country assistance program evaluation for afghanistan

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EvaluationIndependent

Country AssistanceProgram Evaluation Islamic Republic of

Afghanistan


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Reference Number: CAP:AFG 2012-13Independent Evaluation: CE-28

Country Assistance Program Evaluation

October 2012

Islamic Republic of Afghanistan


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NOTES

(i) In this report, "$" refers to US dollars.(ii) For an explanation of rating descriptions used in evaluation reports of

the Asian Development Bank, see ADB. 2010. Revised Guidelines for thePreparation of Country Assistance Program Evaluations. Manila.

Director General V. Thomas, Independent Evaluation Department (IED)Director H. Hettige, Independent Evaluation Division 2, IED

Team leader T. Yokota, Senior Evaluation Specialist, IEDTeam members A. Brubaker, Evaluation Specialist, IED

K. Hewitt, Evaluation Specialist, IEDR. Vasudevan, Evaluation Specialist, IEDJ. Dimayuga, Senior Evaluation Officer, IEDA. Morales, Evaluation Officer, IEDO. Nuestro, Evaluation Officer, IEDE. Li-Mancenido, Associate Evaluation Analyst, IED

The guidelines formally adopted by the Independent Evaluation Department on

avoiding conflict of interest in its independent evaluations were observed in thepreparation of this report. To the knowledge of the management of IndependentEvaluation Department, there were no conflicts of interest of the persons preparing,reviewing, or approving this report.

In preparing any evaluation report, or by making any designation of or reference to aparticular territory or geographic area in this document, the Independent EvaluationDepartment does not intend to make any judgments as to the legal or other status ofany territory or area.


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Abbreviations

ADB Asian Development BankADF Asian Development FundAITF Afghanistan Infrastructure Trust FundANDS Afghanistan National Development Strategy

ANR agriculture and natural resourcesARTF Afghanistan Reconstruction Trust FundCAPE country assistance program evaluationCAREC Central Asia Regional Economic CooperationCPS country partnership strategyCSO Central Statistics OrganizationCSP country strategy and programDABM Da Afghanistan Breshna Moassassa

DABS

Da Afghanistan Breshna SherkatDFID Department for International Development of the United

KingdomDMF design and monitoring frameworkEIRR economic internal rate of returnFMPARP Fiscal Management and Public Administration Reform ProgramGDP gross domestic productIED Independent Evaluation DepartmentIMF International Monetary FundJFPR Japan Fund for Poverty Reduction

km kilometerLARP land acquisition and resettlement plan

m meterMDG Millennium Development GoalMEW Ministry of Energy and WaterMFF multitranche financing facilityMOF Ministry of FinanceMPW Ministry of Public WorksNGO nongovernment organizationNPP national priority program

O&M operation and maintenancePBA performance-based allocationPCR project completion reportPIU project implementation unitPSFMDP Private Sector and Financial Market Development Program

PSM

public sector managementRRP report and recommendation of the PresidentTA technical assistanceTCR technical assistance completion reportUN United Nations

UNDP United Nations Development ProgrammeUS United StatesUSAID United States Agency for International Development


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Contents

Preface vAcknowledgments viiExecutive Summary ixManagement Response xviiDevelopment Effectiveness Committee: Chairs Summary xxi

Maps xxiii

Chapter 1: Introduction 1A. Objectives 1B. Scope and Approach 1

Chapter 2: Country Context 4

A. Background 4B. Economic and Social Development Since 2001 5C. New Challenges in the Post-Transition Period 11

Chapter 3: Country Strategies and Program 14A. Government Strategy 14B. ADBs Country Strategies and Program 15C. ADB Portfolio 16D. Allocation of Funding from the Asian Development Fund 18E. Afghanistan Infrastructure Trust Fund 20

Chapter 4: Design and Implementation of the Strategies and Program 22A. ADBs Role in the Extensive Foreign Support 22

B. A Decade of Operating in a Conflict-Affected Situation 32C. Effects of Security Concerns and Inadequate Implementation Support 37

Chapter 5: Support for Capacity Development 42A. Public Sector Managemet 42B. Private Sector Development and Financial Sector 44

Chapter 6: Results and Sustainability 46A. Three Infrastructure Sectors 46B. Private Sector Development and Financial Sector 50C. Capacity Development for Public Sector Management 50D. Impacts 52E. Sustainability 54

Chapter 7: Assessment 56A. Assessment by Evaluation Criteria 56B. Overall Rating 60

Chapter 8: Challenges, Lessons, and Recommendations 63

A. Security and the Kabul Process 63B. Making Development Demand-Driven 64C. Sustainability 65


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D. Capacity Development and Governance 66

E. ADB Administration 66

Appendixes1. Evaluation Framework 69

2. Afghanistans Opium Economy 713. Country Economic and Social Improvements and Millennium Development

Goals 734. Summary of ADB's Country Partnership Strategies for Afghanistan 825. ADB Program Implementation and Portfolio 896. Summary of Transport Sector Assessment 1007. Summary of Energy Sector Assessment 1148. Summary of Agriculture and Natural Resources Sector Assessment 1259. Summary of Public Sector Management Assessment 13510. Summary of Private Sector Development and Financial Sector Assessment 15411. Summary of Resettlement Assessment 17112. ADB and Government Performance 189


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Preface

In 2002, the transitional government of Afghanistan, supported by the internationalcommunity, established priorities and implemented some important early measures layingthe foundations for economic stability, resumption of growth, and provision of socialservices. The Asian Development Bank (ADB) assumed a key role in the internationalcommunitys efforts to plan for and help in the reconstruction. W ith the significant supportof the international community, starting from the very basics, Afghanistan achieved someprogress. But the gaps are crucial and the challenges daunting.

This first country assistance program evaluation report for Afghanistan provides anindependent assessment of ADBs strategy and program in Afghanistan covering the period

from ADBs reengagement with the country in 2002 through 2011. During this period,support approved by ADB totaled $2,732 million, 65% of which came from grants. ADBsoperations in Afghanistan have continued under highly uncertain, extremely difficult, and

risky conditions with the continued dedication and hard work of staff. Initial years called foran emergency approach for infrastructure provision, and ADB responded to this urgency.Situations of emergency call for quick actions. Equally important, they stress the need forprotocols and quality standards in order to ensure effectiveness and sustainability ofoutcomes.

The 750-kilometer network of improved roads, rehabilitated with support from ADB, allowstravel in less time. Four airports are functional, providing access to remote parts of thecountry. ADB-supported transmission lines have improved power supplies to Kabul, whereelectricity is available almost around the clock in 2012 compared with about 4 hours a dayin 2002. ADB has also contributed to financial reforms and the emergence of the privatesector. At the same time, several important program outcomes have yet to be realized,particularly in the vital areas of agriculture and natural resources, attributable toimplementation weaknesses, inter alia, because of the security situation. Capacitydevelopment efforts call for substantial improvement, human resources need strengthening,and institutional reforms require careful support. While there were achievements insupporting gender equality, a much stronger and sustained approach is needed. Monitoringof outcomes has been weak; ADB must set concrete, achievable targets and ensuresystematic and regular monitoring.

The evaluation finds the crucial need for continued support from the internationalcommunity, including ADB. This, however, must be accompanied by far stronger action oncapacity development and reforms to improve development effectiveness. The evaluationrecommends that ADB acknowledge the conflict more clearly and set the next countrypartnership strategy period for 3 years or less. In responding to country demands, it calls foran effort to link development efforts across sectors and partners. It asks for a greater stresson the sustainability of interventions supporting reforms and fiscal implementation, and on

capacity development and governance improvements tailored to the countrys uniquecircumstances. It also suggests a strengthening of the operational capacity of the residentmission and of the management procedures of the Afghanistan Infrastructure Trust Fund.

