Completion Report. Project Number: Loan Number: 2091-AFG(SF) December Afghanistan: Afghanistan Investment Guarantee Facility Project

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1 Completion Report Project Number: Loan Number: 2091-AFG(SF) December 2011 Afghanistan: Afghanistan Investment Guarantee Facility Project

2 CURRENCY EQUIVALENTS Currency Unit afghani (AF) At Appraisal At Project Completion 12 August September 2010 AF1.00 = $ $ $1.00 = AF AF45.15 ABBREVIATIONS ADB Asian Development Bank AIGF AISA BBA BHF CWRD FDI IDA IHFD DFID MIGA NAPCOD PAR PRG PRI PSOD Afghanistan Investment Guarantee Facility Trust Fund Afghanistan Investment Support Agency BRAC Bank Afghanistan Business Humanitarian Forum Central and West Asia Department foreign direct investment International Development Association International Home Finance and Development Department for International Development Multilateral Investment Guarantee Agency New Afghanistan Project for Cotton and Oil Development portfolio at risk political risk guarantee political risk insurance Private Sector Operations Department NOTE (i) In this report, "$" refers to US dollars. Vice-President X. Zhao, Operations 1 Director General J. Miranda, Central and West Asia Department (CWRD) Director D. Kertzman, Financial Sector, Public Management and Trade Division, CWRD Team leader Team member M. Endelman, Principal Financial Sector Specialist, CWRD M. Marcelino, Operations Analyst, CWRD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 CONTENTS BASIC DATA i I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1 A. Relevance of Design and Formulation 1 B. Project Outputs 2 C. Project Costs 4 D. Disbursements 5 E. Project Schedule 6 F. Implementation Arrangements 6 G. Conditions and Covenants 7 H. Performance of the Borrower and the Executing Agency 7 I. Performance of the Asian Development Bank 7 III. EVALUATION OF PERFORMANCE 8 A. Relevance 8 B. Effectiveness in Achieving Outcome 8 C. Efficiency in Achieving Outcome and Outputs 8 D. Preliminary Assessment of Sustainability 8 E. Impact 9 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 9 A. Overall Assessment 9 B. Lessons 9 C. Recommendations 10 APPENDIXES 1. Project Framework Project Structure Compliance with Loan and Project Covenants Status of Investments with Political Risk Guarantee Cover Political Risk Guarantees Issued Overall Assessment of Project Performance 18

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5 BASIC DATA A. Loan Identification 1. Country Afghanistan 2. Loan Number 2091-AFG(SF) 3. Project Title Afghanistan Investment Guarantee Facility Project 4. Borrower Islamic Republic of Afghanistan 5. Executing Agency Ministry of Finance 6. Amount of Loan SDR3,430, Project Completion Report Number PCR: AFG 1281 B. Loan Data 1. Consultation Date Started 24 April 2004 Date Completed 30 April Loan Negotiations Date Started 29 July 2004 Date Completed 30 July Date of Board Approval 24 September Date of Loan Agreement 4 November Date of Loan Effectiveness In Loan Agreement 4 March 2005 Actual 3 March 2005 Number of Extensions none 6. Closing Date In Loan Agreement 30 September 2009 Actual 28 September 2010 Number of Extensions none 7. Terms of Loan Interest Rate 1% Maturity (number of years) 40 Grace Period (number of years) Terms of Relending (if any) Not applicable

6 ii 9. Disbursements Category a. Dates Initial Disbursement Final Disbursement Time Interval b. Amount (SDR) 18 May July months Effective Date Original Closing Date Time Interval 3 March September months Original Allocation Part Cancellations Last Revised Allocation Amount Disbursed Undisbursed Balance (1) (2) (3=24) (4) (5) (6=45) Guarantee Contracts 3,430,000 1,802,002 1,627,998 1,627,998 0 $ equivalent 5,000,000 a 2,666,332 b 2,500,000 c 2,500,000 d 0 e a Dollar equivalent as per report and recommendation of the President b Dollar equivalent as of date of approval of cancellation c d e d + e Actual dollar equivalent. Dollar equivalent as of report preparation. C. Project Data Cost 1. Project Cost ($ million) Component 1 Appraisal Estimate Foreign Exchange Cost Local Currency Cost 0 0 Total Actual 2. Financing Plan ($) Appraisal Estimate Committed to AIGF a Actually Disbursed to AIFG b PRGs Issued c Item Component 1: AIGF first loss PRG ADB loan to Afghanistan IDA credit to Afghanistan DFID grant Plus investment and premium income (net) 0.8 Subtotal (A)

7 iii Component 2: supplemental PRGs MIGA Private sector PRG providers ADB through supplemental PRG facility Subtotal (B) Total (A+B) (before cancellations) ADB = Asian Development Bank, AIGF = Afghanistan Investment Guarantee Facility Trust Fund, DFID = Department for International Development, IDA = International Development Association, MIGA = Multilateral Investment Guarantee Agency, PRG = political risk guarantee. a As committed by ADB, IDA, and DFID to AIGF to back first loss PRGs issued by MIGA. b Actual amounts disbursed and placed into the AIGF account. c The difference between the amount in the AIFG account and the amount of the first loss PRGs issued against those funds may be surplus and possibly released after 30 September Cost Breakdown by Project Components (see above) 4. Project Performance Report Ratings Implementation Period Ratings Impact & Implementation Outcome Progress From 31 October 2004 to 28 September 2010 Satisfactory Satisfactory D. Data on Asian Development Bank Missions Name of Mission Fact finding Date No. of Persons No. of Person-days Specialization of Membersª Project review 2527 Aug a Project review 18 Feb b Project review 1415 May b, c Project review 23 June b, c Project review (through video conference) 25 October c, d, e Project review 2 November e Project completion review (desk review) 118 August d, e ª a = director, Central and West Asia Department, b = country director, Afghanistan Resident Mission, c = national project officer, Afghanistan Resident Mission, d = principal financial sector specialist, Central and West Asia Department, e = operations analyst, Central and West Asia Department

