With Pledged Support From:

Afghanistan Reconstruction Trust

Fund Report to Donors

Fourth Quarter of the Afghan Fiscal Year

December 22, 2003 to March 20, 2004 And

Afghan Fiscal Year 1382

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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CURRENCY EQUIVALENTS

(Effective March 15, 2004)

Currency Unit = New Afghani US$1 = 49.34 Afs

AFGHAN FISCAL YEAR March 21-March 20

Solar Year (SY) Begins on SY1381 March 21, 2002 – March 20, 2003 SY1382 March 21, 2003 – March 20, 2004 SY1383 March 21, 2004 – March 20, 2005

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ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank AACA Afghan Assistance Coordination Authority AFMIS Afghanistan Financial Management Information System ARDS Afghanistan Reconstruction and Development Services ARTF Afghanistan Reconstruction Trust Fund AKDN Aga Khan Development Network CAWSS Central Authority for Water Supply and Sewerage CCFO Counterpart Chief Financial Officer CGAP Consultative Group to Assist the Poor DFID Department for International Development ECEPWP Emergency Community Empowerment and Public Works Program IARCSC Independent Administrative Reform and Civil Service Commission IDA International Development Association IDP Internally Displaced Persons IRA Islamic Republic of Afghanistan JPMU Joint Program Management Unit KfW Kreditanstalt für Wiederaufbau LOTFA Law and Order Trust Fund for Afghanistan MC Management Committee MCAT Ministry of Civil Aviation and Tourism MFI Microfinance Institution MISFA Microfinance Investment and Support Facility for Afghanistan MIWRE Ministry of Irrigation, Water Resources and Environment MOC Ministry of Communication MOF Ministry of Finance MOFA Ministry of Foreign Affairs MOPW Ministry of Public Works MRRD Ministry of Rural Rehabilitation and Development MUDH Ministry of Urban Development and Housing MWP Ministry of Water and Power MWE Ministry of Water and Environment NEEP National Emergency Employment Program NEEPRA National Emergency Employment Project for Rural Access NGO Non-Governmental Organization NSP National Solidarity Program O&M Operations and Maintenance PRR Priority Reform and Restructuring SDR Special Drawing Rights SY Solar Year (March 21 to March 20) TAFS Technical Assistance and Feasibility Studies TISA Transitional Islamic State of Afghanistan UN United Nations UNAMA United Nations Assistance Mission in Afghanistan UNDP United Nations Development Program UNHCR United Nations High Commissioner for Refugees UNOPS United Nations Office for Project Services USAID United States Agency for International Development

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Table of Contents

Executive Summary----------------------------------------------------------------------------- iv

I – Introduction -------------------------------------------------------------------------------------1

II – Recurrent and Capital Costs Window ------------------------------------------------------2

III – Investment Window --------------------------------------------------------------------------7 1 – Technical Assistance and Feasibility Study Project ----------------------------------7 2 – National Emergency Employment Program – Phase 1 (NEEP–1) --------------- 11 3 – Microfinance Project ------------------------------------------------------------------- 13 4 – Emergency Telecommunications Project -------------------------------------------- 15 5 – Repair of Kabul City Major Roads & Drainage System --------------------------- 16 6 – Improvement of Power Supply to Kabul--------------------------------------------- 17 7 – Strengthening the Financial Management Capacity of Government ------------- 18 8 – UNDP Police ---------------------------------------------------------------------------- 20

IV – Return of Expatriate Afghans ------------------------------------------------------------ 23

V – Investment Projects Under Preparation-------------------------------------------------- 25 1 – National Solidarity Program (NSP)--------------------------------------------------- 25 2 – Other Requests for ARTF Funding --------------------------------------------------- 26

VI – Annexes -------------------------------------------------------------------------------------- 29 Annex 1 ARTF Financial Tables as of March 19, 2004----------------------------------- 30

Annex 2 Anticipated Financing Requirements of ARTF for SY1383-84 --------------- 34

Annex 3: Fiduciary Standards ---------------------------------------------------------------- 40

Annex 4: Note on Donor Cofinancing of Investment Projects or Programs through ARTF--------------------------------------------------------------------------------------------- 43

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EXECUTIVE SUMMARY

The Afghanistan Reconstruction Trust Fund (ARTF), operational for over eighteen months, has demonstrated itself to be a vital mechanism for financing the country’s recurrent budget and supporting priority investment and technical assistance programs. With support from 24 donors, the ARTF provides a mechanism for coordinated funding of reconstruction activities in line with agreed priorities of Government. Since its establishment in May 2002, the total paid in contributions to the fund total over $471 million. In SY1381 (March 21, 2002 to March 20, 2003), its first year of operation, contributions to the ARTF reached US$185 million. In SY1382 (19 March 2004 2003) total paid in contributions for the fiscal year stand at US$286 million with pledges for a further US$378 million to date for SY1383 (ending March 20, 2005). Further indications from donors suggest the total commitments for 1383 will be significantly higher than this early estimate. Disbursements to date total US$362 million, of which approximately 76 percent (US$274 million) supported the Government’s operating budget and costs of the monitoring agent, and 24 percent supported investment programs. ARTF commitments are gradually shifting from supporting the Government’s recurrent costs to more investment projects. Several new investment projects are in the pipeline and will increase the overall proportion of ARTF resources committed to investment projects.

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I – INTRODUCTION

The Afghanistan Reconstruction Trust Fund (ARTF) established in May 2002, has

received support from 24 donors to Afghanistan and has emerged as one of the main instruments for financing the country’s recurrent budget. It is also evolving into a significant financing source for the Government’s investment programs and technical assistance. The ARTF provides a mechanism for coordinated funding of reconstruction activities in line with agreed priorities of the Government. The ARTF is designed to:

(i) promote transparency and accountability of reconstruction assistance;

(ii) help reinforce the national budget as the vehicle for promoting alignment of the reconstruction program with national objectives;

(iii) reduce the burden on limited government capacity for the first few years of re-engagement, while promoting capacity building over time; and

(iv) help fund the essential recurrent budgetary expenditures required for the government to function effectively.

The ARTF is overseen by a Management Committee comprising representatives of

the Asian Development Bank, the Islamic Development Bank, the United Nations Development Program, and the World Bank. The Management Committee is responsible for reviewing progress and for making key management decisions, including for the approval of investment projects proposed for ARTF financing. The World Bank is the Administrator of the fund, and it has employed a Monitoring Agent to assist in ensuring proper fiduciary management.

The ARTF comprises three components: • Recurrent and Capital Costs (also referred to as “Running Costs”) • Investment Programs • Afghan Expatriates and Training.

This report provides a description and update of each component. Significant issues

and recent developments are also included as appropriate. The future anticipated needs of Government, through the ARTF, are summarized in Section V of the report.

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II – RECURRENT AND CAPITAL COSTS WINDOW

Amount committed: US$345 million Closing date: June 30, 2006

The ARTF has been a critical instrument to meet essential recurrent cost requirements. This support enabled payment of salaries to more than 200,000 civil servants each month, over half of whom are outside of Kabul. In addition, the ARTF supports Operating and Maintenance costs of key government buildings and finances bulk purchases of essential equipment. A total of $345 million has been committed to date for the recurrent and capital cost component, of which a total of $274 million has been disbursed ($215 million in SY1382 and $59 million in SY1381), leaving $71 million available in the Trust Fund for recurrent and capital costs financing. This amount includes $50 million in a revolving reserve account (special account), leaving $21 million for actual new expenditures. According to Government estimates, the Recurrent Cost component will need at least $300 million for SY 1383 to maintain current level of engagements, fulfilling about 50% of the $606 million operating budget of the Government. The remaining $306 million is planned to be raised from Government’s own revenue. In SY 1382, wages represented 68% of total disbursements, while non salary represented 32% (24% for Operations and Maintenance, 6% for Bulk Purchases and the remaining 2% for current multilateral debt obligations). One of the objectives of 1383 set out by the Government and ARTF teams will seek to increase disbursements for non-salary expenditures, while at least maintaining the 1382 level of wages.

Expenditures for payroll and Operations and Maintenance (O&M) financed under

ARTF are to be coherent with allocations established in the national budget. A comparison of actual versus budgeted expenditures in 1382 shows that payroll remain consistently below budgeted amounts, while actual O&M meets or slightly exceeds budget allotments (see Table 1 below).

Table 1 - Budget versus actual - expenditures SY 1382 Payroll

AFA m O&M AFA m

Total AFA m

Budget SY1382 (*) 11,419 9,712 21,130 Defense, Interior, Security (**) (4,260) (4,705) (8,965) Civilian budget SY1382 7,159 5,007 12,165 Actual expenditures 5,924 10,260 16,184 Defense, Interior, Security 5,234 5,234 Actual Civilian expenditures 5,924 5,026 10,950 Remaining Authorized Budget SY1382

1,234 (19) 1,215

*) Ordinary budget as approved Hamal 4, 1382 ; **) Ineligible under ARTF

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ARTF Payroll expenditures

Payroll expenditures for 1382 will continue to be processed through the first few months of 1383 and will be funded from the 1383 ART allocation. As shown in Table 2 below, the number of civil servants have been stable during 1382 while average monthly payroll expenditures have shown a steady increase both in provinces and central Government. This has resulted in a 23% increase in average payroll per employee for each of the first 3 quarters of 1383 (there is an insufficient number of fourth quarter payrolls processed at this time to compute reliable numbers). The increase was more pronounced in central Government (38%) than in provinces (14%). The number of civil servants reported remain well within approved headcount limits set for Central Government (168,972) and provinces (164,230). Total payroll reimbursed under ARTF is estimated at 5,626 million, representing about 95% of the total payroll expenditures of Government shown in Table 1 above.