Vinod ThomasDirector GeneralIndependent Evaluation

Foreword


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Acknowledgments

This country assistance program evaluation (CAPE) report for Afghanistan was prepared in2012 by a team led by Toshiyuki Yokota, Senior Evaluation Specialist, Division 2,Independent Evaluation Department (IED), under the overall guidance of IED DirectorGeneral, Vinod Thomas and IED Division 2 Director, Hemamala Hettige.

The CAPE report integrates the findings of sector assessments on agriculture and natural

resources, capacity development for public sector management, energy, private sectordevelopment and financial sector, and transport. These sector assessments were conducted

in 20112012 by IED staff: Andrew Brubaker, Kelly Hewitt, Rajesh Vasudevan, and the teamleader, with support from Ma. Juana Dimayuga, Alvin Morales, Ma. Olivia Nuestro, and

Elizabeth Li-Mancenido. The contribution of Walter Kolkma, Director, IndependentEvaluation Division 1, IED in supervising the evaluation approach paper and some of theabove sector assessments is gratefully acknowledged. External and internal peer reviewers

included Nils Fostvedt, Njoman Bestari, Henrike Feig, and Cheolghee Kim, and theircomments contributed to strengthening this report.

A team of international consultants joined missions to Afghanistan and assisted in preparingsector background papers and preliminary sector assessments; these have helped to enrichthis report. These include: Peter Darjes, Gita Gopal, Simon Peter Gregorio, Tetsu Ito, Eugene

McCarthy, Ravi Nangia, David Parish, and Srinivasan Rajagopal . Romella Denopol supportedthe portfolio review in Manila, and Mohammad Ishaque Sarwari and Mohamad Fahim

Zaheer conducted the beneficiary and ocular survey in the field.

We gratefully acknowledge the support by the Central and West Asia Department for this

evaluation, and the comments received on a draft of this report, provided by relevantdepartments and offices of the Asian Development Bank, as well as by the Ministry ofFinance and other line agencies (including the Afghanistan Chamber of Commerce and

Industries; Central Statistics Organization; Afghanistan National Disaster ManagementAuthority; Da Afghanistan Bank; Da Afghanistan Breshna Sherkat; IndependentAdministrative Reforms and Civil Service Commission; Ministry of Agriculture, Irrigation andLivestock; Ministry of Commerce and Industry; Ministry of Energy and Water; Ministry ofForeign Affairs; Ministry of Mines; Ministry of Public Works; Ministry of Rural Rehabilitation

and Development; Ministry of Transport and Civil Aviation; Ministry of Womens Affairs; andNational Environmental Protection Agency); and private companies (Afghanistan

International Bank, BRAC Bank [Incorporated in Afghanistan], and Roshan TelecomDevelopment Company Afghanistan, Ltd.). We would also like to acknowledge thecontribution of innumerable government, nongovernment, and civil society stakeholderswithin and outside Kabul who met with us to discuss and comment on ADB support fortheir country. Their feedback was very important in preparing the CAPE report.

Many development partner representatives took the time to meet with us, and we aregrateful to them, in particular, to International Finance Corporation, German DevelopmentCooperation, Embassy of Japan, Embassy of the United States of America, InternationalMonetary Fund, International Security Assistance Force, Japan International CooperationAgency, Kreditanstalt fr Wiederaufbau, Norwegian Church AidACT Alliance, Departmentfor International Development of the United Kingdom, United Nations Office for ProjectServices, United States Agency for International Development, and the World Bank for theirgracious cooperation.

IED retains full responsibility for this report.


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Executive Summary

More than one-third of Afghanistans people live below an internationalthreshold for extreme poverty of $1 per day. Decades of war and civil strife have causedwidespread human suffering, changed the countrys social and political fabric, and leftformidable challenges to recovery. When the Asian Development Bank (ADB) resumedits program in Afghanistan in 2002 alongside several other development partners, theimmediate needs were to restore economic stability, rebuild institutions, and providebasic services at a time when hopes had been raised that armed conflict might beending. As it turned out, the poor security situation resumed after a brief respite, andthe hostilities have severely impeded the operations of Afghanistans developmentpartners and overall progress on socioeconomic development.

With the significant support of the international community, Afghanistan

achieved some progress over the decade from 2002 to 2011. It now has an electedgovernment. A great deal of essential social and economic infrastructure has been builtor reconstructed, and a large share of rural households enjoys access to schools, healthservices, water, and irrigation facilities. Nonetheless, based on indicatorsper capitagross domestic product, poverty, child nutrition, primary school enrollment rate, andliteracy ratesAfghanistan remains one of the worlds least developed countries.Despite attention to the problem, gender inequity remains an enormous challenge in allwalks of life. The fragile nature of the countrys natural environment, if not preservedcarefully, poses considerable risks to its future well-being.

This country assistance program evaluation (CAPE) report provides anindependent assessment of ADBs strategy and program in Afghanistan during 2002

2011. It identifies key issues and challenges and draws lessons and recommendationsto guide future operations. The CAPE was prepared during a time of ongoing armedconflict in the country and a strong sense of uncertainty about Afghanistans prospectsfor 2014, when international combat troops will withdraw and the government willbecome responsible for the countrys security. This report highlights the achievementsmade under difficult circumstances, at times guided by available tools and capacity,which were understandably limited in the first decade of operations. However, a viewof development outcomes needs to be taken linking different initiatives to generateresults on the ground, and using effective planning for capacity development andsustainability. The evaluation sees the crucial need for continued support to the countryfrom the international community, including ADB. This, however, must be accompaniedby far stronger action to improve and sustain the effectiveness of developmentsupport.

Country Strategies and Program

ADB is the fourth largest of Afghanistans development partners in terms oftotal support after the United States, Japan, and the European Union. During theevaluation period, ADB approved lending and nonlending projects amounting to$2,732 million, comprising 32 sovereign projects (loans and grants), 7 nonsovereignprojects, and 49 technical assistance activities. ADBs sovereign operations haveaccounted for 93% of its lending and nonlending program in the country, with the


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remainder going to its nonsovereign program. Most of the support (83%) was drawn

from the Asian Development Fund (ADF), with the balance provided by the Japan Fundfor Poverty Reduction (JFPR), ADBs Technical Assistance Special Fund, bilateral support,

and the Afghanistan Infrastructure Trust Fund (AITF). During 20022011, Afghanistanbecame the fourth largest recipient of ADF resources (loans and grants) behindBangladesh, Viet Nam, and Pakistan. During the same period, in terms of grant funds,

it became the single largest recipient of ADF grants among ADBs developing membercountries, with a share of 37% of ADF as a result of being classified in 2001 as a highlyindebted poor country.

Two country strategies have guided ADB operations during the evaluation

period. An initial country strategy was prepared in May 2002 and updated three timesbefore ADB launched the second country partnership strategy (CPS) for 20092013 inNovember 2008.

The objective of the initial strategy was to achieve economic growth whileensuring a seamless transition from humanitarian to reconstruction and developmentsupport. The initial strategy did not focus on outcome objectives (pillars) but rather onrequired inputs. This weakness in defining expected outcomes was symptomatic of

most country strategies before results frameworks became the norm. Although theinitial country strategy had a broad scope, this was narrowed in 2003 to three

sectorsenergy, transport, and agriculture and natural resourcesin response to agovernment request. The strategy update for 20062008 retained this sector

composition but emphasized three thematic areas: (i) capacity development, (ii) policyand institutional reforms, and (iii) governance and the financial sector. Consistent withits Strategy 2020, launched in 2008, ADB also sought to support private sectoroperations, notably in banking and telecommunications.