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9 I. PROJECT DESCRIPTION 1. The Afghanistan Investment Guarantee Facility Project, approved by Asian Development Bank (ADB) Board of Directors on 24 September 2004, 1 aimed to increase foreign direct investment (FDI) in Afghanistan by issuing $60 million in political risk guarantees (PRGs) to investors. Increased FDI was envisioned stimulating the local economy, generating employment, and helping to transfer modern technology and business practices from abroad to Afghanistan. The project was designed to fill a gap in the market for PRG cover, ensure that PRGs were issued by a highly creditworthy party, and leverage political risk-taking capacity from the private sector. The project provided (i) $10 million in first loss PRG cover issued by the Multilateral Investment Guarantee Agency (MIGA), which was backed by a loan of $5 million equivalent from ADB to Afghanistan and other funds that were committed or paid in to the Afghanistan Investment Guarantee Facility Trust Fund (AIGF), and (ii) $50 million of second loss PRG cover issued by MIGA, private insurers, and ADB, which would supplement on a second loss basis the first loss cover issued by MIGA on behalf of AIGF. 2. AIGF was sponsored by the government of Afghanistan, with committed funding from the ADB loan and a $5 million credit from the International Development Association (IDA). 2 The ADB loan was from Special Funds resources and available for withdrawal for 5 years, to 30 September The loan had a term of 40 years, including a grace period of 10 years. The second loss PRG cover from ADB was backed by ordinary capital resources, limited to $10 million in aggregate, and provided on a case-by-case basis through a supplemental PRG facility following procedures applicable to nonsovereign operations. II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 3. At appraisal, project design and formulation was highly relevant to the country s development objectives and ADB s country strategy and program, In the National Development Framework, 2002, 4 the government prioritized the development of the private sector and a competitive, export-oriented economy using modern technology and business practices which was capitalized by FDI. In the report Securing Afghanistan s Future: Accomplishments and the Strategic Path Forward, prepared by the government and over 100 experts from the United Nations and multilateral development institutions, it was noted that foreign companies found it difficult to invest in Afghanistan because of the real or perceived insecurity of their investments and that government has received bilateral support for investment insurance and is looking for additional bilateral and multilateral support for its instruments. 5 Further, at the international investors and donors conference on Afghanistan and 1 ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Guarantee for the Afghanistan Investment Guarantee Facility Project. Manila (Loan 2091-AFG[SF]). 2 The Government of the United Kingdom subsequently became a sponsor through a 1 million ($1.89 million equivalent) grant from the Department for International Development. 3 ADB Country Strategy and Program: Afghanistan, Manila 4 Government of Afghanistan. National Development Framework. (accessed on 18 August 2011). 5 Ghani and Abdullah as Steering Committee Co-chairs Securing Afghanistan s Future: Accomplishments and the Strategic Path Forward. Kabul. Page 72 of this report notes the specific directions and areas of engagement taken by the government to support private sector policies. (accessed on 18 August 2011).