Table 2: Headcount and Payroll Expenditures Submitted to ARTF in 1382

Monthly average 1st quarter

Monthly average 2nd quarter

Monthly average 3rd quarter

Average 1382 (*)

Estimated Annual (Based on Average)

Central Government

No. employees 86,467 82,810 80,704 83,327 Payroll (th. AFA) 162,056 171,236 208,228 180,507 2,166,084 Average payroll Afa/employee

1,874 2,068 2,580 2,166

Provinces No. employees 140,657 143,525 138,865 141,016 Payroll (th. AFA) 265,061 300,930 298,947 288,313 3,459,756 Average payroll Afa/employee

1,884 2,097 2,153 2,045

Total No. employees 227,125 226,335 219,569 224,343 Payroll (th. AFA) 427,117 472,166 507,175 468,820 5,625,840 Average payroll Afa/employee

1,881 2,086 2,310 2,090

(*) Based on payrolls submitted so far to ARTF in 1382.

Based on the Government’s headcount database the Ministries of Education and Public Health had the highest payroll expenditures for the first 8 months of 1382, with Education representing more than half the total ARTF payroll expenditures: ARTF overwhelmingly pays the salaries of teachers and other Education civil servants. Civilian staff of the Defense and Interior ministries are following in distant third and fourth position with a combined 9%. For 1383, the Government and ARTF Administrator have agreed to exclude all Defense Ministry (payroll and O&M) expenditures from ARTF.

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Table 3: Ministries with the highest payroll

Ministry Total Gross Payroll (AFA)

% of total

207 Ministry of Education 2,321,699,906 51.9 217 Ministry of Public Health 315,288,479 7.0 202 Ministry of Defense (*) 209,897,277 4.7 206 Ministry of Interior (*) 187,995,710 4.2 219 Ministry of Agriculture 169,141,331 3.8 Total top 5 3,204,022,703 71.6

(*) Civilian staff only. DELAYS IN SUBMISSION OF PAYROLLS: Fiduciary standards require that, in order to be eligible for reimbursement by ARTF, payrolls need to be submitted within 3 months for central Government and 4 months for provinces. Ineligibility due to delays in submission of payrolls have been reduced to a trickle for provinces (about 1%), but remain higher for central Government at 8.1%, mostly for the Ministry of Foreign Affairs due to long delays in receiving payroll rosters from Afghan embassies abroad. Operations and Maintenance (O&M) Expenditures

Operations and Maintenance submitted to ARTF for reimbursement come mostly from central Government (76%) versus provinces (24%). The lower level of O&M expenditures in provinces reflects of the limitation of capacity of the central Government in extending its reach throughout the country. There are notable delays in O&M budget allotments from line ministries to the provinces, issues of transfer of funds between province and the central Government.

Table 4: O&M expenditures

(AFA m) (%)Central Government 5,441 76Provinces 1,772 24Total 7,163

Ineligibility of O&M remains stubbornly high, averaging nearly 70% of monitored

expenditures. The Government and ARTF Administrator are currently preparing a program of training and capacity building to improve O&M eligibility.

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Table 5: Ineligibility of monitored O&M expenditures

Monitored(AFA m)

Ineligible(AFA m)

Ineligibility (%)

Central Government 1,004 562 56.0 Provinces 434 429 98.8 Total 1,438 991 68.9

In the central Government, the ten ministries with the highest O&M ineligibility are

shown in Table 6 below. These ten ministries represent 70% of total O&M expenditures in the central Government.

Table 6: Ten Highest Ministries by O&M ineligibility

In order to design solutions for the high ineligibility of O&M issue, a more detailed

analysis was carried out to identify the most frequent reasons for ineligibility. All instances can be classified in the following five categories:

a) Payment process, which include lack of authorizations, missing documents,

Government form not filled out properly, non conformity of issued check, etc., b) Procurement issues, such as missing documents (invoices, contracts, bid

documentation), non compliance with local procurement regulations, non compliance with the requirements of the Grant Agreement, lack of evidence of purchase, etc.,

c) Advances (transfers), for which the relevant expenditure evidences were not available after 3 months,

d) Military and Police: expenditures excluded from ARTF reimbursement, e) Others: all issues covering payments of per diem to personnel, equity payment to state

organizations, incorrect calculations, etc. Table 7 below shows the ineligibility categories and the frequency of ineligibility per

ministry in the central Government.

Ministry / Entity

Total Expenditure

Monitored Expenditure

Ineligible Expenditure Ineligible

(mAFA) (mAFA) (mAFA) (%) President's Office 462 200 161 80 Public Health 524 150 89 59 Foreign Affairs 416 173 55 31 Justice 133 26 24 92 Light industries & Food 119 100 97 97 Water & Power 90 66 62 93 Agriculture 92 24 19 79 Frontiers 47 12 11 91 Finance 72 8 3 37 Return Refugees 31 14 11 78 Total 1,986 773 532 69

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For provinces, the high ineligible ratio is mostly due to Herat and Kandahar, where

lack of budget allotment by the line Ministries and advances not supported by appropriate documentation (e.g.: invoices, contracts, receipts), or non-compliance with the national or international procurement rules.

The Government and ARTF administrator are currently preparing a Technical Assistance program to considerably reduce ineligible O&M expenditures. This program will include support to implementation of the new procurement law, providing training assistance in procurement in line ministries, issuing clear and comprehensive operational manuals and providing intensive training to the ministries’ staff, strengthening the internal audit offices and increasing the frequency of external audits by the General Auditor’s Office.

Table 7: Categories of Ineligibility from Monitoring - O&M – Year 1382

Ministry / Entity Payment process Procurement Advances Military

& Police Other

President's Office 3 7 41 10 3 Public Health 0 24 2 0 3 Foreign Affairs 1 13 33 0 0 Justice 4 1 3 11 0 Light industries & Food 0 0 0 0 8 Water & Power 2 3 4 0 0 Agriculture 0 6 8 0 2 Frontiers 0 0 2 0 10 Finance 1 3 7 0 1 Return Refugees 4 5 6 0 13 Total Central Government 15 62 106 21 40

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III – INVESTMENT WINDOW

ARTF Investment Projects (US$ million)

Description

Signing Date

Closing Date Amount Approved

Amount Disbursed as of March 19,

2004Technical Assistance and Feasibility Study Project

March 8, 2003

September 30, 2005 $14.000 $1.723

National Emergency Employment Programme Phase 1

March 14, 2003

September 30, 2004 $16.620 $16.620

Microfinance Project June 4, 2003

September 30, 2005 $9.700 $2.258

Emergency Telecommunications Project July 10, 2003

December 31, 2005 $3.000 $0

Repair of Kabul City Major Roads & Drainage System (KfW-implemented)

November 8, 2003

June 30, 2005 $3.000 $0

Improvement of Power Supply to Kabul (KfW-implemented)

December 10, 2003

June 30, 2006 $7.435 $0

Strengthening Financial Capacity of Government (CCFO Project)

October 11, 2003

February 28, 2006 $5.100 $1.146

UNDP Police 1, 2 and 3 June 30, 2004 $21.636 $21.636

TOTAL $80.491 $43.383

1 – Technical Assistance and Feasibility Study Project

Amount committed: US$14 million Closing date: September 30, 2005 Project Objectives

In early SY 1382, a total of 450 projects were planned for the National Development Programs to be included in the Government budget for 1381-82. Of these, only 170 were either ongoing or ready for implementation. An urgent need was identified to list, rank, select, and prepare projects for financing and implementation. For this purpose, the Government requested ARTF support to establish a Technical Assistance and Feasibility Studies Unit (TAFSU) under the Afghan Aid Coordination Agency (AACA) to manage and facilitate the preparation of new projects or programs under various ministries for donor funding. ARTF funding for a Technical Assistance and Feasibility Study Project was approved in late calendar 2002 for a total of US$14 million, and a first tranche of US$8 million was signed on February 8, 2003.

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The primary objective of the project is to ascertain availability of quick technical assistance to the Government of Afghanistan in designing projects and performing feasibility studies in response to ministries’ needs.

TAFSU operates under the Ministry of Reconstruction and works closely with the

Afghanistan Reconstruction and Development Services (ARDS) department. Today, TAFSU is providing consulting services to line ministries to develop project documents and commission feasibility studies, and to help prepare strategies, programs, and projects that meet national development needs. Government assistance is provided by: (i) developing capacity to define new projects or programs; and (ii) developing prepared projects or programs suitable for funding from key development partners and, in some cases, from commercial sources. The implementation timetable for the first year includes a target of at least 5 projects or programs to be prepared for donor consideration.

TAFSU supports line ministries through a combination of individual consultants

(sector specialists) working in ministries as in-house advisors, and engineering or management consulting firms hired to undertake project preparation, management, and capacity building within ministries. TAFSU reports to the Ministers of Reconstruction and Planning yet the funds are under management of the Minister of Finance who oversees the Facility and chairs and Inter-Ministerial Review Group.

The Technical Assistance and Feasibility Study Project is divided into: 1) AN INDIVIDUAL CONSULTANTS COMPONENT (US$5 MILLION): a contractor firm

has been selected to provide services for project administration, including selection and recruitment of key consultants, preparation of TORs, short-listing of candidates, contract negotiation, logistical arrangements, financial management and program monitoring. Consultants selected under this component are placed in line ministries unless their activity is cross-sectoral, in which case they stay within ARDS;

2) A FEASIBILITY STUDIES COMPONENT (US$9 MILLION): firms are invited to design bankable projects, or perform feasibility studies for projects already identified.

Although Afghanistan is two years into the reconstruction program, medium- to long-

term planning for resource mobilization remains poor. Technical assistance is difficult for ministries to quantify, and coordination among national projects still requires stronger capacity and project management. One of the objectives and intended benefits of TAFSU is to integrate qualified national professionals into the mainstream of development activities. National professionals need to team up with international counterparts on major tasks to build confidence in local talent and to boost public perception toward government. Implementation Progress

TAFSU staff currently includes two Afghan expatriates as Director and Manager, a part-time administrator, three Lead Sector Generalists, and eleven qualified experts and advisers reporting to five ministries (Ministry of Finance, Ministry of Communications,

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Ministry of Urban Development and Housing, Ministry of Public Works, and Ministry of Irrigation, Water Resources, and Environment). Among them, six lead sector specialists have been recruited to undertake technical assistance and to design and supervise feasibility studies. These positions are contracted through the Crown Agents procurement advisors firm. By recruiting Afghan nationals with international experience, TAFSU has combined Afghan international and national knowledge with that of leading sector experts to design sound projects.

