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Islamic Republic of Afghanistan

Ministry of Finance

Development Cooperation Report

2010

DEVELOPMENT COOPERATION REPORT | I

Foreword On behalf of the Ministry of Finance (MOF) of the Government of the Islamic Republic of Afghanistan (GoIRA), it is my pleasure to present the first Development Cooperation Report (DCR) to the international community and the people of our nation. The Development Cooperation Dialogue (DCD) process was initiated to stimulate policy dialogue on development and reconstruction between the GoIRA with its Development Partners (DPs) to help strengthen the relationship and cooperation between the GoIRA and its partners. This report, the outcome of a successful round of negotiations, will serve as a critical tool for GoIRA and our DPs to assess the development achievements of the country since 2002, identify the challenges to development in Afghanistan encountered both by the Government and the international community and will hopefully provide policy directions to further strengthen and accelerate the development process in Afghanistan. We greatly appreciate the sustained assistance to Afghanistan provided by the international community for development and gratefully acknowledge how such support helped bring positive changes to the lives of Afghans since 2002. We acknowledge the significant contributions made to our nations development, through provision of support to the financing of Afghanistans medium and long term strategies (Afghanistan National Development Strategy and the national priority programs- NPPs). This report makes a brief assessment of the utilization of development assistance to date and further analyzes the effectiveness of the delivery of development assistance as based on the principles of Aid Effectiveness, agreed upon by the international community and announced in Paris in 2005. DCR reviews the financial trends of Official Development Assistance (ODA) flows since 2002 multi-year projections of financing provided by DPs and the differences and disparities in financial support and development progress across sectors and geographic areas. Dissemination of information and overview analyses contained in reports of this nature contribute to transparency and accountability of development finance utilization for the benefit of all stakeholders - the GoIRA, DPs and most importantly, the Afghan public. The development dialogue process and the record of information collected, analyzed and shared widely have the best potential of strengthening mutual trust between GoIRA, the international community and the Afghan population. If appropriately used, these reports can provide decision making tools for the Government and the international community for better aid coordination promoting improved medium and long term planning of development interventions that can produce development results generating sustainable economic growth and development benefits for the people of Afghanistan. I express GoIRAs commitment to serve the needs of the Afghan nation and its public and to this effect make best efforts to strengthen cooperation, based on mutual accountability, with its DPs. The current report, with its basic data and policy analysis, serves these objectives. Thus, our commitment is to make the DCDs an annual event and publish annual reports generated out of the process. Our DPs' continuous support to this process through provision of optimal information about their development financing to Afghanistan will ultimately maximize public information both in Afghanistan and in donor countries about the benefits of our DPs development interventions in Afghanistan. MOF, on behalf of GoIRA, takes this opportunity to extend its gratitude to the Afghan population and the international community for their continued support to GoIRA. We also thank UNDP for the technical and financial assistance in support of the DCDs. Dr. Omar Zakhilwal Minister of Finance

DEVELOPMENT COOPERATION REPORT | III

Contents

Foreword................................................................................................................................................................ I Contents ............................................................................................................................................................... IV Acronyms .............................................................................................................................................................. V Executive Summary ............................................................................................................................................... 1 1. Introduction .................................................................................................................................................. 4 2. History of Foreign Assistance in Afghanistan ............................................................................................... 6

2.1. Pre-Cold War era (1919-50s) ................................................................................................................ 6

2.2. The Cold War era (1960s-1990s) .......................................................................................................... 6

2.3. Post 9/11 (2001- present) .................................................................................................................... 7

3. Landmark Conferences ................................................................................................................................. 9 3.1. Bonn Conference (2001) ...................................................................................................................... 9

3.2. Tokyo Conference (2002) ..................................................................................................................... 9

3.3. Berlin Conference (2004) ..................................................................................................................... 9

3.4. The London Conference ..................................................................................................................... 10

3.5. Rome Conference (2007) ................................................................................................................... 10

3.6. Paris Conference on Afghanistan (2008) ............................................................................................ 11

3.7. Hague Conference (2009) .................................................................................................................. 11

3.8. London Conference (2010)................................................................................................................. 12

3.9. Kabul Conference (2010) .................................................................................................................... 12

3.10. Lisbon Conference (2010) ...................................................................................................................... 12

Assessment ..................................................................................................................................................... 14

4. Aid Dependency (Reality of Aid in Afghanistan) ......................................................................................... 15 5. Overview of External Assistance ................................................................................................................ 18

5.1. Synopsis .............................................................................................................................................. 18

5.2. Geographic Distribution of External Assistance ................................................................................. 21

5.3. Loans .................................................................................................................................................. 22

5.4. Aid Predictability ................................................................................................................................ 22

5.5. Main Delivery Channels of External Assistance ................................................................................. 23

5.5.1. External Assistance for Security Sector...................................................................................... 23

Analysis ........................................................................................................................................................... 25

5.5.2. External Assistance for Development ............................................................................................ 27

5.5.2.1. Trust Funds ............................................................................................................................ 28

5.5.2.2. Assistance through Government Systems ............................................................................. 30

5.5.2.3. Support for Government Operating Budget .......................................................................... 31

5.5.2.4. Share of Aid as Percentage of Government Budget .............................................................. 31

6. Aid Effectiveness in Afghanistan ................................................................................................................ 34


6.1. Introduction ....................................................................................................................................... 34

6.2. The Achievements in Brief ................................................................................................................. 34

6.3. The Lapses Preventing Optimization of Benefits of International Assistance in Afghanistan ........... 35

6.4. Absence of Strong Donor-Afghan Government Partnership ............................................................. 35

6.5. Paris Declaration and Accra Agenda for Action Addressing the Lapses ............................................. 36

6.6. Paris Declaration and Accra Agenda Aid Effectiveness Principles in Action in Afghanistan .............. 37

6.6.1. Ownership .................................................................................................................................. 37

6.6.2. Alignment ................................................................................................................................... 37

6.6.3. Harmonization ........................................................................................................................... 38

6.6.4. Mutual Accountability ............................................................................................................... 39

6.6.5. Managing for Development Results .......................................................................................... 40

6.7. Primary Challenges to Implementation of Aid Effectiveness Principles in Afghanistan .................... 41

6.7.1. Continuing Insecurity ................................................................................................................. 41

6.7.1.1. Analysis .................................................................................................................................. 41

6.7.2. Inadequate Capacity of National Institutions ............................................................................ 42

6.7.2.1. Analysis .................................................................................................................................. 43

6.7.3. Low National Budget Execution ................................................................................................. 44

6.7.4. Corruption .................................................................................................................................. 44

6.7.4.1. Analysis .................................................................................................................................. 45

6.8. Conclusion .......................................................................................................................................... 46

Annex-I Introduction to Development Partners .. .48 1. ADB (ASIAN DEVELOPMENT BANK) ASSISTANCE TO AFGHANISTAN ......................................................... 49 2. THE AGA KHAN DEVELOPMENT NETWORK (AKDN) IN AFGHANISTAN ...................................................... 50 3. AUSTRALIA IN AFGHANISTAN ..................................................................................................................... 52 4. CHINA IN AFGHANISTAN - COMMITTED TO THE SPIRIT OF GIVING ........................................................... 54 5. Canadas (CIDA) aid to Afghanistan ............................................................................................................ 55 6. Czech Official Development Assistance to Afghanistan ............................................................................. 57 7. Danish Development Assistance to Afghanistan ........................................................................................ 59 8. European Union IN AFGHANISTAN ............................................................................................................. 61 9. Finlands Contribution to Afghanistan ........................................................................................................ 63 10. Frances Assistance to Afghanistan ............................................................................................................ 64 11. Reconstruction and Development - German Cooperation with Afghanistan ............................................ 65 12. Indias Development Cooperation Program in Afghanistan ....................................................................... 68 31. Participation of Islamic Republic of Iran in the reconstruction of Afghanistan .......................................... 70 14. ITALYS SUPPORT TO AFGHANISTAN .......................................................................................................... 72 15. Japans Assistance to Afghanistan .............................................................................................................. 73 16. LITHUANIAN DEVELOPMENT COOPERATION IN THE ISLAMIC REPUBLIC OF AFGHANISTAN..................... 75 17. THE NETHERLANDS IN AFGHANISTAN A SMALL COUNTRY WITH A BIG FOOTPRINT .............................. 76 18. NEW ZEALAND DEVELOPMENT PROGRAM ................................................................................................ 77 19. Norways Development Assistance to the Government of the Islamic Republic of Afghanistan ............... 78 20. Polands Assistance to Afghanistan ............................................................................................................ 80


