Document of The World Bank FOR OFFICIAL USE ONLY Report No. T7697 AF- TECHNICAL ANNEX FORA PROPOSEDGRANT OF SDR 22.1 MILLION (US$33.4 MILLIONEQUIVALENT) TO THE ISLAMICREPUBLIC OF AFGHANISTAN FOR A PUBLIC FINANCIAL MANAGEMENT REFORMPROJECT April 30,2007 FinancialManagementUnit SouthAsia Region This documenthas arestricted distribution and may be usedby recipients only inthe performance of their duties.Its contentsmay not be otherwise disclosedwithout World Bank authorization CURRENCY EQUIVALENTS March31, 2007 CurrencyUnit=Afghani US$l.OO=AFN 50.19 GOVERNMENT FISCAL YEAR March21 March20 - Vice President: Praful C. Pate1 Country Director: Alastair McKechnie Director, Operational Services and Quality: Barbara Kafia Sector Manager: Robert Saum Task Team Leader: Paul Edwin Sisk 2 FOR OFFICIAL USEONLY ABREVIATIONS AND ACRONYMS ACCA Association of CharteredCertifiedAccountants AFMIS Afghanistan FinancialManagementInformationSystem ANDs AfghanistanNational DevelopmentStrategy ARDS Afghanistan ReconstructionandDevelopmentServices ARTF Afghanistan ReconstructionTrust Fund APR Annual PerformanceReview CAO ControlandAudit Office CQS Consultants' Qualifications Selection CSR Civil ServiceReform DA DesignatedAccount DAB DaAfghanistanBank DFID Departmentfor InternationalDevelopment(UK) EPAP EmergencyPublic Administration Project FBS FixedBudget Selection FM FinancialManagement GDP Gross DomesticProduct GOA Governmentof Afghanistan HRM HumanResourcesManagement IARCSC IndependentAdministrative ReformandCivil Service Commission I-ANDs Interim-AfghanistanNationalDevelopmentStrategy ICB InternationalCompetitive Bidding IDA InternationalDevelopmentAssociation ISA InternationalStandardsofAuditing LCS LeastCost Selection MIS ManagementInformationSystem M&EU MonitoringandEvaluationUnit MOE Ministry ofEconomy MOF Ministryof Finance MTFF MediumTermFinancingFramework NCB NationalCompetitiveBidding NGO NonGovernmentalOrganization PACB PublicAdministration CapacityBuilding PAR PublicAdministration Reform PEFA Public ExpenditureandFinancialAccountability PEFM Public ExpenditureandFinancialManagement PFM Public FinancialManagement PFMR Public FinancialManagement Reform PPU ProcurementPolicyUnit PRGF PovertyReductionandGrowthFacility PRR PriorityReformandRestructuring PSIB ProgrammaticSupport for InstitutionalBuilding QBS Quality BasedSelection QCBS Quality and Cost BasedSelection RIMU Reform ImplementationManagementUnit SAR South Asia Region SBD StandardBiddingDocuments SDU SpecialDisbursementsUnit SOE Statement of Expenditures sss Single Source Selection This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not be otherwise disclosed without World Bank authorization. THE ISLAMIC REPUBLIC OF AFGHANISTAN FORA PUBLIC FINANCIAL MANAGEMENTREFORMPROJECT Table of Contents ICountryandSectorBackground . .................................................................................. A. Issues inPublic Financial Management............................................................. 66 B. Government's Public Financial ManagementStrategy.................................... 12 I1 IDA'SResponseand Strategy . ................................................................................... A. IDA's Recent Support for PFM....................................................................... 14 B. Objectives. Rationale and Strategy for IDA's Continuing Support.................14 17 I11 The ProposedProject . ............................................................................................... 20 A Project Objective.............................................................................................. . B. Detailed Project Description............................................................................ 20 20 I V InstitutionalArrangementsand ProjectImplementation . .................................... 36 V Action Plan. MonitoringandEvaluationand Results . ............................................ 40 B. Monitoring andEvaluationArrangements....................................................... A. Action Plan....................................................................................................... 40 41 C. Bank Supervision............................................................................................. 42 Annexes Annex A. ResultsFramework andMonitoring................................................................. 43 Annex B. Project Cost Summary by Componentand Category....................................... Annex C ProcurementArrangements.............................................................................. . 46 Annex D. Financial Management..................................................................................... 47 57 68 Annex F. Map IBRD 33358.............................................................................................. Annex E. Terms of Reference for Major Technical Assistance Packages ....................... 79 Boxes 12 Box 2.1: Linkage with PSIB Series .................................................................................. Box 1.1: Afghanistan Compact Benchmarks for Financial Management........................ Box 2.2: Linkages with IDNARTF's Public Administration ReformInitiatives.,..........14 19 4 Tables 7 Table 2.1: IDA/ARTF SupportedInvestmentProjectsinPFM........................................ Table 1.1: MediumTerm FiscalFinancing Requirements.2002/03-2009/10.................... Table 2.2: Donor Funding of Technical Assistance inPublic Financial Management....15 18 Table 3.1: Costs by Component........................................................................................ 34 Table 4.1: ImplementationTable.,.................................................................................... Table 3.2: RiskMitigation................................................................................................ 35 37 5 I.COUNTRYANDSECTORBACKGROUND A. Issuesin PublicFinancialManagement RecentDevelopmentsinthe AfghanEconomy 1. Afghanistanhas achieved respectable economic growth duringthe past four years, with the real value of non-opium Gross Domestic Product (GDP) increasing by 29 percent in 2002/03, 16 percent in 2003/04, 8 percent in 2004/05, a drought year, and 14 percent in 2005/06. The Governmento f Afghanistan (GOA) has also maintained a stable macroeconomic framework as evidenced by the successful completion o f all quarterly reviews under the IMF Staff-Monitored Program (SMP, from March 2004 to March 2006) and the first review of the Poverty Reduction and Growth Facility (PRGF) program. Monetary policy has been restrained, supported by the adherence to strong fiscal discipline and a "no overdraft" rule that prohibits Central Bank from financing a deficit. Inflation i s decelerating and year-on-year inflation declined to 5.2 percent in September 2006 (compared to 16percent in2004/05). 2. Duringthis period, public spendingmanagedthrough the budget process has been the government's main tool to implement its development strategy and coordinate donor assistance. In 2004, the government introduced the concept o f a core budget (all funds flowing through government accounts subject to its Public Financial Management [PFM] regime) and an external budget (external assistance directly executed by donors; essentially ex-PFM) that accounts for almost two thirds of all spending. The core budget consists o f an operating budget ("ordinary budget" covering current expenditure and some small capital expenditure) and a development budget (reconstruction projects and some recurrent costs). The total core budget expenditure increased between 2004/05 and 2005/06 by 30 percent to US$l.1 billion. Within the core budget, operating expenditures amounted in 2005/06 to US$651 million, 63 percent of which consisted o f wages and salaries. Core development expenditures reached US$424 million, increasing by 58 percent from 2004/05, reaching almost six percent of GDP, a commendable level by international standards. This development strategy has created a high demand for maintaining credible, transparent and effective PFM performance, principally through the Ministryo fFinance (MOF). 3. While the external budget is financed exclusively from donor grants, the core budget i s financed from four sources: (i) domestic revenues, which reached US$415 million in 2005/06 (5.7 percent o f GDP); (ii)donor grants, including the Afghanistan Reconstruction Trust Fund (ARTF) and proceeds o f the International Development Association (IDA) budget support (US$724 million or 9.9 percent of GDP); (iii) external loans, including the proceeds o f the Programmatic Support for Institutional Building I (PSIB I)(US$107 million or 1.5 percent o f GDP); and (iv) changes in currency deposits at Da Afghanistan Bank (DAB), Afghanistan's central bank. To date, the GOA has been able to maintain donor confidence and participation by operating within an agreed Medium Term Financing Framework (MTFF) that has accompanied its medium term development and poverty reduction agenda. 6 4. Continuing to use the budget process as the main instrument for promoting developmentandpoverty reduction, the GOA and donors have agreed on a revised MTFF (Table 1.1), based on the recently concluded Interim-Afghanistan National Development Strategy (I-ANDs)and "Compact" to end 2009-10. Meeting Compact objectives requires substantial increase in spending from US$1.1 billion in 2005/06 to US$1.6 billion in 2006/07 and US$2.6 billion by 2009/10. In addition to making needed investments in development projects, key increases in operating expenditures are likely to be driven by: (i) implementationofanewpayandgradingpolicy; (ii) recruitmentofaround the the 10,000 teachers per year; (iii) increase in non-wage expenditures to cover levels for an operating and maintaining new investments and to accommodate costs transferred from the external budget previously financed by donors outside the budget process; and (iv) significant increases inthe security sector. Table 1.1: MediumTerm FiscalFinancingRequirements,2002/03-2009/10 (US$million) 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 Estimates Rev. Projections A. DomesticRevenues 131 208 268 416 540 715 880 1,080 B. Expenditures(Bl+B2) 346 617 829 1,075 1,639 2,030 2,410 2,700 B.1.OrdinaryExpenditures 346 452 560 651 884 1,030 1,210 1,300 Wages 299 396 411 546 650 750 825 Goodsand Services 95 88 126 187 200 250 275 Capital Expenditures 41 41 37 24 25 30 40 Others 17 35 71 127 155 155 155 B.2. DevelopmentExpenditures 165 269 424 706 1,000 1,200 1,400 C. Budlet Deficit(A-B) a/ (215) (409) (561) (660) (1,098) (1,315) (1,530) (1,620 D. Float and Adjustments (15) 35 8 (40) E. Sale of Non-FinancialAssests 40 40 100 200 200 F. Financing 230 375 553 700 1,098 1,315 1,530 1,620 ARTF 59 236 285 407 396 400 400 400 LOFTA and Amy Trust Fund 17 36 54 82 96 75 75 75 PSlB b/ 80 80 80 80 80 Other ExternalFinancine 134 99 371 302 486 680 925 1.015 DomesticFinancingc/ 20 4 (243) (171)l 120 I so 50 50 ?4GDP A. Domestic Revenues 3.2 4.5 4.5 5.7 6.4 7.2 7.6 8.2 B. Expendirures 8.5 13.5 13.9 14.7 19.5 20.5 20.9 20.5 ofwhich operaring budge1 8.5 Y Y Y.4 8.Y 105 i n 4 105 Y Y IC.ofwhich Budge1Deflcir (5.3) (8.9) (9,4) (9.0) (13.1) (13.3) (13.3) (12.3, oprolmg budgel dqficll I (5 3) (3 3) f4 91 f3 211 (4III f3 21 f2 9) fl 7 a/ Excluding grants, b/ Amount for successor program (e g for 2008/09 and 2009110) to be decided, c/ Change in cur :ncy deposits Note the exchange rate for 2006/07 and beyond is AFA 50 per US$ Source Budget documents and Staff estimates 5. GOA is expected to make a major improvement in generating domestic revenue over the Compact period, and has secured technical assistance to strengthen tax and customs performance. Nonetheless, there are significant risks and uncertainties about the outcome of this effort. As a result, donors' assistance will remain crucial as a source o f stable and predictable financing for Afghanistan's budget inthe coming years. Building on pledges made at the London Conference, external assistance to the budget is expected to increase from US$l.O billion in2006/07 to US$l.6 billion in 2009/10. The ARTF and the Law and Order Trust Fundfor Afghanistan are expected to remain key vehicles for this assistance. Inaddition, Afghanistan has adopted a prudentexternal debt strategy and i s expected to borrow only at concessional terms. It i s also expected to become eligible under the Heavily Indebted Poor Countries initiative, combined with the Multilateral Debt Relief Initiative and bilateral commitment to debt cancellation, should lead to 7 significant debt relief in the coming years. All o f these initiatives and options remain feasible, however, ifthe international community maintains confident that PFM functions are performed following acceptable international norms for transparency and accountability. It also would require that a larger percentage of the annual budget provisions (currently at about 37%) be used inthe year for which they are allocated as an indication o f growing efficiency inthe use o f public monies. AchievementsinPFM 6. Since 2002 the GOA has made progress in establishing a functioning public financial management system under the direction o f the MOF. The World Bank assessment o f Afghanistan's public financial management and procurement performance' conducted under the auspices o f the Public Expenditure and Financial Accountability (PEFA) program (November 27, 2005), concluded that while there are weaknesses that threaten longer term sustainability o f the M O F performance and "exacerbate the disconnect between public expectations and the actual delivery o f services, the strong achievements interms o f fiscal discipline, cash control, and aggregate transparency have contributedto macroeconomic stability, as well as to sustained external assistance." 7. The MOF is producing annual budgetsthat meet basic requirements of the GOA- IMF-Donor approved MTFF, even though the timeliness o f preparingthese budgets and the system for monitoring budget execution and assuring their development effectiveness continues to require improvement. The system i s also performing adequately against each o f the six basic sets o f criteria used to evaluate performance in the PEFA2 partnership program. MOF's overall performance has also been recently reconfirmed in the Mid Term Review o f the Public Administration Capacity Building (PACB) project that has provided financial support for the MOF treasury, procurement, and audit functions. 8. Importantly, the basic legal framework underlying the PFM and procurement systems has also been established including new procurement and financial management basic laws, establishment o f basic systems and protocols for procurement and financial operations, and reporting and performance auditing. Recruitment and training o f Afghan staff inprocurement has begun. Additional analysis has been completed that provides the basis for upgrading the Afghanistan Financial Management Information System(AFMIS) and training o f staff inbasic accounting and auditing has occurred. 9. However, these achievements have been obtained with a high degree o f direct donor assistance through the ARTF Administrator's Office and the Afghanistan National Development Agency and with the use o f costly operations contracts with international firms, including the hiring o f qualified Afghans as national contractors. In addition, the Afghanistan: ManagingPublicFinancesfor Development;November27,2005; conductedunder the auspices of the PEFA Program. * PFM"Turn outs;" addressingcomprehensiveness andtransparency;usingpolicy-basedbudgeting; maintainingpredictabilityandbudgetcontrol; accounting, recordingandreporting;maintainingexternal scrutiny andaudits. 8 integrity o f the system has depended on having PFM operations centralized in the MOF with little direct management role assigned to line ministries, provincial offices, or state owned enterprises. Moreover this control i s being managed on a "transactions" basis, and with significant levels o f ex ante clearances. Currently, as many as 70 long term international and 200 national contactors assure that MOF performs its basic budgeting, treasury, audit and procurement functions adequately. Not surprisingly, the areas o f performance under the PEFA assessment with the highest ratings were those in which contractors played the most dominant role. 10. Donors have been willing to support such heavy direct management and supervision as part o f addressing the emergency situation facing the country. However, this is not a sustainable situation and reforms should now be pursued to raise the level of responsibility and accountability for PFM within the "mainstream" MOF. The ANDs and Compact negotiated betweenthe GOA and the donor community has identified both improving the performance o f financial management services and capacity building to permit these services to be mainstreamed into the MOF and line ministries as part of their core operations. With this improved performance, the donor community would be able to meet several o f its own wishes to improve the effectiveness o f aid for Afghanistan: improving the timeliness and predictability in providing necessary resources, increased use o f the core budget to receive and manage assistance (decreasing the reliance on the "external budget") and improve transparency on usingthe external budget when used. ContinuingChallenges,IssuesandConstraints 11. To achieve its developmental goals, GOA and the donor community have agreed on a MTFF to 2010 that i s ambitious and sensitive to risks. Overall spending through the core budget i s projected to rise by 63% compared to the plan for 2007 (Table 1.1). O f this, "ordinary spending" for personnel, operating costs and small investments would grow by 33%. This will increase the number o f small, repetitive transactions, involving numerous agencies (the top 10 line ministries3excluding defense and interior, account for only about 46% o f this spending) and place increased demands on regular cash management, accounting, auditing, and the performance o f these functions by line ministries. The MTFF also calls for an increase of about 100% in the development budget. Success in realizing this level o f investment spending depends heavily on the GOA'S capability to execute tendering and contract management and to do so following improved procurement management practices. Currently, only about 52% o f planned expenditures are being realized. This spending i s concentrated in relatively few line ministries; five line ministries4are expected to account for in excess o f 60% o f the total and the top 10 account for virtually the entire development budget. Lastly, while GOA expects to increase the level o f financing through customs and nationally generated taxes, realistically the MTFF continues to require a 50% increase in external financing. The willingness o f external sources to be forthcoming in a regular and predictable manner 3Indescendingorder; Education, Energy andWater, ForeignAffairs, Public Health,NationalSecurity, HigherEducation,Finance,Justice,President's Office, andAgriculture. 4Indescendingorder; RuralDevelopment, Public Works, Water andEnergy, Health, and Education. 9 will depend on maintaining transparency and good governance in public financial management. 12. Inorder to strengthen the capability and sustainability o f the PFM system, MOF and the Control and Audit Office (CAO) have recognized that it will have to address several organizational and capacity constraints. 0 Incomplete re-organization o f MOF. While all main departments within M O F have undergone restructuring under the Priority Reform and Restructuring (PRR) program, the MOF would still require restructuring o f its remaining functions to assure that all o f its departments work as an integrated whole. It i s also important that staffing plans in terms o f numbers, job descriptions, grade levels, and qualifications be finalized. This i s critical for making further staffing decisions, including revising grading and pay to adopt the GOA pay and grading policy, internalizing new rules governing the civil service; establishing the balance betweenthe use o f international and national contractors and civil servants to perform PFM functions. 0 Concentration o f Responsibility. A high degree o f accountability in financial management decisions has been achieved by concentrating them inthe hands o f the ARTF, Afghanistan Reconstruction and Development Services (ARDS) and in MOF departments, in a closely monitored "transaction-based" system. However, this has also the effect o f lowering accountability for procurement and financial management decisions on the part of line ministries and agencies and actually increases the governance risk o f operations. There are limits to the expansion o f the internal capacity o f the M O F to further expand the transaction-based system and remain responsive, accountable and efficient. Line ministries and agencies should be involved in PFM to increase predictability and timeliness o f their operations, albeit, in parallel with their capacity to meet accountability standards. 0 Inadequate Human Resources Numbers, Capacity and Management. Engaging international firms and local consultants to perform basic treasury, budget, audit and procurement functions has been a default strategy, considering the inadequate technical capacity o f the civil service and inadequate incentives to the few who are qualified to remain in government service. Government external auditing in Afghanistan, for example, i s still dependent on external international advisors to perform financial statements audits and to conduct any other audits to acceptable standards. There i s no accounting profession inthe country and training in certification related programs i sjust becoming available and i s given only in English which as such is not accessible for most CAO staff. Several remedies, including off-site training, adequate grading and pay, effective recruiting and management o f careers o f civil servants for the longer term 10 (including pension management), and establishing schemes o f service for key professional classes are interlinked factors and require specialized management capacity that the MOF and most other ministries lack. Anti-corruption and Maintaining Accountability and Transparency while Reforming. The control environment on which Afghanistan's PFM formal controls rest i s undermined by corruption in its various forms and manifestations. This i s increasingly seen as one o f the most important threats to Afghanistan's entire state-building and to delivering public services. The GOA recognizes the critical importance o f addressing corruption and the MOF i s seeking advice on how to fight it. While a strategy is being developed and implemented, however, the current PFM operational functionality cannot be reduced while the effects o f PFM reforms are realized. Therefore, the M O F reform program would be compelled to maintain the high levels o f transparency and accountability, which are constraints on corruption, already attained with the current technical assistance. Moreover, the demands for transparency and accountability for the use o f public resources is growing in Afghanistan, first as anti-corruption sentiment i s growing and second as the legislature i s developing its role. Meeting these requirements would constrain the pace at which M O F could reduce its dependence on international supported staff and contracted services and de-concentrate o f PFM operations. The transformation process would require careful study and management including close monitoring and evaluation, and adjustment o f the reform program. 0 Maintaining Good Coordination and Momentum in Reform. Most experts see "reform" as an evolutionary process which requires time and the involvement o f all departments whose functions are interlinked.It i s also a process that affects individuals who should be engaged. With several sources o f assistance coming to the MOF, there i s a risk o f disconnects between the programs, agendas, timing and standards that may be adopted that would impair the smooth functioning the MOF as the GOA'Sapex public finance management organization. Moreover, staff may be subject to declining motivation and performance ("reform fatigue") as the process extends over time. Therefore a participatory and "change management" approach to improving performance would be preferred over a centralized "administered" change process. Both o f these initiatives require a vehicle for coordinating and planning change that will be sustained for a considerable period o f time. 11 B. Government'sPublicFinancialManagementStrategy Overall Development Strategy 13. InJanuary 2006, the government completed its I-ANDsand presented it together with the Afghanistan Compact to the international community. This strategy builds on earlier achievements, notably the National Development Framework (April 2002) and the report "Securing Afghanistan's Future" (March 2004). The I-ANDs i s anchored in a vision for Afghanistan "to consolidate peace and stability through just, democratic processes and institutions, and to reduce poverty and achieve prosperity through broad based and equitable economic growth." These development objectives are consistent with the Millennium Development Goals' national targets adopted by the Cabinet in 2005. The strategy i s structured around three pillars: (i) security; (ii)governance, rule o f law and human rights; and (iii) economic and social development. 