A second spin-off of TAFSU is to provide consultants with the ability to move

forward on the Priority Reconstruction and Reform Program in the Independent Administrative Reform and Civil Service Commission (IARCSC), Ministry of Foreign Affairs, Justice Sector, Natural Resources Sector with more experts expected to arrive in May/June 2004.

Technical assistance provided to the Ministry of Irrigation, Water Resources, and Environment has resulted in a Development Strategy and Expenditure Draft (2004-2015) that articulates an approach for the sustainable development and management of all national water resources. It outlines the role of government, both regional and provincial administrations, and calls for better water allocation management for productive water supply, irrigation, hydropower, industry, and the urban and private sectors.

Two urban specialists are currently assisting the Ministry of Urban Development and Housing (MUDH) in the development of a program of priority investment projects and providing on-the-job training of Afghan counterparts in project design and implementation. Key deliverables include: investment project identification; project management and procurement assistance; writing of specialists’ TORs; reports to AACA’s Aid Coordination Unit on the status of projects; regular communication with donors supporting the relevant program; coordination of operational and technical issues relating to the Central Authority for Water Supply and Sewerage (CAWSS).

Within the Feasibility Studies component, the offer to do feasibility studies has been offered to all ministries. The placement of Management Consulting Firms to conduct situation analysis, however, has targeted seven critical sectors:

• Roadways Rehabilitation and Network Expansion • Power Generation and Distribution • Civil Aviation • Irrigation Systems Rehabilitation and Expansions, including multi-

purpose dams • Urban Planning and Development • Urban Water Supply and Sanitation • Emergency District Level Infrastructure.

To date, more than 140 firms have expressed interest and an inter-ministerial

committee has prepared a shortlist and detailed procurement documents (including TORs prepared in consultation with World Bank sector specialists). TAFSU is initiating an

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inventory of all development projects and documents prepared for Afghanistan since 1967. This inventory should provide valuable information by revisiting projects with a view toward renewed project planning. For now, the majority of contracts have been awarded to the Ministry of Water and Power (MWP), the Ministry of Civil Aviation and Tourism (MCAT), and the Ministry of Urban Development and Housing (MUDH). Ministry of Water and Power (MWP)

FEASIBILITY STUDY FOR BAGHDARA HYDRO-POWER PROJECT: In response to a request from MWP to review a project designed in 1970, TAFSU has reviewed and finalized TORs for the Baghdara Hydropower Project. Publication of the required services has been issued and sent by ARDS for consultant firms to undertake the feasibility study, including geological investigations; topographical mapping; hydrological, first-stage environmental and social impact studies; preliminary and feasibility design of dam waterways, power house, transmission facilities, auxiliary structures, cost estimates, and financial and economic analysis. The study estimated costs at US$6 to US$8 million. Requests for bidding information were drafted and sent to MWP for final review. If the dam proves feasible, construction could be completed by 2011.

POWER GENERATION, DISTRIBUTION, AND TRANSMISSION: Technical assistance will be provided to develop implementation capacity within the MWP. The consultants will be from an engineering company fielding 4 specialists to form the core of the Program Implementation Support Unit (PISU) in the ministry, and will provide assistance in four areas: i) project preparation, ii) procurement, iii) supervision, and iv) information technology training. The estimated cost of the proposal is about US$3.0 million. Technical Evaluation of proposals took place in March 2004; two proposals passed the technical evaluation and qualified for the financial evaluation.

REHABILITATION OF THE 100 MW NAGHLU HYDROPOWER PLANT (NHPP): Constructed in 1967 under USSR assistance, 65km east of Kabul, NHPP is the largest plant in Afghanistan, currently producing about 70 MW but production may stop at any time due to facility deterioration and the lack of spare parts. MPW intends to award a contract for its rehabilitation following an international competitive bidding procedure. Technical assistance has been contracted for three months to prepare the bidding documents through a comprehensive assessment of the plant after inspection and possible tests begun April 2004. Ministry of Civil Aviation and Tourism (MCAT)

CIVIL AVIATION INFRASTRUCTURE REHABILITATION AND UPGRADING STUDY: ARTF approved a shortlist of firms for a Civil Aviation Infrastructure Rehabilitation and Upgrading Study to conduct an assessment of short- and long-term development needs for civil aviation in Afghanistan. Request for bidding information is being sent to short-listed firms. The estimated input of the CBU (Capacity Building Unit) consulting team is in the order of 120 man-months, over a period of three years, including two experts/managers on a full-time basis (a team leader and a training manager).

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Ministry of Urban Development and Housing (MUDH)

URBAN PLANNING SERVICES: A request has been received to provide Urban Planning Services through a management consulting firm over a three-year period to: i) identify priority projects, ii) develop projects or hire consultants to do feasibility/design work, and iii) implement capacity building within the ministry. The estimated cost of the proposed TA is US$4.5 million.

2 – National Emergency Employment Program – Phase 1 (NEEP–1)

Amount committed: US$16.62 million Closing date: September 30, 2004 Project Objectives

As part of its targeted social protection for vulnerable groups, the Government has launched a National Emergency Employment Program (NEEP), financed by several donors, to create employment and to repair infrastructure. NEEP-1, part of the Government’s NEEP, will assist the Government in providing social protection and in improving key rural access infrastructure through short-term emergency employment opportunities on labor-based rural access infrastructure restoration/maintenance sub-projects.

This NEEP-1 grant is aimed at providing bridge financing from the ARTF to the Transitional Islamic State of Afghanistan (TISA) for an 18-month period to maintain the momentum and credibility of the two ongoing labor-intensive public works projects, before the supplementary financing under the larger National Emergency Employment Project (NEEPRA US$39.2 million) becomes available.

The two on-going projects are: • the IDA grant-funded Labor Intensive Public Works (LIPW) Roads component of the

Emergency Community Empowerment and Public Works Program (ECEPWP; IDA Grant H009);

• the SIDA-funded project on repairs to the Shamalan Canal Irrigation System.

Approximately 80 percent of this grant is for road sub-projects and 20 percent is for irrigation sub-projects. Provision in this grant also exists to support limited start-up costs for the NEEP’s Joint Program Management Unit (JPMU) aimed at assisting TISA in: (i) developing a national database of contractors; (ii) standardizing tender documentation; (iii) establishing accountable and transparent bid evaluation procedures; and (iv) training in international supervision procedures, hence ensuring that at least 56 national staff from the associated line ministries are trained in these procedures.

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NEEP-1 under ARTF financing is expected to: (i) create a minimum of 3,500,000 unskilled labor-days of employment; (ii) rehabilitate a minimum of 3,000 km of rural roads; and (iii) reclaim or protect a minimum of 15,000 hectares of Shamalan Command Area. The sub-projects underway will generate 1.29 million labor-days, repair nearly 1,700 km of roads; the irrigation sub-projects will generate 0.16 million labor-days. Average labor intensity of all sub-projects is 66 percent. A rapid assessment of the social targeting aspects was undertaken through a social analysis which drew on 66 labor respondents. Most workers under NEEP-1 are able bodied men—some women are working in the central highlands. Labor employed on these projects include IDPs and Kutchis. Further rapid impact assessments are being planned.

Implementation Progress

Satisfactory progress has been made towards attaining the primary objective of maintaining momentum and credibility of the National Emergency Employment Program (NEEP). Fifty percent of the funding available under this grant was disbursed to the implementing partner UNOPS on September 2, 2003 enabling UNOPS to: (i) staff and equip its Kabul and regional offices; (ii) carry out field surveys of sub-projects; (iii) prepare designs and bid documents; (iv) procure construction materials (gabion wire); and (v) program the sub-projects procurement in a timely manner, ensuring appropriate overlap with the on-going labor intensive public works projects. Another fifty percent was committed in a Letter of Credit to UNOPS, leaving the project funds totally committed and/or disbursed. At present, 63 irrigation sub-projects costing US$989,316 (33 percent of this category allocation) are under implementation. Since inputs such as cement and gabion wire were difficult for the communities/Shuras to procure, they have been procured in bulk by UNOPS, and the sub-project contracts with communities/Shuras are being signed based on materials procurement and transport, labor supply, and management only. As far as the roads are concerned, 157 Level-I and 26 Level-II sub-projects, costing US$3,164,545 and US$2,249,811, respectively, are under implementation. The total commitment for road sub-projects is US$5.4 million (59% of this category allocation). Procurement of another 64 road sub-projects is in advanced stages.

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Progress on the secondary objective of ensuring effective functioning of the JPMU is also satisfactory. Timely approval of the grant enabled UNOPS to resource the NEEP JPMU, which is now fully operational under NEEPRA. This has been critical in designing the scaling-up strategy for the NEEP, which is going to assist TISA in the on-going re-costing exercise for ‘securing Afghanistan’s future.’ JPMU and UNOPS have: (i) developed a preliminary national database of roads contractors; (ii) drafted standard tender documentation; and (iii) established accountable and transparent bid evaluation procedures.

3 – Microfinance Project

Amount committed: US$9.7 million Closing date: June 30, 2006 Project Objectives

The ARTF resources are funding a pilot phase which will support delivery of credit and other financial services to the poor, particularly women as part of the Government’s Livelihoods and Social Protection Development Program. Access to financial services is expected to promote investment, meet emergency needs, reduce vulnerability and build assets. Specifically, the project will: (i) provide funds to microfinance institutions (MFIs) for on-lending to the poor; (ii) support capacity-building of MFIs to improve their effectiveness in implementing poverty reduction programs; (iii) assist in building capacity of the Ministry of Rural Rehabilitation and Development to manage and monitor grant funds; and (iv) support setting up of a national wholesale support facility—the Microfinance Investment and Support Facility for Afghanistan (MISFA)—needed to scale-up sustainable microfinance operations in Afghanistan. The project also provides an opportunity to test models of microfinance in Afghanistan including NGO microfinance (both savings and credit groups, and individual lending), community-based savings and credit associations or cooperatives, and microfinance commercial banks.