21. Spanish Cooperation concentrated in Badghis Province ............................................................................ 81 22. The Swedish Development Assistance to Afghanistan 2002-2010 ............................................................ 83 23. Swiss Commitment to Afghanistan - a contribution to a better future ..................................................... 84 24. TURKEYS CONTRIBUTION TO AFGHANISTAN ............................................................................................ 86 25. Afghanistan Development Co-operation Report - UK Input ....................................................................... 88 26. USAID ASSISTANCE TO AFGHANISTAN ....................................................................................................... 90 27. WORLD BANK IN AFGHANISTAN ................................................................................................................ 92 Annex-II Tables and Graphs 95

DEVELOPMENT COOPERATION REPORT IV

Acronyms AAA Accra Agenda for Action AACA Afghanistan Assistance Coordination Authority AC Afghanistan Compact ACBAR Agency Coordinating Body for Afghan Relief AIA Afghan Interim Authority ANA Afghan National Army ANCOP Afghan National Civil Order Police ANSF Afghan National Security Forces APPF Afghan Public Protection Forces APRP Afghanistan Peace and Reintegration Trust Fund AREU Afghan Research and Evaluation Unit ASFF Afghanistan Security Forces Fund ASNGP Afghanistan Sub-national Governance Program CDP Capacity Development Program CERP Commanders Emergency Response Program CIM Centrum fr Internationale Migration und Fachkrfte CIMIC Civil Military Cooperation CNTF Counter Narcotics Trust Fund CPI Corruption Perception Index CSR Civil Service Reform DAC Development Assistance Committee DAD Donor Assistance Database DCD Development Cooperation Dialogue DCR Development Cooperation Report DFID Department for International Development DFR Donor Financial Review DMU Debt Management Unit DOD Department of Defense DODCN Department of Defense and Counternarcotics DOD-CN Drug Interdiction and Counter-Drug Activities DP Development Partner EPHS Essential Package of Hospital Services FY Fiscal Year GDP Gross Domestic Product GoIRA Government of the Islamic Republic of Afghanistan HIPC Heavily Indebted Poor Countries I-ANDS Interim Afghanistan National Development Strategy IFC International Finance Corporation IMF International Monetary Fund M&E Monitoring and Evaluation

DEVELOPMENT COOPERATION REPORT | V

MCP Management Capacity Program MOF Ministry of Finance NIP National Immunization Program NPPs National Priority Programs NRAP National Rural Access Program NRVA National Risk and Vulnerability Assessment OECD Organization for Economic Cooperation and Development OEF Operation Enduring Freedom OG Operational Guide PAR Public Administration Reform PD Paris Declaration PDP Provincial Development Planning PEFA Public Expenditure Financial Assessment PFEM Public Finance and Expenditure Management PITF Political Instability Task Force PRR Priority Reform and Restructuring PRSP Poverty Reduction Strategy Paper PRT Provincial Reconstruction Team QIP Quick Impact Project SAF Securing Afghanistans Future SDC Swiss Agency for Development and Cooperation SIGAR Special Inspector General for Afghanistan Reconstruction TA Technical Assistance TF Trust Fund TIKA Turkish International Cooperation and Development Agency TVET Technical and Vocation Education Training UK United Kingdom UN United Nations UNHCR United Nations High Commissioner for Refugees UNMAS United Nations Mine Action Service UNOPS United Nations Office for Project Services USA United States of America USAID United States Agency for International Development USDoD US Department of Defense USSR Union Soviet Socialist Republic WB World Bank

DEVELOPMENT COOPERATION REPORT | 1

Executive Summary The Development Cooperation Report (DCR) 2010, prepared by the Aid Management Directorate (AMD) of the Ministry of Finance (MoF), is a living proof of the determination of Government of Islamic Republic of Afghanistan (GoIRA) officials to make inflow of foreign assistance effective for Afghanistan and its people. The results of the Development Cooperation Dialogues (DCDs) between the MoF officials and their DPs (DPs), along with other measures introduced by MoF (e.g. organizational restructuring for aid management and an aid management policy; Donor Financial Review (DFR); reform of Development Assistance Database (DAD)), are expected to pave the way for effective development. Tracing the long history of foreign involvement in Afghanistan, the DCR advances the analysis to the 21st century and the complex aid scenario in this country, which, devastated by decades of war, was compelled to marginalize development of its people for decades. This DCR covers the years post-9/11, a period in which GoIRA and its DPs have worked to reconstruct the country from the ashes. The impediments on their way are all-embracing: threats to human security resulting from terrorist violence; weak rule of law and governance; inappropriate protection of human rights; lack of resources to educate and provide employment to millions of young people and to nurture a healthy population men and women - who could serve as the main contributors to increasing the countrys productivity. Low capacity of human resources in a country where war has played havoc with the education system exacerbates the difficulties the Afghan leaders encounter. The DCR reflects the resolve of GoIRA to tackle these issues, both with its own limited revenue and effective financial and technical assistance from its DPs, as per the aid effectiveness principles announced in Paris (2005) and Accra (2008). The DCR is a call by GoIRA for the implementation of the principles of aid effectiveness, elimination of ineffective aid and a pledge to make itself accountable to its tax-paying public. The DCR outlines the international community and GoIRAs progress from 2001 to 2010, starting in Bonn, followed by conferences in Tokyo, Berlin, London, Rome, Paris, Hague, London, Kabul and Lisbon, where we re-pledged to legitimize a state born out of decades of conflict. The DCR sounds an alert that many themes common to the previous conferences continue to dominate todays agenda, as some basic problems related to the revitalization of Afghanistan, and to also make aid delivery and utilization more effective, have not been resolved. The DCR contends that while the inadequacies of the outcomes of the previous conferences should not deter the GoIRA and the DPs to take new actions, acknowledgement of the lack of progress and further resolve to take new and determined measures are essential for sustainable resolution of the problems. The Report contends that while the generous assistance of the international community produced some significant outcome results, in the absence of appropriate adherence to the aid effectiveness principles, full benefits of foreign aid have not been realized. On the DP side, deficiencies in aid delivery cover several spectrums that restrict appropriate implementation of aid effectiveness principles. Discrepancies in pledges, commitments and disbursements of aid finances, resulting in unpredictability in availability of financial resources, continue to hamper long term planning. The DCR also expresses concerns about the high aid dependency rate of Afghanistan, relying on external funding both for recurrent/operating costs and also development expenditure. DCR identifies the risks of aid dependent economies and proposes measures for GoIRA to take for mitigating the risks.


The security scenario - a war on terror - pushes a large volume of external finances to address security requirements. Itemization by DCR of a long list of funds, solely devoted to security-related programming, vividly displays the dominance of security sector spending (representing 51% of total external assistance), which outweighs investments in other sectors combined. While security is a pre-condition for operation of development projects, inequity in distribution of funds between security and non-security development sectors often results in neglecting the countrys basic development needs prioritized by GoIRA, and aid becomes politicized and militarized. 82% of external assistance disbursed from 2002-2010 by-passed GoIRAs national budget process, was invested in programs/projects parallel to those of GoIRA and managed directly by the implementing agencies of the DPs, without any accountability to the GoIRA. Such practices of tied and prescriptive donor-driven aid violates the Paris principle of ownership of development programs by the recipient government and alignment of donor programs with national priorities. DCR concludes that external ODA delivery by-passing Government budget channels results in a missed opportunity for GoIRA to learn by doing and thereby develop the required capacity to design, implement, monitor and report on development programs. In relation to parallel mechanisms for aid program delivery, the ill-conceived contracting and sub-contracting processes of the DPs and their negative impact on the Afghan economy has been raised in the DCR. According to DCRs assessment, donor coordination in Afghanistan is less than satisfactory and harmonized actions are few. Program Based Approaches (PBAs) and Sector Wide Approaches (SWAPs) have hardly gained ground. The result is fragmentation of aid, duplication of programs in the absence of well shared information amongst DPs and unbalanced and inequitable development resulting from overcrowding of certain sectors or geographic areas by too much funds invested by too many DPs. Meanwhile, other areas with greater needs are left with little investment. These problems emanate from inadequate attention by the DPs to accountability needs. GoIRA has limited knowledge about one third of the total external assistance investment in the country since 2001, as many DPs do not disclose information on project activities and results, while others do not have information readily available . Under such circumstances, when results to be attained by the donor-funded programs are not clearly recorded and communicated, managing for development results becomes rather rhetorical. Other than accountability for development results, mutual accountability needs demand further actions. DPs demand accountability from GoIRA in areas such as faster project/program execution, increasing absorptive capacity, improved public performance management and greater transparency to control corruption. The DCR outlines the measures undertaken by GoIRA to address these accountability requirements, as demanded by the DPs. The expectations are that transparent and regular DCDs would help build up mutual accountability and trust. The DCR provides a lengthy list of actions to be taken to address the lapses (as identified above), to which a lack of attention will lead to failure in effective aid delivery and utilization, which, in turn, will have huge impact on Afghanistans reconstruction and development. Other than those actions directly related to promoting aid effectiveness, critical points integral to balanced development and reduced aid dependency include increased revenue generation and implementation of the related reforms in tax and customs administration, and engendering an enabling