14. The Afghanistan Compact commits the Islamic Republic o f Afghanistan and the international community to work toward a stable Afghanistanthrough good governance and bases the Compact on a number o f principles that bear on PFM including: fiscal sustainability, lasting Afghan capacity and effective state and civil society institutions, combating corruption, and ensuring public transparency and accountability (Box 1.1). Box 1.1: AfghanistanCompactBenchmarksfor FinancialManagement By end-2007, the Government will ensure improvedtransparent financial management at the central and provincial levels through establishing and meeting benchmarks for financial managementagreed with and monitoredby the internationalcommunity, including those in the anticipated PRGF. In turn and in line with improved government accountability, donors will make every effort to increase the share of total externalassistanceto Afghanistan that goes to the Core Budget. Afghanistan will achieve, and then maintain, externaldebt sustainability by end-2007. PublicFinancialManagementStrategy 15. The government realizes that the reforms o f the PFM system that have already begun will have to continue for it to meet the challenges o f the next years. As the custodian o f the PFM, the MOF has prepared a Strategic Plan for the years 1384-89 (2006-2010) that proposes reforms that could produce both greater efficiency in managing public resources (turnout) and maintaining the standards for oversight and governance that have been achieved. 16. These reforms set goals and a short term work agenda for: (i) mobilizing revenue and managing government finances; (ii) supporting economic management and growth; (iii)managing "public wealth;" (iv) promotinggood governance; and(v) establishing itself as a "best practice leader" in public sector reform. The action plan for the immediate future covering 18 months seeks to correct some o f the more immediate deficiencies in budget formulation and execution; procurement throughout the public sector; financial controls, accounting, reporting, audit and public accountability; and structural and administrative reform o f the MOF, provincial administrations and the 12 financial management (FM) capabilities o f line ministries.Annual progress reviews were expected to identify further actions for makingincremental improvements. 17. The strategy cites, among others, the risk of development in various departments becoming misaligned and the need for good coordination between M O F and other ministries and agencies as a basis for extending sound PFM practices. It calls for a participatory process for strategic planning, regular support to MOF managers and decision-makers to assure alignment o f actions, improved management o f technical assistance, and regularized contact and communications with partner ministries and agencies. 18. In 2005 the World Bank conducted a review of the PFM in Afghanistanusing a performance measurement framework developed by the PEFA partnership program5 which identifies a set o f critical objectives o f a PFM system and a standard set o f high- level PFM indicators to assess performance against those objectives. 19. The assessment considered as part o f the PFM arrangements the significant external support (both advisory and operational) provided to the government in procurement, treasury and audit as well as the work o f the ARTF's Monitoring Agent. 20. This assessment generally portrays a public sector where financial resources are, by and large, being used for the intended purposes as authorized by a budget which is processed with transparency and has contributed to aggregate fiscal discipline. The expenditures and financial position are reported regularly in an understandable format. However, performance regarding the allocation o f spending across programs and agencies and the efficiency of operations i s not as good. 21. Since the assessment the government enacted the Public Finance and Expenditure Management Law with robust reporting requirements on public finances and a commitment to independent review by the Auditor General. This has been matched by the government's full and timely publishingo f its monthly statement o fbudgetexecution on the MOF web site. Similarly, all large procurement opportunities are widely published andthe outcomes are also widely shared. 22. The study led to an outline o f a "Road Map for PFM reform" which coincides with the MOF agenda which also calls for maintaining the reform effort as a managed process through a special unit within the ministry. The members of PEFA include the World Bank, International Monetary Fund, European Commission, UK Department for International Development, FrenchMinistry of Foreign Affairs, Royal Norwegian Ministry of Foreign Affairs, Swiss State Secretariat for Economic Affairs, and Strategic Partnership with Africa (SPA). The analytical framework, indicator set, and detailed instructions for ratingsare in PEFA (2005). Also see www.mfa.org. 13 11. IDA'SRESPONSEAND STRATEGY A. IDA'SRecentSupport for PFM 23. IDA has supported the establishment and functioning of a sound PFM system since the launching of the Afghanistan InterimAdministration in 2002. It has done this through two sets of complementary operations; through three operations providing PSIB (Box 2.1) which have focused on making progress in establishing an enabling legal framework for institutional development; and three investment operations; the Emergency Public Administration Project (EPAP, US$l0.0 million, GRTD-H0060); the Second Emergency Public Administration Project (SEPAP, US$8.4 million, GRTD-H 0550); and the Public Administration Capacity Building project (PACB, US$27.0 million, GRTD-H 1440) (Table 2.1). Additionally, the Strengthening Financial Management Capacity Project (TF052735-AF) funded through the ARTF also provided supportto the PFMreforms. 24. The basic objective of these grants has beento assist the GOA to make good and transparent use of public sector resources inthe post conflict environment. This has been done by puttinginplace additional capacity to perform critical PFM operations, initiating the process of developing indigenous capacity to perform these functions and beginning the developmentofbroaderreforms inthe public administration. Box 2.1: Linkagewith PSIB Series Institution-buildingis at the core of the objectives of the PSIBs and significant achievements have been made under PSIB Iand 11, which are further advanced in the proposed PSIB 111. The program supports improvements in the PFM legal framework; specifically civil service, procurement and financial management laws were enacted. The program also supports improvements in budget management processes and budget execution; all PSIB operations have supported the adoption of annual budgets, anchoredin a macroeconomic framework; the program is also linkedto a tightening of fiduciary standards. Beyond the change in the regulatory framework, the program supported reforms in payroll management, procurement, and internal and external audit. Inparticular, for the first time, the government submittedto Parliament its annual accountswith an external audit review, aprior action for PSIB111. Another prior action for PSIB 111is the commitment to a PFM action plan by the government. The plan follows the format of the roadmap which accompaniedthe Afghanistan PEFA review of 2005 and provides steps to be taken inthe short andmediumterm. The steps in the following areas will be assisted directlyby the Public FinancialManagement Reform (PFMR) project: budget execution with the AFMIS expansion, internal control with the implementationof the accounting manual and duty specific training for Treasury and line ministry financial managementstaff, internal audit and external with capacity building and work practices development, payroll with systems development, procurement and accounting and reportingwith capacity building and direct operations support, accountability through the support for a public accounts committee in Parliament, and with monitoring of progress on reforms with the support to the Reform ManagementUnit. 25. With this support the government-wide procurement and financial management arrangements satisfied the fiduciary requirements for the Bank's general budget support and the ARTF contribution to the recurrent budget. Moreover, it enabled the Bank and 14 other donors to rely entirely on the government-wide treasury and audit systems for the financial management o f investment operations. 26. The PACB project continues the operational support through consultant services to assure that basic public finance functions (procurement, treasury and audit) were performed so as to meet internationally accepted standards. The terms o f reference for these consultants also contained references to providing training but this was not the principle mandate. However, the scope o f its activities was broadened to include: (i) developing the regulatory and institutional framework in these core fiduciary management areas; (ii) further systems development that is based on a full understanding o f medium-term requirements and the country's implementation capacity; and (iii) capacity building and training not only in the central agencies but also in line ministries and the provinces so that staff could maintain and operate systems independently and effectively. However, this set o f activities was not well identified in the original design. Given the difficulties infilling positions inthe Treasury Department with adequate national staff and the late mobilization o f training consultants for prospective auditors, the project objectives were modified in late 2006 to align with the principle outcomes o f the activities which were the maintenance o f fiduciary performance. 27. During the period 2002 to the present, donors have provided continuous financing for the recovery program and are pledged to continue this support. While the government, with World Bank and other donor technical assistance on PFM, has been largely successful in maintaining a stable and transparent fiscal environment, there continues to be general concern that the demands for procurement, treasury operations, budget formulation and implementation, internal and external audit, and legislative oversight could exceed the PFM abilities o f the MOF and agencies usingpublic funds. Table 2.1: IDNARTF SupportedInvestmentProjectsinPFM Operation Amount Date Focus Scope of Activities EPAP I $10m April Treasury, procurement, Primarily operational support ................................................................................................................................................................................................................................................................» 2002 externalaudit through large TA contracts EPAPII $8.4m June 2003 Treasury, procurement, Continued operational support. civil service management Earlysupport for PRRand civil .................................................................................................................. ............................ ................................... ........................... service management ...................... ........................................ PACBP $27 m Dec. 2004 Treasury, Financial Further operational support. management systems, Separate capacity building procurement, internaland components ................................................................................................................................................................................................................................................................¸ external audit Counterpart $ 5.lm Oct. 2003 Financialmanagement in Primarily operational support ChiefFinancial selectedline ministries through a single large TA contract Officer (funded through ARTF) LessonsLearned 28. There are a number o f lessons from the Implementation Completion Report o f EPAP 1, the mid-term review o f EPAP I1 and the restructuring o f the PACB project that the government and IDA have built into the proposed project. 15 * For an emergency operation to be effective in a severely damaged post- conflict environment, intensive Bank supervision i s essential. Contracts for direct operations support need to be separated from capacity building activities to ensure that both are performed simultaneously. Under the EPAPs, initial capacity building suffered greatly due to the pressures to get the operations up and running quickly and keep them runninginan environment of constant flux. The expectations for capacity buildingand institutional strengthening need to be closely aligned with the availability and skills levels o f the government counterparts. All assumptions regarding the availability and capability o f government counterpart staff need to be documented and validated with great care and revisitedover time. The government needs to continue to engage the services of the advisors for as long as it takes to build sufficient, demonstrable capacity in core public administration areas even as the roles o f the advisors become increasingly transitional. The legal framework for financial management and procurement in Afghanistan i s now more demanding and poses significant new challenges to the government. Treasury, Procurement and Audit Departments are all still dependent on external advisors to perform the key tasks; where nationals are involved in critical matters, these are involved as local advisors and not civil servants. This is a consequence o f incomplete restructuring and the failure to move to merit based recruitment. The systems to support budgetexecution are inplace inthe MOF butthere i s no functionality offered under the AFMIS to support operations by the line ministries (ie., budget preparation, contract and grant management, purchasing and asset management, and personnel management) which are all critical to improved service delivery. Reform in the MOF i s monitored by a unit in the Deputy o f Administration but the cross cutting issues o f the organization o f the ministry, human resources and the monitoring and evaluation of the reform's progress do not get sufficient high level attention to achieve the implementationo f the ministry's strategic plan. 16 B. Objectives,Rationaleand Strategyfor IDA's ContinuingSupport IDA'sReformStrategy 29. Inthe context ofthe recently concluded agreement on the I-ANDSand the 2007- 2010 Compact, donors and GOA have agreed that providing that the level of transparency, accountability and good governance that has been achieved to date under the preceding donor support operations for MOF i s maintained, that there should be a progressive transfer o f responsibility for managing the PFM systems to the MOF and away from reliance on the ARTF Monitoring Agent and the operations advisors for procurement, treasury and audit. This transition should proceed at a pace that is consistent with the MOF and line ministries' capacity to resolve regulatory, organizational and personnel management issues affecting sustainability. As the administrator for one major source o f financing for the I-ANDs (ARTF) and a major provider o f financing for both the operations and development budgets, IDA has a particular responsibility to lead inthis effort. 30. The broad plan for making this transition would be: (i)continuing to provide operational support for basic operations through the services o f internationally recruited firms, while (ii)makingfurther steps to re-organize the MOF and line ministriesina more de-concentrated PFM system; (iii)deepening the regulatory framework and building humanresource capacity to facilitate mainstreaming o foperations; and (iv) managing these changesto assure their longer term sustainability. The strategy would encompass all o fthe major functions o f the MOF and require the coordination o f the contributions o f several donors. Therefore, as part o f the strategy, leadership for managing the transition would be placed inthe M O F ina specialized Reform ImplementationManagement Unit (RIMU)that reports directly to the Minister o f Finance. This would place the ownership and accountability for progress with the MOF. Lastly, the rate at which the transition can be made will depend on variables and circumstances that cannot be fully accounted for ex ante. Therefore, the implementationo f the transition and the programming o f resources to support it would be made through annual progress and program reviews, supported by third party "reviewers," reporting to the RIMU (see sub-component 3.1.6 o f the Detail Project Description). 31. This broad plan i s largely consistent with the vision which M O F has developed and the World Bank recommendations in "Managing Public Finance for Development." These aimed at guidingthe M O F inidentifying and implementing a wide range o f actions required for strengthening its current functions and capacities and moving forward from meetingthe emergency needs o f the last four years toward a modem and effective public financial management organization. Rationalefor ContinuingBankInvolvementwith PFMReform 32. Several donors are providing specific assistance to major departments inthe MOF and other entities for P F Mas appears inthe Table 2.2. 17 Table2.2: Donor Fundingof TechnicalAssistance inPublicFinancialManagement Function and Department Donor Objective Ministry of Finance ................................................................................................................................................................................................................................................................° Customs EC Constructionof Customs Houses IDA Customs EmergencyCustoms Modernization and Trade Facilitation Project ................................................................................................................................................................................................................................................................¾ Revenue ADB Mustofiat Reform ................................................................................................................................................................................................................................................................¾ DFID Tax Reform CIDA RevenueSystems Development ................................................................................................................................................................................................................................................................¹ Budget DFID Advisors for Budget Preparationand Control ................................................................................................................................................................................................................................................................¾ CIDA Advisors for BudgetPreparationand Control ADB Capacity Building ................................................................................................................................................................................................................................................................· Treasury ADB Mustofiat Reform ................................................................................................................................................................................................................................................................¯ IDA Treasury Operationsand Capacity Building U S Treasury DebtReconciliation and Control Internal Audit IDA Capacity Building and Institutional Strengthening State OwnedEnterprises USAID Policy Advisors Minister's Office ADB Advisors ProcurementPolicy Unit IDA ProcurementCapacityBuilding Ministry of Economy ARDS IDA Direct OperationsSupportto Procurement CAO CAO IDA Capacity Building and Operations Support 33. Inthe next phase o f its support for PFM, IDA'Svalue added would be to buildon the experience it has had through the series o f projects cited above which donors have acknowledged as substantial. It would then provide additional leadership in coordinating donor assistance beingprovided intheir respective areas o f competence from its position as administrator o f the ARTF. Linkagewith PublicAdministrationReform 34. The proposed project is one element of a wider public administration reform agenda that has been developed by the government, with IDNARTF support to contribute to a more effective state through better PFM performance and by building capacity to sustain this performance (Box 2.2). To date, in the same projects that have contributed to maintaining sound PFM, IDA has also provided major support for the restructuring o f agencies and ministries and rationalizing the functions and job descriptions o f public sector employees in order to pursue operational efficiencies o f service delivery that lead to improved developmental outcomes from public expenditures. In restructuring agencies, attention is being placed on establishing reliable financial management units that would receive the training and capacity being decentralized from the MOF. Major re-structuring o f the MOF itself has been part o f this effort. The focus o f the Public Administration Reform (PAR) is now being directed towards reform of civil service practices in a new Civil Service Reform (CSR) project, whose objective i s to increase personnel performance through incentives, merit-basedhiring, good management, and competency enhancement. Consideringthat personnel costs account for 18 about 30% o f the MTFF (about 62% o f the ordinary budget), gains in this area will be significant for controlling costs and increasing expenditure effectiveness. 35. Together with the CSR project, the Public Financial Management Reform (PFMR) project helps strengthen core business practices within government, namely human resource and financial management - through appropriate regulatory, organizational and technical reforms. Reforms in these areas should provide the supporting organizational environment within which more sector-specific reforms can be effective. Both projects support the achievement of specific triggers under PSIB as well as benchmarks under the Afghanistan Compact. Both projects also support the Government's anti-corruption strategy through identifying and addressing areas that are vulnerable to corruption and through promoting a rules-based culture within government. 36. Therefore through these two operations, the CSR project and the proposed PFMR project, IDA will contribute to the government's overall ability to execute two interlockedbusiness practices -public financial management andpersonnel management. Box 2.2: Linkageswith IDNARTF's Public Administration Reform Initiatives A significant piece of analytical work is underway to assist the government to define priorities and programs in Public Administration Reform. This will include specific areas of work on: how to deepen line ministry reforms, the evolution of sub-nationalgovernance over time, and strengtheninginstitutions of accountability. Work is progressing to define an integrated program of activities and mechanisms for managingresources ina coordinatedway. As part of defining work programsunder this broaderPAR framework, IDA has assistedthe governmentin defining a realistic implementationplan for achieving its civil service reform goals in line with Compact benchmarks. This has beenpresentedto donors for support at the April Afghanistan DevelopmentForum. A major work program i s underway with IDA and other donor support to assist the government develop its anticorruption strategy and to identify areas where improvements could limit the vulnerability to corruption, including inthe area ofpublic administrationreform. The ARTF financed Management Capacity Program is supporting the interim buying-in of Afghan consultants into civil service positions to manage core common function departments while broader capacitybuilding efforts take hold. 19 111. THEPROPOSED PROJECT A. Project Objective 37. The objectives o f the project are to: (i)develop an efficient and effective public financial management system; and (ii) develop the humanresource capacity o f the MOF and CAO to ensure better operation o f public financial management. 38. Indicators for monitoring these performance objectives would correspond closely to those used inthe recently completed PEFA analysis and would include: (i) the degree o f coherence o f budget, treasury and revenue estimates with ANDs priorities and MTFF; (ii)thetimeliness ofbudget,treasury andrevenuepreparation andexecution; (iii)the number of ministriedagencies successfully managing elements o f the procurement and treasury functions with ex post control; (iv) measures o f good governance such as the trend of the percentage of donor support transiting MOF core budget processes; and (v) the quality of governmental audit. The project's impact would also be observed inthe proportion o f the national budgetthat was being managed under improved line ministries and Mustofiats, and eventually, an improvement in the rates o f implementation of budgets that are beingmade available. B. Detailed Project Description 39. The PFMR project will be implemented over a period o f three years and will contain the following components. 1.INSTITUTIONALDEVELOPMENT (US$11.4million) 40. The project would assist each ofthe major departments within MOF and the CAO to develop and implement the structures, procedures and systems required to carry out their mandates under the new PFM legal framework. The legal framework is now ahead o f the procedures and systems to support it. The project would also assist the Treasury Department with systems development, would assist MOF finish the procedures for procurement, and would develop work practices for government audit. 