTF Recurrent Window compared to Investment Window (US$ million) $120 $100 $80 $60 $40 $20 $0 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 (Source: World Bank) Pending Funding Requirements Based on the US$280 million annual contribution to the recurrent budget financing agreed with the Government for SY1384, and the projected financing requirement of US$75 million for the first quarter of SY1385, the financing requirements of the recurrent cost trust fund in the second half of SY1384 total US$200 million. 7

14 Table 4: Recurrent Window (TF ) Funding Requirements ( US$ millions) Estimate for SY st Half Actual 3 rd Qrt Estimate 4 th Qrt Estimate Opening Fund Balance Less: 1) Recurrent Expenditures to be funded by ARTF 2) Reserve for following quarter Funding Required (Source: World Bank) 2. Recurrent Budget Execution Cost Category Execution Civilian operating expenditures for the first half of SY1384 came to AFN7.8 billion or 51 percent of the approved annual budget. This result reflects an execution of 47 percent of the payroll budget and 60 percent of the annual operation and maintenance budget. Table 5: SY1384 Budget versus actual expenditures, as of Sep22, 2005 Payroll (AFA million) O & M (AFA million) Total (AFA million) Initial Budget SY ,440 9,209 28,649 Defense, Interior, Security, Afghan National Army -9,446-4,204-13,650 Add: Civilians Interior Budget SY1384 eligible Ministries 10,180 5,005 15,185 Actual expenditures for the first two quarters 8,367 5,481 13,847 Defense, Interior, Security, Afghan National Army -3,764-2,154-5,918 Interior non-uniformed staff Advances Expenditures SY1384 eligible Ministries 4,760 2,991 7,751 Remaining Budget SY1384 5,420 2,014 7,434 (Source: Monitoring Agent report Sonbola 1384) Payroll In the table above adjustments are made to both budget and expenditures to September 22, 2005 to arrive at the execution of budget expenditures eligible for financing under the ARTF recurrent cost window. Given the uniform distribution of payroll costs throughout the year, actual payroll for the first half should be 50 percent of the approved budget; they come to 47 8

15 percent of the approved payroll budget for eligible activities because the provincial payroll for month 6 was not yet recorded in the central financial records as of the end of the second quarter. Figure 2 Payroll expenditures 1384 AFA M 2,000 1,800 1,600 1,400 1,200 1, Hamal Saur Jawza Saratan Asad Sonbola Total Central Total Provinces (Source: Monitoring Agent report Sonbola 1384) Head Count & Average Salary Level Staffing and average monthly salary levels for the provincial and central ministries civil service of SY1383 are presented below against those of SY1384 by quarter. Table 6: Head Count and Salary Costs SY1383 SY1384 First Half Average Quarter 1 Quarter 2 Average Central Government No. Employees 74,151 77,672 74,166 75,919 Payroll ( x1,000 AFN) 322, , , ,629 Average salary (AFN./month) 4,344 4,589 4,513 4,551 Provinces No. Employees 167, , , ,876 Payroll ( x 1,000 AFN) 456, , , ,380 Average salary (AFN/month) 2,732 2,480 2,523 2,502 Total No. Employees 241, , , ,780 Payroll (x 1000 AFN) 778, , , ,009 Average salary (AFN/ month) 3,215 3,112 3,346 3,229 9

16 3. ARTF Funding of Recurrent Costs by Line Ministries Recurrent budget eligible expenditures in the amount of US$113 million from the first half of SY1384 have been included in requests for repayment through the ARTF recurrent cost trust fund. The distribution of the US$113 million by line ministry with comparison to the distribution of US$243 million for the whole of SY1383, before adjustments, is presented in the table below. Table 7: ARTF Funding of Recurrent Costs by Line Ministries Ministry USD % USD % Ministry of Education 44,085, % 103,567, % Ministry of Foreign Affairs 8,340, % 17,608, % Ministry of Public Health 7,766, % 14,386, % Ministry of Labor &Social Affairs 7,384, % 12,212, % Ministry of Higher Education 5,078, % 7,009, % Ministry of Martyrs & Disabled 3,641, % 7,568, % Ministry of Agriculture 3,388, % 7,833, % Administrative Affairs 3,180, % 2,677, % Presidents Office 2,963, % 6,212, % Others 28,018, % 64,111, % 113,847, % 243,187, % (Source: Monitoring Agent report Sonbola 1384) Figure 3 Disbursements by Ministry - SY1384 Education 36% 40% Foreign Affairs Public Health Labor and Social Affairs Higher Education 4% 6% 7% 7% Other (Source: Monitoring Agent report Sonbola 1384) 10

