Afghanistan Reconstruction Trust Fund Report to Donors

Transcription

1 With Pledged Support From: Afghanistan Reconstruction Trust Fund Report to Donors Fourth Quarter of the Afghan Fiscal Year 1384 December 22, 2005 to March 20, 2006 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 March 20, 2006) Currency Unit = Afghani ( AFN or AFA) US$ 1 = AFN GOVERNMENT FISCAL YEAR (SY1384 ) March 21, March 20, 2006 Solar Year Period SY 1381 March 21, 2002 March 20, 2003 SY 1382 March 21, 2003 March 19, 2004 SY 1383 March 20, 2004 March 20, 2005 SY 1384 March 21, 2005 March 20, 2006 SY 1385 March 21, 2006 March 20, 2007 World Bank Kabul Office Street 15, House 19 Wazir Akhbar Khan Kabul, Islamic Republic of Afghanistan Contact Information for the ARTF Jean Mazurelle Country Manager - jmazurelle@worldbank.org David Freese Local Focal Point - dfreese@worldbank.org Paul Sisk Task Team Leader, Recurrent Window - psisk@worldbank.org Nancy Zhao Operations Advisor, Investment Window - nzhao@worldbank.org For additional information: ii

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5 ABBREVIATIONS AND ACRONYMS AACA ADB AFMIS AFA AFN AKDN ARDS ARTF CAWSS CCFO CGAP DFID ECEPWP FS GIRA IARCSC IDA IDB IDP IMF IRA JPMU KfW LOTFA MA MC MCAT MFI MISFA MIWRE MoC MoF MoFA MoPW MRRD MUDH MEW MP NPBSE NEEP NEEPRA NGO NPP NSP O&M P PAM PBSE PFEM PM PRR SDR SIDA SOE Afghan Assistance Coordination Authority Asian Development Bank Afghanistan Financial Management Information System Afghanis Afghanis Aga Khan Development Network Afghanistan Reconstruction and Development Services Afghanistan Reconstruction Trust Fund Central Authority for Water Supply and Sewerage Counterpart Chief Financial Officer Consultative Group to Assist the Poor Department for International Development Emergency Community Empowerment and Public Works Program Fiduciary Standards Government of the Islamic Republic of Afghanistan Independent Administrative Reform and Civil Service Commission International Development Association Islamic Development Bank Internally Displaced Persons International Monetary Fund Islamic Republic of Afghanistan Joint Program Management Unit Kreditanstalt für Wiederaufbau Law and Order Trust Fund for Afghanistan Monitoring Agent 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 Energy and Water Ministry of Power Non-pension-based Salary Expenditure National Emergency Employment Program National Emergency Employment Project for Rural Access Non-Governmental Organization National Priority Programs National Solidarity Program Operations and Maintenance Pension Performance Assessment Matrix Pension-based Salary Expenditure Public Finance and Expenditure Management Pro Memory Priority Reform and Restructuring Special Drawing Rights Swedish International Development Agency State Owned Enterprise iv

6 TAFS UN UNAMA UNDP UNHCR UNOPS USAID USD WB 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 US Dollars World Bank v

7 Table of Contents I. HIGHLIGHTS... 1 II THE ARTF IN RELATION TO THE BUDGET AND FLOW OF FUNDS The ARTF and the National Budget Sources and Uses of ARTF Funds... 4 III THE ARTF RECURRENT COST 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 Frequent Asked Questions on the ARTF Recurrent Costs window IV THE ARTF INVESTMENT WINDOW Investment Window Funding of Project Proposals Allocations Approved for Investment Projects Portfolio Status ANNEX 1: STATUS OF INVESTMENT PROJECTS AFGHANISTAN CIVIL SERVICES CAPACITY BUILDING PROJECT TECHNICAL ASSISTANCE AND FEASIBILITY STUDIES NATIONAL EMERGENCY EMPLOYMENT PROGRAM MICROFINANCE FOR POVERTY REDUCTION TELECOMMUNICATIONS PROJECT STRENGTHENING FINANCIAL CAPACITY OF THE GOVERNMENT IMPROVEMENT OF POWER SUPPLY TO KABUL NATIONAL SOLIDARITY PROGRAM EMERGENCY POWER REHABILITATION PROJECT (Naghlu HPP) URBAN WATER SUPPLY AND SANITATION EDUCATION QUALITY IMPROVEMENT PROGRAM (EQUIP) RURAL WATER SUPPLY AND SANITATION ANNEX 2: ARTF FINANCIAL TABLES vi

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9 I. HIGHLIGHTS The Afghanistan Reconstruction Trust Fund was established in May 2002 to serve as a coordinated financing mechanism for the Government s recurrent budget (the Recurrent Cost Window) and priority reconstruction programs and projects (the Investment Window). Since commencing operation, the ARTF has successfully mobilized US$1.3 billion in grant contributions from 24 bilateral donors and is the primary instrument for financing the civilian operating budget. SY 1384 Financial Picture During the fourth quarter (December 22, 2005 March 20, 2006), ARTF contributions for SY1384 reached US$404 million out of representing 86% of the initial plan of US$467 million. Some contributions from the USA, UK and Germany slated for the 1384 envelope were shifted by donors to Total disbursements for the year reach US$407 million. Recurrent Cost Window: Disbursements under the ARTF Recurrent Window were budgeted at US$280 million for SY1384. Actually, a total of US$288 million has been disbursed for recurrent expenditures (US$202 million for wages and US$86 million for O&M expenditures). In Section 6 of Part III of this report, the Administrator has added FAQs on the Recurrent Cost Window. We hope that this new section will facilitate understanding of this aspect of ARTF financing. Investment Window: There are currently 12 effective investment projects (of which 11 are disbursing) funded by the ARTF investment window, with a total commitment of US$310.2 million. Along SY1384, the ARTF Management Committee has approved additional allocations in a total of US$131.3 million comprising US$34.2 million for Microfinance Investment Support (TF052452); US$45.9 million for the National Solidarity Program (TF053939); US$21 million for Urban Water & Sanitation (TF054729); US$20.2 million for the National Emergency Employment Program; US$5 million for Civil Service Capacity Building (TF053940); and US$5 million for Rural Water Supply & Sanitation (TF055447). Changes in the ARTF Governance Structure In response to the request of the government to be a part of the Management Committee (MC), the Administrator held discussions with the Management Committee and the Donors Committee on this topic. Welcoming the opportunity for greater ownership by government and the potential for improved coordination, the government is now included 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 internal audit included rates of ineligible expenditures and consultant contracting procedures. The Administrator has completed follow up on all actions. Donors will see in this ARTF quarterly report a more detailed articulation of issues related to determination of eligibility. 1