1.1ProcurementInstitutionalDevelopmentand SocialAccountability 41. In order to cope with the urgent task of reconstruction in Afghanistan, arrangements were put inplace under EPAP to provide `centralized' technical assistance by means o f operations support to advisors for procurement under the Procurement Unit o f the ARDS. ARDS managed the Procurement Advisor and recruited and trained 10 local counterpart staff as Procurement Liaison Officers who serve as liaisons with the line ministries with an objective to ensure transfer o f procurement capacity and responsibility to the line ministries. The Procurement Advisor also initiated a training program, conducted a review o f procurement legislation, and prepared draft new legislation which was finally adopted in September 2005 as the new Procurement Law inAfghanistan. 20 42. The PACB project responded to the needto transfer procurement capacity as well as responsibility for procurement functions to the line ministries o f the government. This required institutional development as the core component o f the procurement reform initiative. While some o f the capacity development assistance envisaged flowed from the Bank's previous intervention and impliedfurther training o f targeted individuals, the core objective o f the overall plan was to develop institutional capacity. The capacity development program was predicated on a gradual transfer of procurement responsibility to the purchasing entities based on their demonstrated ability to house and make use o f trained and experienced procurement officers. 43. The services required as part o f the procurement component o f PACB comprise: (i)a sustainable nationwide capacity building strategy to take into account the requirements not only o f central government but also provincial and municipal government as well as the private sector; (ii)a program to assist and facilitate the achievement o f PRR status for a number o f key purchasers at central and sub-central level; (iii)planto transfer procurement capacity and responsibility to those central and a sub-central purchasers according to a set o f milestones; and (iv) a system o f attestation whereby the performance o f ministries can be assessed against identified benchmarks as part o f the milestone mechanism. The objective was twofold: to build the capacity o f procurement officers o f the client, its key purchasing ministries, and provincial authorities; and to strengthen the organizational structure of the procurement function within procuring entities with a view to transfening responsibility for procurement from ARDS to the procuring entities themselves. 44. In 2005, as part of the broader review of Afghanistan's PFM system, an assessment o f procurement procedures and performance focused on the legal framework applicable to the conduct o f procurement inAfghanistan as well as on the performance o f those responsible for applying the procurement procedures was carried out in 2005. The study confirmed the scope o f procurement reform and capacity building activities under the PACB to: (i)create a Procurement Policy Unit (PPU); (ii) finalize and approve the Procurement Law and draft regulations to implement it; (iii)develop and implement a large scale capacity-building program for procurement officers in the government; and (iv) create a training program for the local private sector to enhance its capacity to participate inbids. 45. Under the PACB project, a PPU has been established under the MOF, a new Public Procurement Law has been adopted, the procurement regulations have been drafted, and a system has been established whereby all bidding opportunities as well as contract awards are published in the ARDS procurement website. However, due to various reasons, the government could not complete selection o f a consultant for procurement reform support (Procurement Capacity Building and Legal & Institutional Framework Development) in due course. The process o f selection has recently been completed and the contract with the procurement support consultant was signed in February 2007. Since only a few months o f project duration are remaining for PACB, this component o f procurement reform, which commences under PACB, would continue to be the central planko fthe procurement reforminitiative under the PFMRproject. 21 46. In addition to assisting government purchasers in this way, the project will provide institutional support for the newly created regulatory body (PPU). The PPU requires direct assistance to carry out its functions (listed inthe Procurement Law). They will have started down the path o f creating an information website and a basic Management Information System (MIS) for procurement. This, however, requires significant further input to provide a useful tool. The PPU will also have many other tasks which will require funding, not least in respect o f the adoption o f secondary legislation (including guidelines and manuals) and the dissemination o f information and analysis o f data so that they can provide reports indicating the successes and failures o f the system. The project will therefore include funds for the PPU to: (i)retain consultants to create more Standard Bidding Documents (SBDs), a procurement manual and guidance notes; (ii)develop the website andinteractive MIS; and(iii) the PPUfor publication, assist analysis and dissemination o f review panelprocedures, documentation and decisions. The MIS to be developed for procurement will provide a database of procurement requirements by contracting entity and track the procurement process of large procurements to the stage o f contract award and supports the publication o f procurement information. The AFMIS expansion will include a Purchases module which controls the payment o f contracts once awarded (see sub-component 1.2). Accountability and Disclosure 47. Given the significant changes in the legal and regulatory framework and the traditionally passive public response to expenditure on procurement, there is an initial needto encourage greater public awareness o f the changes to the procurement rules and to promote change inbehavior. The immediate needis to design aneffective and strategic communication and procurement disclosure strategy, taking into account the specific circumstances that prevail in the country. To better support the transition and its related capacity building exercise, an effective communication component will be designed to raise awareness o f the reform agenda and its implications within: (i) government (politicians, parliamentarians, the andpublic officials); (ii) private sector (bidders, consultants suppliers, etc.); and (iii) the civil society at large (academia, non-governmental organizations, civil society organizations, civilians). This component andthe awareness it will raise should also mitigate risks o f failure by ensuring a wider constituency is reached, ownership creation, and dealingwith corruption through a sound, efficient and transparent procurement process. Putting procurement out in the openwithincivil society will also set the stage for possible future inclusion ofcivil society in the procurement function as an oversight element once the GOA has come up with its strategyon anti-corruption. 48. Inthe medium term, it is important not to lose sight of the opportunity to start work on social accountability initiatives. Efforts will be made to discover the most appropriate means o f educating and including civil society in the monitoring o f the procurement function. This should, however, be preceded by a situational analysidassessment that would allow the development o f such a longer term strategy. 22 49. In light of this gradual approach, the project will retain a consultant for a communications and awareness strategy (housed within PPU) and a consultant for situational analysis/assessmentinrespect o fpossibilities for social accountability measures. 1.2 Treasury SystemsDevelopment and Roll-out 50. Over the past four years, an integrated financial management system has been implemented in the Treasury o f the MOF. The basic objective o f this system was to ensure accountability over the Governments budget and expenditures including the use o f donor funds. The system was not intendedto be a complete integrated MIS that would be capable o f serving the needs o f all government managers. It was basically a Treasury system with FreeBalance software as the core application o f the system known as the AFMIS. 51. As the government is moving forward with their reform program, the AFMIS needs to be enhanced to meet the increasing demands on the Treasury staff as well as line ministries and Mustofiats. The software platform for AFMIS i s FreeBalance, the systems study carried out under the PACB project recommended keeping this platform given the knowledge acquired and the reasonably good performance o f the core applications o f expenditure module, general ledger, allotments, bank reconciliations and financial reporting. These core applications give Treasury all the means to effect payments, keep control by allotment, and report incompliance with the law and donor requirements. 52. The expansion should respond to the needs o f line ministrieswhere there is a need to automate control by contract and develop controls by grant. Given that the procurement capacity building contract will develop a procurement MIS to automate and control the process leading up to the selection and award o f a contract, the PFMR should provide an application for the contract control. A Purchasing Module would provide this functionality. Similarly, the PFM law requires that each line ministry keeps a register o f its fixed assets; giventhis and the integration provided between a Purchasing Module and a FixedAsset Module, the AFMIS expansion should comprise Purchasing and the Fixed Assets Module. Similarly, the recording o f revenue would be rendered more secure through the use o f the Accounts Receivable Module. 53. A fully automated off-the-shelve HumanResources (HR)MISfor implementation inMOF is also considered necessary. At present, MOF uses the Microsoft Access based payroll system known as Verified Payroll Program which includes the Computerized Payroll System. Nevertheless, there i s no HR functionality inthe system and the support and documentation o f in-house systems i s not optimum. The ultimate goal for HR MIS i s to direct deposit the net pay to each employee's bank account and provide the critical personnel data for eventual centralizationand determination o f pensionliabilities. 54. A principle o f systems implementation which the team and the government agreed i s to have same vendor applications for all integrated operations (i.e., operations where individual transactions from the modules are required to be posted to other 23 applications). Following from this it was decided that FreeBalance Purchasing, Fixed Assets, and possibly HR Modules would be acquired to address the needs identified. 55. The systems study recommends the implementation o f a budget support management system as a highpriority. Whether the FreeBalance module meets the needs or whether another vendor's product should be used will be determined following the study tour by the MOF's budget and treasury officials to review the performance of HR and BudgetPreparation Modules installed inother government settings. The same vendor principle i s not critical in this case because the Budget Preparation Module and core accountability applications are not integrated but just interfaced with a periodic file submission for loading the budget and updates. The systems integrator consultant selected for the Treasury system will program the interface for the periodic uploading o f the budget files to AFMIS and down loading o f allotment and expenditure information. 56. Therefore, the project would engage a firm o f consultants for up to 36 months to acquire, install, and train national staff in the use o f the following modules from FreeBalance in order to complete the expanded financial management functions in AFMIS - Procurement, Fixed Assets, and Accounts Receivable. The Budget Preparation andHRModule vendor selection will be decided subsequently. 57. To conduct their designated business affairs and be partners with the MOF in distributing the growing administrative responsibilities, line ministries will require the ability to enter transactions into AFMIS and to approve such transactions through the Financial Controllers (Treasury staff) located within the line ministries. The project would support the roll-out o f the AFMIS so that transaction processing and payment authorizationmay be decentralized but that payment processing would remain centralized withinTreasury andthe Mustofiats. This component will assist the government inrolling out AFMIS to five or six line ministries which currently account for the majority o f public sector non-military and non-policing functions as well as six Mustofiats. The selection o f line ministries will be made by Treasury and Budget Departments after considering the capacity and impact o f the roll-out. The pre-conditions for the roll-out include the reform o f the Administration Department o fthe line ministry to a point where staff are under the PRR, the organization and duties o f all financial management staff are clear and documented and the line ministry enters into a written understanding with the MOF on its obligations for the roll-out and using AFMIS, and the line ministry provide the infrastructure to allow the installation of the terminals. Inaddition to the full roll-out to six line ministries, the consultant will assist the government in rolling out just the reporting module o fthe AFMIS to additional line ministries. 1.3Internal Audit Work Practices 58. To date the internal audit activities in line ministries and agencies have been under the control o f the CAO and have been oriented towards detecting frauds and irregularities by line ministries' staffs. The Public Expenditure and Financial Management (PEFM) Law and its financial regulations have transferred control o f 24 internal audit from the CAO to the MOF by providing that the MOF appoint internal auditors to audit the financial and accounting affairs o f all state administrations. 59. Initial steps have been taken under the PACB project to build a modem Internal Audit Department in the MOF, including the recruitment o f more accounting specialists and initial training o f recruits ininternal auditing techniques, and the formation o f a high level Audit Committee to oversee the department's work. Steps being undertaken by a consultant appointed under PACB include preparing an internal audit manual, various audit procedures for financial functions, and work programs for internal audits within the MOF. 60. The project would now support implementation of the expanded MOF responsibility through development o f improved audit methodology and training. The project would also finance further development and roll-out o f internal audit procedures and plans to the line ministries and provinces, and to improve the capacities of the internal audit staff through on thejob training. 61. The consultant will be hired to provide work practice tools and on-the-job training to the cadre o f internal auditors that are engaged inproviding internal audit services inthe MOF and the line ministries. Work practice tools will be developed inthe form o f a new internal audit manual that covers the requirements o f Financial Regulations 11.5 to 11.10 including issues o f internal audit organization, management, planning, conduct, reporting, and follow-up. The on-the-job training will involve leading the auditors inthese ministries incarrying out and reporting some 80 major investment projects (selected on the basis of their value and implementation complexity that could disguise fraud) during the period of the engagementto buildproficiencies to levels that accord with International Internal Audit standards. 62. The CAO has undertaken a significant number o f audits that have identified possible malfeasance and the Auditor General has referred cases to the Attorney General for possible prosecution. There i s a need for similar findings by internal auditors to be referred to a fraud investigation unit prior to consideration o f prosecution or disciplinary action. The component will assist with establishing a fraud investigation unit in the MOF's Internal Audit Department, developing and launching its basic operational skills, and preparing a roadmap for developing specialist fraud investigation processes in Afghanistan. 1.4 Supportfor ExternalAudit 1.4.1 Advisory Services 63. The CAO is reforming its organization, methods and operations. Major training efforts are inprocess to improve the skills o f the audit staff. The CAO, with World Bank funding, has used a professionalaccounting firm to provide guidance to the CAO inthese matters and there i s a need for a senior advisor to the Auditor General on a full-time basis to continue improving the CAO's performance and to build capacity to fulfill its mandate 25 underthe law. A new Audit Law is inpreparation and the advisor will be neededto assist with implementation o f new audit manuals and training the CAO in functions set out in the PEFM and draft Audit Laws. 64. The project would finance the services of a senior audit advisor for policy guidance which has beenongoing since 2006 and strengthening o f the CAO which would allow the direct operations advisor firm to concentrate on delivering audit services. The advisor would be supported by three audit experts available on a full time basis to work as audit team leaders and provide on-the-job training to the CAO staff. 1.4.2 ExternalAudit Developmentof PhysicalInfrastructure - 65. The CAO has moved to new accommodations and requires improved physical infrastructure for their operations. The project would finance improved physical infrastructure including the Information Technology Center, office furnishings and on- line access to AFMIS. The CAO has identified its requirements including computers and relevant software for the field and central audit staff, necessary terminals to connect with the AFMIS to support more efficient auditing, appropriate Computer Assisted Audit Techniques, office furniture, and work stations. 1.4.3 ExternalAudit ParliamentaryOversight - 66. The project will support operationalizing the recent decision to establish the Parliamentary Oversight Committee function, and reinforce and reinvigorate the accountability o f the Executive in the management o f public finances to the legislature through a timely, comprehensive, and methodical review o f audit reports and audited accounts o f the government. 67. Exposure to a well tested system o f legislative scrutiny o f public spending in the context o f a similar political system will help to create awareness o f international best practice, and provide the Committee Chairman and Auditor General with much needed knowledge and understanding of: (i) a tested approach to the timely processing o f audit reports and accounts; (ii) constitution and powers (including understanding o f member nomination procedures, tabling o f schedules, nominating a Chair); and (iii)means through which to promote accountability and transparency. This sub-component will be managed by the CAO and provide management assistance, training, and operating support to build the capacity o f members o f the parliamentary committee in their oversight function as well as supporting secretariat and technical assistance aimed at strengtheningthe administrative support to the committee. 2. HUMANRESOURCESCAPACITYDEVELOPMENT (US$5.0 million) 68. The transfer o f skills to civil servants to operate PFM systems lies at the heart o f sustainability o f adequate PFM performance. Under this component, the project would provide consultants, training opportunities, and materials for the development o f skills o f MOF staff, line ministry staff, and CAO staff. In selecting staff for training, which in 26 turnleadsto advancement, the MOF and the CAO will be sensitive to and follow gender- sensitive policies. 69. Given a three-year project life, it is not expected that the MOF and the CAO would acquire the full range and level o f skills to assume complete responsibility to operate unaided all the PFM systems by the end o f project date. However, while the exact end-state i s not known at this time, advances along the continuum will be treated as solid progress inthe right direction. 70. By project end, however, the MOF staff will have acquired the skills to interpret and apply the PFM laws and regulations for dealing with the routine and current state o f budget execution, reporting and control. The nature o f the technical assistance will transition away from direct operations support as capacity grows. While some direct operations support will be required for the maintenance and further development o f the AFMIS, most technical assistance beyond the current project would be for policy formulation and implementing further reforms. 71. Similarly, the CAO will have progressed to a point where its staff can conduct routine review o f compliance and simple project financial statement audits with the assistance o f an external audit manager to ensure adherence to current auditing standards. Beyond the project life direct assistance would be required for conducting audit o f State Owned Enterprises and complex projects, while the state budget audit could be done with the limitedinvolvement o f an audit advisor for quality control purposes. As inthe case of MOF beyond the current project, technical assistance would be required for policy formulation and implementingfurther reforms. 72. The capacity o f line ministry staff to carry out procurement should, on the other hand, advance to a point where at least in the targeted ministries this staff will assume responsibility for procurement with the mandated supervision o fthe PPUo f MOF. 2.1 Human Resource CapacityDevelopmentin Procurement 73. Interms o f individual training needs, the continuing need to provide purchasing entities with a competent cadre o f procurement officers will be fulfilled through the continuation o f the training programs developed initially by the procurement agents retained under EPAP I.The training activities o f the procurement capacity building contract outlined in sub-component 1.1 will be delivered under this sub-component and will be rolled-out more widely, especially to local government entities as well as to specialist audiences such as decision makers and auditors. Further effort will be made to ensure that there i s a private sector able to respond adequately to (and, where necessary, challenge) the public purchaser in the changed procurement environment. The training needs at sub-central level will be identifiedthrough the training needs assessment. 74. As a result and inaddition to continuing with the existing training program under the PACB project, this project will provide more training at sub-central level, more 27 private sector workshops, specific training programs for the PPU staff, and a training program for dispute panels. 2.2 Human Resource CapacityDevelopmentin Financial Management 75. This sub-component will assist the MOF Treasury Department and the administration departments o f selected line ministries in developing staff capacity in financial management functions. The program would be based on the training needs assessment that was conducted in 2006 for Treasury in the PACB project and additional training needs assessments may be conducted in the line ministries to be engaged inthe decentralization process. Training in line ministries will be done in close coordination with the Budget Department to take any opportunity joint training with assistance provided by the Budget Department. Up to 200 staff could be affected. In addition to providing trainers and materials for duty specific training, for developing a pool o f staff with higher accounting skills, the project will also provide funds to reimburse Treasury staff for attending classes conducted by private entities such as the ACCA. 2.3 Human Resource CapacityDevelopmentin Audit 76. The project would complete the classroom training inintroductory accounting and auditingthat beganunder the PACB project for the first batch o f internal auditors o f the MOF and staff o f the CAO. Additionally, a stream o f internal auditors and CAO auditors intended to provide leadership and more expert skills will be financed for advanced training. The Association o f Chartered Certified Accountants (ACCA) professional accountant training now available in Kabul could be used for this purpose for staff who would become senior leaders in the Internal Audit Department and CAO. Selection o f officers for this training should be based on career development plans and the likelihood that they can contribute over the mid-term to development o f the Internal Audit Department and the CAO. 3. REFORMMANAGEMENT (US$1.0 million) 77. The processes o f coordinating support for improvements in M O F functions and for assuring the improvements are well aligned across departments and with other line ministriesandMustofiats would be managedthrough a newly-formed RIMU.The RIMU would be responsible for developing annual work plans which would assure the coordination o f actions proposed in various departments, monitoring implementationo f these actions so that the overall results o f the project and the M O F strategic plan are achieved. This latter function has been initiated by the MOF. It would also be responsible for assuring that new personnel policies for the civil service being developed and supported by the Independent Administrative Reform and Civil Service Commission (IARCSC) are properly integratedinto the MOF's own HR management department. 