10 2 the International Community: A Partnership for the Future, 6 ADB acknowledged the need for investment insurance or guarantees to help catalyze private investments and offered to provide such guarantees in collaboration with others. 7 In light of this, the project was designed to (i) help increase the FDI needed to fill the domestic savings and investment gap, 8 (ii) attract potential foreign investors during the post-conflict period by making available well-structured protection against noncommercial risks within the power of the government to mitigate, and (iii) mobilize political risk insurance or guarantee cover for investments in Afghanistan, which was scarce and available from only a few official and private sector insurers. 4. ADB s country strategy and program for Afghanistan, supported the project by proposing $500 million in loans and grants to build capacity, establish appropriate policy and institutional frameworks, and rehabilitate essential infrastructure all key to facilitating private sector investment. ADB s support of the government s strategy of facilitating a private sector-led economic recovery through its nonsovereign operations aimed to mobilize investment in banks, telecommunications, the production of building materials, and other economic activities. 5. Upon the completion of ADB s participation in the project in September 2009, the project design was relevant. The government continued to prioritize developing the private sector and an export-oriented economy, and 13 of the 45 investors that had registered preliminary applications for PRGs continued to pursue financing or project evaluation, according to MIGA. 9 However, because of the particular modality chosen (PRG cover for noncommercial risks that were or ought to have been within the power of the government to mitigate), project design became less attractive, as it could not address (i) deteriorating security in Afghanistan, which caused FDI flows to decline significantly, 10 or (ii) international and regional banks growing aversion to risk with the onset of the global financial crisis, causing them to withdraw from Afghanistan. Project design also did not address (i) the inability of the Afghanistan Investment Support Agency (AISA) 11 to translate initial investor interest into FDI or to promote PRGs to support such investment, partly because of its incapacity to keep trained staff; (ii) MIGA s limited marketing of PRGs to potential investors outside of Washington, DC; and (iii) local investors lack of interest in PRGs, notwithstanding MIGA s efforts to offer them through a local finder. B. Project Outputs 6. The project s outcome was to stimulate FDI and increase private sector investment and employment. 12 Its output was the issuance of $60 million in PRGs for selected risks to protect 6 This conference, in Berlin on 31 March and 1 April 2004, was attended by over 60 delegations from European Union, Group of Eight, and North Atlantic Treaty Organization states, as well as from Afghanistan s neighboring countries and other countries with a particular commitment to Afghanistan. 7 Collaboration was expected to be with MIGA, given its previous experience in providing guarantees in post-conflict countries, such as Bosnia and Herzegovina, and the preliminary analysis of demand for PRG cover conducted by MIGA from November 2002 to January Gross domestic savings was negative $1.56 billion in 2003 (negative 32.7% of gross domestic product), and negative $1.71 billion in 2004 (negative 29.9% of gross domestic product), according to the World Bank. 9 PRGs had the potential of directly or indirectly supporting some $836 million of investment, according to the aide memoire of the 25 October2 November 2010 joint supervision mission of the World Bank and the MIGA. 10 According to the International Monetary Fund, FDI net inflows in current dollars was $68 million in 2004, $80 million in 2005, $238 million in 2006, and $243 million in 2007, reaching a peak at $300 million in 2008 before falling to $185 million in AISA was set up with support from the United States Agency for International Development, MIGA, United Nations Development Program, Afghanistan Business Council, and World Bank to facilitate the registration, licensing, and promotion of investments in Afghanistan. 12 Para. 18 of the report and recommendation of the President (footnote 1) and the project framework (Appendix 1) use the terms objective and purpose instead of outcome. They do not quantify how much foreign direct

11 3 investors debt and equity investments in Afghanistan. 13 It was anticipated that up to $30 million of this cover would be mobilized from private sector PRG providers under MIGA s cooperative underwriting program, leveraging the first loss cover backed by AIGF and second loss cover from MIGA and ADB. Eligible investors included individuals, corporations, and financial institutions that provided financing for new projects. Eligible investments included those in manufacturing, agribusiness, banking, and smaller infrastructure projects, though larger projects could be considered case by case. 7. Despite the deteriorating security situation and the global financial crisis, which project designers could not foresee, the project s achievement of its outcome was successful, as evidenced by (i) $108.6 million of investment being stimulated by PRGs, well above the target value of $80 million specified in the IDA and MIGA results monitoring framework for the project, 14 and (ii) the creation 850 jobs, more than the target of 700 jobs 15 (Appendix 4, Status of Investments with Political Risk Guarantee Cover, has more details). Also successful was the project s output, as evidenced by the issuance of six PRGs with a total value of $80.4 million ($20 million more than expected) supporting five investments. Substantial leverage was achieved for AIGF and its sponsors, Afghanistan and the United Kingdom, as a result of MIGA providing $28 of second loss PRG cover for every $1 backed by AIGF. However, this leverage was skewed by the $76.5 million PRG that supported MTN s investment into Areeba (now one of Afghanistan s largest mobile telecommunications operators) under which MIGA retained a very large $74.5 million second loss position. investment (FDI) was expected as an outcome of the program. However, according to the aide-memoire of the 2010 World Bank and Multilateral Investment Guarantee Agency (MIGA) joint supervision mission, their results monitoring framework specified the overall project outcomes as (i) FDI stimulated by Afghanistan Investment Guarantee Facility Trust Fund (AIGF), with a baseline value at project inception of nil and an end of project target value of $80 million, and (ii) the number of jobs created through investments supported by AIGF, with a baseline value at project inception of nil and an end-of-project target value of Paras of the report and recommendation of the President (footnote 1) specify one output: the issuance of $60 million of political risk insurance (PRGs) for selected risks to eligible investors for eligible debt and equity investments into Afghanistan. It is noted that (i) investors could choose any combination of four types of risk coverage: transfer restriction, expropriation, war and civil disturbance, and breach of contract; (ii) PRGs would normally be for not more than 7 years; and (iii) first loss PRGs backed by AIFG could cover debt and equity, subject to an exposure limit of $2 million per contract. The project framework (Appendix 1) does not include such specifics. 14 Areeba investment was $85 million, BRAC Bank $6.35 million, Geo Building Technologies $2 million, the New Afghanistan Project for Cotton and Oil Development (NAPCOD) $14.1 million, and Business Humanitarian Forum (BHF) $1 million, according to the aide-memoire of the 2010 World Bank and MIGA joint supervision mission. 15 Areeba investment created 500 jobs, BRAC Bank 50, Geo Building Technologies 100, NAPCOD 180, and BHF 20, according to the aide-memoire of the 2010 World Bank and MIGA joint supervision mission.