The Microfinance Project is divided into three components: 1. MICROFINANCE FUND (US$2.5 MILLION): A few (9 to 10) high-potential, qualified

microfinance providers, to be selected through a competitive process in accordance with stringent eligibility criteria, will test models of microfinance in Afghanistan. Potential models include NGO microfinance (including savings and credit groups, and individual lending), community-based savings and credit associations or cooperatives, and microfinance commercial banks. Under this component, organizations that are direct providers of microfinance, and organizations that act as second tier organizations developing retail capacity, are eligible to apply for financing. The grant also supports investments required for expansion of programs, including operational costs.

2. CAPACITY BUILDING OF MF PROVIDERS (US$1.2 MILLION: Microfinance

Institutions (MFIs), as well as NGO MFIs, planning to start microfinance programs, will improve their effectiveness in implementing poverty reduction

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programs through capacity building. This component covers the costs of strengthening the governance structure, developing management information and accounting systems, standardizing monitoring and reporting requirements, managing portfolios, as well as training staff.

3. IMPLEMENTATION SUPPORT AND SET-UP OF MISFA (US$1.3 MILLION): to manage

grant funds, monitor and report on use of funds by NGO MFIs, implementation of Microfinance Investment and Support Facility for Afghanistan (MISFA) will require support through international and local consultants, hiring and training of local staff, goods and equipment, as well as operational assistance.

Based on business plans submitted by short-listed NGO MIFs, the target of reaching

more than 30,000 beneficiaries across the country by end of 2004 has been established. Implementation Progress

Despite the difficult conditions, the funding of NGO MFIs has begun with support having been provided to seven institutions: Bangladesh Rural Advancement Committee (BRAC), Mercy Corps, Foundation for International Community Assistance (FINCA), CARE, Communities, Housing and Finance (CHF), Women for Women (WfW) and World Council of Credit Unions (WCCU). An appropriation is expected for the Aga Khan Development Network (AKDN) institution. The rapid progress achieved by these programs as well as that expected from others in the pipeline has led to increased demand for funding.

Contracts of Mercy Corps, FINCA, and WfW are specifically earmarked for capacity building of MF providers. These institutions are already utilizing funds to develop business plans for credit operations and procuring necessary equipment for strengthening their programs. MISFA has been set up in its own independent premises. In addition,

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Development Alternatives, Inc. (DAI) has been hired to support operationalization of MISFA. DAI is establishing itself as an autonomous legal entity, assisting the Project Director in administration and monitoring funds by NGO MFIs and will be responsible for reporting and assessing impact.

In a short duration, the project has achieved success in moving towards the desired

objectives. Achievements on the ground by partner NGO MFIs have been faster than expected and disbursements to four partner institutions have already been made. An amount of US$2.4 million was disbursed by end March, 2004 and an additional amount of US$2 million is committed to be disbursed shortly. The funds disbursed have reached more than 7,000 beneficiaries. Recoveries so far have been nearly 100 percent. A portion of the funds disbursed are being applied to strengthen capacity of the partner institutions to deliver credit and assist the poor in rural and urban Afghanistan.

Given the institutional set-up and progress made thus far, other donors are actively

pursuing channelling funding for microfinance through MISFA. CGAP and USAID have approved US$1 million and US$5 million, respectively. An additional US$4.7 million was recently approved by CIDA through their ARTF contribution which has been added to the ARTF Microfinance Grant amount.

4 – Emergency Telecommunications Project

Amount committed: US$3 million Closing date: December 31, 2005 Project Objectives The project objectives are to:

• rehabilitate the Ministry of Communication’s (MOC) facilities • improve national and international telecommunications connectivity • improve MOC's ability to collect revenues • accelerate progress toward a competitive private provision of national

telecommunications services. The project consists of the following three components:

1. REHABILITATION OF SATELLITE EARTH STATION IN KABUL (US$1.3 MILLION),

including:

(i) replacing the Satellite dish (ii) upgrading the Earth Station's power supply and equipment.

The MoC urgently needs improvement and expansion of the international satellite gateway for international services—rehabilitation of the Satellite Earth Station in Kabul is the quickest option. Such rehabilitation will eliminate bottlenecks in transmission capacity between Kabul and the outside world. The capacity of this link will also be

16

offered to other service providers to increase usage and, thereby, revenues. The rehabilitation requires replacing the dish, upgrading the power supply and other equipment; the existing infrastructure, such as the motorized base and adjacent building, will continue being used as much as possible.

2. MICROWAVE PROJECT: EXPANSION AND IMPROVEMENT OF TRANSMISSION LINKS

(US$1.4 MILLION). Rehabilitation and expansion of the microwave link to Peshawar to provide

transmission capacity between Kabul, Jalalabad, Nuristan, Kunar, Laghman and Peshawar is urgently required. Telephone network traffic to Afghanistan’s neighboring states provides an important social link to the Afghan refugee community and a commercial tie to trading partners. The MoC has identified an immediate project to reestablish terrestrial networks from Kabul to Pakistan. The reestablishment of this link will provide much needed transmission capacity between Kabul, Jalalabad, Nuristan, Kunar, Laghman and Peshawer. These microwave links will provide immediate voice and data connectivity for the above Provinces and Peshawer, as well as national and international broadcasting traffic.

3. BILLING AND COLLECTION SYSTEM (US$0.3 MILLION): The installation and operation of an efficient billing and collection system for the

digital network covering Kabul and neighboring areas is needed to avoid large revenue losses for the MoC. The expected benefits from project implementation are: (i) increased international telecommunications connectivity allowing for greater, cheaper, international voice data and broadcast traffic into and out of Afghanistan; and (ii) improved sustainability due to a billing system which allows for timely payments and revenue.

Implementation Progress Bidding documents for all components have been completed. The bidding process for Microwave Project and The Rehabilitation of Satellite Earth Station in Kabul is ongoing. The evaluation process for all three components should be completed by June, 2004. There is concern that bids may be higher than anticipated given continued weak security. Based on present estimates, the SDH microwave network will be made up of about seven hops, i.e.: eight sites. Of these, two sites—one in Kabul and one in Lataband—are existing sites while the remaining sites are new.

5 – Repair of Kabul City Major Roads & Drainage System

Amount committed: US$3 million Closing date: June 30, 2006 Project Objectives

The purpose of this project is to improve the transport services on roads within the city through the rehabilitation of high priority road sections. The overall objective is to achieve a relatively fast, effective, and visible contribution to the economic recovery of

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Kabul. Direct beneficiaries during the project life will be employees and laborers taking part in this labor intensive project. After project completion, the direct beneficiaries will be transport entrepreneurs and operators of motor vehicles. Indirect beneficiaries are consumers benefiting from lower transportation costs and pedestrians, as well as road users and households benefiting from improved transport services, road safety, and environment.

As a result of this project, approximately 45,000 tons of additional asphalt will be

produced and used for pothole backfilling. Based on the experience of the ongoing German-funded program, approximately 155 km of asphalt road can be repaired with this additional input of material—the total length depending on the width and condition of the roads, that is the quantity of asphalt required per road sector. Implementation Progress Implementation has started with financing from KfW, which will be reimbursed retroatively to KfW by ARTF once payment procedures have been processed. Progress to date includes: about 15,000 m² of road has been excavated and prepared for repair; 29,921 m² of road has been repaired; and a total of 10.56 tons of asphalt has been utilized.

6 – Improvement of Power Supply to Kabul

Amount committed: US$7.435 million Closing date: June 30, 2006 Project Objectives

The objectives of this grant are to improve the availability and reliability of power supply in Kabul through the rehabilitation of Mahipar Hydropower Station, 110 kV transmission lines, and additional measures for street lighting. The project supplements and extends activities financed under Afghan-German Financial Cooperation and has three components:

• partial rehabilitation of Mahipar Hydropower Station (US$4.41 million) • rehabilitation of 110 kV transmission lines (US$1.14 million) • supply and installation of street lighting in Kabul (US$1.13 million).

The main project activities comprise procurement and supply of materials for and implementation of: a) rehabilitation works in the hydropower station, b) transmission and distribution materials, and c) street lighting. The hydropower stations are the only secure source of power for Kabul. Consequently, the project aims to improve the reliability of this supply by rehabilitating two (out of three) 22 MW units and the corresponding transmission line that have not been maintained during the last 20 years due to a lack of tools, spare parts, and consumables. The project will also co-finance materials for the rehabilitation of the Kabul-Naghlu 110 kV 55 km transmission line. So far, KfW has provided two million euros for this project, and awarded the contract to the firm ABB under a competitive procedure.

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The street lighting component will contribute to improving security in Kabul. The procurement of materials is going to be done under national shopping, and the work will be executed employing local workers. The benefits of the project are concentrated in Kabul. Implementation Progress

The grant was signed on December 10, 2003. As this forms a component of a larger

project financed by the German Government, KfW has made most of the arrangements to support implementation of this portion. Rapid implementation is anticipated.

The rehabilitation project of the Mahipar Hydropower Station will finance the supply

of tools, spare parts, consumables, and the project’s supervision. The supplier will be Voith Siemens Hydro Kraftwerkstechnik (VSHK)—the original equipment manufacturer—and a contract has been signed. The MWP staff supervised by Voith Siemens will develop the works. The capacity to be rehabilitated is 44 MW.

The rehabilitation project of the Sarobi-Kabul 110 kV transmission line has not been initiated. So far, KfW has provided 4.5 million euro for this project, and awarded the contract to ABB under an international competitive bidding process. The materials are going to be purchased as an extension to the existing supply contract for transmission projects.

The supply and installation project of 116 kms of street lighting in Kabul has not yet been initiated. So far, KfW has provided two million euro for this project. The procurement of materials is going to be done under national shopping, and the work will be executed by DECON (a German consulting firm) employing local staff.