78. While it i s important that there be continuity in applying actions to improve performance, the RIMUwould be treated as a "task force" with a finite life and not as a permanentline agency o f the MOF. Throughthis arrangement the MOF managerialteam (minister, deputy ministers, and director generals) would be provided with options and 28 alternatives for making further improvements in overall ministerial functionality. The work o f the RIMU would also allow the management o f the M O F to conclude arrangements with other line ministries and Mustofiats covering their roles and responsibilities in implementing de-concentrated PFM functions. To meet its objectives, the RIMUwould undertake the following tasks. 3.1.1 TargetedRestructuring of Internal MOF BusinessArrangements 79. The RIMU would assure that the various fhctions and relationships between targeted MOF departments were organized to be mutually supporting inproviding efficient PFM. It would draw on the support beingoffered through the IARCSC (being supported by an IDA grant supporting reforms inthe civil service) to rapidly reviewandrevise, as needed, decisions made under the PRR for the allocation o f functional responsibilities, lines of authority and reporting, and the level and types o f staffing required to exercise these functions. The IARCSC with financing o f the CSR project would assist the MOF/RIMU to acquire the services o f an internationally recognized expert inthe operations o f macro-level public finance institutions such as ministries o f finance, treasury boards, central banking institutions to diagnose intra-institutional organizational issues inthe MOF, propose solutions andsupport their implementation over aperiodofabout 36 months. 80. The RIMUwould then work with department heads and staff to implement any restructuring that is recommended. It would pursue a "change management" methodology that would involve the participation o f the staff that would be affected in understanding the rationale for changes, receive feedback on proposals and build commitment and ownership o f changes as they came into effect. 3.1.2 Staff Re-grading under the GOA PayIGradingPolicy 81. The recently completed PRR process produced revised job descriptions and statements o f qualifications for virtually all o f the MOF 220 higher level staff (grades 2 and above) and about 70% o f 5,700 lower level staff (grades 3 and below). The RIMU would arrange with the IARCSC for applying the new grade and pay policy o f the government with support provided through the CSR project. The IARCSC Pay and Grade Unit would work with the RIMUand MOF HR Department to re-map the revised job descriptions into the new %grade system, and complete the task o f defining newjob descriptions to correspond to the new 8-grade system where this was required. Staff o f the MOF HR Department would be trained in creating and grading job descriptions as part o f the process. The IARCSC Pay and Grade Unit, supported by its own team o f international experts, would then prepare confidential reports recommending the re- assignment o f incumbents of former positions into the newly graded positions. 3.1.3 Supportfor theHuman ResourcesManagement (HRM) Department 82. The RIMUwould facilitate the strengtheningo f the HRMDepartment to position it to perform new personnel management functions beingdeveloped under the GOA civil service reform strategy. It would arrange with the IARCSC to train and mentor 29 MOF/HRM staff to apply new operational procedures and manuals as they are developed under the CSR project covering: (i) for positions graded 3 and below following hiring merit-based practices; (ii) assessing individualjob performance; (iii) managing personnel assignments, re-assignments, promotions and sanctions; and (iv) applying separation policies. Incoordination with the CSR project, the RIMU would facilitate the placement of a human resources management expert for 36 months to assist the MOF HRh4 Department to re-organize so as to accommodate the management o f new civil service regulations, and to mentor staff inapplying the training and new operational norms. 3.1.4 Preparation of New Human Resources Management Initiatives 83. The MOF would be expected to make three major strategic decisions to sustain the effects o ftraining, pay reform, and improved personnel management: Initiating "schemes o f service" to permit the M O F to be competitive in recruiting and retaining professionals in selected professional streams considered critical for the long term performance o f PFM fimctions withinthe framework o f the new grading and pay system. While the new grade and pay system would be adequate for motivating and promoting staff and rewarding the performance of most general civil service fimctions in the MOF, select professions including accounting, procurement management, government auditing have special job descriptions, qualifications and certifications, and remuneration requirements that should be recognized if individuals in these fields are to become experienced and long term public servants. The RIMU and HRM Department would prepare a proposal for installing "schemes of service" for these three professional categories with the assistance o f international experts inthe matter, andwhen agreed, launch its application; 0 Reducing the reliance on internationally recruited technical assistance in line functions o f the MOF would be an important element in establishing the longer term sustainability of Afghanistan's public financial management system. The current level o f credibility o f MOF's financial management practices i s being assured by the extensive use o f international and national contractors which is not considered to be sustainable in the long run. In 2007 there are 76 full time expatriate consultants and 200 "local advisors" working primarily in line duties in the MOF. The RIMUwould collaborate with the respective departments inMOF on a diagnosis of continuing needs, an inventory o fpositions that could be "nationalized" considering available human resource capacity, and a timetable for making the transfers; and 0 Introducing gender-sensitive personnel practices. While there i s not a national standard for recognizing and addressing the special requirements o f women inthe Afghan work force, the M O F would initiate: (i)baseline a survey to develop intelligence on the numbers and status o f women currently employed and diagnose issues that impede their productive 30 contributions; and (ii) design actions that could be implemented within current legal constraints to remove obstacles and promote further participation o f women inthe MOF workforce. 3.1.5 PFMR Project CoordinationandAdministration 84. The RIMU would coordinate the implementation of the components of the project. It would also coordinate through the use o f the annual work plan for MOF, the implementation o f the PFMR project with the projects being financed in parallel, for examplethe DFID support to the Budget Department. 85. For the next three years, the RIMUwould assume responsibilities for day-to-day project administration including the: (i)administration o f contracts with international firms (including those not supported by the IDA Grant), as well as monitoring performance under these contracts; and for (ii)project related procurement, financial management, and accountability for safeguards. The Administration Department would participate inthese tasks and assume control by the end o f the third project year. 3.1.6 Monitoringand Evaluation of Results 86. The RIMU would temporarily incorporate the MOF Monitoring and Evaluation Unit (M&EU)to assure coherence between monitoring and evaluation of results and the development and re-development o f reform work programs. The unit and RIMU would produce an Annual Performance Review (APR) with emphasis on the benchmarks contained inthe Results Framework, as well as a review o f actions that had been taken. It would cover all reform measures undertaken inthe MOF, notjust those supported by the PFMR project. 4. DIRECT OPERATIONALSUPPORTFOR PFMFUNCTIONS (USS16.0million) 87. The goals o f the government include maintaining appropriate fiduciary standards to provide reasonable assurance to the Afghan public and to international donors that government resources and donor funds are subject to appropriate budget and expenditure controls. This has been achieved during the reconstruction period with the assistance o f direct operations support based on internationally recruited consultant firms for procurement, treasury and external audit. Moreover, the Mid-Term Review o f the PACB project indicated that because o f the limited progress in progress in capacity building o f civil service skills in PFM, there i s a need for continuing the direct operations support under a new PFM technical assistance operation on with the World Bank. It is also recognized that the outputs o f these contracts provide the fiduciary framework that the government has agreed for the PSIB and for the ARTF contribution to the recurrent budget. The PFM action plan soon to be committed to by the government is also directly supported by the outputs o f the direct operations support contracts. By the end o f the project, however, the nature o f support needed to procurement, treasury and audit will 31 have evolved to that o f supervision, policy advice, and assistance for reform rather than for the execution o fthe day-to-day operations. 88. While the project's approach to direct operations support recognizes that this type o f technical assistance i s still necessary for the medium term, it looks for this round o f 'contracts to contribute to building the skills for the Afghanistan public sector by two means: (i) on-the-job training for civil servants who will be acquiring basic knowledge under the HR Development component o f this project with the direct operations consultant firms; and (ii) by including inthe technical assistance teams under the direct operations support contracts a larger share o f local advisors with concrete deliverables for the transfer o f knowledge and skills for the operation of the PFM systems. This will contribute to a pool o f local advisors highly trained in public financial management and provide sustainability as an alternative to international support infuture inthe form o f in- country expertise which would complement the knowledge and skills o f the civil service. 4.1 Direct OperationsSupportfor Procurement 89. There are currently two forms o f direct operational support for procurement funded by the PACB. 90. First, the services o f a central procurement facilitation consultant directly support line ministries with the procurement process with both procurement o f donor programs and domestically funded procurement. The consultant works under the Ministry of Economy (MOE) and an allowance i s included to cover operating costs o f the MOE Procurement Unitwhile the consultant services are required. 91. While these consultant services and support will be continued under the scope o f the proposed project, the decentralization process envisaged through the transfer of procurement responsibilities which i s integral to this project will mean that the need for such direct operational support will decrease significantly over time. Six line ministries are targeted for de-concentration o f procurement following the training and certification under the capacity building of Component 1. Under the existing arrangement, the procurement facilitating consultants' team is located at the ARDS; however, a different approach is envisaged to be followed under the current proposed project whereby the team leader o f the consultants' team will be located at the ARDS and all other key staff will be located at the line ministries. Through this modified approach, the procurement facilitating consultant will not only be able have better interaction with the line ministries butwill also be able to mentor the line ministries' procurement staff. 92. Second, the PPU within the MOF is receivingdirect support through the funding o f its director (an international consultant) and core staff who are tasked with setting up the PPUand makingit operational. This short term support will continue underthis component to enable the PPU to begin its functions while a full complement o f local staff i s being recruited andtrained inall the requiredfunctions. 32 4.2 Direct Operations Support to Treasury Operations 93. During the reconstruction MOF has maintained high levels of accountability in part through the assistance of a consultancy services to Treasury financed by earlier World Bank projects. The demand for transparency and accountability for the use o f public resources i s growing in Afghanistan and meeting the requirements for reform, accountability and transparency will constrain the pace at which M O F can reduce its dependence on international supported staff and contracted services. The project will continue to provide operational support for the Treasury functions through the services o f internationally recruited firms. 94. Activities under this sub-component will include: operational support and on-the- job training in accounting and reporting, cash management, payroll processing, grant management, and payment processing as well as maintenance and operation o f AFMIS. The contractor will put more emphasis than in the past on using local advisors and transferring a requisite minimumlevel of skills to them to operate the PFM systems by project end. 4.3 Direct Operations Support to ExternalAudit 95. The scarcity o f qualified accountants and the lack o f understanding o f financial statement audits within the CAO have required that the audit advisor firm play a significant role in the conduct o f audits since 2002. During this period, the CAO has completed, with the assistance o f the audit operations advisors, the audit o f all o f the World Bank and ARTF funded projects, and the capacity o f the CAO staff has improved under the on-the-job training supplied by the firms during the audits. These steps have been successful inre-establishing the CAO as a working institution capable o f absorbing institutional strengthening assistance, but it has not developed the institution and its staff sufficiently for them to conduct financial statement audits to international standards without continuing professionalassistance. 96. This sub-component will first finance the consultant services to conduct with the CAO the external audit o f donor projects. An important objective i s achieving compliance with the International Standards o f Auditing (ISAs). The audit operations advisors financed by the World Bank projects have not yet participated in audit o f the government-wide financial statements. The passage o f the PEFM Law necessitates that the CAO make greater use o f the advisor in these audits which should be done in accordance with the ISAs. The firm will also assist with state budget audit during the period o f the PFMR project. 97. Similarly, the selection criteria for the operations advisor will consider the share o f local advisors in the team who are following some accreditation program in accounting. Team members are expected to acquire the core skills for audit field work by the end o f the project life. 33 98. Cost Estimates. The cost estimated for each component in Table 3.1 is based on calculations performed by the Bank team using unit rates on contracts under the current PACB project. Table 3.1: Costs bv ComDonent Component US$ 1. Institutional Development 11,400,000 2. Human Resource Capacity Development 5,000,000 3. Reform Management 1,000,000 4. Direct Operations Support for PFM Functions 16,000,000 Total 33,400,000 5. POTENTIAL RISKSAND MITIGATION 99. The PFMR project would be implementedin a high risk environment created by an uncertain security situation and general weakness in Afghanistan's institutional capacity for implementing operations. These risks are largely beyond the control of the MOF. Conversely, there is a high degree of consensus among donors and officials that reform in the MOF and the overall PFM system is critical and that there is strong ownership by current MOF leadership of a strategy for change. Safeguards issues (environmental, social) are not likely to arise as the project is designed to maintain fiduciary controls while gradually introducing reforms. 100. However, the project also faces significant implementation risks that derive from its being essentially an institution development and capacity building operation including those presentedinTable 3.2. 34 Table 3.2: RiskMitigation Risk Mitigation Laggingtraining and capacity development that Create new and additional civil society and will limit pool of qualified personnel university-led options for professional training and certification Low recruitment andor retention rates for Complete pay and grading reform inMOF; trained personnelthat will slow rate oftransfer explore new grading options for certified PFM of responsibilities to civil service and procurement professionals Resistanceof staffto reforms Adopt a participatory and changemanagement approachto build in-house ownership of reform Incomplete donor coordination creating reform Adopt pro-active donor coordination and program gaps and inconsistencies mobilization action within RIMU Non responsivereform programming, missing Manage reform through annual performance opportunities and repeating errors evaluations and follow-on budget and work programs by RIMUwith stakeholders Objectives could be undermined by pervasive Emphasizethe social accountability and greater petty and procurement corruption disclosure on procurement Reliance on country systems for project The country systems will be aided by the same financial managementand procurement project outputs and monitoredby the project implementation and not on project specific and team and the PSIB supervision project controlled arrangements No tradition of accountability or institutional Support to Parliament to encourage due process framework to support de-concentration applied for malfeasance and support for building fraud investigation capacity 35 Iv. INSTITUTIONAL ARRANGEMENTS PROJECTIMPLEMENTATION AND 101. The PFMR project will be implemented over a period o f 36 months under the following arrangements, 1. Governance and Management Structure 102. The project would be implemented under the authority o f the Minister o f Finance. He would chair and be assisted by a PFM Reform Steering Committee, comprising senior M O F departmental managers (Treasury, Budget, Internal Audit, Administration, PPU), a representative o f the M O E (responsible for procurement operations support) and a representative o f the CAO to maintain focus on results, good communications, a consolidated view o f the reform, and any necessary policy and regulatory improvements. This committee i s a successor to the advisory committee overseeing the PACB. 103. Daily operations o f the project would be organized and coordinated for a newly formed RIMU.The RIMUwould report to the Minister and assist him as the "secretariat" for deliberations o f the PFM Reform Steering Committee. This practice would follow, in effect, that already employed by the M&EU monitoring the implementationo f the MOF Strategic Plan. The specific roles o f the RIMUwould be to: (i) prepare the overall plan o f actions with the contributions o f the various departments and donors making contributions; (ii) coordinate actions to assure mutual support and cross-functional efficiency; (iii)monitor progress; and (iv) evaluate the intendedresults. This would cover all project-supported activities including those implemented through the M O E and the CAO as well as activities financed by other donor partners (for example the Department for International Development-UK [DFID], supporting the development o f the Budget Department). 104. Managers o f the various MOF departments being supported through the project (and by other donors) would be responsible for achieving their own results within the MOF annual work plan once they are agreed. 2. Specific Implementation Arrangements for Project Components 105. Each component and sub-component would follow daily implementation arrangements specific to the needs of the department being assisted and tasks to be performed. These responsibilities are summarized in Table 4.1. The RIMU Director would convene periodic meetings o f these working level authorities to identify and resolve implementation issues that were outside the scope o ftheir individual authorities. 106. The Treasury Department, MOE, and CAO would also be ultimately responsible for the performance o f line ministries in executing their specific areas o f expertise following the decentralization o f PFM functions. The implementation of the roll-out o f AFMIS will be done in conjunction with the Budget Department given the coverage of 36 allotment and contract control now under their responsibility which will be affected by the roll-out. However, the RIMU would assist in coordinating the execution of de- centralization process from an institutional development perspective. The RIMUwould collaborate with the managers o f the departments concerned to assure that critical agreements affecting the decentralization process have been or are being resolved including: selecting the line ministries to be assisted; setting preconditions to be met by line ministries prior to being supported in adopting PFM functions; defining procedures and processes for maintaining work flows between MOF and the line ministries and quality control; and assuring adequate training and materials for line ministry staff. Table 4.1: Imdementation Table 1 ....................................................................................................................................................................................... ............................................................................................................................................................................................................................................. 1 Component 1.1 Social Accountability Treasury and PPU Budget ................................................................................................................................................................................................................................................. Departments t1 I1 t t1 ........................................................................................................................................................................................ ji II;I:~;-~I;- AFMIS DevelopmentandRoll-out ...................................................................................................................................................................................................................................................... Development of InternalAudit ........................................................................................................................................................................................ Work Practices ................................................................. .................................. ................................ t"""""......................................................... CAO 2 Component ................................................................................................................................................................................... 2.1 HRDevelopmentinProcurement ....................................................................................................................................................................................................................................... I PPU 2.2 HR DevelopmentinFinancial Treasury I I II I .................................................................................................................................................................................. I ............................................................ ............................................. .............. ..................................... ................... Management I. "" 2.3 HRDevelopment inAudit I InternalAudit I I PMU I ................................................................................................................................................................................... 3 Component .......................................................................................................................................................................................................................................... PFMRManagement 3.1 Public FinancialManagement ReformProject 4 Component Direct Operations Support 4.1 DirectOperations Support for MOE I II I .......................................................................................................................................................................................... Procurement .............................................................................................................................................................................................................................. 