12 4 Table 1: Political Risk Guarantees Issued and Afghanistan Investment Guarantee Facility Trust Fund Leverage Projects PCG Value AIGF Exposure MIGA Exposure Leverage ($) a ($) a ($) a for AIGF Expiry Date a MTN Afghanistan (Areeba) 76,500,000 2,000,000 74,500, Jun 2012 BRAC Afghan Bank 1 1,800, ,000 1,500, Sep 2013 BRAC Afghan Bank 2 225, , , Mar 2014 Geo Building Technologies 180,000 90,000 90, Mar 2015 NAPCOD 1,269, ,522 1,057, Cancelled BHF 429,840 64, , Cancelled Total 80,403,975 2,778,498 77,625, Cancelled Total, less cancellations 78,705,000 2,502,500 76,202,500 Funds held by AIGF b 7,712,320 Potential excess of funds in AIGF 5,209,820 AIGF = Afghanistan Investment Guarantee Facility Trust Fund, BHF = Business Humanitarian Forum, MIGA = Multilateral Investment Guarantee Agency, NAPCOD = New Afghanistan Project for Cotton and Oil Development, PCG = partial credit guarantee. a Sourced from the MIGA on 14 September b Sourced from the AIGF trust account statement on 30 June 2011 and including investment and premium income. Source: Asian Development Bank estimates. 8. At project inception, MIGA suggested that a leverage ratio of 5:1 could be achieved between first loss cover backed by AIGF and second loss cover offered by MIGA, private sector PRG providers, and ADB. This ratio was changed in 2008 to 1:1 to promote AIGF utilization and give greater comfort to ADB and potential private sector providers of second loss PRG cover. However, this change did not make a difference, and no second loss PRGs were issued by private sector PRG providers or ADB. This was because the deteriorating security in Afghanistan and the impact of the global financial crisis on international insurance companies such as American International Group, which was one of the largest private political risk insurance providers at the time, caused the supply of PRG cover for Afghanistan from the private sector to evaporate. Also, investors wanted equity cover, instead of debt cover which the $10 million supplemental PRG facility could provide. C. Project Costs 9. At appraisal, the estimated total project cost was $60 million, which was the amount of capital needed to backstop AIGF so that MIGA could issue first loss PRG cover plus the amount of reserves needed by MIGA, private sector PRG providers, and ADB to issue second loss PRG cover under the project. This amount was expected to come from (i) an ADB loan of $5 million equivalent and $5 million in IDA credit plus grants, which would be placed into the AIGF account (component 1), and (ii) up to $50 million in supplemental second loss PRG cover in aggregate: $10 million offered by MIGA, $30 million by private sector PRG providers under MIGA s cooperative underwriting program, and $10 million by ADB (component 2).

13 5 Table 2: Financing Plan and Cost Breakdown by Component Appraisal Estimate Committed to AIGF a Actually Disbursed to AIFG b PRGs Issued c Item Component 1: AIGF first loss PRG ADB loan to Afghanistan IDA credit to Afghanistan DFID grant Plus investment and premium income (net) 0.8 Subtotal (A) Component 2: supplemental PRGs MIGA Private sector PRG providers ADB through the supplemental PRG facility Subtotal (B) Total (A+B, before cancellations) ADB = Asian Development Bank, AIGF = Afghanistan Investment Guarantee Facility Trust Fund, DFID = Department for International Development, IDA = International Development Association, MIGA = Multilateral Investment Guarantee Agency, PRG = political risk guarantee. a As committed by ADB, IDA, and DFID to AIGF to back first loss PRGs issued by MIGA. b Actual amounts disbursed and placed into the AIGF account. c The difference between the amount in the AIGF account and the amount of the first loss PRGs issued against those funds may be surplus and possibly released after 30 September The actual project cost of component 1 was $7.7 million: $2.5 million from the ADB loan, $2.5 million from the IDA credit, $1.9 million from the Department for International Development (DFID) grant, and $0.8 million from net investment and premium income. 16 However, as only $2.5 million of this amount is needed to backstop first loss PRGs that are still issued (Table 2), about $5.2 million in the AIGF account may be surplus and potentially can be released and made available to the government after 30 September 2011, with the balance of $2.5 million being released from June 2012 to March 2015 as PRGs expire, assuming no claims are made. 17 D. Disbursements 11. ADB s made its first disbursement of $1.25 million on 18 May 2009, or 50 months after loan effectiveness. This delay was due to lack of coordination between MIGA and ADB, staff changes by all parties, and the lack of investment projects needing immediate PRG cover at the time. ADB made its second disbursement of $1.25 million on 1 July 2009, matching IDA s second disbursement made in May ADB thus only needed to disburse half of the $5 million equivalent loan. 16 As detailed in the unaudited Statement of Receipts, Disbursement and Fund Balance for AIGF Trust Account held at the International Bank for Reconstruction and Development, as of 30 June 2011 AIGF had earned $0.95 million from investment and premium income and incurred $0.13 million for administration expenses and a very small, $572 war and civil disturbance claim, which was paid in April 2011 for physical damage to the BRAC Bank following an explosion at the Safi Hotel and shopping center. 17 The framework agreement and para. 48 of the report and recommendation of the President allow funds remaining in AIGF at the end of project implementation, or that become available as PRGs expire after project implementation, to be used by the government for establishing a new guarantee facility or for financing imports from ADB member countries, other than ineligible items and in accordance with ADB policies and procurement guidelines.