The objective of the second CPS was to contribute to the high economicgrowth rates targeted by the government to achieve its objective of poverty reduction.The CPS retained the previous overall strategy, including its focus on three sectors, but

added new crosscutting themes such as public sector management, counter-narcotics,gender and development, governance, private sector development, and regional

cooperation. Support for these thematic areas has been minimal, however, with theexception of regional cooperation. The second CPS also instituted a distinct shift infinancing approach. The bulk of ADB support was to be provided through multitranchefinancing facilities (MFFs) on account of their flexible nature. During the CAPE period38% funds were allocated through the MFF modality.

Key Achievements

Operations in Afghanistan started and have continued under highly uncertain,extremely difficult and risky conditions. The dedication and hard work of ADBs staffand others have been very valuable. The government considers ADB a key development

partner that has been responsive to its requests, and informed the IndependentEvaluation Department (IED) that it had given its outstanding partnership award toADB.

Through ADBs support, the country can now make use of a 750-kilometer (km)network of rehabilitated and improved roads that allow more travel in less time. Of theseven intended airports, four have been built with good outcomes. A new 75-km railline was completed ahead of schedule. ADB helped improve power supplies to Kabulwhere, subject to continuing rehabilitation and expansion of the distribution system,


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Executive Summary xi

electricity is now available almost around the clock compared with about 4 hours a dayin 2002. The Afghanistan International Bank, supported by ADB private sectoroperations, has a reputation for good corporate governance. ADB has also contributedto related financial reforms. Roshan Telecom, another private sector beneficiary,outperformed its expansion plans and reached its subscriber target faster thanoriginally anticipated. Unlike some other development partners, ADB has implemented

its programs through the government budget, which allows transparency and capacitydevelopment. Several of ADBs envisaged program outcomes were not achieved,however, and ADBs support for Afghanistan, which in 2002 was restartingdevelopment almost from scratch, must continue to address the daunting challenges.

Critical Gaps and Challenges

High-level international efforts to support Afghanistan have influenced theoperations of all development partners. The complementarity of security anddevelopment support was underlined during the CAPE period at a series ofinternational conferences on Afghanistan. These high-level conferences achieved ageneral international consensus on strategic directions and financial commitments toAfghanistan after international forces and their Afghan allies ousted the Taliban regimein 2001. ADB was active in the lead-up to the conferences and made pledges ofsupport alongside its development partners. Despite agreements on levels of support,the approaches to be taken, and delineation of tasks throughout the evaluation period,little emphasis was given to linking or complementing the efforts of developmentpartners or even, in some cases, their activities with those of the government. Forexample, synergies between transport and energy projects were not tapped indeveloping the mining industry.

Most partners have felt obliged to release the funds they committed despitethe governments limited absorptive capacity and constraints to effective resource use.A comparison of development partner support with the size of Afghanistans economy

puts the issue of absorptive capacity in sharp relief. Aid disbursements during 2002

2010 amounted to $57 billion and accounted for 74% of Afghanistans accumulatedgross domestic product for the same period. The knowledge, human resources, andprocedures of Afghanistans institutions were not up to receiving and making effectiveuse of such large amounts of external support. This lack of absorptive capacity hasrevealed itself in slow implementation of projects, frequent recourse to foreignconsultants, low sustainability, and market distortions. About 95% of ADBs publicsector management and capacity development support was approved in the first CPSperiod for 20022008. Given that this capacity constraint was well recognized, a betterstrategy might have been to spread the aid flow over time and use this longer period tomore gradually and sustainably help increase capacity. This might have been a difficultoption to adopt, given the intense political and security considerations at the time, butADB should have discussed and evaluated it as a matter of due diligence and planning.

Quick processing and implementation may have been imperative in the initialemergency operations after 2001, even if this meant that projects could not be plannedand appraised thoroughly. Both the initial CSP and the first CSP update in 2003advocated emergency support and simplified procedures to respond rapidly to aprecarious situation. The use of this emergency approach never really ended, however,and was used almost continuously throughout the evaluation period. It has oftenprovided the reason for deviating from proper planning, project design, andimplementation practices. Clearly, the exigencies in Afghanistan demanded a special


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xii Afghanistan Country Assistance Program Evaluation

response, but technical standards and some due diligence in designing projects ought

not to be compromised.

The difference between following an emergency approach and continuingsecurity concerns needs to be carefully analyzed. While the security situation hascontinued to plague development work, particularly since 2006, it seems to have

provided a justification for continuing the same emergency approach. Continuingconflict does not warrant a continuing emergency approachwhere planning, design,and implementation practices may be compromised due to the urgency of the need. Ina conflict-affected situation, security is the largest concern, and sustainability and riskmanagement should be the priorities rather than the speed of implementation, which

is a priority for an emergency. In the post-emergency phase, security concerns shouldhave been reflected in project designs, and project designs should have been sensitivewith respect to their impact on security.

ADBs efforts to support and make up for deficient institutional capacity in thepublic sector were weakened by ADBs decentralization practices. Governmentministries and agencies report that ADB has taken longer to resolve projectadministration issues than other major development partners. One contributing factor

may have been the centralized procurement and disbursement practices in ADB.Another factor could have been the limited size and the skill mix of the staff of the

Afghanistan Resident Mission, which has fallen short of the demands of ADBs portfolioin the country. The number of international staff in the resident mission is far smaller

than those of other major development partners, even in relation to their differentlevels of assistance, and has decreased since 2006, while ADB activities have grown.This shortcoming could have been addressed by large, regular missions from ADBheadquarters, but this did not occur. Security hazards not only made it difficult torecruit staff for the resident mission but also restricted staff travel to Afghanistan andthe length of time staff members spent there. Estimates from ADB's Central OperationsServices Office for 2011 show that, while the average mission duration per project ADB-wide was about 24 days, it was 12 days for Afghanistan. It was not easy for the ADB

missions to visit projects outside Kabul due to security risks, the cost of using armoredvehicles, and limited accommodation. However, some other development partners have

managed to retain a sizeable staff contingent with a combination of monetary andnonmonetary incentives to compensate for the difficulties encountered.

ADBs use of MFFs has been frequent and sometimes not consistent with MFFsapplication principles. The second CPS recommended providing the bulk of ADBsupport through MFFs, and all projects since, except the Hairatan to Mazar-e-Sharif

railway project and the supplementary support to the Regional Power Transition Project,have done so. The flexibility of approving tranches under the MFF allowed ADB to cater

to changing circumstances of the country context and was much appreciated by thegovernment. However, this modality requires substantial capacity in the executingagencies or detailed plans to develop such capacity. This condition has not been met in

Afghanistan. The MFFs have often been used even where sector roadmaps orinvestment programs are not sufficiently well defined. These vague investmentprograms have also enabled the financing of frequent and substantial cost overruns ofongoing projects. While flexibility is an intended design feature of the MFF modality, itwas not meant to hedge against every kind of uncertainty. Road maps providingstrategic direction, investment programs specifying physical and nonphysicalinvestment, risk management measures, and capacity of the government could have

been more fully adhered to in Afghanistan.


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Executive Summary xiii

ADBs assessment that Afghanistan was in a postconflict situation in the second

half of 2000 was premature. ADB has treated Afghanistan as a postconflict countrysince 2002 despite a deteriorating security situation and the steady rise in armedhostilities since 2006. When ADB reviewed its strategy for weakly performing countriesin 2007, the country strategy classified Nepal as conflict ongoing while incongruouslycategorizing Afghanistan as postconflict. Afghanistan continued to receive

substantial ADF funding under this classification as well. A conflict-affected countryrequires a different approach than a postconflict one does. In a postconflict situation,the key considerations are reconstructing the political, economic, and social system. Inan ongoing conflict-affected situation, the security issue remains paramount. ADB hasno doubt recognized the seriousness of the security situation, but it relied on thegovernment to mitigate security risks. The World Bank currently classifies Afghanistanas conflict-affected.

Public services have been improved over the evaluation period, but a high levelof dependence on external support continues. For example, good progress has beenmade in education, access to health services, and gender issues. Critical infrastructurehas been rehabilitated, improving access of Afghanis to many previously inaccessibleparts of the country. And an additional 2 million people have access to electric power.