10 ARTF quarterly report (Mar. 20, 2006) In addition, in November 2005, the Administrator briefed donors on the fiduciary control structure in place, noting also the risks that remain in managing an operation of this type. London Conference On the occasion of the international community gathering in London for the Conference on Afghanistan (31 January 1 February, 2006), a meeting for ARTF donors was arranged on 2 February In addition to an overview of the funding and activities of the ARTF, the meeting provided an opportunity for donors and government to engage in a discussion on the proposed Performance Assessment Matrix (PAM). This matrix is being developed to respond to donors wishes to use the ARTF as a coordinated mechanism to support policy dialogue. The meeting supported the idea of the PAM and noted that such a mechanism needed to complement other broader monitoring systems being established for the Compact and Interim Afghan National Development Strategy. The meeting agreed to discuss the PAM further in subsequent meetings in Kabul. Another topic of discussion was the system for donors expressing a preference for use of their contributions. Donors wished to retain the system and noted that, in bilateral discussions, they would ensure preferences are aligned with government priorities. Representatives from donors were represented at the meeting, along with the ARTF Management Committee and members of the government. 2

11 II THE ARTF IN RELATION TO THE BUDGET AND FLOW OF FUNDS 1. The ARTF and the National Budget SY1384 Core Budget (March 21, March 20, 2006): The core budget records all transactions that are channeled through the Treasury including domestic revenues, expenditures from the Ordinary Budget and expenditures from international donors that use the Treasury system. However, it excludes expenditures that are made directly by donors outside the Treasury system (which are referred to as external budget, Table 1). Domestic revenues in SY1384 (2005/06) are projected at US$405 million, while expenditures are projected at US$1,059 million (US$678 million of ordinary expenditure and US$382 million of development expenditure). As a consequence, the core budget deficit is projected at US$654 million, of which approximately almost two thirds (US$405 million) financed from the ARTF (US$288 million under the recurrent window, and US$117 million disbursed under the investment window). Table 1: ARTF and the Core (Treasury) Budget SY (2002/ /08) (US$ million) SY1381 SY1382 SY1383 SY1384 SY1384 SY1385 SY1386 SY / / / / / / / / Estimates Rev. Budget Projections A. Domestic Revenues B. Expenditures ,687 1,059 1,450 1,700 1,900 Operating Expenditures Wages and Salaries n/a Goods and Services n/a Capital Expenditure n/a Other n/a Development Expenditures , C. Fiscal Deficit (before grants) , ,000 1,000 D. Donor Grants ARTF Recurrent Investment Other E. Fiscal Deficit (after grants) F. Financing External financing (net) n/a Sale of Non-Financial Assets n/a Domestic financing (net, including adjustments) n/a 39 (191) (177) (123) - (70) (275) Memorandum Item External budget 503 1,226 2,503 3,180 2,000 1,800 1,600 1,400 GDP 4,084 4,585 5,975 7,283 7,283 8,887 10,364 12,003 Exchange rate Domestic revenues (% GDP) Expenditures (% GDP) Fiscal deficit (before grants, % GDP) Note: for 1384, projections are based on 11 months of actual data. Source: MoF, IMF, Staff projections. Compared to the previous year, projections for SY1384 highlights: A 51% increase in revenues, mainly resulting from a significant increase in customs collections and a large payment of overflight fees (in addition to domestic revenues, the Government has granted a new telecom license, collecting an additional US$40 million in revenues). A 21% increase in operating expenditures, driven by recruitment of teachers and the across-the-board pay increase granted in November A 20% increase in development expenditures, indicating some progress in implementation capacity, even though this remains below budget. 3

12 A 8% increase in the fiscal deficit before grants, which was financed by an increase in ARTF contribution. In turn, the fiscal deficit after grants was reduced by half. SY1385 Core Budget (March 21, March 20, 2007): In March 2006, the Cabinet approved a budget for SY1385 and submitted it to the Parliament, which is considering it in May The proposed budget includes a substantial increase in domestic revenues, a modest increase in operating expenditures (notably allowing for the full-year impact of the November 2005 pay increase and for some additional operating expenditures), and a significant increase in development expenditures. As in previous years, the Government is committed to fiscal discipline and the fiscal deficit is fully financed by grants and external loans (no overdraft at the Central Bank). Projections: For the medium term, the Government has adopted in October 2005 a Medium- Term Fiscal Framework, notably indicating its objective to take measures to mobilize more domestic revenues. Domestic revenues are expected to reach US$550 million in SY1385 (2006/07) and continue to increase afterwards. Disbursements from the ARTF are expected to remain around US$400 million per annum (US$280 million from the recurrent window and US$120 million from the investment window). 2. Sources and Uses of ARTF Funds Analysis of SY1384 (March 21, March 20, 2006): Paid-in contributions to the ARTF during SY1384 amount to US$404 million, while an additional US$238 million was carried over from previous years (Table 2). Disbursements amount to US$407 million US$288 million through the recurrent window and US$117 million through the investment window. Disbursements from both the recurrent and investment windows were slightly above plan (the budget indicated US$280 million and US$112 million respectively). The cash balance carried over to the new fiscal year is US$235 million, of which US$92 million is committed to the recurrent window, US$123 million to the investment window, and US$3 million committed for the fees of the Monitoring Agent. As a result, ARTF enters the new year with only US$17 million available for new investments. 4