17 4. Trends of the Eligibility of Submitted Expenditures Submitted expenditures against approved and disbursed by type of expenditure over the last 6 quarters of ARTF are presented in Table 8. This indicator expresses the relation of submitted expenditures to expenditures found eligible and paid by the Fund. As such, it catches all causes of ineligibility which span incompliance with: i) government own rules on procuring, authorizing, documenting and reporting, ii) the grant rules on activities which are eligible for financing, and iii) the fiduciary standards stipulated in the ARTF for cash management and reporting. Table 8: Summary Statements of Expenditures (Amounts in USD 1,000) Sep 22, Total 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 % % % 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% 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% Total Q1 Q2 Q3 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% Total 43,729 82, ,956 31,628 79, , % 96.4% 88.0% (Source: Monitoring Agent report, Sonbola 1384) For this range of causes of ineligibility, the Monitoring Agent conducts different tests with varying coverages including: 100% examination of codes to determine eligibility of entity submitting the expenditure, 100% review of the dates of payrolls to ensure compliance with fiduciary standards, statistical sampling of payroll expenditures to select transactions for review of support and site visits to view support and examine processes followed for a riskbased sample of specific payroll and O&M expenditures. In addition to sites visits by the Monitoring Agent, 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 half of SY1384. Additionally, 11

18 payroll for 18,700 civil servants in Kabul from 16 ministries are witnessed by a team including an official from the Central Bank. Most of the tests noted above are covered in one of two processes: (i) a desk review of all expenditures and (ii) site visits to test a sample of expenditures. The desk review is applied to 100% of expenditures recorded in the centralized integrated financial management system against the recurrent budget. The Monitoring Agent performs the desk review before the withdrawal application is submitted to the World Bank. The desk review is an automated function to identify all expenditures for non-eligible budget entities (i.e., Ministries of Defense, National Security and Interior); these expenditures are then excluded from the submission to the World Bank. Also, expenditures that are charged to suspense accounts and advances are identified and excluded from the submission to the World Bank. Lastly, material items may be queried depending on the history of ineligibility of the budget entity submitting the expenditure; in 1382 and 1383 this brought to light specific ineligibles items which were taken out of month s expenditures presented to the Bank for reimbursement. The remaining expenditures are included in a Statement of Expenditure (SOE) and submitted and reimbursed by ARTF. The objective of the Monitoring Agent s site visit is to provide assurance that expenditures reimbursed by ARTF under the recurrent window comply with the fiduciary standards which were agreed between the Administrator and the Ministry of Finance. For the sample of selected sites, the site visit involves the examination of the documentary support for expenditures that were included in the SOEs. The review may take place at the location where the expenditure is paid or in those cases where insecurity in the regions does not permit a site visit the review takes place in the Ministry of Finance and is based on the documents forwarded from the locations. The approach to monitoring expenditures for payroll and O&M is slightly different based on the risks associated with the expenditures. The work of the Monitoring Agent, from the outset, considered the additional 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 noted, 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. For O&M however the amount of ineligible expenditures has been much higher. The selection of the size of samples in the selected spending entities is based on an agreed risk model. For O&M all expenditures over a prescribed threshold (i.e., equivalent of US$ 70,000) are selected for testing. Also, individual expenditures in round figures are selected for testing since the round figure may be an indication of improper expenditures and the ministries with a history of higher ineligibility have a higher percentage of expenditures tested in the sample. 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. The Monitoring Agent s coverage and the ineligibility percentages should also be viewed in relation to the relative weight of payroll and O&M in total ARTF recurrent expenditures. In 12