However, all this has been the result of a level of support that may not be sustainable.The external grants made available to Afghanistan account for 82% of total publicspendingthat is, central government spending plus off-budget development partnerspending that bypasses the budget process. This flow of funds is expected to diminish.In addition, Afghanistans budgetary challenges will be increased by the spendingrequired to take charge of its own security after the withdrawal of foreign troops in2014. It is vital that all aid agencies focus on sustainable development during thistransitional period. The international community can help the transition byconsolidating efforts to link interventions to create sustainable outcomes. Much willalso depend on Afghanistans own efforts to take stronger actions to improve theeffectiveness of projects and programs as well as their sustainability. Some newinitiatives are being planned by the government, particularly in the infrastructuresectors, to introduce funding for operation and maintenance; however, it is too early todiscuss the feasibility of these measures.

The strategy to support the Kabul Process and Afghanistans transition after2014 needs to be determined. The Kabul Process agreed upon by Afghanistan and theinternational community requires the government to assume a greater burden in thefinancing of recurrent and investment costs in the face of a likely reduction over time inforeign funds. ADB grant funds will be subject to a gradual decrease owing to theenvisaged phaseout of the postconflict premium, which will be completed by 2018.However, the government will need grants for a long time for development investmentand recurrent costs, which will now also include greater amounts for security. TheInternational Monetary Fund and the World Bank have estimated that the country islikely to achieve partial fiscal sustainability, defined as domestic revenues covering

operating expenditures, only by 20242025. The financial squeeze likely to occur in theintervening period may cause further security and sustainability issues. The KabulProcess needs to be based on a clear and detailed road map for the transition period.

The AITF was established by ADB in 2010 to finance the countrys infrastructurefunding requirements. The governments of Japan and the United Kingdom havecommitted $126 million to the fund as of end May 2012. Another multidonor trustfund is the Afghanistan Reconstruction Trust Fund (ARTF), which was established in2002 and has been administrated by the World Bank. More than 30 development


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partners pledged $4.8 billion for the ARTF as of end December 2011. The ARTF has amore cooperative structure with other agencies, and a strict accountability mechanism.ADB needs alternative sources to maintain its support to Afghanistan because of thephaseout of the postconflict premium of ADF by 2018. The current sole managementframework of the AITF is appropriate to manage a small pool of funds. To increasecontributions to the AITF from other agencies, ADB needs to strengthen the

management structure and operational framework of the AITF, learning from similarfunds.

Assessment

ADB support was strategically focused. It was also consistent with theoverarching objective of ensuring a seamless transition and economic growth throughreconstruction and rehabilitation. Activities of the program have been mostly alignedwith the governments priorities as well as with sector and country strategies. The focuswas consistent with agreements with government and development partners. However,monitoring of results has been difficult, given the lack of results frameworks.Collaboration during the initial phase has been good but has diminished, particularlyduring implementation reducing the linkages with complimentary activities thataugment development outcomes. The quality of project design was weak, with overlyambitious designs, sometimes irrelevant monitoring indicators, absent and unrealistictargets, and weak adherence to required due diligence.

Through ADB support, the country can now make use of a network ofrehabilitated and improved roads, four airports, and a new rail system. In the energysector, the main outcome is significantly improved power supplies to Kabul. Howeverthe difficulty of the operating environment meant that costs have often exceededestimates considerably without commensurate benefits. Estimated implementationperiods were consistently ambitious, despite expected limitations in implementationcapacity, and the weak security situation, which should have called for longerimplementation periods. Outcomes in agriculture and natural resources are limited,

because many projects have been delayed and are ongoing. Progress in capacitydevelopment has been mixed. Some organizational capacity in terms of systems andprocesses has been strengthened particularly in the Ministry of Finance, but this hasbeen undermined by weak appreciation and implementation of the new systems, andby lack of clarity in organizational responsibilities in other government agencies.Despite some institutional reforms, anticipated reforms have not progressed in manycases.

ADB support for private sector was successful. ADB managed its equityparticipation in the Afghanistan International Bank well and the bank was the firstmultilateral development bank to invest in a private commercial bank incorporated inAfghanistan. In addition, Roshan Telecom supported by ADB also performed well,exceeding its original expansion plans and reaching its subscriber target faster than

anticipated. However, a spot in the sun was that the Afghanistan InvestmentGuarantee Facility has not reached the original target, 1020 of beneficiary projects.

Most physical projects were completed recently and adequate data to assessimpacts were not available, the physical investment for transport and energy will likelyachieve envisaged impacts such as economic and social development. As a result,transport and energy sectors performed better than other sectors. The impact ofcapacity development efforts has been less than satisfactory. There are dual concernsregarding sustainability of the program, which are the availability of domestic financial


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Executive Summary xv

resources and the capacity of public institutions. Unless strong action is taken, these

concerns could hurt the envisaged impact in the future.

Recommendations

Acknowledge the conflict, set the next CPS period for 3 years or less, and help

coordinate development partner efforts. It needs to have a realistic assessment of thecurrent and likely future security environment, and the CPS term should therefore beshorter than normal due to the high risks and uncertainty that now characterize thecountry context. It will be important to carefully assess the security situation, financial

and fiscal sustainability, and institutional capacity while coordinating with other keydevelopment partners to make complementary efforts. As the fourth largest source of

funds in Afghanistan, ADB is in a position to provide leadership in coordinatingdevelopment partner efforts in several areas to increase overall efficiency andeffectiveness.

Shift from an externally and centrally driven development approach inAfghanistan to one that responds to overall country demands. It has to pay carefulattention to country context and absorptive capacity in project design, and to useappropriate financing modalities. While a future program should continue to focus on

infrastructure and capacity development in the government, sector strategies should bebased on analyses of industrial and agricultural demand and of the populations

socioeconomic needs. ADB also needs to link its support in each sector to its owndevelopment efforts in other sectors and to those of other development partners, andto work with central and local governments to achieve development outcomes inproject areas.

Prioritize sustainability in the Kabul Process in coordination with other key

development partners and address it in a holistic manner in the medium term withadequate attention to fiscal implementation and financial provisions. This will require

detailed financing plans, including cost estimates for operation and maintenance

(O&M) based on government strategy and sector master plans; financing projections;and identification of the agencies in the central or local governments, the privateentities, and other asset users that should or can be responsible for O&M. To facilitatethis effort, ADB needs to help prioritize relevant reforms and support them.

Develop and closely monitor a long-term capacity development and governanceimprovement plan carefully tailored to Afghanistans unique circumstances and the

governments needs. Effective capacity development needs to be shaped by the specificcircumstances and challenges in Afghanistanthe short history of the currentgovernment, weak cooperation between central and local governments, and publicsector staff with limited education levels and low salaries. It requires bettercoordination by development partners. Operations need to explicitly strengthengovernance to maximize the development effectiveness of its support. For example, the

procurement law needs to be implemented effectively, beginning with thedevelopment of a procurement manual. Financial management and project monitoringneed strengthening.

Strengthen the management and operational procedures for ADB operations inKabul to play a more engaged role in supporting the Afghanistan program. Monetaryand nonmonetary aspects of work need to be addressed to enable filling of all vacantresident mission positions in ADB's focus areas. ADB needs to consider working withNGOs for external monitoring if project sites are not safe enough for ADB staff and


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consultants but safer for NGOs. Any decision to shift additional responsibilities to the

resident mission must be preceded by a strengthening of its financial and procurementcapabilities as well as technical skills, since this is where the majority of issues arise.

Related, multidonor trust funds are useful to build synergies across partners andprovide complementary links to other sectors. They also provide a means for donors tocontribute even without a substantial presence in the country. This evaluation did not

evaluate the performance of funds like the AITF given the short time that has elapsedsince its initiation, but ways and means for participatory and transparentadministration and for generating buy-in from a broad spectrum of aid agencies wouldseem to merit attention.