environment for private sector development through implementation of business investment and banking laws and control of corrupt practices. Actions for promotion of equalitarian practices in development investment will include emphasis on womens development, which will help utilize the productive capacity of 50% of the Afghan population. Urban-rural disparities should be countered with transfer of more aid resources to, and better development programming for, the rural areas through Provincial Development Planning that would facilitate balanced allocation of funds. The DCR concludes with a summary of the GoIRA-DP commitments at the Kabul Conference (2010). The highlights of these commitments included: greater proportion (at least 50%, within the next two years) of aid delivery through the Afghan budget (or on-budget support), along with measures taken to maximize aid effectiveness benefits from off-budget assistance (as per the guidance outlined in the Operational Guide for OffBudget Development Financing). Both are expected to help reduce Afghanistans aid dependency and enable the Government to utilize aid resources identified in needs-based development, in priority sectors. The DCR confirms that the international communitys commitments were matched at the Kabul conference by GoIRAs commitments for reforms to strengthen public finance management systems, reduce corruption, improve budget execution and increase revenue collection. GoIRA is determined to take further measures to make aid utilization more effective. GoIRAs expectation is that timely delivery on its own commitments, translated into concrete monitorable actions, shall elicit concomitant delivery from the international community. Future DCRs will report on the progress in the planning and implementation of the commitments made by both GoIRA and the DPs. (Hard data on donor profiles and aid flow and distribution are available in the main text)


1. Introduction Overall, this report aims to provide an analysis of aid flows to Afghanistan and their effectiveness. Following this first DCR, similar future reports will provide more comprehensive information on foreign assistance and improve public awareness on its role in the stabilization and development of Afghanistan. After the establishment of the Interim Administration in 2001, following the Bonn Conference, the international community committed to support the new transitional Government in Afghanistan by providing both development and military assistance. Since then, billions of dollars of development assistance have been provided in different forms: financial grants, loans, and in-kind and technical assistance. The need for oversight of the high and intensive volume of international assistance to track the inflow of aid and ensure aid coordination and management was acknowledged as a priority by GoIRA. The GoIRA thus established the Afghanistan Assistance Coordination Authority (AACA) in April 2002 through a presidential decree. In August 2003, the AACA was dissolved and the functions of aid coordination and management were incorporated into the General Budget Directorate of MOF. In 2006, MoF initiated the semi-annual Donor Financial Review (DFR) process, with the aim to: (a) obtain and analyze data on donor assistance to Afghanistan and (b) support preparation of the National Budget. Such a process helped build cooperative ties between GoIRA and its DPs and promoted mutual accountability and transparent exchange of information. These outcomes assisted GoIRA in planning spending priorities and appropriation of development finances through tracking the inflow of donor finances. In 2008, MoF published the first DFR report on development assistance to Afghanistan. The 2008 and the subsequent reports have, to date, serve as useful digests providing information on foreign assistance to Afghanistan. Initially presented as priorities by H.E. President Hamid Karzai during his inaugural speech of his second-term appointment as president, and later officially introduced in the Kabul Conference (July 20, 2010), GoIRA and the international community endorsed the Kabul Process, an Afghan-led action plan to improve governance, social and economic development, and security, prioritized from the Afghanistan National Development Strategy (ANDS). GoIRA prioritized the needs in the form of National Priority Programs (NPPs). For promotion of effective cooperation between the GoIRA and its DPs, significant resolutions were adopted at the Kabul Conference, which are highlighted below:

In line with the London Conference Communiqu, the international community restated its strong support for channeling at least 50% of development aid through GoIRAs core budget within two years. Concomitantly, GoIRA resolved to undertake the necessary reforms to strengthen its public financial management systems, reduce corruption, improve budget execution, and increase revenue collection to finance key NPPs and progressively achieve fiscal sustainability.

The international community expressed its readiness to progressively align donor development assistance with the NPPs, with the GoIRA achieving 80% of alignment within the next two years.


The international community committed to work with GoIRA to take concrete steps necessary to address GoiRAs current limited capacity for absorption of funds.

The international community expressed its intent to begin work with GoIRA to practically implement the principles outlined in the 2030 Operational Guide: Criteria for Effective Off-Budget Development Finance.

The DPs expressed their intent to work with GoIRA to improve procurement procedures and pursue due diligence in international contracting process over the course of a year; endeavor to reduce sub-contracting unless a clear evidence of added value for adoption of such an approach was provided; and take responsibility for ensuring transparency and accountability of all sub-contracting networks.

The Kabul Process, the commitments made by all parties to improve partnership, and the interest generated in addressing the issues that would help implement these commitments, created a heightened sense of need for comprehensive and regular dialogues with DPs on aid and development effectiveness. In view of this, AMD of MoF started the first series of direct bilateral dialogues in late November 2010 with individual DPs, the process called the Development Cooperation Dialogues (DCDs). It is believed that comprehensive discussions between the GoIRA and the DPs, promoted by DCDs, would better attend to the need for compliance with development effectiveness principles and devise measures to improve effective and efficient delivery and utilization of aid. Successful dialogues would certainly help advance the implementation of the aid effectiveness principles of the Paris Declaration (2005) and Accra Agenda (2008). The DCD meetings provide the opportunity to the international community and GoIRA to discuss and internalize the importance of the commitments made and the challenges ahead. There are clear signals that a process of this nature helps both the GoIRA and its DPs to work in close collaboration to maximize the impact of development assistance. The success of the first set of DCDs is best evidenced in DPs transparent release of information of their assistance provided to Afghanistan and joint Afghan Government and DPs review of the obstacles and solutions to effective aid delivery and utilization. This report, which presents quantitative and qualitative analysis of foreign assistance to Afghanistan, is mainly developed based on DCDs and other complementary studies such as PD Evaluation 2010, PD Monitoring Surveys and Principles of Good International Engagement in Fragile States and Situations. The expectation is that regular reports of this nature will further promote accountability and transparency of ODA to both the Afghan and donor country publics. Notably, this DCR marks a departure from the former DFR Reports as it includes inputs from all DPs engaged in Afghanistan and contributing to its development. The report begins by setting out the history of ODA since 2002 (including international conferences on Afghanistan), followed by presentation of significant trends in the flow of development assistance, Afghanistans aid dependency, an analysis of the relationship between the military and development aid and aid distribution. The report subsequently analyzes ODAs impact in Afghanistan and explores the remaining critical challenges to be addressed. Finally, it focuses on the implementation of aid effectiveness principles of the Paris Declaration (2005) and the Accra Agenda for Action (AAA-2008) in the Afghanistan-specific context, along with recommendations for the way forward.