19 the last two years payroll approximated 75% of total uses and it reported ineligibility of 6.1% for 1383, primarily arising from late reporting or exceeding head counts caps. These results provide a high level of confidence in propriety of uses, particularly considering that reasons for ineligibility arise more around timely reporting and allotment control rather than unbudgeted or unsupported uses. The next quarterly report to donors will provide a more comprehensive treatment of the topic of monitoring and ineligible expenditures to follow up on suggestions made during a recent audit by the World Bank's Internal Audit Department. Current Performance As shown in Table 8, eligibility of payroll fell to 94% in the second quarter of SY1384, and the O&M eligibility for the first quarter of SY1384 was just 54% before remedial action (and 91 % after correction ). Figure 4: Trends in Eligibility (% of Eligible expenditures) 100% 80% 60% 40% 20% 0% 1383-Q Q Q Q Q Q Q3 Payroll approved O & M approved The 94% payroll eligibility for the second quarter of SY1384 was attributable to the security costs associated with the President s office which were recently absorbed into the national budget and were reimbursed by ARTF before being detected through a site visit. The high O&M ineligibility ratio for the first quarter arises from the rejection of a single sourced contract of US$17 million for a geological survey of which US$9 million has been paid from the ARTF recurrent cost window account. The related contract is being reprogrammed to and refinanced by the development budget at which time it will no longer be considered in the calculation of ineligibility ratios. Without this contract the O & M ineligibility ratio would be 91%. Full recovery by the ARTF of the payment was made in the month following reimbursement Monitoring Agent Appointed In the first half of 2005 the Administrator concluded a quality and cost based selection process to select a Monitoring Agent for SY1384 and two successive years. The firm 13

20 PriceWaterhouse Coopers NV, which served as Monitoring Agent in the past, was awarded the contract. 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 final report is expected within 30 days. 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 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. As reported in the March 2005 Quarterly Report, 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. 14

21 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 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. 15

22 IV ARTF INVESTMENT WINDOW Allocations Approved for Investment Projects As of September 22, 2005, cumulative approvals by the ARTF Management Committee for investment projects amount to US$251 million. Table 9 provides the year-wise breakdown. During the first half of SY1384, the ARTF Management Committee has approved additional allocations of US$68.5 million comprising: US$20.3 million for Microfinance (TF052452); US$22.2 million for NSP (TF053939); US$21 million for Urban Water & Sanitation (TF054729); and US$5 million for Rural Water Supply (TF055447). It should be noted that only US$20.3 million had been transferred to the child trust fund TF as of September 22, Table 9: ARTF Management Committee Approvals for Investment Projects (US$ million), as of September 22, Total Rural Development TF NEEP TF052452/ Microfinance TF National Solidarity Program TF Rural Water Supply Infrastructure TF Kabul Roads TF Telecom & Microwave Link TF Kabul Power Supply TF Urban Water Supply and Sanitation TF Rehabilitation of Naghlu Hydropower Plant TA & Capacity Building TF TA and Feasibility Studies Facility TF CCFO Project TF Afghan Expatriate and Lateral Entry Others TF Education Quality Improvement Project The allocations to the investment portfolio are in alignment with the country s development priorities accorded to rural development; rehabilitation and development of basic infrastructure of roads, power, water supply and telecommunication; and capacity building, taking into account availability of bilateral donor and MFI assistance 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: 16