4.2 DirectOperations Support for Treasury I lCAO ................................................................................................................................................................................... Treasury ................................................................................................................................................................................................................................. 4.3 DirectOperations Support for ExternalAudit 3. Coordination with Donors and with the PAR Strategy 107. The RIMU would conduct two closely related annual events that would include the participation of donors and other stakeholders. The APR would report on the achievement o f results and evaluate progress considering the benchmarks set for the project and expectations set out in the previous years' annual work program. The APR would diagnose issues and lead to recommendations for modifying work programs, regulations or implementation arrangements. An annual work programming exercise, which would account for the results o f the APR, would also include the participation o f donors and account for changes intheir support activities. 37 108. The government i s committed to public administration reform and its strategy has recently evolved to encompass deep reforms within line ministries, improvements in institutions o f oversight such as the judiciary and Parliament, and over the longer term, evolution inthe role o f sub-national institutions o f governance and enhanced civil society engagement. Reform o f the PFM in the MOF, MOE, CAO and other line ministries and sub-national bodies i s a critical element o f the overall GOA PAR strategy and program considering its role in determining civil service pay and responsibilities for determining the rate at which PFM functions can be transferred to line ministries and agencies. The MinisterofFinance is a member ofthe PAR SteeringCommittee which oversees the civil service reform and general PARprogram. 4. ProcurementArrangements 109. Afghanistan has made considerable efforts to establish the Legal and Regulatory Framework for procurement in the last five years with the donor support. A new Procurement Law reflecting the best international practices in public procurement has been enacted in November 2005 replacing the earlier Procurement Regulations. The Afghanistan Procurement Regulations and Procedures have been prepared and awaiting the clearance from the Ministry o f Justice and the Cabinet o f Ministers. A Special Procurement Commission which will be responsible to review the contract award recommendations for contracts exceeding US$500,000 will be operational in April 2007. A Manual of Procedures for Procurement Appeal and Review has been preparedand the system will beginto be operational by April 2007. Afghanistan-specific bidding/proposal documents will be prepared by December 2007. Bidding opportunities for all major contracts and the contract awards are published in the ARDS website under the MOE. ARDS-PU i s currently issuing the bidding documents to all the potential bidders electronically free o f charge. The above actions will increase the transparency and the confidence o f the business community. However, much needs to be done in dissemination o f the new law/regulations/procedures/appeal mechanism to all the stake holders o f government and the business community. A technical assistance operation i s in place to carry out an intensive and extensive capacity building program. Action will be simultaneously taken to develop procurement proficient personnel with an accreditation system. In addition GOA would seek opportunities to get the civil society involved to provide an oversight inthe adherence to transparency inthe process. 110. Most o f the procurement under the project will be for the provision o f technical assistance through firmshdividuals which would provide assistance corresponding to each o f the components and sub-components to MOF/MOE and CAO. ARDS-PU shall assist all the implementing agencies to carryout procurement o f major consultancies including high value individual assignments and all goods following International Competitive Bidding (ICB) and National Competitive Bidding (NCB) procedures other than the assignment for selection o f a firm to manage the Procurement Unit. The implementingagencies will provide technical inputs inpreparation o f terms of reference and specifications and take the lead in carrying out technical evaluations. The procurement departments o f each implementing agency will be responsible for the procurement o f small value goods contracts following Shopping and Direct Contracting 38 procedures. RIMU will take the lead in coordinating activities among all agencies. Actual tenderingwould be managed by the ARDS. A summary o f procurement methods i s given inAnnex C. 111. The Financial Officer of the RIMU would be responsible for contract administration, and with the user department, shall monitor compliance with terms o f reference/compliance to the agreed specifications. 5. FinancialManagement, Disbursementand Audit Arrangements 112. A PFM performance rating system has been recently developed for Afghanistan by the PEFA multi-agency partnership program which includes the World Bank, IMF, European Commission, and other agencies. Afghanistan's ratings against the PFM performance indicators portray a public sector where financial resources are, by and large, being used for their intended purposes as authorized by a budget that i s processed withtransparency andhas contributedto aggregate fiscal discipline. 113. At the project level, financial management will be coordinated by the RIMU of the MOF. The RIMUwouldreportto the Minister of Finance as hisproject executive arm and will also serve as the "secretariat" for deliberations o f the PFM Reform Steering Committee. A Financial Management Specialist will be recruited at RIMU with responsibility for financial management activities of the project which will include processing o f consultants and suppliers invoices for payments (Le., preparing M-16 forms payment orders); maintaining relevant accounting records; preparing required monthly, quarterly and annual reports; coordinating with other component implementing entities to ensure that adequate financial management requirements are met; liaising with the Special Disbursements Unit (SDU) to ensure that the Designated Account (DA) i s replenishedwhen due; and responding to project audits. 114. At the implementing entities responsible for the other components, a dedicated manager and an accounts officer will be assigned by these entities to ensure that they maintain adequate records andpreparetechnical andfinancial reports oftheir activities. 115. Quarterly un-audited financial statements will be prepared by the RIMU accounting unit. Consolidated project reports will be prepared, reviewed, and approved by the MOF, supported by the FM Advisor. A DA will be opened at Da Afghanistan Bank (DAB, Central Bank). The DA will be maintained by the MOF. Withdrawal applications for replenishment will be submitted monthly. Financial management arrangements for the project are detailed inAnnex D. 116. Funds Flow. Funds management for the project will follow existing procedures. As with all public expenditure, all payments under the project will be routed through MOF. The FMAdvisor will assist the MOF inexecuting and recordingproject payments. In keeping with current practices for other projects in Afghanistan, the DA will be operated by the SDU inthe Treasury DepartmentMOF. Requests for payments from DA funds will be made to the SDU by RIMU. In addition to payments from DA funds, 39 RIMU can also request the SDU to make direct payments to consultants or consulting firms and special commitments for contracts covered by letters of credit. Such requests will follow World Bank procedures. All withdrawal applications to IDA including replenishment, reimbursement, and direct payment applications will be prepared and submittedby MOF. 117. Accounting and Reporting. A Financial Management Manual will be prepared by RIMU documenting the financial management arrangements for the project. The manual will outline guidelines for project activities including specific requirements for each component implementing entity, and establish a project financial management system in accordance with standard Afghan government policies and procedures. This will include use o f the Chart o f Accounts developed by the Treasury to record project expenditure. Project accounts will be consolidated centrally in MOF, through the SDU and supported by the FM Advisor. Consolidated Project Financial Statements will be preparedfor all sources and uses of project expenditures. 118. Disbursement Method. Disbursements from the IDA grant will make use of reimbursement, direct payment, and payments under Special Commitments including full documentation or against statements o f expenditures, as appropriate. 119. Retroactive Financing. A provision has been made to reimburse the Government for payments from government resources up to a maximum o f US$2 million for eligible project expenditures incurredafter April 15, 2007 and up to the signing o f the Financing Agreement, in accordance with the Bank's procurement guidelines. In particular and given its urgency and priority, this provision i s expected to be utilized to facilitate the early mobilization of the consultants on systems development and for the RIMU. 120. Audit of Project Funds. The Auditor General, supportedby the Audit Agent, is responsible for auditing the accounts of all IDA-financed projects. Annual audited project financial statements will be submitted within six months o f the close of GOA'S fiscal year. The project audit o f 1384 reported ineligible expenditures which are still pendingresolution. v. ACTION PLAN,MONITORINGEVALUATION RESULTS AND AND A. Action Plan 121. The M O F has agreed to establish the RIMU as the vehicle for advising MOF management on its action plan for improving overall PFM performance. Staffing of the RIMU has begunwith the appointment o f the Director. The remaining national staff of the RIMU were due to be appointed before project negotiations. The services of international advisors for the RIMU have begun in that terms o f reference and qualifications for two key positions have been agreed. Securing these services will be arrangedwith the IARCSC under conditions governingthe CSR project. The project will 40 be implemented through annual work plans; the plan for the first year will be prepared before the project begins. B. Monitoring and Evaluation Arrangements 122. The RIMUwould incorporate the current M&EUinto its structure for the life of the PFMR project to assure coherent results-focused project management. The M&EU now reports to the Deputy Minister o f Administration and this arrangement would be re- instated at the end o f the project. 123. The M&EU which is staffed by a senior Afghan national consultant has conducted one full year monitoring the reform activities assigned to each of the MOF's operating departments contained in the MOF Strategic Plan. It has reported findings quarterly to the Deputy Minister o f Administration and senior MOF officials. However, the Strategic Plan focused mainly on shorter term actions that would correct immediate operational deficiencies in the MOF's work. As a result, the M&EU has not had experience in monitoring "results" and evaluating longer term outcomes. It has not therefore been ina position to recommend re-programming reform activities contained in that Strategic Plan. 124. With the M&EUstaff, the RIMUwould introduce a newmonitoring methodology including monitoring the achievement o f annual benchmark results as presented inAnnex A, in addition to the more conventional monitoring o f the execution o f activities that are agreed inannual work programs. 0 Quarterly Activity Reports. RIMU/M&EU would continue current practices in compiling quarterly activity and input use reports that would also evaluate progress in meeting expected annual results. The audience for these reports would be the RIMUand the PFMR Steering Committee. They would be used essentially for short term management and coordination purposes. They would draw on observations by the M&EU and activity reports by those responsible for implementation of various components and sub-components (as i s the current practice), as well as expenditure and personnel use data. They would estimate the likelihood o f meeting annual results expectations based on these observations. The mid- year report would be compiled so as to coincide with a regular supervision mission o f IDA and other donors. 0 Annual Performance Report. During the last quarter o f each project year, intime to influence the preparation ofthe following year's work program, the RIMUwould contract with independent short term consultants to make a more thorough review o f project performance. Their report would be "strategic" in nature and tone, compiling the updated information previously presented in quarterly activities reports, but focusing on evaluating progress in meeting results benchmarks (for individual components and sub-components) and the project's strategic objectives. It 41 would make recommendations concerning modification o f activities, and inan extreme case, modificationof expected results. The audience for this report would be the RIMU, the Minister, Deputy Ministers/Treasury, the Project Steering Committee, and donors. Annual Performance Review (APR). Based on the consultant's report, the Minister and the RIMU would convene an APR whose objectives would be to: (i)validate the factual findings and agree with or modify their interpretation; and (ii) discuss and agree on modifications to the reform program activities. This would assure that strategic results were going to be achieved and the follow-on annual work program (activities, costs, financing, implementation arrangements) would incorporate these actions. In the second APR, if exogenous events appeared to make original assumptions underlying the project unrealistic, the development objectives o f the project may also be modified. The APR would be timedto meet the GOA budget cycle. Donors would be expected to time their project supervision activities to participate inthe APR. 125. After approximately 24 months o f project implementation, the RIMU would conduct a strategic review o f progress in meeting overall PFMR results (Annex A). As a key part o f this review, it would engage short term consultants to assist in updating the findings o f the "PEFA Analysis" contained in the 2005 publication "Afghanistan: Managing Public Finances for Development." The purpose o f this review would be to identify the framework for the preparation of a further 2-3 years of reform in the PFM system which might be supported by donors. The audience for this review would be the political level o f the GOA, donors, and stakeholders. Donors would participate in this review treating it as an "identification" exercise for their further possible support for PFM reform. C. Bank Supervision 126. Bankmonitoring and evaluationwill bebased on a set o f specific and monitorable performance monitoring indicators from the results framework presented in Annex A. Specific benchmarks have been outlined for agreement between the government and technical assistance providers early on in implementation so as to measure specific progress in meeting both the PFM performance and capacity building objectives. The project's task team leader will be located in Kabul and conduct continuous supervision. Additionally, a full supervision mission will be carried out twice a year comprising appropriate specialists from each o f the component areas. This supervision will be conducted incoordination with the supervision o f DFID's technical assistance on Budget Formulation and Execution. Before the end o f the second year o f project implementation, a mid-term review will be conducted in order to assess the advance toward the development objectives. The RIMUwill have the primary responsibility to prepare and furnish to IDA quarterly project report highlightingprogress in undertaking the actions required to achieve project development objectives. 42 ANNEXA. RESULTSFRAMEWORK MONITORING AND Project Development Contribution to Global Objectives Project Outcome Indicators GOAMOFGoals (i)todevelopanefficient i)Coherenceofbudget,treasuryandrevenue Maximizes PFM contribution to and effective public estimates with ANDs priorities andMTFF economic management and growth financial management ii)Timelinessofbudget,treasuryandrevenue development impact and system preparationand execution development impact of resource flows; lowers risk to donors of making longer term, predictable commitments (ii)todevelopthehuman i)Levelandperceptionofgoodgovernance Builds "good use" justification for resource capacity ofthe inPFMoperations mobilizing national revenue (tax MOF and CAO to ensure ii)Number of ministries/agenciesperforming and customs reform) andgood better operation ofpublic assignedtreasury functions stewardshipand improved financial management iii)Numberoflineministriesconductingstand development impactjustification alone procurement for increaseddonor support iv) Relianceon international technical assistance diminishing Contributing Outcomes/Outputs Contributing Outcome Indicators Contribution to PDO Results Authorities restructure i)NumberofMustofiatswhichhave Provides structural framework for institutions and de- implementedrestructuring and new efficiency and efficacy inPFM concentrate operations: processes of Mustofiat Reformprogram contributesto a "culture of Mustofiats accountability" and goodpractice; broadens responsibility for good stewardshipof national financial resources MOF establishes, i) Regularpublicationofopportunityand Providesbasis for internal promotesand outcomes of public contracts. management and control of implements PFM ii)Numbersofinternalandexternalfinancial financial resources and assets, systems that meet new audits done to acceptable standards. supporting good governance accountability and iii)Timeliness,qualityofannualfinancial transparency norms statements submittedto the legislatureand MOF manages its human Providesthe humanresource resourcesfollowing capacity required for PFM systems improved recruitment, to function career managementand incentivesstandards 43 ANNEXA.1. ACTIONABLEINDICATORSAND PROGRESSBENCHMARKS Benchmark Benchmark Collectionand Year 2 Year 3 Reporting [favorable Approval by Minister, MOF; and revenueestimates reactionby reactionby donors at annual annual evaluation with ANDS priorities donors1 donors] evaluation of with donors; treasury results PEFA Review, (expenditure and 2009 revenue) vis-a- vis ANDs and MTFF framework Timeliness and Irregular and Quarterly cash Annual cash Annual cashplan Minister, Treasury predictability of Moderate forecast plan submitted realizedto Reports, PEFA treasury and revenue prepared and to Minister, within 80% of Review, 2009 preparationand submitted to updated forecast execution Minister quarterly Level and perceptionof Moderate 5% increase of 5% increase of 5% increase of Minister, MOF good governanceinPFM share of donor share o f donor share of donor with donors; operationsas measured funds through funds through funds through RIMU/M&E, by %of share of donor Core Budget Core Budget Core Budget APR; PEFA funds entrustedto the Review, 2009 CoreBudget Number of ministries None 2 Ministries 4 Ministries 6 Ministries with RIMU/M&E, performing assigned recording with on-line on line access for Annual Progress Treasury functions payment access and payment requests Review (APR); request on line making on line and recording PEFA Review, to AFMIS payment allotments 2009 requests directly in AFMIS Number of line 1 1 3 6 RIMUPPU; APR ministries conducting stand-alone procurement ReducedRelianceon Analysis of 20% of 50% of strategic RIMU/Operations International TA options and strategic goal goal achieved Departments strategy achieved determined Number of Mustofiats Nil 1 3 6 RIMUDirector which have General Treasury, implemented APR restructuringand new processesof Mustofiat Reform program Regularpublication of ' 50% of the 80% o f the 100% of the Monthly opportunity and contracts contracts contracts procurement outcomes of public meetingthis meetingthis meeting this facilitating contracts, in compliance requirement requirement requirement consultantreports with the Public and MOF ProcurementLaw and procurementweb the Regulations site with information from procurementMIS Number of internal Nil 4 12 24 RIMU/CAO; APR auditscompletedinline ministries and Mustofiats to 44 Baseline Benchmark Benchmark Benchmark Collection and Indicator Dec. 2006 Year 1 Year 2 Year 3 Reporting acceptable standards Timeliness and quality Only Qatia Qatia and Qatia and Qatia and Bank supervision of annualfinancial issuedin line Annual Cash Annual Cash Annual Cash of submissionby statements submitted to with law Based Based BasedFinancial MOF to the legislatureand Financial Financial Statements and Parliament donors Statements Statements and information on issuedby Sept. information on liabilities and 21 liabilities and assets issued by assets issued Sept. 21 ( as in by Sept. 21 year 2) Percentageof 0 50 o f Level 2 100 of Level 2 100 all levels RIMU/HRM authorizedpositions and above and above Unit/IARCSC filled by re-grading and (AB) mapping staff into 8- 50 of Level 3 grade152 pay-point and below system or hiring Improved work Not available Plan to be Progress 5% a Progress 10% HR MOF environment for establishedas year from base year personnelrecords women, including of 2007 increase in numbersof women employed at different levels 45 ANNEXB. PROJECTCOST SUMMARY BY COMPONENT AND CATEGORY (100% Financedby IDA) Incremental 000,000 Consultant Operating of $US Services Training Goods Expenses Total ................................................................................................................................................................................................................................................................® Component 1 - Institutional Development ProcurementStrengtheningand ................................................................................................................................................................................................................................................................³ 1.1 Social Accountability 0.90 0.90 Treasury SystemsDevelopment ................................................................................................................................................................................................................................................................¶ 1.2 and Roll-out 5.OO 5.00 Internal Audit - Development of ................................................................................................................................................................................................................................................................¬ 1.3 Work-practices 2.20 2.20 ................................................................................................................................................................................................................................................................¯ 1.4 External Audit Advisory Services for External ................................................................................................................................................................................................................................................................· 1.4.1 Audit 2.00 2.00 Office and I T Equipment for the ................................................................................................................................................................................................................................................................° 1.4.2 CAO 1.oo 1.oo * ParliamentaryOversight - Public 1.4.3 Accounts Committee 0.20 0.10 0.30 Cam onent Sub-total 1.00 0.10 11.40 ................................................................................................................................................................................................................................................................§ Component 2 HR Capacity Building - ................................................................................................................................................................................................................................................................¹ 2.1 HRDevelopment inProcurement 1.oo 1 .oo HRDevelopment inFinancial ................................................................................................................ 2.2 Management ........................................... 2.00 ; 2.3 HR Development inAudit 2.00 2.00 5.00 P 5.00 ................................................................................................................................................................................................................................................................" Component 3 Reform Management - 3.1 Reform Management 0.70 0.30 1.oo Component Sub-total 0.70 0.30 1.00 Component 4 - Direct Operations ,,,S!!EP?!!? ................................................................................................................................................................................................................................................................y Direct Operations Support for ................................................................................................................................................................................................................................................................a 4.1 Procurement 3.10 0.90 4.00 Direct Operations Support for ................................................................................................................................................................................................................................................................