13 Table 2: ARTF Sources and Uses of Funds (US$ million), as of March 20, 2006 SY1381 SY1382 SY1383 SY1384 SY / / / / / Actual Estimates Projections SOURCES OF FUNDS (A+B) A. Net Donors contributions (A1-A2) A.1. Donors contributions A.2. IDA fees minus Investment income 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 (100.8) a/ Based on proposed National Budget. b/ Assumes a cushion of US$125 set aside at the end of SY1385 (2006/07). c/ Assuming a total of US$150 million of new commitments approved in SY1385 (2006/07). Projections for SY1385 (2006/07): At the date of the preparation of the report, no paid-in contribution has been recorded for the new fiscal year, but ARTF donors have made pledges in the order of US$350 million. Under current assumptions, this could lead to a substantial reduction in ARTF commitments to the investment window (in SY1385 compared to SY1384, Chart 1). Indeed, given the proposed budget, ARTF will be expected to disburse US$280 million through the recurrent window. Assuming that ARTF seeks to allocate US$150 million for new commitments under the investment window (compared to US$131 million in SY1384), disbursements under the investment window are projected at US$120 million (the pace of disbursement critically depends on the type of projects in the portfolio as they have different implementation periods). To continue the practice of funding a cushion for the recurrent window (at a level equal to (i) the estimated disbursement for the current quarter plus (ii) a reserve equal to the next quarter requirements), this would mean that ARTF s resources for SY1385 are US$101 million below requirements (Table 2 and Chart 1). This raises two concerns: - without additional resources, new commitments would have to be reduced to US$49 million, compared to US$131 million in SY1384 (Chart 1) this would also imply not honoring a large part of the contributions with preferences; - if, as in previous years (Chart 2), donor contributions to the ARTF were to come in late during the fiscal year, ARTF would have to either postpone any commitments (including preferences) to new investment projects until toward the end of the fiscal year, or reduce the size of the cushion for the recurrent window at the risk of having insufficient resources to reimburse recurrent costs. 5

14 Chart 1: ARTF Recurrent Cost and Investment Windows (US$ million) 350 Projections Disbursements to Recurrent Cost Window Commitments to Investment Window Without additional resources / / / / /07 Chart 2: Monthly Flow of Funds (Cumulative amount for each year, US$ million) Hamal Saur Jawza Saratan Asad Sonbola Mizan Aqrab Qaus Jadi Dalv Hoot Hamal Saur Jawza Saratan Asad Sonbola Mizan Aqrab Qaus Jadi Dalv Hoot Paid-in Contributions Investment Recurrent Costs Total Disbursements 0 0 Hamal Saur Jawza Saratan Asad Sonbola Mizan Aqrab Qaus Jadi Dalv Hoot Hamal Saur Jawza Saratan Asad Sonbola Mizan Aqrab Qaus Jadi Dalv Hoot Note: for instance, in SY1384, after 6 months (month of Sonbola), paid-in contributions had reached US$170 million, while disbursements had reached US$190 million (US$145 million from the recurrent cost window and US$45 million for the investment window). 6

15 III THE ARTF RECURRENT COST WINDOW (TF ) The ARTF recurrent window finances salaries and wages of about 266,000 non-uniformed civil servants, most of whom are working outside 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 March 20, 2006, a total of US$888 million has been made available to the government for financing the recurrent budget, of which US$796 million has been disbursed (US$59 million in SY1381, US$214 million in SY1382, US$235 million in SY1383, and US$288 million in SY1384, plus a standing advance of US$50 million for working capital), leaving a balance of US$41 million. The quarterly disbursements under the Recurrent Cost window Trust Fund display a positive trend over the last 2 years indicating Government s ability to execute the rising ARTF contributions (see Chart 3). Chart 3: Quarterly disbursements of ARTF Recurrent Window compared to Investment Window (US$ million) $140 $120 $100 $80 $60 $40 $20 $ Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 Q4 (Source: World Bank) 7

16 Funding Requirements for 4 th Quarter 1384, 1 st Quarter 1385 The estimate of the funding requirement of the recurrent cost window for a specific quarter is determined by comparing the balance of the Recurrent Cost window trust fund 1 to the resources estimated to be called on in the current quarter, plus a reserve equal to the next quarter requirements. The estimate of resource requirement is drawn from the estimated SY1385 contribution to the recurrent budget of US$ 280 million. 2 As such, for the whole of SY1385 the recurrent window requirement is US$309 million with a transfer of US$99 million required for the first quarter of 1385 (March 21, 2006 June 20, 2006). Table 3: Recurrent Window (TF ) Funding Requirements ( US$ millions) Actual SY1385 First Quarter SY1385 SY1384 Estimate Opening Fund Balance Less: 1) Recurrent Expenditures funded by ARTF 2) Reserve for following quarter Transfer from Parent Fund Required (Source: World Bank) Recurrent Budget Execution The budget and actual expenditures for SY1384 to March 20, 2006 for the government s recurrent budget are presented in Table 4, with adjustments to the both budget and expenditures to arrive at the budgeted and actual eligible expenditures for ARTF-eligible ministries under the ARTF recurrent cost window. Eligible ministries operating expenditures came to AFN16.98 billion or 93% of the approved annual budget. This result reflects an execution of 94% of the payroll budget and 92% of the annual operation and maintenance budget. Because provincial payroll cost accounting for month 12, which amounts to 4 % of the payroll budget, has not yet been completed in AFMIS, final payroll cost will only be come out at 98% of the final budget. On the execution of O&M expenditures in eligible ministries of AFN billion in Table 4, while expenditures to date come to 93% of the annual budget, the distribution between 1 In addition to the opening balance in the Trust Fund there is an advance of US$50 million for working capital which must be maintained and not run down so it is not presented as available. 2 The 1384 expenditure to be refunded through submission in 1385 of approximately US$ 58 million are assumed to be equal to the 1385 expenditures to be refunded in