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Management Response

On 8 November 2012, the Director General, Independent EvaluationDepartment (IED), received the following response from the Managing Director Generalon behalf of Management, for the Afghanistan Country Assistance Program Evaluation(IN.267-12):

General Comments

We appreciate the country assistance program evaluation (CAPE) for the IslamicRepublic of Afghanistan. The CAPE provides an overview of ADBs operations andefforts to respond to the countrys development needs.

We agree with the successfulratings for ADBs operations in the transport andenergy sectors, where significant progress and impact have been made since 2002, and

for non-sovereign operations. However, we disagree with the marginally less thansuccessfuloverall assessment of ADBs sovereign operations and of the overall program,and the so-called missed outcomes of Japan Fund for Poverty Reduction (JFPR)operations. The report also fails to reflect the sensitivity of its overall assessment andoverall rating to minor changes in sector-based assessments: a change in only one ofthe 30 components, for example the rating for efficiency of transport projects to 2(satisfactory) instead of 1 (less than satisfactory), would lead to a rating ofsuccessful for ADBs overall operations, rather than the CAPEs less than successful

rating.

We are concerned about possible misleading inference and impression

emanating from such a sensitive overall assessment, particularly in view of the fact thatmany physical projects were only recently completed or are still ongoing, and the lackof available data to assess outcomes and impacts, which have led to someunsubstantiated conjectures. In this context, we have serious reservations as to howsome of the ADB operations were portrayed, including a number of unsubstantiatedviews such as on the use of the Design-Build (DB) contract modality, as well as on theissue of emergency approach. Regarding the latter, although ADB did prematurely

declare Afghanistan to be in a post-conflict stage, ADB did employ a conflict consciousapproach, and project processing and implementation followed ADB guidelines.

While recognizing the importance of security in the context of Afghanistansdevelopment during 20022011, the CAPE fails to fully and properly analyze itsimplications for project design and implementation, as well as for the suitability and

choice of financing modalities and instruments.

Comments on Specific Recommendations

Recommendation (1): (i) Acknowledge Afghanistan as a country still embroiledin conflict, (ii) Set the country partnership strategy (CPS) period for 3 years or less, and(iii) Help coordinate development partner efforts. We agree. We believe Afghanistanshould be classified as a country in conflict with due recognition of associated

difficulties that countries experience when at conflict. ADB and other development


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xviii Afghanistan Country Assistance Program Evaluation

partners are not able to work in many parts of the country due to the ongoing conflict

and associated security concerns. We will continue giving necessary attention tosecurity considerations in our operations. A shorter CPS period, given the upcoming

transition through 2014 and the inherent uncertainty, has in fact already beenconsidered and reiterated in IEDs recommendation. The CPS guidelines and the Fragileand Conflict-Affected Situation (FCAS) approach provide sufficient flexibility in CPS

preparation and planning. ADBs Afghanistan Resident Mission (AFRM) will consult withthe government about next steps regarding the future CPS. Aside from liaising withvarious line ministries and supporting project implementation efforts, AFRM activelyparticipates with donors in weekly meetings such as UNAMAs Country Team,Ambassadors Conclave, and Head of Agencies, and in periodic meetings of relevant

working groups of the National Priority Programs (NPPs). In addition, ADB as theSecretariat for CAREC, is closely coordinating with Afghanistan and the CARECdevelopment partners.

Recommendation (2): Shift from an externally and centrally driven developmentapproach in Afghanistan to one that responds to overall country demands. ADBsassistance is already fully government-driven. ADBs operations, particularly in thetransport, energy, and natural resources sectors, have been responding to overall

country demands. Requests for financing from ADB are for projects selected by thegovernment based on the Afghanistan National Development Strategy (ANDS) and

supporting national development planning documents. These documents are the resultof internal consensus within the country themselves with respect to developmentpriorities, with the process being supported by the donors. ADB consults with lineministries on a regular basis to identify needs and priorities. In addition, all of ADBsfinancial assistance is channeled through the governments core budget, unlike that ofmost development partners. This principle of 100% of ADBs assistance being on -budget conforms to the Kabul Conference (July 2010) commitment by the internationalcommunity to channel at least 50% of donor assistance through the core budget by the

end of 2012, and is helping to strengthen the governments commitments to greatertransparency and governance in public financial management.

Recommendation (3): Prioritize sustainability in the Kabul Process incoordination with other key development partners and address it in a holistic mannerin the medium term, with adequate attention to fiscal implementation and financialprovisions. We agree. In fact, this is the current status of ADB assistance, and we willcontinue our efforts to increase sustainability through better sector governance and

increased emphasis on operations and maintenance (O&M). Efforts focusing ongovernment-led responsibility for O&M are currently underway with ADB support in allour priority sectors. Under the Transport Network Development Investment Program,ADB is assisting in reforming the transport sector through the establishment of a railauthority, road authority, and road fund, the latter being specifically established toensure adequate funding for road maintenance. The energy sector has an O&Mstrategy and Da Afghanistan Breshna Sherkat (DABS) is funding its O&M requirements

through its internally generated revenues, with no subsidies from the government.Under an ongoing Water Resources Development Investment Program, ADB isproviding (i) O&M training and planning for the water and agriculture ministrys staff,

(ii) interim O&M funds with the government assurance that they will allocate adequaterecurrent budget, and (iii) water user association training for farmers in O&M anddevelopment of a financial sustainability mechanism.

Recommendation (4): Develop and closely monitor a long-term capacitydevelopment and governance improvement plan. We concur with the recommended


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Management Response xix

approach, which is ADB's current practice in Afghanistan. ADB has supported thegovernment with both targeted and integrated approaches to capacity developmentand governance improvement. Visible capacity development is integrated and realizedthrough ADBs infrastructure programs. For example, in 2010 ADB worked with USAIDto formulate a strategy for energy sector capacity development and to date, ADB hasallocated nearly $50 million for capacity support in the energy sector. ADB is currently

supporting capacity of the nations energy sector through: (i) sector master planning,(ii) O&M, (iii) Project Management Office support and training in procurement, projectmanagement and implementation, (iv) distribution planning, (v) DABS managementassistance, and (vi) numerous formal training courses to impart sector knowledge. Inthe transport sector between 2003 and 2009, ADB provided $12.5 million through 11technical assistance projects focused on capacity development. Since 2008, as sectorplanning has moved into programmed implementation with the finalization of ANDS,ADBs transport interventions have been twinned with a step-by-step capacitydevelopment program of the Ministry of Public Works.

Recommendation (5): Strengthen the management and operational proceduresof the AITF and the resident mission in Kabul to play a more engaged role insupporting the Afghanistan program. We have serious reservations on the assessment

of the structure and operation of the Afghanistan Infrastructure Trust Fund (AITF). TheCAPE makes incorrect comparison of AITF established only in late 2010, with theobjective, structure and operation of the Afghanistan Reconstruction Trust Fund (ARTF)which was established in 2002.

The ARTF was established in 2002 and serves as a coordinated financingmechanism for the governments recurrent budget and priority reconstructionprograms and projects. The ARTF is heavily concentrated on agriculture, ruraldevelopment, education and social services, and public sector capacity building. TheARTF supports only small-scale rural infrastructure projects, whereas, in contrast, theAITF focuses on cofinancing ADBs and the governments medium to large scaleinfrastructure projects. Due to its direct involvement with projects across multiplesectors and the large number of relatively small contracts, the ARTF has a morecomplex administrative structure than the AITF, whereas the AITF implementscofinanced projects through line ministries. The agencies themselves are directlyresponsible for the administration and management of the projects. AFRM holdsregular consultations with potential stakeholders and contributors to the AITF as wellas with relevant government agencies. The report also ignores the fact that the AITFserves as a platform to discuss sector policy issues with current and potential donors,which facilitates a coordinated policy dialogue with the government. On accountability,all projects cofinanced by the AITF strictly follow the ADBs on-budget approach, duediligence, procurement, and disbursement procedures. We also would like to note thatAITF accounts are being regularly audited by an international audit firm as externalauditor.