2. History of Foreign Assistance in Afghanistan Foreign assistance has played an important role in Afghanistans history, with Afghanistan receiving its first monetary assistance from the East India Company during the British rule in South Asia. Although the mentioned financial assistance did not necessarily put Afghanistan in the category of aid dependent nations, the country has rarely achieved fiscal sustainability even after it gained de jure and de facto status of state. The degree of its aid dependency changed from time to time, with changes in economic and political situations in the country. The history of the influx of foreign assistance to Afghanistan can be divided into the following three periods, each of which was characterized by factors influencing the countrys aid dependency: 1. Pre-Cold War (1919-1950s) 2. The Cold War era (1960s-1991) 3. Post 9/11 (2001-present)

2.1. Pre-Cold War era (1919-50s)

In order to modernize the centralized economy, several attempts were made to scale up economic growth during King Amanullahs regime. These included widening the revenue base such as tax collection. The basics of domestic revenue mobilization came from the tax on agricultural products, which accounted for 60% of domestic revenues. The amount of revenue from this category declined to 18% in 1953, and 7% in 1958, respectively. As a result, the domestic revenues were not enough to finance the needs of the country, which, in turn, made the economy run a fiscal deficit. In order to fill the deficit, the then Government sought foreign assistance from major donor countries of the time. The major sectors receiving support in this period were infrastructure and education. Selected results of such assistance can be cited in the construction of schools; the most ancient ones, Malalai and Estiqlal, were built with the help of the French Government, Germany constructed Amani and the USA built Habibia High School. Due to a lack of information, however, it is difficult to track the exact volumes of foreign assistance, their type and the results achieved.

2.2. The Cold War era (1960s-1990s)

Even before 1960s, the economy was heavily influenced by factors associated with the Cold War. In order for the country to survive the pressures of the superpowers during the Cold War period, the then Prime Minister, Mohammad Daud Khan, sought foreign assistance from both USA and the Soviet Union. From the late 1950s to 1970s, Afghanistan received 50% of its foreign assistance from the former USSR, and 30% from the USA, which included approximately USD 160 million commitments in the form of loans (DMU, MoF). Assistance was also received from multilateral DPs such as the World Bank and ADB. Foreign assistance mainly focused on infrastructure and agricultural sectors. The major outputs were the Salang Tunnel and 1200 km of paved roads, which played an active role in economic growth. The 1970s was marked by an economic downturn characterized by severe droughts, low agricultural production, consequent famine and a centralized economy, which hampered private investment. In


such a difficult period, western aid assistance also declined, which pushed the country into further economic turmoil. The deteriorating scenario made the country rely mostly on former USSR assistance. During the Soviet occupation of Afghanistan, the inflow of former USSR assistance to the country got further momentum, which helped develop infrastructure and boost trade opportunities. In the decade of 1970s, the amount of loans Afghanistan received from the USSR stood at USD 11 billion (DMU, MoF). Notably, although the enormous flow of financial assistance from the former USSR helped Afghanistan cover its fiscal deficits, it had an adverse impact on potential influx of assistance from other countries and multilateral agencies. During the Soviet occupation, illicit (informal) components were introduced into the licit (formal) economic structure. The illicit economy was promoted with case and in-kind assistance from neighboring countries, and from the USA to the Mujahidin and refugees. During this period, NGOs led the humanitarian response and provision of assistance. In the absence of proper records, it is not possible to report the exact amount of foreign assistance in support of the Mujahidin. However, available data confirms that USSRs aid to GoIRA contributing to the licit pie of the economy in 1980 alone was USD 1 billion, which further grew in subsequent years (Steve Coll, 2004). The official inflow of assistance to Afghanistan stopped after the downfall of Dr. Najeebullahs regime, which also marked the end of the Cold War in 1992. However, small scale humanitarian assistance from a few countries via NGOs and UN agencies continued between 1992 and 2000. Due to unavailability of information, it is not possible to present the exact amount of assistance during this period.

2.3. Post 9/11 (2001- present)

The post-Taliban era was a turning point in the economic history of Afghanistan as it was the first time since the end of the Cold War that Afghanistan moved to the top of the ODA 1agenda. Acknowledging the mistakes made, and the resulting negative impact of withdrawal from substantive engagement in Afghanistan, the international community recognized the need to help Afghanistan become a stable state for global security reasons. The international community therefore re-entered Afghanistan, a country with war-torn infrastructure, a feeble economy and weak governance incapable of delivering basic services to its people. The re-intervention process began with the establishment of the Interim Government in late 2001. In response to a large number of needs and challenges in the country, a remarkable volume of development assistance has been provided. For further details on distribution of aid, refer to the overview section below. External assistance provided to date, has enormously contributed towards achieving some significant results in various sectors of the economy. Building, reconstructing and rehabilitating physical infrastructure, amongst other major achievements of foreign assistance, played a key role in economic development in Afghanistan. For the first time in history, more than 4000 kilometers of paved highways, secondary and tertiary roads have been built with aid money. The investment in the energy sector

1 Official Development Assistance in the form of grand or loan from a sovereign Government to a developing

country or multilateral agency for the promotion of economic development and welfare.


provided 30% of the people with access to electricity. The increasing GDP rate since 2001 is a highlight. These are just a few examples of the impacts of external assistance, the detailed account of which can be found in Chapter 3.


3. Landmark Conferences

3.1. Bonn Conference (2001) Representatives of Afghanistan, under the initiative of Mr. Lakhdar Brahimi, Special Representative of the United Nations Secretary General for Afghanistan, met in December 2001, and agreed to bring an end to the coalition war against the Taliban and build a new Government in cooperation with the international community. From the Bonn conference emerged the Afghan Interim Authority (AIA), made up of 30 members, headed by a chairman. AIA was inaugurated December 22, 2001 with a six-month mandate, followed by a two-year Transitional Authority (TA), after which democratic elections were to be held for formation of a permanent Government. The Bonn Agreement authorized the establishment of the NATO-led International Security Assistance (ISAF) Force for oversight of security in Afghanistan. The Afghan Constitution Commission also established in Bonn to draft a new constitution in consultation with the public. A judicial commission was established to rebuild the justice system in accordance with Islamic principles and international standards of the rule of law, Afghan legal traditions and inauguration of a Supreme Court. In the Bonn Conference, the international community did not pledge any financial assistance, but they expressed determined political commitments to support a prosperous and peaceful Afghanistan.

3.2. Tokyo Conference (2002) The International Conference on Reconstruction Assistance to Afghanistan was held on January 21-22, 2002 in Tokyo, with ministerial level participation, co-chaired by H.E. Hamid Karzai of the Afghanistan Interim Administration, Japan, the US, the EU and Saudi Arabia. The conference provided the AIA an opportunity to reaffirm its determination to pursue the process of reconstruction and development of Afghanistan according to the Bonn Agreement principles and provided the international community the opportunity to express its political support for this process with pledges of concrete assistance. The international community strongly emphasized the importance of rapidly establishing a comprehensive macroeconomic and monetary framework. Thus the focus was placed on sound economic reforms to achieve sustainable economic development. A cumulative total pledge of more than USD 5.1 billion of assistance was announced to support the implementation of the commitments of the conference.

3.3. Berlin Conference (2004) The Berlin conference was held on March 31, 2004 in Berlin, Germany. The conference was co-chaired by the UN and the Government of Afghanistan, Federal Government of Germany and Government of Japan. This Conference had three major aims: (1) Renewal of commitments for reconstruction funds; (2) long-term commitments from the International Community for continued support to Afghanistan; and (3)

http://en.wikipedia.org/wiki/NATOhttp://en.wikipedia.org/wiki/Afghan_Constitution_Commission


concrete planning for the post-Bonn phase of reconstruction. The conference reaffirmed the need to boost Afghanistan's fragile reconstruction efforts, improve security conditions to promote peaceful presidential election in 2004 and the parliamentary and provincial elections of 2005, and furthermore to clamp down on the burgeoning opium trade. The following were the major outcomes of the conference: (a) GoIRA agreed on a development framework entitled Securing Afghanistans Future (SAF), (b) NATO committed to expand ISAF's mission by establishing five additional Provincial Reconstruction Teams by the of Summer 2004 and further PRTs thereafter; and c) ISAF agreed to assist in securing the conduct of elections. At the end of the conference, multiyear pledges were made for the reconstruction and development of Afghanistan totaling USD 8.2 billion for the three years from March 2004 to March 2007. But this amount included earlier commitments and thus new confirmed commitments amounted only to USD 5.6 billion