17 central and provincial operations is 78% central and 22% provincial indicating the persistence of difficulties in provincial level operations, although O&M for the provinces for month 12 is pending recording in AFMIS. Table 4: SY1384 Budget versus actual expenditures to Mar 20, 2006 Payroll AFA m O&M AFA m Q4 SY1384 AFA m Q4 SY1383 AFA m Initial Budget SY1384 (1) 19,440 9,209 28,649 26,475 Add: Mid year budget review (3) 1,562 1,281 2,843 Defense, Interior, National Security, Presidential Protection (9,446) (4,204) (13,650) (11,240) Services Add: Interior non-military staff (2) Budget SY1384 eligible Ministries 11,968 6,286 18,254 15,755 Actual expenditures for SY ,168 10,616 29,784 25,045 Defense, Interior, National Security, Presidential Protection (8,326) (4,248) (12,574) (12,046) Services Interior non-military staff Advances (22) (614) (636) (121) Expenditures SY1384 eligible 11,232 5,754 16,986 13,398 Ministries Actual expenditures SY1384 in percentage of adjusted budgeted expenditures Remaining budget SY ,268 2,357 Remaining budget SY1384 in percentage of initial budget (Source: Monitoring Agent 4 th Quarter 1384 Report) Cost Category Distribution The distribution of the AFA 16,986 million relating to Expenditure SY1384 Eligible Ministries among cost categories is present in Chart 4. The Grant Agreement divides expenditure in categories of Payroll and O&M but these can be subdivided into four more precise categories as follows: under Payroll: Payroll based salary expenditure (PBSE) 3 and Non-payroll based salary expenditure (NPBSE) 4 and under O&M: O&M expenditure excluding pensions (OM-P) 5 and Pensions (P) payroll ( payroll and non-payroll 3 PBSE comprises all payroll based salary expenditures including gross salary, food allowance, education level allowance, PRR payments and bonus payrolls. 4 NPBSE comprises all expenditure classified in AFMIS as wages and payroll that are supported by documents other than payrolls. Examples include assistance payments to employees and transportation expenses. 5 OM-P comprises all recurrent expenditures recorded in AFMIS not included in one of the other categories 6 comprises pension payments by both the Ministry of Martyrs and Disabled 9

18 based salary expenditure) represent 69% of total eligible ministry expenditures down from 72% for the whole of SY1383 when O&M experienced a lower budget execution even greater difficulties in provincial operations. Chart 4 D: Expenditures by main category (excluding Military and other ineligible by nature) (AFA m) 3, % % Payroll based payroll Non payroll based payroll 2, % 8, % O&M excluding pension Pension (Source: Monitoring Agent 4 tth Quarter 1384 Report) Head Count & Average Salary Level Staffing and average monthly salary levels for the central ministries and provincial civil service of SY1383 are presented below against those of Quarter 1,2 and 3 7. The rise in average cost for the Central Government reflects the implementation of new positions and salaries under the public administrative reform program (PRR) and the general pay increase; the latter also affects Provincial payroll. Table 5: Head Count and Salary Costs SY1383 Average SY 1384 Qrt. 1 SY 1384 Qrt. 2 SY 1384 Qrt. 3 Central Government No. Employees Payroll ( x1,000 AFN) Average salary (AFN./month) Provinces No of Employees 74,151 76,224 74,876 75, , , , ,784 4,344 4,680 5,039 5, , , , ,834 Payroll ( x 1,000 AFN) 456, , , ,081 7 Qtr 4 averages are affected by payrolls for which accounting has not been comopleted in AFRIS, so these will be presented in 1385 quarterly reporting once Qtr 4 data has been complied and accounting completed. 10

19 Total Average salary (AFN/month) 2,732 2,479 2,531 2,859 No. Employees 241, , , ,608 Payroll (x 1000 AFN) 778, , , ,865 Average salary (AFN/ month) 3,215 3,110 3,104 3,562 11

20 3. ARTF Funding of Recurrent Costs by Line Ministries In SY1384, US$269 million of eligible expenditures have been included in requests for repayment through the ARTF recurrent cost trust fund (US$253 million after adjustments to the submissions). The distribution of the US$ 269 million by line ministry with comparison to the distribution of US$243 million for the whole of SY1383, also before adjustments, is presented in the Table 6. In SY1384, 60.5% of total disbursements of payroll and non-payroll expenditures from the ARTF related to 5 out of 46 line ministries and independent budget agencies. This pattern has not changed from SY1383. Table 6: ARTF Funding of Recurrent Costs by Line Ministries Ministry USD % USD % Ministry of Education 104, , % Ministry of Foreign Affairs 17, , % Ministry of Public Health 16, , % Ministry of Labor &Social Affairs 13, , % Ministry of Higher Education 11, , % Ministry of Martyrs & Disabled 12, , % Ministry of Agriculture 8, , % Administrative Affairs 6, , % Presidents Office 5, , % Others 72, , % 269, % 243, % (Source: Monitoring Agent report Hoot 1384) Chart 5: ARTF Disbursements by Ministry Chart 3B: ARTF Disbursements by Ministry - SY 1384 Education 39% 39% Foreign Affairs Public Health Labor and Social Affairs Martyrs and Disabled 5% 5% 6% 6% Other (Source: Monitoring Agent Hoot 1384 Report) 12