7 – Strengthening the Financial Management Capacity of Government

Amount committed: US$5.1 million Closing date: February 28, 2006 Project Objectives Through the services of Counterparts Chief Financial Officers (CCFO), the objectives of this project are to:

• improve the financial management capacities of the Ministry of Finance and selected key line ministries;

• increase donors’ confidence regarding the recipient’s financial capability. The project consists of the following components (Parts), subject to modifications as

the recipient and the administrator agree upon from time to time to achieve the objectives. PART A:BUDGET PREPARATION: The provision of consultants’ services to assist in budget preparation processes including programming activities and preparing budget estimates of wage, non-wage and development expenditures.

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PART B:FINANCIAL MANAGEMENT SYSTEM: The provision of consultants’ services, including procurement and installation by consultants of computers for financial management systems to assist in preparation of systems and methods that allow for a degree of standardization between line ministries. PART C:PUBLIC SECTOR MANAGEMENT CAPACITY BUILDING: The provision of consultants’ services to develop and carry out short in-country training modules covering core financial management disciplines to key staff in selected line ministries.

The CCFOs outputs will include:

• Increased number of staff able to perform financial management functions by ministry and location

• Improved timeliness and accuracy of payments to consultants, suppliers, and contractors

• Improved quality and timeliness of financial reports by selected ministries • Increased financial capacity of line ministries to plan and manage development

programs, thereby developing sustainable capacity to manage reconstruction activities • Improved assistance in the project and program implementation outside of Kabul. • Increased confidence in the transparency of government ministries, and increased

flow of financial information among line ministries, the Ministry of Finance, and other stakeholders.

• Increased financial flows from donors through national financial systems. Implementation Progress

The Ministry of Finance has selected eight line ministries to receive CCFOs under this project. The CCFOs will be provided by Maxwell Stamp, which has been competitively selected. The ministries receiving support from this project are: Ministry of Interior (MOI), Ministry of Health (MOH), Ministry of Foreign Affairs (MOFA), Ministry of Education (MOE), Ministry of Water and Environment (MWE), Ministry of Agriculture (MOA), Ministry of Water and Power (MWP) and Ministry of Public Works (MOPW).

The grant was declared effective on November 19, 2003. Since effectiveness, the management firm, Maxwell Stamp, has begun dispatching experts to Kabul. Pursuant to mobilization of seven CCFOs from December 2003 until today in line ministries, progress in Part A has been made. The CCFOs will now be involved in implementing Parts B and C after announcement and allotment of budgets to the line ministries have been made.

The original grant request was reduced from US$9.1 million to US$5.1 million to

cover the Maxwell Stamp contract. Plans are now underway to increase the number of CCFOs to 18 to cover more ministries, requiring an additional US$5 million above the $5.1 million already allocated.

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8 – UNDP Police

Amount committed: US$16.8 million Closing date: June 30, 2004

This project is a follow-up to a US$4.836 million project executed by UNDP, which closed in May 2003.

Project Objectives

The main purpose of the Law and Order Trust Fund for Afghanistan (LOTFA) is to finance priority police activities. The funds are channeled to the Ministry of Interior through the Ministry of Finance to support the formation of national police forces. Priority activities under LOTFA are: i) the nationwide payment of police staff salaries; ii) acquisition of non-lethal equipment; iii) rehabilitation of department facilities; iv) capacity building; and v) institutional development. In this context, it was agreed among concerned parties (MOI, donors, countries, and the United Nations) that the first priority for LOTFA is the payment of police salaries.

The project is executed by UNDP and the Administrator plays the role of fiscal agent. UNDP is responsible for reporting to the Administrator.

This Finance Investment Project intends to carry out, in connection with the civil

branch of the police, the following: • Payment of salaries and benefits • Provision of uniforms • Provision of non-military vehicles • Provision of computer and two-way communication equipment • Provision of fuel • Payment of operating and maintenance costs associated with vehicles, computers, and

communication equipment. Implementation Progress Related to objectives, main actions in progress are:

POLICE ID CARD SYSTEM: A police ID card system is being developed on a pilot basis, involving the MOI as the ministry responsible for police, MOF, UNAMA, UNDP, the German Police Project, and USAID. Such as system will provide effective monitoring and verification of salary recipients.

COMPUTERIZATION OF THE PAYROLL SYSTEM: An EC expert is advising the MOI on computerization of the payroll system; Switzerland (SDC) has pledged SFr 0.5 million to the MOI for this project.

MANAGEMENT UNIT: To assist the MOI in reporting expenditures and monitoring payments, a Management Unit was established with two national finance officers to be supplemented by international experts/advisors.

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TECHNICAL ADVICE: Germany—the lead LOTFA donor—and UNDP are advising the MOF and the MOI on harmonization of payment procedures. Police salaries, similar to other government departments, should be processed through the Provincial Finance Department, rather than through a separate system, as is currently done.

Police salary payments are critical to the reliability and integrity of the police, law and order, and, ultimately, security. In 2003, through reimbursement to MOF of salary payments, the overall police force (including officers, sergeants, and policemen) were paid in 32 provinces. The funds sourced from the ARTF and transferred to UNDP for use in LOTFA have made a major contribution to operationalizing LOTFA. Factors affecting the payment of police salaries have been identifies as:

• weak budget allotment mechanisms • unreliable modality of payment to provincial levels • lack of reliable payroll systems • absence of banking facilities at the district level.

Achievement of the grant’s objectives will require development of a transparent

system that ensures government oversight of the payment process. This is a long-term process. The concerned Ministries, UNAMA, UNDP and the German Police Project are working through LOTFA to develop an interim process that will permit accountability for payments. The computerization of the payroll system is under way with support from an EC-contributed expert and funding from Switzerland (SDC, SFr 0.5 M). The assessment phase is complete, and an 18-month proposal for an Electronic Payment System has been submitted.

Under the trust fund TF052366, to date total resources received from ARTF by LOTFA is US$16,800,000. Three percent of this covers UNDP administrative support costs, leaving a total of US$16,296,000 as programmable resources.

The objective of funding LOTFA Priority 1: SALARIES was fully met. Actual

transfers from LOTFA to the MOF to date amount to US$44.4 million, transferred by UNDP Treasurer to the designated account of MOF in seven installments. Such transfers have been treated as advances under current NEX procedures. In line with the mandate and areas of engagement outlined in the project document: Support to Law and Order Trust Fund (AFG/02/A20/QX) and the LOTFA Terms of Reference, the immediate priority is the reimbursement of police salaries. The latest consolidated report received from MOF for the period November 22 to December 22, 2003 indicates a total expenditure of US$ 39.64 million.

Reports for the period December 22, 2003 to March 21, 2004 have not yet been received. A total of US$4.76 is considered an advance to the ministry for the year 2004.

Requirement for Priority 2 PROVISION OF NON-LETHAL EQUIPMENT under the SY1382 national development budget was met through the purchase of 1,100 vehicles, spare parts for 3 years, as well as radio communication equipment for the Afghan National Police force.

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TABLE 1 – LOTFA Expenditures to date Expenditures M USD

Salaries/transfers to Ministry of Finance 44.4 Equipment * 5.1

TOTAL 49.5 * Excluding Security of registration Process

TABLE 2 Registration Security

Expenditures M USDVehicles (610) 4.69

Communication Equipment (610) 1.66 Other 0.06

Allowances 0.10 TOTAL 6.51

MONITORING MISSIONS: During the LOTFA donor meeting on July 25, chaired by H. E. Ali Ahmad Jalali, Minister of Interior, it was agreed to increase the number and the quality of verification missions to provinces. The objective will be to observe and verify the payment of salaries to police and to review the existing payroll system/mechanism as well as the facilities (equipment, building, etc.) in the provinces, with the aim of reaching all 32 provinces before the end of December 2003. To date, monitoring has been undertaken in Kabul and 13 provinces. Further monitoring missions are planned to cover 18 additional provinces by June 2004.

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IV – RETURN OF EXPATRIATE AFGHANS

Amount committed: US$5 million Closing date: June 30, 2006 Component Objectives The objective of the Afghan Expatriate and Training Component is:

• to enhance the contribution of expatriate professional Afghans living abroad in reconstruction efforts by enhancing policy and institutional capacities within the public sector;

• to fill skill gaps in areas such as IT, engineering, and teaching with well-trained overseas Afghans;

• to provide Afghans in the country with opportunities for structured on-the-job training and enhance their technical skills. This component will contribute to Afghanistan’s reconstruction efforts by placing

Afghan-expatriate professionals with development experience in ministries and non-governmental sectors which are experiencing critical skill gaps. The component will also contribute to the capacity building of Afghan national counterparts through structured on-the-job training. Related issues to implementation of this component include setting appropriate compensation levels—those that are attractive enough to recruit Afghan overseas, but aligned with local circumstances to minimize friction among existing civil servants—and to ensure the establishment and adherence to transparent and clear guidelines. Implementation Progress

After some delay, progress has been made in launching this component of the ARTF.

A Coordination Committee (CC) has been established to provide program guidance, including areas of priority placement, selection procedures, and approximate compensation packages. The CC is chaired by the Afghanistan Reform and Civil Service Commission (ARCSC).

The following principles have been agreed:

• The CC will provide oversight, confirm procedures for recruitment, placement,

compensation structure, and other rules and regulations in consultation with the ARTF management committee;

• The placement of expatriate Afghan experts will be in areas endorsed by Transitional Islamic State of Afghanistan (TISA);

• Experts will be recruited for at least 12 months for senior-level positions and 6-12 months for technical positions;

• Clear and merit-based recruitment, monitoring, and evaluation procedures and an equitable structure of compensation in line with relevant principles embodied in a code of conduct are to be established;

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• Specific Terms of Reference (TOR) will be required for each assignment, which would include a training component for counterpart capacity building;

• Placements for high-level policy experts will be at a senior advisory level and TOR would include the provision of training on planning, technical, managerial, and/or institutional skills;

• Placement of technical positions will also include a training component for the counterpart on technical skills;

• The line ministries will assign suitable Afghan experts to work as a team with the recruited expatriate Afghan experts. Monitoring of experts will be conducted by the ministry with support provided by the contractor (see below);

• Funds will be made available for relevant training of national counterparts; and • A contractor will be selected to provide services for program administration,

including establishing and maintaining a roster database, advertisement of consultants TOR, short-listing of candidates, contract negotiations, logistical arrangements, financial management, and program monitoring.