3.4. The London Conference The London Conference was held on January 31 and February 1, 2006, in the capital city of UK where 66 states and 15 international organizations participated. The conference was co-chaired by British Prime Minister H.E. Tony Blair, The President of Afghanistan H.E. Hamid Karzai and UN Secretary-General Kofi Annan. In this conference GoIRA presented the Interim Afghanistan National Development Strategy (I-ANDS), through which the future development framework was envisaged. The delegates adopted the Afghanistan Compact, a political agreement between the international community and the GoIRA, and agreed to establish a Joint Coordination and Monitoring Board (JCMB) for overall strategic coordination of the implementation of the Afghanistan Compact. This identified three critical and interdependent areas or pillars of activity for the next five years: Security, Governance, Rule of Law and Human Rights, and Economic and Social Development. An additional focus was on a critical issue cross-cutting across all pillars: elimination of the narcotics industry, a formidable threat to the people and state of Afghanistan, the region and globally. The Afghanistan Compact marked the formal conclusion of the Bonn process The compact served as a basis for the next phase of reconstruction, with commitments to rely more on the country's own institutions and support the Afghanistan National Development Strategy (ANDS) development process. At the end of the conference the donor countries and development agencies pledged to provide a total of USD 10.5 billion for a period of five years to support the implementation of ANDS. After the confirmation of pledges and exclusion of the reiterated pledges, the actual new pledge was confirmed to be USD 8.7 billion.

3.5. Rome Conference (2007) The Rome conference was held on July 2, 2007 in Rome, Italy. The conference was co-chaired by Government of Afghanistan, Government of Italy and the United Nations and focused on strengthening the rule of law and justice sector in Afghanistan. The framework for the rule of law and justice reform


was provided by the Afghanistan Compact and its benchmarks, based on the vision of Justice for All and within the overall conceptual framework of the Afghanistan National Development Strategy (ANDS). In this conference, GoIRA committed itself to finalize a national justice sector strategy and to implement comprehensive rule of law reform with the assistance of the International Community, through a national justice program. The DPs promised to support Afghanistan on its path towards the rule of law and justice, based on the GoIRA proposed national justice program and pledged a total of USD 360 million. However, after the confirmation and exclusion of reiterated pledges, the new pledge was verified to be USD 40 million.

3.6. Paris Conference on Afghanistan (2008) The International Conference in Support of Afghanistan was held on June 12, 2008 in Paris, the capital of France, under the chairmanship of the three co-chairs: H.E Nicolas Sarkozy, President of France, H.E Hamid Karzai, President of Islamic Republic of Afghanistan and H.E Ban Ki-moon, UN Secretary-General. This conference marked a new commitment of the international community to work in closer cooperation under the Afghan leadership to support Afghanistans first five year National Development Strategy (ANDS). GoIRA and the international community agreed to retain the Afghanistan Compact as the foundation of future activities. The agreed priority was to strengthen institutions and economic growth, particularly in agriculture and energy sectors. The other key elements identified in the Declaration of this conference were the importance of holding free, fair and secure elections in 2009 and 2010; ensuring protection of human rights and the provision of humanitarian assistance; and the need to improve effective utilization of aid in order to ensure concrete and tangible development benefits for all Afghans. At the end of the conference the international community announced a generous financial pledge of USD 20 billion, of which only USD 14 billion was confirmed to be new pledges.

3.7. Hague Conference (2009) The Hague conference was held on March 3, 2009 based on the initiative of the Government of the Netherlands. The conference was hosted by the Government of Netherlands and co-chaired by the Foreign Minister of the Islamic Republic of Afghanistan, the Foreign Minister of the Kingdom of Netherlands and the Special Representative of the UN Secretary-General for Afghanistan. The conference agreed on the urgent need for a clear direction for provision of strengthened support to the people of Afghanistan, for enhanced security, improved life conditions and protection of their democratic and human rights. The U.S Government unveiled a new strategy, which committed additional funds and troops for Afghanistan, and a renewed focus on targeting al Qaeda militants on the Afghanistan/Pakistan border. In this conference the GoIRA presented a new policy to promote reconciliation with the Taliban. Overall, the conference participants agreed to pursue the following priority for promotion of good governance and stronger institutions in Afghanistan; generation of economic growth; strengthening security and enhancing regional cooperation.


3.8. London Conference (2010) The second international conference on Afghanistan in London was held in January 2010 where the prime focus was to set a timetable for advancing security operations tied to a political process in Afghanistan. The conference was organized by British Prime Minister Gordon Brown and co-chaired by the President of Afghanistan H.E. Hamid Karzai and United Nations Secretary-General Ban Ki-moon. This Conference represented a decisive step towards greater Afghan leadership to secure, stabilize and develop Afghanistan. The aim of the 2010 London Conference was to draft plans to hand over security responsibilities from ISAF to Afghan forces and to encourage Taliban members to renounce violence. The conference laid out a plan for what was hoped to be a new phase addressing the conflict of Afghanistan. One of the major outcomes of the conference was the agreement on the transition of security to Afghan Security Forces in a gradual fashion where Afghan security forces to take the responsibility of security province by province until 2014. Together, the GoIRA and the international community committed to make intensive efforts to ensure that GoIRA would be prepared to increasingly meet the needs of its people through developing its own institutions and resources.

3.9. Kabul Conference (2010) The landmark Kabul Conference was held on July 20, 2030 in Afghanistans capital, Kabul. Hosted by GoIRA and co-chaired by the United Nations, the conference agreements followed up on the London communiqu of January 2010 and reaffirmed renewed commitment to the Afghan people. It was historic as it was the first time that a conference of this kind was held in Afghanistan and by Afghans. GoIRA presented an Afghan-led plan for improving development, governance and security, including the NPPs and Public Financial Management Roadmap. An Operational Guide was introduced for promoting alignment of off-budget development financing with GoIRA development priorities and, thereby, improving the effectiveness of aid. In order to enable GoIRA to implement its prioritized agenda, renewed emphasis was placed on the need for sustained and coherent capacity-building support at national and sub-national levels. The Kabul Conference was a critical stepping stone to the Kabul Process of transition to full Afghan leadership and responsibility for the countrys security, development and reconstruction in all spheres, building on previous international commitments including the London Conference of 2010 and the GoIRA-led Consultative Peace Jirga of June 2-4, 2010.

3.10. Lisbon Conference (2010) The NATO Conference was held in November 2010 in Lisbon and chaired by the NATO Secretary-General, Anders Fogh Rasmussen. This was the third major international conference of 2010 for Afghanistan. NATOs mission in Afghanistan was the main topic of discussion. At Lisbon, 28 heads of states of NATO elaborated the policy statement related to special training (to be started in the beginning of 2011) for capacity building of Afghan security forces to make them able to

file://file-server/shared/2-%20Development%20Budget/Aid%20Effectiveness/Mannual/Resources/14-Communique%20of%20London%20Conference%20on%20Afghanistan.pdffile://file-server/shared/2-%20Development%20Budget/Aid%20Effectiveness/Mannual/Resources/15-Kabul%20Conference%20Cluster%20Paper.pdf


assume the security responsibilities for Afghanistan by the end of 2014. The assumption of responsibility by Afghans will help pave the way for withdrawal of NATO and its allies from Afghanistan. Other agreements included the allies agreement with Russia to jointly expand support for Afghanistan, including by broadening transit arrangements, extending training of counter narcotics officials and providing equipment to Afghan security forces. Table 1: Summary of major outcomes of the international conferences on Afghanistan

Conference Major Outcomes Pledges

Bonn Conference (2001)

1. The Afghan Interim Authority (AIA) was inaugurated with a six-month mandate to be followed by a two-year Transitional Authority (TA), after which elections were to be held.

2. Establishment of the NATO-led International Security Assistance Force mission for Afghanistan.

3. Establishment of the Afghan Constitution Commission to draft a new constitution in consultation with the public.

4. The establishment of a national justice sector strategy, and a judicial commission to rebuild the justice system

Tokyo Conference (2002)

1. GoIRA and International Community reaffirmed commitment to pursue the process of reconciliation, reconstruction and development, according to the Bonn Agreement.

2. GoIRA and International Community reaffirmed the commitment to establish a comprehensive macroeconomic and monetary framework.