21 4. Trends of the Eligibility of Submitted Expenditures Eligibility Under the recurrent cost window, ARTF provides budget support to the government of Afghanistan but only for expenditures which meet the criteria set by the Government of the Islamic Republic of Afghanistan (GIRA) and the ARTF Grant Agreement. The Ministry of Finance has agreed with the World Bank, as the ARTF Administrator, to additional requirements through the Fiduciary Standards. Criteria for eligibility are set out in the box below. GIRA Regulations The Annual Budget Decree: since ARTF provides budget support to GIRA, expenditures can be found eligible only if they are included in the yearly budget; this early budget has to be approved by the ARTF Management Committee. Other. All goods and services must be procured and accounted for in accordance with GIRA law and regulations. If expenditure does not comply with local regulations it will not be considered to be eligible for financing by ARTF. It is important to note that the Afghan procurement law allows for procurement to conform to donor requirements (article 50 sub 1). ARTF Grant Agreement Current Amendment number 15 dated September 13, Military, all military expenditures are ineligible for financing. Procurement. Capitalized goods and works need to be procured in accordance with the WB procurement guidelines. Fiduciary Standards Fiduciary Standards (revised as at 20 December 2004). In addition to the Afghan laws and regulations, an addition set of requirements were agreed on the timeliness of reporting and efficiency of cash management of eligible expenditures. Current Performance Submitted against approved expenditures by type of expenditure over the life of ARTF are presented in Table 7 along with the percentage relationship of approved expenditures of total submitted in each quarter and year. As such, the percentages encompasse all causes of ineligibility, as explained in the section on Eligibility, above. Eligibility percentages by quarter are skewed by seasonal factors affecting monitoring activity as more monitoring is done later in the year when more transactions are available to review and as conditions allow more site visits. The performance of the government in submitting expenditures which meet stringent rules on eligibility can be best seen from the yearly rates of 89.2% for SY1384 against 88.4% for SY1383. This yearly rate comprises an eligibility rate of 90.2% on payroll which has been over 90% in the past 3 years and 87.1% on O&M which has shown a steady improvement since O&M eligibility in SY1384 was significantly affected in the first quarter the rejection of a single-source services contract to the US Geological Survey under which US$ 9 million was disbursed. The related contract was transferred to the Development Budget in the third 13

22 quarter; the correction in the eligibility statistics results in the Qrt. 3 rate of 119.9% in O&M eligibility. Final eligibility statistics for the SY1384 will be affected by the submission of the last Statement of Expenditure for reimbursement whereby recovery will be made relating SY1383 security costs of approximately US$4 million incurred in the President s Office but only detected by the external audit on Payroll eligibility appears to decline over the first 3 quarters in 1384 but this relates to the nature of the monitoring whereby the payroll reporting fiduciary standard are not applicable before 4 months after payroll month and because the review of supporting documentation only begins in the second quarter of the year. Table 7: Summary Statements of Expenditures ARTF Summary Statements of Expenditures (Amounts in USD 000) March 20, 2006 Submitted by MoF to MA Approved by MA and disbursed by WB O&M Payroll Total O&M Payroll Total O&M Payroll Total USD USD USD USD USD USD % % % 1381 Total 42,239 87, ,157 27,318 87, , % 99.7% 88.4% 1382 Total 300, , ,682 41, , , % 92.5% 36.4% Q1 17,499 17,734 35,233 7,153 16,222 23, % 91.5% 66.3% Q2 19,050 63,594 82,644 15,155 62,474 77, % 98.2% 93.9% 1383 Q3 15,481 64,395 79,876 15,291 61,848 77, % 96.0% 96.6% Q4 (*) 30,134 56,314 86,449 23,789 49,167 72, % 87.3% 84.4% 1384 Total Q1 Q2 Q3 Q4 Total 82, , ,202 61, , , % 93.9% 88.4% 23,626 31,420 55,047 13,222 31,420 44, % 100.0% 81.1% 27,,231 63,770 91,001 24,543 55,648 80, % 87.3% 88.1% 16,876 55,046 71,922 20,238 47,559 67, % 86.4% 94.3% 20,474 46,073 66,547 18,837 42,375 61, % 92.0% 92.0% 88, , ,518 76, , , % 90.2% 89.2% Causes of Ineligibility The total of ineligible expenditures for SY 1384 are presented in Table 9, first by cost category of expenditure on the vertical axis (Payroll, Non Payroll Based Salary, O&M, and Pensions) and then on the horizontal axis by the related source of rules: Government of Afghanistan, ARTF Grant Agreement and Fiduciary Standards. As highlighted in Chart 6, the largest source of ineligibility is the failure to comply with Fiduciary Standards (49% of all ineligibility); that is, not reporting Payroll on time and exceeding headcounts caps set in the approved staffing plans (Tashkeel). Within these 14

23 expenditures rejected for fiduciary standard of AFA million, AFA of the total fiduciary standard ineligibility of payroll relate to headcount caps excesses (AFN475.6 of this figure originate in the Ministry of Education). The second largest source is in O&M with the failure to follow Government s procurement rules (22%). Table 8 - Total Ineligibility by Main Category of Expenditure and Related Rules AFA million GIRA ARTF FS Cum. Total Q4 PBSE NPBSE Total Payroll O&M P Pension Total O&M Cumulative total Q4 SY ,692.5 Chart 6 - Total Ineligibility by Main Cause Cumulative SY 1384 Chart 5 C: Total ineligibility by main cause AFA m % GIRA % ARTF FS % 15