The CC has been established, and the principles and framework of the operation have

been decided. Description of the required program administration contractor has been advertised through UNDP Development Business, Development Gateway, and the local press in Afghanistan. At least 30 senior-level Afghan expatriates will be recruited through the contractor to contribute to policy reform and institutional development of TISA, and at least 50 technical-level Afghan expatriates will be recruited to fill skill gaps in critical areas and to train Afghan national counterparts.

Technical and Financial Proposals were received on March 22, 2004.

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V – INVESTMENT PROJECTS UNDER PREPARATION

1 – National Solidarity Program (NSP)

In December 2003, the World Bank Board approved an International Development Association (IDA) project in the amount of US$95 million to finance Afghanistan’s National Solidarity Program—a program aimed at strengthening communities through block grants. In addition to the IDA financing, the ARTF Management Committee has approved an additional $45 million co-financing by ARTF, funded by several donors. The ARTF-funded NSP will become effective within the next month. Project Development Objectives and Key Indicators The project objectives are to strengthen community-level governance, and to support community-managed reconstruction and development sub-projects to improve access of rural communities to social and productive infrastructure and services. The outcomes will be: (i) the establishment of a framework for village-level consultative decision making and representative local leadership as a basis for interaction within and between communities on the one hand, and with the administration and aid agencies on the other, and (ii) local level reconstruction, development, and capacity building which will lead to a decrease in poverty levels. Beneficiaries of the NSP are expected to be the rural poor and near-poor. Experience in other countries suggests that approximately 60–70 percent of program funds return to local labor, and nearly all of the benefits from the physical works accrue to primary producers. The co-financing by ARTF will finance formation of CDCs and block grants for 560 targeted communities. The indicators for strengthening community-level governance are the establishment of :

• more than 450 CDCs (80% of the targeted 560 villages), and • more than 180 CDCs (40% of the established CDCs) with representation of

women either in the CDC or in councils or committees. The key indicator for improved access to social and productive infrastructure and services is more than 300 funded community projects completed or under implementation (in specific districts, the annual implementation planning of most Facilitating Partners comprise community mobilization and sub-project preparation over a four month period for three successive batches of villages. Consequently, communities in the third facilitation batch will have sub-project proposals prepared and appraised by the end of the implementation year, but sub-project implementation and disbursements of block grants will only begin in the following year). Project Components

The project is comprised of four components:

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BLOCK GRANTS FOR COMMUNITIES: To plan and implement sub-projects involving reconstruction and development activities identified through a participatory process at the community level, grants will be available for activities that focus on community infrastructure (public goods), human capital development, savings and credit schemes for women and disabled, and asset transfers for women and disabled. The choice of eligible sub-projects is subject to a short list of prohibited investments. COMMUNITY FACILITATION AND SUB-PROJECT PREPARATION: Facilitating Partners (Afghan and International NGOs, plus UN-Habitat) will support local communities through:

• establishment of inclusive Community Development Councils through secret ballot elections,

• identification of local development needs and priorities for a medium-term community investment plan (Community Development Plan);

• assistance for preparing sub-project proposals that address priority needs for appraisal by MRRD; and

• assistance in carrying out sub-projects for which block grants have been made available.

CAPACITY BUILDING AND IMPLEMENTATION SUPPORT: Consultant services for capacity building and implementation support to MRRD by the NSP Oversight Consultant will be made available. This component will fund incremental operating costs for MRRD, which, with the capacity building provided by the NSP Oversight Consultant, will augment MRRD’s human and physical capacity to supervise and implement the project. Facilitating Partners will provide services to strengthen the capacity of local communities to undertake project planning, financial record keeping, and operation and maintenance of community assets. EXTERNAL MONITORING AND EVALUATION: Monitoring and evaluation will include verification of reported implementation status, assessment of project objectives and outcomes, and research on program policy and implementation.

2 – Other Requests for ARTF Funding

The next two ARTF funded projects to be considered by the ARTF Management Committee for approval are:

THE AFGHANISTAN STABILIZATION PROGRAM: This program’s objective is to improve government presence in the provinces and contribute to peace and stability by:

(i) providing a provincial stabilization fund to finance small rehabilitation projects in provinces;

(ii) finance communications equipment for better connectivity between provinces and the central government;

(iii) provide training and technical assistance to civil servants based in the provinces and

(iv) finance rehabilitation of government buildings in 150 districts during a first phase, followed by 199 districts during a follow-up phase.

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ARTF would finance component (iv) through the existing recurrent window. This

method would use government channels instead of “projectizing” assistance, enhance government capacity to implement rehabilitation and allow assistance to flow where donors and their contractors cannot reach due to security concerns. A specific project code in the Treasury Department’s chart of accounts would monitor the flow of funds specifically targeted for this project. Several donors have expressed interest in funding this component through ARTF, which is seeking initial contributions of $20 million to finance the first phase of the project.

THE LATERAL ENTRY PROGRAM would finance key line positions in central and provincial administrations. Candidates would be drawn from a pool of qualified Afghans— either expatriate or currently living in Afghanistan but working for the international aid community. These line positions would receive salaries comparable to those offered by the international aid community to local Afghans, under special contractual arrangements where government would grant an interim official status. Positions under this project would gradually be merged with new civil service positions at higher salaries created under the the Priority Reform and Restructuring (PRR) Program. The Lateral Entry Program is expected to cost about US$100 million over the next four years. A more detailed pipeline of projects is presented in Annex 2.

SCALING UP OF EXISTING ARTF PROJECTS such as Microfinance and Technical Assistance and Feasibility Studies have also been requested by the Government.

Details of the pipeline of ARTF requests is available in Annex 2, including scaling up

of existing projects and new projects, either free standing or for co-financing.

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VI – ANNEXES

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ANNEX 1 ARTF FINANCIAL TABLES AS OF MARCH 19, 2004

TABLE 1 - COMMITMENTS, DISBURSEMENTS, AND FUND AVAILABILITY (US$ Million)

Item SY1381 SY1382 SY1381-2 Total Current month Available Year End Total Disbursed Disbursed

as of 02/19/2004 02/20 to 03/19 (a) (b) (c) = (a) + (b) (d) (e) (c) - (d) - (e)A. PAID IN DONOR CONTRIBUTIONS $184.787 $286.463 $471.250

Investment Income Minus IDA Fees -$0.548 -$2.051 -$2.599 Net Donor Contributions [1] $184.239 $284.412 $468.651

B. COMMITMENTS TF050577 - Recurrent Costs and Afghan Expatriates [2]

Recurrent & Capital Costs Component [2a] * Wages $40.953 $180.000 $220.953 $161.769 $24.954 $34.231O&M $13.655 $70.000 $83.655 $52.588 $12.231 $18.836Bulk Contracts $1.067 $30.000 $31.067 $13.096 $1.062 $16.909Debt Sevice, IDA $2.770 $4.000 $6.770 $6.640 $0.000 $0.130Debt Service, IMF $0.767 $0.250 $1.017 $0.767 $0.000 $0.250Debt Service, ADB $0.000 $1.538 $1.538 $0.557 $0.000 $0.981

Subtotal [2a] $59.212 $285.788 $345.000 $235.418 $38.246 $71.336 Afghan Expatriates Component [2b] $5.000 $0.000 $5.000 0.000 0.000 $5.000

Subtotal TF050577 [2] $64.212 $285.788 $350.000 $235.418 $38.246 $76.336

TF050578 - Monitoring Agent [3] $2.244 $3.150 $5.394 $2.075 $0.000 $3.319

Closed Investment Projects [4] TF050855 - UNDP Police Pr. 1 & 2 $4.836 $0.000 $4.836 $4.836 0.000 $0.000

Subtotal Closed Investment Projects [4] $4.836 $0.000 $4.836 $4.836 $0.000 $0.000

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Item SY1381 SY1382 SY1381-2 Total Current month Available Year End Total Disbursed Disbursed

as of 02/19/2004 02/20 to 03/19 (a) (b) (c) = (a) + (b) (d) (e) (c) - (d) - (e)

Current Investment Projects [5] TF052366 - UNDP Police 3 $0.000 $16.800 $16.800 $16.800 $0.000 $0.000TF050973 - NEEP $25.420 -$8.800 $16.620 $8.310 $8.310 $0.000TF050970 - Feasibility Studies Facility $8.000 $6.000 $14.000 $1.723 $0.000 $12.277TF052081 - Microfinance $1.000 $0.000 $1.000 $0.258 $0.000 $0.742TF052452 - Microfinance 2 $0.000 $8.700 $8.700 $2.002 $0.000 $6.698TF052482 - Kabul Roads $0.000 $3.000 $3.000 $0.000 $0.000 $3.000TF052475 - Telecom & Microwave Link $0.300 $2.700 $3.000 $0.000 $0.000 $3.000TF052541 - Kabul Power Supply $0.000 $7.435 $7.435 $0.000 $0.000 $7.435TF052735 - CFO Project $0.000 $5.100 $5.100 $1.146 $0.000 $3.954

Subtotal Current Investment Projects [5] $34.720 $40.935 $75.655 $30.239 $8.310 $37.106

C. TOTAL COMMITMENTS & DISBURSEMENTS [2+3+4+5] $106.012 $329.874 $435.886 $272.569 $46.556 $116.761 D. CASH AVAILABLE FOR NEW COMMITMENTS $32.765