US$5.1 billion

Berlin Conference (2004)

1. The final publication of Securing Afghanistans Future (SAF) document was produced by the World Bank, the UN and GoIRA.

2. NATO committed to expand ISAF's mission by establishing five additional Provincial Reconstruction Teams by summer 2004 and further PRTs thereafter, as well as the readiness of ISAF and OEF to assist in securing the conduct of elections.

US$5.6 billion

London Conference (2006)

1. Adoption of Afghan Compact. 2. Establishment of a Joint Coordination and Monitoring Board (JCMB) for overall

strategic coordination of the implementation of the Afghanistan Compact. 3. Commitment to Afghan National Development Strategy. 4. Eliminating the narcotics industry.

US$8.7 billion

Rome Conference (2007)

1. Finalization of a national justice sector strategy. 2. The implementation of a comprehensive rule of law reform through a national

justice program.

US$0.04 billion

Paris Conference (2008)

1. New commitment of International Community to work more closely together under Afghan leadership to support Afghanistans first five-year National Development Strategy (ANDS).

2. Commitment to strengthen institutions and economic growth, particularly in agriculture and energy sectors.

3. Commitment to hold free, fair and secure elections in 2009 and 2010. 4. Commitment to ensure respect for human rights and the provision of humanitarian

assistance. 5. Commitment to improve aid effectiveness

US$14 billion

Hague Conference (2009)

1. Commitment to promote good governance and stronger institutions; to generate economic growth; to strengthen security and to enhance regional cooperation

2. Pledged a stronger military offensive against the Taliban insurgency, to invest in civil reconstruction, to tackle the drug trade and to stabilize neighboring Pakistan.

3. The U.S Government unveiled a new strategy, which combined extra funds and troops for Afghanistan, and a renewed focus on targeting al-Qaeda militants on the Afghan/Pakistan border.

4. GoIRA presented a new policy to reconcile with Taliban and give opportunities to reintegrate into Afghan society.

http://en.wikipedia.org/wiki/NATO


London Conference (2010)

1. Drafted a plan to hand over security responsibilities from ISAF to Afghan forces and to encourage Taliban members to renounce violence.

2. A Peace and Reintegration Trust Fund mooted to offer economic alternatives to those who renounce violence.

3. Commitment to making intensive efforts to ensure that GoIRA is increasingly able to meet the needs of its people through developing its own institutions and resources.

Kabul Conference (2010)

1. An Afghan-led plan for improving development, governance and security, including National Priority Programs, was presented by GoIRA to enhance service delivery.

2. Commitment to sustained and coherent capacity-building support at national and at sub-national levels.

3. Commitment to support Afghan ownership and leadership, strengthening international partnership.

Lisbon Conference (2010)

1. Special training of capacity building of Afghan forces would be resumed in 2011 to make them able to assume the security responsibility of all Afghanistan by the end of 2014.

2. Commitment to broaden transit arrangements, extending training of counter narcotics officials and providing equipment to Afghan security forces.

3. Signed an agreement with the NATO Secretary General on a long-term partnership between the Alliance and Afghanistan that will endure beyond the combat mission.

Assessment The international community and GoIRA have marched from Bonn in 2001 to Tokyo, Berlin, London, Rome, Paris, Hague, London, Kabul and Lisbon in 10 years, re-pledging delivery of development and reconstruction, security, governance and rule of law, and helping to legitimize a Government and a state born out of decades of conflict. At the base of all conferences lay the intent to revitalize Afghanistan and bring new hope for the future. While much optimism must boost our activities, it is unwise to avoid a realistic assessment of how much of what was planned, agreed upon and promised in the past costly conferences have been delivered to Afghans. It is important that we do not repeat the mistakes of the past. The issue of accountability, in fact, has been raised repeatedly at national and international levels, regrettably with no real impact in producing better results.

Indeed, with generous support from the international community, some results are seen on the ground. But given that we started at ground zero in 2001, any improvement is bound to be seen as a sign of progress. Many of the themes common to the previous conferences continue to dominate the joint agenda of the international community and Afghans, as some basic problems have not been resolved. Full resolution of these issues could not have been expected, but the lack of improvement on issues significantly important for Afghanistan's survival, development and eventual exit from aid dependency must be noted. Not that the inadequacies of the results of the past should deter us from taking new actions and continue the previous resolve, but acknowledgement of the inadequacies and probing their causes are essential for future success.


4. Aid Dependency (Reality of Aid in Afghanistan) A country is truly aid dependent when it relies on external funding to cover its day-to-day operating (recurrent) costs and development expenditures. Afghanistan has been aid dependent for over 60 years, with the roots of dependency going back to the middle of the 20th century, which has been explained under the previous section History of External Aid. As stated earlier, Afghanistan has become one of the largest recipients of external aid since 2002. After the fall of the Taliban, external aid has accounted for a substantial portion of the countrys Gross Domestic Product (GDP). The following graph shows the trend of the contribution of ODA as a percentage of GDP over the past few years.

At the level of 71%, the aid dependency ratio in Afghanistan is one of the highest in the world. Similarly, dependency in Afghanistan is high compared to its neighboring countries like Pakistan, where the aid to GDP ratio is 1.1%, Iran, with a ratio of 0.1%, and Uzbekistan, with a ratio of 2.4% (Nation Master 2010). Since 2002, the entire Development Budget, and on average up to approximately 45% (44% for 2010-2011) of the Operating Budget, has been financed by external aid. It is worth acknowledging that this assistance has helped the country achieve a lot in terms of development over the past years. External assistance has helped build infrastructure, increase primary school enrolment, increase access to basic health for almost the entire population and has helped to generate revenues from nationally conducted economic activities. The following graph shows the trends of national revenue versus operating expenditures:

Figure 1: Aid as Percentage of GDP


Despite an increasing trend in domestic revenue, it still accounts for less than 10% of total GDP (MoF 2011). The argument that Afghanistan is heavily dependent on external assistance continues to be valid and is supported by the fact that the entire development budget and a significant portion of the operating budget of Afghanistan are financed by external assistance. Similarly, the above graph shows that there is also an increasing trend in operating expenditures of the country which puts a heavy burden on the Government and increases the reliance of the country on external financing. It is anticipated that this burden and the gap between the national revenue versus operating expenditure will increase even further, given the new fiscal pressures such as the transition process and strengthening of ANA and ANP. It is anticipated that aid dependency will remain a reality for Afghanistan for a number of years. Therefore, efficient aid delivery and effective coordination among DPs and between DPs and the Government is important to ensure that the aid money is spent on revenue generating sectors that guarantee maximum return on investment and sustainable development.

Figure 2: Domestic Revenue vs. Operating Budget

Section I

Overview of External Assistance


5. Overview of External Assistance

5.1. Synopsis This section presents an overview of external assistance to Afghanistan since late 2001. Since the establishment of the interim Government, a total of USD 90 billion in aid has been pledged for Afghanistan (for the period of 2002-2013) by the international community through a series of pledging conferences and supplementary means. From the total ODA pledged, USD 69 billion has been formally committed to be disbursed from 2002 to 2010. Of the total ODA committed, USD 57 billion forms the actual amount of ODA disbursed to finance a wide range of programs and projects as part of the reconstruction and development process. [See figure 1] Since 2002, the volume of total annual development assistance increased from a total of USD 3.2 billion in commitment in 2002 to USD 16.8 billion in 2010. [See figure 2] The reason for a two-fold rise in the amount of assistance in 2007 was due to an increase from the United States (2007 Supplementary Budget). In 2008 and 2009, similar levels of development assistance were retained. However, 2010 marked the peak of assistance committed to funding development and security-related activities in Afghanistan. Despite this large increase in the volume of ODA committed, the total volume of assistance disbursed has only been USD 10.9 billion, indicating a 65% execution rate by DPs.