24 Monitoring Total budget expenditures for SY1384 come to AFA29.7 billion as presented by cost category of expenditure in Table 4 In the following sections, the monitoring work performed on each cost category is explained and the coverage by the Monitoring Agent in terms of the percentage of the value of transactions reviewed of the total expenditures submitted is given. Chart 7 - Total Ineligibility for SY1384 by Category Chart 5 D: Ineligibility by category of expenditure AFA m 3.1 0% Payroll based salary % % Non payrollbased salary O&M -/- Pension Pension % Payroll Based Payroll The work of the Monitoring Agent, from the outset, considered the various controls applied to payroll: centralized control of authorized posts, centralized head count data base and the verified payroll program. These arrangements contributed to a relatively lower level of ineligible expenditures detected in payroll payments. As presented in the box, the Monitoring Agent reviews payroll expenditures through site visits and from the Ministry of Finance through statistical samples drawn from the expenditures for the whole year. The lower coverage of government rules compliance relates to the examination of individual salary payments which are too voluminous to cover in large percentage and is supported by the results of tests of eligibility which indicate a high degree of compliance. The headcount caps (Tashkeel) as officially approved as part of the budget SY1384 on Asad 10, 1384 (August 1, 2005) are used to monitor actual employment versus caps in SY Payroll relating to staff in excess of the caps is not funded by ARTF; Table 9 presents the significant cases of staffing caps overruns. 16

25 Table 9 - Approved Staff Caps versus Actual Approved Highest actual % above Ministry Caps caps 12 Administrative Affairs 871 1,467 68% 23 Foreign Affairs 871 1,478 70% 25 Commerce % 27 Education 144, ,210 19% 32 Mines and Industry 673 3, % 47 Labor and Social Affairs 5,848 6,217 6% From the monitoring work detailed in the box below 8, it is clear that great assurance is obtained that only authorized payroll of eligible ministries is funded. Table 10. Monitoring compliance of payroll-based Payroll Risk of Noncompliance with: Monitoring performed GIRA Detailed verification of individual payroll based salary expenditure. ARTF Grant Verification based on SOE of ineligible Agreement ministries and Military payroll codes. Reconciliation of headcount database non-military payroll expenditure compared to non-military payrolls presented on SOE (excludes bonus payrolls). Statistical sample on Kabul payrolls for eligibility of employees (non-military / not from state enterprises) Fiduciary Standards Employments limits must have been submitted and approved. Payroll must have been submitted within the set time limits. Payrolls must have allotted funds. Submitted payrolls are recorded on accrual basis in the headcount database and verified with approved headcount caps. On a monthly basis, payrolls received during any month are categorized on the basis of the month to which they relate. YTD based on the submitted SOEs, actual expenditures by Ministry compared to budget (includes the nonpayroll based payroll expenditures since Monitoring coverage 3% 100% 80% 40% 100% 100% 100% 8 PM ( pro memory) used for the expenditures that have been monitored but the related total expenditures for the cost category not available from AFMIS. 17

26 Salaries abroad require statement signed by ambassador. part of the same main group). Detailed verification of individual payrolls from the Ministry of Foreign Affairs as to signature of ambassador. PM Non-Payroll Based Payroll Non-payroll based payroll payment are similar in nature to O&M expenditures in that they are not supported by payrolls journals or systems. As such a higher degree of review of supporting documentation is performed by the Monitoring Agent (34 % against 3% in payroll Table 11: Monitoring compliance for non-payroll Payroll Risk of noncompliance with Monitoring performed GIRA regulations Monitoring site visits: Detailed verification of non payroll based salary expenditure. ARTF Grant Verification based on SOE of ineligible Agreement non-payroll based Military salary codes and Ministries. Fiduciary Standards Expenditure must have allotted funds. Advances must be settled within three months. Monitoring site visits: Military expenditures within line ministries. YTD based on the submitted SOEs, actual expenditures by Ministry compared to budget (includes the payroll based payroll expenditures since part of the same main group). Detailed testing during monitoring site visits. Monitoring coverage 34% 100% 34% 100% 34% O&M Excluding Pension Considering the diverse nature of ineligibility with the O&M expenditure the Monitoring Agent invests more in the review of supporting documentation through the site visits than is necessary with payroll costs. The experience from the site visits determines the frequency and extent of future visits to budget units so the sampling is risk-based. Similarly, material O&M items may be queried depending on the history of ineligibility of the budget entity submitting the expenditure Additionally, all expenditures over a prescribed threshold (i.e., equivalent of US$ 70,000) are selected for testing; individual expenditures in round figures are selected for testing since the round figure may be an indication of improper expenditures. This risk-based approach is designed to reduce the possibility of ineligible expenditures being funded through the unmonitored part of expenditures, though it does not eliminate the possibility. In SY1384, 44 % of the total value of transactions has been 18

27 reviewed for all risks and 100% for eligibility of the ministry and for proper allotment of funds. Further review of 1384 expenditures, particularly of provincial expenditures will continue until end of June, 2006 and any ineligibility will be reflected in the last statement of expenditure. Table 12: Monitoring compliance for O&M Non-compliance Method with GIRA Detailed testing during monitoring site visits ARTF Grant Verification based on SOE of ineligible Agreement ministries. Monitoring site visits: Military expenditures within line ministries Monitoring site visits: Verification of procurement of works and capitalized goods. Fiduciary Standards Expenditure must have allotted funds. Advances must be settled within three months. Rent paid abroad must be supported by a signed lease agreement. Cash management: Exceptions to the standard rule on advances. At the end of each SY, MA performs a check on the basis of SOEs submitted, verification of actual expenditures compared to budget. Detailed testing during monitoring site visits. Detailed testing during monitoring site visits. Detailed testing during monitoring site visits. Monitoring coverage 44% 100% 44% 44% 100% 44% 44% 44% Pension Individual pension transactions are of a very small amount but fortunately these operations lend themselves to statistical sampling and analysis because the arise in a single control framework. However, the results of the sampling underway are not complete so they are not present in the box below. The review of pension costs did ensure that military pensions are excluded. 19