While we agree that AFRM should be strengthened, we believe its currentstaffing is appropriate given the constraint in available resources. AFRM uses the JointVenture approach which facilitates close and seamless cooperation at the operationaland administrative levels between the RM and Headquarters, and maximizes theefficient use of staff resources.


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Chairs Summary:Development Effectiveness

Committee

The Development Effectiveness Committee (DEC) considered the IndependentEvaluation Department report, Afghanistan Country Assistance Program Evaluation(IN.267-12), on 12 November 2012. The following is the Chairs summary of theCommittee discussion:

DEC noted the CAPEs recognition that ADBs support is strategically focused in

ensuring a seamless transition and economic growth through reconstruction andrehabilitation, but also noted that monitoring results has been difficult because of the

lack of a results framework. DEC also noted the CAPEs recognition of ADBscontribution in improving roads, airports, rail system and power supply, despite costoverruns, project delays and longer implementation periods, although most projectswere completed recently and adequate data to assess the impacts is not alwaysavailable. DEC took note of Managements disagreement with several ratings includingthe overall less than successful rating and recognized the difficult situation inAfghanistan, which must be factored in when preparing strategy and projects. DEC alsoconsidered that the focus should not be only on the ratings but also on lessons learnt.

Concerns on classification of Afghanistan and sustainability of projects. DECnoted the urgent need to reassess the Afghanistans post-conflict status in ADBoperations in the next CPS, which should cover a shorter CPS period while fully takinginto account the implication of security to the operations. Given Afghanistans securitycontext and high dependence on aid, DEC supported the need to include sustainabilityconsiderations in project design and was reassured to hear from staff that sustainabilityis high on the government and donors agenda.

Use of the multi-tranche financing facility for supplementary financing. DECsought clarification about the use of the multi-tranche financing facility (MFF) infinancing cost overruns, noting that such changes merited the Boards consideration,and noted staffs response that no ADB procedures or compliances were compromisedin the use of MFF and that the use of tranches enabled progress in the field. DEC willfurther review when IEDs evaluation of the MFF is presented to DEC.

Improving donor interest on the Afghanistan Infrastructure Trust Fund. DECdiscussed the differences in purpose and duration between the Afghanistan

Infrastructure Trust Fund (AITF) and the Afghanistan Reconstruction Trust Fund (ARTF),and noted the diverging views of Management and IED on governance related aspects.DEC welcomed the IEDs indication at the outset that it would revise the section toclarity that the section is not an evaluation of the AITF which was established only in2010 but rather suggesting lessons from other trust funds operating in the countrywhich may lead to improve the participation of donors in AITF.


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xxii Afghanistan Country Assistance Program Evaluation

Resident mission staffing. DEC recognized the work done by the AfghanistanResident Mission and inquired whether staffing should be increased to further improve

development effectiveness. DEC suggested that Management consider variousincentives to attract staff and reinforce in-country presence for more efficient andeffective donor coordination.

Evaluation approach for conflict afflicted countries. DEC members discussedevaluation guidelines and their flexibility, in terms of achievement of outputs andoutcomes, for fragile and conflict afflicted contexts. Members also agreed that theCAPE could be instructive in engaging countries with similar contexts such as Myanmar

and Nepal.

Prospects of private sector development. DEC noted the success of ADBsprivate sector operations in Afghanistan and future prospects on mining and gasexploration. DEC stressed the importance of private sector development, further notingthat job creation is one of the most critical factors for inclusive growth. DEC membersunderscored the urgency of mainstreaming gender in project design noting that ADBhas not done enough in addressing gender issues in Afghanistan.


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CHAPTER1

Introduction

A. Objectives

1. The objective of this country assistance program evaluation (CAPE) report is toimprove the effectiveness of the development assistance provided by the AsianDevelopment Bank (ADB) to the Afghanistan. The CAPE considered the economic,political, and development context in which the program was formulated andimplemented. The CAPE report aims to (i) provide an independent assessment of ADBssupport to the country, (ii) analyze factors affecting this performance, and (iii) makerecommendations to prepare the next country partnership strategy (CPS) and to

improve ADBs performance in the future.

B. Scope and Approach

2. This was the first CAPE for Afghanistan and covered the period from ADBsreengagement with the country in 2002 through 2011.1 It has been undertaken at atime when the International Security Assistance Force is preparing a scheduledwithdrawal from the country by the end of 2014 and the government of Afghanistan istaking over the principal responsibility for its security and development. This is a causeof considerable uncertainty, and the CAPE has given due consideration to this situationin its analysis and assessments. The report draws on multiple sources, including thefindings of four country missions and field visits since December 2011 by a large teamof Independent Evaluation Department (IED) staff and consultants. To the extent

possible, local consultants were engaged to verify outputs and outcomes. Theevaluation involved discussions with government agencies, ADB staff, and developmentpartners, as well as review of ADB strategy documents, project files, and other relevantliterature. The evaluation benefited from an ADB perception survey of stakeholders togain insights into ADBs performance. The draft report was discussed in Kabul with thegovernment, and this final report takes into account comments from the governmentas well as from ADB management and staff.

3. Support approved by ADB for lending and nonlending projects in Afghanistanduring the 20022011 evaluation period totaled $2,732 million, of which 65% wasprovided on a grant basis. This comprised 32 sovereign projects, 7 nonsovereignprojects, and 49 technical assistance (TA) operations. The sovereign program made up

93% of the total, and nonsovereign support the remaining 7%. Figure 1 shows thehistory of allocation of the Asian Development Fund (ADF) in Afghanistan during theevaluation period.

4. ADB launched two full country strategies during the CAPE period. An initialcountry strategy and program (CSP) was prepared in May 2002, followed by three

1 ADB started lending operations in Afghanistan in 1970 but put its operations on hold in 1979. Totallending and nonlending operations in the country for this period amounted to $97.7 million with 9 loansand 16 technical assistance (TA) programs.

65% of total ADsupport since2002 (and 100%since 2007) was

grants


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2 Afghanistan Country Assistance Program Evaluation

updates during 20032008.2 A completion report for the first strategies was prepared

in November 2006.3 In November 2008, ADB formulated a new CPS for 20092013.4The CAPE has considered the evolution of these strategies and programs over the 10-

year evaluation period in light of changing government development plans, and theevolving strategies of development partners, and important developments on theground. Operations in Afghanistan started and have continued under highly uncertain,

extremely difficult, and risky conditions. The dedication and hard work of ADBs staffand others have been very valuable. The government considers ADB a key developmentpartner that has been responsive to its requests, and informed IED that it had given itsoutstanding partnership award to ADB.

5. The CAPE was guided by IEDs Revised Guidelines for the Preparation ofCountry Assistance Program Evaluations.5 It assessed the formulation of the country

strategies, the compatibility of the assistance programs with the strategies, and theperformance of the ADB lending and nonlending products and services provided under

these programs. The CAPE takes the position that preparations for operating in aconflict-affected country should have gone into these strategies and project documents

when they were prepared and that expectations for implementation and delivery of

results should have been adjusted accordingly. The evaluation was therefore based onthe documents stated objectives and targets, using the standard evaluation criteria.The CAPE drew on assessments in five key sectors: transport, energy, finance andprivate sector, agriculture and natural resources, and public sector management (PSM).These assessments were based on reviews of projects that have been completed or

were at a mature stage of implementation. More details on the CAPE methodology arein Appendix 1.

