Documentof The World Bank FOR OFFICIAL USEONLY ReportNo. T7610-AF TECHNICAL ANNEX FORA PROPOSED CREDIT OF SDR 21.6 MILLION (US$31.0 MILLIONEQUIVALENT) TO TRANSITITIONAL ISLAMICSTATE OF AFGHANISTAN FOR AN EMERGENCY CUSTOMS MODERNIZATION AND TRADE FACILITATIONPROJECT NOVEMBER 24,2003 This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCYEQUIVALENT Currency Unit - Afghani US$1 - 44.567 AFN (As o f October 31,2003) SDRl - - US$1.43798 (As of October 31,2003) GOVERNMENTFISCALYEAR March 21 -March 20 ABBREVIATIONSAND ACRONYMS ACD Afghanistan Customs Department MPW Ministry ofPublic Works ACOC Afghan Chamber o f Commerce MRRD Ministryo f RuralRehabilitation and AIA Afghanistan InterimAdministration Development ASOE Afghan State Owned Enterprises P I M Project ImplementationPlan ASYCUDA Automated System for Customs Data PRR Priority Reformand Restructuring CFAA Financial Accountability Assessment PWP Project Work Plan CG Consultative Group SMTQ Standards, Metrology, Testing and CPFA Country Profile o f Financial Quality Accountability SOE Statement o f Expenditures DAB Da Afghanistan Bank SY Solar Year ESSF Environmental Social Safeguards TA Technical Assistance Framework TISA Transitional Islamic State o f FYP Five Year Plan Afghanistan GMU Grant ManagementUnit TSS Transport Special Sector IARCSC Independent Administrative Reformand UNCTAD UnitedNations Conference on Trade and Civil Service Commission Development ICD Inland Clearance Depot UNIDO UnitedNationalIndustrial Development ICT Informationand Communications Organization Technology UNLK UnitedNations Layout Key MIWRE Ministryo fIrrigation, Water Resources UNOPS UnitedNational Office for Project and Environment Services MOC Ministry of Commerce USAID United States Agency for International MOF Ministry o f Finance Development M O I Ministryo fInterior wco World Customs Organization MOT Ministry o f Transport WTO World Trade Organization Vice President : Praful C. Pate1 Country Director : Alastair McKechnie Sector Director : Vincent Gouame Transport Sector Manager : Guang Z. Chen Task Team Leader : Amer Z. Durrani 11 FOROFFICIAL USEONLY TRANSITIONAL ISLAMICSTATE OFAFGHANISTAN EMERGENCY CUSTOMS MODERNIZATIONAND TRADE FACILITATIONPROJECT TECHNICAL ANNEX Table of Contents I BACKGROUNDANDSTRATEGY...................................................................................... . 1 A. Afghanistan inTransition ..................................................................................................... 1 B. Current StateofCustoms andTransit ................................................................................... 2 C. TISA's Customs Modernization and Trade FacilitationReforms......................................... 6 I1. IDA RESPONSEAND STRATEGY.................................................................................. 9 A. IDA'STransitional Support Strategy for Afghanistan .......................................................... 9 B. Rationale for IDA'SInvolvementinCustoms andTrade Facilitation .................................. 9 C. LessonsLearned and Reflectedinthis Emergency Project ................................................ 10 I11. THEPROPOSED PROJECT ............................................................................................ 12 A. Project Objectives ............................................................................................................... 12 B. DetailedProjectDescription............................................................................................... 13 C. Institutional Arrangements and Project Implementation..................................................... 16 D. Project Justification andEconomic Benefits ...................................................................... 22 E. Sustainability andRisks...................................................................................................... 23 This document has a restricteddistribution andmay beusedby recipients only in the performance of their official duties I t s contents may not be otherwise disclosed . lwithout World Bank authorization . Listof Attachments Attachment 1: Procurement Arrangements Attachment 2: Financial Management, Disbursement, and Audit Arrangements Attachment 3: Customs Modernization Strategy Attachment 4: Customs Infrastructure Assessment Attachment 5: Information and CommunicationTechnology Attachment 6: Trade and Transit Attachment 7: Trade Facilitation Attachment 8: Civil Service Reformand Restructuring inAfghanistan Customs Department: A Review Attachment 9: Civil Service Reformand Restructuring inMinistryo f Commerce: A Review Attachment 10: Donor Participationin Customs and Trade FacilitationReform Attachment 11: Project Performance Indicators and Monitoring Attachment 12: Project Justificationand Economic Benefits Attachment 13: Domestic Revenue Mobilization Attachment 14: Customs FinancialManagement: An initial Assessment iv Technical Annex: EmergencyCustoms Modemization& Trade Facilitation Project Page 1 I. BACKGROUNDANDSTRATEGY A. Afghanistan inTransition (i) Sims Of GrowthAmongst A Fragile Post Conflict Environment 1 Afghanistan, ravaged by chronic conflict and political instability for the last two decades, i s on the sure but slow and challenging path o f reconstruction. Despite limited state infiastructure, Afghanistan Interim Administration (AIA) and its successor, the Transitional Islamic State o f Afghanistan (TISA), has managed to: restore basic government; reverse the humanitarian disaster; draft a new constitution; prepare a National Development Framework, and implement it through the National Development Budget. TISA i s creating an enabling environment for sustainable economic growth. 2 GDP grew by 28.6 percent during2002/03. Goodrains ledto a resurgence inagricultural production which accounts for about 50 percent o f GDP' and supports 85 percent o f the population. Afghanistan's trade also increased. Officially reported imports2 in 2002 (USS85lmillion) were up 50 percent over 2001. Due to poor reporting and smuggling, actual imports could even be higher. Rapid surveys undertaken at the borders in September 2003 estimate these imports at US$2.4 billion-indicating the increased aid and the revival o f commercial activity. 3 Despite these achievements, not all i s well. Growing security threats further fueled by a lack o f definitive progress on national reconciliation, a large opium drugbusiness, and the slower than expected progress on reconstruction are all threatening to undermine these achievements. Not the best environment in which to hold the first ever national democratic elections scheduled for June 2004. It i s now more than ever, that TISA needs assistance to improve its effectiveness. It must be seen rebuilding the country's infiastructure and the lives o f the Afghan people. Not only must the future be imagined, it must be built. (ii) AnEffectiveGovernmentNeedsRevenues 4 Financial sustainability i s vital for TISA's effectiveness and Afghanistan's future. The national development budget (USS1.7 billion for SY 1382-2003) is entirely donor financed- and will remain so in the medium term. TISA's ordinary budget (government payrolls, operations, and maintenance) i s already projected at USS550million per year and anticipated to increase inthe medium term. 5 TISA's revenues are primarily from two sources-customs and domestic taxation. Customs revenues make up 70 percent o f the total revenues. Enhanced revenue mobilization i s one o f TISA's highest priorities. TISA's priority i s to improve revenue collection by reforming its tax system and customs administration, initially, through "high yielding" measures that can be easily administered. 6 In the short to medium term customs revenues will continue to be the single largest contributor. TISA hopes to increase revenues from Customs through: (a) better administration ~ ~~~ ~~ Based on 1993 estimates. * Non Oil imports only. Estimates o f POL imports range from 0.5 to well over 1million tones, and total POL imports, including products for re-export, could be around 2 million tones (USS0.4 billion-based on under US$200/tone which is the average border CIF price). Technical Annex: Emergency Customs Modernization & Trade Facilitation Project Page 2 and collection o f existing customs revenues-better valuation, assessment, collection, and less leakage; and (b) facilitating trade and transit to increase the customs revenue base. The customs enabling environment, administration, and operations are slowly being rebuilt-but are still far from meeting TISA's expectations o f securing increased revenue, protecting society, and facilitating trade. B. Current State of CustomsandTransit (i) CustomsLepislationAndTariff 7 The SY 1361 (1982) Customs Law provides the current legal framework and guidelines for the establishment o f the Customs Administration. However, this L a w falls short on various counts and does not establish a sufficiently robust framework for a modern customs administration and customs revenue control. Despite relatively high tariffs (the highest was 150 percent) in the past the effective tariffs have been low due to the use o f extremely low exchange rates and lack o f hightariffs on commonly excisable goods. (ii) CustomsAdministrationAndOperations 8 Development o f Afghan Customs Department (ACD) has been severely constrained by a lack o f experienced managers, a poorly paid and trained customs administration staff, poor communications and infrastructure cumbersome and ineffective policies and procedures, the lack o f an effective central revenue and customs authority, and the usurping o f Customs' role by other agencies3. Improper valuation and classification, and lack o f effective control on movement o f goods are a natural results o f this environment which has also led to widespread smuggling including a substantial trade in contraband and narcotics. Concurrently, a significant proportion o f the customs revenue collected at the border provinces are not voluntarily remitted to the Treasury-remittances to-date have required substantial effort on the behalf o f Ministry o f Finance (MOF). 9 The present customs clearance system on an average involves 20 different procedures, and requires some 50 different processing steps. Inaddition to the customs duties and the service charge for the Pro-forma invoice, issued by the Afghan Chamber o f Commerce (ACOC), there are some 27 additional taxes and fees collected. Documentation and other requirements at the Afghan borders are time consuming and costly: on the Karachi - Torkham - Jalalabad route, truckers estimate that border clearance takes up to 3 days (2 days is considered normal), and the documentation charges amount to about US$165/container. 10 The characteristics of border operations are: limited inward transit and related extensive transshipments; insufficient control over goods, vehicles, and passengers; poor space management; and inter-agency overlaps. At inland cargo clearance facilities, there are difficulties over: clearance procedures and associated documentation; extensive handling o f goods with possibly excessive examinations; and duty assessment. Further details on the state o f customs in Afghanistan are given inAttachment 3. (iii) CustomsInfrastructureAndCommunications 11 Border facilities are mostly run-down, congested, or in cases, only partially fmctional- not at all conducive to proper customs operations. Most office and residential buildings are in Suchas the Chamber of Commercedoingvaluation for thepurposes ofduty assessment. Technical Annex: EmergencyCustoms Modernization& Trade FacilitationProject Page3 need o f structural rehabilitation or extension, or both. Almost all border facilities have no external communication links or IT setups, and have mostly unreliable power supply. Water supply and sanitation systems are largely inadequate or not present at all. 12 Inadequate physical infrastructure also constrains operations at nearly all Inland Clearance Depots (ICDs). Some ICDs are also poorly located in congested urban areas and pose a serious security concern under the present situation. Electricity supply i s mostly unreliable, or contingent upon supplies from neighboring counties. Water supply and sanitation systems are poorly equipped and insufficient to cater even for present needs. 13 At present the communications infrastructure betweencustomoffices inKabul (including the headquarters, airport and the customs house) provincial offices and border posts in non- existent. All ACD processes (administration and customs declaration) are manual. Attachments 4 and 5 provide a detailed assessment o fthe state o f customs infrastructure and communication. (iv) Standard And Oualitv Of Traded Goods 14 Afghanistan's participation in international trade and its ability to attract new investment flows can be a major contributing factor to its economic growth. Standards are meant to make trade between countries easier and to ensure product quality and safety. However, these standards often end up being non-tariff barriers if any one o f the trading country i s not equipped to impose and maintain standards. This i s a basic requirement to participate inthe trading system and Afghanistan has no related capacity. Therefore, as a priority, Afghanistan's capabilities have to be established to enforce a certain quality standard o f its traded goods in conjunction with a system for standards, metrology, testing and quality. 15 The absence o f a standards, metrology testing, and quality (SMTQ) has an even greater impact on Afghanistan's economy in the context o f its imports. Since TISA cannot check the quality and safety o f its imports, substandard (and often smuggled) products compete with (legitimately imported) quality products and drive these out o f the market given the absence o f information to the consumer and the thriving informal markets. This not only hurtsthe consumer and the economy, it i s also a colossal barrier to formal and legitimate trade. (v) Current State OfTransit System 16 Afghanistan has a substantial number o f transit4 alternatives and i s thus not dependent on any single route. It is, however, faced with substantial problems and high transit-related trade costs as a result of various in-efficiencies inits present transit system. 17 Transit-transport costs within Afghanistan are high partly due to: (i) very poor the condition o f the road network; the short internal hauls on many o f the transit routes; (ii) the insecurity in parts o f the country-imposing limitations on operating hours, restricting the flexibility o f truck operations, and sometimes requiring the use o f convoy systems; and (iii) the "Transit" is the sumo f all the door-to-door physical, organizational and administrative operations necessary to carry goods, from their origin overseas to Afghanistan, or vice-versa, or through Afghanistan: air, sea, or land freight, collection and delivery, handling, financial services (insurance, banking, etc.), import-export procedures, Customs, etc. For this project, due to nature o f the basic Customs reforms being undertaken by TISA, Customs and Transit are being treated separately. Technical Annex: Emergency Customs Modernization& Trade FacilitationProject Page 4 numerous checkpoints' along the routes-costs are raised directly by the multiple fees and taxes, and indirectly by the delays and uncertainties that the checkpoints impose. 18 The transit system i s disjointed, with transshipment, border formalities, customs clearance at provincial capitals, and numerous check-posts en route. Coordination between transporters in Afghanistan and transit countries, and between shippers and customs officials i s poor because o f the lack o fprofessional transit agents and poor communications. 19 Afghan participation in the transit system outside o f Afghanistan i s practically absent. This has resulted in the very restricted access given to foreign trucks and thus the need for transshipment at the border. With a few exceptions, all o f Afghanistan's foreign trade i s transshipped at the border. Transshipment i s time-consuming and costly, both in terms o f direct charges, such as warehousing and handling, and indirect costs, such as those resulting from loss and damage o f goods. 20 Afghanistan i s virtually excluded from modern international trade logistics systems. Most international shipping lines do not allow their containers into the country. It is impossible to obtain insurance for cargo moved within Afghanistan-with a few very costly exceptions. Within Afghanistan, cargo moves under either owners' risk or carriers' liability (at much higher freight rates). 21 The countrywide absence o f either a functional insurance or a formal banlung sector also prevents the development o f a bonding or monetary guarantee system for either vehicles or cargo intransit. To provide adequate security to Customs, bonding of cargo is effectively being carried out through "in lieu o f bond" type non-financial mechanisms-which provide no financial recourse in the event o f default. However, even this cannot be considered as standard practice6 and may change without notice and i s specific to a border. All these factors restricts the opportunities for a streamlined transit systems to allow clearance at final destination rather than at the nearest regional center. 22 Afghanistan has been a contracting party to the "Convention on International Transport o f Goods under TIR Carnets" (1975) since September 23, 1982. However, it has never implemented the TIR procedures, documentation, and liability systems that allow specifically approved vehicles and operators o f member associations and States to transit seamlessly through member countries. 23 Overall, despite the low transport costs on the routes o f some o f its transit partners, Afghanistan faces a transit system which, unless improved, will impose major constraints on the development o f its foreign trade and thus economic and social development. Further details are given inAttachment 6. Provincial agencies interfere with operations by often imposing informal procedural requirements. This restricts the freedom of transit and poses a substantial barrier to trade. The current Afghan system for transit including bonding securities indocuments or inkind (30% o f goods), may seem weak, confusing and poorly organized. Afghan administration perceives this differently. This perception is in line with other aspects o f current Afghan transit logistics-standards do not seem either necessary nor applicable to a pragmatic social understanding where Afghan cultural factors are predominant and locally understood. Technical Annex: Emergency Customs Modemization & Trade Facilitation Project Page 5 24 Ministry o f Commerce (MOC) i s the main institution dealing with transit and trade facilitation issues'. MOC i s tasked with developing and implementing policies that facilitate economic expansion, trade, and foreign investment. It has twelve departments, fifteen subordinate units, and a 51percent share in 15 Afghan State Owned Enterprises (AS0E)-and has specific departments for border trade, international transit, foreign trade, and transit sub-departments in border provinces. (vi) Current State Of Goods Transport Services In Support Of Transit 25 There are 80,000 registered trucks in Afghanistan with capacities varying from 5 to 50 tons. The road transport industry in Afghanistan i s not too different in ways and means o f operation when compared to similar industries in Pakistan and India, but very different in operational means when compared to Iran or to the trucking industries in the CIS countries. The industryis based on traditional means o f ownership and collateral financing, and on regulations going back to 1967 (and older). Transport operates in an informal environment-and traditional social pacts ensure that applicable norms are observed and enforced. As a result, the Afghan road transport industry satisfies the traditional Afghan demand and has little or no participation inthe internationaldemand for transport, within, and through Afghanistan. 26 The local freight-forwarding industry existed and was very active prior to 1975, but i s nonexistent today. There are no norms o f accreditation for freight-forwarders and the few domestic agencies are only acting on commission to secure transport capacity or return-hauls. However, post 9/11, the international freight-forwarders are operating in Afghanistan, through foreign operators and financial instruments. There i s practically no domestic participation inthese operations. These international operations are "facilitated" by the informal border transit payments and options; the extent o f this facilitation varies from border to border. 27 The "single" language and use o f local characters, and the non-conformity to international formats o f all documents i s a substantial barrier to foreign trade. Discharge o f imported consignments requires about 26 steps and may need a query from the office o f origin. Afghan transport documentation and procedural requirements may vary intransit provinces-this inconsistency i s often relatedto local requirements. 28 The Ministryo f Transport (MOT) manages the government-owned vehicle fleet (buses & trucks) and regulates the private sector transport industry. It has two parallel structures to deal with government-run and private transport services, with an overarching central hierarchy which provides oversight and planning for public and private sector operations. Further details are given inAttachment 7. MOT owns at least 14 of the Afghan State Owned Enterprises (ASOE). More than half o f these ASOEs compete with the private sector trucking industry.The MOT collects an estimated USS50 million per year through a transport "commission" (tax) on road transport-it i s not clear if (and how) this, or a part o f this, revenue i s remitted to TISA's central revenue fund. MOT'S present institutional structure and mandate requires an urgent review to enable it to develop better policies and implementation capabilities which support TISA's Customs and Trade Facilitationreforms. 'The1344 (1965) Law on the Basic Administration ofAfghanistanprovidesthat the Ministry of Commerceis responsiblefor the `subscribing to the development of national income' and `regularizing the imports and exports in the interests of the national economy'. Underthis law, the Ministry of Finance i s responsible for the `collection and regulation of the income of the state'. Technical Annex: Emergency Customs Modemization & Trade FacilitationProject Page 6 (vii) Government Management Of Customs And Transit 29 Presently, government management o f customs and transit enabling environment i s fragmented amongst the Ministries of, Finance (MOF), Commerce (MOC), Interior(MO1) and Transport (MOT), and the Afghan Chamber o f Commerce (ACOC), creating obvious inefficiencies in securing customs and trade revenues and in facilitation o f trade and transit. C. TISA's CustomsModernizationand Trade FacilitationReforms (i) ObiectivesOfReform 30 The objectives o f the TISA's Customs modernization, and trade facilitation plan are to secure revenues, protect society, and facilitate trade and thus economic development and job creation. (ii) ProgressOnReforms 31 The Five Year Plan - The Afghanistan Customs Department (ACD) in the MOF has prepared a Five Year Plan (FYP) in July 2003 to achieve TISA's objectives and its focus i s on: increasing revenue collection; improving clearance times; bringingCustoms tariff, exchange rates and valuation in line with internationally accepted practices; enabling remittance o f all Customs revenues collected in the regions to central treasury; improving the key Customs infrastructure to a standard that allows for proper enforcement o f Customs controls; re-organizing, and re-building capacity o f the Kabul and Regional Headquarters to hlly control Customs activities; building a stable and comprehensive legal framework for Customs; and establishing effective enforcement controls. 32 Restructuring of Kabul Customs Headquarters - ACD i s inthe process o f implementing civil service reforms approved under the Priority Reform and Restructuring Decree (PRR). Its PRR proposal was developed in consultation with the Independent Administrative Reform and Civil Service Commission' (IARCSC). The ACD was the first department/agency to have its reform proposals approved by the IARCSC. This i s significant not only for the department, but for the civil service as a whole. Further details are given inAttachment 8. 33 Revision of and the New Customs Law -The new Customs tariff regime has been approved by the cabinet on October 29, 2003 after wide discussion with other government ministries and the trade. The new tariff structure has four bands (0, 5, 10, 20) and requires uniform country wide use o f the daily Central Bank exchange rate invaluations and assessments. It is undergoing the final legal scrutiny by the Ministryo f Law and Justice, before being decreed by the President. Concurrently, a draft o f the new Customs Law is also under discussion with MinistryofLawandJustice. 34 Re-stafing and building capacity within the ACD - The Deputy Minister for Customs and Revenue has been in place since June and has started the process o f intemal selection and fresh recruitment to re-skill and re-staff the ACD. A new Director General o f Customs was appointed in the second week o f October to relieve the Deputy Minister o f his dual charge. Negotiations were held between ACD and the heads o f both Pakistan and Iran Customs to agree The IARCSC is the agencyresponsible for approvingPRR proposals, for allocatingfunds from the Civil Service ReformFundsfor employeestransferredto higherinterimsalary scales (referredto as InterimAdditional Allowances- IAA) andfor providing some modestsupport for equipment. Technical Annex: Emergency Custom Modemization & Trade Facilitation Project Page I on a training and capacity building programs for ACD officers-these arrangements are near finalization. 35 Re-stafJing and Introduction of revised Customs Clearance Procedures and automation at Kabul A/P Customs and Kabul ICD - Customs staff in Kabul Airport Customs and Kabul Customs House has been rationalized-some transferred and some new staff hired. The retrained Customs staff i s implementing the new streamlined customs procedures-including the revised interim Afghan Customs Clearance Document (a Single Administrative Document), valuation (with the database supplied by the ACOC), and computerization o f the Customs declaration data. These procedures are also being rolled-out into the regional Customs head quarters with assistance from Bearing Point (and funded by USAID). 36 Customs Brokerage Training - Formal customs brokerage i s being developed in the private sector to over come the conflict-of-interest arising from customs officers acting both as facilitatorhrokers and then assessors. Inaddition to regular trainings, a self study guide has been developed and the first batch o f examinations for Customs Brokers i s scheduled for December 2003, 37 Automation of Customs Declaration - ACD has agreed with UNCTAD to start the phased implementation o f its Automated System for Customs Declaration (ASYCUDA). The benefits o f this include: increased revenue; reduced /simplified number o f documents; streamlined, transparent procedures; equitable decision making; improved clearance times; reducedtrade costs; and timely and reliable trade statistics. ACD officials have visited Iran to see the Iranian ASYCUDA system in operation. The Iranians are prepared to offer technical assistance and training-including the donation o f a Persian translation o f the system with reference tables, tariffs, and reports. 38 MOC to undergo PRR - MOC has started its institutional restructuring process and i s preparing the first stage application to the IARCSC, as well as formed a PRR worlung group assisted by USAID, GTZ, and IDA. The Minister o f Commerce has shown commitment to reform the Ministry and reorient its activities to those o f a state trade regulator and facilitator. M O C has shown willingness to rationalize the role of state-owned enterprises active in the customs and related transit environment. Further details are given inAttachment 9. 39 MOC CG Working Groups - MOC has established six working groups on trade and Investment with the assistance o f Bearing Point (funded by USAID). These working groups are: Trade Regime and WTO Accession; Administrative Barriers to Trade and Investment; Trade ad Legal Framework; Export Promotion; Chamber o f Commerce; and Women's Entrepreneurial Development. These working groups are assisted by USAID and IDA, and are likely to be assisted by GTZ and DFID. 40 Synergies between MOC and MOF on customs and transit/trade facilitation issues - MOC and MOF are improving coordination on Customs and transidtrade facilitation issues, and are also broadening this dialogue to include Ministry o f Interior and Ministry o f Transport, to clarify roles and responsibilities in support o f the overall Customs modernization and trade facilitationreform objectives. Technical Annex: Emergency Customs Modemization & Trade Facilitation Project Page 8 (iii) ReformImplementationStrategy 41 Despite these credible efforts, TISA realizes that the reforms remain a Herculean task, and needs a careful implementation strategy to accelerate the process. Key principles o f this TISA strategy are as follows. Clarification of, and securing, the enabling environment for customs to achieve its strategic role in the development and reconstruction o f Afghanistan-through appropriate legislation, and an agreement with MOC, MOT, and MOI on respective roles and responsibilities. Better coordination and enhancement o f the donor assistance to help focus the valuable but scattered inputs to implement the Five Year Plan without wasting resources due to overlappinginvolvement. Using the national budget as a tool for implementing the Five Year Plan objectives. Improving the recipient capacity within the ACD and the MOC-focus on human resource development. Reaching agreement with regional customs administrations (particularly Iran and Pakistan) to assist intraining and assistance on establishing the modem ACD. Providing a suitable work environment for the developing human resource- improve office buildings, provide reliable power and other utilities, improved communications and suitable level o foffice automation. Establishing a central customs training center and a Bureau o f Standards and Metrology with adequately equipped laboratories. Immediately rehabilitating and improving the key busy border facilities and ICDs to not only improve the environment for customs and trade but also improve the relationshipbetween the border provinces and Kabul. (iv) TISA's Request To IDA 42 TISA has requested IDA'Shelp in the overall policy and strategic coordination o f the reform and inimplementing the Five Year Plan objectives including key support inthe following areas. 