º 4.2 Treasury 8.00 8.00 * Direct Operations Support for 4.3 External Audit 4.00 4.00 Cam onent Sub-total 0.90 16.00 Total 26.10 5.00 1.00 1.30 33.40 46 ANNEXC. PROCUREMENTARRANGEMENTS A. Country Context 1. The Bankhas gained substantial experience andunderstanding o fthe procurement environment in Afghanistan through its involvement in the interim procurement arrangements put in place through EPAP as well as with the institutions such as ARDS that i s holding the current responsibility for government's procurement administration. As part of the broader review of Afghanistan's PFM system, the Bank recently carried out an assessment o f the procurement environment in the country based on the baseline and performance indicators developed by a group o f institutions led by the World Bank and Organization for Economic Co-operation and Development/Development Assistance Committee. 2. The first key issue identified through the procurement assessment was the need for ownership and a champion in the government for reform, deepening o f capacity, ensuring integrity in the operation o f procurement systems, and promoting sound procurement among ministries. 3. A new Procurement Law was adopted in November 2005 which radically transforms the legal and regulatory framework for the procurement administration o f Afghanistan. While it provides a very modern legal system for procurement, effective implementation o f the law may encounter difficulties in the current weak institutional structure and capacity o f the government. A PPU has now been established under MOF to ensure the implementation through the creation o f secondary legislation, standard bidding documents, provision of advice and creation of the necessary information systems for advertising and data collection. "Afghanistan Procurement Regulations" has been prepared under two sections: (i) Regulations; and (ii) Procedures and under review by the Ministry o f Justice prior to submission to the Cabinet o f Ministers. Procedures for procurement appeal and review have been developed by PPU/MOF and the nominated memberswill be appointed for the system to be functional by April 2007. 4. Inthe absence o f adequate capacity to manage procurement activities effectively, some interim arrangements have been put in place to improve the procurement management o f the country. A central procurement facilitation service, ARDS-PU has been established under the supervision o f MOE. The Bank and the government have agreed on a program for country-wide procurement reform and capacity buildingleading to the transition from centralized to decentralized procurement services. The Bank funded PACB project is the primary instrument for implementing the program to strengthencapacity o f the line ministries to manage public procurement in an effective, transparent and accountable manner. However, the implementation o f the procurement capacity building strategy has not made any significant progress yet due to lack o f coordination and delays in decision making within the government. The envisaged radical changes to the procurement management environment expected from the new Law also require the urgent implementation o f a comprehensive human resources and 47 capacity development program. The implementation o f the procurement reform component o f the PACB and the proposed PFMR project should be considered with due priority to ensure that fiduciary standards are further enhanced and that capacity i s developed inthe government to maintainthese standards. PartA General - 5. The procurement administration of the project would be carried out inaccordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004, "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Financing Agreement. The general description o f various procurements under different expenditure categories are described below. For each contract to be financed by the Grant the different procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame agreed between the Grant Recipient and the Bank project team are described in the Procurement Plan. This Procurement Plan will be updated at least annually or more frequently as required to reflect the actual project implementation needs and improvements inthe institutional capacity. 6. Procurement of Works. The proposed grant will not finance any works contracts. 7. Procurement of Goods. Goods procured under this project would include office furniture and equipment, IT equipment and software, multi media equipment, office equipment and computers for MOF/CAO. The procurement o f goods will be done using Bank's SBDs for all ICB and Afghanistan-specific SBD agreed with the Bank for all NCB. Other procurement method will be shopping. All goods contracts estimated to cost more than US$200,000 shall be procured following ICB procedures. The contracts estimated to cost more than US$lOO,OOO and less than US$200,000 shall be procured following N C B procedures and contracts estimated to cost less than US$lOO,OOO shall be procured following shopping procedures. With the prior agreement with IDA, direct contracting method may be used to procure proprietary software including upgrades for existing software and other goods and services which meet the requirements as per the provision under paragraph 3.6 o f Bank's Guidelines. 8. Selectionof Consultants.There will be a several highvalue technical assistance (TA) contracts under the project. These TAs will include the hiring o f consulting firms for: (i)Procurement Capacity Building and Legal and Institutional Reform; (ii) Treasury systems development and roll-out; (iii)Internal Audit Work Practices; (iv) HR development in Financial Management; (v) HR development in Audit practices; (vi) Management o f Reform implementation o f the MOF; (vii) Central Procurement facilitation; (viii) CAO support inaudit operations; and (ix) Treasury Operations support. The consultant for Procurement Capacity Building and Legal and Institutional Reform has commenced the assignment. This assignment will be partly financed by the ongoing PACB I1project. 48 9. In addition there will be high value assignments for individual consultants to provide: (i)advisory inputs to PPU; (ii) to support Internal Audit Reviews and Fraud Review; and (iii) external audit - Parliamentary oversight. 10. Some o f the above assignments have already commenced under the on-going PACB project and extensions to the ongoing contracts as needed may be provided based on the performance o f the consultants in the on-going assignment following Single Source Selection (SSS) procedures. 11. The selection o f consultants under the project will include Quality and Cost Based Selection (QCBS), Quality Based Selection (QBS), Consultants' Qualifications Selection (CQS), Least Cost Selection (LCS), Fixed Budget Selection (FBS), SSS and individual consultants in accordance with Section V o f the Bank's guidelines for the selection o f consultants. Threshold for CQS procedure will be US$200,000 per contract. 12. Short lists of consultants for services estimated to cost less than $100,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o fparagraph 2.7 ofthe consultant guidelines. 13. Incremental Operational Costs which would be financed by the project would be procured using the implementing agency's administrative procedures which were reviewed and found acceptable to the Bank. Part B Assessment of the Agency's Capacityto ImplementProcurement - 14. The project will be implemented by MOF. An assessment o f the capacity of the MOF to implementthe procurement actions under the project was carried out inFebruary 2007 by Deepal Fernando (Senior Procurement Specialist) and Rahimullah Wardak (Procurement Analyst) o f the Afghanistan country office. 15. The assessment reviewed the organizational structure for the implementation of the project andthe capacity o fthe implementingagenciesto handle procurement. Ministryof Finance 16. Director General (Administration) o f the MOF i s handlingday-to-day small value procurement for the ministry. Therefore, that unit has the capacity to carry out small value contracts following shopping and direct contracting procedures with limited capacity building. This unit has not handled and does not have the capacity to handle large value contracts including selection o f consultants. Controland Audit Office 17. The Department of Services reporting to Director General (Finance and Administration) i s responsible for all the procurement actions o f the CAO. CAO's office does not carry out major procurement activities. Inthe recent past they have purchased a 49 few computers and furniture under the development and ordinary budget. They have one procurement officer. We can agree to allow the CAO office to procure goods following shopping and direct contracting procedures. Ministry of Economy 18. The Procurement Unit o f the MOE is handling day-to-day small value procurement for the ministry. Therefore that unit will have the capacity to carryout small value contracts following shopping procedures with limited capacity building. This unit has not handledand does not have the capacity to handle large value contracts including selection o f consultants. 19. The ARDS-PU o f the M O E already has sufficient capacity and experience in handlingprocurement. At present, PUprovides procurement services to all the ministries under the GOA for all projects funded by the government and donors. There was a circular o f MOF which indicates that ARDS-PU should carry out all the procurement actions for contracts estimated to cost more than US$200,000. This requirement may be waived provided the implementing ministry/agency i s sufficiently equipped with staff or procurement consultants capable of carrying out procurement actions. The staff o f ARDS-PU is familiar with procurement procedures and guidelines o f the GOA, World Bank and other donors. ARDS has a register o f firms and consultants. All the bid invitations and Expressions o f Interest are advertised intheir website and the documents are issued electronically free o f charge to the registered bidders and the others who wish to participate in the biddingprocess. All the awards as per the Law are published in the ARDS website on behalfof all the ministrieswho seek their services. 20. Based on the above assessment, it was agreed that all goods contracts following I C B N C B procedures and all consulting assignments with firms and high value assignments o f selection o f individual consultants on behalf o f the M O F will be carried out by the ARDS-PU under the MOE. The assignment for the selection of a consultant for central procurement facilitation will behandledby the administration unit o f the MOF with guidance from MOE and PPU of MOF, as it will be a conflict to allow the current ARDS-PU to take a lead inthe procurement process. 21, However in order to mitigate procurement risks, it i s proposed to conduct several training programs as indicated below for the staff o f the MOF, CAO, and MOE especially drawn from the administration unit and potential evaluation committee members. In addition, it i s important that the consultant selected to carryout the capacity building activities carry out several programs to create awareness among all the stakeholders o f the new Procurement Law and Afghanistan Procurement Regulations and Procedures. The proposed capacity buildingprogram is presented insection D1. The procurement risk at the country levelis consideredas "Average." 50 Part C ProcurementPlan - 22. The Grant recipient, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Grant recipient and the project team and is available at MOF, Pashtunistan Wat, Kabul, Afghanistan. It will also be available in the project's database and on the Bank's external website. The procurement plan will be updated inagreement with the project team annually or as requiredto reflect the actual project implementation needs and improvements ininstitutional capacity. PartD Frequencyof ProcurementSupervision - 23. Inaddition to the prior reviewsupervision to be carried out from Bank offices, the capacity assessment o f the Implementing Agency has recommended two procurement reviewsper year. Attachment 1 Detailsof the ProcurementArrangementsinvolvingInternationalCompetition: A. Goods andWorks andNon-ConsultingServices (a) List o f contract packages which will be procured following ICB and direct contracting: NIL (b) Goods above US$200,000 equivalent per contract and all Direct Contracting will be subject to prior review by the Bank. B. ConsultingServices (a) List o f Consulting Assignments with short-list o f international firms. 51 Review Expected btimated by Bank Proposal Rej Cost in Selection (Prior / Submission No. Description of Assignment US$m Method Post) Date Comments PPUlO3 ProcurementCapacity 6.0 QCBS Prior 2006 Contract Awarded; Building and Legal and ProcurementHR Institutional Reform development is included. Partly financed under PACB. MOF-1 Treasury systems 5.0 QBS Prior Sept. 30,2007 developmentand roll out MOF-2 Internal audit work 2.2 QBS Prior Sept. 30,2007 practices MOF-3 HR developmentin Prior Sept. 30, 2007 financial management MOF-4 HR developmentin audit Prior Sept. 30,2007 practices MOF-5 Management of reform Prior Sept. 30, 2007 implementation of the MOF MOF-6 Central procurement Prior Sept. 30, 2007 facilitation CAO-1 Support CAO in audit Prior Sept. 30, 2007 operations MOF-7 Support Treasury Prior Sept. 30, 2007 operations PPU/l-2 Advisory inputs to PPU Prior Already commenced (aroundfour contracts) sss under PACB. These will be considered basedon the need and the performance I ofthe consultants. MOF-8- Parliamentaryoversight Indv. Prior MOF-9 Procurement Strategic Indv.1 Prior Communication and CQS Dissemination Stratenv (b) Consultancy services estimated to cost above $100,000 or equivalents per contract and all Single Source Selection o f consultants (firms) and estimated to cost US$50,000 for individual for assignments will be subject to prior review by the Bank. (c) Short lists composed entirely of national consultants. Short lists o f consultants for services estimated to cost less than UD$100,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 of the consultant guidelines. 52 ProcurementPlan A. General A1 Projectinformation Country: Afghanistan Recipient: Islamic Republic o f Afghanistan ProjectName: Public Financial Management Reform Grant No.: Project Implementing Agency: MinistryofFinance A2 Bank'sApprovalDateof the ProcurementPlan: March31,2007 A3 Dateof GeneralProcurementNotice: March21,2007 A4 Periodcoveredby this procurementplan: Eighteen Months B. Goods andWorks andNon-ConsultingServices B1 Prior Review Threshold. Procurement Decisions subject to Prior Review by the Bank as stated inAppendix 1to the Guidelinesfor Procurement: I I Procurement I Prior ReviewThreshold($) IComments I 1. IGoods 2. Direct Contracting (Goods and Services) All I II200,000 Equivalent or more B2 Any Other SpecialProcurementArrangements. None B3 ProcurementPackageswithMethodsandTime Schedule 1 1 3 8 9 Ref.I 2 Contract Estimated Procurement Pre- Domestic Review by Expected Bid- Comments No. (Description) Cost Method qualification Preference Bank (Prior Opening Date (US%m) 01 Computers and 0.4 Oct. 3 1, 2007 related IT equipment several packages 02 Office 0.2 NCB No No Prior Oct. 3 1, 2007 equipment for CAO and other agencies 03 LANforCAO 0.2 NCB No No Prior 0 4 IFurniture 0.2 N S No No Post several lots 53 C. Selectionof Consultants C1 Prior Review Threshold:Selection decisions subject to Prior Review by Bank as stated in Appendix 1 to the Guidelines Selection and Employment of Consultants: Selection Method Prior Review Threshold ($) Comments 1. Competitive Methods (Firms) More than 100,000 equivalent 2. Individual Consultant More than 50,000 equivalent 3. Single Source (Firms) All 4. Single Source (Individual) All C2 Short list comprising entirely of national consultants. Short list of consultants for services, estimated to cost less than $100,000 equivalent per contract, may comprise entirely o f national consultants in accordance with the provisions of paragraph 2.7 o fthe Consultant Guidelines. C3 Any Other SpecialSelectionArrangements. None C4 ConsultancyAssignments with SelectionMethodsandTime Schedule 1 2 4 5 6 7 Expected Estimated Review by Proposals Selection Bank (Prior Submission Descriptionof Assignment Method Post) Date Comments ProcurementCapacity QCBS Prior 2006 ContractAwarded; Building and Legal and Procurement HR Institutional Reform development is included. Partly financed under PACB. MOF-1 Treasury systems 5.0 QBS Prior Sept. 30,2007 developmentand roll-out InternalAudit Work 2.2 QBS Prior Sept. 30, 2007 Practices HR development in 2.0 QBS Prior Sept. 30, 2007 FinancialManagement HR development inAudit 2.0 QBS Prior Sept. 30,2007 practices Managementof Reform 1.0 QBS Prior Sept. 30, 2007 implementation of the MOF Central Procurement 3.1 QCBS Prior Sept. 30,2007 facilitation Support CAO in audit 4.0 QBS Prior Sept. 30,2007 operations SupportTreasury Operations Prior Sept. 30,2007 Advisory inputs to PPU Prior (around four contracts) under PACB. These will be considered basedon the need and the performance Parliamentary oversight 0.3 Indv. Prior MOF-9 ProcurementStrategic II 0.2 1IIndvKQS Prior Communicationand Dissemination Strategy 54 D. ImplementingAgency CapacityBuildingActivitieswith Time Schedule D1. In this section is the agreed capacity building activities. In addition to the program conducted by IDA for MOF/MOE/CAO staff, it i s proposed that staff involved in the procurement activities o f the grant be nominated to participate at training programs for Procurement Law/Regulations/Procedures/goods/worksand consulting services conducted by the consultant hired for capacity building assignment under the MOF/PPU. Proposed Capacity Building Program ExpectedoutcomeI Estimated Estimated Proposed No. Activity Description Duration Start Date Participants 1 ProcurementWorkshop: 2 days May 2007 CAO/MOF/MOE GeneralIntroduction 2 ProcurementWorkshop: 1day June 2007 CAO/MOF/MOE Procurementof Goods 3 ProcurementWorkshop: 1day May 2007 CAO/MOF/MOE Selectionof Consultants D2 Agreed Proceduresfor NationalCompetitiveBidding In order to ensure economy, efficiency, transparency and broad consistency with the provisions o f Section I o f the Procurement guidelines, the following criteria shall be followed in procurement under National Competitive Bidding procedures: (i) Standard biddingdocuments approved by the World Bank shall be used. (ii) Invitations to bid shall be advertised in at least one (1) widely circulated national daily newspaper and bidding documents shall be made available to prospective bidders, at least twenty eight (28) days prior to the deadline for the submission o f bids. (iii) Bids shall not be invited on the basis of percentage premiumor discount over the estimated cost. (iv) Bidding documents shall be made available, by mail or in person, to all who are willing to pay the required fee. (v) Foreignbidders shall not be precludedfrom bidding. (vi) Qualification criteria (incase pre-qualifications were not carried out) shall be stated on the bidding documents, and if a registration process is required, a foreign firm determined to be the lowest evaluated bidder shall be given reasonable opportunity of registering, without any hindrance. (vii) Bidders may deliver bids, at their option, either in person or by courier service or by mail. 55 All bidders shall provide bid security as indicated in the bidding documents.A bidder's bidsecurity shall apply only to a specific bid. Bids shall be opened inpublic inone placepreferably immediately,but no later thanone hour, after the deadlinefor submissionof bids. Evaluation of bids shall be made in strict adherence to the criteria disclosedinthe bidding documents, in a format, and within the specified period, agreed with the Association. (xi) Bids shall not be rejected merely on the basis of a comparison with an official estimate without the prior concurrence of the World Bank. (xii) Split award or lottery in awardof contracts shall not be carriedout. When two (2) or more bidders quote the same price, an investigationshall be made to determine any evidence of collusion, following which: (A) if collusion is determined, the parties involved shall be disqualified and the award shall then be made to the next lowest evaluated and qualified bidder; and (B) if no evidence of collusion can be confirmed, then fresh bids shallbe invitedafter receivingthe concurrence ofthe World Bank. (xiii) Contracts shall be awarded to the lowest evaluated bidders within the initial period of bid validity so that extensions are not necessary. Extension of bid validity may be sought only under exceptional circumstances. (xiv) Extension of bid validity shall not be allowed without the prior concurrence of the World Bank (A) for the first request for extensionif it i s longer than eight (8) weeks, and (B) for all subsequent requests for extensionsirrespectiveofthe period. (XV) Negotiations shall not be allowed with the lowest evaluated or any other bidders. (xvi) Re-bidding shall not be carried out without the World Bank's prior concurrence. (xvii) All contractors or suppliers shall provide performance security as indicated in the contract documents. A contractor's or a supplier's performancesecurity shall apply to a specific contract under which it was furnished. 56 ANNEXD. FINANCIALMANAGEMENT I.CountryIssues 1. The Bank has gained substantial experience and understanding o f the financial management environment in Afghanistan through the large number o f projects under implementation over the past four years. The PACB project i s the primary instrument to continue and enhance the fiduciary measures put in place during the past years to help ensure transparency and accountability for the funding provided by the Bank and other donors. 2. A PFM performance rating system using 28 high-level indicators that was developed by the PEFA multi-agency partnership program was applied in Afghanistan in June 2005. PEFA i s comprised o f the World Bank, IMF, European Commission, and several other agencies. The system i s structured around six core dimensions o f PFM performance: (i) budget credibility; (ii) comprehensiveness and transparency; (iii) policy- based budgeting; (iv) predictability and control in budget execution; (v) accounting, recording, and reporting; and (vi) external scrutiny and audit. Afghanistan's ratings against the PFM performance indicators generally portray a public sector where financial resources are, by and large, being used for their intended purposes. This has been accomplished with very high levels o f support from international firms; this assistance will continue to be needed over the medium term if these ratings are to be maintained. There i s also much room for improvement. 3. In spite of undeniable gains made in reconstruction since the end of 2001, the challenges facing Afghanistan remain immense, not least because of the tenuous security situation in the region and continued prevalence o f a large illegal and illicit economy. The policy framework benchmarks have not yet beenfully costed so various priorities are funded through the annual budgeting process. The rising costs o f the security sector constitute the major constraint on attainment o f fiscal sustainability. With regard to executive oversight, the national assembly will play an increasingly active role. All in all, the new national strategy has created high expectations o f the executive which could prove to be quite difficult to meet. 4. The public sector, in spite o f considerable efforts to reform its core functions, remains extremely weak outside o f Kabul. The lack o f qualified staff inthe civil service and the absence o f qualified counterparts in the government after 30 years o f war and conflicts i s a binding constraint. Delays in reforming the pay structure and grading o f civil servants have severely crippled the public administration o f the country. Domestic revenues lag behind expenditures by a factor o f ten to one. Large-scale corruption could emerge to undermine the government's efforts to enhance aid flows through national accounts. Capacities to track expenditures and monitor expenditure outcomes have improved but they need rapid and substantial strengthening if progress toward the attainment o f national development targets i s to be monitored. Currently 75% o f external revenues bypass government appropriation systems. 57 5. The World Bank is financing a Financial Management Advisor to assist the MOF, an Audit Advisor to assist the CAO, and a Procurement Advisor to assist inprocurement- related activities. Also an Internal Audit function i s being developed within the MOF with World Bank financing. USAID, and earlier the Indian Aid Assistance Program, is financing a team o f consultants and advisors to assist the DAB inlocal as well as foreign currency operations. The activities carried out under the existing public administration projects have helped the government to ensure that appropriate fiduciary standards are maintained for public expenditures, including those supported by the Bank and the donor community. 