6. The CAPE study relied on intensive desk reviews and stakeholder interviews,and faced several constraints. Although national consultants made field visits to fourprojects in the agriculture6 and four projects in the transport sectors,7 IED staff were

2

ADB. 2006. Initial Country Strategy and Program: Afghanistan, 20022004. Manila.3 ADB. 2006. Country Strategy and Program Completion Report: Afghanistan, 20022006. Manila.

4 ADB. 2008. Country Partnership Strategy: Afghanistan, 20092013. Manila.5 ADB. 2010. Revised Guidelines for the Preparation of Country Assistance Program Evaluations. Manila.6 ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the

Transitional Islamic State of Afghanistan for the Emergency Infrastructure Rehabilitation andReconstruction Project. Manila (Loan 1997); ADB. 2006. ProposedGrant Assistance to Afghanistan for theRural Business Support Project. Manila (Grant 9100); ADB. 2009. Report and Recommendations of thePresident to the Board of Directors: Proposed Multitranche Financing Facility and Administration of Grantand Cofinancingto the Islamic Republic of Afghanistan for the Water Resources Development InvestmentProgram. Manila (Grants 0167 and 0170); ADB. 2005. Report and Recommendations of the President tothe Board of Directors: Proposed Loan and Asian Development Fund Grant to the Islamic Republic of

Figure 1: Allocation of Asian Development Fund and Approvalsfor Afghanistan, 20022011

ADF = Asian Development Fund.Source: Asian Development Bank.

0

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800

2002 2003-2004 2005-2006 2007-2008 2009-2010 2011-2012

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The CAPE coversa 10-year period

and draws onassessments offive key sectors


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Introduction 3

not encouraged to make field visits or conduct interviews outside of Kabul due to the

security risks. The absence of independent evaluation studies on Afghanistan prior toCAPE preparationperformance evaluation and sector assistance program evaluation

reports, for exampleposed a challenge. In addition, monitoring and evaluation dataavailable from ADB and the government were sparse.

Afghanistan for the Western Basins Water Resources Management Project. Manila (Loan 2227, and Grants0033 and 0052).

7 ADB. 2009. Proposed Grant Assistance to the Islamic Republic of Afghanistan for the Hairatan to Mazar-e-Sharif Railway Project. Manila (Grant 0161); ADB. 2004. Report and Recommendations of the President tothe Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the Andkhoy-Qaisar RoadProject. Manila (Loan 2140); ADB. 2003. Report and Recommendations of the President to the Board ofDirectors: Proposed Loan to the Transitional Islamic State of Afghanistan for the Emergency InfrastructureRehabilitation and Reconstruction. Manila (Loan 1997); ADB. 2006. Proposed Grant Assistance to theIslamic Republic of Afghanistan for the Rural Business Support Project. Manila (Grant 9100).


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CHAPTER 2

Country Context

A. Background

7. Country characteristics. Afghanistan is one of the least developed countries inthe world, and its approximately 34 million people are among the poorest. Four-fifthsof the population live in rural, often rugged, and remote areas, and more than one-third of its people subsist below an international threshold for extreme poverty of $1per day. Just 12% of the mostly mountainous land area is arable, and the climateincludes periods of extreme aridity and cold. Although Afghanistan has substantialmineral resources, they remain, with a few exceptions, largely unexploited. The country

has been racked by long periods of armed conflict since the late 1970s and almostcontinuous political instability, and efforts to modernize governance and society havelong faced strong opposition from conservative Islamic and tribal traditions. Agricultureand subregional trade have historically been the mainstays of the economy.

8. Among Afghanistans weakest human development indicators are low levels ofliteracy and life expectancy, high child and maternal mortality, a shortage of trainedpersonnel, and insufficient public expenditure on health and education. Women havetraditionally been accorded a lower status than men, and there is gender inequalityacross the board, including in education, employment, access to health services, andlegal rights.

9. Decades of political and military conflict have damaged institutions and

government structures, as well as social and physical infrastructure, including crucialrural irrigation systems. This strife displaced vast numbers of people and greatlydiminished the countrys human and financial capital, pushing millions into lives ofextreme poverty without employment opportunities or access to basic services.8 Muchof the limited progress in education, human rights, and government that had beenmade before major hostilities began in 1980 was reversed during successive stages ofcivil turmoil. Through the ensuing decades, Afghan society has been burdened bywidespread corruption and a large informal sector that has included illicit trade andproduction and export of narcotics.

10. Despite a major assistance effort by the international community since 2001,these problems and the countrys overall development challenges remain formidable.Armed conflict continues, and concerns exist that security conditions could worsen

with the slated departure of international military forces in 2014. Afghanistan,meanwhile, must struggle to develop despite a narrow economic base, agriculturalproduction that is dependent on precipitation, poor infrastructure, weak institutionsand governance, and limited capacity.

8 It is estimated that the gross national income per capita fell to $435 in 2000 from $1,271 in 1985, a levelto which it recovered only after 2010.

More than onethird of people

subsist below thepoverty line in

Afghanistan

Decades of

political andmilitary conflicthave damaged

institutions,government, and

social andphysical

infrastructure


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Country Context 5

11. Historical and political context. Landlocked Afghanistan lies at the crossroads

between Central, South, and West Asia and has historically had strong trade andcultural ties with its neighboring countries. Its current geographical boundaries were

established by the middle of the 19th century, but its history has frequently beenmarred by violent internal struggles for power and conflicts between its oftenantagonistic ethnic and tribal groups. This instability has often been exacerbated or

encouraged by the interference of rival foreign powers seeking influence within itsborders for strategic reasons. Afghanistan has four main ethnic groups, several smallerones, and a strong tribal culture. Strong ethnic and tribal allegiances continue to playan important role in defining peoples identity.

12. In 1979, the former Soviet Union invaded the country in support of the thencommunist government, touching off a decade-long war with mujahedin rebelssupported materially by an array of other foreign powers. After the former Soviet Unionwithdrew its troops in 1989 and its client government fell 2 years later, mujahedinfactions embarked on a destructive civil war, which culminated in 1996 when Kabul fellto the Taliban. This group consolidated its hold over most of the country andintroduced a repressive conservative regime until it was ousted in 2001 by aninternational military invasion led by the United States (US) in support of the Afghan

forces of the anti-Taliban Northern Alliance.

13. The defeat of the Taliban government created a new opening for political,economic, and social development. To address the countrys future and establish a

process for political reconstruction, the United Nations (UN) sponsored a conference ofrepresentatives of the international community and Afghanistans anti -Taliban groupsin Bonn, Germany in 2001. The plans that emerged included the adoption of a newconstitution, presidential elections in 2004, and elections for a national assembly in2005. In June 2002, a loya jirga, a traditional general council of leaders from aroundthe country, selected an interim transitional administration to govern the country until

elections in 2004. The current President and the bicameral National Assembly werechosen in the second of the two presidential and legislative elections that have beenheld since then, although the official voting results have been hotly contested. 9Ministers at the national level and provincial governors are appointed by the President.The provinces also have elected provincial councils.

B. Economic and Social Development Since 2001

1. Overview of Recent Developments

14. The transitional government established in 2002, supported by theinternational community, established priorities and implemented some important early

measures. These included key steps to lay the foundations for economic stability,resume growth, and provide social services. Among them were measures to improve

macroeconomic management, rebuild institutional and human capacity, rehabilitate

infrastructure, improve service delivery, and encourage the return of displaced personsand refugees to their homes.10

15. With support from the International Monetary Fund (IMF), the governmentundertook currency reform in 2002, took steps to establish a national payment system

9 The conduct of the second round of elections for the presidency in 2009 and the National Assembly in2010 raised questions about the integrity of the election process.

10 It is estimated that more than 4.5 million refugees returned to Afghanistan from neighboring countriesfrom 2002 to 2010, but a further 3 million individuals of Afghan origin still continue to live abroad.