23 Table 10: 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 5.0 2% Infrastructure % Kabul Roads 3.0 1% Telecom & Microwave Link 6.1 2% Kabul Power Supply 7.4 3% Urban Water Supply and Sanitation % Rehabilitation of Naghlu Hydropower Plant % TA & Capacity Building % Technical Assistance and Feasibility Studies Facility % Strengthening the Government Financial Capacity 5.1 2% Afghan Expatriate and Lateral Entry Programs 8.0 3% Others 5.0 2% Education Quality Improvement Project 5.0 2% % Portfolio Status As of September 22, 2005, the ARTF investment portfolio comprises 12 active projects with a combined commitment of US$ 203 million, of which US$118 million (58 percent) have been disbursed. Basic information is given in Table 11. More detailed project-specific information is given in Annex I. The grants supporting NSP, NEEP and Microfinance are disbursing very fast compared with the infrastructure projects which have a disbursement period of about three years. Figure 3 presents the quarterly disbursements of the investment portfolio. Table 11. ARTF Investment Portfolio, September 22, 2005 (active projects) Commitment Disbursed TF No. TF Name Effective Closing US$ m US$ m Rural Development NEEP 3/14/03 9/30/ Microfinance for Poverty Reduction 7/10/03 6/30/ National Solidarity Program 9/30/04 6/30/ Infrastructure Kabul Roads 2/17/04 6/30/ 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/ TA & Capacity Building TA & Feasibility Studies Facility 3/8/03 2/28/ CCFO 11/19/03 2/28/ Civil Service Capacity Building 6/15/05 2/28/ Other EQUIP 6/1/05 3/31/ Subtotal:

24 Figure 5: Quarterly disbursements of ARTF Investment Window (US$ million) $30 $25 $20 $15 $10 $5 $ Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 (Source: World Bank) 18

25 1 2 Table 12: Status and Ratings of Investment Projects as of September 22 nd, 2005 (amounts in US$ million) NEEP Microfinance National Solidarity Program Kabul City Roads Emergency Telecommunication Kabul Power Supply Urban Water and Sanitation Emerggency Power Rehab. TA and Feasibility Study Project CCFO Project Expatriate Afghan & Training Component Approved Grant Amount Amount Disbursed Amount Available Start Date 03/14/03 06/04/03 04/05/04 02/17/04 07/10/03 02/02/04 02/13/05 02/13/05 03/08/03 11/19/03 05/13/02 Closing Date 09/30/05 06/30/06 06/30/06 06/30/05 12/31/05 06/30/06 12/31/08 01/31/09 02/28/10 02/28/06 06/30/06 Achievement of Grant Objectives S S S S S S S MU MS U S Implementati on S S S S S S S MU MS U MS Project Management S S S S S S S MU MS S MS Financial Management S S S S S MS MS MS MS S MS Procurement S S S S S S S U S S MS Monitoring & Evaluation MS S S S S MS S MS MS U MS (S: MS: Moderately, MU: Moderately Unsatisfactory, U: Unsatisfactory) 19

26 ANNEX 1: STATUS OF INVESTMENT PROJECTS 20

27 1. AFGHANISTAN CIVIL SERVICES CAPACITY BUILDING PROJECT TF P Contact: Ms. Jalpa Patel Approved: 02-May-05 Effective: 15-Jun-05 Closing: 28-Feb-10 Committed: US$8 million Disbursed: US$0.11 million Available: US$7.89 million Committed: US$0.5 million Objective: To build the capacity into 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 middleand 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: The AEP commenced in August, 2004 and nearly all funds ($5m) are committed one year ahead of schedule (although not yet disbursed). Progress to date has been impressive. Around 50 Experts have already been contracted to date to work in a range of Ministries. Appointments are being made on the basis of merit; the IARCSC has been able to effectively resist (sometimes considerable) pressure from Ministries for appointments based on patronage. A recent external Bank-funded review of the AEP praised the merit-based selection process: Thanks to composition of and role played by the Executive Committee, it seems that little improvement can be made to improve the selection process and better prevent the risks of patronage and cronyism. The paper goes on to comment: what has been achieved by a few Afghan expatriates whether funded or not by this project is impressive Clearly many Afghan expatriates act as key change agents. Component 2: The LEP commenced in August, 2005 and the first positions have been advertised. Major Procurement Contracts and Status Date Type US$ million Contractor Country Status Jul04 Consulting Services 0.5 IOM Kabul Switzerland On-going Issues and Actions An internal World Bank review of the Afghan Expatriate Program was conducted in May/June This focused on three components: procurement, financial management, policies and procedures (overall implementation). 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 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep Jan-09 May-09 Sep-09 Jan-10 Achievement of Objectives: Implementation: Project Financial Procurement: Monitoring & Evaluation: Moderately Moderately Moderately Moderately Moderately