28 Table 13: Monitoring compliance for Pension Risk of noncompliance with Monitoring performed GIRA regulations The payments made by the pension department of the Ministry of Labor and Social Affairs are monitored by drawing a statistical sample on the payments made by the department in Kabul. The findings from this sample are extrapolated to the whole of the year Pension payments through the Ministry of Martyrs and Disabled are verified through testing of the control environment of the pension payments in Kabul. ARTF Grant Verification that Military pension Agreement expenditure budget codes have been Fiduciary Standards excluded from SOEs. The Fiduciary Standards do not lay down rules that pension expenditure has to comply with in order to be eligible. Monitoring coverage 50% PM 100% - 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. An audit report on the Recurrent Window Trust Fund acceptable to the Administrator was presented in January and discussed at the ARTF Management Committee meeting of February 28, 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 2004/5 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. 20

29 A major review of Public Finance Management (PFM) by the World Bank contains a 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 assessment suggest that: Strong progress has been made on fiscal discipline. There remain significant fiscal risks, however, due to the lack of a more explicit multi-year framework and also because some risks are poorly monitored, such as those associated with state-owned enterprises and municipalities. Progress has also been strong in terms of collecting adequate information. The challenges are mainly related to flows of information with provinces, and information flows on donor-implemented operations. Budget policy remains constrained by weak capacity. Although making the budget the central instrument of policy and reform is a key objective of the government, the policy orientation of the budget remains constrained by the government s weak capacity and the very large external budget funded directly by donors and executed outside government budgetary channels. The budget process is orderly, but more remains to be done to link the budget more closely to the government s development strategy and to a medium-term perspective. At the aggregate level, the government has presented realistic budgets for operating expenditures. However, the distribution across ministries and functions fluctuates 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. Treasury Operations at Present Operations in Treasury in from 1384 have been affected by staff rotation and a recent review by the Monitoring Agent has indicated severe weakness in the internal control in the payments process in Treasury. The Ministry of Finance is working to address the findings but the situation is being closely monitored by the Administrator and the Monitoring Agent. 6. Frequent Asked Questions on the ARTF Recurrent Costs window Why does the ARTF support the recurrent costs of government? The government is gradually improving its own revenue base, through customs and taxation, so it can pay its recurrent costs fully in the future. Improvements are being made and in SY1384 revenue collection was 46% above the previous year. However it will be some time 21

30 before the government is fully able to support its recurrent costs. Therefore, the ARTF finances part of the government s approved 9 operating budget except for security-related costs and land purchases. At the beginning of the fiscal year the Administrator and ARTF donors agree with the government on the volume of the financing gap in the recurrent budget to be financed by the ARTF. Why does the ARTF not fund military or security related expenses? The Articles of Agreement of the International Development Association (IDA) and the International Bank for Reconstruction and Development (IBRD) (together, the Bank ) prohibit the Bank from involvement in the political affairs of its member countries. In addition, the Articles of Agreement spell out the purposes of the Bank, which purposes have been interpreted by the Bank s Board of Executive Directors not to permit involvement in military or security related activities of member countries. The Bank in its capacity as trustee of the ARTF is guided by the overall purposes of the Bank, the political prohibition clause and the other provisions in the Articles of Agreement. Funding military or other securityrelated expenditures would be outside the Bank s mandate and would violate the political involvement prohibition. What kinds of recurrent costs are financed by the ARTF? Each fiscal year the government agrees a proportion of its recurrent budget to be financed by the ARTF. Expenses up to this agreed amount are reimbursed by the ARTF during the year, as long as they adhere to the government's financial management regulations and the fiduciary standards stipulated in the ARTF Grant Agreement. To date, approximately 75% of recurrent costs have been for payroll expenses and 25% for operations and maintenance expenses. Of the 25% for operations and maintenance, 75% was incurred in Kabul and 25% in the provinces. How does the ARTF Administrator monitor use of these funds? The Administrator has a contract with Price Waterhouse/Coopers (PWC) to serve as a Monitoring Agent (MA), which is responsible for reviewing expenses submitted to the ARTF by the government. The MA checks compliance with (i) Government's internal controls (ii) ARTF requirements and (iii) efficiency standards. The MA reviews all of the expenditures codes to ensure they are eligible for ARTF funding and in line with the budget. The MA also reviews some expenses in more detail. The MA decides which expenses to examine more thoroughly by applying a carefully designed risk-based approach to monitoring. Is it possible that some expenditures are entirely unchecked by the MA? No, all expenditures are subject to certain minimum checks. How does the Bank monitor the work and performance of the Monitoring Agent? The Monitoring Agent is under contract to the Administrator which works closely with the MA to monitor their performance and work outputs. They meet regularly to review findings and determine follow up actions. In addition, as part of the World Bank's fiduciary framework for all operations (whether financed by the World Bank or ARTF), an annual independent audit is conducted. The Bank follows up with the Government and the MA on audit findings. The most recent audit covering SY1383 (March 21, 2004 March 20, 2005), 9 The annual budget is first approved by Cabinet and, from SY1385 onwards, subsequently by Parliament. 22