The UnitedNationssponsored aconference in2001 to establisa process forpoliticalreconstruction

WithInternationalMonetary Fundsupport, the

governmentundertookfinancial reforms


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6 Afghanistan Country Assistance Program Evaluation

in 2003, and enacted laws relating to the central bank (Da Afghanistan Bank) and

banking in 2004. Action was also taken to try to improve monetary management andbanking supervision, to introduce a more efficient tax system, and to improve revenue

administration. Government revenues, which were negligible in 2001, rose to 4.7% ofgross domestic product (GDP) in 2003. Progress was also made on improving thesupply of electricity and on rehabilitating roads. The transitional government also set

up an interim regulatory authority in 2003 to encourage private investment in thesector. These measures led to the start of operations of two mobile communicationscompanies by 2003. Similarly, the Law of Banking in Afghanistan helped create pre-conditions for the revitalization of the moribund banking industry and led to theestablishment of several new banks.

16. Afghanistan has continued to make progress. GDP grew at a compound annualrate of around 9% after 2001. Some success has also been achieved in rebuilding somenational institutions and capacity, notably in the Ministry of Finance (MOF). Transporthas been a priority, and road construction and rehabilitation have been substantial.Investments in the badly degraded power sector and the development of a nationalelectricity grid have produced sound results. Kabul now gets electricity for much of theday, compared with only 4 hours daily previously. Afghanistans people now have

greater access to primary education and basic health facilities, although this varieswidely across the country, particularly because internationally funded projects have

been limited by the high security risks in some areas. Some advances have also beenwon in the improvement of womens rights, especially considering the extreme

inequities and daunting challenges that prevailed in the decade prior to 2001.Nonetheless, Afghanistan continues to lag far behind other countries in the region insocioeconomic development.

17. The progress has depended heavily on strong international support. Externalfunding currently accounts for 82% of total public spendingcentral governmentspending plus off-budget external spending (Box 1). 11 Dependence on externalconsultants or turnkey contracts is also high, and institutional capacity continues to beextremely limited in most areas, as do domestic resources.

18. These challenges are compounded by others. After improving in the wake ofthe 2001 international military intervention, the overall security situation has worsenedsince 2006. The Taliban has regrouped, and conflict between its insurgents andgovernment and international forces undermines stability and economic growth in

many parts of the country. The development process is constrained by poor governanceand widespread corruption, as well as fragmented government institutions andoverlapping responsibilities between line ministries and between the national andprovincial governments. Capacity is weak, especially at the provincial level. Widespreadproduction of narcotics fuels the insurgency, official corruption, and criminality(Appendix 2). The youth and rapid growth of the population mean that economicexpansion and overall development must keep pace if high expectations are to be met

and socioeconomic conditions and stability improved.12

11 While IED did not assess the degree to which the ADB funds reach their targets, it looked into reports ofthe Office of Anticorruption and Integrity and the Office of Auditor General, which found no evidence ofcorruption in some operations they investigated after receiving allegations of corruption.

12 An estimated 46% of the population is below 14 years of age. Net population growth is about 2.8%.

People now havegreater access tobasic education

and healthfacilities

Institutionalcapacity

continues to beextremely limited

in most areas, asdo domestic

resources


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Country Context 7

Box 1: Afghanistan Remains Heavily Dependent on Foreign Funding

Afghanistan has received a great deal of support from foreign governments since 2002,particularly from the United States, as well as major assistance from bilateral agencies andmultilateral institutions. Of the $90 billion pledged to Afghanistan so far, about $57 billion hadbeen disbursed by the end of 2010. These disbursements averaged 74% of gross domesticproduct during 20022010, with about 51%, or $28.9 billion, going toward security. This doesdo not include the costs of the presence and operations of foreign troops in the country, whichare paid for under the defense budgets of the governments contributing the forces. Nor does itcover emergency humanitarian aid and reconstruction work. The balance of the 20022010disbursements49%, or $27.7 billionwas spent on rehabilitation and development efforts,including (in declining order of funding) infrastructure repair and development; agriculture andrural development; improvements in governance, social protection, education, and health; andprivate sector development,

Aid to Afghanistan during this period can be analyzed in two main waysaccording to itspurpose and according to whether it was routed through the national budget or was spent off-budget. The government estimates that 82% of cumulative foreign support has been spentdirectly by foreign development partners, bypassing the national budgetary processes. Concernshave been raised that this large off-budget foreign spending has weakened national ownershipof projects, prevented the harmonization of aid and mutual accountability, and made less of a

contribution than it could have to domestic capacity development. The figure below shows thesources and uses of foreign funds for FY2010.

Sources and Uses of Funds to Afghanistan

FY = fiscal year, GDP = gross domestic product.a This category covers spending on education, health, and all other nonsecurity sectors across

government.b Development expenditures include significant noncapital security spending, e.g., private protection

companies.c Estimated local spending content (cash impact) of external budget, 100% externally financed.

Source: International Monetary Fund. 2011. Islamic Republic of Afghanistan: Staff Report for the 2011 ArticleIV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility. Appendix III.Economic Developments. Washington, DC.

$1.6 billion

11% of GDPDomestic Revenues

Operating BudgetSecurity

$1.3 billion8% of GDP

Nonsecurity$1.1 billion7% of GDP

Public Spending in FY2010


Developmentb


Nonsecuritya


Security


ExternalBudgetGrants

Development Budget$0.9 billion6% of GDP

External BudgetcSecurity


Development$2.6 billion17% of GDP

Security$0.8 billion5% of GDP

Nonsecurity$0.3 billion2% of GDP

Grants to Operating Budget

Discretionary$0.2 billion1% of GDP

Nondiscretionary$0.4 billion2% of GDP

Grants to Development Budget

$6.5 billion

41% of GDPGrants


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Country Context 9

22. On the other hand, growth in agricultural production of cereals, fruits and nuts,and livestock failed to keep up with overall growth. Agricultures share of GDP over thesame period fell from the equivalent of 30% to 15%. More worryingly, food cropproduction has failed to keep pace with population growth. Afghanistan has had toimport food in recent years, and some provinces have required food aid due toshortages. 15 The sectors poor performance is a crucial problem for the countrys

economy and people, because an estimated 85% of the population depends directly orindirectly on agriculture and agricultural products, which also account for about half ofall exports.

23. The industry sector has grown at a rate similar to that of the overall economy,with its share increasing from 20% to around 22% of GDP during 20022010. 16 It hasbeen helped in particular by a boom in the construction subsector based on the largeinflow of foreign funds. Construction now contributes to industrial output.

24. Inflation averaged around 10% over the period and was high due to increasesin international food and fuel prices and an expansion in money supply that occurreddespite some efforts by the central bank to contain it. Inflation was estimated ataround 8% in 2011, following some easing of food price increases.

25. Afghanistan is highly dependent on foreign aid to meet gaps in its budget andits external account. In 2010, imports of goods amounted to $7.2 billion, equal to57.4% of GDP, while export of goods totaled $2.2 billion. The export figure included in-country sales of domestic goods and services to foreign troops and other noncitizens.The current account deficit of $6.4 billion (51.3% of GDP) was offset by officialtransfers of $6.1 billion. Afghanistan also received about $300 million in foreign directinvestment. Afghanistan was granted debt relief as a highly indebted poor countryunder the Multilateral Debt Relief Initiative as well as additional debt write-offs fromParis Club creditors. This reduced its total external debt from about 170% of GDP in2007 ($12.0 billion) to about 8% in 2010 ($1.3 billion). Support since 2006 from ADBand other development partners has been almost entirely provided through grants.

26. In terms of public finance, the government succeeded in raising domesticrevenue collection to 11% of GDP in 2011 through tax measures, administrativeimprovements, and consolidation of earlier reforms. However, the government budgetstill relies on an equivalent amount in foreign grants to cover its remain

country assistance program evaluation for afghanistan

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