43 Customs - Policy and overall strategic framework; performance based Budget management; customs automation (ASYCUDA); implementation advisors (officers fi-om various customs services to work with Afghan line-staff); A C D HQrestructuring implementation (PRR implementation support) and roll-out to regions; infrastructure (regional ICDs and border facilities, HQoffice, and Regional offices); information and communications infrastructure; and incremental operating costs duringthe project period. 44 Trade Facilitation - Policy and overall strategic fi-amework for restructuring including support to M O C PRR; alignment o f national trade documents; transit treaties; Bureau o f Standards and Metrology (through UNDO); incremental operating costs and some infrastructure and information and communications support; WTO accession assistance through UNCTAD; rationalizationo f the role o f MOC's state-owned enterprises; developing the role o f private sector inmanagement o f transit facilities; benchmarking o f trade and transport logistics costs and time; and, a review o fMOT'S organizational structure and the transport regulatory environment. Technical Annex: EmergencyCustoms Modernization & Trade Facilitation Project Page 9 45 TISA has also requested IDA to provide emergency finances for implementing some urgent measures that form part o f its tax administration business plan. This local taxation reform complements the overall customs and trade facilitation reforms. 11. IDA RESPONSE AND STRATEGY A. IDA'STransitional Support Strategyfor Afghanistan 46 IDA's Transitional Support Strategy presented to the Board in March 2003 focuses on four areas: improving livelihoods (employment generation, community development, and the rural economy including water resources management); fiscal strategy, institutions, management (budget, role o f MOF, revenue and expenditure arrangements, central-local fiscal framework); governance and public administration reform (role o f state, financial transparency, good governance o f public administration, civil service reform); and enabling private sector development (business climate, financial sector, infrastructure, regulation, and trade). B. Rationalefor IDA's InvolvementinCustoms andTrade Facilitation (i) Global Expertise, "Long-Haul" Partnership, And ProgramLeverage 47 The proposed project contributes to achieving progress on three o f the four focus areas o f the IDA'STransitional Support Strategy for Afghanistan. Supporting the Customs reforms will help secure sustainable revenues, improve budget management, increase financial transparency, implement civil service and public administrationreform, and improve governance. This coupled with the transit and trade facilitation reforms will help improve the enabling environment for trade (infrastructure, regulation, rules and procedures) and improve conditions for private sector development. 48 The Bank has developed considerable expertise in assisting countries to streamline their customs and transit regimes, and reducing trade costs-at present it i s undertahng 80 trade facilitation projects in developing countries worth US$4,6billion. The Bank i s also a key partner inthe UNtrade facilitation initiative on land-locked countries. Similar on-going Bank programs in some o f Afghanistan's neighboring countries can help the development of beneficial regional and bilateral integrationinitiatives for customs and transit. 49 Through separate projects, IDA i s assisting TISA in: its overall public administration and civil service reform; its overall fiscal strategy (and i s preparing a first budget support operation for TISA during this FY); and, in the development o f its emergency communications. These parallel interventions in related areas, will leverage the IDA'Sassistance through this proposed project inthe various policy areas, thereby improving the chances o f success. 50 TISA's customs modernization and trade facilitation reform i s seeking a few "quick- wins" but realistically has a ten year horizon. To complete this reform implementation, TISA needs a partnership that can provide reliable long-term support and guidance. IDA'S programmatic focus and ability to do rapid follow-on projects, when lending for key structural and financial reforms, can help provide the necessary long-term continuity required for this reform agenda. Technical Annex: Emergency Customs Modemization & Trade FacilitationProject Page 10 (ii) RoleOfOtherDonors 51 MOF/ACD convened and hosted the first donor meeting on Customs in Kabul on October 18, 2003. This was attended by the Bank, IMF, USAID, DFID, and EC. ACD stressed the need for improved donor coordination in support of the Five Year Plan to avoid wastage of resources and to accelerate the implementation of reforms. Details of donors and the areas of the Five Year Plan they are supporting (including the current known level of funding) are summarized inAttachment 10. A summary of the main activities beingundertaken by the various donors incustoms and transit reformi s as follows. 52 DFIDwill provide technical assistanceof the following nature: advisory; training (codes and practices, ethics, communications skills, effective management); change management programs; management development (personnel management and administration, selection and recruitment aligned to payroll, performance management-primarily at HQbut later inthe border provinces); and humanresource and institutionaldevelopment. 53. USAID will provide technical assistance of the following nature: implementation and operations (financial controls related to customs collection, valuation and classification, procedures and documentation-passenger management, exemptions, and single administrative declaration document, Customs code-legislation, rules and orders, procedures, Customs brokers, right-sizing human resource); and, enforcement (border control and management, curbing drugs, contrabands, and corruption-through an arrangementwith UnitedStates Immigration, Narcotics, and Law Enforcement). In addition to the above, USAID may also finance communications equipment (as required) intandem with the proposed IDAproject. As part of its on-going support to TISA on Economic Governance in Afghanistan, USAID i s also supporting MOC in trade facilitation to: analyze the trade system and assess MOC's capacity building needs; enhance legal and regulatory framework o f trade; build capacity in international trade; and, enhance trade environment by reforming trade-related activities. EC will provide technical assistance of the following nature: transit development (political and diplomatic implications), and transit facilities-preferably at the border; and systems and procedures-with the aim of "free movement o f goods within the rules". 54. IMF will provide technical assistance of the following nature: review and guidance on overall Customs modernization and associated revenue mobilization plan and proper sequencing of donor assistance(incoordination with IDA). C. Lessons Learned andReflected inthis Emergency Project (i) ReinforcingPolicyActions 55. Bank experience suggests that projects of this nature require coordinated and mutually reinforcing action in many policy areas. Therefore the proposed project's design will aim to integrate the efforts of relevant ministries and donors involved in the reform program. At the same time the project team will try and leverage the outcomes of this project through other IDA and donor projects in relevant areas. At TISA's request the project will finance some key emergency assistance for implementing the accompanying overall tax administration business plan. Improvements on overall local tax administration will cause less reliance on customs revenue, and will keep cost o f local productionat par with imports. Technical Annex: Emergency CustomsModernization & Trade Facilitation Project Page 11 (ii) PersuasionRatherThanImposition 56. Although the outside perception can be o f a weak and poorly organized customs and trade administrative environment, compoundedby poor infrastructure, and overcrowding o f many facilities, reality i s somewhat different-there i s a functioning control system, albeit different from what would be expected in other environments. It is critical to realize that while a social pact has enabledtrade to flow inan environment o f chronic conflict, it has not adapted well to the needs o f a modem functioning sovereign state. It lacks the ability to efficiently secure revenue for TISA, to guarantee against movement o f contraband, or to facilitate modern trade. 57. It is important that the development strategy should, to ensure ownership and sustainability, identify and buildupon the strengths o f the Afghan society, while simultaneously seeking an improved foreign trade environment. Given that new management (often without previous knowledge o f customs) i s being brought in, many new customs officers will be recruited and trained, new systems are being introduced with technical advisers, trainers and mentors, this i s a suitable time to introducenew concepts and standards. (iii) Including;ThePrivateSectorStakeholders 58. The trade facilitation work plan for the project will include the principle of influencing a gradual change from informality to formality in the adoption o f modem options for cross-border transport operations, bonded systems for freight-in-transit, insurance and financial trade practices; as well as ensuring creation o f avenues for the private sector so that they have an equal, if not higher, stake inthe formal system. The political and "informal" realities o f transit in Afghanistan cannot be ignored. Cooperation o f the private sector duringthe reforms will be a key to success. The project will need to establish a trade-off between current privileges o f the private sector under a status o f informality and the potential advantages under a more formal and modem system o f governance. This in turn will play a key role in eradicating the current informal smuggling and irregular practices. Involving the private sector is not to be restricted to gaining their good-will. This has to be supplemented by capacity-building and training targeting Human Resource development and institutions. (iv) FlexibilityInProiect Design 59. Given the urgent needs in Afghanistan and the fact that TISA's credibility with the Afghan people i s at stake, the project design is flexible to enable rapid start-up and implementation, including provisions for review and retargeting finances as project implementation proceeds. Issues such as ownership o f border facilities, overlapping and unclear institutional roles and responsibilities will be dealt with during the project, in parallel with the rehabilitation of the critical customs and related transit infrastructure. A detailed best-practice "Customs and Transit enabling environment and objectives matrix" has been prepared and discussed with TISA that will form the basis o f mapping the existing institutional roles (policy) and responsibilities (implementation). This will also form the basis for subsequent discussion and agreement on the revised roles and responsibilities duringthe project. Further details are given in Attachment 3. (v) Use Of UNOPS For RapidProiect Implementation 60. At this time ACD/MOF (or MOC) does not have the project management capacity to implement the project. Therefore it has proposed using the United Nations Office for Project Technical Annex: Emergency CustomsModemization & Trade FacilitationProject Page 12 Services (UNOPS) as the implementation consultants. A comparable arrangement i s worlung successfully inother IDA-financed projects inAfghanistan, where timely delivery i s critical. (vi) Monitoring 61. An essential aspect o f the project relies on the monitoring o f the performance, seen as (i) an indicator o f project efficiency in terms o f trade facilitation and productivity o f the ACD and other relevant govemment or other agencies, and private operators, (ii) a basic calculation method o f the benefits gained through project implementation, and (iii) a tool for benchmarking and establishing regional and international comparisons. Inaddition, the indicators will, as experience shows under other projects usingthe same methodology, increase ownership over the project, as they introduce a certain element o f competition. 111. THE PROPOSEDPROJECT A. Project Objectives 62. The project development objective i s to: provide TISA emergency assistance to start establishing a more efficient customs and transit regime. This will be a first step in support o f TISA's short term goal to increase the collecting capacity o f customs and to reduce smuggling and irregular practices, and the medium to long term goal o f decreasingtransaction costs to trade. The project will achieve this through improvements in: (a) key customs and related transit infrastructure and communications; and, (b) the capacity for customs and transit administration. This will lay the basis for a functioning customs service and facilitation o f Afghanistan's international trade. At the same time there are substantial risks both within and outside the project's influence that could easily limit outcomes. This is a highriskproject both interms o f the current security situation in Afghanistan and the potential internal resistance by the current political and informal "business monopolies". Table 1:ProposedInvestmentsand OutcomesBeingSought DesiredOutcome Investment,US$ million Improvements in key customs and transit related infrastructure and communications 21.3 Improvements in the capacity for customs and transit administration 8.7 Improvementsto local tax administration 1.o Total 31.0 63. The project's performance will be measured through progress on the following indicators: Customs revenue collected; trade volume; total number o f customs declaration; total number o f customs staff; declaration per staff; transit costs to trade. A detailed table o f performance indicators, their monitoring frequency, and source o f data, are provided in Attachment 11. These performance indicators as measured at national level will establish the gains in productivity brought inparticular by the project. At the local level, a single indicator at selected pilot sites (border and inland clearance locations) will provide a simple measurement o f the time for clearance. 64. The principle i s to measure the time between arrival and departure, with no consideration for the different steps involved. All the processes are therefore captured, including those over Technical Annex: Emergency Customs Modernization & Trade Facilitation Project Page 13 which Customs would seemingly have little or no control (for example, time taken by the immigration authorities to check passports, or time taken by a broker to prepare a declaration). However, as the result shows the average aggregate time-which i s the main concern o f the industry-improvements will be reflected inthe average time for clearance. Inaddition, Customs are expected, during the project, to take facilitation measures which will increase the speed o f work involving other agents, such as brokers. Experience shows that the administration i s thus rapidly able to identify the bottlenecks and take remedial action. If delays persist due to the activity o f other agents and administrationcannot be reduced, the A C D will be ina better position to seek action at higher government level. This approach, was for the first time used under the Trade and Transport Facilitation in southeast Europe program (TTFSE), and has proven highly successful, to the extent that the serious monitoring by the administration o f their performance in itself led to rapid improvements. 65. Very little data i s available at this stage in Afghanistan. Some base line data for these indicators has been assembled, but it i s purely indicative. These performance indicators and the project outcome monitoring indicators will be reviewed after the project becomes effective and the project work plan i s being prepared. A plan will be finalized to track the achievement o f these project performance indicators and the time-bound values (including the revised baseline values) o f each indicator will be finalized inagreement with TISA. B. Detailed ProjectDescription (i) A Time-Slice OfThe Afghanistan Customs Department's FiveYear Plan 66. This project is financing a time-slice o f some o f the key elements o f the ACD Five Year Plan. This is in line with the agreed donor strategy. The strategic implementation needs for these key elements are more than the available financing. Therefore this project takes a programmatic approach by sizing the overall requirements for the key elements, where IDA assistance was sought, and then prioritizing the investments based on agreed criteria. 67. The total appraised requirements for implementing key elements o f the Five Year Plan over the next four and a half years, related to the two outcomes being sought by this project, are US$50.3million. Of this US$38.8million i s required for infrastructure and communications investments, and the other US$11,5million i s required for capacity building. The proposed IDA project will invest US$30million over the next three and a half years to start a phased implementation o f the overall appraised requirement and US$lmillion to support the accompanying overall tax administration reform. It i s expected that one, or more, o f the other donors will finance the gap. Should the priorities o f these donors change, IDA can consider fundingthe gap through a subsequent operation at TISA's request. 68. The project will assist ACD/MOF: in the constructiodrehabilitation o f physical infiastructure o f customs and transit; the procurement and installation o f all the ICT sub- projects-including design, supervision, and project management; and, provide technical assistance for ACD restructuring, Customs policy and strategy development, Customs legislation, ACD budget management, implementation o f border and inland control (including assistance from regional customs specialists), ACD's ICT project management, ACD assets management, overall project technical/content quality control and management, and other ad hoc advice (as required). 69. At TISA's request, duringnegotiations, the project will also finance some key emergency assistance for implementing the accompanying overall tax administration business plan. It was Technical Annex: Emergency CustomsModernization& Trade FacilitationProject Page 14 agreed that the unallocated amount o f US$1 million will be allocated to the emergency implementation o f the tax administration business plan, using the project implementation arrangements, for the following: automated tax administration system feasibility study; purchase o f required software (including licensing fees and required hardware); technical assistance for starting implementation o f the TISA's tax administration business plan; rehabilitation o f three provincial revenue administration offices; and incremental operating costs. The category reallocation request will be sent to IDA as soon as the surveys have been completed and a [disbursement] category wise requirement i s known to TISA. 70. The project will assist MOC: in the rehabilitation o f physical infrastructure in Kabul related to key departments working on trade facilitation and for developing the Bureau o f Standards and Metrology-including design, supervision, and project management; and, will provide technical assistance for, policy and strategy development for-and restructuring of- MOC, alignment o f national trade documents to United Nations Layout Key (UNLK),improving transit treaties and transport corridor agreements, implementation o f TIR, basic industry calibration capability-including some basic laboratory testing facilities for testing o f agro- industrial products, rationalizing the role o f MOC's ASOEs, developingthe role o f private sector in trade facilitation, review of MOT'S organization (transport regulatory environment), benchmarking o f trade logistic costs and time, and other ad hoc advice (as required). 71. The project will provide overall project implementation support to ACDMOF and MOC. (ii) Proiect Costs BYExpenditure Category 72. Project costs by expenditure category are as follows, Expenditure Category Amount US$ I Percentage Submoiect Grants 13.9 46 Goods 5.1 16 Consultant Services 9.7 31 Incremental Operating Costs 1.3 4 Unallocated (Improvements to local tax 1.o 3 administration) Total Project Costs 31.0 (iii) InvestmentCriteriaAndPriorities 73. The physical investments will satisfy the following basic criteria. (a) The objectives should be to introduce (i) decent work conditions, likely to promote job satisfaction, and generate an image o f professionalism and authority; (ii) smooth traffic flows, thus necessitating a rationalization o f the location o f buildings, and, within the facilities, o f the different work units (e.g., placing the examination bays inside the warehouses); and (iii)to ensure that physical infrastructure designs match the revised workflows. (b) With the introduction o f new procedures, there will likely be less physical examinations, thus requiring less space; some clearance may take place at TechnicalAnnex: EmergencyCustomsModemization& Trade FacilitationProject Page 15 importers' premises. Other than for the essential public needs, bonded warehouses should be owned and operated by the private sector (but approved by Customs). (c) Efforts should be made to linkthe documentary flow to the movement o f the goods to improve controls. The facilities, whether at the border or inland, should be guarded by gate officials, with permanent and adequate control over movements into and out o f the area. (d) Typically, clearance facilities should be located close to the final destination place where the goods will be used. At the border, the Customs processing facility should be as close as possible to the entrance o f the border zone, and, when not possible, there should always be a Customs check post at the immediate proximity o f the border line (in effect, next to the border police check point). 74. Immediate priorities for physical improvements incustoms and transit will be as follows. Rehabilitate a (temporarily limited) headquarters structure, to install a core management team and establish its credibility. This should involve outfitting, computer equipment linked into a local network, air conditioning, telephone and/or radio equipment. Establish at all facilities a gate control shed, with appropriate working conditions, and inparticular communications with the local management. Start separating the public and users from administrative positions, using counters, windows, and establishing secluded areas where the public will not be admitted. At borders: (i)separate traffic flows (pedestrians, minivans, and trucks), using concrete separators o f the width o f a traffic lane, with traffic marshalling preventing vehicles from stopping and jamming the area, and paving o f access roads and parking areas; (ii) establish Customs control booths close to the border line, with communications with the central unit; and (iii) whenever possible, introduce signaling directing different traffics to the appropriate lanes. At inland facilities, pave the parking lots and access roads, and reorganize the examinationbays within the warehouses. Rehabilitate the management buildings/sections and create separate areas for the public and the staff, with limited interface areas. Progressively introduce local computer networks, supported by (i)power generators and UPS, (ii)air-conditioning, and (iii)adequate security - for progressive automation and ASYCUDA implementation. Develop a telecommunications network (i)within the facilities, and (ii)with headquarters, and (iii) the local authorities and other agencies (in particular with the police). Establish a national Bureau o f Standards and Measures (BSM) with sufficiently equipped laboratories. 75. Immediate priorities for improvements in the capacity for customs and transit administrationwill be as follows. (a) Provide technical support for overall technical management o f the project. (b) Technical Assistance to support ACD restructuring and overall policy and strategy formation. (c) Appoint a budget officer in ACD to prepare, assist in procuring cabinet approval, and to monitor the recurrent and development budget. (d) Appoint a customs and transit legislation specialist-preferably with Iranian Customs Service background-to assist in the final Dari drafting o f the Technical Annex: EmergencyCustoms Modemization & Trade FacilitationProject Page 16 improvements to the legislation, rules and procedures, and in seeking approvals from Ministryo f Law and Justice. Start development o f and phased implementation o f ASYCUDA. Start training in (i)computer use, (ii) management o f control issues, and (iii) search techniques (it i s only at this stage that it would be effective to introduce sophisticated search equipment). Provide management support for implementation o f the information and communicationstechnology (ICT) sub-projects. Provide support to establish and operate the Bureauo f Standards and Measures TA to improve and assist in negotiating transit agreements and transit-transport corridor agreements. Assistance to implement the TIR Convention (including restructuring and rebuilding capacity o f the Afghanistan Chamber o f Commerce). Start work on re-aligning trade and transit documents. Start work on private sector cooperation and capacity issues in facilitating transit- transport and trade. Selective technical assistance for MOCrestructuring. project's phasedprioritized approach does not in any way imply "unfinished" or "low quality" facilities; it just means taking on rational physical investments and associated capacity building requirements in a holistic and prioritized manner, and deferring certain parts untilfurther financing is available. (iv) Retroactive Financing 77. At TISA's request, the project will retroactively finance sub-project grants, equipment, consulting services, and incremental operating costs for a total o f US$2.0million (6.5 percent o f total project cost) for expenditures incurred after September 30, 2003 in accordance with IDA procurement procedures (through UNOPS) and for the following purposes: rehabilitation and refurbishment o f ACD Kabul Headquarters including provision o f ICT goods and equipments, vehicles, technical assistance for ASYCUDA implementation start-up (through UNCTAD), chief technical advisor for the project (through UNCTAD), project preparation for Bureau o f Standards and Metrology, institutional survey/mapping o f MOC, other required technical assistance, and related incrementaloperating costs. C. InstitutionalArrangements and ProjectImplementation (i) InstitutionalArrangements 78. The project will be implemented by the Afghanistan Customs Department (ACD) o f the Ministry of Finance (MOF) over a period of 42 months. While certain sub-projects have already started, the overall project implementation i s expected to have started by the end o f February 2004. The project will be completed in August 2007 and the credit will be closed in December 2007. The ACD has proposedusingUnited Nations Office for Project Services (UNOPS) as the implementation consultant for the overall project. Project support to Ministry o f Commerce (MOC) will also be provided through UNOPS under its contract with ACDMOF. 79. Both, TISA's, and IDA'Sexperience with UNOPS in similar arrangements on other on- going projects inAfghanistan with Ministries o f Rural Rehabilitation and Development (MRRD), Public Works (MPW), and Irrigation, Water Resources and Environment (MIWRE) has been positive. Prior to agreeing to usingUNOPS as an implementation consultant on these projects, the Technical Annex: Emergency CustomsModemization & Trade Facilitation Project Page 17 IDA reviewed and concurred to the use o f the operating guidelines and procedures o f UNOPS (including financial management and disbursements) for activities executed by them. UNOPS i s presently successfully helping implement US$68million o f IDA (or IDA administered) financing to TISA with three ministries (and indirectly one other ministry-Ministry o f Martyrs and Disabled). 80. As part o f the project appraisal, the IDA reviewed UNOPS's capacity to undertake this additional workload. UNOPS Afghanistan has strengthenedits staff since M a y 2003, especially in financial management, disbursement, procurement and engineering. IDA i s also conducting an institutional and human capacity review and strategy exercise with UNOPS (Afghanistan) in December 2003 to help them to better respond to the upcoming implementation and local capacity buildingchallenges. 81. The project further proposes engaging (preferably through UNOPS): the services o f the United Nations Conference on Trade and Development (UNCTAD) through an interagency letter o f agreement for providing assistance on ASYCUDA development and implementation and on trade facilitation; and, the services o f United Nations Industrial Development Organization (UNDO) for assistance inthe development o f the Bureau o f Standards andMetrology. 82. UNOPS will assist ACD/MOF in implementing the construction o f physical infrastructure o f customs and transit, the procurement and installation of all the ICT sub-projects, and in the rehabilitation o f physical infrastructure in Kabul related to key departments in M O C working on trade facilitation and for developing the Bureau o f Standards and Metrology- including design, supervision, and project management. UNOPS will also engage the technical assistance for overall customs policy and strategic advice, legislation, ACD budgeting, border and inland control (regional customs specialists), ICT project management, and asset management. UNOPS will also procure all the vehicles for the project and provide overall project implementation support to TISA, as well as administrative and implementation support to U N C T A D and UNIDO. 83. UNCTAD will provide technical assistance to ACDMOF and M O C for overall management and quality control o f the project's technical aspects, and to MOC for provision o f consultants, conduct o f studies, and data collection inthe agreed trade facilitation areas. 