28 2. TECHNICAL ASSISTANCE AND FEASIBILITY TF Contact: Ms. STUDIES P Nancy Zhao Approved: 08-Mar-03 Effective: 08-Mar-03 Closing: 28-Feb-10 Available: US$10.3 million Allocated: US$18.5 million Disbursed: US$8.2 million Committed: US$6.9 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: Activities under this component are taking place in the Ministry of Water and Power (MWP) and the Ministry of Urban Development and Housing (MUDH). Five contracts have been awarded, for a total amount of US$6.9 million. Out of this amount, US$1.7 million has been disbursed and US$5.2 million is still committed. Component 2: There are currently 8 experts working in line ministries and government institutions, including two experts assisting with the implementation of the TAFSU project itself. There were four new recruitments during the period. Total Commitments for individual contracts amounts US$6.9 million, out of which US$5.8 have been disbursed. Major Procurement Contracts and Status Date Type US$ 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 On-going Jun-04 Management Firm for TAFSU 1.3 Altai Consulting Afghanistan completed Oct-04 Consulting Services for MUDH (water supply) 0.9 Beller GmBH Germany completed Jun-05 Baghdara Hydro Power Plant Feasibility Study for MWP 3.4 Fichtner GmBH & CoKG China On-going 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: 42% Achievement of Objectives: Implementation: Project Financial Procurement: Moderately Moderately Moderately Moderately Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Monitoring & Evaluation: Moderately 22

29 3. NATIONAL EMERGENCY EMPLOYMENT TF050973P Contact: Mr. Amer PROGRAM Zafar Durrani Approved: 14-Mar-03 Effective: 14-Mar-03 Closing: 31-Mar-08 Available: US$ 0 million Allocated: US$16.62 million Disbursed: US$16.62 million Committed: US$ 0 million Objective: The objective of the project is to assist the recipient in providing employment in rural areas at a minimum wage, as a safety net, to as many people and in as short a time as may be feasible Component 1: Road Sector-Labor Intensive Public Works (US$ million ) Component 2: Irrigation- Labor Intensive Public Works (US$ 3.47 million) Implementation Progress & Highlights of Achievements Sub-projects under NEEP-I (and with further continuous financing under follow-on NEEP Projects) have now reached to all provinces of Afghanistan, with overall 11~12 million labours generated. It is estimated that a typical stint on a NEEP subproject (including NEEP- I, subprojects) enables one individual to meet daily consumption requirements for approximately 276 days [National Rural Vulnerability Assessment (NRVA), carried out by MRRD-2004], which in itself is a substantial achievement. As of 31 st July 2005, under NEEP-I, approximately 2,500 kms of rural access and 3,100 running meters of structures were completed. In addition 98 natural resource management sub-projects, 25 small irrigation sub projects and four large irrigation sub-projects (in Shamalan area) have been completed. Out of the 402 contracts awarded, 385 were complete while on 17 contracts the works are in final stages of completion. Overall 98% of the physical works were complete. The disbursements on work by UNOPS were 90%, balance being retention and final bills. Labour days targeted under the project were 4.4 million, while labor days as per present commitments stand at 4.1 million, out of which 3.7 have already been paid. Major Procurement Contracts and Status Date Type US$ Million Contractor Country Status May-03 UNOPS acting for the Implementing Agencies (IAs) Works & Goods 3.47 using Local Shuras (village/community councils) (Irrigation Sector) and Local Contractors World Completed May-03 Works & Goods (Road UNOPS acting for the Implementing Agencies (IAs) Sector) Local Shuras and Local Contractors World Completed Issue: The original Grant amount of US$ million has been fully disbursed. DFID and USAID have expressly committed a funding of GBP 18 million (approximately US$ 35 million) and US$ 2 million respectively through ARTF for continuing the NEEP program (for rural access network only). The first tranche of the DFID grant to ARTF of GBP 10 million (USD 18.2 million) has been released while the second tranche is to be released upon satisfactory progress against the program. USAID has committed to release USD 2 million to ARTF before 30 th September A mini appraisal was carried out by the Task Team to top up the existing NEEP-1 Grant Agreement with this additional funding of US$ 37 million, and the appraisal documents for US$ 20.2 million have been submitted to the ARTF MC. It is expected that once approval has been accorded by the MC, the implementation of the works under the new funding would commence by mid to end October Action Required: ARTF Management Committee to review and approve the application for the additional funding of US$ 20.2 million. Issue: Closing date for NEEP-I has been extended from September 30 th 2005 up to March 31 st 2008, to encompass the sub projects to be undertaken with the additional funding contributed by DFID and USAID. Million $18.00 $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Achievement of Objectives: Implementation: Project Financial Procurement: Monitoring & Evaluation: 23