D.1: Untargeted Funds $16.065 D.2: Expressed Donor Preferences (**) $16.700

* Commitments for Recurrent & Capital Costs are based on Government estimates and prior disbursements ** See Table 3 for detailed donor preferences

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TABLE 2 - ACTUAL AND EXPECTED DONOR CONTRIBUTIONS As of March 19, 2004

Paid-In, Committed, Pledged US$ Million

SY 1381 SY 1382 SY 1383 (*) Donor

Total

Paid-In Total

Paid-In Committed

(Signed) Pledged

(Unsigned)Total

Expected

SY1381-3

Total Expected

Australia $0.000 $2.635 $0.000 $0.000 $0.000 $2.635Bahrain $0.000 $0.504 $0.000 $0.000 $0.000 $0.504Canada $11.998 $50.093 $0.000 $5.548 $5.548 $67.639Denmark $5.000 $5.000 $0.000 $0.000 $0.000 $10.000EC $15.871 $52.686 $0.000 $55.058 $55.058$123.614Finland $2.792 $2.454 $0.000 $0.000 $0.000 $5.246Germany $10.068 $11.443 $0.000 $0.000 $0.000 $21.511India $0.200 $0.200 $0.000 $0.000 $0.000 $0.400Iran $0.000 $0.989 $0.000 $0.000 $0.000 $0.989Ireland $1.000 $1.733 $0.000 $1.835 $1.835 $4.568Italy $17.000 $0.000 $0.000 $0.000 $0.000 $17.000Japan MoF $2.500 $0.000 $0.000 $0.000 $0.000 $2.500Japan MoFA $2.500 $0.000 $0.000 $0.000 $0.000 $2.500Korea $2.000 $2.000 $0.000 $0.000 $0.000 $4.000Kuwait $5.000 $5.000 $0.000 $0.000 $0.000 $10.000Luxembourg $1.020 $0.000 $0.000 $0.000 $0.000 $1.020Netherlands $33.667 $41.151 $0.000 $0.000 $0.000 $74.818Norway NORAD $6.818 $27.630 $0.000 $0.000 $0.000 $34.448Norway MOFA $0.000 $2.000 $0.000 $0.000 $0.000 $2.000Portugal $0.000 $0.457 $0.000 $0.000 $0.000 $0.457Saudi Arabia $10.000 $5.000 $0.000 $0.000 $0.000 $15.000Sweden $3.103 $5.982 $0.000 $0.000 $0.000 $9.085Switzerland $0.673 $0.000 $0.000 $0.000 $0.000 $0.673Turkey $0.500 $0.000 $0.000 $0.000 $0.000 $0.500UK $15.079 $47.096 $19.826 $81.108 $100.934$163.109USA $38.000 $20.000 $76.491 $0.000 $76.491$134.491UNDP $0.000 $2.411 $0.000 $0.000 $0.000 $2.411

TOTAL $184.787 $286.463 $96.318 $143.549 $239.867$711.117(*) Includes monies pledged in 1382 not yet credited to ARTF

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TABLE 3: EXPRESSED DONOR PREFERENCES (million) As of March 19, 2004

Program or Project Donor

Donor National Solidarity Program Microfinance Total Own Currency Est. US$ Equiv. US$ paid in Own Currency Est. US$ Equiv. US$ paid in Australia Bahrain Canada 14.000 $10.985 13.350 $5.548 $4.708 $21.241Denmark EC 15.000 $18.353 $18.353Finland Germany India Iran Ireland Italy Japan MoF Japan MoFA Korea Kuwait Luxembourg Netherlands Norway NORAD Norway MOFA Portugal Saudi Arabia Sweden Switzerland Turkey UK 3.000 $5.723 1.000 $1.802 $7.525USA 10.000 $10.000 $10.000UNDP

TOTAL $28.353 $16.707 $7.351 $4.708 $57.119

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ANNEX 2 ANTICIPATED FINANCING REQUIREMENTS OF ARTF FOR SY1383-84

Proposed Investment Program for ARTF, as of March 19, 2004 A – Background

The Government is committed to use ARTF funding as it simplifies management and oversight of donor resources by coordinating financial assistance. The Government will accordingly be advising donors that it will request additional funding for ARTF in the coming months to meet its priority investment requirements. ARTF is a preferred modality for financing investment projects because it entrenches good management practices within line ministries. These good management practices include the requirement to prepare projects to international standards and to meet international standards for procurement and financial management. ARTF financing reduces the number of project accounts to be managed and streamlines the financial reporting and audit requirements. The management committee of the ARTF must approve the projects, and the World Bank provides fiduciary oversight. B- National Priority Programmes

B.1 – Principles of National Programmes All national programs should adhere to a set of principles addressing the following:

• Each national program will have a steering committee consisting of a number of ministers to ensure broad ownership and continuity, where policy decisions should be taken, and oversight of the program be maintained.

• There should be a clear locus of executive decision making: one entity should be responsible for implementation, and professional managers and management teams should be recruited to manage the programs. Program design will build in mechanisms to ensure that the capacity to manage the programs is created.

• Each national program should report regularly, at least on a monthly basis, to Cabinet, its steering committee and the public on the progress, according to an agreed upon set of measures.

• Each national program should be established with a long term policy perspective (5 years unless there are good reasons for it to be shorter) but have a rolling, annual set of objectives which are realistic (eg four or five).

• Mechanisms of accountability and transparency, including procurement, reporting and financial management, will be adhered to for each national program.

• Each national program should be designed with the principle of social equity fully in mind.

• The principles apply all existing and new National Programmes and these programmes can be revised on the basis of need.

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B.2 – Existing National Programmes The portfolio of existing National Priority Programmes shall continue. These are comprised of the following: National Transport Program

• Ring road, secondary roads, farm to market roads, airport and rail network. Afghanistan Stabilization Program

• Government buildings, communications, capacity building at provincial and district level, provincial funds.

National Emergency Employment Program

• Emergency employment in every province for road building, irrigation and other projects.

National Solidarity Program

• Block grants to communities for their priority projects. • Improving governance structures through participatory processes at the village

level. National Irrigation and Power Program

• Small, medium and large scale irrigation works. • Dual purpose dams. • Alternative energy supply. • Generation and transmission.

Feasibility Studies Facility

• Preparation of feasibility studies as prerequisite for implementation of large scale programs and projects.

B.3 – New National Programmes The portfolio of National Priority Programmes will be expanded to address identified national needs, as follows: National Agriculture Program

• Land titling. • Alternative livelihoods. • Forestry. • Animal husbandry. • Environmental standards.

National Skills Development Program

• Provision of management and vocational training, including information technology, across the country.

• Lateral entry to key government positions on a transparent basis • Literacy training. • Upgrading of Higher Education vocational training facilities.

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• Skills Development for the disabled and widows. National Accountability and Rule of Law Program

• Capacity building in accounting and auditing. • Anti corruption initiatives. • Strengthening rule of law. • Legislative agenda.

National Private Sector Development Program

• Industrial parks. • Private sector enabling legislation. • Micro-finance and credit for medium sized businesses. • Addressing the removal of other constraints to the legitimate private sector.

National Urban Program

• Urban land titling. • Emergency infrastructure. • Water and sanitation. • Site and services for returnees. • Environmentally friendly urban transport.

National Vulnerability Program

• Reducing poverty and vulnerability of the ultra – poor and excluded, addressing the needs of five groups particularly – single-headed households (including widows), internally displaced, street children, disabled and kuchis.

NB While Education and Health are also government priorities, these programs are already fully embedded in their own ministries and funded largely through the recurrent budget so are not included separately as programs. Financing Mechanisms Each program could be submitted through ARTF to allow donor contributions to programs and/or each new program could be allocated $10m from government resources to ensure timely start up. C – Proposed pipeline of projects

Projects are submitted to ARTF in advance of receiving adequate financial commitments from donors, because the Government is committed to fast-tracking implementation of the 1383 budget. Discussions with donors have shown interest in channeling resources through ARTF, particularly since the Administrator has put forth a method for donors to express a preference for specific investment programs or projects. Without ARTF, the Government would have to resort to loan financing to meet its priority development needs and to provide basic social services to the Afghan public.

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The total allocated to date to the priority projects to be submitted to ARTF is $533 million. This will require additional financing commitments this fiscal year to ARTF of at least $274 million to date (more projects will be added to the pipeline during the course of 1383), and significant additional resources for next fiscal year (1384).

All projects included below are authorized for submission to ARTF. Lead ministries are responsible for submitting project concept notes in the required ARTF format through MoF to the Management Committee of ARTF for approval. It is suggested that they liaise with the Development Budget Unit for advice on completing the forms, and can request advice from the World Bank and/or the Design and Feasibility Studies Unit if they require additional technical assistance to complete the preparation.

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Table 1

Requests for financing through ARTF as of March 19, 2004

Overall Project Cost (US$ million)

Funding Requirement

for SY 1383 (US$ million)

Project/ Short Description

National Priority Program

Mode of Financing

Total ARTF Financing

Total ARTF Financing

I - Active Projects requiring supplemental financing

Technical Assistance and Feasibility Studies Project (TAFS)

Feasibility Studies Facility ARTF $30 $30 $16 $16

Microfinance National Private Sector Development Program

Bilateral donors and ARTF $180 $75 $15 $15

IDA financed Emergency Infrastructure Reconstruction Project: additional goods and works for currently (i) Provincial Towns WSS and (ii) Kabul sanitation

National Urban Program IDA and ARTF $53 $20 $20 $20

IDA Financed Emergency Transport Rehabilitation Project (a) Rehabilitation of the Talaqan-Faizabad Road (120 km) (b) Kabul Airport(Demining, Taxiways, Power supply)

National Transport Program IDA and ARTF $168 $60 $105 $60

Emergency Irrigation Rehabilitation Project (a) Rehabilitation of small irrigation schemes (b) Rehabilitation of medium irrigation schemes (c) Preparation of Feasibility Studies (d) Monitoring and Evaluation

National Irrigation and Power Program IDA and ARTF $75 $35 $50 $35

II - Projects under preparation requiring financing from ARTF Afghanistan Stabilization Program (ASP) – Government Buildings Component.