Figure 2: Classification of ODA by Year (2002-2010)

Figure 1: Overview of External Assistance (2002-2010)


Not all commitments made from 2002 to 2010, have been translated into 100% disbursements. The reasons for slow disbursement are manifold. Amongst all, security deterioration is considered to be a major obstacle hampering project implementation across the country. Security cannot be accepted as the sole excuse, however, because other DPs such as the United Kingdom, Canada, Japan, and the Netherlands fully disbursed the amount of development assistance they committed from 2002 to 2010. The European Union comes fifth with a 90% disbursement rate, followed by the United States with 84%, and the World Bank with 81%. In terms of the volume of ODA disbursed, however, the USA is by far the largest donor, followed by Japan, EU, UK, WB and Canada. [See figure 3] For the bulk of external assistance disbursed from 2002 to 2010 for both security and development, two main channels of delivery have been used: a) Off-budget, and b) On-budget. Off-budget support consists of assistance that bypasses the Governments Public Finances Management System with little or no Government involvement in planning, implementation or monitoring of the programs/projects. On-budget support consists of assistance that either has been given to the Government as bilateral support or provided through the Trust Funds. Most such on-budget programs are Government designed, implemented and monitored. Administered by multilateral agencies, Afghanistan Reconstruction Trust Fund (ARTF), Law and Order Trust Fund for Afghanistan (LOTFA) and Afghanistan Peace and Reintegration Trust Fund (APRTF) provided the largest sources of on-budget support to the Government. However, an analysis of ODA disbursement for financing security, reconstruction and development related development activities reflect the ratio of on-budget to off-budget support as 18:82. In other words, only 18% of external assistance disbursed in the period 2002 to 2010 has been provided through the Governments Core Budget. The remaining 82% of assistance has been managed by the DPs alone through projects/programs implemented parallel to those of the Government. [See figure 4]

Figure 3: Classification of ODA by Donor (2002-2010 in US$ billions)


Notably, from year to year, the percentage of ODA channeled through the Governments budget might fluctuate, with the on-budget amount slightly higher in some years while lower in others. For the sake of simplicity, the ratio of on-budget assistance has been calculated from the cumulative volume of external assistance disbursed since 2002. Despite the fact that only a fraction of external assistance has passed through Governments treasury, the trend of DPs on-budget contributions, in terms of volume, has experienced an upward trend. [See figure 5] However, after the commitments made at London and Kabul Conferences, in January and July 2010 respectively, GoIRA expects an increase in the volume of on-budget assistance by its DPs.

Figure 4: Ratio of On-budget versus Off-budget Support (2002-2010)

Figure 5: DPs Contribution through the Governments Budget


5.2. Geographic Distribution of External Assistance Since the start of reconstruction and development in Afghanistan, data collection based on geographical distribution of external assistance has always been a challenge for GoIRA. Despite a number of initiatives taken by MoF since 2003, such as the establishment of the DAD and carrying out portfolio reviews with the individual DPs and/or DFR processes, the Government has not been able to collect accurate and reliable data on distribution of aid across different provinces. However, according to [Figure 6], which only reflects data for the top 10 provinces and is the only data available at MoF, the highest amount of external aid - USD 2.8 billion - which includes both security and development spending, has been disbursed in the capital Kabul, followed by Helmand, Kandahar, and Nangarhar provinces. On average, the provinces of Herat, Kunar, Ghazni, Paktika, Paktya and Balkh have received USD 476 million each. For further details of provincial distribution of external assistance, please refer to [Graph 2] in Annex-II of this report. In addition to the assistance provided for reconstruction and development purposes by our DPs, the bulk of disbursements made in all these provinces include spending through military means such as the PRTs and CERP. The GoIRA underscores that sustainable development requires a more equitable distribution of investment across sectors and geographical areas, and therefore the DPs are encouraged to make use of the current systems in place to provide maximum information about aid distribution and to use the information made available through these systems for better coordination and planning of aid flows in the future. Figure 6: Top 10 Recipient of External Assistance (2002-2010)


5.3. Loans Since the late 1960s, Afghanistan, in addition to receiving external assistance in grants, has received foreign assistance in the form of loans from bilateral and multilateral creditors. Total loans committed between 1966 and 2008 stand at USD 13 billion, of which USD 11 billion or the largest proportion has been provided by the former Soviet Union during the Soviet era in Afghanistan. While a large portion of ODA provided to Afghanistan since 2002 is in the form of grants, a fraction of it, which is around USD 1.5 billion, has been provided in the form of loans. [Table 5] in Annex-ii shows that Asian Development Bank (ADB) is the second largest provider of loans to Afghanistan, followed by the World Bank (WB). Afghanistan is obliged to repay the loans it has received from every bilateral and multilateral creditor. Although the country has received a total amount of USD 10.5 billion as debt relief under the Heavily Indebted Poor Countries (HIPC) 2Debt Initiative, its total debt stock or outstanding loans to be repaid stand at USD 2.3 billion. It is envisaged that Afghanistan will receive a sum of USD 225 million as debt relief under the HIPC over the next 20 years.

5.4. Aid Predictability As committed in the Accra Agenda for Action, providing full and timely information on annual commitments and actual disbursements will allow recipient countries to record the actual amount of aid flows in their budget estimates and their accounting systems. It was agreed that, DPs will provide developing countries with regular and timely information on their rolling three-to-five-year forward expenditure and/or implementation plans, with at least indicative resource allocations that developing countries can integrate in their medium-term planning and macroeconomic frameworks. (AAA, 2008) In the context of Afghanistan, aid predictability has been a challenging problem where most DPs have not been providing GoIRA with information on their rolling three-to-five-year onward level of assistance and/or indicative resource allocations for projects/programs that are implemented in the country. [Figure 7] shows predictability of external assistance for 2011-2013. According to available information at MoF, USD 4.4 billion is estimated to be spent during 2011. However, the trend is declining to USD 1.2 billion in 2012 and USD 0.7 billion in 2013, respectively. It is worth noting that these figures are best estimates only, and may change overtime.

2 The HIPC program was initiated by the International Monetary Fund (IMF) and the WB in 1996, following

extensive lobbying by NGOs and other bodies. It provides debt relief and low-interest loans to cancel or reduce external debt repayments to sustainable levels. To be considered for the initiative, countries must face an unsustainable debt burden which cannot be managed with traditional means.

Assistance is conditional on the

national Governments of these countries meeting a range of economic management and performance target.

Figure 7: Predictability of Aid

http://en.wikipedia.org/wiki/Non-governmental_organizationhttp://en.wikipedia.org/wiki/Debt_relief


5.5. Main Delivery Channels of External Assistance

With respect to sectoral distribution of external assistance in Afghanistan, the security sector carries a slightly heavier weight compared to the rest of the sectors combined. As indicated in [Figure 7], 51% of external assistance disbursed to date has been invested in security, whilst the remaining 49% supported development activities across different sectors. The overview is divided into two main sections: a) Security, and b) Reconstruction and Development, which are discussed below:

5.5.1. External Assistance for Security Sector After the ousting of the Taliban regime and with the establishment of the Afghan Interim Government in late 2001, building of the Afghanistan National Security Forces was one of the first priorities of the Government and DPs. To serve this purpose, the international security forces started to actively support the establishment of Afghanistan National Police (ANP) and Afghan National Army (ANA). As far as involvement of international security forces in the reconstruction and development is concerned, in 2002 the U.S. Department of Defense (USDoD) began providing funds to small scale reconstruction and development projects in support of their counter-insurgency activities in provinces. Until 2004, the U.S. forces were the only international security forces, under the International Security Assistance Forces (ISAF) mandate, to provide reconstruction and development funding to Afghanistan. After the transfer of ISAF command to North Atlantic Treaty Organization (NATO) in 2004 and expansion of NATO peacekeeping to the provinces, more donor countries with military presence began providing development funding through PRTs with civil-military mandates to respond to the immediate reconstruction and development needs of the provinces. Although there was no initial plan to rely on the PRTs for delivering assistance in the long term, these channels continue to deliver assistance in the provinces.

5.5.1.1. U.S. Department of Defense (USDoD)

The United States is by far the largest provider of security assistance for Afghanistan. According to the

SIGAR report of January 2011, from 2002 to 2011, the USDoD has appropriated a total amount of USD

31.98 billion in support of the Afghanistan National Security Forces, of which USD 28.85 has been

committed, and USD 26.05 billion has been disbursed. Afghanistan Security Forces Fund (ASFF),

Commanders Emergency Response Program (CERP), and Drug Interdiction and Counter-Narcotics

Figure 7:

Main Delivery Channels of External Assistance (2002-2010)


Activities (DOD-CN) are the three main military programs financed by the United States in support of the

Afghanistan National Security Forces, and reconstruction and development efforts in Afghanistan.