31 which was completed slightly behind schedule, was considered acceptable by the Bank. What are 'ineligible expenditures'? Firstly, as noted above, any security related expenditures are ineligible for ARTF financing. In addition any expenditure that does not adhere to the government's budget and procurement rules, or to the reporting and cash management standards agreed with the Bank, would be ineligible. When an expenditure is found to be ineligible it does not necessarily imply misuse or wrongdoing. Does the ARTF directly finance the Government s recurrent budget? No. The government first funds its recurrent budget and regularly submits expenditure details to the ARTF which reimburses for the amounts requested after an initial check of eligibility by the MA. Ineligible expenditures are frequently detected by the MA before any reimbursement takes place. However the monitoring process reviews expenditures at later stages to detect any further ineligible expenditures which may have been reimbursed to the government at the first stage. What is the mechanism for recouping ineligible expenditures and for that matter, misused funds after they have already been paid by the ARTF? After ineligible expenditures are detected by the MA, they are deducted from the other eligible reimbursements made by the ARTF to the government. Sometimes this happens in the same month the expenditure is submitted but often it happens later due to the lag in the monitoring process. For this reason the ineligible expenditures reported each month can vary as amounts are reconciled through an ongoing process. The same process is followed if funds have been misused but in such cases the ARTF brings the issue to the direct attention of the Ministry of Finance so that controls may be strengthened in the future. Is the Government's overall performance with regard to expenditure eligibility improving? The overall trend is improving gradually. Improvements have been made in the government's compliance with ARTF fiduciary standards, as well as government's own control procedures. The Bank is providing capacity-building support to the Ministry of Finance and the Control and Audit office to further improve compliance. 23

32 IV THE ARTF INVESTMENT WINDOW Investment Window Funding of Project Proposals Proposals for new investments must address a funding gap for a Government priority project or program, be included in the approved national budget and must be satisfactorily appraised by the Bank sector experts. The MC will evaluate the project appraisal document for a new investment and if found to be satisfactory and subject to funds availability, may approve financing. Once approved, legal documents are prepared for signature by the Bank (as ARTF administrator) and countersignature by the Government. Normally, such agreements are effective upon Government countersignature and disbursement may commence immediately. Disbursement, financial management and procurement procedures for the ARTF investment window follow standard Bank operational policies and procedures. Supervision and implementation reports are made available to ARTF donors and the Government. Allocations Approved for Investment Projects As of March 20, 2006, cumulative approvals by the ARTF Management Committee for investment projects amount to US$314.2 million. Table 14 provides the yearly breakdown of these allocations. In SY1384, the ARTF Management Committee has approved additional allocations of US$131.3 million comprising: US$34.2 million for Microfinance (TF052452); US$45.9 million for National Solidarity Project (TF053939); US$21 million for Urban Water & Sanitation (TF054729); US$20.2 million for the National Emergency Employment Program; US$5 million for Civil Service Capacity Building (TF053940); and US$5 million for Rural Water Supply (TF055447). Table 14: ARTF Management Committee Approvals for Investment Projects, as of March 20, 2006 (US$ million) Total Rural Development TF National Emergency Employment Program TF052452/TF Microfinance TF National Solidarity Program TF Rural Water Supply & Sanitation Infrastructure TF Kabul Roads & drainage System TF Telecom & Microwave Link TF Kabul Power Supply TF Urban Water Supply and Sanitation TF Emergency Power Rehabilitation Project TA & Capacity Building TF Technical Assistance & Feasibility Studies TF Strengthening the Financial Capacity TF Civil Service Capacity Building Others TF Education Quality Improvement Project

33 The allocations to the investment portfolio align with Afghanistan s development priorities accorded to rural development; rehabilitation and development of basic infrastructure (roads, power, water supply and telecommunication); and capacity building. These allocations also take into account availability of 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: Table 15: Composition of Resource Allocation under the ARTF Investment Window Total Allocation Distribution Rural Development % National Emergency Employment Program % Microfinance % National Solidarity Program % Rural Water Supply & Sanitation % Infrastructure % Kabul Roads % Telecom & Microwave Link % Kabul Power Supply % Urban Water Supply & Sanitation % Emergency Power Rehabilitation Program % TA & Capacity Building % Technical Assistance and Feasibility Studies Facility % Strengthening the Government Financial Capacity % Civil Service Capacity Building % Others % Education Quality Improvement Project % % 25

34 Portfolio Status As of March 20, 2006, the ARTF investment portfolio comprises 12 active projects with a combined commitment of US$309.2 million, of which US$187.3 million (60%) have been disbursed. Basic information on active projects is given in Table 16. More detailed projectspecific information is given in Annex I. The grants supporting National Solidarity Project (NSP), National Emergency Employment Program (NEEP) and Microfinance are disbursing very fast compared with the infrastructure projects which have a disbursement period of about three years.. Table 16. ARTF Investment Portfolio, March 20, 2006 (active projects) Commitment Disbursed TF No. TF Name Effective Closing US$ m US$ m Rural Development Nat l Emergency Employment Prog. 3/14/03 3/31/ Microfinance for Poverty Reduction 7/10/03 6/30/ National Solidarity Program 9/30/04 3/31/ Infrastructure Telecommunications 7/10/03 12/31/ Improvement of Power Supply to Kabul 2/2/04 6/30/ Urban Water Supply & Sanitation 2/21/05 12/31/ Emergency Power Rehabilitation 2/13/05 1/31/ Rural Water Supply & Sanitation 12/15/05 12/31/ TA & Capacity Building TA & Feasibility Studies Facility 3/8/03 2/28/ Creating Financial Capacity 11/19/03 2/28/ Civil Service Capacity Building 6/15/05 2/28/ Other Educational Quality for Improvement 6/1/05 3/31/ Subtotal: