Document of The World Bank FOR OFFICIAL USE ONLY Report No: PAD2479 INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT IN THE AMOUNT OF SDR 17.8 MILLION (US$25 MILLION EQUIVALENT) AND A PROPOSED GRANT FROM THE AFGHANISTAN RECONSTRUCTION TRUST FUND IN THE AMOUNT OF US$75 MILLION TO THE ISLAMIC REPUBLIC OF AFGHANISTAN FOR A FISCAL PERFORMANCE IMPROVEMENT SUPPORT PROJECT (FSP) November 28, 2017 Governance Global Practice South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective November 19 2017) Currency Unit = AFN AFN68.6335 = US$1 US$0.7119 = SDR 1 FISCAL YEAR July 1 - June 30 (World Bank) December 22 – December 21 (Government of Afghanistan) Regional Vice President: Annette Dixon Country Director: Shubham Chaudhuri Senior Global Practice Director: Deborah L. Wetzel Global Practice Directors: Edward Olowo-Okere, James A Brumby Practice Manager: Fily Sissoko, Alexandre Arrobbio Task Team Leader(s): Yousif Mubarak Elmahdi, Adenike Sherifat Oyeyiola ABBREVIATIONS AND ACRONYMS ACCA Association of Chartered Certified Accountants ACD Afghanistan Customs Department ACBR Afghanistan Central Business Registry AEITI Afghanistan Extractive Industries Transparency Initiative AFMIS Afghanistan Fiscal Management Information System AMIS Audit Management Information System ANPDF Afghanistan National Peace and Development Framework APFM Afghanistan Public Financial Management AOP Administrative Office of the President ARD Afghanistan Revenue Department ARTF Afghanistan Reconstruction Trust Fund ASA Advisory Services and Analytics ASYCUDA Automated Systems for Customs Data BPIS Budget and Planning IT Solution CBR Capacity Building for Results Facility CCTV Closed Circuit Television CGE Computable General Equilibrium COFOG Classification of Functions of Government CPA Citizen Participatory Audit (CPA). CPA Certified Professional Accountants CPV Common Procurement Vocabulary CRG Core Reforms Group CSO Civil Society Organizations DA Designated Account DAB Da Afghanistan Bank DAD Development Assistance Database DBI Doing Business Indicators DG Director General DLI Disbursement Linked Indicators DM Deputy Minister DO Development Objective DSA Debt Sustainability Analysis ECF Extended Credit Facility EFI Equitable Growth, Finance, and Institutions e-GP Electronic Government Procurement EITI Extractive Industries Transparency Initiative EU European Union FPIP Fiscal Performance Improvement Plan FSP Fiscal Performance Improvement Support Project FY Fiscal Year GoA Government of Afghanistan GC General Conditions GDP Gross Domestic Product GIS Geographic Information System GRS Grievance Redress Service GRB Gender Responsive Budgeting HDI Human Development Index HEC High Economic Council HR Human Resources IAD Internal Audit Department ICT Information and Communications Technology IDA International Development Association IFR Interim Financial Report IIA Institute of Internal Auditors IMF International Monetary Fund INTOSAI International Organization of Supreme Audit Institutions IOC Incremental Operating Costs IP Incentive Program IPF Infrastructure Preparation Facility IPF Investment Project Financing IPR Intellectual Property Rights IPSAS International Public Sector Accounting Standards IT Information Technology LTO Large Taxpayer Office MA Monitoring Agent MFPD Macro-Fiscal Policy Department MOF Ministry of Finance MSG Multi Stakeholders Working Group MTBF Medium Term Budget Framework MTEF Medium Term Expenditure Framework MTFF Medium Term Fiscal Framework MTO Medium Tax Payers Office NATO North Atlantic Treaty Organization NCB National Competitive Bidding NPA National Procurement Authority NPPs National Priority Programs NSW National Single Window NTA National Technical Assistant O&M Operations and Maintenance OBI Operational Business Intelligence OCDS Open Contracting Data Standards OCP Open Contracting Partnership ODA Official Development Assistance PAC Public Accounts Committee PACT Policy Action Coordination Platform PAD Project Appraisal Document PDO Project Development Objective PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PFMR-II Second Public Financial Management Reform Project PIM Public Investment Management PMIS Procurement Management Information System PMRS Performance Management and Reporting System PIU Project Implementation Unit PMT Performance Management Team PPP Public Private Partnership PPSD Project Procurement Strategy for Development RIMU Reform Implementation and Management Unit SAO Supreme Audit Office SAIs Supreme Audit Institutions SBD Standard Bidding Documents SBPS State Budgeting Planning System SDR Special Drawing Rights SDU Special Disbursements Unit SIGTAS Standard Integrated Government Tax Administration Systems SIP Shared Information Platform SMAF Self-Reliance through Mutual Accountability Framework SOEs State Owned Enterprises SOCs State Owned Corporations SOCB State Owned Commercial Banks STEP Systematic Tracking of Exchanges in Procurement STO Small Taxpayers Office TA Technical Assistance TAF Technical Assistance Facility TPDC Tax Policy Development Committee UN United Nations UNDP United Nations Development Programme US United States VAT Value Added Tax WTO World Trade Organization The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) BASIC INFORMATION Is this a regionally tagged project? Country(ies) Financing Instrument No Investment Project Financing [✔] Situations of Urgent Need of Assistance or Capacity Constraints [ ] Financial Intermediaries [ ] Series of Projects Approval Date Closing Date Environmental Assessment Category 19-Dec-2017 28-Dec-2022 C - Not Required Bank/IFC Collaboration No Proposed Development Objective(s) To contribute to the improvement of domestic revenue mobilization and public expenditures management, and of reinforcing a performance oriented management culture in the Ministry of Finance. Components Component Name Cost (US$, millions) Component 1: Budget as Tool for Development 10.00 Component 2: Revenue Mobilization 40.00 Component 3: Treasury Management, Accountability, and Transparency 30.00 Component 4: Institutional Capacity Building and Performance Management 20.00 Page 1 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Organizations Borrower : Islamic Republic of Afghanistan Implementing Agency : Ministry of Finance National Procurement Authority Supreme Audit Office PROJECT FINANCING DATA (US$, Millions) [ ] [ ] IBRD [ ] IDA Credit [ ✔ ] IDA Grant [ ✔ ] Trust [ ] Counterpart Funds Parallel Funding Financing FIN_COST_OLD Total Project Cost: Total Financing: Financing Gap: 100.00 100.00 0.00 Of Which Bank Financing (IBRD/IDA): 25.00 Financing (in US$, millions) FIN_SUMM_OLD Financing Source Amount Afghanistan Reconstruction Trust Fund 75.00 IDA-D2630 25.00 Total 100.00 Expected Disbursements (in US$, millions) Fiscal Year 2018 2019 2020 2021 2022 2023 Annual 11.93 25.00 26.14 15.09 21.84 0.00 Cumulative 11.93 36.93 63.07 78.16 100.00 100.00 Page 2 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) INSTITUTIONAL DATA Practice Area (Lead) Governance Contributing Practice Areas Energy & Extractives Finance & Markets Macro Economics & Fiscal Management Trade & Competitiveness Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks Gender Tag Does the project plan to undertake any of the following? a. Analysis to identify Project-relevant gaps between males and females, especially in light of country gaps identified through SCD and CPF Yes b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or men's empowerment Yes c. Include Indicators in results framework to monitor outcomes from actions identified in (b) Yes SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating 1. Political and Governance  High 2. Macroeconomic  High 3. Sector Strategies and Policies  Substantial 4. Technical Design of Project or Program  Substantial 5. Institutional Capacity for Implementation and Sustainability  High 6. Fiduciary  Substantial Page 3 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) 7. Environment and Social  Low 8. Stakeholders  Substantial 9. Other  High 10. Overall  High COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✔] No Does the project require any waivers of Bank policies? [ ] Yes [✔] No Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 ✔ Natural Habitats OP/BP 4.04 ✔ Forests OP/BP 4.36 ✔ Pest Management OP 4.09 ✔ Physical Cultural Resources OP/BP 4.11 ✔ Indigenous Peoples OP/BP 4.10 ✔ Involuntary Resettlement OP/BP 4.12 ✔ Safety of Dams OP/BP 4.37 ✔ Projects on International Waterways OP/BP 7.50 ✔ Projects in Disputed Areas OP/BP 7.60 ✔ Legal Covenants Conditions Page 4 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) PROJECT TEAM Bank Staff Name Role Specialization Unit Team Leader(ADM Governance- Corporate Yousif Mubarak Elmahdi GGO18 Responsible) Backbone HR Assessment Adenike Sherifat Oyeyiola Team Leader Public Financial Management GGO24 Procurement Specialist(ADM Aimal Sherzad Procurement GGO06 Responsible) Rahimullah Wardak Procurement Specialist Procurement GGO06 Financial Management Ahmed Shah Ahmadzai Financial Management GGO24 Specialist Ahmed Mohamed Tawfick Finance Sector -SOEs, Debt, Team Member GFM06 Rostom Sukuk Anand Kumar Srivastava Team Member Procurement (NPA) GGO06 Bernard James Haven Team Member Revenue (ARD) GGO18 Ehsanullah Shamsi Team Member Energy/Extractives (AEITI) GEEX1 Hasan Afzal Zaidi Team Member Customs (ACD) GTI05 Janardhanan Ramanujam Team Member Disbursement WFALA Juan Carlos Alvarez Counsel Legal LEGES Luiza A. Nora Team Member Citizen's Engagement GSU06 Mohammad Aman Farahi Team Member Macro and Fiscal Management GMF06 Mohammad Arif Rasuli Team Member Environmental Safeguards GEN06 Najla Sabri Team Member Gender GSU06 Environmental Safeguards Obaidullah Hidayat Environmental Safeguards GEN06 Specialist Pragya Shrestha Team Member operations GGO24 Raul Felix Junquera-Varela Team Member Revenue (ARD) GGO28 Saurabh Shome Team Member Economic Analysis GMF06 Shankar Narayanan Social Safeguards Specialist Social Safeguards GSU06 Shughla Hellali Team Member Gender GSU06 Si-Ambhaivan Sisombat Team Member Leadership Development GGO28 Page 5 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Syed Waseem Abbas Kazmi Team Member PFM GGO24 Taehyun Lee Team Member Economic Analysis GMF06 Victor Manuel Ordonez Team Member Disbursement WFALA Conde Extended Team Name Title Organization Location Page 6 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) AFGHANISTAN FISCAL PERFORMANCE IMPROVEMENT SUPPORT PROJECT (FSP): TABLE OF CONTENTS I. STRATEGIC CONTEXT ...................................................................................................... 9 A. Country Context ................................................................................................................. 9 B. Sectoral and Institutional Context ................................................................................... 10 C. Higher Level Objectives to which the Project Contributes ............................................. 12 II. PROJECT DEVELOPMENT OBJECTIVES ............................................................................ 13 A. PDO ................................................................................................................................... 13 B. Project Beneficiaries ......................................................................................................... 13 C. PDO-Level Results Indicators ........................................................................................... 13 III. PROJECT DESCRIPTION.................................................................................................. 13 A. Project Components ......................................................................................................... 13 B. Project Cost and Financing ............................................................................................... 18 B. Project Cost and Financing ............................................................................................... 18 C. Lessons Learned and Reflected in the Project Design ..................................................... 18 IV. IMPLEMENTATION........................................................................................................ 19 A. Institutional and Implementation Arrangements ........................................................... 19 B. Results Monitoring and Evaluation ................................................................................. 21 C. Sustainability .................................................................................................................... 22 D. Role of Partners ................................................................................................................ 23 V. KEY RISKS ..................................................................................................................... 23 A. Overall Risk Rating and Explanation of Key Risks ........................................................... 23 VI. APPRAISAL SUMMARY .................................................................................................. 27 A. Economic and Financial (if applicable) Analysis .............................................................. 27 B. Technical ........................................................................................................................... 29 C. Financial Management ..................................................................................................... 30 D. Procurement ..................................................................................................................... 31 E. Social (including Safeguards) ............................................................................................ 31 F. Environment (including Safeguards) ................................................................................ 32 Page 7 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) G. Other Safeguard Policies (if applicable) .......................................................................... 32 H. World Bank Grievance Redress ....................................................................................... 32 VII. RESULTS FRAMEWORK AND MONITORING .................................................................... 33 ANNEX 1: DETAILED PROJECT DESCRIPTION ......................................................... 45 ANNEX 2: INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS ............. 55 ANNEX 3: IMPLEMENTATION SUPPORT PLAN......................................................... 59 ANNEX 4: BANK’S PROGRAMMATIC APPROACH TO SUPPORT FPIP .................. 60 ANNEX 5: INITIAL FSP WORK PLAN ........................................................................... 63 Page 8 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) I. STRATEGIC CONTEXT A. Country Context 1. Afghanistan is a poor, deeply fragile and conflict affected country . It has been in almost constant conflict for over 35 years with no durable political settlement established. This has had a destabilizing effect on social cohesion, exacerbating ethnic divisions and weakening government institutions and rule of law. GDP per-capita is among the lowest in the world, poverty is deep and widespread, and social indicators are still at very low levels. About 39 percent of the population lives in poverty and roughly another one third is susceptible to dropping below the poverty line. Widespread poverty and limited access to services lead to poor living standards for the majority of the population; Afghanistan’s HDI ranking is 171st out of 188 countries. 2. Following a sustained period of impressive development progress after the fall of the Taliban, Afghanistan is currently undergoing a difficult adjustment. With an influx of aid since 2002, Afghanistan sustained rapid economic growth and improvements against important social indicators for more than a decade. Annual growth averaged 9.4 percent between 2003 and 2012. With the withdrawal of international security forces1 starting in 2011 and with the subsequent political transition in 2014, economic and social progress has substantially slowed. Internal divisions within the National Unity Government slowed vital reforms and delayed the appointment of key officials, undermining policy certainty. Afghanistan also currently faces a humanitarian crisis arising from large numbers of return refugees (approximately 800,000 in 2016) and a large and growing internally displaced population (1.2 million). Armed conflict in Afghanistan has claimed the lives of 26,512 civilians and injured 48,931 others between 1 January 2009 and 30 June 2017 and continues to cause severe harm to civilians across Afghanistan.2 3. Reduced aid and security presence led to a rapid weakening of demand with follow- on impacts across the economy. Aid flows decreased from around 75 percent of GDP in 2012 to 45 percent of GDP, in 2015 annual firm registrations have declined by more than half since 2012 while unemployment has increased (from 13.5 percent in 2008 to 22.6 percent in 2014), both reflecting falling confidence. With slowing economic activity, fiscal revenues declined from 11.6 percent of GDP in 2011 to 8.7 percent of GDP in 2014, before recovering slightly to 10.7 percent of GDP in 2016. The security situation has also led to reversals and increasing disparities in access to services. Recent evidence from household surveys suggests that access to services is declining among the poor. 1 The number of NATO troops declined from about 130,000 in 2011, to around 15,000 by end-2014. 2 Afghanistan Protection of Civilians in Armed Conflict Midyear report 2017, United Nations Human Rights https://unama.unmissions.org/protection-of-civilians-reports. Page 9 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) 4. With an undiversified productive base, the economy relies heavily on foreign aid and public expenditure. The private sector is extremely narrow, with employment concentrated in low-productivity agriculture. Investment since 2001 has focused around the aid-driven contract economy. Private sector development is constrained by weak institutions, inadequate infrastructure, widespread corruption3, and a difficult business environment4. Public expenditure constitutes 25.6 percent of GDP; however, foreign grants currently finance more than two-thirds of budget expenditure and substantial off-budget security needs. A large trade deficit, of around 38 percent of GDP in 2016, is also financed almost entirely by aid inflows. With aid expected to decline from around 46 percent of GDP in 2017 to 20 percent of GDP by 2030, and in the context of a rapidly growing population, new sources of growth, employment, revenues, and exports are desperately needed, as are savings from improved management of public expenditure. B. Sectoral and Institutional Context 5. Afghanistan has made significant progress in establishing a functioning and credible Public Financial Management (PFM) system that has contributed to increasing revenues from about US$130 million in 2002 to over US$2.1 billion in 2016. The legal framework underpinning PFM (Public Finance and Expenditure Management Law, and Public Procurement Law) has been established. The Afghanistan Financial Management Information System (AFMIS) has been rolled out across provinces, and is being used for payment processing, accounting and reporting. The Government’s PFM performance is generally portrayed as one in which public finances are, by and large, used for their intended purposes as authorized by the budget, which is processed with transparency and where the fiscal aggregates are well controlled. This is demonstrated by Afghanistan’s 2013 Public Expenditure and Financial Accountability (PEFA) scores, which were above the average for low-income states and fragile contexts, and equaled middle-income country results for control, reporting, and external scrutiny. 6. Despite maintaining aggregate fiscal discipline, Afghanistan’s PFM systems are not fully developed to ensure strategic allocation of resources and efficient service delivery. Almost half of the development budget remains unspent (execution rate is 54 percent), leading to an overall budget execution rate of 76 percent. The low execution rate being the result of inefficiencies in budget planning, poor appraisal of development projects, protracted procurement processes, and overall low government capacity. Public expenditure is currently not aligned with the fiscal sustainability objectives of the government. Moreover, public spending is expected to grow over the medium-term while resources are projected to remain tight. Further, the operations and maintenance of public assets are reportedly weak, constraining the delivery of public services. 7. Improving revenue collection is central to Afghanistan’s self-reliance5 agenda, but remains constrained. 2016 domestic revenues reached 10.8 percent of GDP, while expenditure 3 Afghanistan was ranked 169th of 176 countries according to the 2016 Corruption Perception Index. 4 Afghanistan was ranked 183rd of 190 countries in the 2017 Doing Business Survey 5 The Government presented its vision for building self-reliance in the context of declining international assistance to the Page 10 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) was 26.9 percent of GDP, with the deficit largely financed through development partner grants. The Government of Afghanistan (GoA) has recently taken policy and administrative measures to increase domestic revenue collection. A 10 percent telecom services fee was introduced in 2015. While there is a possibility that it could be suspended through legislative action in the future, this is not likely in the immediate future and the fee continues to be collected. Value Added Tax (VAT) is planned for implementation by 2020, and is particularly important in the context of Afghanistan’s accession to the World Trade Organization (WTO), as the VAT must offset revenues that will be lost to tariff reductions. However, a narrow tax base, low capacity, weak internal controls, and a decentralized tax administration remain significant challenges. GoA also faces a difficult trade-off balancing strict compliance measures with a conducive business environment. 8. Despite the direct and indirect support that state-owned enterprises (SOEs) receive from the budget in the form of subsidies, equity injections, deferred taxes, other payment arrears and loan guarantees, their ultimate performance remains weak. Presently, Afghanistan has 50 SOEs which account for only 2 percent of national revenues and about 4 percent of GDP. 15 of these SOEs are corporatized and commercialized (state-owned corporations or SOCs) and three are state-owned commercial banks (SOCBs). Non-financial SOEs operate in strategic sectors such as energy, mining, and telecom. No diagnostic study to date appears to have properly documented the size and the market concentration of each SOE in the sub-sectors in which they operate. The financial performance of SOEs is not monitored and contingent liabilities are unknown, posing a fiscal risk. 9. Afghanistan currently relies on unsustainable donor-financed project consultants (often called ‘second civil service’) to execute core government programs. This reliance has eroded government capacity and impedes the use of country systems to build accountability, fight corruption, mobilize domestic revenue and attract investment. There is a shortage of skilled staff capable of developing and applying procedures and establishing institutions. Professional training for the public sector, especially for experts and managers, and training resources in general are insufficient. 10. The Government recognizes that it is critically important to address these challenges, all of which impact negatively on service delivery. In this regard, the GoA’s PFM Road Map provides significant opportunities to build on previous progress and further strengthen Afghanistan’s PFM system. The Road Map is underpinned by a 5-year rolling Fiscal Performance Improvement Plan (FPIP). The FPIP is an ambitious and comprehensive reforms program that covers the whole breadth of public financial management. It is intended to both reinvigorate progress as Afghanistan seeks to move to the next level of performance, and also introduce a new emphasis on sustainability, capacity building, and government leadership of reforms. It does so by providing a comprehensive approach to fiscal management reforms that expands beyond core PFM, for example through the inclusion of revenue administration and policy, HR reform, and macro-fiscal policy analysis. FPIP clearly reflects a desire to move international community at the London Conference in December 2014. Page 11 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) beyond business as usual. In contrast to many PFM reform plans, the FPIP includes a strong focus on implementation. The plan does not simply state what will be done, but also examines in detail how incentives and structures can be established to ensure implementation and periodically measure progress. In line with this, the Ministry of Finance (MOF) has decided to use the FPIP as the only vehicle to implement PFM reforms and clarified to donors to channel all their support to MOF only for FPIP, rather than separate projects. Donors are also invited to participate in the annual planning and evaluation of rolling plans. 11. In line with MOF’s directive and to support the government’s FPIP reform initiative, the Bank has designed a new engagement model (“programmatic approach”) that consolidates existing activities into three interrelated and complementary instruments. The FSP, constitutes the implementation arm of the new engagement model and is intended to provide critical inputs in the form of upfront investments drawn directly from FPIP work plans. Government has demonstrated strong ownership of the FSP, committing up to US$100 million in parallel financing over five years, to support related infrastructure that will not be directly financed from FSP, and an internal incentive program to reward strong performing FPIP teams. The FSP will be underpinned through the FPIP Advisory Facility, a programmatic package of Advisory Services and Analytics (ASA). The FPIP Advisory Facility scales up resources for foundational Bank-executed technical assistance to operationalize and inform FPIP implementation. The third instrument is the Incentive Program (IP) Plus, which is the major channel for multi-donor policy-based budget support to the GoA, providing approximately US$300 million per year. This will provide the overall reward structure for the FPIP. Refer to Annex 4 for further details on the FPIP and the Bank’s programmatic approach. C. Higher Level Objectives to which the Project Contributes 12. The higher-level objective to which the FSP contributes is that of self-reliance. The FSP is a direct derivative of the GoA’s strategic vision entitled “Realizing Self-Reliance: Commitments to Reforms and Renewed Partnership”. This vision has been translated into two key flagship reform programs. The first is the Afghanistan National Peace and Development Framework (ANPDF), which provides a credible framework for improving security, political stability, and economic and fiscal stabilization. The ANPDF includes plans to advance good governance, including electoral reform and strengthening democratic institutions, promoting the rule of law, and respect for human rights, particularly in relation to women and girls, fighting corruption and the illicit economy including narcotics. These reforms are intended to pave the way for enhanced private sector investments and sustainable social, environmental and economic development. 13. The second complementary reform program – to which the FSP directly contributes through implementation support to the FPIP – is the GoA’s PFM Road Map. Specifically, this focuses on building the country’s public administration capacity to accelerate aid utilization, provide faster and better services, and ensure transparency and accountability of public expenditure to take the reconstruction agenda forward and win back the trust of citizens. Page 12 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) 14. The FSP is intended to make key contributions to both fiscal and institutional self- reliance. The FSP includes strong focus on macro-fiscal policy analysis, as well as options for improving revenue collection and expenditure management. While designed primarily as an all- of- MOF Technical Assistance (TA) facility, the FSP will not “substitute” but rather supplement the development of government systems and core institutional capacity. This includes capacity development in core PFM areas, in customs, revenue etc. but also to help build the MOF as an institution through constitution of its backbone and shared services including information technology (IT), human resources (HR), and fiduciary. In line with Government’s commitment to gradually reduce the dependence on parallel systems, the FSP will not include a Project Implementation Unit (PIU) but would be focused on project implementation through country systems. II. PROJECT DEVELOPMENT OBJECTIVES A. PDO 15. To contribute to the improvement of domestic revenue mobilization and public expenditures management, and of reinforcing a performance oriented management culture in the Ministry of Finance. B. Project Beneficiaries 16. The departments of MOF and non-MOF FPIP departments [the Supreme Audit Office (SAO) and National Procurement Authority (NPA)] are the primary project beneficiaries. Through contributions to improved domestic revenue mobilization and public expenditures management, the GoA at large stands to benefit from the FSP. C. PDO-Level Results Indicators 17. The key results of the FSP are based around the strategic objectives of the government PFM Road Map. These are as follows:  Improved development budget execution rate.  Increase in domestic revenue as a percentage of GDP.  Increased compliance with audit recommendations.  Improvement in core institutional capacity, represented by a reduction in the number of long-term technical assistants. III. PROJECT DESCRIPTION A. Project Components 18. The FSP is organized around four complementary investment components supporting Government-executed technical assistance, capacity building, and IT Page 13 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) infrastructure. For purposes of clarity and coordination, and because FSP includes a multitude of joined-up actions along thematic lines between departments, the four investment components are categorized around the PFM cycle. 19. The FSP is designed to align with the government’s own work program (the FPIP), and will therefore support the FPIP in its entirety. It does so sequentially, through “locking- in” of “early wins”, especially given that the project spans the period pre- and post-election. The project is prioritized around flagship reforms particularly in neglected thematic areas, and the bedding down of achievements in more-advanced areas. Support within these areas is sequenced along critical path dependencies. The FSP is also designed with greater flexibility in allocating resources where they are needed – it embeds an FPIP ‘cycle of trial and error’, building-in flexibility that is significantly greater than in previous PFM projects. Sub-components with limited traction can be dropped or simplified during implementation, and funds unspent in one department could be shifted to another (within and across components) or to address emergent gaps. This will be done through changes in work and procurement plans, which are to be updated regularly. The below outlines sequenced priority areas to be locked-in by the FSP along its four components (refer to Annex 5 for an initial FSP work plan capturing these areas, and Annex 1 for a detailed project description capturing full component outlines and context). 20. Component 1: Budget as Tool for Development [$10m]. This component aims to increase budget credibility by improving the efficiency of budget processes, realistic budget estimation and costing, linking budget with policy and introducing medium term budgeting. It is organized along the following inter-linked sub-components: 21. Budgeting Processes: This sub-component would support the Budget Department to revise budget processes with a focus on realistic cost estimation, better commitment controls and gender-sensitivity. This first requires linking the budget to Public Investment Management (PIM) systems and to procurement planning, and development and implementation of forward estimates for multi-year budget planning, particularly for development projects. Gender mainstreaming will require the development of a framework for gender disaggregated statistical analysis to feed into the budget. Implementation of new processes derived from the provincial budgeting policy delegating financial authority to the provinces, development and roll-out of an Operations and Maintenance (O&M) policy, and improving budget disclosures and comparability of budget and accounts are the other key reforms to be implemented. 22. Fiscal Policy: This sub-component would continue support to the Macro Fiscal Performance Department (MFPD). The MFPD currently produces a medium-term fiscal framework (MTFF) that provides economic and fiscal projections. Further support will be provided in improving the quality of the MTFF in developing a well-designed medium term budget framework (MTBF) and a medium term expenditure framework (MTEF). Within the overarching framework of the MTFF, the MTBF aims at allocative efficiency and the MTEF enhances efficiency of the expenditures, all within a three to five-year horizon. The MTBF thus aligns multi-year budgets with national priorities leading to budgetary ceilings thereby reducing financing volatility. The MTEF critically examines expenditure performance against budgeted Page 14 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) targets for identifying how expenditures can be made more effective. Institutionalizing these practices will entail improving the fiscal strategy, including alignment of the budget with Government priorities, , as well as strengthening PIM systems. MFPD will also target development and implementation of a sustainable debt policy. Support to MFPD will include enhancing the capacity of secretariat and advisory services to the High Economic council (HEC), and Tax Policy Development Committee (TPDC). 23. Development Policy: This sub-component will continue support to the Policy Department, also working closely with the Ministry of Economy and sector ministries, to increase the efficiency of public spending and linking fiscal strategy to budget strategy. This involves support to operationalizing the ANPDF implementation mechanism through finalization and M&E of updated, consolidated and costed sector strategies (National Priority Programs or NPPs) and work plans, and ensuring their alignment with the budget. It also involves the development of a PIM framework to improve project identification, appraisal, review and approval. FSP will work in close collaboration on Public Private Partnership (PPP) issues with the upcoming Bank Infrastructure Preparation Facility (IPF). The IPF is still to be fully designed, but it is currently foreseen that the IPF will fund the appraisal and preparation of pre-feasibility and feasibility studies of both public (PIM) and PPP infrastructure projects. For public (PIM) projects going forward, support from the IPF will end with the feasibility studies and other required TA support for these projects is to be facilitated through the FSP. Support to the Policy Department will include enhancing the capacity of secretariat and advisory services to the Development Councils6. 24. Component 2: Revenue Mobilization [$40m]. This component is designed to strengthen capacities of various revenue administration departments to increase tax compliance and facilitate timely filing and payment. It further aims to enhance Government’s capacity to effectively regulate Afghanistan’s minerals and hydrocarbon resources sector. It is organized along the following sub-components: 25. Tax Administration: This sub-component will build on existing support to the Afghanistan Revenue Department (ARD) through business process reengineering that will feed into further improvements of basic IT infrastructure and systems, especially Standard Integrated Government Tax Administration Systems (SIGTAS) and e-payments. It will continue taxpayers support services and outreach, and further advance implementation of the ARD reform plan, including restructuring on a functional basis, and strengthening reporting and accountability structures between mustofiats and ARD. Ongoing reforms to tax policy and the introduction of VAT will also be supported. 26. Customs Administration: This sub-component will build on existing support to the Afghanistan Customs Department (ACD), including consolidation of efforts to improve enforcement (data analysis and collection, anti-corruption policies and plans, and post clearance 6 Development Councils, equivalent to thematic committees around which the National Cabinet has been reorganized, are intended to provide a forum for related ministries to develop strategic frameworks and prioritize programs (built around results) to increase efficiency in budgetary allocations. Page 15 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) audit and mobile verification), simplify and standardize customs clearance and processes, and HR reforms. The development and implementation of a National Single Window (NSW) system, deployment of a Trade Information Portal7 and the continued geographical and functional rollout of Automated Systems for Customs Data (ASYCUDA) will underpin support under this sub- component. 27. Afghanistan Extractive Industries Transparency Initiative (AEITI): This sub- component will support required key actions to be undertaken with respect to the Extractive Industries Transparency Initiative (EITI) implementation in Afghanistan, before and post- validation. This primarily includes addressing AEITI recommendations of Validation and Reconciliation reports. 28. Component 3: Treasury Management, Accountability, and Transparency [$30m]. This component aims to consolidate basic core PFM functions to underpin more ambitious aspects of planned PFM and budget reforms. It is organized along the following sub- components: 29. Treasury: This sub-component will build on existing support to the Treasury Department through further strengthening of core systems and ensuring full implementation and compliance. This would include consolidation of financial management systems including AFMIS, improved commitment controls, production of complete and comprehensive financial accounts, and introduction of new payroll controls. The Treasury will also prepare annual financial statements pertaining to the core budget using Cash Basis International Public Sector Accounting Standards (IPSAS). Strengthened accounting and auditing practices of the corporate sector will be facilitated through support to development of the Certified Professional Accountants (CPA) Law and curriculum. Treasury will also be supported to develop a framework for Sukuk Bonds. 30. Audit and Financial Reporting: This sub-component will build on the development of the Accountancy Law through technical assistance to support implementation – including to assist the Internal Audit Department (IAD) to improve audit follow-up and strengthen the internal audit function of line ministries. External audit efficiency will be supported through an HR and capacity building strategy for the SAO, and in the interim, contracting with consultancy firms for Grants audit, and for quality control and quality assurance. The SAO will also be supported to automate manual audit processes through the roll-out of an Audit Management Information System (AMIS) to automate manual audit processes. 31. Procurement: This sub-component will build on the long-standing partnership with the NPA to advance a third generation of public procurement reforms. This involves first reviewing and stabilizing current reforms and the supportive legal, regulatory, and policy framework. This will be built upon through new reforms related to implementing open contracting to improve collection and disclosure of public procurement data across the full contracting cycle; and 7 The Trade Information Portal will provide a single on line and user friendly platform where all the information relating to trade regulations, procedures, fees, forms etc. from all the various trade related agencies is aggregated and presented on one website. Page 16 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) establishing countrywide Framework Agreements for procuring large volume small value items of repetitive purchase by various Government entities. The most significant third generation reforms relate to assessment and piloting implementation of Electronic Government Procurement (e-GP) that will follow comprehensive process re-engineering. 32. SOEs, Insurance, and Properties: This sub-component will be guided by a diagnostic assessment to measure the size, composition, market share as well as economic weight of SOEs, and financial, operational and fiscal performance of the entire SOE sector. The sub-component will also support the development of an insurance sector policy, and of procedures and policies, and an information management system for public properties. 33. Citizen’s Engagement: This sub-component will support the GoA in establishing and implementing a proper mechanism for budget transparency, accountability and participation, consistent with international best practices, in two areas: (1) Under MOF, this sub-component will help to mobilize Civil Society Organizations (CSOs) in order to establish and implement a framework where CSOs collaborate with MOF for further citizens’ awareness in the planning and oversight of the budget at both the national and sub-national levels; and (2) Under the Auditor General, this sub-component will support Citizen Participatory Audit (CPA). The SAO will engage with CSOs in an effective manner around the audit cycle to jointly monitor the quality of public expenditures to strengthen their impact in exercising public oversight. 34. Component 4: Institutional Capacity Building and Performance Management [$20m]. This component aims to build capacity of MOF staff and the requisite systems for effective functioning of the ministry, and to reinforce overall performance management and coordination of the FPIP. It is organized along the following sub-components: 35. Backbone/shared services: This sub-component will support the functioning of the corporate backbone and shared services of MOF, including through implementation of a strategic planning exercise (functional review) to be supported through the Capacity Building for Results (CBR) Facility. This will involve the development of a competency framework (to be supported through the FPIP Advisory Facility) to assess the current capacity gaps at MOF and accordingly guide recruitment and TA migration (working with the CBR Facility) performance management, training and professional development. The sub-component will support MOF Administration business process reengineering and automation, and digitalization of MOF’s archive system. Measures to enhance aid management and projects’ coordination and monitoring, and public outreach by MOF including of the FPIP, will also be facilitated. 36. Information Systems: This sub-component will be guided by an all-of-MOF Information and Communications Technology (ICT) Assessment being undertaken through the FPIP Advisory Facility. This is intended to lead to an ICT Strategy that informs the IT investments to be carried out under FSP and enhanced systems connectivity, as well as institutional and staffing aspects which need to be addressed. Page 17 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) 37. Performance Management: Based on the recommendations of a Scoping Report completed as part of the FPIP Advisory Facility, this sub-component will provide support to enhance collaborative leadership skills and to strengthen the cohesiveness and effectiveness of leadership teams in the context of FPIP. This will involve the development of a Communications Strategy including measures to institutionalize the process of behavioral change, to assist new policy processes, and provide timely support to bridge policy and implementation gaps revealed over the course of project implementation. Technical assistance will be provided to support the MOF Performance Management Team (PMT) in the development of annual and mid-year performance assessment reports of the FPIP, and the development of a publicly accessible web- based Performance Management and Reporting System (PMRS). B. Project Cost and Financing B. Project Cost and Financing Amount US$ in Millions Project Components Project cost IDA Financing ARTF Component 1: Budget as Tool for 10.00 - 10.00 Development Component 2: Revenue Mobilization 40.00 15.00 25.00 Component 3: Treasury Management, 30.00 5.00 25.00 Accountability, and Transparency Component 4: Institutional Capacity 20.00 5.00 15.00 Building and Performance Management Total Costs 100.00 25.00 75.00 C. Lessons Learned and Reflected in the Project Design 38. The main lesson learned and that has driven both the initial conceptualization and now design of the FSP relates to the need to de-fragment program assistance. Development partners are providing support to MOF through multiple projects and instruments. These include ARTF-funded government executed investment and capacity building projects (Second Public Financial Management Reform Project [PFMR-II], Technical Assistance Facility [TAF], and Second Customs Reform & Trade Facilitation Project), donor-executed technical assistance projects, and policy-and-results based programs which provide discretionary budget support. The fragmentation of donor assistance across these different instruments poses several challenges and implementation frustrations for MOF. For example, the selective approach of each assistance project leaves important areas within MOF under-resourced (e.g. MOF backbone and shared service functions). The proliferation of projects also imposes high coordination cost across the different stakeholders. The fragmentation of projects and governance structures undermines the Page 18 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) efforts of MOF to consolidate reform planning and policy discussions within one single leadership team. There is limited flexibility to mobilize assistance in new areas both on a timely basis, and for emerging priorities while valuable resources get stuck in projects that underperform. 39. The Bank’s programmatic approach to supporting the FPIP and most specifically the FSP (the implementation arm of the programmatic approach), is envisioned to overcome these challenges. It has resulted from the GoA’s request to the development community to rethink its MOF assistance portfolio and approach, with MOF emphasizing its desire to move to more programmatic, performance-based financing. The FSP and the other two pillars of the Bank’s programmatic approach are a first step, allowing ARTF partners to overcome the above challenges within the ARTF and World Bank portfolio. As a second step, other development partners will be encouraged to pool their resources for FPIP implementation behind the Bank program, or to align their assistance with the program’s unified governance structure. 40. One of the lessons from the report on non-technical drivers of PFM reforms is that there can be a tendency to move from reform to the next reform, rather than ensuring greater bedding down of recently introduced systems – and this is particularly important in a low capacity/ fragile and conflict affected context. The FSP does exactly this by consolidating and building upon core PFM achievements such as in treasury function where further roll-out and upgrade of AFMIS will continue. In other areas, there has been strong past success but challenges remain. For instance, there are still no accounting standards in the country. This is partly due to the previous overreliance on parallel systems that have constrained capacity development within the SAO, which the FSP will now help to move on with an HR and capacity building strategy. In other areas, considerable progress has been made – from a very low base - in terms of setting the institutional foundations and establishing the legal framework. Proposed reforms under the FSP will help to make the leap to implementation e.g. procurement law implementation. 41. After 15 years of substantial efforts at PFM strengthening, a baseline institutional capacity has been established but national capacity remains largely weak and spread thin . Building from this lesson and in line with the Government’s self-reliance strategy, the FSP prioritizes the building up of institutional capacities instead of relying on unsustainable donor- financed project consultants. While it is designed primarily as a TA facility, the FSP will not support “substitution” but rather the development of government systems and institutional capacity. Consequently, a key result of the FSP relates to gradually reducing reliance on parallel structures. IV. IMPLEMENTATION A. Institutional and Implementation Arrangements Page 19 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) 42. Governance of the FSP, as of the other two pillars of the Bank’s programmatic approach, will be firmly anchored in the leadership structure of the FPIP. Governance of the FSP (and the programmatic approach as a whole) will be centered within the MOF Leadership Team. The MOF Leadership Team - chaired by the Minister of Finance and consisting of the Chief of Staff of MOF, the four MOF Deputy Ministers, all MOF Director Generals and key Directors - meets twice per month and will meet at least three times per year on FPIP, including heads of external FPIP partner agencies (NPA, SAO). 43. More frequent FPIP related meetings will be held through the Core Reforms Group, which is the steering committee for the implementation of the FSP. The Core Reforms Group (CRG) is composed of all members of the Leadership Team with the exception of the Minister of Finance. The CRG, chaired by the Deputy Minister for Finance, will meet at least once every two months and on an ad hoc basis as needed. It is fully authorized to provide strategic guidance for the FSP, approve annual budgets and plans (including reallocation), and review progress quarterly, as well as to ensure that the objectives of the FSP are aligned with the FPIP, and the strategic vision of the GoA in fiscal reforms and other policy decisions. As required, the MOF Leadership Team will validate decisions taken at the CRG. This arrangement facilitates better implementation by providing more time and space for discussion and ensuring swift decision making. Moreover, with the CRG – not the individual MOF beneficiary – guiding the implementation of the program, it will ensure that support to MOF is no longer insulated within individual departments, but assists all departments within MOF with FPIP implementation. This will ensure 100% alignment with the FPIP. 44. The PMT, reporting to the Deputy Minister for Finance, will provide day-to-day operational backstopping and coordination across beneficiary departments. The PMT serves as the coordinating bridge, responsible for communication and follow up of decisions between the steering committee and teams. The PMT acts as secretariat to both the Leadership Team and Core Reform Group. In this role, the PMT provides an evidence-based decision support system and coordinates teams’ efforts towards the achievement of the overall PDO of the FSP. The PMT is responsible for ensuring that the FPIP work plans supported by the FSP are synergized and add up, providing technical support to teams in reform planning, investment planning and implementation monitoring. The PMT which comprises 6 members, has built up considerable experience and knowhow and is planned to be buttressed with additional expertise in M&E and change management. 45. The MOF, NPA and SAO will manage the implementation of the program through corporate systems without the assistance of parallel PIUs. An overall Project Director – the current MOF Director for Finance – has been appointed for the FSP. Each MOF Deputy Ministry, the NPA and SAO will nominate a dedicated focal point (component coordinator) and team with primary responsibility to implement FPIP plans, and who will be provided leadership and project management training and coaching. On a quarterly basis, teams will report to the PMT to prepare consolidated progress reports. Existing institutional arrangements will be used for financial management which will be under the overall responsibility of the Finance Directorate of MOF’s Deputy Ministry for Administration. The Procurement Directorates of Page 20 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) MOF, NPA, and SAO respectively will be responsible for procurement. To empower and help expedite beneficiary department’s implementation, the MOF Deputy Ministry for Administration will second financial management and procurement staff to each MOF Deputy Ministry and to the SAO, including key staff from existing MOF PIUs that are to be discontinued upon FSP effectiveness. The selected PIU staff will be transitionally integrated into relevant core departments (Tashkeel) within 18 months. 46. Beneficiary departments will be primarily responsible for implementation of their respective FSP activities. In line with the in-built flexibility of the FSP, activity and procurement plans would be updated regularly in close coordination with the PMT and in consultation with the Core Reform Group. Refer to Annex 2 for detailed institutional and implementation arrangements. B. Results Monitoring and Evaluation 47. FSP, as a tool to support implementation of the FPIP and its performance management framework, will draw on this established monitoring and reporting system. The FSP Results Framework will utilize the mid-year and annual independently validated assessments for monitoring, whereby data around FSP indicators would be collected by the PMT through the PMRS it is developing. The PMT would report on implementation of the FSP as part of twice yearly published and disseminated FPIP reports. Brief progress reports would also be made available at the end of each quarter through the PMRS which will be online and open to access of external users, to follow-up on targets and learn on bottlenecks and their resolution. MOF is prepared to restructure its assessment reports to introduce additional measures, if necessary, especially with respect to quality, accuracy and timeliness of data collection and reporting, as well as measures to ensure timely corrective action. 48. The FPIP performance management framework provides a good structure but needs improvement to make indicators specific and measurable. The performance management cycle starts with directorates (SAO is not yet included) establishing rolling five year plans at the start of the fiscal year. The rolling five years’ plan encompasses a number of activities/actions that are largely inputs, as well as mostly general outputs and outcomes. These are prioritized in terms of impact and risk, and on the basis of which, a list of flagship reforms is prepared. The PMT is responsible to collate the information from directorates and prepare performance reports, however, the baseline, the unit of measurement and sources of data are not defined, and judgement is applied to monitor and evaluate indicators. The performance management cycle includes independently validated mid-year progress and end year performance assessments based on three weighted criteria: (i) Quality; (ii) Timeliness; and (iii) Effectiveness. Figure 1: FPIP Performance Management Framework Page 21 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) 49. The FSP Results Framework drills down to the key issues relevant to each of its selected priority areas, drawn from the FPIP work plans. In recognition that the FSP is just one of a three-pronged approach to support FPIP which itself is intended to be evolving (“rolling”), this is done by specifying results at the level of intermediate outcomes, considered priority and therefore continually relevant to FPIP. Where selected indicators are not currently included in the FPIP rolling plans, MOF will incorporate these starting from the plans for 2018, ensuring the FSP results framework is fully aligned with FPIP. Associated targets have also been set to capture a sub-set of the broader program, reflecting realistic but meaningful progress/functional improvements directly attributable to the project. capture progress within the broader program. C. Sustainability 50. The FPIP is derived from the GoA’s self-reliance strategy. Consequently, self-reliance is a higher-level objective of the FSP, which is intended to make key contributions to both fiscal and institutional self-reliance. Contributions through FSP to the goals established in the FPIP would represent major advances in Afghanistan’s capacity to manage its public sector and support improved domestic revenue mobilization, economic management and service delivery. 51. The FSP moves beyond business as usual. While TA projects over the past 15 years have delivered important gains in developing a relatively strong-performing PFM system, the FPIP signals a desire to improve on past performance. The programmatic approach (including the FSP as its key implementation pillar) is intended to both reinvigorate progress as Afghanistan seeks to move to the next level of performance, and also introduce a new emphasis on sustainability, capacity building, and government leadership of reforms. 52. Through the FPIP, GoA has strongly committed to reforms to address corruption, improve transparency and strengthen integrity. This focus on building the foundations for stronger governance, supported tangibly by the FSP, will support government’s goal of Page 22 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) mobilizing an increasing proportion of aid on-budget, as well as contributing to government’s broad state-building agenda. D. Role of Partners 53. The World Bank and development partners are providing support to MOF through multiple projects and instruments. Support includes a range of investment and capacity building projects. There are also a number of policy and results based programs with linkages to the FPIP such as the results-based and Bank administered ARTF Incentive Program (IP), the United States (US)-funded New Development Partnership Program, the European Union (EU)- funded State Building Contract, and the new World Bank Development Policy Grant, all of which provide discretionary budget support. The International Monetary Fund (IMF) also approved a US$45 million three-year Extended Credit Facility (ECF) for Afghanistan in July 2016. The program will support a policy mix that aims to preserve macro-financial stability by strengthening fiscal and external balances, keeping inflation low, and maintaining exchange rate flexibility and strong buffers. 54. As part of FPIP implementation, MOF is taking the lead role in donor coordination. To avoid duplication and leverage comparative advantages, the current ARTF Working Group is being expanded and reorganized into a budget support donor platform. This is to be co-chaired by DMs Finance (FPIP) and Policy (ANPDF). The Policy Action (PACT) Coordination Platform will coordinate and monitor reform commitments that are anchored in multi- or bilateral policy- based programs and are managed by MOF. The new platform aims at: (1) improving MOF governance of policy-based programs, and ultimately their performance; (2) enhancing Government ownership, as well as; (3) improving Government-Donor coordination and alignment across policy-based programs and Government strategies. Given the central role of the FPIP in policy and results based programs, the PACT Coordination Platform is expected to also play an important role in the coordination of international donor support around the FPIP. To buttress this, MOF has been inviting donor partners to participate in FPIP annual planning and assessment process. It has also communicated to donors to complete and close their TA projects that are outside FSP. V. KEY RISKS A. Overall Risk Rating and Explanation of Key Risks 55. The overall risk rating for the project is “High”. This is acknowledged upfront and reflects the comprehensiveness and ambition of the FSP vis-à-vis the difficult and fragile operating context of Afghanistan, political economy factors, and inconsistencies in stakeholder ownership, cooperation and capacity. Risks in four areas are most pronounced and could potentially jeopardize the achievement of project results. These risk areas, discussed below, are: (i) political and governance risks; (ii) macroeconomic risks; (iii) institutional capacity for implementation and sustainability risks; and (iv) security risks. Page 23 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) 56. Political and Governance: There are multiple sources of political and governance risk in Afghanistan. Power-sharing arrangements under the National Unity Government are a continued source of tension and potential future instability. Current political arrangements and the possibility of a new government pose risks of potential changes in the level of political support for the FPIP. With a short window until the next election in 2019, the potential political disruptions could delay FSP implementation. This risk is planned to be mitigated through trying to move fast initially by “locking-in” priority flagship, underserved and more-advanced “quick win” areas ahead of elections. There may be some slow down before another push (until project completion) with potential adjustments once a new Government is established. 57. Macroeconomic: Afghanistan’s macroeconomic outlook is subject to substantial risks. The country remains heavily reliant on aid, and any reduction in security and civilian support below expected levels would place pressure on fiscal sustainability and service delivery. Access to continued external support is most likely to be sustained at expected levels if progress can be sustained against key structural reforms. Successful implementation of the reforms planned under FPIP (through FSP), including on revenue mobilization and expenditure management will therefore help mitigate this risk, along with continued World Bank policy dialogue on fiscal management and structural reforms under the IP Plus. 58. Institutional Capacity for Implementation and Sustainability: The public sector in Afghanistan is characterized by highly uneven and thinly spread technical capacity. The context of long-term aid dependency had left some agencies and reform processes heavily dependent on international technical assistance, and vulnerable to associated delays, discontinuities, and coordination problems. The Government is fully aware of these capacity deficiencies. This is reflected in the design of the FPIP (and thereby the FSP), which places strong emphasis on institutional transformation, across technical directorates but also within the corporate backbone of MOF. This risk is further mitigated through the FPIP Advisory Facility which has provided an entry point for the carry-out of Bank-executed upfront work critical to the implementation of the FSP, especially in the absence of a PIU (refer to Annex 3 for the Bank’s implementation support plan and Annex 4 for further details on activities supported by the FPIP Advisory Facility). 59. Security (Other): Continued insurgent activity represents another source of risk to achievement of the PDO. Deterioration in the security situation could divert government capacity and policy attention from supported reforms, impede the provision of technical assistance, or undermine the expected impact of supported reforms. Previous experience has shown that the Bank can successfully monitor and support implementation of reform programs even with a limited in-country presence. 60. In addition, risks in several areas are rated “Substantial”, including: a. Technical Design of Project: The breadth and technical sophistication of certain aspects of the FPIP may prove excessively ambitious. Attempting to implement such a broad range of reforms may also spread available capacity too thin, potentially slowing progress. The scope of the FSP will not be narrowed - MOF has been clear that the FPIP Page 24 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) should be supported in its entirety to ensure that interdependencies and complementarities between different aspects of reforms are recognized and managed as part of a coherent cross-ministry planning process. Moreover, the FSP includes several new areas of support (e.g. HR, SOEs, AEITI), some of which (e.g. backbone/shared services) are precisely where MOF is keenest for Bank support. However, FSP support will be staggered to front-load reforms that are the most likely to be robust, feasible and critical from a political economy perspective and with the greatest buy-in. This will consider the implementation window until the 2019 elections, technical complexity and inherent context-driven challenges. b. Sector Strategies and Policies: Linked to the technical design of the project is the political sensitivity of some of the planned reforms, for instance on linking HR systems with a payroll generation module, the implementation of AEITI, which has not progressed much since 2009, and issues around incentives that might prevent some areas of reform such as customs enforcement to succeed. Another element is the inherent lack of predictability of a fragile and aid dependent environment, which might impact, for instance, medium term fiscal and expenditure frameworks. With this in mind, the FSP is designed to allow the Bank together with government to periodically reassess the appropriateness of policy actions supported by technical assistance. The programmatic approach as well as the built-in financing flexibility of the FSP also gives the project the agility to respond to changes as certain reforms unexpectedly gain or lose traction. Another issue relates the performance management framework of the FPIP. Target scores against ‘aspirational’ benchmark indicators, if achieved, would place Afghanistan among the top tier of developing countries in terms of the comprehensiveness of its PFM systems and adoption of best practices. While establishing aspirational goals can be useful, there are risks that such goals are perceived as unrealistic. To mitigate these risks, results supported by the FSP while directly linked and feeding into the overall performance management framework, would be specified at the level of intermediate outcomes rather than as specific technical reforms. In this way, the Bank would be supporting achievement of the objectives of the FPIP while avoiding “cherry-picking”, and incentivizing across plan actions. c. Fiduciary: The FSP will be implemented by MOF, NPA, and SAO using country systems. This is a necessary step to promote self-reliance, in terms of both fiscal sustainability and core institutional capacity, but poses fiduciary risks in the short-term. Financial Management and Procurement assessments have been undertaken by the Bank as part of project preparation. These highlight specific risks arising from gaps in fiduciary systems (including low civil service capacity) and recommend mitigation. MOF’s plan to retain key staff from discontinued PIUs to support procurement, manage contracts (including for SAO) and help build MOF’s corporate backbone, is one avenue through which fiduciary risks can be significantly managed. Risks associated with failure to build capacity by these staff due to for instance, perverse incentives, will be mitigated through their integration into core civil servant positions within 18 months. This has already been agreed with the selected staff and will be facilitated through MOF’s existing CBR managed-TA transfer program which allows staff to retain higher National Technical Assistant (NTA) salaries as (CBR-recruited) Tashkeel. NPA will conduct its own Page 25 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) procurement and has adequate capacity to do so, and it will carry out large procurement packages on behalf of SAO. The SAO’s Procurement Directorate will be responsible for the SAO’s small procurement packages. As an additional mitigation measure, the Bank has also recommended that an International Procurement Consultant be hired to provide overall support to all three entities over the first 6-12 months of FSP implementation. Moreover, much of the advance work carried out through the FPIP Advisory Facility has focused on fiduciary aspects, carried out in tandem with preparation of the project procurement plan. This includes preparation of a Project Procurement Strategy for Development (PPSD). Supporting analysis (all-of-MOF ICT Assessment) informing complex design and procurement, specifically of IT systems (and their connectivity), both new and expanded IT systems is also underway. MOF already has considerable experience and success with IT reforms, notably AFMIS, secured through PFMR-II. Reform Implementation and Management Unit (RIMU) (PFMR-II PIU) staff including those that contributed to IT reforms, are amongst the staff that have agreed to be integrated into the core Tashkeel of MOF. d. Stakeholders: Varying degrees of FPIP buy-in and ownership (and complexity of reforms across the different teams) poses risks to implementation. The success of the FPIP requires upfront commitment and coordination to be institutionalized across the whole of MOF, starting with the MOF Leadership Team. The capacity of some teams to achieve their goals will depend on actions by other teams. Coordination will need to be both systematized and incentivized. This is partly addressed by the three-pronged approach to FPIP, with: (a) the FPIP Advisory Facility helping to lay foundations; (b) the FSP financing relevant investments; and (c) the IP Plus incentivizing results. The built-in flexibility of the FSP to move away from underperforming areas and teams further helps to reduce impact on overall implementation. The placement of the PMT responsible for day-to-day coordination of the FPIP as a secretariat to the MOF Leadership Team and CRG anchored within the Office of the Deputy Minister for Finance (chairing the CRG) is also a sensible approach. Additionally, a Change and Performance Management Scoping Mission undertaken through the FPIP Advisory Facility, has provided concrete recommendations to enhance collaborative leadership skills and to strengthen the cohesiveness and effectiveness of leadership teams in the context of FPIP. Another stakeholder risk relates to the heavy emphasis on MOF and potential underserving of other government entities (outside of NPA and SAO). The majority of targeted reforms while led by MOF, require the coordination and inputs of other line ministries. MOF’s important role in strengthening capacity of other ministries needs to be considered. The FPIP may not completely capture some key activities where MOF staff will need to provide capacity support to other ministries. One example where it does, is in internal audit. Another example where it may not do, is in the implementation of medium-term budget framework, which will likely depend on the availability of accurate bottom-up costing information from line ministries which they may not currently have systems and capacity to produce. Similarly, it is unclear how PFM constraints are affecting the delivery of services in health and education. To address this issue, CBR will be utilized to strengthen links to other ministries. A new phase of CBR is currently under preparation Page 26 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) and foresees support to the functional streamlining and reform of priority ministries. This will help to build a larger coalition around the project beyond MOF. 61. Environmental and Social risk is rated as “Low” given that no physical works are anticipated to be directly funded under the project. VI. APPRAISAL SUMMARY A. Economic and Financial (if applicable) Analysis 62. There are three main channels through which there will be a first order impact of the FSP on growth and development. Broadly, most of the activities are likely to lead to three outcomes – enhanced revenue mobilization which in turn will result in increased expenditures, increase in the budget execution rate and an improvement in the efficiency of public expenditures. 63. The proposed VAT in Afghanistan is expected to widen the tax base and promote efficiency. The FSP aims to build capacity in the Government to raise taxes in the most optimal manner where the deadweight loss to the economy is minimized. Moreover, the FSP’s approach to revenue mobilization is primarily focused on improving tax and customs administration to maximize revenues in the existing tax policy regime. The resulting improvements are likely to lead to faster pace of revenue accretion i.e. improved revenue buoyancy without major changes in the tax policy regime. 64. Improved budget execution will lead to an increase in spending. The degree to which expenditure policy supports growth depends on the level or quantum of expenditures. If every condition in the environment in which spending occurs were to be held unchanged, more public expenditure would necessarily result in greater realization of current development outcomes, simply because there would be more resources available to commit to the development problem. The current budget execution rate is at 76 percent of the budgeted amount. An increase in the budget execution rate will improve the level or quantum of spending and lead to greater outcomes. 65. An increase in the efficiency of expenditures will improve development outcomes for each incurred unit of expenditure. The other channel through which expenditures support development outcomes is through improving the efficiency with which these resources are spent or improvement in the fiscal multiplier. Recent cross country research by the World Bank has identified that in low income countries ‘Absorptive Capacity’ of the government plays an important role in the effect of government spending on the real GDP growth. Absorptive Capacity is the ability of the Government to identify, attract and efficiently use financial resources (domestic and external) (Asea, 2016). In effect, it’s the ability of the Government to marshal and use all its resources - economic and human - in support of its stated economic policies. The research quantifies that a one standard deviation change in absorptive capacity Page 27 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) leads to an increase of 18 percent in the multiplier effect, compared to the average. As stated earlier, this increase in the absorptive capacity works through improving the quantum of the fiscal multiplier. 66. The FSP will help the government spend more and spend better. The economic analysis will try and quantify the effects on the overall level and growth of the economy. While these are first order effects, second order effects will work through many channels because more and better managed public expenditures will affect all sectors of the economy. Identifying all these channels is beyond the scope of the analysis and quantifying them is even more problematic. Therefore, the economic analysis focuses on the direct or first order impact of the project. 67. Through increasing budget execution rates, the FSP could increase GDP growth by 0.5 percentage points annually. The execution rate of the total budget is at 76 percent in 2016 – 90 percent for the operating budget and 54 percent for the development budget. The relative proportion of the operating and development budget is about 62: 38. Assuming that their relative proportions remain unchanged, the FSP target of improving the execution rate of the development budget from 54 to the targeted 75 percent would mean an improvement in the overall budget execution rate from the current 76 percent to 84 percent in 2021. It is assumed that this improvement occurs in a linear manner. As estimated by the World Bank, the current fiscal multiplier for Afghanistan is at 0.78, i.e. an increase in public spending by 1 percentage point of GDP leads to a 0.78 percent increase in nominal output (GDP) (The World Bank, 2017). Given these conditions, the increase in the development budget execution rate from 54% to 75% by 2021, could expand the GDP by about USD 1.8 billion between 2017 and 2021. 68. Bank analysis indicates that improvement in the efficiency of expenditures could also generate important gains. The FSP directly addresses parameters that will enhance this absorptive capacity, particularly through better public investment management. Cross-country empirical studies indicate that an improvement by one standard deviation in the absorptive capacity of a country, compared to the average absorptive capacity of the sample of countries, can lead to an increase of 18 percent in the multiplier effect. Assuming the absorptive capacity of the government will improve by one fifth of the standard deviation, over the next five years (until 2021) in a linear manner each year, then by 2021, the fiscal multiplier for Afghanistan could improve from 0.78 to 0.81. In nominal terms this will amount to USD 50 million gain in the GDP over five years. While the initial gains may sound benign, efficiency gains will persist and grow exponentially over time even after the program concludes. 69. The estimated first order impact of the FSP on economic growth via both the channels – increase in execution rate and more efficient resources allocation – will be an increase in the growth rate by an average of 0.5 percentage points each year from 2017 to 2021. As a result, the size of the economy will expand by more than 2 percent over the baseline scenario with no FSP. Hence the first order impact of FSP investment of USD 100 million has the potential to expand the economy by a cumulative of USD 1.85 billion between 2017 and 2021. Page 28 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Table 1: First order impact of FSP on GDP (USD million current prices) Nominal GDP: Nominal GDP: Nominal GDP Year increased improved Total % of GDP (US$ millions) expenditure efficiency 2017 21309 87 1 87 0.41 2018 22777 193 3 196 0.86 2019 24281 330 7 338 1.39 2020 25852 491 14 506 1.96 2021 27266 699 25 724 2.65 70. Second-order impacts of the FSP are potentially large. The FSP will make a substantial contribution towards reducing corruption, improving the business environment, and fostering a more rule-based approach. The impact of these changes is potentially very large. For example, recent research using a panel of 106 countries estimated that 10% reduction in the level of corruption increases the growth of real per capita growth by 7.86% (d'Gostino, Dunne, & Pieroni, 2016). Similarly, work by Djankov and others has quantified the economic gains from improving a country’s performance against the Doing Business Indicators (DBIs) and the impact on economic growth. Specifically, Djankov et al (2006)8 find that a country that can improve its ranking by one place gains an additional 0.04 percentage point increase in the rate of economic growth. In addition, the introduction of VAT from 2020, is expected to improve revenues by 1.5 percentage points from 2020 onwards. B. Technical 71. FSP is strategically relevant to and reflects government priorities. World Bank support to implementation of the FPIP, and specifically the FSP, was requested by the President and the Minister of Finance. It is required to support Government’s efforts to improve domestic revenue mobilization and public expenditures management, and reinforce a performance oriented management culture in the Ministry of Finance and related entities. It is not only based on the existing government program but also directly aligns with the government’s vision of self- reliance. Specifically, the FSP is focused towards supporting activities of the Five-Year Plan across MOF and non-MOF FPIP entities (SAO and NPA). 72. The Project is technically sound for the following reasons: (i) it builds on previous PFM reform efforts and investments through consolidating disparate pieces of the PFM institutional and systems regime, and working towards integration, sustainability and deepening reforms; and (ii) the Project is focused on building institutional capacity and reducing reliance on consultants which is an important element of the government’s self-reliance vision. Moreover, 8 See for example Djankov, McLiesh and Ramalho (2006), Djankov, Freund, and Pham (2010) and Corcoran, and Gillanders (2015) examine the links between the ease of doing business and economic growth. Page 29 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) while the Project is ambitious in its scope (reflecting the government’s full FPIP program), its design takes into account the political economy risks and the short window to elections. During appraisal, the Bank team worked with government on applying readiness criteria which could help to prioritize and sequence (“front-load”) activities, and for which the preparation of annual project work plans could be leveraged. On this basis, the FSP “locks-in” flagship, underserved or more-advanced (“quick win”) reform areas included under the FPIP in the first 18 months of implementation (up to elections). Consistent with international lessons regarding basics first and “problem driven” approaches, it was agreed that the program would initially focus on: (a) core PFM functions that underpin and must precede the more ambitious aspects of the FPIP; and (b) areas where current weaknesses are presenting serious threats to economic management and service delivery. The project design also includes flexibility to reallocate resources from low performing to high performing (sub) components. Refer to Annex 2 for more detailed description of readiness criteria. 73. Anchorage of the FSP in MOF has been assessed as feasible and consistent with the Government’s request. This direct recipient execution model which positions the GoA in the lead is grounded in lessons from TA facilities in several countries as well as similar projects in Afghanistan where government ownership has often been weak, especially during design and in early implementation. This arrangement also responds to Government’s commitment to enhance the capacity of core Government functions and gradually transition away from parallel implementation structures. 74. Outputs produced under the FSP will remain in ownership of the Government. These will not be attributed as Bank’s own work; however, the Bank’s strong involvement will be there to support MOF’s capacity for ensuring fiduciary compliance. The task team will also bring in the Bank’s global knowledge and expertise – across and beyond the Equitable Growth, Finance, and Institutions (EFI) Vice Presidency - through the technical oversight, quality assurance and monitoring of outputs, as well as in the deployment and synergy of complementary instruments (FPIP Advisory Facility, ARTF Incentive Program, CBR etc.) for the benefit of the FSP, and FPIP at large. C. Financial Management 75. The MOF will carry out the financial management functions for the project through its Finance Directorate. MOF guidelines for budget preparation will be followed. Project accounts will be maintained in MOF Treasury Department in AFMIS, which records all project expenditures and receipts in the government’s accounting system. The Finance Directorate will maintain subsidiary books of records using MS Excel. IAD of the MoF will carry out the Project’s semi-annual internal audit. Disbursements will be report based. A Designated Account (DA) will be opened at Da Afghanistan Bank (DAB, Central Bank). The Finance Directorate will process all payment requests through the Special Disbursements Unit (SDU) of MOF. Semi- annual interim financial reports (IFRs) will be prepared by the Finance Directorate and submitted to the Bank within 45 days from the end of the period. The Project follows the centralized payment mechanism applied in Afghanistan and controlled by MOF. Internal controls are Page 30 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) adequate both at the central and implementing agency levels. An annual project audit will be carried out by the Supreme Audit Office (SAO) with technical assistance from an audit agent funded under the project and based on the project financial statements prepared by MOF. The audited financial statements will be submitted not later than 6 months after end of each fiscal year in which the Project is implemented. There are no overdue audit reports, IFRs or unsettled ineligible expenditure in respect of MOF. The FM risk rating is Substantial. Refer to Annex 2 for detailed financial management arrangement. D. Procurement 76. Procurement will be carried out in accordance with the Bank’s Procurement Regulations for Borrowers for Goods, Works, Non-Consulting and Consulting Services and applicable to Investment Project Financing (IPF) hereinafter referred to as “Regulations”. The Project will be subject to the Bank’s Anticorruption Guidelines, dated October 15, 2006, and revised in January 2011 and July 1, 2016. The World Bank’s Procurement Manual, Standard Procurement Documents (SPDs), Requests for Proposals and Forms of Consultant Contract will be used. The government has prepared and shared a PPSD which details the procurement methods and approaches. Procurement staff are also attending the necessary procurement training under another Bank funded project (PFMR-II). The Project will implement the Systematic Tracking of Exchanges in Procurement (STEP): a World Bank planning and tracking system, which would provide data on procurement activities, and establish benchmarks. 77. Based on the initial procurement capacity assessment, the threshold of High Risk Implementing Agency will apply for the prior review of the contracts under the Project. A PPSD outlining the oversight arrangements for procurement processes as well as contract execution has been prepared. In terms of capacity, while MOF initially planned to recruit a procurement and contract management agent to support the transition away from the use of PIUs, it now plans to retain key staff (including for SAO) from discontinued PIUs (to be integrated into Tashkeel within 12 months). Several of these have experience with IT procurement, notably AFMIS through PFMR-II. An all-of-MOF ICT Assessment to guide new and upgraded systems and infrastructure is also under way through the FPIP Advisory Facility. The NPA will conduct its own procurement and has adequate capacity to do so, and it will carry out large procurement packages on behalf of SAO while NPA helps build up the capacity of SAO’s Procurement Directorate. The SAO will be responsible for its small procurement packages through its Procurement Directorate. As an additional mitigation measure, the Bank has also recommended that an International Procurement Consultant be hired to provide overall procurement support over the first 6-12 months of implementation. Refer to Annex 2 for detailed procurement arrangement and Annex 6 for the FSP Procurement Plan. E. Social (including Safeguards) 78. The Citizen Participatory Audit would be a new exercise for the Supreme Audit Office. While the SAO has developed the framework for citizen participatory audits based on knowledge exchange with other Supreme Audit Institutions (SAIs), this has not been Page 31 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) implemented for Afghanistan. The citizens are not much aware about PFM systems in the country and the mechanism of participatory audits. Initially, the SAO will focus on information dissemination using a combination of workshops, seminars, round table discussions, forums and trainings to educate and sensitize citizens about the role of external audit and areas of cooperation. Moreover, the external audit reports will also be made publicly available. Few CSOs will be identified and training sessions will be organized on how to operationalize citizen participation in public oversight. F. Environment (including Safeguards) 79. No environmental safeguards are triggered. The Project does not include any physical works and will therefore not have any environmental impacts. G. Other Safeguard Policies (if applicable) 80. None of the World Bank’s safeguard policies are triggered. Considering that there are no potential negative social and environmental impacts expected, the Project has a safeguards risk rating of “Category C”. H. World Bank Grievance Redress 81. Communities and individuals who believe that they are adversely affected by a World Bank (WB) supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. . Page 32 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) VII. RESULTS FRAMEWORK AND MONITORING Results Framework COUNTRY : Afghanistan Fiscal Performance Improvement Support Project (FSP): Project Development Objectives To contribute to the improvement of domestic revenue mobilization and public expenditures management, and of reinforcing a performance oriented management culture in the Ministry of Finance. Project Development Objective Indicators Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection Name: Increased Percentage 54.00 75.00 Annual Annual audited financial Budget and development budget statement and Qatia Treasury execution rate accounts of GoA and directorates of MOF quarterly budget execution to prepare financial reports for development statements, Qatia budget prepared by MOF. accounts and budget execution reports. SAO to conduct audit. Description: This indicator measures the proportion of actual development expenditure during the fiscal year against development budget approved by the legislature at the start of the fiscal year. Page 33 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection Name: Increased domestic Percentage 10.70 12.20 Annual Macro-Fiscal Policy Government of revenue as a percentage of Department, Afghanistan Afghanistan GDP Revenue Department, and Afghanistan Customs Department reports. Description: This indicator measures revenue collected and reported by the government as a percentage of the country's GDP. Name: Effective Percentage 15.00 60.00 Annual Report from Audit Supreme Audit implementation by Management Information Office budgetary units on the System (AMIS) established external audit and implemented at SAO, recommendations verified by third party. Description: This indicator measures for each audit year, the number of audit recommendations implemented by the 10 largest spending ministries against total number of audit recommendations agreed between the SAO and respective ministry during annual audit. Name: Improvement in core Number 499.00 250.00 Annual Monitoring report of the MOF Administration institutional capacity, MOF, verified by the Bank. Deputy represented by a reduction Ministry (Human in the number of long-term Resources technical assistants Department) Page 34 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection Description: This indicator measures the performance by MOF civil servants of functions previously performed by consultants, by tracking the reduction in long-term consultant numbers. Intermediate Results Indicators Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection Name: Increased budget Percentage 57.00 75.00 Annual MOF budget execution Budget Directorate execution rate of the reports by each province. provinces by implementing new provincial budgeting policy. Description: This indicator measures the proportion of total expenditure at each of the 34 provinces during a fiscal year against the budget approved by the legislature at the start of the fiscal year. Name: Improved gender Text Gender Gender Annual Budget and Expenditure Budget Directorate disaggregated statistical disaggregat disaggregat reports with gender and Gender analysis and documentation ed budget ed budget disaggregated statistical Responsive Budget and and analysis. (GRB) unit of MOF expenditur expenditur e data not e data, and available statistical analysis available for 6 pilot ministries Page 35 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection Description: This indicator measures improved gender disaggregated statistical analysis and documentation in the public financial management system within six GRB pilot ministries. Name: Large projects are Percentage 10.00 50.00 Annual BC-1 forms of projects MOF Policy Deputy properly appraised with the costing more than US$10 Ministry (PIM Unit) support of a new PIM Unit to million appraised during a be established financial year, verified by the Bank. Description: This indicator measures the proportion of projects of more than US$100 million that are properly appraised, evidenced through Budget Circular (BC) 1 forms including economic analysis and detailed costing. Name: Effective M&E of Percentage 0.00 100.00 Annual MOF Policy Deputy Ministry MOF Policy Deputy development projects M&E reports. Ministry (M&E through development of a Department) proper M&E system Description: This indicator measures the proportion of all development projects monitored and evaluated through the new M&E framework and system to be developed by the MOF Policy Deputy Ministry. Name: Implement ARD Re- Text Plan All regional Annual Periodic progress reports on Afghanistan Organization and approved revenue plan implementation by Revenue Modernization Plan by cabinet offices ARD, verified by the Bank. Department report to ARD Page 36 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection Description: This indicator measures implementation progress against ARD Re-organization and Modernization Plan that has been approved by the Cabinet. Name: Increased number of Text LTO: 195; LTO: 380; Annual Number of tax returns by ARD active tax filers MTO: 5325; MTO: tax payer as reported by STO: 3137 10400; SIGTAS. STO: 6713 Description: This indicator measures the number of income tax returns filed by large tax payers, medium tax payers, small tax payers, and corporate entities. Name: Staff and business Text No staff or VAT Annual ARD approved plan and ARD processes are in place for processes business progress reports. VAT implementation in 2020 in place processes developed and staff trained Description: This indicator measures the progress of ARD against the agreed work plan to build its human resources and systems for VAT implementation in 2020. Name: Percentage increase Percentage 5.00 100.00 Annual ASYCUDA implementation ACD in custom duties through report and ACD Annual enhancement of ASYCUDA Report customs automation Description: This indicator measures progress on the introduction of new ASYCUDA modules (including automation of customer service center, and single window extension), to support increased annual customs duty collected by ACD and deposited in Treasury. Page 37 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection Name: Web based AFMIS Text No All Annual AFMIS extension progress Treasury extended to embassies and embassy, embassies, reports against approved Department selected districts, district, 300 rollout plan. municipalities, and SOEs municipalit districts, 20 y, and SOE municipaliti connected es, and at to AFMIS least 5 SOEs connected to AFMIS Description: This indicator measures progress on extension of AFMIS to embassies and selected districts, municipalities, and SOEs, through provision of access rights and training to users at targeted spending units. Name: Afghanistan Institute Text Institute Institute Annual Treasury Department CPA Treasury of Certified Public not established establishment progress Department Accountants (CPA) established , CPA law reports established and two batches enacted, trained and curriculum developed Description: This indicator measures progress towards establishing the accountancy profession in Afghanistan. Name: Number of IADs in Number 0.00 26.00 Annual MOF Internal Audit MOF Internal Audit Line Ministries that are Department progress Department strengthened and reports functioning based on Page 38 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection standards set out by IIA Description: This indicator measures the number of line ministry internal audit departments strengthened (by MOF IAD) in line with standards set by the Institute of Internal Auditors. Currently, with the exception of MOF IAD, no IAD is functioning per standard. Name: Rolling out e-GP in Number 0.00 3.00 Annual National Procurement National the pilot phase in 3 or more Authority progress reports Procurement departments based on data from e-GP Authority system. Description: This indicator measures progress towards procurement, commissioning and roll-out of e-GP system in 3 identified pilot departments. Name: Simplification and Text MOF MOF Annual MOF Administration MOF Deputy standardization of MOF Administrat Administrat business process Ministry of Administration business ion ion simplification and Administration processes business business standardization progress processes processes report. not simplified simplified and and standardize standardize d d Description: This indicator measures progress towards simplification and standardization of MOF Administration business processes. Name: Improvement in Number 90.00 140.00 Annual FPIP assessment reports Performance Page 39 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection performance management Management Team coverage, represented by an increase in the number of teams adopting FPIP Description: This indicator measures the number of teams that use the FPIP to regularly report and evaluate progress. Name: Transparency and Yes/No N Y Bi-annual MOF website, Performance MOF citizen engagement in Management and Reporting reform planning, System, media etc. represented by timely publication of annual and mid-year FPIP assessment reports Description: This indicator measures transparency and citizen engagement in the FPIP reform process, through timely public disclosure of annual and mid-year FPIP assessment reports. Page 40 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Target Values Project Development Objective Indicators FY Indicator Name Baseline YR1 YR2 YR3 YR4 YR5 End Target Increased development budget execution 54.00 57.00 62.00 66.00 70.00 75.00 75.00 rate Increased domestic revenue as a 10.70 10.90 11.20 11.60 12.00 12.20 12.20 percentage of GDP Effective implementation by budgetary units on the external audit 15.00 20.00 30.00 40.00 50.00 60.00 60.00 recommendations Improvement in core institutional capacity, represented by a reduction in 499.00 450.00 400.00 350.00 300.00 250.00 250.00 the number of long-term technical assistants Intermediate Results Indicators FY Indicator Name Baseline YR1 YR2 YR3 YR4 YR5 End Target Increased budget execution rate of the provinces by implementing new provincial 57.00 60.00 65.00 69.00 72.00 75.00 75.00 budgeting policy. Framework for For 1 pilot For 2 pilot For 4 pilot For 6 pilot Improved gender disaggregated statistical Gender Gender gender ministry, ministries, ministries, ministries, analysis and documentation disaggregated disaggregated disaggregated gender gender gender gender Page 41 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Indicator Name Baseline YR1 YR2 YR3 YR4 YR5 End Target budget and statistical disaggregated disaggregated disaggregated disaggregated budget and expenditure analysis budget and budget and budget and budget and expenditure data not developed and expenditure expenditure expenditure expenditure data, and available rolled-out. data, and data, and data, and data, and statistical statistical statistical statistical statistical analysis analysis analysis analysis analysis available for 6 compiled in a compiled in a compiled in a compiled in a pilot ministries report report report report Large projects are properly appraised with the support of a new PIM Unit to be 10.00 15.00 20.00 30.00 40.00 50.00 50.00 established Effective M&E of development projects through development of a proper M&E 0.00 20.00 40.00 60.00 80.00 100.00 100.00 system Readiness Phase Completed: All Phase 1 preparatory Completed: Phase 2 Phase 3 Phase 4 steps to Leadership Completed: Completed: All regional Completed: All Implement ARD Re-Organization and Plan approved implement Cadre and Kabul and two Kabul and four revenue regional Modernization Plan by cabinet ARD Re- Corporate other regional other regional offices report revenue offices organization Support revenue offices revenue offices to ARD report to ARD and Services report to ARD report to ARD Modernization established plan carried out LTO: 232; LTO: 269; LTO: 306; LTO: 195; LTO: 343; LTO: 380; LTO: 380; MTO: 6340; MTO: 7355; MTO: 8400; Increased number of active tax filers MTO: 5325; MTO: 9400; MTO: 10400; MTO: 10400; STO: 3850 STO: 4450 STO: 5150 STO: 3137 STO: 5850 STO: 6713 STO: 6713 Page 42 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Indicator Name Baseline YR1 YR2 YR3 YR4 YR5 End Target Preparatory work to Business VAT Work Plan VAT business VAT business No staff or VAT staff develop processes Staff and business processes are in place established, processes processes processes in recruited and business developed and for VAT implementation in 2020 including developed and developed and place trained processes and implementatio staffing plan staff trained staff trained implementatio n plan ready n finalized Percentage increase in custom duties through enhancement of ASYCUDA 5.00 10.00 30.00 60.00 80.00 100.00 100.00 customs automation All embassies, All embassies, No embassy, 10 embassies, 15 embassies, 20 embassies, 300 districts, 300 districts, 10 districts and district, 50 districts, 100 districts, 200 districts, 20 20 Web based AFMIS extended to embassies 10 municipality, and 20 and 20 and 20 municipalities, municipalities, and selected districts, municipalities, and municipalities and SOE municipalities municipalities municipalities and at least 5 and at least 5 SOEs connected to connected to connected to connected to connected to SOEs SOEs AFMIS AFMIS AFMIS AFMIS AFMIS connected to connected to AFMIS AFMIS Training completed for first batch (including at Training Institute Institute CPA law CPA law least 5 initiated for established, established, Afghanistan Institute of Certified Public drafted and Institute not enacted and females), and second batch CPA law CPA law Accountants (CPA) established and two curriculum established curriculum reciprocal (including at enacted, and enacted, and batches trained outline developed membership least 10 curriculum curriculum developed agreement females) developed developed signed with two international/r Page 43 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Indicator Name Baseline YR1 YR2 YR3 YR4 YR5 End Target egional accountancy bodies Number of IADs in Line Ministries that are strengthened and functioning based on 0.00 5.00 10.00 15.00 20.00 26.00 26.00 standards set out by IIA Rolling out e-GP in the pilot phase in 3 or 0.00 0.00 1.00 2.00 2.00 3.00 3.00 more departments MOF Mapping of Mapping of Standardizatio Standardizatio Standardizatio MOF Administration 50% of 100% of n of 30% of n of 70% of n of 100% of Administration Simplification and standardization of MOF business relevant MOF relevant MOF relevant MOF relevant MOF relevant MOF business Administration business processes processes not administration Administration Administrative Administrative Administrative processes simplified and processes processes processes processes processes simplified and standardized completed completed completed completed completed standardized Improvement in performance management coverage, represented by an 90.00 100.00 110.00 120.00 130.00 140.00 140.00 increase in the number of teams adopting FPIP Transparency and citizen engagement in reform planning, represented by timely N Y Y Y Y Y Y publication of annual and mid-year FPIP assessment reports Page 44 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Annex 1: Detailed Project Description 1. Component 1: Budget as Tool for Development [$10m]. This component aims to increase budget credibility by improving the efficiency of budget processes, realistic budget estimation and costing, linking budget with policy and introducing medium term budgeting. It is organized along the following inter-linked sub-components: 2. Budgeting Processes: Weaknesses in the existing budgeting processes and systems contribute to low budget execution: (a) budget processes are focused on allotments rather than realistic costing; (b) provinces have no financial autonomy to prepare budgets; (c) large development projects are included in the budget without appraisal; (d) information systems used for budgeting and accounting are not integrated; and (e) ministries prepare procurement plans but these are not integrated with budgeting; procurement plans are often prepared after budget approval. 3. As part of the FSP, budget processes will be revised with a focus on realistic cost estimation, better commitment controls and gender-sensitivity. Budget disclosures and comparability of budget and accounts will also be improved. This first requires linking the budget to PIM systems. Under the FPIP Advisory Facility, the Bank is conducting a PIM Assessment, the recommendations of which will be implemented under the FSP. Incorporating procurement planning into the preparation of budgets, particularly for development projects, and development and implementation of forward estimates for multi-year budget planning are the other measures planned to help formulate realistic budgets. Implementation of new processes derived from the provincial budgeting policy delegating financial authority to the provinces; development and roll-out of an Operations and Maintenance (O&M) policy; and improving budget disclosures and comparability of budget and accounts are the other key reforms to be implemented. 4. Gender Responsive Budgeting (GRB) was introduced as part of the budget procedures in Afghanistan by the MOF with technical support from the United Nations Development Programme (UNDP) and United Nations (UN) Women. MOF has been piloting GRB in six ministries and although the program has had some achievements, including the drafting of a GRB Strategic Action Plan and the development of a GRB manual, it continues to be limited in scope due to technical capacity issues, scarcity of human resources and finances, and lack of gender-disaggregated data. The Gender Budget Cell within MOF was to be comprised of a group of senior and mid-level officers from various departments, but only has one senior GRB Specialist on hand. The FSP will support gender mainstreaming in the budget process by complementing the capacity building activities of UN Women with a focus of making the GRB Cell at MOF a functional cross-cutting unit. This will include proper staffing of the GRB Cell, institutionalizing the GRB Cell as a unit of the Budget Department, supporting its capacity to develop a framework for gender disaggregated statistical analysis, and aligning GRB implementation with ongoing and planned budget reforms Page 45 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) 5. In terms of information systems, the FPIP Advisory Facility is supporting the preparation of a medium-term ICT Strategy for MOF. This will be critical to aligning information needs with future investments in technology. At present, MOF operates different information systems for budgeting, treasury, revenue, customs, and debt/grants management that are not integrated. MOF has hired some IT staff but support services are largely being provided by the software vendors. Based on the recommendations of a study currently being undertaken to evaluate available options and MOF’s ICT Strategy, the FSP may support the implementation of an interfaced Budgeting and Planning IT Solution (BPIS), including rollout to line ministries. 6. Fiscal Policy: The development of well-designed medium term frameworks, taking into consideration the resource ceilings and fiscal sustainability constraints, is critical. The FSP will thus support MFPD in improving the fiscal strategy, including alignment the government budget with Government priorities, enhancing the quality of the MTFF, as well as strengthening PIM systems. Support to MFPD will include enhancing the capacity of secretariat and advisory services to the HEC, TPDC, and development and implementation of a sustainable debt policy. Professional development opportunities for MFPD, including trainings and formal qualification programs will also be provided. 7. Development Policy: To increase the efficiency of public spending and linking fiscal strategy to budget strategy, FSP will support the preparation and M&E of updated, consolidated and costed sector strategies and work plans, and ensuring their alignment with the budget. It will also involve the development of a PIM framework to improve project identification, appraisal, review and approval. The Policy Department will lead this activity working closely with the Ministry of Economy and sector ministries. FSP will work in close collaboration on PPP issues with the upcoming Bank financed Infrastructure Preparation Facility (IPF), including on PIM- PPP coordination (already ongoing). The FSP will further support the Policy Department in its secretarial and advisory function to the Development Councils. This will involve ensuring that Development Council work plans are implemented; regular high level and technical meetings are organized; and their decisions are recorded, distributed, and archived. For these purposes, the Policy Department will develop a handbook outlining rules, procedures, and operation and coordination mechanisms for the Development Councils. A task force will be established to oversee the Development Councils’ gate keeping function of all financial and legislative matters. The Policy Department will also ensure that remaining National Priority Programs (NPPs) are drafted (in alignment with the ANPDF) including implementation and financial plans, are consulted with stakeholders, and are integrated in the national budget. 8. Component 2: Revenue Mobilization [$40m]. This component is designed to strengthen capacities of various revenue administration departments to increase tax compliance and facilitate timely filing and payment. It further aims to enhance Government’s capacity to effectively regulate Afghanistan’s minerals and hydrocarbon resources sector. It is organized along the following sub-components: 9. Tax Administration: The ARD has strengthened its administration of core taxes over the past several years, but important challenges remain, including human resources capacity, Page 46 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) complex business processes, and limited IT systems. To address these challenges, the FSP will support the ARD in completing a series of administrative reforms. These complementary reforms will pilot new processes in the Large Taxpayer Office (LTO) before rolling them out to the Medium and Small Taxpayer Offices and the provinces. In the near term, this support is expected to significantly improve the taxpayer experience. In the medium term, the ARD will raise significant new revenues through the introduction of VAT. The main interventions are as follows: i. Business process reengineering in the LTO to support revision of the taxpayer registries, introduce hybrid electronic filing compliant with the existing legal framework and establish processes for VAT rollout in 2020. To support automation and ICT including SIGTAS and e-payments, a Master Plan and Change Management Plan will be created and a data warehouse is envisaged. ii. Audit training and mentoring program, enhancing the quality of the risk-based audit system. The implementation of the Disputes Resolution Board will be supported in the medium-term. To strengthen internal controls, an Anti-Corruption Strategy will be created, with an internal audit function to respond to taxpayer complaints. iii. Implementation of the ARD’s Re-Organization and Modernization Proposal that was approved by the Cabinet in early 2017. The FSP support will include a training needs assessment, development of curriculum for the tax academy, and (merit-based and gender- balanced) job descriptions and match to training program. iv. To support communication with taxpayers, a communications strategy will be developed and taxpayer guides will be updated with new legislation and filing procedures. Service standards will be established, and annual taxpayer surveys will measure performance. In terms of female tax payer, specific arrangements will be done to address the needs of female tax payers ensuring proper facilitation for collecting their tax and providing technical assistance to them as they are relatively new in the formal economy. v. The FSP will also support the Revenue Planning Department to build analytical capacity to support the revenue analysis and forecasting functions, with analytical training. 10. Customs Administration: ACD has made significant progress in recent years, including automation of declaration processing9 and the progressive adoption of practices and procedures consistent with international standards and good practice norms. However, it remains an unfinished agenda as evidenced by the country’s low position on global rankings 10. Further investments are required to build on and deepen the ACD’s reform and modernization program. 11. The FSP will support a range of technical assistance activities that build on previous engagements by the Bank and other development partners and respond to changing operational requirements, including: (i) the establishment of a fully operational Customs Enforcement capability, including integration of the former Customs Police into the ACD; (ii) supporting the adoption of sound human resource management policies to ensure they promote merit-based, and to the extent possible, gender-balanced recruitment, mobility, advancement, performance 9 Over 95% of all formal trade is now processed via the ASYCUDA World customs declaration processing system. 10 Afghanistan was ranked at 138 out of 160 countries on the Customs and border management component of the 2016 Logistics Performance Index and at 175 on the Doing Business (Trading Across Borders) indicator. Page 47 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) appraisal, remuneration practices, and policies to support the flexible deployment of human resources; (iii) the development of an enhanced human resource development and training curriculum and its incorporation into staff planning and deployment policies; and (iv) the development of enhanced performance monitoring and evaluation capabilities covering all key organizational objectives, including establishment of an Internal Compliance Unit11. Extensive support will also be provided to bring Afghanistan into compliance with the provisions of the recently concluded WTO’s Trade Facilitation Agreement. Work will also be undertaken in the areas of corruption prevention/detection, and Customs to Customs cooperation with neighboring countries, including real time data exchange to limit opportunities for fraud. 12. The FSP will also support major investments in ICT, including the development and implementation of a NSW system, deployment of a Trade Information Portal and the continued geographical and functional rollout of ASYCUDA. Attention will also be paid to developing mechanisms ensuring the long-term sustainability of ASYCUDA and related ICT investments and infrastructure. It will also support technology integration in the automation process, including weigh-in-motion system, automatic gates, biometrics, Closed Circuit Television (CCTV) and cameras and vehicle number plate readers, to enhance operational efficiency and improve controls. 13. In addition, to support and underpin the above described activities, the Bank will undertake as part of FPIP Advisory Facility a comprehensive functional review of ACD to strengthen management control and oversight of national activities, and ensure the organization adequately supports strategically important functions, including monitoring of internal controls, consistency in application of Customs procedures throughout the country, and Customs specific HRM capacity. 14. AEITI: EITI was launched in Afghanistan in March 2009, and started its formal implementation in February 2010 when Afghanistan was declared an EITI candidate country. The National Multi Stakeholders Group (MSG) with a wide participation of government, private sector and civil society groups was set up to oversee EITI implementation processes in Afghanistan. However, Afghanistan is yet to meet EITI requirements and become an EITI compliant country. The FSP will support required key actions to be undertaken with respect to EITI implementation in Afghanistan, before and post-validation. These include: (i) training and capacity enhancement activities for MSG; (ii) support to addressing AEITI recommendations of Validation and Reconciliation reports; and (iii) operational support to efficient AEITI implementation. These actions will enable Afghanistan to become and maintain EITI Compliant Country status in line with the new EITI Standards, and will further help to establish a sound EITI implementation mechanism. This will help to enhance Government’s capacity to effectively regulate Afghanistan’s minerals and hydrocarbon resources sector in a transparent manner, fostering private investment in the sector and ensuring that extractive industries benefit those who are most impacted. 11 As mandated by Cabinet approved ACD HR Policy (Cabinet resolution No. 20 dated September 2, 2015). Page 48 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) 15. Component 3: Treasury Management, Accountability, and Transparency [$30m]. This component aims to consolidate basic core PFM functions to underpin more ambitious aspects of planned PFM and budget reforms. It is organized along the following sub- components: 16. Treasury: One of the most significant achievements of MOF is the AFMIS, established in Treasury in 2002 and extending to each of the 34 Provinces in Afghanistan. The system is extensively used within MOF for payment processing and periodic budget execution reporting. AFMIS provides the platform to move to the next generation of reforms to improve system coverage, payment processing and financial reporting. The FSP will support AFMIS extension, including providing access rights and training to 300 additional users at designated spending units so they can enter expenditure data at the transaction level and generate budget execution reports. AFMIS is to be rolled out to all Afghan embassies, selected districts and municipalities, and at least 5 SOEs. 17. Maintaining standards of timely transaction processing, accounting and reporting will continue to be an important objective during the next 5 years. Interface with Da Afghanistan Bank (DAB) will be developed for Electronic Fund Transfer that will eliminate manual cheques and will expedite payment processing. In terms of financial reporting, from 2017 (FY 1396), the Treasury will also prepare annual financial statements pertaining to the core budget using Cash Basis IPSAS. Activities for enhancing the credibility and efficiency in payroll generation and distribution will continue. Transitioning salary payments away from bonded trustees to system- based alternatives will be a primary goal. The Treasury plans to move forward on linking HR systems with a payroll generation module. In terms of training and professional development, the Treasury will establish a trainee program, and CPA Afghanistan will be established. The body will serve as the node for certification of accountants and development of accounting standards for Afghanistan. 18. Treasury will also be supported to develop a framework for Sukuk Bonds. 19. Audit and Financial Reporting: FSP will continue institutional reform and capacity building to improve management oversight by the IAD. Though, IAD developed the audit methodology and guidelines, and an Accountancy Law has now been developed, capacity building and institutionalization of internal audit in line ministries remains limited due to absence of an enforcing authority. FSP will support IAD in setting up and operationalizing audit committees in line ministries, improving the process of audit recommendations follow up; providing professional certifications to internal auditors and implementation of Institute of Internal Auditors (IIA) standards. Since 2002, the Bank has contracted a third-party Monitoring Agent (MA) to monitor, support, and report on the efficient and effective implementation of the Recurrent Cost Window of the ARTF. Capacity building efforts will support the IAD to work along with the MA for transfer of skills and knowledge to enable that function to be transferred from the MA to the IAD. 20. PFMR-II established the foundations for external audit where SAO adopted International Organization of Supreme Audit Institutions (INTOSAI) Standards up to level 3 and submitted Page 49 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) audit reports to the legislature within 6 months of the close of the fiscal year. Some preliminary work was also done to introduce performance audits and citizen engagement. A significant investment was also made to build the capacity of SAO, but there remains considerable reliance on external consultants. FSP will support SAO to build on these PFMR-II reforms with a focus on building its human resource capacity and utilizing technology for efficient audits. SAO is in the process of developing a detailed HR strategy with an aim to develop a workforce equipped with modern tools; FSP will support implementation of the HR strategy. Use of Computer Assisted Audit Techniques and implementation of AMIS are the two important interventions planned to increase efficiency. SAO also plans to adopt level 4 of the INTOSAI standards which will require some changes to the existing audit guidelines and staff training. For citizen engagement in audit and better communication with stakeholders, a communication strategy will be developed and implemented. As the government, will start preparing IPSAS based annual financial statements, FSP will also provide consultant support to conduct financial audits. 21. Procurement: Government procurements account for 19 percent of GDP and almost 50 percent of the national budget; however, a number of stern challenges have been associated with the public procurement system. These challenges include ineffective planning; ineffectual implementation and enforcement of laws, regulations, processes and procedures; lack of access and openness to procurement data/information; and lack of a mechanisms to monitor contracts’ implementation. To address these challenges, GoA is fostering institutional reforms in public procurement to provide value for money and better services through an effective, efficient, transparent and sustainable procurement system. 22. The NPA is the custodian of procurement rules and regulations, and provides facilitation and capacity building service to procuring agencies, and serves as the secretariat of the high level National Procurement Commission. The Bank has a long-standing partnership with NPA and has been supporting procurement reforms through PFMR-II and CBR. NPA has made significant strides in implementing first and second generation public procurement reforms. These included the establishment of NPA (its structures, systems, processes and procedures), the adoption and later review and amendment of the Procurement Law upon Presidential decree, the development of an eProcurement readiness assessment, and implementation strategy and rollout of early activities, as well as foundational governance and anti-corruption activities. 23. The FSP is required to advance this progress through a third generation of reforms. This work first involves improving compliance of enacted regulations through further strengthening the current legal, regulatory and policy framework, including by comprehensively revising the Rules of Procedures and Standard Documents. This will be complemented through application of Open Contracting Data Standards (OCDS)/Open Contracting Partnership (OCP) and complaints handling mechanisms that will help to institutionalize procurement ethics within government and expand the “Coalition for Reform” through strengthened collaboration between Government, Private Sector, Civil Society and international development partners. These measures will support the NPA to strengthen its institutional framework and management capacity to ensure institutional sustainability. This involves revisiting the NPA’s reform strategy “Blue Print” linked to strengthening of its Tashkeel through CBR. The Blue Print process would be Page 50 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) consultative via conduct of consultation workshops within government, with the private sector, civil society, academia and the media, to be supported by FSP. Similar focus will be given to improve “enabling factors” of ministries’ and procurement entities’ such as strengthening of their organization of procurement and human resource capacity. The standardization of Procurement Department Tashkeel and Mass Recruitment has already been accomplished by NPA in cooperation with CBR and will be built upon to ensure more ministries receive capacity certification and become enabled to conduct their procurement proceedings on stand-alone basis. Complementary to this, NPA will continue the professionalization of the procurement cadre through CBR. 24. The other key and by far the most important focus area of third generation procurement reform to be supported by FSP is introduction of e-GP including its change management, cultural integration, increased awareness and socialization within the government and users. It initially entails upgrade of the Procurement Management Information System (PMIS) through process mapping and reengineering and the integration of the PMIS with other relevant apparatus such as tax offices, AFMIS and the Afghanistan Central Business Registry (ACBR). The risk mitigation here is that the e-GP implementation and institutionalization will be gradual and incremental both in terms of modules and piloted ministries. Other efficiency reforms to be supported by FSP include the creation of a Central Procurement Agency for commonly Used Items via Framework Agreements. This will start initially with creation of a specific team to be gradually expanded into an agency. The NPA will carry out an assessment of market practices that will follow the FSP PPSD, and support development of Common Procurement Vocabulary (CPV), price index and cost estimate mechanisms, public access to contract information and civil society/public engagement, and procurement process competency assessment and facilitation. Provincial Procurement Reform modality and implementation is another area where the NPA has developed a draft mechanism in line with the MOF’s Provincial Budgeting Policy. This is awaiting cabinet approval before implementation can commence. 25. SOEs, Insurance, and Properties: Ownership and oversight function over SOEs is inadequate to assess SOEs’ financial, operational and fiscal performance, and to bring the most needed reforms. The FSP would conduct a thorough diagnostic of the performance—financial, operational and fiscal—of the entire sector. The diagnostic study would measure the size, composition, market share as well as economic weight of SOEs (both individually and by sub- sector), and financial, operational and fiscal performance (the latter quantifying fiscal costs and fiscal risks) of the entire SOE sector (again both individually and by sector). This will help to guide the most needed SOE reforms grounded in international best practices that can later be supported through FSP. The FSP will also support strengthening of the legislative framework for insurance through development of insurance sector policy and capacity building in Takaful law and registration, as well as the development of procedures and policies, and an information management system for public properties. 26. Citizen’s Engagement: GoA recognizes that voice, accountability and participation are critical elements of good governance. Key factors are the political will of the leadership of MOF, as well as the government’s desire to improve its international ratings. The government drew up Page 51 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) an action plan to improve its Open Budget Index (OBI) scores 12 and begun producing Citizen Budget and making Pre-budget statement and executive’s budget proposal public. As part of this roadmap, CSOs and researchers have started engaging with the government, primarily through MOF, on budget-related issues, publishing budget analyses and organizing public awareness campaigns through the media. Furthermore, under the Self-Reliance through Mutual Accountability Framework (SMAF) 2015, the government recognizes as one of the principles: “Transparent, citizen-based, monitoring of development and governance benchmarks provides accountability to the Afghan people, and reinforces the reciprocal commitments of donors and the government to improved development performance.” The framework also calls for a Memorandum of Understanding between the Government and Civil Society. 27. While efforts have been made by the GoA to support transparency, participation has still been very weak13. Therefore, the FSP will support GoA in establishing and implementing a proper mechanism for budget transparency, accountability and participation consistent with international best practices in two areas: (1) Under MOF, the project will mobilize CSOs in order to establish and implement a proper framework where CSOs collaborate with the MOF for further citizens’ awareness in the planning, budgeting and oversight from budget execution at national and sub-national levels. The Office of the Minister of Finance will lead the public disclosure of key fiscal information and progress on FPIP implementation through disclosure on the MOF’s website, as well as print and electronic media. For increased transparency and citizen engagement in procurement, the NPA will implement OCDS; (2) Under the Auditor General, the FSP will also support CPA. The SAO will engage with CSOs in an effective manner around the audit cycle to jointly monitor the quality of public expenditures to strengthen their impact in exercising public oversight. Specific measures will consist of: (i) assessing existing challenges (participatory diagnostic) and opportunities for the SAO to leverage CSOs to increase the effectiveness of external audit; (ii) in-depth capacity building programs and technical support on how-to implement citizen engagement practices and tools around the audit cycle; and (iii) supporting the development of a “Framework for Engagement” and actionable plans for implementation development of guidelines how CSOs can be engaged by the SAO in the conduct of performance audits 28. Component 4: Institutional Capacity Building and Performance Management [$20m]. This component aims to build capacity of MOF staff and the requisite systems for effective functioning of the ministry, and to reinforce overall performance management and coordination of the FPIP. It is organized along the following sub-components: 29. Backbone/shared services: Recently, the GoA began the shift to a “Tashkeel first” agenda, using CBR. While performance has improved in many areas, even with less external support, there are still teams with significant capacity gaps. The corporate backbone of MOF – 12 Overall Afghanistan scored 42 out of 100 in Open Budget Survey 2015 which is an international survey about budget transparency conducted in 102 countries 13 It also scored low at 27 on public participation for lack of provisions of opportunities for the public to engage in the budget process which is weak. Also, according to the Worldwide Governance Indicators, Afghanistan scores low in comparison to the rest of South Asia in all six areas. Access to information law for Afghanistan was enacted in 2014 but underlying systems are not fully established for its implementation. Page 52 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Administration, Human Resources, Finance and Accounting, Procurement and IT – remains gravely weak and not fully able to support the operations of MOF technical departments and, by extension, implementation of the FPIP. Professional development (at the individual level) is also almost non-existent across the MOF. The FSP will therefore support the functioning of the MOF (including its corporate backbone and shared services) through implementation of the recommendations of a strategic planning exercise (functional review) to be supported through CBR. This will involve the development of a competency framework (to be supported through the FPIP Advisory Facility) to assess the current capacity gaps at MOF and accordingly guide recruitment and TA migration (working with the CBR Facility) performance management, training and professional development. The sub-component will support MOF Administration business process re-engineering and automation, and digitalization of MOF’s archive system. Measures to enhance aid management and projects’ coordination and monitoring, and public outreach by MOF including of the FPIP, will also be facilitated. 30. In terms of staffing and capacity building, women constitute around 11 percent of employees in MOF, including one Deputy Minister and three heads of departments. Almost all of women employed in the MOF are based in Kabul; only 134 (out of 891 total female employees) are based in the provinces. Although through the PFMR-II there have been some efforts to increase the number of female professionals in the sector by offering scholarships for the Association of Chartered Certified Accountants (ACCA) programs, the FSP will further assist MOF to increase women’s participation in the sector and within the ministry. This will entail the provision of internship programs for female graduates, reviewing HR policies and procedures, as well as making the work environment more conducive for women; as well as implementing anti- harassment guidelines of the government in close coordination and collaboration with the Gender Unit of the ministry. 31. Information Systems: IT is one of MOF’s corporate areas in need of upgrade. The development and improvement of IT systems (to meet current and future needs for efficiency, flexibility, coverage and process integrity) is also highlighted as an ‘enabling factor’ for implementation of the FPIP. While a large investment in additional and upgraded management information systems approved by the Minister of Finance is an important next step, basic IT functionality continues to be deficient across MOF. The MOF only recently acquired its own email server and is in need of advancing towards setup of a full intranet system to support information and workflow within and across its departments. The MOF is also interested in improving its workforce planning and more comprehensive personnel recording-keeping through the setup of HR systems. These upgrades would provide opportunity for improved communication between systems, which would allow for greater efficiency where PFM processes cross systems and for improved information analysis and transparency. This work will be guided by an all-of-MOF ICT Assessment and ICT Strategy currently being prepared through the FPIP Advisory Facility. Investments in upgrading IT systems will be complemented by capacitation of IT staff - another key bottleneck - as part of support to backbone/shared services. 32. Performance Management: FPIP is a complex program involving multiple stakeholders and the success of the program depends on how well it addresses the complex nature of reforms Page 53 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) that involve political leadership and multiple stakeholders with varying degrees of disposition towards embracing change. This requires multilayered behavioral change approach that can help optimize and leverage the PFM systems and processes to improve service delivery. To drive behavioral change through the entire PFM cycle, the attitudinal barriers to change towards achieving the reform program objectives will be addressed by applying the overarching principles of: (i) leadership and political commitment towards change; (ii) policy space for implementing suggested reforms; and (iii) adaptive, iterative and inclusive processes. Based on the recommendations of a Scoping Report completed as part of the FPIP Advisory Facility, FSP will provide support to enhance collaborative leadership skills and strengthen the cohesiveness and effectiveness of leadership teams in the context of FPIP. This will help provide an authorizing environment for implementation teams, as well as system-level reforms that require ownership and support by multiple implementing directorates. A Communications Strategy will be designed to guide measures to institutionalize the process of behavioral change to support new policy processes, and provide timely support to bridge policy and implementation gaps revealed during project implementation. Technical assistance will be provided to support the MOF PMT in the development of annual and mid-year performance assessment reports of the FPIP, and the development of a publicly accessible web-based PMRS. Page 54 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Annex 2: Institutional and Implementation Arrangements 1. Governance of the FSP (and the programmatic approach as a whole) will be centered within the MOF Leadership Team, supported by an FSP Steering Committee (Core Reforms Group). The PMT, reporting to the Deputy Minister for Finance, will act as secretariat to both the MOF Leadership Team and Core Reform Group and provide day-to-day operational backstopping and coordination across beneficiary departments. MOF, NPA, and SAO will manage the implementation of the program through corporate systems without the assistance of parallel PIUs. Beneficiary departments will be primarily responsible for implementation of their respective FSP activities. Figure 1: FPIP/FSP Governance & Implementation Structure Leadership Team (LT) LT: Headed by Finance Minister, LT is responsible for overall FPIP oversight, including validating CRG decisions. Core Reforms Group CRG: Headed by DM Finance, CRG provides strategic guidance, (CRG) approves annual budgets and plans, and reviews FPIP progress Performance Mgmt Team (PMT) quarterly. PMT: Reporting to DM Finance, PMT provides secretariat support to LT and CRG, implementation support to teams, and overall FPIP M&E. Finance & Procurement MOF’s Finance Directorate: Manages overall FSP Finance Directorates function. MOF, NPA, and SAO Procurement Directorates: Manage Procurement functions respectively. MOF Directorates, NPA, SAO: Implement their annual plans SAO MOF Directorates NPA approved by LT/CRG. 2. In line with the in-built flexibility of the FSP, activity and procurement plans would be updated regularly in close coordination with the PMT and in consultation with the CRG. During Appraisal, the Bank team worked with government on applying readiness criteria which could help to prioritize and sequence (“front-load”) initial activity and procurement plans. In assessing the feasibility of individual activities, consistent with international lessons regarding basics first and “problem driven” approaches, the following aspects were considered: a. Flagship nature: whether activities contributed to flagship reforms and had the full commitment and ownership of all relevant stakeholders. b. Underserved areas: whether activities support areas where current weaknesses are presenting serious threats to economic management and service delivery. c. Critical path dependencies: whether activities required sequencing, and the extent to which without these foundational activities underpin and must precede the more ambitious aspects of the FPIP. This helped to support a focus on what are the early wins Page 55 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) that need to be locked in, and which activities needed to be postponed until foundational activities are completed, including through the FPIP Advisory Facility. d. Current progress: whether activities required award of a contract or change of laws or operating procedures. This helped to assess the extent to which operational pre-requisites had sufficiently advanced to allow activities to immediately move ahead, or to be deferred. Critical and naturally more-advanced activities to be rolled-over from closing projects (PFMR-II, Customs, TAF) were considered in this regard. 3. On this basis, the FSP “locks-in” flagship, underserved, or more-advanced (“quick win”) reform areas included under the FPIP in the first 18 months of implementation (up to elections). In general terms, such areas include: i. Core PFM functions. Consolidation of basic core PFM functions as included in the FPIP will underpin more ambitious aspects of planned PFM and budget reforms. Subsequently, the FSP prioritizes technical assistance activities designed to strengthen core systems and ensure full implementation and compliance. This includes consolidation of AFMIS functionality, and introduction of new payroll controls. The Bank has been closely involved with development of the Accountancy Law and through the FSP, would provide ongoing technical assistance to support implementation, including measures to improve audit follow-up, with follow-up of audit findings supported as a results indicator. The FSP would also move forward the recommendations of a readiness assessment on gradual implementation of e-GP to facilitate more transparent, effective and efficient procurement service delivery across government. ii. Corporate backbone. MOF and the Bank recognize that the corporate backbone (Administration, Human Resources, Finance and Accounting, Procurement, IT) of MOF has long been neglected and is weak. The FSP will place stronger upfront emphasis on re- engineering backbone systems and business processes for greater efficiency and effectiveness. The strengthening of the corporate backbone is essential if the implementation of the FPIP is to be successful. iii. Tax administration. Given continued problems with revenue compliance and poor overall revenue performance, strengthening basic tax systems is a foundation for strengthening the public sector. FSP support would usefully focus initial support on improvements of IT infrastructure and systems, especially SIGTAS and e-payments. FSP would provide support to implementation of the ARD reform plan as well as ongoing reforms to tax policy. iv. Customs administration. Customs revenue performance remains weak, reflecting ongoing problems with compliance. As with tax administration, the FSP would support the strong program of reforms included under the FPIP. This includes consolidation of efforts to improve enforcement, and HR reforms building on current World Bank support to customs. v. Provincial budgeting policy rollout. Implementation of provincial budgeting policy may provide the foundation for improved local-level voice in resource allocation decisions over time. The implementation of provincial budgeting policy, however, will require substantial capacity building at the mustofiat level as mustofiats progressively take increased responsibilities for budget execution. The FSP would draw on Page 56 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) international experience with decentralization to support all aspects of provincial budgeting policy implementation. 4. MOF will carry out the financial management functions for the Project through its Finance Directorate. The Finance Directorate has experience in implementing Bank/ARTF financed projects through the TAF which is directly implemented by MOF. The Finance Directorate’s capacity will be augmented by transferring (into Tashkeel) the FM staff of RIMU – the PIU managing the PFMR-II project. 5. Country systems will be used for budgeting, accounting, internal audit and external audit. MOF guidelines for budget preparation will be followed. The Project budget will be based on the procurement plan and work plan. At the central level, project accounts will be maintained in MOF Treasury Department in AFMIS, which records all project expenditures and receipts in the government’s accounting system. The Finance Directorate will maintain subsidiary books of records using MS Excel. The IAD of the MOF will carry out the Project’s semi-annual internal audit. 6. Funds flow arrangements will follow standard procedures applicable to all World Bank funded/ administered projects. A DA will be opened at Da Afghanistan Bank (DAB, Central Bank). The Finance Directorate will process all payment requests through the SDU of MOF, and will also manage the DA. Disbursements will be report based. Withdrawal applications for new advances will be submitted along with the IFRs for the semester indicating the forecast expenditure for six months. The DA will be replenished based on the advance request from MOF as per the IFRs. The Bank will provide Client Connection access to focal finance staff for the management of the project. 7. Semi-annual IFRs will be prepared by the Finance Directorate and submitted to the Bank within 45 days from the end of the period. The formats for these IFRs will be shared with the Finance Directorate, and the Bank will provide training on the preparation of the IFR. 8. The Project follows the centralized payment mechanism applied in Afghanistan and controlled by MOF. Internal controls are adequate both at the central and implementing agency levels. There is adequate segregation of duties. Reconciliations will be done monthly. All these controls will be periodically reviewed by the Bank. The FM Manual of the PMFR-II will be updated to be used for the FSP. 9. An annual project audit will be carried out by the Supreme Audit Office (SAO) with technical assistance from an audit agent funded under the Project and based on the Project financial statements prepared by MOF. The audited financial statements will be submitted not later than 6 months after end of each fiscal year in which the Project is implemented. There are no overdue audit reports, IFRs or unsettled ineligible expenditure in respect of MOF 10. The FM risk rating is Substantial. Page 57 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) 11. Procurement will be carried out in accordance with the Bank’s Procurement Regulations for Borrowers for Goods, Works, Non-Consulting and Consulting Services and applicable to IPF hereinafter referred to as “Regulations”. The Project will be subject to the Bank’s Anticorruption Guidelines, dated October 15, 2006, and revised in January 2011 and July 1, 2016. 12. Standard Procurement Documents (SPDs): Pursuant to IDA’s new General Conditions (GCs) for Credits and Grants (July 2016) and corresponding Legal Agreements, the World Bank’s Procurement Manual, Standard Procurement Documents (SPDs), Requests for Proposals and Forms of Consultant Contract will be used. Goods, work, and non-consultancy services following Open National competition shall be procured using the agreed bidding documents for Afghanistan. This is further confirmed in Article 4(2) of the Procurement Law of the Islamic Republic of Afghanistan dated 27/06/1395 (September 17, 2016) published in the Official Gazette No.1223, which states that in case of conflict/contradiction between the World Bank’s procurement procedures and any national rules and regulations, the World Bank’s procurement procedures will take precedence. 13. Project Procurement Strategy for Development (PPSD): Based on the regulations of the Bank’s New Procurement Framework, the government has prepared and shared a PPSD which details the procurement methods and approaches. Procurement staff are also attending the necessary procurement training under another Bank funded project (PFMR-II). 14. Systematic Tracking of Exchanges in Procurement (STEP): The Project will implement STEP, a World Bank planning and tracking system, which would provide data on procurement activities, and establish benchmarks. The details of the procurement activities, presently prepared in the procurement plan would be transferred in the STEP system. Initial training on the operation of the STEP system will be provided to the procurement officers of Procurement Directorates of MOF, NPA, and SAO. 15. Procurement risk assessment: Based on the initial procurement capacity assessment the threshold of High Risk Implementing Agency will apply for the prior review of the contracts under the Project. Page 58 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Annex 3: Implementation Support Plan 1. The strategy for supporting the implementation of the Project is tailored to the government’s proactive desire to use country systems and orient the Project around FPIP implementation. Risks and challenges mentioned in the risk assessment have been considered. 2. Given the country capacity challenges, intensive support is required, particularly at project startup. The Bank team will support implementation through the following activities: (i) The TTLs based in Dubai will oversee the work program of, and work closely with Bank technical experts and the various government departments involved in the Project. (ii) Involvement of World Bank and particularly EFI colleagues both in the country office and other Bank offices, and from the Controllers unit, to leverage both comparative skills to provide regular support to the Project on technical matters. (iii) Supervision missions on a monthly basis, and formal implementation support missions twice in a year throughout the project implementation period. (iv) The implementation support team will be comprised of the Task Team Leaders; and Task Team Members comprising: legal, disbursement, operational project management, monitoring and evaluation, safeguards, macro-fiscal, revenue and customs, extractives, finance and markets, citizens’ engagement, financial management, procurement, payroll/HRM and public sector. (v) GoA staff implementing the Project will be strengthened through various forms and types of training on World Bank operational processes and procedures, financial management, disbursement, and procurement Guidelines, monitoring and evaluation, strategic communications, leadership, social accountability and project management. 3. To accelerate project implementation, an Implementation Action Plan has been agreed with the GoA as follows: Table 1: Implementation Action Plan Time Activities Skill Needed Resource Estimate Work-planning, prepare Annually operations manual, training Task Team Leaders 70 staff weeks (Years 0-5) materials and project roll out. Operations Support 10 staff weeks Review and clearance of documents FM Specialist 10 Staff weeks Review FM, procurement and Procurement Specialist 8 staff weeks disbursements Disbursement Specialists 2 staff weeks Review project specific Sectoral staff 20 staff weeks implementation aspects M&E support M&E Specialists 4 Staff weeks Mid Term Task team, external team Mid-Term Review 20 staff weeks in 2019 and experts Completion Implementation Completion External team with support 30 staff weeks in 2022 and Results Report from task team Page 59 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Annex 4: Bank’s Programmatic Approach to Support FPIP 1. FPIP is an ambitious and comprehensive reforms program that covers the whole breadth of public financial management. Box 1. The Fiscal Performance Improvement Plan (FPIP) In March 2015, H.E the President of Afghanistan commissioned an assessment of PFM in Afghanistan. One of the key recommendations was for the reform process to be implemented through a team-based performance management and public expenditure reform approach. Within the MOF, a PMT was established to facilitate the development and implementation of the FPIP . The inaugural 5-year rolling plan was approved in February 2016. The MOF led the development of the plan with the support of consultants and the process involved lengthy deliberations with stakeholders and donors. The plan established broad targets, specific reform actions and utilizes a team-based performance management approach. Work plans were articulated at the level of 66 individual teams, against which progress was monitored and self- assessed. The first mid-year assessment was completed in September 2016 and the annual assessment was published in April 2017. The assessment noted that 28 out of 66 teams scored 60% or above in terms of timely, quality and effective delivery of the work plans. The directorates supported by the ongoing Bank projects scored the highest. The services of high performing teams were recognized by a presidential award. Based on the results of the 2016 annual review, FPIP teams updated their rolling plans for 2017 and beyond. Implementation of these plans is underway and the mid-year assessment was carried out in September 2017. 2. The Bank has adopted a programmatic approach to support the FPIP implementation, comprising three interrelated and complimentary instruments . The FSP, constitutes the implementation arm of the new engagement model and is intended to provide critical inputs in the form of upfront investments drawn directly from FPIP work plans. Government will provide parallel financing of up to US$100 million to support implementation of the FSP, including of related infrastructure activities not directly covered by FSP financing. The FSP will be underpinned through the FPIP Advisory Facility, a programmatic package of ASA. The FPIP Advisory Facility scales up resources for foundational Bank-executed technical assistance to operationalize and inform FPIP implementation. The third instrument is the IP Plus, which is the major channel for multi-donor policy-based budget support to the GoA, providing approximately US$300 million per year. This will provide the reward structure for the FPIP. 3. The FPIP Advisory Facility is a four-year Bank executed program that provides a flexible structure for all World Bank ASA for FPIP implementation. This involves:  Directly supporting the MOF in all aspects of FPIP implementation (including preparation of the FSP), with technical assistance provided flexibly to MOF teams to support progress in achieving actions;  Supporting the management of the FPIP process, including peer reviewing FPIP assessment reports, assisting in the development of work-plans, and supporting the establishment of appropriate targets and actions within the plan;  Providing immediate support to short-term FPIP priorities, including achieving improved alignment between the budget and ANPDF priorities through expenditure analysis and reprioritization exercises and support to project assessment. Page 60 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Figure 1: Bank’s Engagement Model to Support FPIP • Bank executed TA to support FPIP FPIP implementation by providing analytical Advisory and advisory services, including assessments and preparation of Facility implementation plans. • Flexible government executed IPF to continue strengthening core PFM, fiscal management, and institutional capacity. FSP • Fous on outputs and process improvements that will contribute to acheieve FPIP strategic objectives. • Budget support based on benchmarks to achieve IP Plus strategic objectives of FPIP. • Investments made through FSP to achieve benchmarks. 4. The FPIP implementation support under the facility consists of eight themes and a number of activities are planned under each theme to be completed by FY20. For each theme, a budget has been allocated and a team leader identified. Listed below are the ASAs and TA to be carried out under the advisory facility, that are relevant to the FSP components. Table 2: FPIP Advisory Facility – ASA and TA Relevant to FSP FSP Components FPIP Advisory Facility – Relevant ASA and TA Component 1: Budget as Tool PIM Assessment and training. Capacity needs assessment of MFPD. for Development Recommendation of the PIM and capacity assessment to be implemented under FSP. Component 2: Revenue To improve customs enforcement, support will be provided to develop an action Mobilization plan including organizational structure, resource requirement and training needs. The plan implementation will be financed by FSP. ARD will be supported in developing ICT strategy, enhancing tax audit capacity by developing methodology, and functional assessment of tax offices to identify capacity gaps. FSP will finance capacity building, strengthening the audit function and development of information systems. Component 3: Treasury The ongoing PEFA assessment is funded under the FPIP Advisory Facility and FSP Management, Accountability, recognizes that resources would be required to address the gaps identified. Support and will also be provided to conduct Open Contracting Assessment and to develop the Transparency Public Procurement Strategy (starting with an already prepared PPSD for FSP) whereas FSP will provide financing for implementation. SOEs monitoring framework will be developed to be implemented under FSP. Component 4: Institutional HR and ICT Assessment of MOF to develop recommendations to strengthen Capacity Building and MOF’s corporate backbone. Performance Management and Leadership Scoping Performance Management Report. FSP to support implementation of the recommendations. Page 61 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) 5. The IP Plus will provide an estimated US$300 million budgetary support to the government during FY18-20. The overall objective of the IP Plus is to support Afghanistan with a reform program that aims at achieving greater fiscal self-reliance and sustainability though increasing domestic revenue mobilization and strengthening expenditure management. The program has two pillars namely: (i) ANDPF; and, (ii) FPIP. The IP Plus FPIP pillar includes a Revenue Matching Grant Scheme intended to incentivize improved revenue performance and therefore assist Afghanistan in its progress towards fiscal sustainability. It is meant to be anchored in the annual revenue targeting negotiations between the MOF and the IMF. The FPIP pillar also includes reform-oriented actions (triggers) which support the overall objective of the FPIP. The IP Plus is under preparation and the FPIP pillar will be anchored within the results framework of FSP. The table below provides examples on how IP Plus triggers will either support FSP implementation or reward outcomes achieved under FSP. Table 3: IP Plus – Triggers Complementing FSP FSP Components Complementing IP Plus Triggers Component 1: Budget as Tool for  The Cabinet approves the Provincial Budgeting Policy, allowing budget Development allocation of discretionary resources to provinces.  