30 TF052452/ Contact: Mr. 4. MICROFINANCE SUPPORT TF Stephen F. P Rasmussen Approved: 10-July-03 Effective: 10-July-03 Closing: 30-Jun-06 Available: US$14.1 million Allocated: US$41.4 million Disbursed: US$27.3 million Committed: US$ 0.5 million Objective: To help the population of the recipient's territory to improve their livelihoods, make the transition from dependence on humanitarian assistance to economic independence and to empower them to build on their entrepreneurial spirit and skills. Component 1: Microfinance Fund (US$ 25.2 million - Loan fund) Component 2: Capacity building of MF providers (US$ 1.5 million - Training category) Component 3: Implementation Support (US$ 10.7 million 0perating & goods, US 3.0 million consultancy) Implementation Progress & Highlights of Achievements Component 1: Total number of active clients: , Active women clients: 83%, Loan portfolio outstanding: USD14 million, Loans disbursed to date (cumulative): 187,632, Average repayment rate 99%. Component 2: Total 12 MFI partners, over 1300 Afghans currently employed, 358 trained by MISFA including 25 managers, 4 MFIs under the ILO capacity building link have received funding. Component 3: At present a total of 128 branches, covering 16 provinces, 120 districts, launched program in poppy growing areas, government has signed up three year contracts with four MFIs and they have received second year funding, ongoing pilot test on Kutchi lending, finalizing a housing product for government employees. Primary Microfinance Institutions (MFI) MFI US$ Million cumulative Disbursed till Aug 05 MFI US$ Million cumulative disbursed till Aug 05 BRAC 8.0 million Women For Women 0.7 million FINCA 1.3 million ARMP AKDN 2.5 million WOCCU 0.7 million CHF 1.3 million CARE-MOFAD 1.0 million DACAAR 0.2 million AFSG-Mercy Corps 1.2 million PARWAZ 0.2 million ACTED-OXUS 0.3 million MADERA 0.05 million Issues and Actions MISFA has made important strides in establishing a sustainable microfinance sector, working in a challenging environment. Much of that success is due to government commitment to MISFA s long-term strategy. Microfinance in Afghanistan still faces significant challenges. Increasing the reach of services to the poor, particularly in rural areas, is one. Building a sector that will outlast subsidy and really offer the poor people of Afghanistan a chance to improve their own lives is another. And very importantly the imperative to develop Afghan capacity to fully manage and operate MFIs. MISFA is also now ready to become a permanent legal entity in the Afghan private sector, with both government and microfinance experts represented on its board, eventually adding private sector representatives as well. With a well-constructed law for non-bank financial institutions, MISFA s partner MFIs could also come under the supervision of Da Afghanistan Bank. The institutionalization of MISFA and MFIs would help create an inclusive and integrated financial sector. This is yet another major concern. The first to transition to an independent legal status and the second to find the funding to support the growth of the microfinance sector. How microfinance will perform is largely determined by how well it comes through all these concerns. Million $45.00 $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 Disbursement Rate: 45% Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Achievement of Objectives: Implementation: Project Financial Procurement: Monitoring & Evaluation: 24