6. Progress has been slower than expected in shifting from operations support provided by the three advisors to capacity development and knowledge transfer to the civil servants. Given that, it i s expected that the advisors will continue to be required for the medium term. Challenges still remain in attaining the agreed upon fiduciary standards and also to further enhance them. And to make matters more complex, the regulatory environment inAfghanistan has advanced significantly inthe past three years. Unfortunately, even mastery o f basic skills in the early environment does not fully qualify the civil servants to work effectively inthe new emerging environment. il- 11. RiskAssessment and Mitigation 7. The table below identifies the key risks that the project may face and indicates how these risks are to be addressed, Condition of Negotiations, Board Risk Residual or Effectiveness Risk Rating RiskMitigation Measures Risk Inherent Risk Country InherentRisk M Source PFM study - l ProjectFinancial H Minimize use ofDesignatedAccount, ManagementRisk maximizedirectpaymentsto consultants; all procurementthrough Procurement Advisor. PerceivedCorruption Government commitment, internal controls andnew internal audit will help to reducethe high levelofperceived corruption. Overall Inherent Risk Control Risk 1. Weak Implementing Newly formed ReformImplementation Entity ManagementUnit (RIMU) of MOF will undertakethe day-to-daymanagement and a PFMReformSteeringCommittee (PFMRSC) will be createdto perform oversight function.BothRIMUand PFMRSCwill havedefined TOR. A FinancialManagementSpecialistwill be recruitedspecifically for the RIMUto 58 Condition of Vegotiations, Board Risk Residual or Effectiveness Risk Rating RiskMitigation Measures Risk IYIN) take responsibility ofthe project F M activities. 2. FundsFlow S Paymentswill be made to consultants, M Suppliers, etc. from the Designated Account by SDU-MOF. Inaddition to payments out ofDA funds, the implementing entities can also request the SDUto make i)directpayments fromthe Credit Account to consultantsor consulting firms, and ii)special commitments for contracts coveredby letters of credit. These payments would only be made by SDUafter due processesandproper authorizationfrom the respective componentimplementing entities. 3. Budgeting S RIMUwillcoordinatewitheach M N componentimplementing entity for preparationof annual work plans and budgets; these would then be presentedto the PFMRSC for approval. 4. Accounting Policies S Will follow internationalstandards. M Y and Procedures Project accountingproceduresand details ofthe F M arrangementswill be documentedinan F MManual to be approvedby the Bank. 5. Internal Audit Newly-createdinternal audit department S N will review project internal control systems. 6. External Audit Will be auditedby CAO with support S N from Audit Advisor. 7. Reporting and Strengtheningthe SDU is apriority under S Y Monitoring the new F MAdvisor contract, to provide information that will comply with agreed format of financial reports. Overall Control Risk S DetectionRisk Adequate accounting, recording, and M N oversightwill be provided inproject procedures. Accounting/Recording/oversightby SDU -MOFofalladvancesm-16supported by Financial Management Advisor. Riskrating:H=highrisk; S=substantialrisk; M=modest risk; L-low risk 59 111. Strengthsand Weaknesses Strengths 8. The government provides assurance to the Bank and other donors that the measures in place to ensure appropriate utilization o f funds will not be circumvented. The government support for PACB is strength in itself to enhance financial management in Treasury operations, public procurement, internal audit in the public sector, and external audit by the Auditor General. A specific strength i s that this i s a follow-up project, and thus, the agencies involved in the implementation o f each component have experience inimplementing Bank projects and following Bank procedures. Weaknesses and Action Plan 9. The main weakness inthis project, as inmany others inAfghanistan, is the ability to attract suitably qualified and experienced counterpart staff especially for financial management. The additional staff to be funded by the project, together with intensive training programs included in this project, i s expected to strengthen the fiduciary arrangements. IV.Action Plan Significant Action ResponsibleAgent Completion Weaknesses Date ~ Shortage o f qualified Appointment of a MOF June 30, and experienced FM Financial Management 2007 staff Specialist inFUMU Project internal controls Financial Management MOF (FUMU) August 31, andprocedures need to Manual developed 2007 be defined V. ImplementingEntity 10. The project would be implemented under the authority o f the Minister o f Finance. The Minister would be assisted by the PFM Reform Steering Committee (PFMRSC) comprising senior M O F departmental managers, a representative o f the MOE responsible for procurement administration, and a representative o f the CAO to maintain focus on results, good communications and a consolidated view o f the reform and to discuss and recommend any necessary policy and regulatory improvements. 11. The PFMRSC will serve as the oversight body for the project. The committee will convene at least every quarter to review progress with implementation and review and approve work plans and budget. 12. Daily operations o fthe project would be managed by a newly formed RIMU. The RIMUwould report to the Minister of Finance on project implementation and will also 60 serve as the "secretariat" for deliberations o f the PFMRSC. The specific role o f the RIMU would be to plan, coordinate, monitor and evaluate the implementation of the overall PFM reform strategy work program and the achievement o f its intended results. This would cover all project-supported activities including those implemented through the MOE and the CAO as well as activities financed by other donor partners (for example, DFID, supporting the development o f the Budget Department). The RIMU would also undertake analyses and recommendations o f key policy issues affecting the efficient performance and sustainability o f PFM reforms. It would be responsible for planning for and facilitating and obtaining the contributions o f the IARCSC to developing the M O F human resources management capabilities so that they are consistent with overall civil service management regulations and best practices. Lastly, the RIMUwould facilitate establishing and maintaining linkages with line ministries and Mustofiats that would be the "clients" instrengthening PFM institutions. 13. Managers o f the PPU, Treasury, Internal Audit, MOE, and CAO being supported through the project (and by other donors) would be responsible for achieving their own specifically assigned results, once they had agreed with annual work plans and established implicit performance agreements through the PFMRSC. The RIMU would monitor these performance agreements. 14. The Financial Management Specialist to be recruited at RIMU will take responsibility for financial management activities o f the project, which will include processing o f consultants and suppliers invoices for payments (Le., preparing M-16 forms payment orders); maintaining relevant accounting records; preparing required monthly, quarterly and annual reports; coordinating with other component implementing entities to ensure that adequate financial management requirements are met; liaising with the SDU to ensure that the Designated Account i s replenished when due; and respondingto project audits. 15. To ensure that the implementing entities responsible for the other components maintain adequate records and preparetechnical and financial reports o f their activities, a dedicated manager and an accounts officer will be assigned by the M O E and CAO. VI. Budgeting 16. RIMU will coordinate with each component implementing entity for the preparation o f annual work plan and the derivation o f annual budget. This would then be submitted to the PFMRSC for approval. RIMU shall also coordinate quarterly budget reviews to ensure adequate budget discipline and control. It will be responsible for ensuring that project expenditures for each fiscal year are captured in the governmental development budget o f that fiscal year. The RIMU must get approvals from the presidential office and the Parliament and attach them to B27 and Project Coding Sheet forms at the time o f requesting yearly allotments for contracts under the project to avoid delays inpayment processing. 61 VII. FundsFlow 17. The standard funds flow mechanism in Afghanistan will be followed in this project. Project funds will be deposited in the Designated Account to be opened and maintained at the DAB. The Designated Account, in keeping with current practices for other projects inAfghanistan, will be operated by the SDU inthe Treasury Department o f the MOF. Requests for payments from the Designated Account will be made to the SDU bythe implementingentity when needed. 18. In addition to payments out of DA funds, the implementing entities can also request the SDU to make: (i) direct payments from the Grant account to consultants or consulting firms; and (ii) special commitments for contracts covered by letters o f credit. These payments will follow World Bank procedures. All project payments will be made to either international firms or local firms that have bank accounts in DAB, a local commercial bank, or an overseas bank. All payments will be made either through bank transfers into the account of such firms or by check. Expenditures for each component will be paid centrally from RIMU in accordance with the approval mechanisms documented inthe project FMManual. VII. Retroactive Financing 19. A provision has been made to reimbursethe government for payments it makes from government resources up to a maximum o f SDR 1.3 million (US$2 million) for eligible project expenditures incurred after April 15, 2007 and up to the signing o f the Financing Agreement in accordance with the Bank's procurement guidelines. In particular, and given its urgency and priority, this provision i s expected to be utilized to facilitate the early mobilization o f the consultants on systems development and for the RIMU. Funds Flow Chart I 'rDirect 1 I Payments IDA to Consultants, 1 etc. after approval of W.A I \ initiated by the DesignatedAccount in project and DAB denominatedin submitted \ USD J through SDU Project eansactionsprocessedthrough SDU and paid in USDor Afghanis I c I 4 I Payment Payment Requests Requests RIMU(MOF), MOE & CAO 62 VIII. Legal Requirementsfor Authorized Signature 20. The M O F has authorization to disburse funds from the Grant. Specimen signatures o f authorized signatories inMOF have previously been submitted to the Bank. IX. Accounting 21. The SDU will maintain a proper accounting system o f all expenditures incurred along with supporting documents to enable IDA to verify these expenditures. The FM staff o f RIMU will: (i) supervise preparation o f supporting documents for expenditures; (ii)prepare payment orders (Form M16); (iii) approval for M-16s by the Minister obtain or Deputy Minister depending on the payment amount; and (iv) submit them to the Treasury Department in MOF for verification and payment. While original copies o f required supporting documents are attached to the Form M16, the project i s required to make and keep photocopies o f these documents for records retention purposes. The FM Advisor in the MOF/SDU will use the government's computerized accounting system, AFMIS,for reporting, generating relevant financial statements, and exercising controls. 22. RIMU FM staff will maintain essential project transaction records using Excel spreadsheets and generate required monthly, quarterly, and annual reports. At the M O E and CAO, the assigned accounting officer will maintain essential project records and prepare basic financial reports (Receipts and Payments Account) on their activities. 23. The FM Manual, to be prepared by RIMU and approved by the Bank, will include: (i) and responsibilities for all FM staff; (ii) roles documentation and approval procedures for payments and release o f funds to each implementingentity involved inthe project; (iii)project reporting requirements; and (iv) quality assurance measures to help ensure that adequate internal controls and procedures are inplace and are being followed. 24. The FM Manual will also establish project financial management in accordance with standard Afghan government policies and procedures including use of the government Chart o f Accounts to record project expenditures. The use o f these procedures will enable adequate recording and reporting o f project expenditures. Overall project accounts will be maintained centrally in SDU, which will be ultimately responsible for recording o f all project expenditures and receipts in the Government's accounting system. Reconciliation o f project expenditure records with M O F records will be carried out monthly by the assigned FM staff inRIMU. X. InternalControland InternalAuditing 25. Project-specific internal control procedures for requests and approval o f funds will be described in the FM Manual to be developed before disbursements begin including segregation o f duties, documentation reviews, physical asset control, and cash handling and management. Adequate procedures, guidelines, and controls on payments to implementingentities involved inthe project will also be includedinthe FMManual. 63 26. The Financial Management Specialist in RIMA will be responsible for coordinating FMactivities of the project with the SDU. 27. Annual project financial statements will be prepared by SDU/MOF detailing activities pertaining to the project as separate line items with adequate details to reflect the details o f expenditureswithineach component. 28. The project financial management systems will be subject to reviewby the newly- establishedinternal audit directorate of the MOF, according to programs to be determined by the Director o f Internal Audit using a risk-based approach. XI. ExternalAudit 29. The project accounts will be auditedby the Auditor General, with the support of the Audit Advisor, with terms of reference satisfactory to the Association. The audit of the project accounts will includean assessmentof the: (i) adequacy o f the accounting and internal control systems; (ii) to maintain adequate documentation for transactions; ability and (iii)eligibility o f incurred expenditures for Association financing. The audited annual project financial statements will be submitted within six months of the close o f fiscal year. All agencies involved in implementation and maintaining records of expenditures would needto retain these as per the IDA records retentionpolicy. 30. The following audit reports will be monitored each year in the Audit Reports Compliance System: ResponsibleAgency Audit Auditors Date MOF, supportedby Special SOE, ProjectAccounts and Auditor General Sept. DisbursementUnit DesignatedAccount 22 XII. FinancialReporting 31. Financial statements and project reports will be used for project monitoring and supervision. Based upon the FM arrangements o f this project financial statements and project reports will be prepared monthly, quarterly, and annually by the RIMU. These reports will be produced based on records kept on Excel spreadsheets after due reconciliation to expenditure statements from SDU (as recorded in AFMIS) and bank statements from DAB. 32. The project reports will include: (i)sources and uses o f funds by project component; and (ii)expenditures consolidated and compared to governmental budget heads o f accounts. RIMUwill forward the relevant details to SDU/DBER with a copy to IDA within 45 days o f the end of each quarter month. The government and IDA have agreed on a pro forma report format for all Bank projects; a final customized format for project reports will be agreed prior to project negotiations. The annual project accounts to be prepared by SDU from AFMIS after due reconciliationto records maintained at the RIMU will form part of the consolidated Afghanistan government accounts for all 64 development projects. This is done centrally in the MOF Treasury Department, supportedby the Financial Management Advisor. XIII. DisbursementArrangements 33. Table D-1 shows the allocation o f IDA proceeds in a single, simplified expenditure category and Table D-2 presents the expected co-financing. The single category for "goods, consultancy services, training, and operating costs" i s defined inthe Financing Agreement to facilitate preparation o f withdrawal applications and record- keeping. Project funds will be disbursed over approximately 40 months. The closing date o f the project will be December 31, 2010 with a final disbursement deadline four monthsafter the closing date. 34. Duringthis additional 4-month grace period, project-related expenditures incurred prior to the closing date are eligible for disbursement. Disbursement procedures set out in the Bank's "Disbursement Handbook for World Bank Clients'' (May 2006) are applicable to this project. Table D-1: IDA Financingby Categoryof Expenditure(SDRs million) Amount of the Grant Financing Expenditure Category Allocations Percentage (1) Goods, consultants' services, training and Incremental 22.1 100 % Operating Costs6 Total 22.1 Table D-2: EstimatedCo-financing(SDRsmillion) IDA ARTF JSDF Beneficiaries Total ?-I1 ?? 1 35. Summary Reports. Summary reports inthe form o f Statements of Expenditure will be usedfor expenditureson contracts above US$25,000. 36. DesignatedAccount. A single designated account will be opened at DAB inUS dollars for a maximum amount of US$1.2 million, representingthree months o f estimated expenditures. The SDU in MOF will manage both payments from and new advances/replenishments to this account. 37. Cash advances may be issued from the Designated Account to be held and managed by RIMU (MOF). This agency's internal controls, cash handling accounting, andpreparation of Statements o fExpenditures (SOEs) have beenassessedas satisfactory. 6Incremental Operating Costs refers to project-relatedincrementalexpenses incurred on account of project implementationsupport and management includingthe rental of office space; the operation, maintenance, rental and insurance of vehicles; fuel; communications, supplies and charges; advertisements; books and periodicals; office administrationand maintenance costs; bank transaction charges; utility charges; domestic travel and per diem but excluding salaries of officials and staff of the Recipient's civil service. 65 38. New cash advances will only be made when all other prior cash advances have beenjustified through submission o f SOEs to the SDU. The Designated Account will be replenished on a monthly basis. 39. Direct Payments. Third-party direct payments will be permitted for amounts exceeding 25 percent o f the advance in the Designated Account or approximately $250,000. All such payments require prescribed supporting documentation. 40. Preparation of Withdrawal Applications. The SDU will review withdrawal applications for quality and conformity to Treasury procedures, and then obtain the authorized signatures. Selected RIMU (MOF) finance staff will be registered as users o f the World Bank web-based Client Connection system, and play an active role in managing the flow o f disbursements. XIV. FinancialManagementCovenants 0 MOF shall submit audited financial statements for the project within six months o f the end o f each fiscal year. The project's audit report will cover the financial statements, the Designated Account, and SOEs inaccordance with terms o freference agreed withthe Association. 0 Un-audited project interim financial reports will be submitted by RIMU (MOF) on a quarterly basis to the World Bank and a copy to SDU-MOF within45 days after the endof eachquartermonth. XV. SupervisionPlan 41. During project implementation, the Bank will supervise the project's financial management arrangements. The team will: Review the project's quarterly un-audited interim financial reports as well as the project's annual audited financial statements and auditor's management letter. Review the project's financial management and disbursement arrangements (including a review o f a sample o f SOEs and movements on the Designated Account and bank reconciliations) to ensure compliance with the Bank's minimumrequirements. Review agency performance inmanaging project funds to ensure that it is timely, accurate, and accountable. Particular supervision emphasis will be placed on asset management and supplies. Reviewo f financial management riskrating and compliance with all covenants. 66 XVI. Conclusion 42. The FM arrangements, including the systems, processes, procedures, and staffing are adequate to support this project--subject to implementation o f the items listed inthe actionplan. 67 ANNEXE. TERMSOFREFERENCEFORMAJOR TECHNICALASSISTANCEPACKAGES Component 1.2 Treasury Systems Development and Roll-out - Background 1. The Islamic Republic o f Afghanistan has begun a program o f government financial management improvements which i s expected to have far-reaching consequences for the manner and processes o f financial transactions, recording, accounting, and reporting over the next several years. The extent o f these reforms i s evolving but includes budget and expenditure reforms and improved accounting, financial reporting, and internal controls. 2. Over the past four years, an integrated financial management system has been implemented in the Treasury o f the MOF. The basic objective o f this system was to ensure accountability over the government's budget and expenditures including donor funds. It was not intended to be a complete integrated management information system that would be capable o f serving the needs o f all government managers. It was basically a Treasury system. FreeBalance software i s the core application o f the system known as the AFMIS. 3. As the government has moved forward with their reform program, it became apparent that AFMIS needed to be enhanced to meet the increased needs o f the Treasury staff as well as line ministries and Mustofiats. Therefore, in this component, the consultant will need to acquire the following modules from FreeBalance in order to complete the expanded financial management functions in AFMIS - Procurement, Fixed Assets, and Accounts Receivable. The vendor for the Budget Preparation module will be decided subsequently. 4. A fully automated off-the-shelf HRMIS for implementation in MOF is also considered necessary. At present, MOF uses the Microsoft Access-based payroll system known as Verified Payroll Program which includes the Computerized Payroll System. Nevertheless, there i s no HR functionality in the system and the support and documentation o f in-house systems i s not optimal. The ultimate goal for HRMIS i s to direct deposit the net pay o f each employee into his or her bank account and provide the critical personnel data for eventual centralization and determination o fpension liabilities. 5. AFMIS will be the core financial management information system o f the GOA. The information contained in AFMIS will provide MOF a foundation for a comprehensive management information view related to the country's financial resources. Inaddition, AFMIS will provide useful financial information to line ministries to enable them to better manage their programs. It will give these ministries the facilities to download relevant and authorized data and perform required analyses. 68 6. To conduct their designated business affairs, line ministries will require the ability to enter transactions into AFMIS and to approve such transactions through the Financial Controllers (a Treasury staff) located within the line ministries. One objective o f the AFMIS roll out i s to have transaction processing andpayment authorization decentralized butpayment processing to remain centrally within Treasury and the Mustofiats. This will streamline transaction processing and enable Treasury staff to be reassigned from data entry to other key Treasury functions. For the purpose o f this Component, the consultant will assist the government inrolling out AFMIS to six line ministries and six Mustofiats. In addition to rolling out AFMIS to six line ministries, the consultant will assist the government in rolling out just the report module o f AFMIS to six additional line ministries. Objectives 7. The objective o f this contract is for the contractor to assist the government in rolling out AFMIS to the six line ministries and six Mustofiats. This roll-out will occur after the contractor installs additional modules (Procurement, Fixed Assets and Account Receivable, Budget Preparation, and HR) purchased from FreeBalance or from other vendors especially for HR and Budget Preparation. In addition, the contractor will roll- out just the Reporting Module to six additional line ministries in order to facilitate management reporting capabilities and develop the program interfaces for HR and Budget modules ifsourced from a vendor other than FreeBalance. Scope of Services 8. This consultancy has several distinct but related components: e Roll out the enhanced AFMIS to Treasury. e Roll out the enhanced AFMIS to the six line ministries and six Mustofiats in a phased approach. Roll out to line ministries i s dependent on having qualified Financial Controllers inplace at the line ministries. e Enhance the management reporting capability in AFMIS to meet management needs from the system. e The consultant will needto develop a roll-out plan and schedule for the system for all designated sites. Inaddition, a plan also needs to be developed for rolling out the Reporting Module to the six additional line ministries. e A checklist needs to be developed detailing tasks that need to be undertaken for roll out o f the system to a typical line ministry and Mustofiat. e Assist the Treasury in determiningHR functionality to be activated from the new module, train payroll units inthe use and develop the interface with AFMIS. e The consultant will take the lead inaddressing change management issues within Treasury and the respective ministriesand Mustofiats. e The consultant shall, in conjunction with MOF personnel, develop and negotiate with line ministries and Mustofiats, appropriate Service Level Agreements for the effective and efficient operation o f AFMIS. These draft agreements shall be developed and signed by the M O F and individual line ministries and Mustofiats 69 prior to implementation o f the systems at the respective line ministries and Mustofiats. Component1.4.1 ExternalAudit Advisory Services - Background 9. The CAO i s inthe process o f reforming its organization, methods, and operations. Major training efforts are in process to improve the skills o f the audit staff. EPAP and PACB assistance has used a professional accounting firm to provide guidance to the CAO inthese matters and there is a need for a senior advisor to the Auditor General on a full-time basis to manage the processes o f continuing improvement that are needed for the CAO to reach a level of performance that no longer needs the routine direct support operations o f the contracted firm. A new Audit Law i s inpreparation and the advisor will be needed to assist with its implementation. 10. An advisor has been in place for one year under PACB and has been a valuable source o f assistance, supported by the program o f technical assistance included in the terms of reference for the supporting audit firm providing direct audit support. The PFMR project will concentrate the work o f the audit firm on deliveringaudit services and support the strengthening o f the CAO by continuing the provision o f an advisor supported by three audit experts available on a full-time basis to work as audit team leaders and provide on-the-job training to the CAO and its staff. This will greatly improve the quality o f the audit work, embed the new audit manuals provided, and build a competent audit workforce conducting audits that are relevant to the role o f the CAO as set out inthe PEFM Law and the draft Audit Law. 11. Some particular Articles o f the PEFM Law will be directly addressed by the advisory services. The advisory services will support Articles 5 and 6 which impose obligations on relevant persons for the conduct o f financial affairs by training the auditors to assess internal controls and the implementation o f these obligations, and thereby support the system o f accountability established by the Law. Article 55 requires a final budget reconciliations report and a set of financial statements prepared in accordance with International Public Sector Accounting Standards. Revenues, expenditures, assets, and liabilities will be reported and audited by the CAO as per Article 59 which requires audit certification and public report to the National Assembly within six months o f the end o fthe year. The auditing services will enable these certifications and reports to be in accordance with InternationalAuditing Standards. 70 Contractor Terms of Reference 12. The specific function o f these advisor services are to coordinate the training and capacity building inthe CAO, and ensure that quality control arrangements are instituted inthe CAO so that audits are conducted to international standards. Objectives 13. The goals o f the GOA include maintaining appropriate fiduciary standards to provide reasonable assurance to the Afghan public and to international donors that government resources and donor funds are subject to appropriate allocation and expenditure controls. An important objective i s achieving compliance with international standards o f financial management including the use o f internationally recognized accounting, auditing, and reporting standards enabled by modern technology and software applications. 14. This contract seeks to consolidate and enhance the capacity o f the CAO to increasingly provide comprehensive auditing services in accordance with International Auditing Standards and to provide the financial statement certifications and audit reports required by the PEFM Law. Specific milestones will be set over the period of the contract to achieve this objective. Scope of the Assignment 15. This consultancy will provide support to the Auditor General with advice on policy and operations matters as they arise and provide specific orientation for the development o f accounting and auditing professional standards and the development o f the support and liaison for the public accounts committee. As the CAO is now facing the need to implement the PEFM Law and the proposed Audit Law, there will be a need to consider re-structuring o f CAO organization and operations and a strategy for handling the career development and training requirements o f the staff to service those re- structuring. The consultancy will guide and support the CAO in the necessary processes which will involve identification of appropriate grading, staff appointment, and allocation processes, and training arrangements. The outcome should be a CAO with appropriately competent, skilled and trained officers to carry out the audit direction, management, and technical audit activities o fthe CAO. Specific Components of the Assignment 16. Advising the CAO. The consultant will advise the president o f the CAO on policy and operational matters as they arise. The consultant will provide specific written inputs on the annual audit plan, staff development and annual training plan, progress of the plan, and approaches to special investigations. The consultant will provide guidance on the implementation o f the Audit Law, the audit manual, the Code o f Conduct, the Strategic Development Plan, and an HR and Career Development Program for the audit 71 staff o f the CAO. A new Training Needs Assessment will be needed to update training requirements. 17. Monitoring the Grant and ARTF Audits. The consultant will support and oversee the work o f the contractor engaged to provide Direct Support Operations to the CAO in its conduct o f the Grant and ARTF audits, as well as the audits requiredby the PEFM Law. 18. Assisting the CAO with Other Types of Audit. The consultant will advise and assist with the introduction o f audits relating to value-for-money, IT, controls evaluation, customs, revenue, and State Owned Enterprises. The consultant will assist the CAO in implementing audit manuals and work practices for other types o f audit as appropriate. The consultant will manage the work of the audit experts assisting with the introduction o f these types o f audit as well as their leadership and improvement o f current audit types. 19. Accounting and Auditing Professional Standards. The consultant will assist the CAO and MOF in beginning to establish the accounting profession and the supporting regulatory and academic frameworks. The consultant will assist in defining a framework for establishing the profession including the governance arrangements and the roles o f the public and private sectors. The consultant will assist as necessary to provide drafts for the requisite laws and regulations. The consultant will establish curricula for the main academic bodies delivering accounting and auditing training at the various levels required by CAO audit staff. 20. Accounting and Auditing Training. The consultant will participate in and manage the work o f the Audit Experts inproviding on-the-job training to CAO auditors. English language and IT training will continue using available sources of training and increasingly use training that i s available in the local market. Costs for these trainings will be funded from the sub component. The consultant will manage the training to be provided under the Duty Specific Training sub component. 21. Public Accounts Committee. The consultant will propose steps to establish a system o f response and scrutiny for external and internal audit reports for management and parliament. Only 2% o f government bodies respond to audit reports on their activities. There has been no involvement o f the MOF indealing with audit reports. The consultant will assist with and manage the support that i s to be given to the committee under the Supporting Parliamentary Oversight sub-component o f this PFMR project. outputs 22. By the end o f the assignment the consultant and the Audit Experts will have assisted the CAO to have undertaken the activities described under the scope o f work. The CAO and key staff in the CAO and the MOF will have a clear role in the establishment o f the accounting profession and processes for adopting and applying international accounting and auditing standards inAfghanistan. 72 Specific Products a Reports on the products delivered by PACB - Audit Law, the audit manual, the Code of Conduct, the Strategic Development Plan. 0 Report on steps taken indeveloping an HR and Career Development Program a Report on Training Needs Assessment. a Periodic reports on performance of the audit agent working on financial statement audits and on-the-job training. a Periodic reports on performance of the audit experts working on audits and on- the-job training. a Report on progresswith establishing the accounting profession. a Documenting and assessing formal accounting and audit training available in Afghanistan. a Curricula for the main academic bodies delivering accounting training leading to an accounting accreditation designation suitable for the CAO staff. a A plan for the accreditation of all CAO staff to appropriate levels for their position on the hierarchic structure of the CAO. a Mechanism and regulation for responses to internal and external audit reports by managementandparliament. 0 Annual report and recommendationsto the presidentof the CAO on audit planfor the state budgetaudit. 0 Periodic reports onprogressof annual audit plan. a Report on support to the Public Accounts Committee. Deliverables The deliverables and timing ofthe assignment include: Inception Report will be basedon initial consultations with relevant counterparts within the government (including TA advisors), the Auditor General's office and the World Bank. It will provide a detailed work program for the period of the assignment including milestones to be achieved in implementing the capacity building component of the project, and indicate steps that needto be taken by the government and the World Bank to facilitate the timely execution of the assignment. First Quarterly Report within four months of the start of the assignment and quarterly thereafter to the Auditor General, reporting on progress being made against objectives and milestones set out inthe agreed work plan, identifying any problems or constraints to achieving progress, and setting out the planned achievementsfor the following quarter. Quarterly reports shall include an updated work program. Final Report withintwo weeks of completion of the assignment. The final report will report on all key activities undertaken during the assignment and progress against the original objectives and milestones set out in the agreed work plan. It 73 will also report on any problems or constraints encountered, actions taken to overcome these and recommendations for future activities by the government. 24. These reports will be submitted by the consultant at the specified times to the Auditor General, the World Bank, and any other designated counterparts. Reports should be indigital as well as hard copy format and written inEnglish. LiaisonandReportingArrangements 25. The consultant will report directly to and work with, the Auditor General and the designated Project Manager, as well as any other designated counterparts from the government. 26. The consultant will closely coordinate with the World Bank task team leader for the project andtechnical assistanceteam to the Parliament. ConsultantQualifications 27. This assignment requires consultants with an adequate mix of relevant qualifications: Advanced degrees or professional qualifications in auditing or accounting, or similarly relevant disciplines and experience. Operating experience inpublic sector auditing at the management level. Experience in managing the transition o f audit to complying with international accounting and auditing standards. Experience working with parliamentarians and with parliamentary committees on audit issues. Component4.2 DirectOperationsSupportto Treasury - Background 28. The GOA has beguna program of financial management improvementswhich are expected to have far-reaching consequences for the processes o f financial transactions, recording, accounting, and reporting over the next several years. The extent o f these reforms i s evolving but includes budget and expenditure reforms and improved accounting, financial reporting, and internal controls. 29. Over the past four years, an integrated financial management system has been implemented in the Treasury o f the MOF. FreeBalance sofiware i s the core application o f the AFMIS. As a result o f the implementation o f the new system, significant improvements have been made in cash management, grant management, bank reconciliations, revenue recording, and recording o f budget appropriations and allotments. 74 30. The contract for the current financial management consultant is due to end. The consultancy for this project i s for a financial management consultant to provide services as set forth inthe sections below. Objectives 3 1. An objective of the government is maintaining appropriate fiduciary standards to provide reasonable assurance to the Afghan public and to international donors that government resources and donor finds are subject to appropriate budget and expenditure controls. Another objective is achieving compliance with international standards o f financial management, including the use o f internationally recognized accounting, auditing, and reporting standards enabled by modern technology and software applications. The government seeks to maximize the use o f existing technical capability andthe FreeBalance software to the extent possible. 32. Additionally, the government i s looking to building the skills for the Afghanistan public sector by two means: (i)on-the-job training for civil servants who will be acquiring basic knowledge under the HR development component o f this project with the direct operations consultant firms, and (ii)including in the technical assistance teams under the direct operations support contracts a larger share o f local advisors with concrete deliverables for the transfer o f knowledge and skills for the operation o f the PFM systems. The contractor will put more emphasis than inthe past on using local advisors and transferring a requisite minimum level o f skills to these to operate the PFM systems by project end. Scope of Service 33. The financial management component will assist MOF to build capacity and attain higher levels o f efficiency in budget execution and financial reporting. This consultancy, which will continue and expand upon the work o f the previous FM consultancy, has a number o f distinct but related components: Operation and maintenance o f AFMIS Transaction processing for the national budget, including World Bank funded projects and projects o f other donors incorporated inthe government budget Accounting and periodic financial reporting to the government and donors Further development o fthe chart o faccounts to meet management requirements Maintaining the Verified Payroll Program inTreasury Reviewing financial control framework, develop and implement financial regulations consistent with the PEFM Law Continue developing the cash management function inthe Treasury Assist inimplementingthe Treasury Development Strategy Provide on-the-job training for civil servant counterparts and duty specific training for local advisors to operate the specific components o f the Treasury systems independentlyby project end 75 ReportingArrangements 34. The FM consultant will report directly to and work with the MOF and the designated Project Manager as well as any other designated counterparts from the government. 35. The FM consultant will closely coordinate with the World Bank task team leader for the project, with World Bank and IMF task team members focusing on public expenditure management and Treasury modernization issues, World Bank missions, and other defined donors organizations. ConsultantQualifications 36. This assignment requires a team o f consultants with an adequate mix of relevant qualifications: Advance degrees inbusiness, accounting, information systems, payroll processes, public administration or similarly relevant disciplines and experience At least 10-15 years of working experience in public sector financial management, accounting, procurement, information technologies and other relevant areas All key consultants must have recent operational experience with or exposure to modern integrated financial management systems Operating experience inconducting such assignments indeveloping countries A clearly identified capacity, supported by previous client references, to impart real knowledge and understanding o f modem system solutions to reflect the clear needto provide a significant awarenessraising and education process at all levels o f government Local expertise and local language skills Excellent report-writing, verbal communications, and humanrelations skills ContractArrangements 37. The contract is for three years. A consultancy staffing of experienced international specialists over the three year period i s envisaged, supported by a team o f about 20 local consultants. The local staff o f the existing FMconsultant may be availa.ble to the successful FMconsultant. The assignment i s expected to start inJanuary 2008. Component4.3 DirectOperationsSupportExternalAudit - Background 38. Since August 2002, an audit consultancy firm, funded out of EPAP (PKF International) and then PACB (Deloitte), has been providing operational support and capacity building assistance to the CAO. The scarcity o f qualified accountants and the 76 lack o f understanding o f financial statement audits within the CAO have required that the firm play a significant role in the conduct of audits. During this period, the CAO has completed, with the assistance o f the firm, the audit o f a substantial number o f World Bank and ARTF funded projects, and the capacity o f the CAO staff has improved under the on-the-job training supplied by the firm during the audits. These steps have been successful in re-establishing the CAO as a working institution capable o f absorbing institutional strengthening assistance, but it has not developed the institution and its staff sufficiently for them to conduct financial statement audits to international standards without continuing professionalassistance. 39. The firm also prepared draft human resources assessment covering training needs, training strategy, HR management, and a staff qualifications inventory. A range o f formal training activities including training in English, computer literacy, and basic accounting, and informal on-the-job training through the conduct o f audits have been conducted with more than 100 CAO staff taking part. Inaddition, an audit law has been drafted as well as a draft strategic plan prepared for the CAO with an audit manual yet to be completed. Mid-term reviews o f progress on these issues indicated a need for more direct, full-time concentration on implementation and further progression o f these activities inthis project i s to be undertaken by an audit advisor and some audit experts recruited full-time to support the CAO under the Advisory Services sub-component o f this project. This will enable the audit firm to concentrate on the audit and on-the-job training work. 40. The goals o f the government include maintaining appropriate fiduciary standards to provide reasonable assurance to the Afghan public and to international donors that government resources and donor funds are subject to appropriate allocation and expenditure controls. An important objective i s achieving compliance with international standards o f financial management including the use o f the International Standards o f Auditing. The firm has largely been excluded in practice from assisting the CAO with auditing the government's financial statements. The passage o f the PEFM Law necessitates that the CAO make greater use o f the firm in these audits during the period o f the PFMR project as well as for the ARTF and the Grant audits to conduct them in accordance with international standards. Contractor Terms of Reference 41. The specific purpose o f this consultancy i s providing the direct operations support to the CAO inconducting all o f its certification audits. Support to Audit Operations 42. Assistance to be provided under this consultancy for audit operations will focus on direct, technical audit support and informal on-the-job training to the CAO teams undertaking audits o f the SY1386, 1387, and 1388 financial statements for the ARTF, the government's annual accounts, and selected World Bank projects. Additionally, the project will provide assistance for the audit o f the UNDP Nationally Executed Expenditure (NEX) projects. As a guideline, approximately 30 World Bank project audits 77 are expected to be undertaken for each solar year. It i s estimated that about 20 person months of experienced and qualified consultancy services will be required to provide support and on-the-job training during the annual audit season to about 240 person months o f CAO audit staff. 43. The on-the-job training provided during actual audit o f accounts is regarded as a key part o f the capacity building being provided to CAO staff through knowledge transfer. The training during the period i s to become more formalized with the intention o f accrediting CAO staff with competencies inthe various elements of audit work as laid out inthe International Federationo f Accountants Competency Standards for Auditors. 44. Additionally, the government i s looking in this round o f contracts to contribute to buildthe skills for the Afghanistanpublic sector by two means: (i) on-the-job training for civil servants who will be acquiring basic knowledge under the HR development component o f this project with the direct operations consultant firms, and (ii)includingin the technical assistance teams underthe direct operations support contracts a larger share o f local advisors with concrete deliverables for the transfer o f knowledge and skills for the operation of the PFM systems. The contractor will put more emphasis than in the past on using local advisors and transferring a requisite minimum level o f skills to these to conduct independently audit field work. outputs 45. The principal project-assisted outputs deriving from the direct audit technical assistance are: 0 Audited SY1386, 87, and 88 financial statements for the ARTF and the State Budget Reconciliation, and State Financial Statements; 0 Audited SY1386, 87, and 88 financial statements for World Bank projects; and 0 Audited2007, 2008, and 2009 financial statements for UNDP NEXprojects. 46. Capacity building outputs will be accredited work experience statements for all CAO staff participating inthe on-the-job work experience program afforded by the above audits ineight competency skills. 47. Capacity building will enable CAO to perform the majority o f audits of government loans and grants to international standards within the period o f the contract with agreedmilestones. 78 ANNEXF.MAP 79 60°E 65°E 70°E 75°E Amu To Darya UZBEKISTAN Dushanbe Murghob TAJIKISTAN To Chardzhev To TAJIKISTAN To Kulob To Shazud Dushanbe To Qurghonteppa AFGHANISTAN TURKMENISTAN Faisabad JOWZJAN JAWZJAN¯¯ Pyandzh B A L K H KONDOZ KUNDUZ ¯ ir Kondoz Kunduz ¯ TTaloqan aloqan ¯ ¯ Pam h Sheberghan ¯ Mazar-e ¯ s Shar¯if Sharif TAKHAR BADAKHSHAN ¯ u Saripul TTirich Mir irich Samangan ¯ Baghlan ¯ K (7690 m) To Meymaneh Mary SAMANGAN ¯ B A G H L A N ¯ F A R YA B ¯ ¯ u d To To Chitral Mashad SAR-E POL SARIPUL ¯ ¯ 35°N Morghab i nNUREST¯AN NURISTAN ¯ Da¯rya-yeQ¯onduz B A D G H¯I S ¯ H Mahmud-e Raqi Raqi 35°N P ¸ ¯ ¯ ¯ KAPISA ¯ ¯ ¯ Nuristan Nurestan ¯ ¯¯ a r Qal`eh-ye Now Qal`eh-ye Bamian Bamyan ¯ ¯¯¯ o PARW¯AN Asadabad ¯ ¯ Charikar Charikar ¯ ¯ ¯ p LAGHMAN To a ¯ KUNAR m i a ng ¯ e BAMYAN ¯ KABUL ¯ KABUL Mehtarlam ¯ Mardan Herat s ¯ u s R Chaghcharan¯ PAKISTAN Harirud ¯¯ Jalalabad ¯ ¯ ¯ WA R D A K Meydan ¯ Shahr INDIA Khyber Pass H E R AT¯ LOGAR NANGARHAR ¯ G H O R To Peshawar Pol-e `Alam `Alam PAKTIKA Ghazni Ghazni¯ Gard¯iz Gardiz ISLAMIC Helmand G H A Z N¯I KOWST Indus To Kowst Kohat 0 50 100 150 Kilometers REPUBLIC O U R U¯ Z G A N ¯ Sharan OF IRAN Farah F A R A H ¯ 0 50 100 Miles Tarin Tar¯in Kowt PA K T¯I K A ¯ Harut ¯ ¯ Farah ¯ Z A B OL ¯ U Qalat ¯ ¯ Khash Tarnak ¯ Kandahar¯ Lashkar Gah ¯ AFGHANISTAN Hamun-e ¯ ¯ Arghandab Saberi¯ ¯ To Zhob D a s h t - I M a r g o PROVINCE CAPITALS Zaranj N ¯I M R O NATIONAL CAPITAL U Z ¯ H E L M A N D H I L M A N D K A N D A H A R ¯ RIVERS Helmand To Quetta MAIN ROADS 30°N Gowd-e NOVEMBER Zereh RAILROADS 30°N IBRD This map was produced by the Map Design Unit of The World Bank. PROVINCE BOUNDARIES The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank INTERNATIONAL BOUNDARIES 33358 2004 Group, any judgment on the legal status of any territory, or any 60°E PAKISTAN endorsement or acceptance of such boundaries. 65°E 70°E