MOF prepares and publishes an ex-ante and ex-post gender assessment of the national budget (repeats annually), which have been presented in budget hearings. Component 2: Revenue  The Cabinet approves a comprehensive HR reform policy for ACD. Mobilization  The Cabinet approves amendments to the Customs Law. The amendments will include provisions that regularize ACD's new enforcement wing, in particular regarding the power for Customs to exercise their powers on the Afghan customs territory.  The Cabinet approves a plan for the re-organization and re-structuring of ARD, including the proposal, policy procedures and a new organization structure. Component 3: Treasury  Cabinet approves amendments to all relevant laws governing PFM and Management, Accountability, and subnational bodies to ensure that the policy can be implemented. Transparency  DAB and MOF migrate 60% of all government salary payments by value through the Automated Transfer System.  SAO law revised ensuring compliance with INTOSAI standards.  CBR process and salary scales implemented at SAO.  Increasing in number of performance audits conducted. Component 4: Institutional  Improvement in core institutional capacity, represented by a reduction in Capacity Building and the number of long-term technical assistants (via ANPDF IP Plus Pillar). Performance Management  Performance management streamlined over time, measured by regular reporting on performance through publication/sharing of FPIP assessments (repeats annually). Page 62 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Annex 5: Initial FSP Work Plan Component 1: Budget as a Tool for Development Milestones Priority Expected Outcome 2018 2019 Revision of budget processes A credible policy-linked budget founded on multi-year Roll-overs, new policy calls and budget New Budget Call circulars and budget perspectives and incorporating procurement planning. disclosures developed. preparation systems developed. Improved budget disclosures and Transparency in public financial operations. Plan to improve budget comparability Move to Government Finance Statistics delivering comparability of budget and developed. (GFS) classification. accounts Classification of Functions of Government (COFOG) functional classification included into the budget statement. Provincial budgeting policy and strategy Strengthened fiscal relations with provinces through de- Institutionalization of Unconditional Fund Provincial budgeting policy M&E concentration, and improved transparency and Allocations. framework developed. equitability of provincial budgets and operations. O&M policy and roll-out Public assets are properly maintained and their life-cycle Public building maintenance manual O&M reform rolled out to 11 additional is prolonged. developed. budgetary units. O&M reform rolled out to 11 budgetary units. GRB implementation aligned with Budget is gender responsive. GRB Cell institutionalized as a unit of the Gender disaggregated budget and ongoing and planned budget reforms Budget Department. expenditure data, and statistical analysis Framework for gender disaggregated compiled in a report for 2 pilot statistical analysis developed with data ministries. collected, analyzed, defined and rolled out. Medium term expenditure, fiscal and A credible budget that is more responsive to Government Fiscal Strategy, Rolling Forward Estimates, MTEF, MTFF, MTBF deployed in the budget frameworks priorities along with more efficient and effective spending and other regular policy papers developed. budget cycle. [more reliable resource envelopes (pre-budget and MTEF, MTFF, MTBF developed. budget) and fiscal space estimates]. Sustainable debt policy Sustainable debt levels. Debt strategy reviewed and updated. Debt Sustainability Analysis (DSA) completed. Delivering high quality advice to TPDC Credible revenue estimates support informed decision Reports, policy papers, Computable General Continue to implement plan for on tax policy along with consistently making. Equilibrium (CGE) model and data improving tax policy advice and revenue accurate revenue forecasts management systems developed. forecasting. Delivering macroeconomic forecasts Better macroeconomic policy delivering better fiscal More reliable and relevant macroeconomic Macro-risk report updated and refined to and providing high-value outcomes. data and briefs produced. improve macroeconomic forecasts on macroeconomic policy advice to HEC quarterly basis. Operationalization of ANPDF Improved national policies that support government Extractives NPP finalized. Any remaining implementation plans and implementation mechanism objectives and priorities. budgets for other NPPs finalized. Development Strategy drives national budget. Report on the progress of Development Report on implementation and budget Councils produced on quarterly basis. alignment of ANPDF/NPPs produced. Page 63 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) PIM Framework and System Improved quality and efficiency of public investments. 15% of new large development projects are 20% of new large development projects properly appraised, costed, and included in are properly appraised, costed, and the budget. included in the budget. M&E Framework and System Improved monitoring and evaluation of development M&E framework developed, and M&E 40% of development projects monitored. projects. system developed and deployed. 20% of development projects monitored. Component 2: Revenue Mobilization Milestones Priority Expected Outcome 2018 2019 Revenue Administration Automation Effective business processes reducing opportunities for Business process reengineering carried out Roll out to the Medium and Small (including for VAT rollout) corruption and increasing taxpayer confidence in the tax in the LTO to support revision of the Taxpayer Offices and provinces system. taxpayer registries, introduce hybrid electronic filing compliant with the existing legal framework and establish processes for VAT rollout in 2020. Revenue Administration ICT (SIGTAS, ARD reporting tools and decision making enhanced. ICT Master Plan and Change Management Data warehouse developed. e-payments etc.) Plan prepared. Taxpayer compliance and anti- Increase in taxpayer confidence in the fairness of the tax Audit training and mentoring program Implementation of the Disputes corruption system supporting higher voluntary compliance. developed and implemented, to enhance the Resolution Board. quality of the risk-based audit system. Anti-Corruption Strategy to strengthen internal controls created, with an internal audit function to respond to taxpayer complaints. Taxpayer awareness More informed taxpayers supporting increased voluntary Communications Strategy developed, to Service standards established, and annual compliance. support communication with taxpayers. taxpayer surveys carried out to measure Taxpayer guides updated with new performance. legislation and filing procedures. ARD Re-organization and Re-organization and modernization of ARD. Readiness Phase Completed: Leadership Phase 1 Completed: Two regions and Modernization Cadre and Corporate Support Services Kabul report to ARD. established. Training needs assessment carried out. Curriculum for the Tax Academy developed. Job descriptions and match to training Analytical training carried out to support program developed. revenue analysis and forecasting capacity of the Revenue Planning Department. Optimization of Customs Academy and Strengthened management control and oversight of Human resource management policy Human resource development and implementation of ACD HR Reforms national activities, and ensuring the organization developed and adopted, to promote merit- training curriculum developed and adequately supports strategically important functions, based and gender-balanced recruitment, incorporated into staff planning and including monitoring of internal controls, consistency in mobility, advancement, performance deployment policies. application of Customs procedures throughout the appraisal, remuneration practices, and Page 64 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) country, and Customs specific HRM capacity. policies to support the flexible deployment Performance monitoring and evaluation of human resources. capabilities developed, covering all key organizational objectives, including establishment of Internal Compliance Unit. Customs Administration ICT Simplification and improvement of customs processes Geographical and functional rollout of NSW system development and (ASYCUDA, NSW etc.) and enhanced transparency, operational efficiency and ASYCUDA, including module of implementation, deployment of Trade controls. exemption, valuation, and Intellectual Information Portal, and technology Property Rights (IPR) database (and integration in the automation process, capacity building). including weigh-in-motion system, automatic gates, biometrics, CCTV and cameras and vehicle number plate readers. Post Clearance Audit (PCA) capacity, Improved efficiency in Customs clearance process. Risk base audit of import, export and transit Audit of regional Customs (starting from mobile verification, and Anti- declarations carried out. Kabul) expanded to 800 major Corruption Combating corruption and enhancing compliance. Audit of regional Customs (starting from companies/entities. Kabul) expanded to 250 major companies/entities. Areas of corruption prevention/detection, and Customs to Customs cooperation with neighboring countries developed, including real time data exchange to limit opportunities for fraud. Implementation of AEITI AEITI compliance. Quality improvement plans and enhanced Quality reports in support of retaining recommendations data collection and reconciliation EITI compliance developed, and procedures developed, and AEITI recommendations implemented. recommendations incorporated into relevant government work plans. Component 3: Treasury Management, Accountability, and Transparency Milestones Priority Expected Outcome 2018 2019 Treasury: AFMIS enhancement and Standards of timely transaction processing (including Annual financial statements on the core Roll out to more embassies, expansion payments), credibility and efficiency in payroll budget prepared using Cash Basis IPSAS. selected districts and municipalities, and generation, and financial reporting improved through Access rights and training provided to 300 at least 5 SOEs. expansion and enhancement of system coverage. additional users at designated spending units. Additional functionalities added, to strengthen payroll and HR systems. Procedures manual developed for Ministry of Foreign Affairs and roll out to between 2 and 10 embassies. Page 65 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Treasury: Accounting and Auditing Strengthened accounting and auditing practices of the Trainee program established by Treasury. First batch of training and professional Practices corporate sector (implementation of Accountancy Law). accreditation carried out, including 5 females. CPA Law and curriculum developed. Regulations, Policies, and Procedures supporting and assisting CPA Afghanistan set up. CPA Afghanistan established, to serve as Reciprocal membership agreement signed the node for certification of accountants and with two international/regional development of accounting standards for accountancy bodies. Afghanistan. Treasury: Sukuk Implementation Establishment of Sukuk operations in Afghanistan. Framework (Law) for Sukuk Bonds Sukuk Bonds implementation facilitated developed. through approval of Framework (Law), formation of supervisory body, and issuance of rules and procedures. Internal Audit Increased implementation rate of audit recommendations Requisite procurement initiated, MoUs Designated IAD MOF teams continue and improved internal controls, risk management and signed, and IAD MOF teams designated work in line ministries (2 years in each governance process. and start work to perform quality assurance line ministry), expanding to 10 pilot line and strengthen (per IIA standards) IA ministries. function of 5 pilot line ministries to operate individually and competently. AMIS installed and implemented in IAD AMIS installed and implemented in line MOF (and staff trained on system), to ministries (and staff trained on system). automate the manual audit process. External Audit Increased efficiency through implementation of HR Consultancy firms for Grants audit and Consultancy firms’ performance (and Strategic Plan, transparency (citizen engagement) quality control and quality assurance continued need evaluated.) measures, follow up of external audits and increase in contracted. number of performance audits conducted (supported Development of AMIS contracted. AMIS is in place, and report on follow- through improved data management). up is generated. Professionalization/Capacity Building of Professionalization/Capacity Building of SAO advanced through first year SAO further advanced through second implementation of HR Strategic Plan, year implementation of HR Strategic collaboration with other SAIs, recruitment Plan, collaboration with other SAIs, and of national and international advisors and equipping of SAO and its regional staff for SAO and Public Accounts offices. Committee (PAC), and equipping of SAO and its regional offices. Citizen engagement enhanced and Citizen engagement enhanced and awareness of CSOs, Media, Parliament and awareness of CSOs, Media, Parliament auditees increased, including through and auditees increased, including through development of Communications Strategy. implementation of Communications Strategy. Page 66 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) Procurement (development and rollout Transparent, effective and efficient procurement service PMIS upgraded through: (a) mapping and E-Purchasing, E-Tendering and E- of first phase E-Government delivery across government organizations. simplification of all (upstream and Contract management modules pilot Procurement and system) downstream) procurement processes; (b) expanded, including: (a) Vendors' development (as sub-systems of PMIS) Classification System for services Decision Support System, Management vendors; (b) E-bidding system for Reporting System, Transaction Support consultancy projects; (c) e-purchasing System; and (c) linkage to relevant modules module; and (d) e-specifications module. of AFMIS (including tax office database), ACBR and Banks. Standard e-Operation Office equipped in Procurement Entities and Provinces. e-GP system procured. E-Purchasing, E-Tendering and E-Contract management modules launched in pilot phase, including: (a) Vendors' Classification System for goods vendors; (b) E-bidding System for goods projects; (c) Debarment System; (d) Administrative Review System and E- Catalogue; and (e) upgrading of procurement related dashboards. SOEs Enhanced efficiency, competitive capacity, and Diagnostic assessment of SOEs carried out, SOEs reforms initiated based on profitability of SOEs. to measure size, composition, market share diagnostic recommendations. and economic weight of SOEs (both individually and by sub-sector), and financial, operational and fiscal performance (the latter quantifying fiscal costs and fiscal risks) of the sector. Supervisory Board established to support Supervisory Board activated and oversight and monitoring of SOEs and providing oversight and policy SOCs and the development of policies to development for the sector. enhance profitability of the sector. Insurance Strengthened strategic framework for insurance Insurance strategic vision, sector policy, and Capacity building in Takaful law and development. law and regulations developed/reviewed. registration carried out. Properties Increase revenue from public properties. Procedures and manuals for the clarification Implementation of procedures and of government Property Law developed. manuals initiated. AFN 580 million revenue from government AFN 580 million revenue from property (leases and rent) including in government property (leases and rent) provinces collected. including in provinces collected. Development of Property Information Deployment and data population of Management System. Property Information Management Page 67 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) System. Number of newly registered government Number of newly registered government properties on Property Accounts increased properties on Property Accounts by 350 through improved data collection on increased by 350 through improved data property type, location, size, and owner collection on property type, location, breakdown. size, and owner breakdown. 30% of public properties maintained. 70% of public properties maintained. 50% of Properties’ staff trained. 100% of Properties’ staff trained. Component 4: Institutional Capacity Building and Performance Management Milestones Priority Expected Outcome 2018 2019 MOF Re-organization Improved functioning and structure of MOF (including its Comprehensive organizational restructuring Organizational restructuring and corporate backbone). and professional development plan professional development program developed on basis of FPIP Advisory initiated, including (gender-sensitive) Facility supported competency framework recruitment and TA migration (working (HR Assessment). with CBR Facility) performance management, training and professional development. MOF Administration Business Process More effective and timely transaction processing, to Mapping carried out for 50% of relevant Mapping carried out for 50% of relevant Re-engineering better support the operations of MOF technical MOF Administration processes. MOF Administration processes departments and, by extension, implementation of FPIP. MOF Procurement Improved procurement efficiency. Procurement and contract management Database deployed. database developed. MOF ICT To meet current and future needs for efficiency, Requisite investments in upgrading ICT Capacitation of MOF IT staff. flexibility, coverage and process integrity of IT systems. systems and connectivity, guided by all-of- MOF ICT Assessment and ICT Strategy currently being prepared through the FPIP Advisory Facility. Performance Management Driving behavioral change through the entire PFM cycle, Implementation of recommendations of Technical assistance provided to support by applying the overarching principles of: (i) leadership Scoping Report completed as part of FPIP PMT in the development of annual and and political commitment towards change; (ii) policy Advisory Facility, on provision of mid-year FPIP performance assessment space for implementing suggested reforms; and (iii) authorizing environment for reports. adaptive, iterative and inclusive processes. implementation teams, and system-level reforms to enhance skills, strengthen cohesiveness and effectiveness of leadership teams in the context of FPIP. Communications Strategy designed to guide measures to institutionalize process of behavioral change to support new policy processes, and provide timely support to bridge policy and implementation gaps Page 68 of 69 The World Bank Fiscal Performance Improvement Support Project (FSP): (P159655) revealed in course of FSP implementation. Web-based PMRS developed for PMT. TA provided to support PMT in the development of annual and mid-year FPIP performance assessment reports. Development of overall Strategic Framework for the Situational Analysis and Five Year Implementation of Five Year Strategy Ministry of Finance. Strategic Vision for MOF developed. initiated. Update and improvement of GoA PFM Reform Strategy PFM Reform Strategy improved and Implementation of updated PFM Strategy (PFM Road Map II). updated on basis of supporting assessments initiated. (including FPIP assessments). Development of an Information Systems Development Situational Analysis carried out, and whole- Implementation of Information Systems and Improvement Strategy. of-government Information Systems Development and Improvement Strategy Development and Improvement Strategy initiated. developed. Chief of Staff: Data Archiving Improved archiving and transfer of data and records to Current documents in MOF archive Design initiated for comprehensive MOF relevant departments. categorized, and documents disposed in archives’ database linked to database for accordance with MOF Archive and the property documents in President’s Office National Archive legal framework. and the Afghanistan Land Authority. Annual assessment of historical data Annual assessment of historical data conducted, and annual workshop on conducted, and annual workshop on Archiving policy at MOF conducted. Archiving policy at MOF conducted. Aid Management Improved evidence-based monitoring and reporting on Official Development Assistance (ODA) ODA data analysis conducted and results the mutual commitment expressed by the donors and data collected from Afghanistan communicated to development partners; government under area six (6) of SMAF. development partners and entered into the Aid Management Policy and New Deal Development Assistance Database (DAD), Engagement advocacy activities at the in accordance with the ODA Data Cycle. national level conducted; dissemination of donor-specific ODA Data Score-Cards on quarterly basis; and forward estimates process reviewed and refined as required DAD rolled out to at least 3 ministries, DAD and AFMIS compatibility is supported through sector specific DAD resolved. trainings and preparation of user guide. MOF Projects’ Coordination and Improved MOF projects’ planning, management and MOF projects’ coordination and monitoring MOF projects’ coordination and Monitoring coordination, and evaluation and reporting. linked-up to Geographic Information monitoring improved through utilization System (GIS), and M&E system of GIS, and M&E system. development. Public Relations Improved Ministry of Finance communication and Development and distribution of relevant Development and distribution of relevant outreach on FPIP reform aspects and progress. media materials. media materials. Page 69 of 69