5.5.1.2. Afghanistan Security Forces Fund (ASFF)

The Afghanistan Security Forces Fund was created by the United States to provide the Afghan National Security Forces with equipment, supplies, services and training in addition to building infrastructure facilities. Since 2005, total funding appropriated for ASFF stands at USD 27.83 billion, of which USD 25.43 has been committed. The total amount disbursed stands at USD 23.08 billion, of which USD 14.80 is for ANA, and USD 8.16 is for the ANP (SIGAR, Jan 2011). [See Figures 8 and 9]

5.5.1.3. Commanders Emergency Response Program (CERP) The Commanders Emergency Response Program (CERP) is solely focused on the provision of humanitarian relief and reconstruction assistance in an emergency response mode, providing urgent assistance to the local population in the areas where U.S. security forces are positioned. This program is providing funding for small projects that are estimated to cost less than USD 500,000 each. According to the SIGAR report of Jan 2011, total cumulative funding appropriated for CERP stands at USD 2.64 billion. The total amount committed is USD 1.99 billion, of which USD 1.54 billion has been disbursed. For detailed geographical distribution of CERP funding please refer to Annex-II [Graph 1].

U.S. Military Funding (2002-2010)

In US$ billions

Agency Pledge Commitment Disbursement

ASFF 27.83 25.43 23.08

CERP 2.64 1.99 1.54

DoD-CN 1.51 1.43 1.43

Total 31.98 28.85 26.05

Source: SIGAR Report Jan, 2011

Figure 8: ASFF Disbursements for the ANA (2005-2010)

Figure 9: ASFF Disbursements for the ANP (2005-2010)


5.5.1.4. Drug Interdiction and Counter-Drug Activities (DOD-CN) The DoD-CN provides support to the counter-narcotics effort by supporting military operations against drug traffickers, expanding Afghan interdiction operations and building the capacity of Afghan law enforcementincluding Afghan Border Policewith specialized training, equipment, and facilities. According to the SIGAR report of Jan 2011, total cumulative funding appropriated for DOD-CN stands at USD 1.5 billion. The total amount committed is USD 1.4 billion, which has been fully disbursed.

5.5.1.5. Provincial Reconstruction Teams (PRTs) After the transfer of command from ISAF to North Atlantic Treaty Organization (NATO) in 2004, expansion of the international security forces to the provinces was planned. The first PRT was established in Kunduz Province. The initial objective behind the establishment of the PRTs was to extend the authority of the central Government and improve security, thereby facilitating the reconstruction process at the provincial level. In 2004, the PRTs were further expanded to the North and West of the country. Currently, there are 27 operational PRTs, comprised of 14 different nations. PRTs are not development agencies, as such, but are engaged in development projects through their reconstruction groups such as Civil Military Cooperation (CIMIC) and Quick Impact Project (QIP). In general, the total PRT contribution towards reconstruction and development in all provinces of Afghanistan stands at around USD 900 million. For further details, refer to [Table 3] in the Annex-II.

5.5.1.6. Law and Order Trust Fund Administered by UNDP, LOTFA was established in 2002 to mobilize resources for the support of Afghanistan National Police (ANP). It is a Multi-Donor Trust Fund which is jointly funded by several DPs. LOTFA is delivered through a series of sequenced phases. The combined phases of the Trust Fund provided a mechanism for coordinating contributions from DPs to cover police salaries, as well as to pursue other police reform activities. In addition, LOTFA has contributed to strengthening the capacity of the Ministry of Interior (MoI) through a range of projects. Approximately 23 DPs contributed to LOTFA from 2002-2011. As at February 2011, USD 1.8 billion has been invested in LOTFA by the DPs. The largest DPs of the trust fund are the U.S.A with USD 694.64 million contributions, and the European Commission (EC) and Japan with USD 422,722,490 and USD 324.62, respectively. [Table 4 in Annex-II includes further details].

Analysis It is estimated that overall, to date, military spending exceeds 50% of the total assistance provided to Afghanistan. In most cases, security spending, including the contribution of military agencies for reconstruction and development, are not appropriately reported to GoIRA or even their relevant countries diplomatic missions (embassies, development agencies) because the funding for the military assistance comes from the donor countrys Ministry of Defense, while the development funds come through the countries Ministry of Foreign Affairs or the development agency with ODA responsibility. Despite the contribution that military aid has made to the reconstruction process, during the earlier years when there was little or no Government infrastructure, their modality of delivery and spending have been criticized for a variety of reasons. The aid provided by these agencies is essentially


militarized, and is an often critiqued approach of aid provision, serving the military or political agenda of the donor country. Humanitarian assistance provided through PRTs and other military means are considered militarized for winning the hearts and minds of the people, mainly for the protection of the foreign troops. Such aid provision not only undermines the neutrality and impartiality principles of aid principles but they undermine development needs-based programming.

To resolve the problems associated with militarized aid, a gradual shift to successful Afghan national programs like the NSP, EQUIP and other national programs are being pursued, under the clusters approach. Moreover, a strategy is being considered for a gradual phase out of PRT-provided and other militarized forms of aid; and for promoting military institutions sole focus on direct security related activities and building capacity of security forces in the provinces. Translation into action of such plans and strategies will help pave the way for the Government to acquire some control over planning of external resources to serve GoIRA priorities.


5.5.2. External Assistance for Development Pure commitment for reconstruction and development purposes for the period (2002-2010) stands at USD 37.6 billion, out of which USD 28.1 billion has been disbursed so far. In terms of sectoral allocation of finances, infrastructure has received the largest amount of assistance followed by agriculture & rural development, governance, social protection, education, private sector and health. [Graph 2] shows both commitment and disbursement figures for each sector. Infrastructure, which is the second largest sector in terms of foreign assistance investment, has received a total of USD 9.20 billion in commitment, of which USD 6.02 billion, or 65% of the commitment, has been disbursed. [See Figure 10] For the volume of external assistance disbursed from 2002 to 2010 solely for reconstruction and development, again two main delivery channels have been used: a) Off-budget, and b) On-budget. MoFs analysis shows that 10% of the disbursed assistance has been provided through the Governments core budget. The remaining 70% of assistance has been managed by the DPs (DPs) for financing projects/programs implemented parallel to those of the Government. [See figures 11 and 12]

3 Unclassified sector consists of assistance provided for cross-cutting activities such as gender, anti corruption etc,

and/or outside of ANDS classification.

Figure 10: External Assistance for Reconstruction and Development (2002-2010)

3


5.5.2.1. Trust Funds As stated above, resources that are provided to the Government through Trust Funds such as ARTF, LOTFA, CNTF and PITF are all considered as on-budget support. After the formation of the Interim Government in late 2001, Afghanistan was rising from the ashes of three decades of war and unrest, when the institutional capacities were very low. The existing rules and procedures, especially the Public Financial Management System, could hardly meet international standards. In order to respond to the capacity inadequacies, the international community, in consultation with GoIRA, decided to establish the Trust Funds mechanisms, managed by multilateral agencies such as the World Bank and UNDP with an aim to mobilize more on-budget resources to finance Governments priority programs across Afghanistan.

5.5.2.1.1. Afghanistan Reconstruction Trust Fund (ARTF) The Afghanistan Reconstruction Trust Fund (ARTF), which is a multi-donor pooled funding mechanism, was established in 2002. It is composed of two windows, recurrent window for partially supporting the Governments operational costs and the investment window to support Governments development budgets. Administered by the World Bank, ARTF has been successful in meeting the Governments priorities in both areas, thanks to the generous contributions of ARTF DPs.

Figure 11: Disbursement only to the Development Sector

Figure 12

External Assistance only for

Development


To date, entire DPs contributions to ARTF, the largest trust fund, stand at USD 4.1 billion. Contributions to ARTF have increased on an annual basis from a total of USD 185 million in 2002 to USD 657 million in 2009. DPs assistance in 2030 may exceed those of 2009, provided that all pledges, which stand at around USD 1 billion, are translated into firm commitments. Contributions made to ARTF are of two kinds: (i) Preferenced investment allowing DPs to invest up to 50% of

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