43291 FEBRUARY 2007 N U M B E R 1 0 High-Risk, Post- W hen countries emerge from conflict, they rarely transition smoothly to a golden age of peace and prosperity. In many Conflict Engagement-- post-conflict countries, infrastructure has been destroyed, armed groups create an atmosphere of insecurity, and the government FM Work in is low in legitimacy and capacity but high in corruption. Indeed, even the "post-conflict" designation is elusive: many countries slip back into Afghanistan pockets of conflict, so that affected areas are unsafe for reconstruction operations. It is hard to use aid effectively in such environments, both because of the obvious physical and institutional constraints and because informal systems and social groupings tend to supersede sound business practices, internal controls, and "neutral" organs of security. Afghanistan is a case in point. It is a high-risk auditing. Financial statements for donor-funded country with extremely weak government capacity investment projects and Government funds are and institutions, poor infrastructure, and growing now prepared on time and are audited to security concerns. In 2002, when the Bank international standards. The first set of the recommenced operations in Afghanistan, the country's audited financial statements has now financial management (FM) system was manual, been submitted to the recently formed National the budgetary process entailed the use of Assembly. There have also been major contingency accounts, and the most recent improvements in budget planning and execution: Government financial statements were eight years budgets are now more complete and old. A key Bank priority was to establish an comprehensive. adequate FM system that would provide fiduciary assurance for the use of the funds of the Bank, other donors, and the Afghanistan Reconstruction Remaining Challenges and Bank Trust Fund administered by the Bank. Response Bank Approach and Successes The Afghanistan FM team has also helped the country address other major FM challenges. Working with the IMF, the Bank's primary approach Lack of functional bodies to fulfill to these enormous FM challenges was to centralize the Afghanistan FM system in the Ministry of oversight responsibilities Finance, deploy off-the-shelf software as the core The oversight function, which is generally A mainstream of the computerized Afghanistan Financial important for project management, is even more approach to using Management Information System (AFMIS), and important in post-conflict countries. The usual country systems was engage several international agents to support practice--placing oversight decisionmaking in the these embryonic country systems. With an FM possible even in a hands of a single individual--can lead to weak agent providing operations support to the Treasury, internal controls, leaving room for heads of very challenging post- an audit agent supporting the Auditor General in ministries or implementing entities to capitalize on conflict environment. the Control and Audit Office, and a procurement the lack of adequate institutions, structures, and agent supporting the Afghanistan Reconstruction systems for personal gain. To mitigate this risk, the and Development Services, a mainstream approach to using country systems was possible even in a FM team in Afghanistan ensures that the very challenging post-conflict environment. implementation arrangements set out in project documents include the appointment of a steering Using the procedures of OP/BP 8.50, Emergency committee with defined terms of reference and Recovery Assistance, to prepare investment minimum required meeting frequencies. The projects, over the past four years the Bank has committee is expected to produce meeting helped Afghanistan achieve remarkable minutes that Bank staff can review during improvements in external financial reporting and supervision. In addition, a Memorandum of Understanding between the To ensure that each committee is Lessons Learned implementing units and the line effective, the FM arrangements are clearly ministries fully documents the specified in the project documents and Broad lessons learned in post-conflict procedures for processing procurements carefully reviewed during supervision. countries were adapted flexibly and and payments. refined in Afghanistan by the FM team. Lack of local qualified and Among the key lessons that may help Inadequate financial planning experienced professionals FMSs in other post-conflict countries are and reporting The lack of local qualified and the following: (a) target a few core FM Following the prolonged period of experienced indigenous accounting and competencies and do them well; conflict, Afghanistan's line ministries had auditing professionals has done much to (b) quickly assess the skills and neither systems nor capacity to support shape the FM approach in Afghanistan. It experience of counterpart staff and fill adequate financial planning, is necessary for the FM team to rely gaps with international agents in core management, and reporting. Today, with heavily on international consultants and areas for as long as needed; (c) develop the support of the FM agent at the to give priority to building capacity. Thus, and document FM practices and Ministry of Finance, the Government they organize frequent workshops for procedures in the local languages to maintains AFMIS, a centralized FM consultants and staff alike, and ensure continually reinforce prescribed information system that records all line that the terms of reference of the FM behaviors; and (d) stabilize the ministry and project transactions and then agent include building the capacity of the accounting and reporting system in the generates monthly reports and annual local staff involved in particular projects. Ministry of Finance before rolling it out financial statements. (Because AFMIS However, it has been difficult for the to line ministries. cannot yet produce interim unaudited agent to accomplish this because of the financial reports, these are prepared extremely weak capacity levels and the manually using Excel.) Pilots are now demand for continuous operational under way to roll out AFMIS functionality support. It has by no means been easy to to two line ministries and two provinces lay the foundation for Afghanistan's first over the next few months, enabling them accounting and auditing professional to generate the required reports and institutions. prepare detailed financial plans. Inability to conduct physical Poor budget preparation, verification implementation, review, To drill down properly on sampled monitoring, and performance transactions and look beyond the invoice, Sound preparation, execution, and a financial management specialist (FMS) monitoring of the budget are vital to the may need to carry out physical efficient and effective use of public funds verification and link the physical outputs and help ensure that resources are to the financial outlay. In Afghanistan, the utilized for the intended purposes. In FMS cannot always visit a site: some many post-conflict countries, information previously safe areas are now on the allocation of resources is closely inaccessible because of reemerging held because it has great political value. conflict, and supervision activities are Budget figures are usually unrealistic sometimes cancelled on short notice This note was prepared by Kenneth because there is no proper coordination when the United Nations issues a Okpara with contributions from his and consultation with units responsible restriction order or declares a "white city" colleagues on the Afghanistan FM Team-- for implementation. Moreover, budget because of threats to human life (which Asha Narayan, Amit Ramchandani, Paul execution is not adequately monitored, means that staff must remain at home). Sisk, and Donna Thompson. midterm reviews are not conducted in When access is denied, the team relies consultation with those responsible for on information supplied by facilitating program implementation, and relevant partners working in the restricted areas. reports are not prepared in time to During periods of restricted movement, support these reviews. In Afghanistan, Bank international staff who reside near This note series is issued by the Financial budget committees for each project the office perform desk reviews, and they Management Anchor to summarize coordinate the budget process to ensure may invite Government staff to meetings good practice and key policy findings that those responsible for implementation at the Bank office. After restrictions are on FM-related topics. of each component are involved in the lifted, missions tend to bunch up; and to OPCSOPCS budget preparation process. These keep project activities on schedule, the OPERATIONS committees also coordinate quarterly FMS has to schedule meetings with POLICY & reviews, monitor budget execution, and multiple task teams during the evenings COUNTRY report to the project steering committee. and weekends. SERVICES