14 6 12. The imprest fund procedure was appropriate for facilitating the transfer of funds to the AIGF account. The unique nature of this project required the adoption of different methods and requirements for liquidating the imprest advance. Instead of statement of expenditures or full documentation liquidation procedures applicable to ADB s usual investment projects, the government was required to attach to the liquidation application an assurance that it would use any surplus funds in the AIGF account to finance eligible imports (footnote 17). 13. Despite the delay in making ADB s initial distribution, ADB, MIGA, and the Ministry of Finance, as the executing agency, found the disbursement procedure to be adequate and appropriate. E. Project Schedule 14. The project was approved by the Board on 24 September 2004 and became effective 5 months later on 3 March 2005, with a closing date of 31 September 2009 subject to extension of up to 2 years if needed. 18 Immediately after ADB loan approval, MIGA started with the 5 year implementation of components 1 and In 2009, MIGA, IDA, and DFID agreed to extend their participation in component 1 for 2 years, to 30 September ADB did not agree, however, because (i) funds in the AIGF account were sufficient to back PRGs already issued and expected to be issued, (ii) viable new investments in the pipeline that would need PRG cover under the project were lacking, and (iii) ADB s special funds resources were needed elsewhere. Because of this, on 18 May 2010 the undisbursed ADB loan amount of SDR1.8 million was cancelled and Afghanistan's commitment to AIGF was reduced from $10 million to $7.5 million ADB s participation in component 2 through the $10 million supplemental PRG facility was cancelled because (i) of lack of viable investments in the pipeline that needed debt cover and which met the other criteria for nonsovereign operations in Afghanistan were lacking and (ii) ADB s ordinary capital resources for nonsovereign operations were needed elsewhere. F. Implementation Arrangements 17. Project implementation arrangements were partly satisfactory. MIGA was responsible for overseeing project implementation, including administering the AIGF account and providing periodic reports and statements to the Ministry of Finance and ADB. However, during the initial phase of implementation, coordination between ADB and MIGA was intermittent because of staff changes at both. MIGA implemented the project with initial contributions from IDA and DFID. It was toward the later stage of the project that ADB s active involvement was sought, including the payment of ADB s disbursement of $2.5 million into the AIGF account. MIGA regularly conducted missions to Afghanistan for AIGF, with ADB representation from the resident mission, and provided reports to ADB. MIGA was responsible in taking the lead in the underwriting, administration, and claims management of partial credit guarantees, as well as in marketing the project. 18 Footnote 1 of the report and recommendation of the President indicates that the extension could be up to 3 years, but in the final negotiated framework and other project agreements any possible extension was scaled back to 2 years, to be consistent with MIGA. 19 The delay in closing the loan account reflected MIGA s advice that 2 of 13 active PRG applications had progressed to the stage of due diligence, which if finalized would require $3 million in first loss cover from AIGF. However, these commitments had not eventuated as anticipated by early May 2010.

15 7 G. Conditions and Covenants 18. Compliance with project conditions and covenants was satisfactory. Despite MIGA s experience with documenting similar guarantee modalities in other post-conflict countries, and ADB s experience with one-off PRGs and PRG facilities, it took 6 months to declare the ADB loan effective because of the unique nature of the ADB loan from Special Funds resources and limited government experience with the guarantee modality. 19. Under Section 4.02 (a) of the loan agreement, the borrower was required to cause MIGA to maintain a financial management system for the project, have such accounts audited annually, and furnish them to ADB not later than 6 months after the end of each fiscal year. However this requirement was not met until June 2010, when ADB received a Statement of Receipts, Disbursements and Fund Balance of AIGF audited by KPMG, which was for the period from the 4 August 2004 date of inception to 31 December MIGA viewed the delay as justified because there were no expenditures on guarantee claims to date and unaudited Statements of Receipts, Disbursements and Fund Balance of AIGF had been regularly provided. 20. Schedule 4 of the loan agreement required that the borrower cause MIGA to (i) carry out the project in accordance with the framework agreement, operational rules, environmental and social safeguards frameworks, and participation agreement and (ii) ensure that, before a PRG was issued, the underlying investment did not involve a prohibited activity and complied with environmental and social safeguards frameworks. MIGA has confirmed that (i) the issued PRGs were in compliance with regard to tenor (not more than 7 years), coverage and the $2 million exposure limit per contract and (ii) the underlying investments did not involve a prohibited activity and complied with environmental and social safeguards frameworks. H. Performance of the Borrower and the Executing Agency 21. The performance of the borrower and the Ministry of Finance is rated satisfactory, notwithstanding their minimal direct involvement with implementation because of the nature of the project. While not an implementing or executing agency, AISA and its ability to promote new investment in Afghanistan and the availability of PRG cover to support such investment was unsatisfactory for lack of trained staff and staff capacity. I. Performance of the Asian Development Bank 22. While its role in the project was negligible because of the design of AIGF, with MIGA taking the lead, ADB s performance is rated only partly satisfactory because of intermittent coordination during the initial stage of implementation. The lack of coordination after the loan became effective until 2008 was primarily because of staff changes at both MIGA and ADB. This was complicated by responsibility for the project being spread out within ADB, with public sector operations responsible for the $5 million equivalent ADB loan to Afghanistan under component 1, private sector operations responsible for the $10 million supplemental PRG facility under component 2, and the Office of Cofinancing Operations responsible for coordinating with MIGA and other cofinanciers.