Afghanistan Stabilization Program

Bilateral donors and ARTF $50 $20 $20 $20

Combined Cycle Conversion of Kabul NW Thermal Power Plant

National Irrigation and Power Program ARTF $18 $18 $18 $18

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Overall Project Cost (US$ million)

Funding Requirement

for SY 1383 (US$ million)

Project/ Short Description

National Priority Program

Mode of Financing

Total ARTF Financing

Total ARTF Financing

Education Quality Improvement Program (EQUIP) (a) School Grants for Quality Enhancement and Infrastructure Development\ (b) Human resource development and capacity building of Provincial and District Education Departments

National Skills Development Program

IDA and ARTF $35 $15 $25 $15

Emergency Power Rehabilitation Project (a) Rehabilitation of 100 MW Naghlu hydropower plant (b) Rehabilitation and Expansion of distribution networks in ten provincial cities (Co-financing for this component can be broken down into lots of $10 million or more and donors could specify preference for one or more of the ten cities included in the project if they so choose).

National Irrigation and Power Program IDA and ARTF $220 $115 $75 $40

Kabul Urban Reconstruction Project (a) Structure Planning for Kabul (b) Repairs to major roads and drains

National Urban Program IDA and ARTF $47 $25 $30 $25

Co-financing medium-term and country-wide IDA-financed UWSS project, for implementation in 2005/6-2008/9, cost currently estimated at $150m. Project would also finance Kabul water supply extension with KfW.

National Urban Program IDA and ARTF $150 $120 $10 $10

Total: $1,026 $533 $384 $274

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ANNEX 3: FIDUCIARY STANDARDS

3.1 Suggested Fiduciary Standards for Reimbursement of Wage Expenditure There are three likely areas of fiduciary concern: 1. Payrolls should be within budget allotments - i.e. there is prima facie approval for the

expenditure 2. The staff concerned are, again prima facie, legitimate public sector employees 3. Audit does not reveal any improper practices. This would give a total of 5 standards that can be applied with effect from the third quarter of the Afghan fiscal year, rising to a possible 7 at a later point. The second phase could be timed to commence 6 months after the launch of phase 1. Phase 1 Phase 2 Payrolls within budget allotments 1 Payrolls are reimbursable only for Ministries that

have submitted proposed employment limits for SY1382, by HQ and province.

Same as phase 1- PWC will confirm with MOF which Departments/Ministries have submitted employment limits

2 Payrolls are reimbursable only for Ministries that have submitted proposed employment limits for SY1382, by HQ and province.

Same as phase 1- PWC will confirm with MOF which Departments/Ministries have submitted employment limits

3 Payrolls are reimbursable only for Ministries that have submitted proposed employment limits for SY1382, by HQ and province.

Same as phase 1- PWC will confirm with MOF which Departments/Ministries have submitted employment limits

4 Payrolls submitted later than three months after the end of the relevant pay period for central ministries and four months for provinces are not reimbursable. Provided, however, that provincial payrolls may still be reimbursed after four months if at least 80 % of the provinces have met the four month deadline. Standard applied starting in September for Kabul, with greater flexibility for provinces. Three month is a binding constraint for the submission of payrolls by Kabul Ministries. Greater flexibility applied to the provinces. These constraints will apply to reimbursement beginning in September. Payroll submitted over 3 month in arrears will not be reimbursed.

Standard strengthened Payrolls submitted later than two months after the end of the relevant pay period for central ministries and three months for provinces are not reimbursable.

5 Payrolls submitted with no allotted funds available are not reimbursable.

Same as phase 1

6 Payrolls that would take the total staff paid in a given month beyond the Central Ministries' SY1382 budget caps are not reimbursable. ARTF will reimburse payrolls up to the budget cap.

Phase one standards also applied to provincial caps.

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Phase 1 Phase 2 PWC will use the ASI employment database to determine adherence to these standards.

Legitimate public sector employment 7 Reimbursement of payrolls is limited to 110%

of the 3 month average of the numbers paid for that ministry/province - unless additional documentation, acceptable to the ARCSC, is provided showing justification for new hiring. (Data are available from the Adam Smith Institute "accounting entry module" reports.).

This calculation will be based on the average of the past three month, not including the month under consideration.

8 For the payroll module pilot ministries (and others as the payroll module gets rolled out), no reimbursement for any staff whose name was not previously on the list unless there is a legitimate change report provided.

Audit 9 Payrolls from units for which the

Auditor General has undertaken an audit and found improper hiring, incomplete time and attendance records, or evidence that employees did not receive the amounts due them (beyond a minimum tolerance threshold as determined by the Auditor General), are not reimbursable for 3 months following the audit.

3.2 Suggested Fiduciary Standards for Operations and Maintenance (O&M) There are three likely areas of fiduciary concern:

1. O&M expenditures should be within budget allotments - i.e. there is prima facie approval for the expenditure

2. Spending is efficient – i.e. appropriate procurement practices are followed 3. Audit does not reveal any improper practices

This would translate in a total of 4 standards that can be applied with effect from the third quarter of the Afghan fiscal year, rising to a possible 5 at a later point. The second phase could be timed to commence 6 months after the launch of phase 1. Phase 1 Phase 2 O&M Expenditures Within Budget Allotments 1 O&M expenditure is reimbursed only for

Ministries that have submitted budget allocations for SY1382, by HQ and province.

Same a phase 1

2 O&M expenditures with no allotted funds available are not reimbursable.

Same as phase 1

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Phase 1 Phase 2 3 O&M expenditure is reimbursed only if

documented satisfactorily in less than three months, for central ministries and six months for provinces.

standard strengthened O&M expenditures that are documented in more than two months for central ministries and four months for provinces are not reimbursable. ARTF cannot reimburse advances made to the provinces for O&M expenditures. This would make it difficult for ARTF to reimburse expenditures from the provinces since the FB system records the payment of the advance, rather than the actual expenditure. The WB will try to find a way to include expenditures on the SOE. All efforts will be made to ensure that no obstacle to provinces spending their non salary allotments.

Appropriate Procurement Practices Followed (*) 4 O&M expenditures not in accordance with the

issued procurement instructions are not eligible for reimbursement.

This standard is valid for capital expenditures made under the ordinary budget as well. Procurement must be in line with the World Bank guidelines. For purchases over $250,000 local guide lines can be used. AG should be encouraged to issue to ministries and provinces guidelines for purchases that require Bank Standards be followed. PWC will discuss with MoF

Audits 5 O&M from units for which the Auditor

General has undertaken an audit and found improper use of funds (e.g. evidence that materials were not received, etc.) beyond a minimum tolerance level are not reimbursable for 3 months following the audit.

(*) The Ministry of Finance needs to issue clear and comprehensive instructions and arrange for training on procedures and procurement practices to be followed when making O&M expenditures. Since for reimbursement from the ARTF, certain procurement practices need to be followed and documentation of expenditures provided, spending units need to understand these requirements.

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ANNEX 4: NOTE ON DONOR COFINANCING OF INVESTMENT PROJECTS OR PROGRAMS THROUGH ARTF

1. ARTF is one of the main instruments available to the Government of Afghanistan to finance key recurrent expenditures (salaries, capital expenditures, operations and maintenance of key government institutions), as well as finance urgent investments and reconstruction activities planned in the country’s economic recovery program. 2. The ARTF can either finance free-standing projects or co-finance IDA or other Donor funded projects. To minimize transaction costs on all development partners involved and more specifically to, inter alia, avoid a complexity of trust fund agreements, reporting and monitoring, the Government and the World Bank Country Team prefer ARTF to be the sole trust fund for all TF funded activities. 3. Into the second year of ARTF operation, the Government is accelerating its process and deepening dialogue with Donors, and Donors currently stand ready to support specific IDA financed projects under preparation or implementation, such as the Emergency National Solidarity Program or Microfinance Project. This is to explore possible ways to maximize the volume and the timeliness of such Donor financing, some of which are blocked due to Donor eligibility restrictions on either expenditure type and/or sectors/sub-sectors. 4. Under the World Bank trust fund policy, no earmarking of Donor contributions is allowed for Bank-administered multidonor trust funds. This is to enable the Bank, as fund administrator, to manage the fund flexibly and optimally in order to maximize the fund’s impact in achieving its objectives. Furthermore, the Bank’s accounting systems do not allow for the tracking of incoming contributions to the main Multi-donor Trust Fund to a specific project/activity. In addition, geographic preferences, such as financing activities in specific provinces, cannot be considered as it would be deemed an interference in the national politics of the country. 5. The Afghanistan Country Team therefore proposes the following in order to facilitate mobilization of additional Donor commitments and ARTF disbursements to priority operations:

• Donors would only be allowed to express a preference for their additional contributions over and above their otherwise expected level of contribution to ARTF.

• Donors who express a preference could do so for up to 50 percent of their total contribution in a given Afghan Fiscal Year (Solar Year - SY).

• The preference is expressed for a priority program or project included in the Government multi-year development budget, and for which the Government has requested ARTF funding.

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• The project has been appraised by the Bank and deemed eligible under ARTF funding.

• The amount expressed in the preference is less than the estimated total program/project cost, and there is a funding gap at the time of the expression of preference.

• Preference would normally be expressed for projects or programs which are scalable in nature and do not require full funding to precede implementation Where the project is very large and is not scalable, preference would be accepted as part of a complete financing plan.

• If the project is scaled back or cancelled, the Bank will discuss with the Donor the disposition of unused funds and whether the Donor wishes to express another new preference according to the above guidelines.

• In a non-legally binding side letter to the Agreement, the Bank will communicate its confidence that ARTF will fund the designated program up to the amount expressed by the donor.

6. For defined projects funded from Donor preferences, the Bank and Government may agree to recognize the direct contribution of the Donor(s) in the ARTF. This recognition will be done as a supplement to the principal recognition of the ARTF, listing all the contributing Donors and the Bank as administrator.