16 8 III. EVALUATION OF PERFORMANCE A. Relevance 23. At appraisal the design of the project was highly relevant. However, due to the particular modality chosen (targeted PRG cover) the project was relevant toward the end of the 5-year implementation period, primarily because of deteriorating security in Afghanistan; international banks heightened risk aversion with the onset of the global financial crisis, causing them to withdraw from supporting FDI to Afghanistan with or without PRG cover; and the failure of initial investor interest registered with the AISA to translate into new investment (para. 5). B. Effectiveness in Achieving Outcome 24. The project was effective in achieving its outcome. The project stimulated FDI, generated employment, created tax revenues, and assisted in transferring modern technologies and business practices from abroad to Afghanistan. But it is noteworthy that the benefits failed to be far reaching, with only six PRGs being issued supporting only five investments, with the bulk of the support going to one mobile telecommunications operator, not the 1020 PRGs primarily for small and medium-sized enterprises (SMEs) across a wide range of sectors as envisioned at appraisal. C. Efficiency in Achieving Outcome and Outputs 25. The project achieved its outcome and output efficiently. The project output was achieved through the issuance of PRGs having a total value of $80.4 million, which was $20 million more than expected. Substantial leverage was achieved for AIGF, whereby MIGA provided $28 in second loss PRG cover for every $1 backed by AIGF (para. 7). 26. The project is expected to generate over $820,000 in investment and premium income after administration and claims expenses. Assuming that no further claims are made, this amount and $6.9 million in the trust account will be returned to the government as PRGs expire to help establish a new guarantee facility if need be or to fund other eligible expenditures. D. Preliminary Assessment of Sustainability 27. The sustainability of the project is less likely. If security in Afghanistan had stabilized as hoped during appraisal, causing FDI flows to continue, and if international banks had not withdrawn from supporting FDI to Afghanistan, the project might have been sustainable and a case could have been made to support a new guarantee facility using funds rolled over from the project. This was not the case, however, so no follow-up action is proposed. 28. Sustainability of the investments supported by the project is mixed. MTN s $85 million investment into Areeba is sustainable. In 2011, Areeba planned to add 104 more towers to its existing 1,300 sites, hire 70 new staffers, and expand its mobile phone customer base from 3.6 million to 4.6 million. This will require additional capital and PRG cover according to MIGA. But International Home Finance Development s $2 million investment into Geo Building Technologies and BRAC NGO s $6.35 million into BRAC Bank are unlikely to be sustainable. Geo Building Technologies brick-making equipment breaks down frequently, rendering the firm unable to handle large volumes. For BRAC Bank, it may not be able to raise additional capital to meet the requirement of Da Afghanistan Bank, Afghanistan s central bank, to raise minimum bank capital to $10 million by June 2011 and $20 million by June 2012.

17 9 E. Impact 29. The expected impact of the project was to support reconstruction, job creation, and longterm economic growth in Afghanistan. Although performance targets and indicators were not specified in the project framework (Appendix 1), according to IDA and MIGA estimates the project mobilized $108.6 million in FDI and created 850 jobs, which exceeded the development objectives set out in their result monitoring framework. This was through the issuance of six PRGs that supported five investments, with the bulk of the support going to one enterprise. IV. OVERALL ASSESSMENT AND RECOMMENDATIONS A. Overall Assessment 30. The project is rated successful (Appendix 6). While the project was highly relevant at the design stage, on completion it became only relevant as security deteriorated and investors grew more averse to risk. The project stimulated FDI, as evidenced by $108.6 million being invested and creating 850 jobs, but it is noteworthy that the stimulated FDI was through only six PRGs that supported only five enterprises, with the bulk of support going to one large enterprise, not the 1020 PRGs primarily for SMEs across a wide range of sectors, as hoped for during appraisal. The project achieved its outputs efficiently through the issuance of PRGs with a total value of $80.4 million, which was $20 million more than expected. Substantial leverage was also achieved, whereby $28 in second loss PRG cover was mobilized for every $1 of first loss cover backed by AIGF. These outputs were skewed by a single $76.5 million PRG that supported an $85 million investment in Areeba, a mobile telecommunications operator. While this investment is sustainable, the project overall is rated less likely sustainable because of the weaker prospects with respect to other investments supported, for reasons beyond the control of the project. 31. The project framework did not identify specific performance benchmarks, targets, or indicators, and the issuance of $60 million of PRG cover as an output was mentioned only in para. 27 of the report and recommendation of the President. B. Lessons 32. The availability of bankable PRG cover for risks that are within the power of the government to mitigate is important to investors and their financiers. However, such targeted cover cannot address concerns about security and macroeconomic stability. 33. Close collaboration with MIGA, IDA, and DFID strengthened project design. It allowed for excellent exchange of experience with regard to PRGs, other insurance products, and how they can best be used to fill market gaps, especially in post-conflict countries. 34. Responsibility for the project was spread out within ADB, causing coordination issues with MIGA and other cofinanciers. For future projects combining sovereign, nonsovereign, and cofinancing operations, having a single focal point within ADB would improve project implementation and prospects for success. 35. The capacity of AISA to promote new investment in Afghanistan and the availability of PRG cover to support such investment was poor because of staff turnover and an inadequate incentive framework. This should have been anticipated and technical assistance could have looked at ways to address this problem.

18 Modifications to project design, the monitoring framework, and the assessment methodology would help future projects using this or a similar PRG modality and projects that combine sovereign, nonsovereign and cofinancing operations. The assessment criteria did not easily accommodate the unique structure of the project or the modality used. C. Recommendations 37. The use of the PRG modality pioneered by this project in collaboration with other public and or private sector PRG providers is recommended again for Afghanistan once security improves and for other post-conflict developing member countries of ADB that need to encourage FDI. The project allowed ADB, IDA, DFID, and MIGA to collaborate closely toward providing targeted support to Afghanistan during the post-conflict period through the use PRGs with relatively short tenors of up to 7 years. More traditional support through loans would not have directly encouraged the private sector to invest and take commercial risk in Afghanistan. In the future, other post-conflict developing member countries may face challenges similar to those that Afghanistan faced after 2001 and need international financial institutions such as ADB to signal that it is once again safe to invest in that country, at least with regard to political risks within the power of the government to mitigate. 38. Future monitoring of the project will be needed to ensure that funds released from the AIGF account are used to establish a new guarantee facility that takes into consideration project lessons or else to finance imports from ADB member countries, other than ineligible items and in accordance with ADB policies and procurement guidelines. 39. A post project performance evaluation should take place after the Geo Building Technologies PRG expires on 30 March 2015, as it will be the last to expire, allowing the remaining funds in the AIGF account to be released.

19 Appendix 1 11 PROJECT FRAMEWORK Design Summary Impact Support and sustain reconstruction, job creation, and longterm economic growth in Afghanistan Performance Indicators/Targets Increase in private sector investment and employment Medium-term fiscal and socioeconomic planning targets Monitoring Mechanisms Economic and social statistics Budget documents and annual development plans Annual development performance reports ADB review and evaluation reports Assumptions and Risks Security, law and order, and peace Political and macroeconomic stability The government s strong and sustained commitment to economic reform Credible implementation of reforms supported by adequate systems and skills Overseas Afghanis interested in productive investment in Afghanistan Outcome Stimulate foreign direct investment by effectively addressing key investor concerns through a risk mitigation facility Increase in private sector investment and employment indicator (Achievement at project completion 20 : foreign direct investment of $108.6 million and 850 jobs created) Amount and number of PRGs issued (Achievement at project completion 20 : 6 PRGs issued with value of $80.4 million) Economic and social statistics Budget documents and annual development plans Annual development performance reports Periodic program progress reports ADB review missions and feedback from investors ADB review and evaluation reports Security, law and order, peace, and political and macroeconomic stability Implementation of reforms supported by adequate systems and skills to attract investment Overseas Afghanis interested in productive investment in Afghanistan Adequate resources provided for capacity building and institutional development 20 Project completion refers to loan closure by ADB. The source of this information is the aide memoire of the 2010 World bank and MIGA joint supervision mission.

20 12 Appendix 1 Design Summary Output PRGs issued to eligible investors for eligible investments Performance Indicators/Targets Amount and number of investor applications and PRGs issued (Achievement at project completion 20 : 6 PRGs issued amounting to $80.4 million supporting 5 enterprises) Turn-around time to respond to investor applications Monitoring Mechanisms Official statistics and independent reports and statistics. Periodic program progress reports from MIGA ADB review missions and feedback from investors ADB review and evaluation reports Assumptions and Risks Effective marketing of PRGs to investors Adequate marketbased pricing of PRGs Effective coordination with MIGA Project Activities/Input 1. Funding by ADB to finance AIGF: $5 million 2. Supplemental PRG facility from ADB for $10 million 3. Cofinancing of up to $45 million from development partners and providers of political risk insurance (Response time did not directly contribute to the output statement. Hence, this indicator was excluded in assessing the project output.) Full disbursement of ADB loan (Achievement at project completion 20 : $2.5 million was disbursed ) Demand for PRGs and PRGs issued Finalization of project and cofinancing agreements. Regular progress reports, statistics, and review missions Investor feedback Effective coordination with MIGA Adequate and timely provision of skilled staff and facilities 4. Technical assistance for capacity building and institutional development through parallel grant cofinancing Capacity building and training delivered to key staff in AISA ADB = Asian Development Bank, AIGF = Afghanistan Investment Guarantee Facility, AISA = Afghanistan Investment Support Agency, MIGA = Multilateral Investment Guarantee Agency, PRG = political risk guarantee.

21 Appendix 2 13 PROJECT STRUCTURE Official (Public Sector) Funding: Commercial Risk-Taking Capacity: Bilateral Grants Loans (ADB, IDA) ADB MIGA Private PRI Market Leveraging through PRGs without Counterguarantee ($20-50 million) Government of Afghanistan (Minstry of Finance) AIGF ($10 million, 1st loss) Implementaion Agent: MIGA Technical Assistance AISA Investors ADB = Asian Development Bank, AIGF = Afghanistan Investment Guarantee Facility Trust Fund, AISA = Afghanistan Investment Support Agency, MIGA = Multilateral Investment Guarantee Agency, PRG = political risk guarantee, PRI = political risk insurance.

22 14 Appendix 3 Covenant COMPLIANCE WITH LOAN AND PROJECT COVENANTS Loan Agreement Covenants (Loan Number: 2091-AFG(SF)) Section 4.02 (a) of Loan Agreement The Borrower (the Islamic Republic of Afghanistan) shall cause MIGA to maintain a financial management system for the project; have such accounts audited annually; and furnish them to ADB not later than 6 months after the end of each fiscal year along with the report of the auditors. Partly complied with. Status of Compliance This covenant was not met until June 2010 when ADB received a Statement of Receipts, Disbursements and Fund Balance of AIGF audited by KPMG LLP, which was for the period from 4 August 2004 (date of inception) to 31 December MIGA advised that such delay was based on the fact there were no expenditures in the form guarantee claims to date, and that unaudited Statements of Receipts, Disbursements and Fund Balance of AIGF had been regularly provided, the most recent dated 30 June Loan Agreement (Schedule 4) Section B Complied with. Guarantee Contracts The Borrower shall cause MIGA to; On 14 September 2011, MIGA has confirmed that: carry out the project in accordance with the Framework Agreement, the Operational Rules, the Environmental and Social Safeguards Framework, and the Participation Agreement; ensure that before a PRG is issued that the underlying investment does not involve a Prohibited Activity and complies with the Environmental and Social Safeguards Framework; notify ADB of any notice of a potential Claim filed by an Eligible Investor under a Guarantee Contract the PRGs issued were in compliance, with regard to tenor (not more than 7 years), coverage and the $2 million exposure limit per contract; the underlying investments did not involve a Prohibited Activity and were compliant with the Environmental and Social Safeguards Framework; a small $572 War and Civil Disturbance claim was deducted from the AIGF trust account and paid in April 2011 for physical damage to the Brac Bank following an explosion at the Safi Hotel/Shopping center. Loan Agreement (Schedule 4) Section C - Progress Reports and Mid-Term Review The Borrower shall cause MIGA to: maintain policies and procedures adequate to enable it to monitor and the Project and the achievement of the objectives thereof; prepare and furnish semiannual Financial Monitoring Report s, which sets forth sources and uses of funds for the Project and describes physical progress in Project implementation, among other things Partly complied with. Prior to 2008, receipt of these reports was infrequent, but since then this covenant was generally met by MIGA through the provision of periodic Supervision Mission Aide-Memoires which included Unaudited Statements of Receipts, Disbursements and Fund Balance of AIGF (the most recent dated 30 June 2011) and other information about investments covered.

23 Appendix 4 15 STATUS OF INVESTMENTS WITH POLITICAL RISK GUARANTEE COVER 1. The Multilateral Investment Guarantee Agency (MIGA) and the World Bank conducted a supervision mission to Afghanistan from 25 October to 2 November 2010 to assess the performance of the project and the three investments then covered by four on-risk political risk guarantees (PRGs). Through an aide-memoire, MIGA advised the Ministry of Finance, ADB, and the Department for International Development that the telecom sector was doing well overall but banking was experiencing problems because of the failure of Kabul Bank. 2. Specific comments about each investment from MIGA were as follows. 3. Geo Building Technologies. In April 2008, MIGA issued a guarantee for $1.74 million to cover the equity and loan investments of International Home Finance and Development (IHFD) in Geo Building Technologies. The project enterprise started the business of green machinery and geo bricks in Afghanistan. The project had a good start with many orders. Unfortunately, IHFD faced two difficulties: (i) difficulty in raising debt necessary to purchase more machinery to deploy in Afghanistan, which prompted it to cancel cover for the $1 million loan, and (ii) the machines had serious technical problems that caused them to break down frequently, rendering the firm unable to handle volumes larger than 100,000 bricks. IHFD identified 42 technical defects with the machines and tried to have the manufacturer address them, to no avail. Business has suffered. Technical difficulties forced the project to be scaled down, and it may shut down if no solution is found. In response to the scaling down, IHFD has reduced its equity cover to $180, BRAC Bank in Afghanistan. BRAC Bank in Afghanistan (BBA) was set up in November 2006 as a bank for small and medium-sized enterprises (SMEs). It is a full service commercial bank with an average loan size of $8,000 and the only bank operating in this market niche. BRAC NGO Bangladesh, owns the major equity share of 50.8%, with IFC, Triodos, and Shorecap each owning 16.4%. BBA started operations with initial paid-up capital of $6.0 million, which was subsequently increased by $2.5 million. IFC invested $1.25 million, comprising original capital of $1 million plus a rights issue in March In October 2010, BBA held $18.0 million in deposits, 10,200 depositors and 1,150 loans outstanding. Current loans and advances totaled $8.7 million, while cumulative loans to SMEs totaled $35 million. 5. The performance of BBA was poor, as it had a portfolio at risk (PAR) of 15%. This poor performance was inherited from 2007 and 2008, when BBA had an aggressive lending policy without a proper credit policy, supervision, or monitoring. This was brought under control in 2009 after the appointment of a new managing director, who managed to reduce the PAR from 50% in 2009 to 15% in June and July The PAR recently increased as the government evicted some small businesses in Kabul to build a road. However, this erosion was also brought under control. The managing director was hopeful that, by June 2011, the PAR would be reduced to less than 10%. He felt that BBA should write off some bad debt and increase provisioning to clear its nonperforming portfolio but thought that a new capital injection would be needed to do this. BBA is seriously concerned about Da Afghanistan Bank's policy to raise minimum bank capital to $10 million by June 2011 and $20 million by June BBA feels that the paid-up capital requirement for an SME bank should not be the same as for the other commercial banks, as they operate in different markets. 6. MTN Afghanistan. MTN Afghanistan (MTNA) is a mobile telecommunications operator that has operated in Afghanistan since July Despite a very difficult operating