84. UNIDO will provide technical assistance to MOC indevelopingthe Bureau o f Standards, Legal Metrology (weights and measures), and basic industry calibration capability, and some basic laboratory testing facilities for testing o f agro-industrial products. This assistance will include preparing a project proposal, detailing the infrastructure, equipment and technical assistance and training requirements during project implementation, and assistance during actual project implementation. (ii) ProiectWorkPlan 85. Once the project has become effective and prior to the signing o f any contractual agreements with UNOPS, and prior to the project launch workshop, TISA (ACDMOF and MOC) jointly with IDA, and in consultation with UNOPS, UNCTAD, and UNIDO, will prepare a detailed work plan for the first year and a half, based on a three and half years implementation horizon. This work plan will form a part o f the UNOPS contract and o f the agreements between UNOPS and UNCTAD and UNOPS and UNDO. Technical Annex: EmergencyCustoms Modemization & Trade FacilitationProject Page 18 86. Subsequently annual project work plans (PWP) will be prepared for the remaining two years. Each annual work plan will be finalized and agreed between the parties at least three months prior to the completion o f the period o f the last work plan. (iii) ProiectImplementationManual 87. A project implementation manual (PIM) will be prepared by UNOPS for the implementation o f the infrastructure and communications sub-projects and will be approved by the IDA and TISA. This manual will cover the following areas: project objectives, overall project management, sub-projects selection criteria, sub-projects design criteria, sub-projects project cycle and procurement procedures, disbursement and flow o f funds, financial management procedures including auditing, interagency coordination, local capacity building, sub-projects supervision, environmental and social safeguards management (including mine risk management), and monitoring and evaluation. A draft manual i s under preparation and will be finalized by February 15,2004. (iv) Capacity Building 88. The capacity o f the Afghan Civil Service in the counterpart agencies (ACD and MOC) will be developed under the project. The agreement between the implementation consultants and TISA will include specific provisions on the following: (a) establishing a joint project management unit with TISA; (b) obligatory requirement to train Afghan civil service counterparts; and, (c) promoting the Afghan private sector. The Project Implementation Manual will include details on the modalities to render operational these provisions. As part o f the performance review o f the implementation consultants (agreed inthe contract) TISA will include parameters to measure the progress on the transfer of the operational responsibility o f the project to the TISA counterpart staff. (v) Procurement 89. All procurements under this project will be undertaken by UnitedNations Agencies. UN Agencies can use their own procurement documents but must follow the IDA'SProcurement Guidelines and Guidelines for Selection and Employment o f Consultants for all works, goods, and consulting services procured under this project. Detailed procurement arrangements for this project are described inAttachment 1. 90. The first two works sub-projects less than US$300,000 (with at least one o f these three being less than US$30,000 in value) and, all works sub-projects greater than US$300,000 in value, will be subject to IDA'Sprior review. The first two contracts for goods through NCB and all contracts for goods estimated to cost the equivalent o f US$200,000 or more irrespective o f procedures, and all procurement through direct contracting will be subject to IDA'Sprior review. Consulting services contracts estimated to cost US$lOO,OOO or more for firms and US$50,000 or more for individual consultants, and any selection o f consultants, on a Single-Source Selection basis will be subject to IDA'Sprior review and approval. 91. UNOPS will submit quarterly Procurement Status Reports to the concerned ministries and to IDA within two weeks o f the next quarter inthe format which will be provided by IDA. Technical Annex: Emergency Customs Modemization & Trade Facilitation Project Page 19 (vi) Disbursement and Financial Management 92. The overall responsibility o f financial management and, disbursement lies with TISA. However, considering that the project is proposed to be implemented through UNagencies, who will make use o f the blanket withdrawal facility available to UN agencies, hence it will be the responsibility o f the UN Agency (ies) to undertake disbursement functions and to comply with the necessary accounting and other fiduciary controls. The use o f the Blanket Withdrawal procedure, however, does not preclude MOF from disputing direct disbursement requests made by the UN agency to IDA, at any given time. An assessment o f Financial Management, Disbursement and Audit arrangements was undertaken and the arrangements envisaged for the project are detailed inAttachment 2. 93. As implementation o f each project is also an opportunity of capacity enhancement, it is important that MOF remains involved in the financial management o f the Project, accordingly it will be the responsibility o f MOF, through its Grant Management Unit (GMU), to undertake the necessary reporting to IDA. To facilitate the work o f the GMUinthis regard, the UNagency will report to GMUon all the activities undertaken. The details o f timing and the formats o f the report will be included in the contract with the UN agency. The UN agency will also put in place a coordinator who will be responsible for coordination with the GMU before the project becomes effective. 94. Under this project, GMU's involvement i s restricted as it i s not likely to undertake day to day accounting. However, it is important that MOF undertakes an "assessment o f GMU's workload and its capacities to ensure that adequate staff i s available to manage its responsibilities effectively. 95. Project accounts will be consolidated centrally in the Ministry o f Finance. Inparticular, the Grant Management Unit (GMU), with support from the Financial Management Agent, will prepare consolidated Project financial statements for all sources and uses o f Project funds. MOF- GMUwill retainthe rightto sign and submit withdrawal applications to IDA. 96. Customs Financial Management - The project recognizes that financial management o f revenues collectedby Customs i s pivotal to the interests o f TISA and the success o f this proposed intervention. IDA has carried out an initial review o f the current processes in Kabul which has indicated the weaknesses in the system, specifically at the provinces and the MOF level and has made suggestions for improvement (refer to Attachment 14). These were discussed with the Deputy Minister o f Finance for Customs and Revenue, who briefed IDA that improvements in this area are beingcarried out by M/s BearingPoint (with USAIDfunding) not only inKabul are but also in the border provinces. He however requested that, inthe coming months, IDA should carry out similar exercises in all locations where customs was operating, and present himwith an independent report. The project will continue with these reviews and closely coordinate with USAID/Bearing Point. The project will be financing the automation o f customs processing which will also contribute to improved financial controls. USAID has also indicatedthat funds could be made available for any Financial Management improvements inthe future. (vii) Environmental And Social Safeguards 97. The project is not expected to have significant negative environmental or social impacts either individual or cumulative. The infi-astructure improvement and development activities will comprise buildingssuch as customs facilities and warehouses, as well as parking areas for trucks. No gas stations, or vehicle repair and service facilities, will be financed under this project. TechnicalAnnex: EmergencyCustoms Modernization& Trade FacilitationProject Page20 Activities to be undertaken under this project are not likely to involve any land acquisition or have adverse social impacts. No involuntary resettlement i s anticipated-there are no encroachments or squatters on the sub-projects sites. 98. Due to the assessed insignificant negative environmental and social impacts o f the proposed project, none o f the safeguard policies are triggered, and it i s rated as an Environmental Category C project. 99. Environmental Impacts - All physical infrastructure sub-projects are planned on existing Government land already available and in-use for similar activities (tax offices, truck parks, customs houses, check-posts, warehouses, transit facilities). No gas stations, or vehicle repair and service facilities will be financed under the project. In some cases, the project will help in improving customs and transit facilities in remote locations and in de-emphasizing the urban locations, as part o f the government strategy to get the clients (traders and transporters), and their goods (warehouses) and equipment (trucks and trailers), out o f the urban congestion. This will contribute to improve urban environments in addition to decreasing the security threat posed by such vulnerable targets being inlocations where human densities are relatively higher. 100. Land Acquisition And Resettlement - In terms o f the Environmental and Social Safeguards Framework (ESSF) agreed between TISA and IDA this project has been categorized as S-3-projects not expected to have any land acquisition or any other significant adverse social impact. Most o f these customs and related transit facilities-especially the border posts-are located in extremely remote places, with the exception o f some o f the customs houses which currently are located either in urban or peri-urban locations. In all such cases, alternate government owned locations are already available outside the urban centers and are often not in- use because o f the inhospitable environs-lack o f water and electricity, poor living conditions, inappropriate or run-down service infrastructure, and no communications. Because o f the provincial "controls" on customs and transit, all related facilities tend to be well guarded with entry restricted to officials and clients, and have no encroachments or squatters. However the project's implementation manual (PIM) to be prepared by UNOPS will include a free-standing guideline on land acquisition, and will include a process framework for managing any unforeseen land acquisition o f any type, voluntary or involuntary. If minor pieces o f land are needed in connection with construction, they can only be obtained through voluntary donations (local authorities do not have the funds to purchase land). The sub-project planning/appraisal format in the PIM will include a check-list recording any amount o f land donated, that the land i s free o f squatters or other encumbrances, and written proof that the land i s provided as voluntary donation. Confirmation o f voluntary surrender will be a criterion on the proposal review list and by supervised by the implementation consultants. Supervision missions will verify that these guidelines are being followed. 101. Indirect Social Benefits - To enhance immediate indirect social benefits o f the project, the project implementation team through the PIM will endeavor to maximize employment generation through the use o f labor based construction techniques to the extent possible. The project i s expected to improve the transparency and legitimacy o f customs, transit, and trade operations- benefiting the trade stakeholders (both large and small, rich and poor). Secondary and tertiary effects could include, increased security to legitimate small and medium tradershading enterprises, contributing to overall poverty alleviation. 102. Mine Risk Management - Sub-projects will not be implemented without appropriate mine-risk management. Current practices for mine risk management (evolved during field implementation) in Afghanistan have been robust. A procedure for Mine Risk Management in TechnicalAnnex: Emergency Customs Modemization& Trade Facilitation Project Page 21 IDA FinancedProjects has been approved by the Bank. This procedure-included inthe PIM- will be followed. All risk assessment and clearance tasks shall be implemented in coordination with the Mine Action Center for Afghanistan (MACA). 103. MOF Capacity for treatment of Environmental and Social Safeguards - Post conflict reconstruction and related required institution building in Afghanistan has been a slow and difficult task-given the depth o f destruction wreaked by 20 plus years o f chronic conflict and instability. The key fact that i s relevant for proper treatment o f safeguards in Afghanistan i s that de facto there i s (even now, almost 2years hence) very little government implementation capacity. Thus the approach adopted by this project is to require the use o f the overall policy framework that sets down criteria, and by incorporating compliance with this framework into the terms o f reference o f the implementation consultants (UNOPS) who will be managing the implementation o f the various activities. 104. In all construction activities funded under this project, the implementation consultants (UNOPS), for the Ministry o f Finance (MoF)/Afghanistan Customs Department (ACD), will ensure that the overall Environmental and Social Safeguards Framework (ESSF)-which provides general policies, guidelines, codes of practice and procedures to be integrated into the implementation-for IDA supported emergency reconstruction operations inAfghanistan, along with the agreed procedures for mine risk management in IDA funded projects inAfghanistan, is followed. 105. Consistent with the provisions o f the ESSF, a focal point will be established within ACD to deal with any potential safeguard issues, as part o f the overall supervision o f the implementation consultant's activities. IDA missions will be very frequent for this project, probably on a monthly basis for the first year. They will routinely include a safeguard specialist (i,e., at least 2 times per year), and safeguard performance will be assessed during annual programmingreviews at the country team level. (viii) Project Readiness For Implementation 106. Rehabilitation/Construction of Customs/Transit Facilities and ICT - The following priorities have been agreed with ACD/MOF. Phase Border or Inland 1 Locations I IIBorder 1 TorKham, SpinBoldak, Islam Qalla, Milach, Hairatan Inland Kabul, Jalalabad, Herat 107. The rehabilitation and refurbishment o f the Kabul A C D Headquarters has been started by UNOPS (with prior agreement o f ACD/MOF and IDA). The total cost for this (including infrastructure and ICT) will be approximately US$0.8million, and completion i s expected in six months. All Phase Isites except SpinBoldak have been surveyed, and physical civil works on each turnkey sub-project site can commence within 2-3 months o fproject effectiveness. Work has been started by UNOPS on detailed survey and preparatiodapproval o f final design and tender documents for the Phase Isites inconsultation with ACD/MOF. 108. Customs Automation - The preliminary feasibility study o f for ASYCUDA has been carried out and a detailed implementation plan prepared. This has included a series of workshops conducted by ASYCUDA specialist with ACDMOF. MOC, and traders. This study has concluded that ASYCUDA could be implemented very rapidly if the expected Iranian Technical Annex: Emergency Customs Modernization & Trade FacilitationProject Page 22 cooperation is forthcoming. The on-going Bearing Point implemented reforms will significantly reduce the development phase - in fact the project critical path will probably be constrained by the re-construction o f the physical infrastructure. 109. Technical Assistance -UNCTAD has already carried out initial assessment to design the technical assistance to be provided and can commence work as soon as the Project work plan has been agreed. Agreements have been reached with both Iran and Pakistan customs authorities for provision o f assistance to ACD including the provision o f long term technical specialists. UNDO has also expressed willingness to mobilize as soon as the project financing i s secure. 110. Project disbursements to UNOPS in the first 6 to 8 months are expected to be U S $ lSmillion. Over the same period approximately US$Smillion will be committed through UNOPS and an estimated US$2,3million will be actually paid out to vendors by June 2004 (US$0.9million for ICT, US$0.25million for vehicles, US$0.75million for civil works through sub-grants, US$0.3million in consultants' services, and US$O.lmillion in incremental operating costs). D. ProjectJustification andEconomicBenefits 111. The viability o f the project has been appraised on the basis o f both conventional economic costs and benefits and in terms o f its contribution to TISA's overall r e f o m strategy. Economic analysis alone cannot encompass the potential benefits that the project have, in reinforcing and widening the authority o f the Afghan government across the country. (i) EnhancedGovernmentRevenue 112. The overall result o f the project should be substantially increased government revenue- it will help provide the financial basis for a functioning Afghan state, by ensuring sustainable government revenue, through: (a) Improved and enhanced collection of customs duties, which are a relatively efficient means o f collecting such revenues. These are usually the major source o f government revenue for countries in which most activities are conducted in the informal sector, and where taxes on incomes, whether individual or corporate, are difficult to assess and collect. (b) Laying the foundations for the emergence o f an efficient and effective customs service. This can both widen the revenue net, by bringingmore o f the total trade into the official channels, and improve revenue collection. (c) Facilitating the transfer o f customs revenues from the provincial level to the central government (ii) Enhanced Trade and Economic Activity 113. The project, by facilitating the introduction o f modem customs and trade regimes will remove some o f the impediments to enterprise and help create the enabling environment for increased economic activity and inward investment. Increased customs revenue is the first fundamental objective o f the project, followed by the creation o f an enabling environment for increased trade as the second basic objective. Inaddition, a more efficient and effective customs Technical Annex: Emergency Customs Modemization & Trade FacilitationProject Page 23 service, with greater institutional capacity, could become an important frontline organization in the govemment's efforts to control the flow o frestricted or prohibited goods. (iii) EnhancedTransitFacilitation 114. Improved procedures and a more efficient customs service within Afghanistan could substantially reduce trade costs ifaccompanied by the streamlining o f the entire transit systems to allow a freer flow o f vehicles and reduced restrictions on trade. Afghanistan i s potentially a key link in transit routes from Central Asia to the Gulf and Arabian Sea. The development o f such routes could generate transit earnings for Afghanistan but their real value may be the leverage that they will provide innegotiatingthe terms and conditions for Afghanistan's own intemational transit. (iv) Overall Economic Benefits 115. The potential benefits from the project, if it i s successful in streamlining customs and transit procedures and systems, are very large inrelation to the expected costs: Truck time savings US$ 7.5 million Cargo time savings US$ 1.6 million Cargo loss reduction US$14.0 million Cargo handling cost reduction US$6.5 million Total benefits US29.6 million 116. These benefits may be underestimated, as they, assume an underestimated value o f cargo time, do not include imports on the Chaman to Kandahar route, and do not include the value o f the reduced management time o f importers. Even if the project achieves only 50 percent o f its modest targets, the project will still generate a substantial economic rate o f retum, on the basis o f these narrowly defined benefits. If the wider implications o f increased customs revenues to the foundations o f the state are included, the overall economic and social returns would be very much higher. (v) ImplicationsFor Revenue Collection 117. As the project will provide support for the development o f the customs service and infrastructure, as well as overall policy development within the Ministries o f Finance and Commerce, improved revenue collection by central administration remains an important immediate and medium term objective. Based on the rather crude trade volume figures available, and the draft revisedtariff structure, the total value o f imported commodities per year currently is in the order of US$2-3billion and the un-weighted average yearly tariff collected would be US$230million. However, to maximize duty collection in the medium term, it will also be essential to covert unofficial trade into official trade through improved compliance. Much o f this depends upon buildingcapacities within the MOF/ACDand MOC. 118. Further details on the project's justification and economic benefits are given in Attachment 12 and details on domestic revenue mobilization inAttachment 13. E. SustainabilityandRisks 119. The project supports the TISA and its objective o f developing an unitary state with (a) substantial power and responsibility vested in a central government, and (b) substantial Technical Annex: EmergencyCustoms Modemization& Trade FacilitationProject Page24 domestically generated resources available to fund the basic functions o f the state. The project will be implementedthrough a wide range o f activities undertaken at locations around the borders o f Afghanistan. The project must be considered as highrisk in terms o f both the present security problems within Afghanistan and the potential resistance to the basic aims and objectives o f the projects. The project has been designed to minimize the potential risks and to mitigate the adverse consequences. (i) SecurityRiskManagement 120. The overall security situation o f Afghanistan i s far fiom stable and some o f the main Customs' posts are located in areas o f high insecurity. The project cannot pretend to be able to control this risk but it i s designed to try and ensure that certain risks are managed to improve the sustainability o f the project. Table 3: SecurityRiskManagement Risk RiskManagement Insecurity prevents the The project will select the more secure locations for the first phase o f construction o f facilities and constructioniimplementation. Itwill encourage labor based construction to implementation of the increase localemployment and localbeneficiaries as a means o try and improve project security during construction. Subsequentphases o f constructioniimplementation will depend on the security positionon the maintrade routes. Assets are destroyed, once Theproject will coordinate withthe local"Provincial ReconstructionTeams" provided. The ICT facilities, (PRTs), constituted by the coalition forces, which are there to provide a secure including the VSAT and and enabling environment for reconstructioninthe various regions o f Microwave links, could Afghanistan, both during and after construction. The Project will also become potential targets, coordinate with the newlytrained borderlcustoms police o fthe Ministry o f especially outside o f Kabul. Interior as they become ready to mobilize at the border posts. 121. Ultimately, however, it has to be accepted that outlying facilities o f the Central Government, such as Customs' posts, may be targets o f disaffected groups and the only lasting solution will be the overall reduction o f insecurity within Afghanistan. (ii) OutcomeRiskManagement 122. The successful implementation o f the project's objectives will almost inevitably impact upon a wide range o f interest groups, for example: 0 Increasing customs revenue collection by central government will diminishthe resources o f the provincial beneficiaries o f the present system. 0 Increasing the efficiency o f the customs service and reducing the discretionary aspects o f the present system will result inprivate traders paying higher levels o f customs duties. 0 Extending the coverage o f the formal trade sector may negatively impact those traders presently working through the informal system. 0 Streamlining transit procedures may reduce multiple cargo handling and transit costs, but may also reduce employment at border crossings. Technical Annex: Emergency CustomsModemization & Trade Facilitation Project Page 25 123. The project i s designed to bring about a structural change within Government and Afghanistan's external trade system. There i s the risk, therefore, that the implementation o f the project will be resistedby some or all o f the interest groups who may be negatively affected. The potential risks are recognized and implementation will involve the private sector and other interest groups to influence a gradual change fkom informality to formality and to minimize the economic and social effects when the new regulations and systems are implemented. Basic to the design philosophy i s the attempt to change potential zero-sum situations into win-win solutions, Table 4. Table 4: Outcome RiskManagement Risk RiskManagement Increased smuggling and loss o f Increasedcustoms efficiency and transparency will lower trade revenue costs and reduce the incentive to avoid the official system. Improved customs controls and extended spatial effectiveness will increase the costs o fthe unofficial system Resistance by the major vested Provide alternative opportunities for financial gain through interests at the provincial level private participationinthe management and ownership o f warehousing and transit facilities Resistance by Afghan truckers to Renegotiation with transit neighbors to increase the level o f through transit reciprocalaccess. Increasing overall economic activity will provide alternative transport demands Corruption within the customs service New staff, ethics training, improved work environment and improved salaries 124. However, it has to be accepted that the project may not be able to compensate all possible interest groups, and some resistance to the changes may be expected. The results o f a successful outcome to the project are central to TISA's overall objectives, and thus there i s likely determined efforts to overcome such resistance including, perhaps, specific employment policies at some of the border crossing points. (iii) ImplementationRiskManagement 125. This would be a difficult project to implement even without the security issues in many o f the border areas. The project combines investment in infrastructure along with policy reform, major changes in work methods, many activities, two ministries and multiple donor agencies. Project supervision costs will needto be higher than the IDA average, especially duringthe initial period. Inaddition, the project implementation arrangements have been designed to minimize the immediately identifiable risks. TechnicalAnnex: Emergency CustomsModemization& Trade FacilitationProject Page26 Table 5: ImplementationRiskManagement Risk RiskManagement Infrastructure constructed but Provision of technical support inthe critical reformareas. Close improved systems not introduced monitoring o f implementation, especially the ACD restructuring and the legislative andtariff reform. Annual project work plans to (a) support to reforms that are progressing and are mutually reinforcing, and (b) revise the strategy for those areas that are progressing less well. Information and Communications A detailedtechnology transfer plan for all ICT components will Technology (ICT) i s not technically beprepared andthe progress will be monitored regularly by the sustainable ICT Project Manager and ACD DeputyProject Manager. ACD/MOF will formulate with Kabul University a summer intern scheme with permanent employment prospects. This, and the ability to pay higher salariesto ICT staff, could mitigate the ICT capacity constraints. During the project the service contractor (andor UNOPS) will operate/maintainer o f ICT and related facilities. Lack o f adequate donor coordination Overallresponsibility for ensuring a concerted approach rests inprogramimplementation with with TISA but the implementation arrangements are designedto resulting fragmented support maximize the potential for donor cooperation - an agreed reform and support program, common implementation arrangements, a joint project steering committee andjoint supervision (ii) MonitoringandEvaluation 126. Project monitoring will be based on intensive IDA supervision and quarterly progress reports from ACDNOF and MOC to IDA. IDA supervision frequency will be at least once every four months, with subject specialists visiting as and when required. The quarterly progress reports will include the progress on the annual project work plan and overall progress on the project outcomes inaccordance with the project's monitoring indicators. Detailedproject monitoring and performance indicators are given inAttachment 11. Attachment 1: ProcurementArrangements Page21 ATTACHMENT 1 PROCUREMENT ARRANGEMENTS A. GeneralDescription The project will achieve its objectives through improvements in: (a) key customs and relatedtransit infrastructure and communications; and, (b) strengthening capacity for customs and transit administration. This will lay the basis for a functioning customs service and facilitate o f Afghanistan's international trade. Table 1: ProjectFinancingSummary (US$ millions) Description Financing Amount Communications 1.6 Power 1.o ITEquipment 0.7 Vehicles 1.3 Equipmentfor Bureauof StandardsandMetrology 0.6 Incremental Operating Costs 1.3 Unallocated 1.o Total Project Cost 31.0 B. ProcurementMethods Procurement under the IDA Credit will be carried out inaccordance with the "Guidelines for Procurement under IBRD Loans and Credits" (January 1995, revised in January and August 1996 and September 1997 and January 1999) and "Guidelines for Selection and Employment o f Consultants by World Bank Borrowers" (January 1997, revised in September 1997, January 1999, and M a y 2002). Procurement o f goods, works and services will follow IDA'SStandard Bidding/Consultancydocuments. Attachment 1: ProcurementArrangements Page28 1 Sub-proiect Grants (US$l3.9million) Sub-project grants will finance the construction /rehabilitation o f physical infrastructure o f customs and transit for ACDMOF, and the rehabilitation o f MOC's physical infrastructure in Kabul related to its working on trade facilitation and to develop the Bureau o f Standards and Metrology. These works will primarily consist o f rehabilitatiodconstruction o f office buildings, dormitories, warehouses, pavementdroads, inspection sheds, water supply and drainage, generator sheds, guard towers, fences and boundary walls, weigh-bridges installation points, lighting for boundary walls and parking. The subprojects are expected to range between: US$lO,OOO and US$300,000 for the small repairs/construction works; and, more than US$300,000 and US$1.5 million for the larger rehabilitatiodconstruction works. A few sub- projects may cost up to US$3 million. Direct Contracting or Solicitation of Price Quotations UB0.9million) - Subprojects less than US$30,000 invalue can conduct procurement by soliciting quotations from at least three qualified local contractors or by direct contract with a qualifiedlocal contractor. National Competitive Bidding (US$3.0 million) - Subprojects ranging in value between US$30,000 and US$300,000 will be implemented by contractors selected through the National Competitive Bidding(NCB) Method. International Competitive Bidding (US$l0.0 million) -Since qualified contractors for works exceeding US$ 3000,000 are not available in Afghanistan, contractors, will be selected through the Modified ICB method, as per paragraphs 2.63 and 2.64 o f the Bank's Procurement Guidelines. The bidding documents will require bidders to satisfy the appropriately determined minimum qualification requirements in terms o f their experience as prime contractor in similar works, annual volume o f turnover, and liquidassets. Sub-projects estimated to cost $1million or more would be subject to pre-qualification. The biddingdocuments in each sub-project will stipulate that labor based techniques be given preference during construction, except where delivery deadlines or other special considerations specified in the bidding documents demand the use o f pre-fabricated construction techniques or non labor intensive techniques. 2 Goods (US$5.1 million) The project will finance information technology, communications, and power generation equipment for border and inland customs/transit facilities (computer hardware and software, VSAT/Radio communications networks, power generators, uninterrupted power supplies), miscellaneous laboratory testing equipment for the Bureau o f Standards and Metrology, office supplies, office equipment, office fumiture, and vehicles. Some o f the IT, communications, and power generation equipment will be procured on tumkey basis including installation, operation and maintenance for a stipulated period o f time. For reasons o f economy and efficiency, wherever possible, items that are similar in nature and are planned to be procured at almost the same time, would be grouped under one contract package and biddquotations would then be invited for the whole contract package. International Competitive Bidding (ICB), Intemational/National Shopping Procedures (IS/NS), and Direct Contracting(DC) procedures will be used for procurement o f goods. Attachment 1:ProcurementArrangements Page 29 International Competitive Bidding fICBi KJS$2.9million): This will be used for goods estimated to cost more than US$200,000 or local currency equivalent per contract. National Competitive Bidding (NCB) fUS$O.7 million): This will be used for goods estimated to cost less than US$200,000 per contract, following the criteria stipulated under paragraph 2.3. International/"ational Shopping (US$I.I million): This would be used for goods estimated to cost less than US$lOO,OOO per contract under the title o f under "Shopping procedures", simplified documents and procedures would be used for soliciting, receiving, and evaluating competitive quotations from at least three suppliers (inInternational Shopping, from two different countries). Direct Contracting (DC) Procedures (US$O.4 million):This would be used for goods estimatedto cost less than US$lO,OOO or equivalent per contract. 3 Consultant Services TcJS$9.7million) Consulting services to be procured under the project include those required for design, supervision, and project management o f the civil works and the technical assistance for overall project technical/content management, customs legislation, ACD budgeting, border and inland control (regional customs specialists), ICT project management, asset management, transit treaties, transport corridor agreements, TIR, capacity building o f ACOC, freight forwarding, transport legislation, trade !egislation, trade documents and procedures, training materials development, private sector cooperation initiatives, developing the Bureau o f Standards and Metrology, and other ad hoc advice. Consultants Services for the project will be procured through UNOPS, UNCTAD, and UNDO. UNOPS will be the prime implementation consultant for the project. UNCTAD will be hired for trade facilitation and UNDO will provide TA intheir respective areas o f expertise only, and will be administratively supported by UNOPS inAfghanistan. Qualit?/-and Cost-based Selection fQCBS)/Least Cost Selection (LCS) -(US$I million): Services through firms estimated to cost US$200,000 or more per contract will be procured following QCBS or LCS. These will primarily include services for design and supervision o f civil works. Selection Based on Consultants ' Qualifications (CQ@JS$O.8 million): Services through firms estimated to cost less than US$200,000 per contract would be procured based on Consultants' Qualifications. These will primarily include services for design and supervision o f civil works. Single Source Selection (SSS) fUS$l.S million): Services for assignments that meet the requirements o f the paragraphs 3.8 - 3.11 o f the Consultants Guidelines may, with Association's prior agreement, be procured following SSS. The selection o f all UN Agencies as the implementationconsultants for this category will follow this method. Individual Consultants (IC) fUS$6.4million): Individual consultants will be selected on the basis o f their qualifications for the assignment, in accordance with Section V of the Consultants Guidelines. Most o fthe TA for the ACDMOF and M O C will be procured following this method. 4 IncrementalOperating Costs (US$1.3 million) Incremental expenses incurred on account o f Project implementation and management, including the installation, operation and maintenance o f vehicles, computers and office Attachment 1:ProcurementArrangements Page 30 equipment, communication and insurance costs, temporary office structures, office administration cost, banking charges, utility charges, domestic travel and per diem, but excluding salaries o f the officials o f the Government's civil service, will be covered under the Project. C. Criteria Acceptable for NationalCompetitive Bidding(NCB) In order to ensure economy, efficiency, transparency and broad consistency with the provisions o f Section Io f the Guidelines, the following criteria shall be followed inNCB: standardbiddingdocuments approved by IDA (Association); invitations to bids to be advertised in at least one widely circulated national daily newspaper and biddingdocuments shall be made available to prospective bidders, at least 28 days prior to the deadline for the submission o f bids; bids to not be invitedon the basis o f percentage premium or discount over the estimated cost; bidding documents to be made available, by mail or inperson, to all willing to pay the required fee; foreign bidders not to be precluded from bidding and no preference o f any kind to be given to national bidders; qualification criteria in case pre-qualifications were not carried out to be stated in the biddingdocuments. Ifa registrationprocess i s required, a foreign firm determined to be the lowest evaluated bidders to be given reasonable opportunity o f registering, without any hindrance; bidders may deliver bids, at their option, either inperson or by courier service or by mail; all bidders to provide bid security as indicated inthe bidding documents. A bidder's bid security shall apply only to a specific bid; bids to be opened in public in one place preferably immediately, but no later than one hour, after the deadline for submission o fbids; evaluation o f bids to be made in strict adherence to the criteria disclosed in the bidding documents, ina format and specified period agreed with the Association; bids not to be rejected merely on the basis o f a comparison with an official estimate without the prior concurrence o f the Association; split award or lottery in award o f contracts not to be carried out. When two or more bidders quote the same lowest price, an investigation would be made to determine any evidence o f collusion, following which: (A) if collusion is determined, the parties involved would be disqualified and the award then be made to the next lowest evaluated and qualified bidder; and (B) ifno evidence o f collusion could be confirmed, fresh bids to be invited after receivingthe concurrence o f the Association; Attachment 1: Procurement Arrangements Page 31 (xiii) contracts to be awarded to the lowest evaluated bidders within the initial period o f bid validity so that extensions are not necessary. Extension o f bid validity would be sought only under exceptional circumstances; (xiv) extension o f bid validity not to be allowed without the prior concurrence o f the Association (A) for the first request for extension if it i s longer than eight weeks; and (B) for all subsequent requests for extensions irrespective o f the period; (XV) negotiations not to be allowed with the lowest evaluated or any other bidders; (xvi) re-bidding shall not be carried out without the Association's prior concurrence; and (xvii) all contractors or suppliers to provide performance security as indicated in the contract documents. A contractor's or a supplier's performance security would apply to a specific contract under which it was furnished. D. UNOPSas the primeImplementationConsultant The project will be implemented by the Afghanistan Customs Department (ACD) o f the Ministry o f Finance (MOF) usingUnited Nations Office for Project Services (UNOPS) as the implementation consultant for the overall project. Project support to Ministry of Commerce (MOC) will also be provided through UNOPS under its contract with ACDMOF. UNOPS has been selected by ACDMOF as it implementation consultant based on the following considerations. UNOPS i s already operational all over Afghanistan and has a proven record o f rapid implementation and positive management o f security issues duringimplementation . Being a UN Agency the Bank can easily arrange direct disbursement to UNOPS with TISA's concurrence hence removing impediments that often thwarts project implementation insuchpost-conflict environments. TISA can focus on the reformprocess rather than on project management. The financing mechanism does not circumvent TISA's budget mechanism and TISA i s the direct ClientIEmployer. Binding financial arrangements are put in place and sustainable funding commitment helps TISA better plan and implementreforms. Bank has the right to review all procurement and financial management procedures. Resources and overheads are shared between the various sub-project level activities; hence preventing duplicated effort or expenditure and diversion into non-productive activities. Continuity o f implementation arrangements i s achieved through use o f a single agency which contributes to overall cost efficiency, security o f project staff, development o f Local PS capacity through harmonization o f biddingdocuments, etc. Local, and foreign, private sectors are not excluded as UNOPS implements the subprojects and procures works, goods, and services through them. UNOPS can implement various parts o f the project across ministries that do not possess multiple implementing agencies. Based on the above advantages, the project supports using UNOPS as the implementation consultant for the overall project. UNOPS will also engage: the services o f the United Nations Attachment 1: ProcurementArrangements Page32 Conference on Trade and Development (UNCTAD)' for providing assistance on ASYCUDA development and implementation and on trade facilitation; and, the services o f United Nations Industrial Development Organization (UNIDO)" for assistance in the development o f the Bureau o f Standards and Measures. UNCTAD has a proven track record o f being a one-stop institution for capacity building activities relating to trade facilitation and i s the parent organization under which the Automated System for Customs Declaration (ASYCUDA) was developed and still operates. UNCTAD i s involved in 300 technical assistance projects in over 100 countries. Its Trade Logistics Branch (TLB) deals with: transport and logistics issues, including the Advance Cargo Information System (ACIS) program; trade facilitation issues, including Customs issues through (ASYCUDA); and, trade and transport-related legal issues. The Trade Logistics Branch counts on about 25 staff members, including project-dedicated staff, with a mix o f professional skills covering the following fields: transport and logistics, including terminal operations; transport software development and implementation; Customs reform and modernization; Customs software development and implementation; trade facilitation measures (institutional, legal, administrative and operational); transit agreement negotiations and implementation. This staff includes well-prepared engineers, economists, lawyers, Customs officers, system analysts and software developers, who provide substantive backstopping in the execution o f technical assistance projects worldwide. UNCTAD supplies ASYCUDA free o f cost, assistance with its country implementation. ASYCUDA i s currently successfully implementedin 84 countries-the best installations, such as those in the Philippines and Romania, are highly rated. Iran i s also using a Persian version o f ASYCUDA that were developed with assistance from UNCTAD/ASYCUDA. Due to the overwhelming similarity between Persian and Dari languages, TISA has requested that the Iranianversion o f ASYCUDA be adapted for use inAfghanistan. UNDO has been involved in assisting developing countries to establish capacity in the area o f standards, metrology, testing and quality (SMTQ) for close to three decades. In implementing UNDO'S core mandate o f supporting industrialization, the starting point for strengthening developing country manufacturing capacity, i s to be aware o f global and national standards, have adequate metrology (measurement capability) and access to testing facilities. As a result, in numerous parts o f the developing world, the standards institutions, metrology and testing facilities have either been started by UNIDO or received UNDO assistance in capacity development. UNOPS will enter into an interagency letter o f agreement with UNCTAD and UNDO prior to signingthe overall contract with ACDMOF and after the agreement i s reached upon the work plan (PWP) as described in the Technical Annex. The Bank will clear both interagency letter o f agreements between UNOPS and UNCTAD and between UNOPS and UNDO prior to the same being finalized and signed. ACD/MOF will sign an agreement will UNOPS only after the Work Plan(PWP) for the project has beendeveloped andthe interagency letters o f agreement have been signed, and after receiving the Bank's clearance. htm://ivw .unctad.oq lohlto:/iwww.unido.org Attachment 1:Procurement Arrangements Page 33 E. Procurement by Implementation Consultants The UnitedNations Agencies, as the implementation consultants, shall follow the Bank's Guidelines including the Bank's StandardDocuments for procurement conducted on behalf o f the Client. Bank's prior and post review requirements, as mentionedunder paragraph Gbelow, will be applicable to procurement carriedout by the implementation consultants. F. ProcurementPlanning Upon completion of the first PWP and prior to implementation of any sub-projects, issuance of any invitations to bid for goods/works or initiating selection process o f any consultants services, the procurement plan for goods, works and services shall be furnished by UNOPS to IDA for its review and approval, in accordance with the provisions of paragraph 1 of Appendix 1 to, Bank's Procurement Guidelines. The procurement plan shall be prepared in accordancewith the Bank's format. G. Prior andPostReview 1 Prior Review The first two sub-projects estimated to cost less than US$300,000 and, all works sub- projects greater than US$300,000 invalue, will be subject to Bank's prior review. The first two contracts for goods through NCB and all contracts for goods estimated to cost the equivalent o f US$200,000 or more, irrespective o f procedures, will be subject to Bank's prior review. Consulting services contracts estimated to cost US$lOO,OOO or more for firms and US$50,000 or more for individual consultants, and any selection of consultants, on a Single- Source Selection basis will be subject to Bank's prior review and approval. 2 Post Review All other contracts, not governed by paragraph G.l, will be subject to selective post- review by Bank during supervision missions. The project provides for audits to be conducted by independent auditors to be hired by the ministries for expenditures incurred as well as asset verification. In addition, the project provides technical audits by independent consultants for community constructionworks on a sample basis. H. Procurement Information UNOPS will submit quarterly Procurement Status Reports to the concerned ministries and to the Bank within two weeks of the start of the next quarter in the format which will be providedbythe Bank. The Procurement Status Reports will indicate: .. number of contracts signed so far, contract amounts, contractor's/supplier's/ consultant's . names, deliveryhontract completion dates; revised cost estimatesfor contracts yet to be processed; and, revised timings of procurement actions including advertising, bidding, contract award, and completion. Attachment1: ProcurementArrangements Page34 I. ProjectCostsbyProcurementMethods The project categories, their estimated costs, and proposed methods of procurement are summarized inthe following tables. Table 2: ProjectCosts" by ProcurementArrangements(US$ millionequivalent) Consultants Selection MethodIs Total Services Costs16 Expenditure QCBS 1 QBS 1 SFB I L C S I CQ 1Other I NBF Category Firms I I 1.0 I 0.0 I 0.0 I 0.0 I 0.8 I 1.5 I 0.0 I 3.3 (1.0) I (0.0) I (0.0) I (0.0) I (0.8) [ (1.5) I (0.0) I (3.3) Individuals I 0.0 I 0.0 I 0.0 I 0.0 I 0.0 I 6.4 I 0.0 I 6.4 (0.0) (0.0) (0.0) (0.0) (0.0) (6.4) (0.0) (6.4) Total 1.o 0.0 0.0 0.0 0.8 7.9 0.0 9.7 (1.0) (0.0) (0.0) (0.0) (0.8) (7.9) (0.0) (9.7) Figures inparenthesisare amounts to be financed by the Bank. All costs include contingencies. 12Includes subprojects less than US$30,000 invalue procured by solicitation o f price quotations from three qualified local contractors or by direct contracting with qualified local contractors. l3Includes goods procured using intemationalhationalshopping (ISNS) and directing contracting. l4Refer to Table 3 for details. l5QCBS = Quality- and Cost-Based Selection; QBS = Quality-based Selection; SFB = Selection under a Fixed Budget; LCS = Least-Cost Selection; CQ = Selection Based on Consultants' Qualifications; Other = Selection o f individual consultants (per Section V of Consultants Guidelines), Commercial Practices, Single Source Selection (SSS), etc.; N.B.F.=Not Bank-financed. Figures inparenthesis are the amounts to be financed. All costs include contingencies. l6All prices include contingencies Attachment1: ProcurementArrangements Page35 Table 4: Thresholdsfor ProcurementMethodsandPrior Review Expenditure Contract Value Procurement Contracts Subject to Category Threshold Method Prior Review (total value of to be prior review contractsinUS$ million) Sub-project Grants FromUS$30,000to NCB First two contracts (0.6) (Works) US$300,000 More thanUS$300,000 ICB All contracts (10.0) Goods Less than US$lO,OOO DC Nil Less than US$lOO,OOO Isms Nil Less than US$200,000 NCB First two contracts Equalto or more than ICB All contracts (3.6) us$200,000 Consultant Services Equalto or morethan QCBSiLCS All contracts (1.O) Firms us$200,000 All UNAgencies - sss All contracts (1S) UNOPS, UNCTAD, UNIDO Less than $200,000 CQ All Contracts estimatedto cost $100,000 equivalent or more.(0.5) Consultant Services Individuals IC All Contracts estimatedto cost $50,000 equivalent or more (4.0) Total estimated value of prior review contracts f21.17) J. OverallProcurementRiskAssessment Despite the UNOPS procuring on behalfo f TISA, the procurement riskwas appraised as highdue to the post-conflict environment, the geographically remote and dispersednature o fthe works, and the decentralized implementation. Therefore, frequent procurement review missions are proposed (once every four months) duringthe project implementation. Attachment 2: FinancialManagement, Disbursement,& Audit Arrangements Page36 ATTACHMENT2 FINANCIALMANAGEMENT,DISBURSEMENT,AND AUDIT ARRANGEMENTS Country Issues The World Bank has gained significant experience and understanding o f the financial management issues in Afghanistan from implementing several projects over the past year. The overall assessment is that though the country's financial management system i s not fully functional, especially to manage donor projects, appropriate mitigation measures in general and project specific, are being taken for this project. This will ensure financial accountability for project funds. Inan effort to strengthen key institutions, the World Bank i s financing a Financial Management Agent to assist the Ministry o f Finance and an Audit Agent to assist the Control and Audit Office. And the Da Afghanistan Bank is assisted by a team o f consultants funded by USAID as well as a team o f advisors under the IndianAid Mission Program. Strengths The commitment o f TISA towards accountability and transparency in its operations is one o f the greatest strength, as it provides confidence to the Bank management ensuring accountability and transparency in utilization of funds. The institutional mitigation measures referred to above reflect this commitment and will help inproper accounting and auditing o f financial transactions. Engaging of a UNagency (most likely UNOPS), will further facilitate reporting according to the bank's requirements. It will also facilitate the process o f disbursement to the suppliers and contractors. Weaknesses One o f the strength o f the project, i.e. engaging UNOPS, also becomes the weakness of the project, as it reduces the scope o f capacity enhancement o f the concerned departments inthe areas o f disbursement, accounting and reporting. However, as a mitigating measure, it is recommended that the Grant Management Unit (GMU) be made responsible for reporting. However as UNOPS will be undertaking the activities and also malung payments, it will be its responsibility to provide, in a timely manner, a detail report as required by the World Bank to GMU, Ministry o f Finance. After the necessary review and approval GMU will forward the same to the World Bank. This measure will further enhance participation as well as ownership in the project at the MOF level. FundsFlow The funds will flow from the World Bank account directly to UNOPS accounts under the blanket withdrawal facility. Under this arrangement an advance is provided to the agency, with a report on a quarterly basis on its usage and a forecast o f expenditures to be incurred in the next period. UNOPS will utilize the services o f UNDO and UNCTAD through a standard UN inter-agency agreement letter and pay them as well. All procurement will be carried out by UNagencies. Retroactive Financing At TISA's request, the projectwill retroactively finance sub-project grants, equipment, consulting services, and incremental operating costs for ACD o f US$2.0 million (6.5 percent o f total project Attachment2: FinancialManagement,Disbursement,& Audit Arrangements Page 37 cost) for expenditures incurred after September 30,2003 in accordance with Bank's procurement procedures (through UNOPS). In any case, as per the Bank's guidelines on emergency operations, any project expenditure paid prior to thefour months to the credit signing date, and more than 20% of the credit amount cannot be claimed as retroactive finance. The retroactive finance can be claimed only after the credit becomes effective. The claim will be admissible for the following purposes: rehabilitation and refurbishment o f A C D Kabul Headquarters including provision o f ICT goods and equipments, vehicles, technical assistance for ASYCUDA implementation start-up (through UNCTAD), chief technical advisor for the project (through UNCTAD), project preparation for Bureau o f Standards and Metrology, institutional survey/mapping o f MOC, required ad hoc technical assistance, and related incremental operating costs. UNOPS will utilize monies from the existing funds available with it under the on-going projects, and recover these costs from its first payment request under this project. UNOPS will maintain a proper accounting system o f all expenditures incurred in the above manner along with all the supporting documents for enabling IDA to verify these expenses. Accounting Policies and Procedures The Project will follow standard government financial management policies and procedures, including using the Chart o f Accounts developed by the Financial Management Agent to record Project expenditures. UNOPS will ensure that the quarterly reporting that it will undertake to MOF will facilitate integration o f expenditures incurred, into the Government accounts. The formats, o f these reports will be incorporated inthe contract agreement o f UNOPS. Project accounts will be consolidated centrally inthe Ministry o f Finance, inparticular, its GMU, with support from the Financial Management Agent, and consolidated Project financial statements will be prepared for all sources and uses o f Project funds. GMU which is ultimately responsible for accounting, has been managing a number o f Grandcredit projects for the last 9-10 months and has sufficient experience to handle such accounting and reporting responsibilities. It has also developed certain procedures and systems, that are very much inplace to ensure a systematic process of disbursement. As mentioned above, there are certain weaknesses inaccounting o f expenditures on a day to day basis and, these need to be worked on by the FM agent on a priority basis. Having said that, it may be added as UNOPS i s likely to incur all expenditures it will be the responsibility o f the concerned agency to ensure accounting o f all the expenditures, with proper fiduciary controls. Staffing Considering that the project i s being implemented by UNOPS, major responsibility o f implementationlies with them. The major function o f GMUwill be to review, approve and send quarterly FMRs to IDA. Hence no immediate additional staff requirements at GMU level are envisaged as the responsibilities o f the project can be managed with the present staff position. At the same time, it i s recognized that the overall capacities at the GMU are under pressure and hence close monitoring will be necessary to ensure that it continues to manage these responsibilities adequately. Accordingly, it i s recommended that MOF undertake assessment o f GMU's workload and capacities to ensure that adequate staff is available to manage its responsibilities effectively. At the project level, the Customs Department falls under the Finance ministry, where GMU is located, any requirements o f FM at the project level, will be easily taken care o f by GMU. Attachment2: FinancialManagement,Disbursement, & Audit Arrangements Page38 Hence, no additional finance staff position i s being recommended under the project for the time being. This can be reviewed as project implementationprogresses and specific needs materialize. Audit Arrangements The accounts o f the Project will be audited by the Auditor General, with support from the Audit Agent, under terms o f reference satisfactory to the Association. The annual Project financial statement to the Association would include a summary o f funds received(showing funds received from all sources), a summary o f expenditures shown under the main Project components/ activities, and by main categories o f expenditures. It should also disclose statement o f financial affairs at the end o f the year and all major accounting policies used in preparing the statement. The audit o f the Project accounts would also include an assessment of: (a) the adequacy o f the accounting and internal control systems; (b) the ability to maintain adequate documentation for transactions; and (c) the eligibility o f incurred expenditures for Association financing. The annual Project financial statements audited by the Auditor General, supported by the Audit Agent, would be submitted within 6 months o f the close o f the fiscal year, i.e. by September 22 o f each year. The following audit reports will be monitored in the Audit Reports Compliance System (ARCS): ResponsibleAgency Audit Auditors MOF SOE, Project Accounts and Auditor General Special Account Reporting; and Monitoring GMU will be provided, in a timely manner, the quarterly report in an acceptable format on UNOPS expenditures. GMU, under the charge o f MOF, will review the same. UNOPS will . facilitate GMU in this review. After the report i s approved by MOF, it will form the basis o f consolidation, if required, along with any expenditure incurred from the special account and under direct payment mode, to prepare Financial Management Reports (FMRs).The Quarterly FMRs will be submittedby the Grant Management Unit, to IDA. showing: (i) and uses sources o f funds by disbursement category and project component; (ii) status o f procurement activities; and (iii)physical progress. These FMRs will be submitted to the Association within 45 days o f the end o f the quarter. Guidelines for borrowers on Financial Monitoring Reports on World Bank-Financedprojects are available at the World Bank offices. One o f the major FM risks o f the project is that GMU still does not have a proper accounting system to record transactions on a day to day basis. It i s undertaking accounting only at the year- end. The MOF with the support o f FM agent needs to look into this aspect on priority basis and ensure that a regular accounting system i s in place before GMU starts undertaking expenditures on a day to day basis under this project. Other risks which could affect the FM performance o f the project i s the poor, or lack of, coordination between GMU and UNOPS. Hence, UNOPS must have in place before the project becomes effective, a person who will be directly responsible for coordinationwith GMU. If the above mitigating measures are taken, the risk factor would be reduced from high to medium. Regular monitoring of FM risks, particularly in relation to GMU's performance and capacities, will further reduce this risk. Attachment 2: FinancialManagement, Disbursement,& Audit Arrangements Page 39 DisbursementArrangements Allocation of CreditProceeds Amount ofthe Expenditure Category Credit Financing Allocations Percentage - (USD) Sub-project Grants 13,900,000 100 Goods 5,100,000 100 Consultants Services 9,700,000 100 IncrementalOperating Costs 1,300,000 100 Unallocated 1,000,000 I Total I 31,000,000 I Financing Percentage. Since collection o f tax revenue has just begun and i s sporadic, disbursement percentages have been set at 100%with the understanding, however, that MOF will submit withdrawal applications on a net-of-tax basis. The tax structure o f the govemment will be reviewed periodically by IDA and decision made whether standard disbursement percentages need to be set and financing percentages amended accordingly. Disbursement Method. Disbursements from the IDA Grant would be transaction-based (replenishment, reimbursement, direct payment, and payments under Special Commitments) with full documentation or against statements o fexpenditures as appropriate). Blanket Withdrawal Method: As project activities will be executed by UNOPS, the Blanket Withdrawal applicationprocedure can be followed, thereby enabling direct disbursements to UN Agencies. On this basis, the UNAgency will be given an advance, and thereafter, will report to IDA on a quarterly basis on the use o f funds, and the estimated forecast for the next six months, to seek direct disbursements. Although reporting will be to IDA and disbursements will be made directly to UNOPS bank account, UNOPS will be required to keep the line ministry informed at all times on financial progress o f the project. There will be only one blanket withdrawal application nominating UNOPS as the implementation consultantheneficiary. UNOPS will pay UNDO and UNCTAD (the two other UN agencies involved). The use o f Blanket Withdrawal procedure, does not preclude the line ministry from disputing direct disbursement requests made by the UNAgencies to IDA. Use of statements of expenditures (SOEs). SOE thresholds are applicable for procurementmade, outside o f the UNAgencies contracts. Since only UNagencies will handle procurements, for all contracts with UNAgencies, reimbursements thresholds and reporting requirements as specified inthe specific contracts, will apply. Special Account. Should there be a need for a Special Account at any given time during the life o f the project, the MOF would write to IDA and make a request. The Special Account will be opened and maintained in D a Afghanistan Bank on terms and conditions acceptable to the Association; and would be operated by MOF-GMU in accordance with the Association's operational policies. Authorized Allocation o f the Special Account would not exceed U S $ l million. Attachment2: FinancialManagement, Disbursement,& Audit Arrangements Page40 Minimum application size. In the case of Blanket withdrawal applications, this minimum application size does not apply. Applications for replenishment to the Special Account, if required, will be submitted (1) monthly, regardless o f amount, or (2) when the Special Account balance i s reduced by 40%, whichever comes first. The minimumapplication size for withdrawal applications for reimbursement, direct payment, or for applications for Special Commitments is 20% o fthe Authorized Allocation o f the Special Account. Authority to withdraw Grant funds. MOF-GMU will retain the right to sign and submit withdrawal applications to the Association. Action Plan IDA has reviewed the operating procedures, including financial management procedures, of UNOPS, and found them to be satisfactory. However, UNOPS must contract a coordinator for all FMmatters dealing with GMU before the project becomes effective. Other items included in the Action Plan are review capacities o f GMU as compared to the work load, and to ensure that GMUhas adequate staff to effectively manage its responsibilities. It will also ensure that GMU starts proper accounting on a day to day basis for all its expenditures. Supervision Plan From a financial management perspective, the Project will need intensive supervision. The focus duringsupervision will be on the internal control arrangements o f the selected UNAgencies for their internal functioning o f accounting, financial reporting and auditing. IDA will review these criteria in order to ensure that they are in compliance with the operating guidelines reviewed and accepted by IDA at the time o f the implementing agency's signing o f the contract with the selected UNAgency. Attachment 3: Customs Modemization Strategy Page41 ATTACHMENT 3 CUSTOMS MODERNIZATION STRATEGY Contents A. Executive Summary B. Major findingsfrom Customs Assessment (i) BorderIssues (ii) InlandClearance (iii) HeadquartersFunctions (iv) Strengths C. A Possible DevelopmentStrategy (i) ManagementObjectives (ii) DevelopmentStrategy (iii) Re-centeringofCustoms (iv) Staff Policy and Training (v) Legislation (vi) Infrastructure and Equipment (vii) Preventive and Enforcement Work Sub-Attachments: 6a: Macro Performance Indicators -Development ObjectiveAchievements 6b: Legislative Matrix 6c: Assessment of Draft CustomsLaw 6d: The Customs Preventive and Enforcement Approach in Afghanistan A. Executive Summary The mission visited Kabul airport and the major customs facilities in Afghanistan, including the inland clearance facilities at Herat and Jalalabad and the border facilities at Islam Qalla (Iran) and Torkham (Palustan)". The characteristics o f border operations seem to be: (i) Limited inward transit and related extensive transshipments; (ii) Insufficient control over goods, vehicles, and passengers; (iii) Poor space management; and (iv) Inter-agency overlap. At inland facilities, the difficulties are: (i)Excessive clearance procedures and associated documentation; (ii) Extensive handling o f goods with possibly excessive examination; (iii) Poor duty assessment. Everywhere, infrastructure and equipment are insufficient. The central Customs administration suffers from: (i)Absence ofcore management; (ii)Lackofcommunications; and(iii) Insufficient technical skills. Although the outside perception can be o f a weak and poorly organized administrative environment, infrastructure, and overcrowding at facilities, reality may be somewhat different. Despite some divergent views expressed during the interviews performance within the Customs Department appears satisfactory, both in terms o f workload conducted and time for release. There is functional control system. This control system i s often localized in nature and socially oriented. Although such a system may lead to an assured delivery o f cargo, it does not necessarily secure revenue collection for the state nor does it foster or facilitate trade activity and growth. 17Other site visits includedthe Mazar-i-Sharif region and borders with Uzbekistan. Attachment 3: CustomsModemizationStrategy Page42 Even though westem standards are not necessarily applied, or applicable, in an environment where the local culture i s a predominant factor, it i s important to devise strategy that simultaneously introduces internationally accepted norms and procedures, and builds upon the strengths o f the Afghan society. Only such strategy can help prepare Afghan Customs to meet 21st Century challenges, while ensuring ownership sustainability, and an improved foreign trade environment. B. Major findingsfromCustomsAssessment (i) BorderIssues a. Transshipment & Supewision - Cargo i s transshipped from the entering foreign trucks onto Afghan vehicles." The notable exceptions are (i) Torkham, where Pakistani trucks are allowed to proceed to Jalalabad, (ii) Hairatan, where Uzbek trucks are allowed to the Mazar-i-Sharif region, and (iii) to a limited extent, Islam Qalla, where Iranian trucks carrying foodstuffs and POL can proceed to Herat (representing 1- 2 percent o f the traffic). All other cargo i s unloaded from the incoming truck, and reloaded back-to-back onto Afghan trucks. The mission didnot observe any Customs supervision during this labor intensive transshipment operation. Supervision becomes difficult due to the position o f the vehicles, the large number o f trucks being simultaneously ~nloaded'~,and reloading outside the border zone. b. Border to Inland Transit - After transshipment, border to inland transit i s managed under a "Transit Document [pre-declaration notification] ", an "Ilm-o-Khabr [consignment note], and a "Bar-Nama [bill o f lading] are the only documentation accompanying goods to the point o f destination, with no insurance coverage. The system i s secured by: (i)convoying between Torkham and Jalalabad, (ii) retention and presentation o f the vehicle documents by the drivers when reporting at the destination, and (iii) approval given to a limited number o f drivers and trucking companies, with clear instructions that failure to report cargo would result in cancellation of the approval. c. Proliferation of Passenger TrafJic -Border crossing at Islam Qalla and Torkham is intense. Over 500 passengers cross every day into Afghanistan at Torkham,20(inaddition to an average o f 300 trucks and other commercial vehicles.21 There is unceasing shuttle traffic across the border. At Islam Qalla, local residents are also allowed to cross the border line to visits shops located on the Iranian side. (Passengers are allowed to bring back up to 30 kg o f duty free goods, mostly foodstuffs, but the means to prevent abuse are limited.) There i s no separation betweenthe traffic flows, and it i s extremely difficult for an outside observer to distinguishbetween shuttle trade, border shopping, and commercial traffic. Further confusion i s created by a multiplicity of Customs workers (basically labor) unloading goods, and no uniformed enforcement authorities Consideringthe structure of trade, commercial vehicle statistics combine trucks (international and Afghan specifications), andvans and shuttle minibuses with commercial loads. 19IslamQalla receives on average 250 trucks approximately per day. 2oEstimationbased on the average numberof coaches- no private vehicles are normally allowed to cross the border. *`According to an initial survey carried out by UNOPS inSeptember 2003. Torkham would appear to represent 70 percent inweight o f all imports into Afghanistan. Attachment 3: Customs Modemization Strategy Page43 with irregular presenceto direct the passenger to the Customs hall. The mission observedthat the exit gate was not always guarded, and sporadic documentary checks were carried out on exiting cargo. As there is no correspondencebetween the Iranian vehicles enteringAfghanistan, and the inbound Afghan trucks leaving the border zone. In the absence of clear monitoring of transshipments, good could easily escape Customs control. At Torkham, a further difficulty could arise ifthe plans o f the Ministerof Tourism to turn the current Customs building(owned by that Ministry) into a hotel were to be realized. This would attract ancillary activities inside the border zone that do not belong there. d. Smuggling & Re-exports - Estimates are that up to 50 percent of all imports into Afghanistan are smuggled. Another concern for regionalrelations i s the volume of goods which transit across Pakistan into Afghanistan, only to be smuggledbackto Pakistan. Furthermore, those items on the negative Pak list transit through Iran, only to be re-exported to Pakistan. The porosity o f the border with Pakistan - and Turkmenistan - further aggravates the situation. Customs, the relevant agency to prevent smuggling, have limited powers of enforcement, and no role inborder patrolling. e. Warehousing at Borders - There are numerous warehouses at the borders, mostly owned by the Ministry o f Commerce, (MOC) that function under a somewhat informal22bonding system. Inthe border zone at Islam Qalla, the mission observed large amounts of goods stored in the open. The warehousesthemselves, while possibly insufficiently secured, are usually well kept. It is, however, difficult to match a specific lot with the corresponding do~umentation.~~Altogether, a rationalization o f goods inside the warehouses would free a significant amount of spacez4,and facilitate inventory controls. J Institutional Overlapping & Fragmentation of Functions - Several agencies operate at the border. Inaddition to Customs, there are Afghan National Security forces and the border police. The MOC too owns facilities, and carries out its own controls, for instance, at Hairatan, on the Uzbek border, the unloading of trains i s carried out under the supervision o f MOC officials. Basic Customs activities, such as the limitedborder-to-border transit across Afghanistan, are also regulated by MOC. At some border crossings, the Ministry of Culture carries out an inspectionof books owned by passengers (library control)25. At occasion, the multiplicity o f agencies, combined with the traffic mayhem, has resulted in inter-agency conflict. In some instances, the police has barred access to the border area to Customs officials, on grounds that they did not possessproper identification. 22The systemis actually a vestige ofthe Soviet era-MOC/SOEs providewarehouse bondliability, whereas SOEsItransporters provide movementbonding liability. 23There is however a local identification system: A slip, indicating the consignee, is affixed to most parcels. 24Such freed up space couldbe usedfor accommodating some o f the goods stored inthe open, ifrequired, since the open storage adds to facility congestion and has greater chances o f cargo slipping through unnoticed. 25Inmany countries, allthese activities wouldbe delegatedto Customs, under the authority ofthe relevant administration. Attachment 3: CustomsModernization Strategy Page44 (ii) InlandClearance a. Documents - Goods are cleared according to an import program and a kind o f declaration. Imports must be licensed by MOC. Other documents to be produced include the transit form, and the bill o f lading or CMR. A more formalized declaration was introduced at Kabul Customs (airport and inland clearance facility), in an effort to prepare for the introduction o f the Single Administrative Document.26 At most clearance facilities, there i s a good manual cargo reception system (based on a register where particulars o f all shipments are entered), but discharge o f arriving transit cargo only takes place ifthe office o f origin sends a query or a consolidated list o f all transits initiated during the month (Islam Qalla). As there are no licensed Customs brokers operating inAfghanistan, some Customs offices have a help desk, where officials assist importers in filling declarations. While this is a real service provided to the trade, it may also generate conflicts o f interest, as the same officers are likely to later check the declarations. b. ClearanceProcedure - At the Herat inland clearance facility, all arriving goods are unloaded into a temporary warehouse, under reasonable Customs supervision. They are then transferred to an inspection bay, where extensive weighing and numbering takes place, together with sampling for certain categories o f imports such as medicine. After examination, goods are returned to the warehouse until their subsequent release, following payment o f duty. At Mazar-i-Sharif, approximately one third o f every shipment i s unloaded and retained in the warehouses, presumably as a guarantee that duty will be paid. c. Classijkation & Assessment - Assessment o f duty relies on tariff classification and valuation. These two activities are performed by the Chamber o f Commerce, based on documentation provided by the importers. While Customs do not currently have the capacity to carry out these core Customs activities, the classification o f goods without any physical inspection is not satisfactory, and can lead to severe misclassification, error or ffaud. Valuation i s done on the basis o f an invoice, compared against a data base o f minimum price lists. At Kabul airport, ACOC has provided Customs with an electronic version o f that data base. For importers who elect to clear the goods without referring to ACOC for certification o f the value, the relevant duty i s increased by 25%. (iii) HeadauartersFunctions There i s practically no capacity within Customs headquarters to manage administration, apart from a clearly committed and well-selected Deputy Minister o f Finance, currently in charge o f the Department. This makes it even more difficult to ensure a consistent and reliable application o f Customs procedures, and to apply a minimal level o f control to ensure prompt remittance to the central govemment o f import duties. Basic shortcomings include the following: - The necessary technical skills in specialized areas (valuation, classification, procedures) are apparently not available. Basic training should be provided rapidly, replicated with field training, and corresponding administrative capacity introduced to handle these modern instruments. 26 The use of the SAD i s a necessary pre-condition for computerization o f clearance. The introduction of the Afghan Customs Declaration was considered a f i s t step, although the document (i) includes 17 only fields compared to the SAD'S 52, (ii) not aligned to the UN layout key, and (iii) not appear to is does follow international coding standards. Attachment 3: Customs Modernization Strategy Page45 - Although plans were made under the current five year plan for a comprehensive headquarters structure, it i s highly unlikely that all units would be staffed in the near future with competent and skilled staff. A contingency organization should, therefore, rapidly be put in place, to support the progressive implementation o f the development plan, and make the best use o f the extensive technical assistance currently provided to the Department. - Senior Customs management has limited control over field operations, due to poor communications, distances, and in some areas, the political situation. It is, therefore, essential that an information system, combined with telecommunications, also be rapidly put inplace. (iv) Strengths The above overall assessment i s somehow mitigated by a number o f strengths not immediately visible to outside observers, but identifiable within Customs: (i)Productivity interms of workload per staff i s satisfactory; (ii) Control mechanisms over consignments operate well; and (iii) characteristicsoftheAfghansocietyofferalternativestosomeimportedadministrative The standards, while providing better ownership over the reformprocess. a. Performance - One rough indicator o f productivity i s the total number o f declarations processedin one year per staff. Although inmost locations there i s no Customs declaration inthe modem sense, an extrapolationbased on the total number o f vehicles entering the country would indicate an equivalent o f 100,000 declarations per year. Compared to the staff (1,100 officers), this would give a ratio o f 91, well above the average o f Central Asian Republics. However, this figure should be used with extreme caution. Observation at the borders and inland clearance facilities, albeit limited, indicated 2 to 3 day clearance delay. Corruption may have been curbed as within Customs recently, 35 officials were dismissed, and another 65 re-assigned to other duties, indicating a strong commitment to fight rampant corrupt practices. Consistent information suggests that bribes are mostly asked for facilitation, which would be reduced by streamlining o f procedures. There i s evidence that the highest bribes are collected by enforcement agencies other than Customs. b. Control - Although there are numerous breaks in the audit trail, and documentary processes are embryonic, it is very likely that officials keep movement o f goods under tight control. There are no reports o f cargo missing in transit, other than cases o f hi-jacking which are beyond the control o f Customs. While the retention o f vehicle documents may prove awkward insome cases, the system i s effective. Officials responsible for warehouse control know, in the absence o f any apparent inventory control, the location and status o f the goods they are responsible for. Importers never complain about missing cargo or pilferage. This would point to parallel methods o f control, which are well accepted. c. Sociological Dimension - The mission i s inno position to carry out an anthropological study o f Afghan society, but it comes out clearly that strong family ties and consensually reached decisions by tribal leadership plays major roles in establishing an effective chain o f command. To ensure ownership and reasonable sustainability o f the Customs reform plan, these social strengths should be factored in, to introduce modem standards. There i s an urgent need to train the youth to manage this change process; and simultaneously achieve goals like devolution in power structure. Attachment 3: CustomsModemization Strategy Page46 C. A Possible Development Strategy to Operationalizethe Five-year Plan The country strategy aims at reducing the dependency on Customs revenue within the next five years, to reach a more realistic 70 - 30 split between intemal taxes and Customs duties, while still increasing revenue collections from Customs. The authorities are considering joining Customs and the tax administration into a united revenue agency (URA), or merging the two under the Ministry of Finance. Another objective is to develop transit activities. These goals will require changes in the legislation and the introduction o f modem standards, supported by appropriate technology and equipment. Improved and streamlined procedures, a clarification o f inter- departmental relations, and reinforced human resources, will contribute to the result. Such a plan requires a strong and professional Customs administration. The following points show the areas where efforts should be focused inthe initial phases. (i) ManagementObiectives It is important to understand the existing system, its local divergences, and build upon its strengths. T o do this, a core o f headquarters managers, possibly recruited externally, should take over the Department. This management team would need an orientation course in a neighboring country. They would rapidly (i) carry out a personal assessment of the administration, (ii) determine clear short term objectives, and (iii) establish and maintain contacts with the field. Limited IT support would already be necessary at this stage. A phased strategy should be followed, with distinct short and medium term objectives. a. Immediate Objectives - These should include specific organizational and revenue-related objectives, as shown inthe table below: Examples of I Ensure the dissemination o f information; Start buildingownership. - short term 0 Carry out field visits to provide assistance, not to control; Provide incentives, review objectives - infrastructure and prepare quick solutions for immediate visible improvements. Organization Examples o f 0 Improve the documentary control systemto make it more visible: Introduce a short term correlation between arriving foreign trucks and their Afghan equivalent; measure time objectives - for processing; assess the workload o f different workstations. Revenue Validate the activity o f Customs laborers through spot checks and audits. Assess the valuation system, estimate revenue shortage due to under-valuation, identify major importers, customize procedures for these. b. Medium-term Objectives- Ina secondphase, the management team would first specialize, then draw a medium term strategy. As day to day operations are crucial, the team should specialize in(i)Organization and Administration, (ii) Procedures, and (iii) Operations. Some examples o f steps requiredinthese sectors are provided inTable -below. Attachment 3: Customs Modemization Strategy Page47 Organization Begin to organize a staff managementpolicy: Computerization o f staff records; and Preparation o f a salary policy and a career profile; Organization o frecruitment based administration o n a multi-annual budget projection; Initiate staff and skills assessment. Inparallel, organize headquarters: Rehabilitate amanagement floor; Introduce mentoring; Establish, define, and maintaincontacts with the private sector at policy making level. Prepare a skeleton IT unit. Procedures Review existing procedures and roll-out satisfactory local initiatives Prepare the introductiono f Customs brokers, review help desk procedures Operations Prepare a matrix o f legislation by main objectives and identify conflicts, overlaps, or inconsistencies; design a basic flow chart o fnetworks and interactions, within the admmistration and outside. Identify weaknesses, internal and external. Design a communication strategy. c. Parallel Replication at Customs Houses - As this process would be going on, the team would also identify field correspondents who would replicate this approach at Customs house level. The Headquarters structure would simultaneously be expanded to cover the areas identified as the weakest, and most likely to generate rapidly improved revenue collection. (ii) DevelopmentStrategy The objective would be to identify the main objectives that Customs want to adopt for the next five to ten years. A mission statement should be drafted. It should include the role o f Customs, and how and when its different components would be achieved. a. TheDifferent Roles of Customs - It is desirable for Afghanistan Customs to gradually assume a more than purely revenue orientedrole. Improved customs effectiveness would rely on it being conferred a preventive and enforcement role, and for it to ultimately become a specialized enforcement agency. b. Chain of development into a Specialized Enforcement Agency - Experience in other countries traces the evolution o f many customs administrations from a purely revenue oriented origin to a enforcement agency role. The nature, scope and logical chain o f customs operations demand following development modelhhain to be adopted: Customs administrations begin with a purely revenue oriented role. However, unlike other revenue administrations, Customs guarantee the payment o f duty by withholding the goods. That relation i s essential. Customs must control goods inmovement, and intercept goods that are not immediately reported. This has a number o f consequences: Customs must identify the goods; ensure delivery; obtain payment; detect offences; and prosecute offenders. Customs services thus deploy preventive and enforcement wings. The role o f the preventive service is to ensure that all goods are delivered to assessors. The assessment branch ensures that goods are only released if they are in accordance with the existing legislation (tariff and other laws). The enforcement service detects goods that were not submitted to Customs control. 0 In some countries, preventive and enforcement duties are performed by other agencies. While this may work if there is good collaboration, it i s often not the case (competition, Attachment 3: Customs Modemization Strategy Page48 superiority, different priorities). As a rule, if another agency is capable o f identifying goods, it means its members have a Customs function. They should then come under the Customs umbrella. Should Customs take over other activities? Collecting excise and VAT on imports essentially involves, at no extra cost, an additional revenue line on the declaration if codification is standardized. The next step could be to collect domestic excise, as the collection mechanism i s basically the same. As Customs see all movements o f goods, it can also act on non-revenue matters. This is becoming an essential role o f Customs in Western countries to Control standards, protect the national heritage, play a role insecurity, fight illicit smugglingo f narcotics and, detect illegal immigrants and emigrants. In turn this requires: (i) delegation from other agencies and cross-designation; (ii) training; and (iii) an enabling legislation. Customs needthe powers o f investigation and intervention. Typically, ina transit country, or in a country with difficult to control borders, Customs should have the power to operate (i) outside approved Customs areas, (ii) the territory, and (iii) the border line. within along Ultimately, Customs become a specialized enforcement agency. c. The integration of Customs with tax administrations - There i s an on-going debate in many countries on the mergerhntegration o f Customs and Tax administrations (a frequent occurrence in Denmark, the Netherlands, Canada, Spain, and many Latin American countries). Table below assesses the pros and cons o f the with and without merger options. Infavor of the merger: Against the merger: Economies of scale; 0 Customs do less and less revenue work and Close relationbetween smuggling and increasingly non-revenue related - including fiscal fraud; enforcement and criminal investigations - 0 Customs valuation impact on VAT activities, work inphyto-sanitary and collection; veterinary fields; 0 Audit methods used for the VAT 0 Customs control i s physical (and justifies increasingly try to focus on when the control over excise goods), unlike tax audits; event took place, like Customs 0 Customs services are not linked to the checks; residence o f the taxpayer, but to the location o f 0 Merger allows an organization by the goods; categories o f taxpayer. There are very wide differences incorporate culture betweenthe Customs and tax administrations. There will always be a limit to integration. IT and HR could be integrated, but an integrated IT would essentially provide a networking solution as opposed to a fully integrated fiscal system. Many merger experiences have failed such as in Argentina, merger worked to some extent, in Canada, but there was already a kind o f merger philosophy there as it tried to merge its Army, Navy, and Air Force, some years ago. Even in Canada, though, the specificity was kept o f each administration. As a rule o f thumb, mergers work essentially in an environment where Customs have no or very limited powers o f enforcement. For example, attempts to more closely integrate Customs with the tax administration in France have always failed because Customs are, in effect, closer to the other law enforcement agencies, and have little incommon with inlandrevenue. Attachment 3: CustomsModemization Strategy Page49 This strategy would need to be approved and formalized, by the govemment together with budgetary support. A long term strategy should be designed to overcome possible objections. For example, the Ministryof Interior may object to wide powers o f enforcement. Customs must then insist on participating in anti-smuggling operations, and gradually demonstrate its effectiveness. d. Institutional Financing Arrangements - Customs can be funded through a varying mix o f the following sources: Budget allocation Declaration processing fee. The WTO agreement authorizes the collection o f a declaration fee, as long as it does not become an "invisible" duty. It should, therefore, be a flat fee, and correspond to the approximate cost o f providing a service to users. According to an interpretation o f the WTO agreement, this fee would be usedto maintain the computer system used for clearing the goods. The cost o f processing a declaration i s approximately the same irrespective o f the value o f the goods. This fee should be entirely re-allocated to Customs, and a Government commitment to this effect shouldbe sought. Overtime and special clearance fees. In many countries, it is accepted that after-hours clearance, or clearance on the premises o f the importers, comprises a service that should be paid for. However, the tendency inWestern countries i s to move away from this system. Proceeds offines and seizures. Inmany countries, Customs i s allowed to retain a part o f this revenue, and a fraction i s used to reward detecting officers. While rewards should not be considered a major part o f the remuneration, they should (i) provide an incentive, and (ii) show recognition for results. Another part o f the pooled funds could be used to reward non- operational staff for their professionalism. (iii) Re-centeringofCustoms There are many activities currently carried out by Customs which do not belong to this department, and may eventually lead to a conflict o f interest. a. Reassignment & Separation of Help Desk Staff- As a brokerage profession emerges, staff from the help desks would be gradually either re-assigned to other positions, or taken over by brokerage firms. However, there will always remain a need for assistance to the public within Customs. Inparticular, with the computerization o f clearance, kiosks where occasional importers who do not have on-line access to the system can key-in their declarations will be necessary. (It i s essential that staff assigned to these assistance activities are in no way involved in the subsequent control o f the declarations they have helpedto prepare.) b. Gradual Reassignment of Laborers - There is a considerable workforce o f "Customs laborers" responsible for unloading trucks and presenting the goods to inspectors.*' This i s usually a function performed by brokers. Although the present arrangement provides numerous opportunities o f employment, it i s likely to be gradually phased out, considering the eventual disappearance o f transshipment as through transit develops, and the introduction o f mechanical handling equipment. As this i s a sensitive area, a very carefully planned strategy would have to be devised, possibly including: 27 Approximately 1,000 at IslamQalla. Attachment 3: Customs Modernization Strategy Page50 0 Partial privatization o f handling activities: The laborers would be approved by Customs, butwould set their own fees, etc.; Establishment o f handling entities; Consolidationo f warehousing and transshipment; Provision o f new services (e.g., sale o f documents, intermediation, guarding of consignments). (iv) Staff Policy and Training To builda professional cadre, with adequate skills, two conditions are needed: (a) A satisfactory environment with adequate safeguards, and (b) access to training. The extensive amount of technical assistance currently provided to Customs must be managed to ensure that it complements without saturating the development strategy. Some other measures that could be adopted to improve staff motivation and efficiency include: a. Improving the Working Environment & Public Image - Experience shows that Customs officers all over the world suffer from a siege complex. Job satisfaction is a primary guarantee of integrity. Staff must be recognized within their administration and by the outside for their performance and service to society. This implies that there should be no subordination to other agencies, institutional or operational, and that the different publics Customs deal with are aware o f the role o f the Department. Inaddition, Customs should operate ina decent environment. This should start with headquarters, and gradually be extended to field locations. (Caution should be exerted to not over-equip the administration, as hardware and equipment are only tools, and do not replace common sense.) Customs Ranks and Uniforms Customs officers should be clearly recognizable, have a proper uniform with appropriate ranking insignia. b. Dealing with Corruption - All over the world, Customs tend to be more corrupt than other agencies, because Customs officers have discreet and immediate control over tangible wealth. Good work environment, supported by a strong team spirit, are important elements. Breaking the discreet contact with the trade i s another. Interestingly, the World Customs Organizations Arusha declaration only mentions adequate salaries as the ante-penultimate measure to be taken. Other more imaginative ways o f dealing with petty corruption could also be adopted, drawing from the experience o f other countries, such as the consolidation o f payments approach. Two such experiences are described below: In a neighboring country, boarding an international flight at the airport was next to impossible, unless payments were repeatedly made at security checkpoints, Customs and immigration controls, and check-in counters. Although not massive in price, these bribes were rapidly discouraging foreigners to visit the country. The authorities then decided to establish a VIP circuit, at a cost o f US$50, which ensured a reliable and fast boarding procedure. The fee corresponded approximately to half the amount o f bribes that were asked for in the past. It was distributed among all the staff, according to a scale that included individual performance. Gradually, bribes also ceased from travelers who didnot apply for the VIP stream. Attachment 3: Customs ModemizationStrategy Page51 0 Inanother country, as trucks exited the port area, there were numerous checkpoints where small bribes were asked from drivers. The Port authority carried out a survey, ascertained the total amount o f money requested from drivers, and offered the different agencies to collect it upfront and re-distribute it to the administrations, as long as the money went to the field staff. Checkpoints disappeared overnight, and were replaced by more efficient and targeted roadside checks. c. Technical Training h Locally Innovated Systems - Technical training i s necessary, as the skills o f many Afghan Customs personnel are limited. Although basic skills in technical areas can be acquired in a standardized manner, the local culture must be taken into account when delivering courses. It i s important not to discourage the staff by giving the impression that (i) new procedures are artificial, suited best to the Western environment, and may not work in the local surroundings, (ii) objectives are unattainable, and (iii)standards are forcibly imported. While some documents and procedures (SAD, HS, WTO valuation code) are international and should be adopted in any case, it i s not always the case for processing chains. Staff should be encouraged to design their own operational systems. d. Training in Neighboring Countries - Inthis respect, mentoring or tutoring arrangements with adjacent counties are probably more efficient, and less costly, than conventional technical assistance. Although the standards may not be up to Westem best practice, they already constitute a progress over the present situation. Experience also shows that staff from a weak environment, when abroad, (i) tend to recommend best rather than corrupt practice, even when they experience them in their own country, (ii)understand better the local situation, and (iii) avoid the discouraging patronizationthat occasionally occurs with internationalexperts. e. Performance-based Staf$ng - Staffing, although largely constrained by current social factors, should be realistically assessed based uponjob performance indicators. Attachment 6a provides an example o f national and site indicators that can be used to assess workload. Although many other elements should be considered before determining the staffing level at a specific location, overall consistency should be sought, as experience suggests that over-staffing limits productivity. (v) Legislation a. Drafting of the Customs Code - It i s essential that the new Customs code provides Customs with the ability to gradually take over the different activities envisaged under the development strategy. Even if these activities cannot be undertaken immediately, they should be factored in under the law. The opportunities to modify the Customs law are limited intime, and international experience shows that it i s extremely difficult to bring substantial modifications to Customs operations once legislation has been passed. This is particularly the case for enforcement-related activities. b. Objectives Matrix - The table in Attachment 3b describes, as an example and in a non comprehensive manner, the main activities that could be envisaged in Customs in a Western environment. To ensure connections and interactionwith other agencies, it would be necessary to identify the different laws and regulations that affect these activities. Harmonization and complementarities could then be sought. This matrix would also be useful to design the networkmg solution to be adoptedbetween the different players. c. Sub-legislation (procedures & practices) - An often encountered error is to wait for the legislation to be voted upon before any work i s done on second and third degree regulations. As Attachment 3: CustomsModemization Strategy Page52 most provisions o f the law are likely to be enacted, especially when consisting o f international standards, as i s the case for valuation, subsidiary regulations should be prepared as early as possible, to enable prompt introduction. (vi) Infrastructure and Equipment There i s currently very limited, if any, office and telecommunications equipment, let alone search tools and computers. Infrastructure varies from adequate but run-down to seriously deficient (see Attachment 4 for details). Inaddition, some facilities are poorly located: in Jalalabad, the inland clearance facility i s in the middle o f the bazaar!. Parking lots and many thoroughfares are not paved, generating clouds o f dust in summer, and numerous puddles inthe rainy season. Furniture i s often damaged. There i s little filing space, although archives are well kept. However, again, the immediate perception should be announced, at least to some extent, since: (i)Search equipment i s only as good as the staff who use it. Therefore, extensive training i s necessary, not only in the technical handling o f the equipment, but also in the principles o f search; (ii) Local inventiveness can efficiently handle traffic, even in the worse conditions; (iii) In a culture that relies less on written formats, other methods o f referencing have appeared; and (iv) Managerial pro-activity at times supplements weak infrastructure. a. General Objectives & Requirements for Infrastructure Investments - Plans for investment should therefore be carefully organized and phased, taking into account the following: Priorities: The objectives should be to introduce (i) decent work conditions, likely to promote job satisfaction, and generate an image o f professionalism and authority; and (ii) trafficflows,thusnecessitatingarationalizationofthelocationofbuildings, smooth and, within the facilities, o f the different work units (e.g., placing the examination bays inside the warehouses). Dejnition of the work process: With the introduction o f new procedures, there will likely be less physical examinations, thus requiring less space; some clearance may take place at importers' premises; and also at bonded warehouses should be owned and operated by the private sector but approved by Customs. Improved control: Efforts should be made to link the documentary flow to the movement o f the goods. The facilities, whether at the border or inland, should be guarded by gate officials, with permanent and adequate control over movements into and out o f the area. Satisfactory location: Typically, clearance facilities should be located close to the final destination place where the goods will be used. At the border, the Customs processing facility should be as close as possible to the entrance o f the border zone, and, when not possible, there should always be a Customs check post at the immediate proximity o f the border line ineffect, next to the border police check point. b. TheInfrastructure Development Action Planfor Afghan Customs - Inthe Afghan context, the following action plan i s therefore suggested: Rehabilitate a (temporarily limited) headquarters structure, to install a core management team and establish its credibility. This should involve outfitting, computer equipment linked into a local network, air conditioning, telephone and/or radio equipment. Attachment 3: Customs Modemization Strategy Page53 Establishat all facilities a gate control shed, with appropriate working conditions, and, in particular communications with the local management. Start separating the public and users from administrative positions, using counters, windows, and establishing secluded areas where the public i s prohibited. At borders: (i) Separate traffic flows (pedestrians, minivans, and trucks), using concrete separators o f the width o f a traffic lane, to prevent vehicles from stopping and jamming the area; (ii)Establish Customs control booths close to the border line, with communications with the central unit; and (iii) Whenever possible, introduce signals to direct traffic to appropriate lanes. At inland facilities, pave the parking lots and access roads, and reorganize the examination bays within the warehouses. Rehabilitate the management buildings/sections and create separate areas for the public and the staff, with limitedinterface areas. Progressively introduce local computer networks, supported by (i) power generators and UPS, (ii) air-conditioning, and (iii) adequate security. Develop a telecommunications network (i)within the facilities, and (ii)with headquarters, and (iii) the local authorities and other agencies (in particular the with police). Start training in (i) computer use, (ii)management o f control issues, and (iii) search techniques (it i s only at this stage that it would be effective to introduce sophisticated search equipment). As facilities improve, a bonus for the local staff could be envisaged, further building up ownership over the reforms. (vii) Preventive and EnforcementWork Modem Customs administration can only operate if they have the ability to investigate cases o f smuggling. As the role o f Customs i s primarily to ensure compliance for imported goods with national regulations (including, but not limited to, the Customs tariff), it i s important that Customs should (i) ensure that all goods are reported to Customs when they cross the border, and (ii) goodsthatwerenotreportedtoCustomscanbefoundwithintheterritory. Inaddition, that trade facilitation measures imply more relaxed upfront control, thus requiring a "safety net" provided by inland enforcement. As discussed above, these activities are sometimes handled by Ministryo fInteriorofficials, butthis is not satisfactory, as itrequires a technology backupthat is not necessarily available to the police.28 It i s therefore better ifCustoms cany out preventive and enforcement activities themselves. The scope o f these activities varies: (i) Post-release audits, which are not investigations, are carried out by Customs, sometimes in conjunction with tax authorities; (ii)Investigations are usually based on information, or the analysis o f import patterns, and require access to many 28Insome countries, anti-smuggling activities are definedunder the penalcode, andare enforcedbythe police. While this is possible inan environment where smuggling is easy to define (Le,, weapons and narcotics), ina modemeconomy, smuggling is multi-faceted, and the identification o f smuggled goods i s not effectively performedby a non-specialized agency. Smuggling is therefore better handled under the Customs law, ifonly because prosecution and penalties are usually based o n a multiple o f the market value, which i s better assessedby Customs. Attachment 3: CustomsModemization Strategy Page54 sources o f information, as well as sometimes tough enforcement; (iii)Preventive duties consist in (a) ensuring that nothing crosses the border unreported, and (b) verifying the status o f goods and vehicles circulating within the territory when there is an indication that they may have been imported. Inan environment such as in Afghanistan, where security is often problematic, these activities can be dangerous, and require trained and well equipped personnel. Customs may not have the necessary organization to carry them out on their own, but it i s essential that they should be associated to other agencies' patrolling duties. The introductiono f an enforcement strategy could be based on the following outline: 0 Establishment o f a specialized unit inheadquarters, managingcontrol squads; 0 Installation o f a basic command center; 0 Equipment (vehicles and communications) o f a few squads, with accompanying training; Patrols along the main transit itineraries; 0 Secondment o f Customs enforcement officers to border patrols; Specialization o f an investigations and intelligenceunit; Development o f the preventive and enforcement wing o f Customs. Attachment 3d. describes in more detail an implementation strategy for the Preventive and Enforcement sector. Attachment 3: Customs Modemization Strategy Page55 Appendix3a Macro Performance Indicators-Development Obiective Achievements This category o f indicators is designed to provide (i)a management tool, (ii)a basis for comparisons and (iii) a way o f measuring productivity gains. Like any indicator, the following are average values, and should be used with circumspection. Most values are abstract, and do not reflect the real situation at a specific work position, but provide a benchmark for subsequent review o f the work process. (i) BasicDefinitions a. Revenue Collected - The revenue collected is the total revenue taken by Customs, irrespective o f the budget line to which it i s credited, and because the indicator shows how much the organization contributes to the State budget: Customs duties, VAT collected on imports, Excise (collected on imports, and inland excise duties when these are also collected by Customs), All other fees collected by Customs onbehalfo fany other administration, Proceeds o f sale o f confiscated goods, when such sales are conducted by Customs, 29 Re-assessments o f duty subsequent to post release reviews, investigations, or Court decisions (these should be indicated for the year when they are actually paid), and, Fines and penalties, when they are actuallypaid. Evenwhen some o f the proceeds o f the fine are allocated directly to Customs, they shouldbe considered as revenue collected. b. Customs Staff- Customs staff means all the employees on the payroll o f Customs, and those not on the payroll o f Customs who are working full-time for Customs e.g., drivers or supporting personnel. When staff are not working full-time e.g., cleaning personnel, they should be prorated: the total number o f working hours divided by the legal annual working hours for an individual equals one full-time employee. c. Total Customs Cost - This i s the total cost to the State for running the Customs service. It consists o f the budget o f the department, including: salaries (paid to all those working in Customs); overtime; bonuses and rewards, paid out o f the budget (including rewards paid out o f the proceeds o f fines and sale of confiscated goods because they are captured under component a. above); Runningcosts; and, Sums directly taken out o f fines and used for maintenance and small repairs. It does not include capital investment, because such expenditure is usually spread over several years, and its benefits may only appear inthe medium or long term place inFN. (A specific indicator could be derived to assess the marginal efficiency o f capital expenditure.) 29There may be a slight distortion here, because it can be argued that, even though Customs did not make the sale, it provided the merchandise, and therefore the revenue, so it should be credited with the budget revenue. However, there is a cost to (i) keeping the goods, and (ii) organizing their sale, so if Customs were to dispose o f confiscated goods, they may still not be able to generate the economies o f scale produced by a specialized agency. Attachment 3: Customs Modemization Strategy Page56 d. Salaries - This is a sub-set o f c. above. It includes all payments made to persons working in or for Customs. When rewards are paid out o f the proceeds o f fines, they should be included (the total fine is creditedto the budget, and the corresponding reward i s included inthe salaries paid). Salaries should also include overtime paid by the trade to Customs for services provided outside working hours (such as clearance at night or duringweek ends), because work duringthose hours also generates revenue. e. Trade volume - This i s the volume o f recorded foreign trade, imports and exports, according to balance o f trade statistical methodology. J Annual number of declarations - This is an aggregate figure including import and export declarations. The figure only consists o f declaration numbers, irrespective o f the number o f items each declaration includes. Although this may introduce a slight distortion, it i s assumed that, at national level, one- and multi- number declarations will balance off, in terms o f numbers and workload. As an example, an oil tanker with only one item on the declaration may represent more processing work than a "groupage" with 99 items on the declaration.. Transit and manifest documents are not included, because they eventually lead to a declaration (except in border to border transit, which again introduces a minor distortion), and their processing i s generally included inclearance. Declarations re-processed innational or regional headquarters (e.g., inward processing, or post release audits) should not be included. (ii) Indicators The table below lists possible indicators that can be used to monitor project performance. These are classified into two broadheads, i.e., indicators o f efficiency and workload. Indicators Indicator 1. Revenue Shows the cost/effectiveness o f staff. When staffing changes, it shows the of collected/ Customs marginal efficiency o f additional staff. The evolution o f this indicator will also Efficiency staff reflect changes inthe work environment (for example, the number o f working hours set down by law), and will be affected by changes inthe duty structure and the pattemof foreign trade. Indicator 2. Total Shows the global costleffectiveness o f the department. It can be affected in the Customsservice cost same way as the above indicator. /Revenue collected Indicator 3. Salaries Shows more specifically the work input o f the organization. When compared /Revenue collected with indicator 2 above, it indicates the part o f fixed and incremental costs. Indicators Indicator 4. Trade This figure reflects crudely the cost to the economy o f imports and exports. It oworkload f volume / Customs cannot be used independently, because some expensive commodities require the staff same processing as cheap goods. It can however help insetting a national standard and be used to compare the situation at similar Customs houses. Italso gives an ideao fthe gap between salaries paid to Customs officials, and the amount o f tangible wealth which they handle. Indicator 5. Annual This indicator requires particular attention. Although it gives the overall work number of output o f the administration (Le., the number o f declarations cleared), the local declarations / situations may vary very significantly. A border station, essentially dealing with Customs staff transit traffic, will process very few declarations, but may still have a heavy workload. Comparisons are therefore easier to establish between inland clearance stations, but, again, the type o f goods that are cleared at a particular location may require different forms o f processing, and lead to differing Attachment 3: Customs Modemization Strategy Page57 (iii) Possible Use o f Indicator Data a. Overall assessment of performance - Indicator 1. gives a general view. When indicators 2. and 3. are compared, they give an indication o f the relative efficiency o f staff compared to equipment. They also give a general correlation between staff and other running costs, and therefore enable the corresponding budgeting when additional staff is hired. This indicators highlyvariable, so it shouldbe comparedto the workload indicators (4 and 5). b. Comparisons - All figures are calculated at national level, andtake into account work unitsfor which direct outputs are difficult to measure. For example, headquarters make policy decisions which impact departmental efficiency, but cannot be immediately quantified. However, the national level provides a benchmark, albeit an arbitrary one. Ifthe same calculations are made at regional and local level, they will point to certain possible trends such as: (i)the evolution o f efficiency at policy making level (by calculating the difference between national and local figures), (ii)differences in productivity between two stations, and (iii) exogenous local factors about which management may not be aware. c. Staff assessment - As administrations gradually introduce an annual staff assessment system, the indicators can be used - with extreme caution - to compare individual performance to standards calculated at national, regional, and local level. d. Stafing and policy decisions by management - The decision to reorganize or establish new work units can be evaluated by taking into account workload and performance values collected at other positions. As an example, the necessary staffing would be (partially) calculated according to national criteria, with possible local adjustments. e. Public relations - An important aspect o f the work o f modern administrations i s to publicize, its performance both within the Government and to the public. n n n a n a sc .C cL $ .C c ca .C P a a - c4 c (r %c a - - a f C 4 In a a a a a a - - - a'- In/ a "p- Y- a a a a n n n n 3 eC 0 - a a a a a a a- I C Attachment 3: CustomsModemization Strategy Page 60 Appendix 3c Assessment o f TISA's Draft Customs Code A. Summary The law i s clear, based on the EuropeanUnion code, and embodies many modem features, which include: Valuation code aligned to WTO principles; post-release checks; the possibility for selective examinations electronic filing; Customs brokers; deferred payment and implicit possibility o f electronic payment. However, a number o f provisions are either missing, or could be stated ina more precise manner. B. DetailedAnalysis Subject to a more detailed analysis, the following areas may require further clarification: (i) Area o f competence o f Customs; (ii) System o f proof; (iii) o f investigation, search, and arrest; Powers and (iv) Procedures and operations. (i) Competence o f the Customs administration a. Territorial Competence-Article 2 ii.provides for operations on foreign territory. It establishes grounds for shared border facilities, but does not (i) mention the reciprocalpossibility for foreign Customs authorities to operate on Afghan territory, (ii) envisage that co-located border stations would require an intemational agreement extra-territorializingthe foreign territory on which they are located, so that the domestic legislation (which extends beyond Customs law) can be applied, for example, arrest and detention o f an offender in a co-located border facility conceded on foreign territory when that individual i s a national o f the neighboring country. Also, applicability o f other laws, such as traffic rules, between the facility and the Afghan border. Articles 4 and 5 define the territorial competence o f Customs, but limit it to approved border crossings and designated inland locations (although article 13-6 and 13-7 envisage mobile preventive and enforcement activities along undefined roads and at the premises o f importers). It would, therefore, be simpler to state that Customs have the power to operate throughout the Customs territory. Article 4 describes in vague terms the Customs territory (the reference to territorial waters, unless it concerns the Amu Daria river, i s superfluous); it does not establish a special border zone (strip o f territory that extends inland from the border, and where Customs officers have extended powers o f search and control). It does not define the border line, or exclusions (or forms o f relative exclusion) from the Customs territory (free zones), and does not mention intemational airports, which are implicitly approved crossing points, but where right o f access o f Customs officers must be stipulated. There are no provisions relative to the right o f access o f Customs officers to postal sorting offices, although it is implicitly mentioned under article 5 1-2. b. Operational Competence- As a rule, Customs shouldbe responsible for control over (i) goods and vehicles crossing, having crossed, or about to cross, the border, and (ii) individuals related to the above; Customs should also be the only agency allowed to perform checks when related to the movement o f goods. However, article 13-a) appears to restrict Customs powers to the control o f goods at approved crossings, or along specific roads (see also 13-6), and it i s not clear if other agencies have similar powers. A provision according to which Customs are the sole agency responsible for the control over goods imported, exported, or in transit, and individuals and vehicles wholwhich carry them, may prove useful to avoid possible conflict o f authority based Attachment 3: CustomsModemization Strategy Page 61 notably on an over-extensive interpretation o f article 9. Furthermore, it should be explicitly stated that Customs may perform compliance checks throughout the territory, and have the power to stop and search vehicles. (ii) SystemofProof Customs laws often rely on some form o f reversal o f the burden o f proof. This i s the case for valuation, but i s often extended to other activities. For example, when individuals carry goods within the border zone, Customs officers should have the power to request evidence that these goods were regularly acquired on the domestic market, or were lawfully imported. In some countries (France), there i s a list o f items which must always be accompanied by evidence o f lawful detention. In the absence o f such evidence, the goods are considered smuggled. These provisions prove in particular extremely effective against smugglingo f narcotics, as evidence o f legal detention cannot, usually, be provided. Articles 272 and 273 describe the procedure for documenting violations, but do not establish the legal standing o f evidence thus collected. A distinction between factual evidence documented in a statement signed by two Customs officers (which can only be disputed by administering the proof that the evidence was incorrect), and admission o f guilt (which can always be retracted) may prove useful inCourt proceedings. (iii) PowersofCustomsOfficers Article 12 o f the draft law i s very general, and combines several distinct concepts: (i) uniforms and firearms, and (ii) obligations (limited to ethics and confidentiality). Article 13-6 mentions the obligation to present identity cards, but there i s no definition o f these cards. It i s not clear what i s the status o f Customs officers (there i s a comment in the draft test concerning the possibility o f them not being civil servants). There i s no provision for an oath taken on commissioning. The provisions about firearms are vague. Powers o f search and arrest are not defined (neither i s the possibility to submit a suspect to a body or in-cavity search). The possibility o f searching premises does not appear to exist. In the current text, this would lead to handing over to the police all serious enforcement activities. (iv) Procedures and Operations The law seems to institute a monopoly for clearance by Customs brokers (article 16): This may not be consistent with international practice, where an importer always has the choice between self-declaration, or usingthe services o f a broker. e There i s a reference inarticle 18 to a "Customs board" which i s not defined inthe law. There i s no provision for a declaration processing fee, although this i s a convenient way o f fundingthe maintenance o f computer systems. There i s no apparent provision for statute o f limitation. e Exemptions and end-use verification are too broadly defined. 0 There should be a mechanism for dealing outside the Court system with other than smuggling Customs offences. Attachment 3: Customs Modernization Strategy Page 62 Appendix3d The Customs Preventive and EnforcementApproach inAfghanistan (i) InternationalBackground The Afghan Customs Administration i s moving to a new approach to its activities, much more objective-driven and dynamic than in the past. It is based on an internationally observed evolution: 0 The revenue collecting role o f Customs, although fundamental, will evolve, due to (i) reduction o f duties (regional free trade agreements, WTO rules, EU accession), (ii)the introduction o f VAT, which implies radically different organization and methods o f work, (iii) increasedinvolvementinintellectualpropertyissues,and(iv)anessentialroleinthe an protection o f the environment, notably through the application o f international conventions; Customs are increasingly involved intrade and transport facilitation (just-in-time inventory, increased border traffic, international competition); Customs have a unique observation ability to monitor movements o f persons, goods, and means o f transport, and that capacity should also be put to use in a whole range o f non- revenue related activities, including the fight against smuggling, illegal immigration, and organized crime; There i s a strong distinction between verification of compliance for commercial traffic, and the detection o f smuggling and other offences, but the overlaps in terms o f detection techniques and skills are such that the same institution can effectively combat both types o f irregularities. (ii) Objectives o f the Present Preventive & EnforcementPlan The present plan aims at: The measurement o f compliance and facilitation o f legitimate trade through the introduction o f (i) selectivity for the verification o f commercial imports, and (ii) targeting o f suspicious individuals and means o f transport, thereby enabling non-Customs traffic to cross the borders unimpeded; The introduction o f a modem investigations service destined to (i) collect and process intelligence, (ii) feed selectivity and targeting databases with updated information, (iii) carry out investigations and document and prosecute offences, and (iv) support post-release checks and audits; The introduction o f a preventive and enforcement (P&E) service which will patrol the borders and main domestic routes, will support the investigations branch, and will carry out spot, random and/or targeted checks, on passengers and goods entering the country. (iii) SupportPlan The plan will require support from various donors, preferably from countries that have demonstrated a strong capability for processing Customs-oriented intelligence information, and have developed a preventive service inan environment comparable to Afghanistan. Inaddition, it Attachment 3: Customs ModemizationStrategy Page63 requires further streamlining and more effective targeting o f key issues, as described in the sections to follow. a. Needfor Improved Compliance Checks & Better Enforcement - Revenue collection mustbe complemented by improved compliance checks, and facilitation should be balanced with better enforcement throughout the territory, at a time when the very concept o f border i s less geographic than functional i.e., the border i s where and when importers and travelers have satisfied all obligations related to finally entering the country - for example an inland clearance station, or bonded warehouse. b. Increased Institutional Scope & Territorial Control - The following checks and verifications should therefore be performed, on a selective andor targeted basis, all over the territory: 0 Customs should have the ability to check vehicles in transit to establish that they comply with international rules, and that goods are not leaked onto the domestic market. When goods that were obviously smuggled are found within the country, this becomes a Customs offence. 0 The area o f activity o f Customs i s not only the actual approved border crossing. Smugglers can also cross the border line in the interval between two border stations (the "green border"). Customs may authorize crossing the border at certain points where it does not maintain a permanent presence, but must be able to intercept and identify goods brought in contravention o f existing laws. It will be increasingly difficult - and ineffective -to try to inspect everything, either at the borders or at inland f a ~ i l i t i e s .Modem Customs must use selectivity tools, based on risk ~ ~ analysis, intelligence sources, and sharing o f data with other agencies and institution^.^' Simplified procedures, as recommended by the WCO Kyoto Convention and EUstandards, provide for clearance outside Customs facilities. These must be supported by the ability to carry out checks, audits, and sometimes searches, inimporters' premises. Such verifications are either established by law, or pre-accepted by importers who wish to benefit from streamlined clearance procedures. It must be accepted that (i)in no country will all the irregularities be detected or prevented, and (ii)international experience shows that comprehensive checks are the worst way o f ensuring compliance. c. Counteracting & Confronting Non-revenue Criminality - In the course o f these activities, Customs can encounter other, non-revenue types o f criminality, either when goods are imported, or by subsequently reviewing past activities, such as the following: Illegal immigration is better detected when vehicle and container checks are determined by preparatory targeting and analysis o f documents and intelligence sources. In addition, an indicationo f illegal traffic can be obtained through the analysis o f previous movements. 31 Duplicated controls carried out successively bythe police andCustoms on the same vehicle, as is often the case now, are not only a waste o f resources, but also prove even more ineffective when they become systematic. 32 Domestic and foreign. Attachment 3: Customs ModernizationStrategy Page64 0 Customs all over the world play a major role in the fight against drugs smuggling, partly through controlled delivery mechanisms, monitoring o f commercial shipments, and their institutional responsibility for carrying out search and rummage; 0 Concern for environmental issues i s increasing, and Customs play a fundamental part in identifying and interceptingtraffic o f endangered species (Washington Convention), radio- active material, or dangerous and/or polluting items. Although addressing this type o f criminality i s essentially the role o f the police, Customs should contribute to the defense o f society and be able to process its sources o f data, initiate investigations, and participate in subsequent inquiries and legal proceedings. In an environment o f increasing menaces, the role o f Customs as a full-fledged law enforcement agency i s far from negligible. d. Customs Preferred Role & Enforcement Functions - To participate in these State objectives, Customs must be part o f a new organization o f responsibilities and competences. For Customs, it means: Expediting genuine trade while developing tools for targeting and selecting suspicious movements, with no interference from other agencies; Ensuring compliance through: (i)a radical re-deployment of staff and resources, as envisaged under Customs development strategy, (ii) introduction o f mobile enforcement teams as part of a full-fledged preventive service, at borders as well as the inlandp (ii) a strong capacity to share and process intelligence, obtain - and pay for - information from informers, and use commercial data available to Customs or the tax administration for detecting other irregularities (such as VAT frauds); The possibility to carry out, under specific conditions, controlled deliveries and manage undercover operations; Cross designation o f police and Customs officials to carry out up-front coordinated checks; and Wide inter-agency cooperation, destined to use the best resource when and where it i s available. (e) Possible Bottlenecks in the Implementation of the Plan - Until recently, the evolution o f Customs in some countries has been different from the strategy outlined above. This i s because: (i)thetraditionalroleofCustomsinsocialist, andother, countrieswaslimitedtotravelersand exchanges involving state enterprises; (ii) free movement o f goods outside approved points o f clearance was restricted, and by default very often considered as contraband, so the detection o f smuggling required limited skills; (iii)either vested interests or matters o f national security encouraged govemments to entrust border control issues to agencies supposedly more loyal than Customs; and (iv) inthe meanwhile, Customs acquired a reputation o f corruption and malpractice that made that agency untrustworthy. Although throughout the world Customs i s considered a law enforcement agency, in Afghanistan resistance i s expected to this evolution. The Afghan Customs Administration has indicated its clear commitment to change through its reform 33For example, staff at border stations incharge of initial verifications should be part o f district squads, rotating according to traffic needsbetween border stations, and carrying out targeted verifications, either at the border crossings, along the green border, or along the major roads. Many o f these controls canbe carried out incoordination with other law enforcement agencies, but Customs should also have the ability to operate autonomously. Attachment 3: CustomsModernizationStrategy Page65 strategy, and i s intent on playing the role o f a modern agency, fully aware o f its responsibilities towards national objectives and i s confident inits ability to deliver. 0 Needfor Phased Implementation - This plan will, therefore, require the phased introduction o f reforms, involving legislation, organizational strengthening and training, incentives structures, and procurement o f essential equipment. This should be phased inthe followingmanner: 0 Necessary supporting legislation, sub-legislation, guidelines, and definitions; 0 A new and flexible organizational layout, accompanied by specific training, including in matters not immediately identified as linked to Customs (basic immigration, phyto-sanitary, standards, and environmentalrules, destined to create awareness o f these issues); 0 Cross-training between agencies, to encourage all staff to make effective use o f resources available inother departments; A compensation, rewards, and career perspective, package; and The necessary equipment to gradually build up a preventive and enforcement wing in the Afghan Customs Administration. Ee, 0 E 8 Y ;ij =I rj W a 3 3 - b m 0 2 z * 4.- a j 8as e e! e 5 W E I L G c Attachment 5: Information& Communication Technolow Page 77 ATTACHMENT 5 INFORMATION& COMMUNICATIONTECHNOLOGY (ICT) A. Background,ExistingICT Infrastructure& RecentDevelopments (i) Current Status o f AfghanistanTelecommunications Infrastructure 0 Afghanistan has an inadequate national telecommunications infrastructure. The Ministry o f Communications (MOCmm) operates a limited digital service mainly in Kabul, Herat and Mazar-i-Sharif, where recent national and international satellite links have been established. A fixed line digital switch comprising o f 12,000 lines has recently been installed in Kabul which has 7,000 active lines. Similarly Herat has a 7,500 fixed line digital switch, while Mazar has a capacity o f 4,000 lines. Work i s inprogress to connect five main cities o f Afghanistan using Very Small Aperture Terminals (VSATs) which will give the MOCmmlimitedtransmission backbone to connect all its digital circuits. 0 There are two Global Standard for Mobile (GSM) service providers operating in the country, namely Afghanistan Wireless Communications Company (AWCC) and Roshan. However, their services are limited to only Kabul, Herat and Mazar. Their networks are already saturated and cannot meet the growing demand. 0 The inadequate communications infrastructure i s a major limiting factor in overall government operations. The effect i s much greater on the Afghanistan Customs Department (ACD), where flow o f information i s absolutely necessary for efficient operations. (ii) Government & Bank Strategy inthe ICT Sector 0 As part o f the draft national ICT policy, the MOCmm has identified the expansion and improved functioning o f the government's own communications network, as a major priority for communications development over the next year. 0 There i s an approved IDA credit - the Emergency Communications Development Project -designed to improve delivery of communications services to the Government and people o f Afghanistan. The project has three major components, covering: (a) expanding and integrating the existing Emergency Government Communications Network (GCN), (b) MOCmm's institutional capacity buildingand (c) postal sector reform. Inthe first phase o f the GCN component, the MOCMM will expand the existing GCN to include an additional 12 ministries which are located in Kabul, including Ministry o f Finance. The second phase will include expanding the GCN to 14 provincial capitals. The ICT services provided to provinces, inparticular provincial capitals, include connection to the Mustojiats and Customs inaddition to other important government offices. 0 It is expected that the private sector will eventually take a lead role to provide the requiredtelecommunications infrastructure and related services. (iii) Current State o f ICT Infrastructure including Computerization at the ACD 0 The mission visited Customs headquarters in Kabul, Kabul international airport, custom houses (ICDs) in Kabul, Jalalabad, Herat and Mazar, and the border posts at Torkham, Islam Qalla and Hairatan. The team also carried out detailed infrastructure surveys and Attachment 5: Information& CommunicationTechnology Page 78 needs assessment of custom facilities duringthese visits, includingfor ICT elements such as electricity, telecommunications, and computerization. 0 At present the communications infrastructure between custom offices inKabul (including the headquarters, Kabul airport and the ICD), provincial offices and border posts i s non- existent. The present limited GSM cellular services and digital lines being operated by the MOCmmare inadequateto fulfill the communicationneeds o fthe ACD. 0 All ACD processesare manual. USAIDis runninga capacity buildingprogram, including for automation, through a team of Bearing Point consultants working with ACD. The program consists of assisting ACD in Kabul to automate some o f the processes and develop an ACCD (Afghanistan Codified Customs Declaration), which has been implemented inKabul but not in the outlying regions of Afghanistan. This project will be in a position to benefit from new legislation, a new HS tariff, a trader identity numbering scheme (TIN), valuation and classification reforms and from a scheme to license professional Customs Brokers. These Bearing Point outputs will be converted into the format required for the ASYCUDA system. 0 Power supply i s available at most ICD locations, including Kabul, Herat, Mazar, Jalalabad and Kandahar. However, there are some locations, including the border posts, where the electricity is neither stable nor reliable, and i s contingent upon supplies from neighboringcountries. B. Proposed Project's ICT Objective & Strategy (i) ICTObjective The objective of the proposed project ICT works is to create an enabling environment for efficient working of the Afghanistan Customs Department (ACD). (ii) TheICTStrategy Modem communication systems and transformation o f manual processes to an automated platform are essential for efficient management of customs operation in Afghanistan. Access to adequate communication systems and effective use o f ICTs globally has shown increased revenues, improved delivery o f services, and an overall significant improvement in customs operations. The project's ICT modernization strategy shall focus on: a. Modernizing Communications - A strong and reliable communications network comprising of Voice, Data and Video (at later stage) would be an important contributor in the successful implementation of the proposed Afghanistan Customs Modernization project. It i s proposed that a robust communications network be established using VSAT - SCPC (Single Carrier Per Channel) links to connect custom offices and border posts around the country. To accomplish this task a phased approach is recommended. This approach is in line with MOCmm's overall telecommunicationpolicy framework. b. Automating Processes- ACD's current manual processes not only lead to departmental in- efficiencies hampering trade, transport and transit activities but also result in substantial revenue loss for the TISA. I t is imperative that these manual processes be migrated to an automated customs system incorporating features like systems administration, national configuration, tariff and master file maintenance, cargo manifest handling, declaration processing and accounting. MOF has decided to implement ASYCUDA++ developed by UNCTAD for this purpose. The Bank project will support the computerization, automation and ASYCUDA adoption processes Attachment 5: Information & CommunicationTechnology Page 79 through: financing IT infrastructure; strengthening power supply and backup arrangements; and providing technical assistance for computerization, automation and ASYCUDA implementation. c. Merits of Adopting ASYCUDA - Some o f the advantage o f implementing ASYCUDA++ include the following: It is built on customs best practices around the world and has been successfully implementedin more than 80 countries, One o f Afghanistan's major trade partners, Iran, i s already usingit and importantly has agreed to provide the Persian version o f the software to Afghanistan and also assistance in implementing ASYCUDA++. Furthermore, the accounting and declaration data from ASYCUDA, if made available to both the Governmental and regional authorities, has the potential to build a degree o f trust and transparency into the system. This could contribute to the development o f and agreement over a fair and equitable system o f revenue sharing Moreover, the use o f duty deferment accounts could enable goods to be releasedunder bond allowing the revenue to be collectedcentrally. From the systems architecture point o f view, ASYCUDA uses distributed server environment which i s independent o f round the clock linkages/connections - and i s thus fully functional off line. d. Rationale o f Bank Involvement inCustoms ICT improvements - Bank involvement is needed inthe light o fthe following factors: TISA has specifically requested Bank's assistance insetting up a robust ICT network for ACD. ICT improvements will support IDA'STransitional Support Strategy's objectives related to fiscal strategy, institutions and management and governance and public administration reforms. The project i s completely in line with the ACD's Five Year plan and will assist the Ministry o f Finance achieve its objectives as laid out inthe plan. Other donors are already involved in building basic capacity in computing skills and automation. The Bank project I C T works will built on the work already done, by providing the requiredinfrastructure, equipment and technical assistance. There i s an immediate need to setup an adequate communication infrastructure followed by a planned and comprehensive automation strategy including implementation of ASYCUDA. The Bank i s already engaged with the TISA in the area o f communications, for instance, Emergency Communications Development Project has been approved by the board. The proposed project ICT strategy i s consistent with the overall telecommunications sector strategy. BothBank projects are likely to have a mutually complementary outcome inthe communications sector. ProposedICTElements The proposed ICT improvements include: (i)installation and commissioning o f a reliable communications network to connect custom offices in Kabul, custom houses in the provincial capitals and border posts, (ii)provisioning o f adequate power supply system to support automation and communications infrastructure (iii)automation i.e., computerization including implementationo f ASYCUDA++ and capacity buildingo f custom staff in basic computing skills as well as specialized software training inASYCUDA++. Attachment 5: Information & CommunicationTechnology Page 80 (i) ACDCommunicationsNetwork 0 Phase one would be a pilot installationo f VSAT (SCPC) hub site at customs headquarters inKabuland connectingKabulairport andICDusingradiolinks. 0 Phase two would involve connecting provincial custom houses (ICDs) with headquarters in Kabul again using VSAT (SCPC) links and in phase three all border posts will be connectedto headquarters inKabul. 0 VSAT - SCPC technology has been recommended to connect custom offices and border posts across Afghanistan after a careful review o f all other technologies available, especially the Microwave links. The installation o f Microwave links to connect border posts with provincial capitals and usingexisting MOCMMVSAT links would have saved ACD substantial monthly recurrent bandwidth costs. However, given the mountainous terrain and distances between provincial capitals and border posts, installation o f Microwave links would not only require heavy initial investment but will also be a challenge to maintain, mainly because a number o f "repeaters" are required which will create numerous point-of-failures, 0 VHF and HF radio technologies will also be implemented to facilitate voice communicationswithin ACD. (ii) ACD'sPowerInfrastructure Adequate power infrastructure i s required to support the proposed automation and communications network o f ACD. The project works will thus include the installation and commissioning o f Generators, Solar panels, UPS and Voltage stabilizers for all locations. A situation and needs assessment o f the present power supply arrangements i s provided in Table 1 below. Electricity Status Attachment5: Information C CommunicationTechnology Page 81 (iii) Automation of ACD - Computerization including office equipment and implementation o f ASYCUDA, Transit Systemand Capacity Building Thiswill entail the following equipment and technical assistance: 0 IT equipment, including PCs, printers, scanners, servers, etc., at the Kabul ACD and training facility, Kabul airport, Kabul ICD and training facility, 4 regional ICDs and at 8 border posts. 0 Installation of ASYCUDA and capacity buildingkaining both in terms of operating and maintaining ASYCUDA and related systems. This will require continuous training of the customs staff both in basic computing skills as well as in ASYCUDA++. USAID through the Bearing point has prepared a good ground in this area by identifying about twenty Afghan staff fluent in English with some basic computing slulls. These individuals are presently under training. These local staff can act as change agents duringthe project implementationand can also helptrain others inthe ACD. 0 A permanent well equippedtraining roomwill be setup as part of this project at the ACD headquarters in Kabul which will be used to deliver regular IT training classes to the staff. Moreover, the training facility planned at the Kabul ICD will also impart IT education to customs officers from boththe center andthe regions. D. InstitutionnelArrangements & ProjectImplementation (i) Automation&ICTImplementation a. Management Staffing at the ACD - It i s recommended that an experienced IT ProjectManager (PM) be appointed to implement the ICT works of the Afghanistan Customs Modernization project. The P M will be responsible for: (a) successful implementationof all elements o f the ICT project including commissioning o f the communications infrastructure, setting up the ACD LAN" and ASYCUDA++ installation, (b) IT training for the ACD staff both in basic computing skills as well as specialized ASYCUDA training in coordination with the UNCTAD team, (c) formulating an IT team to operate and maintain the ICT infrastructure, (d) single point of contact for all ICT related issues inthe project. The ideal candidate for this position would be an Afghan who could then occupy the job of Director IT, as proposed inACD's Five Year Plan. However, given the scarcity of trained local resource persons in Afghanistan, it may not be possible to hire a local. Inthe scenario of hiringa foreign consultant, it would beprudent to have an Afghan Deputy Project Manager (DPM), who would work with the P M on the ICT project closely from the start and will be in a position to take over the responsibilities as soon as the project i s completed. b. Strengthening WOPSICT Management Capacity - UNOPS is likely to be the implementing agency for the implementation of the project, including its ICT works, on behalf of the MOF/ACD. Duringthe appraisal, the team met with UNOPS' Procurement and ICT officers to assess organizational capabilities required to implement the ICT works. Although UNOPS in Kabul has been involved in implementation o f two Bank projects with significant reconstruction work, so far they have not been engaged in any major ICT project implementation. Therefore, it i s recommended that they strengthen their ICT implementation and project management team basedinKabul for successful completion of the project. UNOPS' ICT project team should comprise of a Project Manager with at least ten years of experience in implementation of similar IT projects and an ICT Specialist fully conversant with Attachment 5: Information & Communication Technology Page 82 VSAT and radio technologies, LAN/WAN infrastructure based on TCP/IP, VHF and HF radio operations, hardware sizing, network security etc. (ii) ASYCUDAImplementation The implementation strategy for ASYCUDA i s again a phased one, where a pilot site will be selected first and will be thoroughly tested before rollouts to other locations. The pilot site ideally would be the customs headquarters, Kabul airport and the I C D at Kabul. For the Transit system implementation Jalalabad - Torkhum - Kabul corridor would be a good pilot site which would be in line with the overall project phasing. Please refer to Appendix 12a for a detailed ASYCUDA++ implementationplan as well as related costs. (iii) Sustainability&Risks 0 Even with minimal or no I C T infrastructure, Afghanistan customs still manages to contribute about eighty percent interms o f revenue to the central government. Improved I C T infrastructure and automated processes are likely to contribute to increased revenue collection, provided these are optimally and efficiently operated and maintained. 0 Technical sustainability will be enhanced through continuous training and transfer o f technology for implementing the proposed works. A detailed technology transfer plan for all I C T elements will be prepared and the progress will be monitoredregularly by the Project Manager and Deputy Project Manager o f the ACD. It is assumed that with implementation o f the project, ACD will be able to generate enough fimds/revenue to sustain its VSAT links and be able to pay for the monthly bandwidth costs. Given the scarcity o f human resources, Ministry o f Finance and A C D will formulate a plan with Kabul university to bring in students during summer holidays as interns, who can then become prospective employees. This could partly help mitigate the capacity constraints o f ACD inthe successful implementationo f the ICT works. The ICT project i s potentially at risk from the general security situation in Afghanistan. ICT installations includingVSAT and Microwave links could become potential targets of attacks, especially outside o f Kabul. However, like most o f the current reconstruction and development efforts, the long term sustainability o f the project i s likely to be tied to the general security situation inthe country. (iv) Procurement Methods a. Procurement of Goods - The procurement o f goods will be done through turnkey contracts for the provision, and maintenance o f the communications network ,office equipment including computers, printers etc. and power equipment. International Competitive Bidding (ICB) and National/Intemational Shopping (Isms) will be used.MOF has decided to single-source ASYCUDA software application to automate ACD's business processes. b. Consulting Services and Training - Consultancy services will be contracted following procedures in accordance with the relevant Bank's Procurement Guidelines and as detailed in Attachment 1 (Procurement Arrangements). Attachment5: Information & CommunicationTechnology Page 83 Appendix 5a ASYCUDA Implementation,Staffing & PhasingPlan A. PhasingPlanfor ASYCUDAImplementation (i) Phase 1 (Maximum 24 months) The first phase ofthe project canbe segregatedinto anumber of sub phases: a. Phase 1(a) Mobilization (6 months) - This work couldbecompleted ahead ofthe mainproject: Awareness Programs; Establishment of a project office and a computer training room; Establishment of a local project team. IT and FunctionalTraining for the project team; Study tours (Jordanand Bosniarecommended). Procedural and FunctionalAnalysis; Site inspections and scoping of the Roll-out to the plannedlocations o fAfghanistan. b. Phase 1(b) Prototyping (12 months) - The followingwork will be undertaken whilst the physical infrastructure is beingre-built and as communications links, Local Area Networks and power supplies are being installed inthe various locations that are to be computerized: Translationo f system (Iranian systemmaybe available). Translation o f Genevaprovidedreference tables. (Iranian files may be available). Definingthe user requirement abstract. Definingrole ofand approving Customs brokers. Adaptation of the work of Bearing Point inthe following: o Conversion from ACCD (Afghan Codified Customs Declaration) to S A D declaration and introductiono f such aheadof computerization. o Integrationof tariff NewH S tariffbeingintroducedwith four basic rates of - import duty. o Assignment ofTINto all approved importers and exporters o Programmingofvarious valuation criteria. Configuration ofnational system. Configuration of Import and Export Declarations on the system. Definitionof Customs Procedures Building of reference tables (many of which may be available from the Iranian system). Programming of system Taxation Rules. Adapting filter programs (principally assessment notice andrelease order). Programming the user definedreports. Attachment 5: Information & CommunicationTechnology Page 84 Training o f Local Implementationteam (LIT). Laboratory testing and fine tuningof the prototype. Delivery o f the prototype to HQ. c. Phase I (c) Pilot Installation in Kabul. (6 months) - Pre-requisites: Physical environment prepared (air conditioned, LAN installed, stabilized power supplies assured, new work flow accommodated by room layout). Installationof the system at: Kabul Inland Clearance Depot (ICD) Kabul InternationalAirport. Operational testing and further fine tuningo f the system. Training o f local system users - Customs and Trade. Production o f the national operational system. d. Phase I (d) Installation of a Transitsystem between Torkham, Jalalabad and Kabul: (six months concurrent withprototypingphase) - Pre-requisites: Stable security environment. VSAT microwave communications system installed. Transit Regulations in-place. Physical environment prepared (Air-conditioned, LAN installed, stabilized power supplies assured, new work flow accommodated by roomlayout). Commencement: Earliest Start: 3 months after start of prototyping. Elements: Training o f local system users - Customs and Trade. Installation and configuration of transit modules in Torkham, Jalalabad and Kabul. Testing of inward and outwards transit procedures. (ii) Phase11. Roll-OutPhase (24months) The second phase will extend the proven automated systems to all Customs offices throughout Afghanistanas humanresources, funding, infkastructure andthe overall security situation allow. a. Phase I1 (a) Rollout to Customs OfJice Jalalabad (3 months) - Pre-Requisites: Security situation i s stable. Physical environment prepared (Air-conditioned, LAN installed, stabilized power supplies assured, new work flow accommodated by room layout). Installation o f the operational system developed and fine tuned under Phase I. (to complement the previously installed transit system.) Elements: Customs and trade users to be trainedto operate the system. Attachment 5: Information & Communication Technology Page 85 b. Phase II(b) Development of National Communications (3 months) - Pre-Requisites: VSAT communications system inplace. Location: ASYCUDA communications system to be installed between all computerized Customs offices. Elements: Training o f Headquarters staff and local system support officers to use the system and data. The system will: Automatically extract declaration and accounting data every night in each office (Jalalabad ICD and Kabul ICD). This data will be automatically uploaded and consolidated into a Customs Headquarters data base inKabul. 0 Reference table updates input at Customs Headquarters will be automatically downloaded to each Customs office. (Example: tariff and currency updates). Accommodate the ASYCUDA transit system and enable transit statistics to be produced. c. Phase II (e) Rollout to Customs Offices Herat and Islam Qalla( 3 months) - Pre-Requisites: Security situation i s stable. Physical environment prepared (air conditioned, LAN installed, stabilized power supplies assured, new work flow accommodated by room layout). Location: The operational system, the transit system and the national communications system will be installed inthe Herat region. The through transit procedure to be tested between two border stations o f IslamQalla and Torkham. d. Phase II (d) Completion of Rollout to Remaining Customs Ofices of Afghanistan - Location: The proven system to be rolled out to the remaining Customs Houses and border offices as required. Elements: Communication links will be established between HQand several other government Departments and Ministries enabling the statistical outputs o f the system to be shared and distributed according to government requirements. Management information to be distributed to Headquarters Sections (audit control, valuation policy, tariff control, enforcement and intelligence). Risk management team established to monitor and adjust selectivity criteria. B. SystemCapability The applications system software to be supplied under this project in the first phase will include the followingmandatory capabhties interms of: Attachment 5: Information& CommunicationTechnology Page 86 Tariff and control table management; Management of systemconfiguration; S A D processing, including temporary admission, inwardoutwardprocessing, Exports, Transit and post entry; Direct Trader Input(DTI); Selectivity; ExaminingOfficer control; Warehousing; Payment, cash accounting and duty deferment; Manifest processing; ASYCUDA++ development platform; Systemsecurity, passwords and configuration of user groups; Calculation and management of duties and taxes as contained within the Customs tariff (e.g. VAT, Customs, Excise); Declarationdata for statistical and management information systems. National communications includingtransit. Project Inputs ByGovernment "inlund"or through alternatefunding An ACD Project Director (APD)who will beresponsiblefor the overall coordination ofthe project with the ACD. A full-time ACD NationalProject Manager (APM)willbeappointedresponsiblefor the full implementationprogram inall pilot offices andthe establishment andmaintenanceof liaison with thirdparties. A full-time ACD Project Team (APT) of between four and six experienced Customs officers. Two will be computer orientated and, with training, will be able to build, load, copy, amend, archive andrestorethe system. Two Officers will have training slulls, and the remainder will be responsible for the documentation and organization of the Customs procedures. Within a singleoffice environment, suitablephysical accommodation for all the project team and office automation equipment. Travel and subsistence for ACD nationalproject staff within the country. ByUNOPS A Project Chief Technical Adviser (CTA) to co-ordinate all aspects of the various project inputs and to be responsible for the reporting of project progress (shared with the Trade Facilitationpart ofthe project) UNIX/RDBMStrainingwhchwillprovidebasictrainingintheUNDZoperatingsystemand the selectedrelational database managementsystemfor upto 4 persons from ACD. Two project vehicles will be provided for use by the experts and project team members to cany out their duties. Essential office computer equipment for HQ(national team and international experts) and for pilot sites. Attachment 5: Information & CommunicationTechnology Page 87 0 Local interpreters. Two interpreters will be employed locally during the four year term of the project. They should be able to interpret between Dan and English. They should also act as project secretaries and occasional translators and should ideally be capable o f using word processing on micro computers. 0 Local h v e r s . Two full time drivers are required to service the project experts and the project team. 0 Equipment: o Essential equipment andproprietary software; Servers, PCs, printers, UPS, etc., for the prompt commencement o f project activities, file building for the prototype and in- country training that will be requiredbythe project team inHeadquarters; and o Remaining equipment, as identified, for useat the remaining sites. 0 Maintenance costs for equipment. 0 Project consumables (paper, printing, fuel for project vehicles, communications, etc.). 0 Refurbishment costs for essential building works to the computerized offices and related equipment, including generators, stabilized power supplies, air conditioners, dust proofing, communications equipment and suitable local areanetworks. (iii) UNCTAD UNCTAD through fundingprovidedby the World Bank, inclose consultation withthe ACD, will provide the following inputs based upon a continuous assessment of the respective Customs Administrations involvingtechnical needs o f this institution. 0 A Senior Information Technology (SIT) Advise. 0 A total o f sixteen missions, each averaging one month's duration, will be undertaken duringthe project according to the demands o f the work and the requirements o f ACD. The UNCTAD SIT Adviser will assist the work o f the APM and will direct the work o f the IT advisor. H e or she will primarily be responsible for ensuring that the ASYCUDA communications package i s properly adapted to the needs o f the ACD; that the project team are trained and capable o f building and installing the ASYCUDA ++ system, o fprogramming the filter programs and user definedreports and o f producingthe required system documentation inDari. 0 An Information Technology(IT) Adviser. In Afghanistan. 0 The IT Adviser will be recruited with the co-operation o f the Iran Customs Department and will provide full time in country assistance the APM. The IT Adviser will work under the direction o f the SIT Adviser and will be responsible with the respective A C D counterparts for the technical aspects o f system building, maintenance and installation at all required offices. The IT adviser will also assist with adaptation o f reports and filter programs, with the writing o f communication scripts and with the preparation o f technical system reference documentation inDari. A Senior CustomsAutomation Adviser (SCA). 0 A total o f sixteen missions, each averaging one month's duration, will be undertaken duringthe project according to the demands o f the work and the requirements o f ACD. The SCA will assist the APM and direct the work o f the Customs Automation Adviser. H e will be responsible for the functional aspect o f the project including planning and determining the work flows, office layouts, Customs Procedures (including DTI), system taxation rules, training programs, systems analysis, co-ordination with other Attachment5: Information & CommunicationTechnology Page 88 government departments and interested bodies and for the making o f any resulting . recommendations to the Project Director. A CustomsAutomation Adviser (CAA) in Afghanistan. 0 The CAA will be recruitedwith the co-operation o f the IranCustoms Department and will provide full time in country assistance to the APM. The UNCTAD Customs Adviser will work under the direction o f the SCA and will assist the APM. CAA will be responsible with the respective ACD counterparts for the functional aspects relating to buildingo f the prototype system. CAA will also be responsible for the fiscal integrity of the system, for building and maintaining the password file and for ensuring that the new Customs Procedures and the planned office work-flow system are properly implemented at each site that i s computerized. A Regional Project Coordinator. 0 The Project Coordinator will devote four months of each year to co-ordination o f UNCTAD project activities, including project monitoring, backstopping and various administrative arrangements such as Customs and training, expert selection, recruitment . and functional training course organization. TechnicalLiaison OflcerKoordination Programmer (TLO). 0 The TLO will be responsible for the technical liaison and backstopping between the ACD project team and the ASYCUDA++ development team in Geneva. The Technical Liaison Officer will also be responsible for the analysis and programming activities relating to the system functionality in the Customs Department and o f the preparation o f the requirements to interface ASYCUDA++ with other Governmental information systems, as necessary. A Senior CustomsBusiness Analyst (phase2) 0 The analyst will provide on-going functional analysis and advice to enhance the local implementation o f the ASYCUDA++ system in order to interface it with other Governmentalinformation systems. Senior ManagementITAnalyst (Phase 1) 0 The Analyst will work in close cooperation with ACD and will periodically visit Afghanistan to determine project status, attend coordination meetings, etc., in furtherance o f project related activities. ASYCUDA++ Technical and Functional Foundation TrainingCourseDelively costs 0 These relate to the provision o f training activities. Training activities will be undertaken inAfghanistan. Duty travel costs 0 (Daily allowancesheimbursement) associated with in country travel by UNCTAD experts and mission costs for coordination, training and technical support by . the Geneva-based team. Study Tours 0 Two study tours for eight participants to two suitable countries employing a DTI ASYCUDA ++ system (Jordan and Bosnia recommended). Attachment 5: Information & CommunicationTechnology Page 89 Sundries 0 These are for the procurement o f any miscellaneous items required during the project implementationactivities. UNCTADProject support costs 0 At 10%o fthe total costs. Contingency 0 For any additional, unforeseen items identifiedfor the project. Attachment 6: Trade & Transit Page90 ATTACHMENT6 TRADEAND TRANSIT (i) TheMacroEconomy The population o f Afghanistan is estimated at 22 million and GDP is estimated at US$4 billion (US$186 per capita). The value of official exports over this period was low at just US$lOO million although re-exports smuggled through to Pakistan in particular i s valued at US$2.1 billion. The import of goods and non factor services over the same period equals US$3.6 billion. (IMF, 2003) GrowthinGDP during2002/03 was 28.6% primarily due to resurgence inagricultural production as agriculture supports about 85 percent of the total population and accounts for about 50 percent o f GDP.34Agricultural production in 2002 i s estimated to be approximately 82 percent higher than in2001.35 Although, a few large state-ownedindustriesare operational, including cotton gins and granaries, the economy i s dominated by small-scale production and informal sector trading, includingsuch activities as handicraft manufacture, sewing, metal working, and machine repair (World Bank, Trade and Regional Cooperation betweenAfghanistan and its Neighbors, 2003). (ii) TradeFlows2000 Presently, there is very few data on Afghanistan's foreign trade flows and even fewer are fully reliable. The breakdown in the statistical service and basic government data collection is exacerbatedby (a) partial control of trade and customs by regional authorities, and (b) extensive informal international trade in both imports and particularly exports. For example, some recent work on the petroleum sector indicates that estimates of domestic imports range fromjust under 0.5 million tons to well over one million tons36,and total imports, including products for re- export, may approach two million tons. It is known, at a qualitative level, that Afghanistan's total trade is substantially higher than the official statistics suggest. It is also known that a large proportion o f commercial imports are subsequently re-exported unofficially to Pakistan, profiting from Pakistan's restrictive trade regime and hightariff rates. To remedy the absence of trade statistics, in2001UNDP mounted a survey around the borders o f Afghanistan, counting the number o f vehicles entering/exiting Afghanistan and extrapolating trade flows from these transport estimates. The results are shown inTable 1below. 34Basedon 1993 estimates. 35Derivedfromthe annual food assessmentofthe Foodand Agriculture Organizationofthe UnitedNations(FAO) 36 Tanzania, a low income country with a broadly equivalent population, imports approximately 1.25 million tons ofpetroleum products. Attachment 6: Trade & Transit Page 91 Table 1:Afghanistan Trade Flows(US$ million):2000 Iran Pakistan Total Transit Traffic: Imports 379 61 440 Exports 39 6 45 Total 418 67 485 BilateralTrade: Imports 39 221 260 Exports 0 45 45 Total 39 266 305 UnofficialTrade: Imports 95 82 177 Exports 139 941 1080 Total 234 1023 1257 Total Trade: Imports 513 364 878 Exports 178 992 1170 Total 691 1356 2048 Counting vehicles for a few days i s a rather crude way o f estimating trade and there seems to be some inconsistency between the total level o f imports and the re-exports to Pakistan. The volume o f goods imported for re-export should correspond with the value o f goods re-exported. 20 percent seems a rather high figure for value added within Afghanistan, as indicated by Table 2, based on the UNDP/WB study o f 2000. Table 2: Total Trade (US$ million) 2000 Imports Exports Domestic 396 130 Re-exports 806 1097 Total 1202 1227 The estimates were made before the change inregime. A new trade survey, again based on truck counts around the borders, i s planned for November, 2003. (iii) TradeFlows2003 A recent limitedtraffic study at most o f the main Border Posts, inconnection with the survey of customs' infrastructure, counted the following daily flows o f commercial cargo vehicles (the count periods ranged from one to three days). The results are shown inTable 3 below: Table 3: Cross-BorderFreight Vehicle Flows (vehicles/day) Light Medium Heavy Total Torkham - Jalalabad 80 190 530 800 IslamQalla - Herat 20 40 115 175 Torghundi -Heart 10 20 60 90 Sher Khan - Kunduz 5 15 35 55 Aquina -Mazar 2 35 37 Hairatan -Mazar 14 1 59 74 Attachment6: Trade& Transit Page 92 (iv) Assumutions for Trade Estimates Developing estimates o f present trade values and volumes, in a scenario where very little reliable data i s available, requires making some broad and rather elementary assumptions, such as: The vehicle counts at the border points provide reasonably reliable estimates o f annual average traffic flows; Vehicle payloads o f 1 ton for a light vehicle, 12.5 tons for a two-axle medium truck and 30 tons for a heavy truck are reasonable approximations to reality; Total aid traffic amounts to about 500,000 tons, mainly routedthrough Pakistan Assumed average import values are: Pakistanroute: US$ 400/ton (mixed cargo) Iranroute: US$lOOO/ton (consumer goods and fuel) Torghundi: US$ 300/ton (primarily oil and gas) Sher Khan: US$lOOO/ton(machineqdequipment) Aquina: US$ 300/ton (primarily oil) Hairatan: US$ 300/ton (primarily oil, grain, fertilizer) (v) Estimation o f Afghanistan's Trade inVolume & Value Terms Based on these assumptions, the total tonnage and value o f Afghanistan's imports can be estimated, though the margin o f error may be substantial (Table 4). Table 4. Afghanistan's Import Traffic, 2003 Total Imports(million tons) Value Imports Truckdday Total Aid Commercial US$/ton US$ billion Torkham- Jalalabad 800 3.35 0.50 2.85 400 1.140 IslamQalla - Herat 175 0.72 0.72 1000 0.725 Torghundi- Herat 90 0.38 0.38 300 0.113 Sher Khan - Kunduz 55 0.23 0.23 1000 0.227 Aquina-Mazar 37 0.19 0.19 300 0.058 Hairatan- Mazar 74 0.33 0.33 300 0.098 Total 1231 5.20 0.50 4.70 2.360 Overall commercial imports are estimated as about US$ 2.4 billion, double the level o f imports estimated for 2001. Given the substantial increase in aid and the revival o f commercial activity, since the change inregime a rapid growth in imports was expected. This is broadly equivalent to the relative changes recorded in the Comtrade statistics. The Comtrade statistics do not fully cover all the official trade but Table 5 shows that trade from many more o f Afghanistan reporting partners increased (35 countries) than declined (11 countries) and that many o f the growth rates were dramatic. In total, the Comtrade statistics showed a near doubling o f Afghan imports in 2002. However, only 46 countries, from a possible 250, reported on their trade with Afghanistan in2002 and, therefore, the numberscan onlybe consideredindicative. Attachment 6: Trade & Transit Page 93 Table 5. Afghanistan: ChangeinImports2001-2002 ChangeinImports TradingPartners ImportValue, millionUS$ (%I No. YO 2001 2002 >(-50%) 6 13 5.8 2.1 0 - (-50%) 5 11 40.5 22.7 0-+50% 5 11 118.1 155.6 50% - +loo% 3 7 187.4 306.5 100%- +150% 1 2 0.2 0.4 150%- 1200% 2 4 7.0 20.3 200% - +300% 7 15 56.1 194.3 300% - +4OO% 3 7 9.6 41.4 400% - +500% 2 4 1.5 8.1 <+500% 12 26 7.1 99.9 TOTAL 46 100 433.1 851.3 Source: Consolidated data UNCOMTRADE and Iran CustomsAdministration (IRICA) From the limited sample available, Pakistan remained the principal trading partner o f Afghanistan and its trade increasedby over 50%, as shown inTable 6. Table 6. Afghanistan: PrincipalTrade Partners(Imports) 2001 2002 US$ million % US$ million YO Pakistan 143 33 223 26 Korea Rep, 95 22 128 15 Iran(non oil) 37 8 125 15 Japan 45 10 84 10 USA 6 1 80 9 Germany 14 3 48 6 Russia 8 2 32 4 Turkey 7 2 20 2 China 17 4 20 2 Kenya 32 7 16 2 Other 31 7 75 9 Total 433 100 851 100 Source: Consolidateddata UNCOMTRADE and Iran CustomsAdministration (IRICA) Exports to Afghanistan from U S A rose by 1293%, Russia by 319%, Germany by 250% and Iran 242%37. Several o f Afghanistan's neighbors, such as Turkmenistan, Uzbekistan and Tajikistan, didnot report their trade. (vi) Afghan & Intra Regional Trade Profiles A recent reportby the World Bankprovidesthe import and export profiles o fAfghanistanandthe Central Asian States. A total o f 27% o f Afghanistan's official exports remain within the region while 73% o f commodities are traded with the rest o f the world whereas only 11% o f imports are from the region and 91% from the rest o f the World. Table 7 below provides the intra regional trade profiles o f Afghanistan, Iran, Pakistan, Tajikistan, Turkmenistan and Uzbekistan. 37The Iranianestimates may not includethe export of fuel to Afghanistan. Attachment 6: Trade & Transit Page94 Table 7 Intra-Regional Trade, 2002 Afghanistan Iran Pakistan Tajikistan Turkmenistan Uzbekistan Exports Region 28 274 276 118 430 158 Rest of 76 25,890 9,610 619 2,280 1,605 the World Regional 27 I 3 16 16 9 share (%) Imports Region 284 468 240 195 136 101 Rest of 2,396 21,640 10,998 525 1,683 2,124 the World Regional 11 2 2 27 7 5 share (99) Total Region 312 142 516 313 566 259 Rest of 2,472 47,530 20,608 1,144 3,964 3,729 the World Regional I1 2 2 21 12 6 share (%) Note: MillionofUS$ and percentages. Source: IMF Direction ofTrade Statistics, 2002. Afghanistan i s surrounded by countries with similar productionprofiles. Therefore, expanding the volume and value o f exports will require an aggressive policy o f economic and agricultural diversification over the short to medium term. On the import side, it i s vital for Afghanistan to (i) enhance the cost efficiency o f import through investment in customs administration and transit facilities (ii)to reduce levels o f smuggling and illicit trading activities and (iii) collect customs to revenues. Revenue collection i s particularly important to allow the Government to fund its recurrent expenditures. (vii) Afphan Transit Routes Afghanistan has tradehansit routes with five o f its six neighbors; China i s the only neighbor without a significant direct trade route. The routes vary considerable inthe type o f transit system and facilities. a) Pakistan - Transit through Pakistan i s still governed by the 1965 Transit Agreement which defines the routes and the transport arrangements: rail transport to the railheads at Peshawar and Quetta (now the rail goes to Chaman), and then road transport, by both Afghan and Pakistani trucks. However, the transit arrangements have been modified substantially in recent years: 0 Pakistan has imposed a negative list o f commodities which cannot be shipped through Pakistan, inan attempt to reduce trade diversion. 0 Pakistan Railways i s unable to provide the service required and bonded road transport fkom Karachi has been allowed for non-commercial cargo, using the National Logistics Cell (NLC) or its sub-contractors. 0 The transporters' unions have required the use o f national transport on the Chaman - Kandahar route. Consequently, all cargo i s transshipped at the border, from Pakistani to Afghan trucks, and then moved to Kandahar for clearance. Attachment 6: Trade& Transit Page 95 Transit along the Peshawar - Torkham - Kabul route still follows the arrangements established in the 1965 Agreement. Afghan and Pakistani trucks move from the border to customs clearance at Jalalabad usingan ad-hoc security system based on the deposit o f the vehicle documents. The costs on the routes are summarized in Table 8. There i s very little difference between the costs by road and rail, despite the very long distances. Road freight rates in Pakistan are among the lowest inthe world3* Table 8: AfghanistanTransit Cost: Pakistan Routes Transit Costs(US$) Pakistan Afghanistan Total Container (20ft) Kabul Rail +Road 1005 985 1990 Road 2030 Kandahar3' Rail + Road 965 915 1845 BaggedCargo (ton) Kabul Rail +Road 27 24 51 Road 28 24 52 The transit costs withinAfghanistan are very highinrelationto those inPakistan, bearing inmind that the costs in Pakistan include the port charges and a very much longer line-haul distance (Karachi -Peshawar, 1730km: Peshawar -Kabul, 300km). Transit times to Kabul average about 14 days by road and 20 days by rail +road. Transit times to Kandahar are one to two days faster. b) Iran -The Iranianroute i s used for both petroleum imports, consumer goods from Dubai and commodities on the Pakistan negative list. The primary route i s presently from the port o f Bandar Abbas to Islam Qalla, though a new route i s being developed from the port o f Chabahar, through Zaranj, to Delaram on the Herat - Kandahar highway. A transit treaty exists between Afghanistan and Iran, allowing free transit within each country but the treaty does not appear to function and almost all cargo i s transshipped from Iranian to Afghan trucks at the border4', and then moved about 120kms for customs clearance at Herat. The costs, quoted for the route, are higher than those on the Palustan route (Tables 8 & 9). Iran has adopted international standards for its road transport sector and vehicle payloads are restricted to a maximum o f 22 tons. The cost differences are even higher for bagged cargo and fully loaded40ft containers. Inaddition to the roadroute, some Afghan traffic, mainly aid cargo, uses the rail route through Iran, Turkmenistan and Uzbekistan to Tennefiairatan. Despite the change o f gauge, at the Iran-Turkmenborder, the rail route works reasonably well. 38A recent World Bank study found long distance rates to be about US$ 0.7/ton-h 39Transporters quote the same roadrates to both Kabul and Kandahar, despite the very large difference in distance. Theyjustify the higher unit costs to Kandahar on the basis o fpoor road conditions and route insecurity. 40A very small number o f vehicles (perhaps 2% - 3%), carrying highly perishable goods, are allowed direct transit to Herat. Attachment 6: Trade & Transit Page 96 Table 9: Afghanistan Transit Costs (US$): IranRoute Container(20ft) US$/km Port charges 150 Bandar Abbas - IslamQalla 1400 0.97 Border costs 50 IslamQalla -Heart 200 1.63 Clearance costs 100 Herat -Kabul 1200 1.15 Total Costs 3 100 e) Turkmenistan - There are two transit entry points from Turkmenistan which are used primarily for the import o f fuel and gas, though there i s also reported to be some transit traffic from Pakistan to Turkmenistan. The trade corridors with Turkmenistaninclude: - Torghundi: a road-rail inter-change facility with Turkmen railways. Imports are moved byroadto Herat for customs clearance. - Aqina Mary: a road route with poor road conditions on either side o f the border. Some Afghan trucks are allowed to operate into Turkmenistan to pick up cargo. Imports are cleared at Mazar-i-Sharif. Afghanistan proposes to join TRACECA, connecting Central Asia to Europe through the Black Sea ports. Torghundi would be one possible entry for trade usingthe TRACECA routes. d) Uzbekistan - Duringthe 1970s, the Soviet rail system to Europe was the main Afghan transit route for commercial cargo with goods shippedbetween the Afghan river ports and the rail connection at Termez. The Soviet rail network has been broken up into national railways but the system continues to operate efficiently and it remains the preferred transit mode for most o f Central Asia. A railh-oad bridge was constructed by the Russians and the railhead moved from Termez to the Afghan town o f Hairatan and a modem rail-road interchange facility constructed. The terminal remains intact and appears invery good condition. The rail route i s used for the movement o f fuel and relief supplies, from Europe as well as countries such as Kazakistan, and basic commodities such as grain, cement and fertilizer. Road transport i s also used to transport cargo into Afghanistan and at least four Afghan companies have permits to cross into Uzbekistan. The status o f the route for the commercial movements i s opaque and i s largely influenced by personal connections with important people on both sides o f the border. Cargo imported through Hairatan i s cleared at Mazar-i-Sharif. Uzbekistan i s interested inusingroads innorthem Afghanistan as part o f a new transit route to the Iranianports and a transit agreement i s under consideration. e) Tajikistan - There are reports that the route i s officially closed, but some cargo, particularly vehicles and construction equipment, i s still being imported. At present, barges are used to transport cargo across the river to Sher Khan, but plans have been announced for the construction o f a bridge and river port facilities. Goods imported through Sher Khan are processed and inspected by customs at Kunduz, for onwards clearance at the Mazar ICD. Tajilustan i s interested in diversifying its transit routes and gaining access to Karachi. A draft transit treaty with Afghanistan i s under negotiation. (iv) Evaluationo f Afghanistan's Transit and Trade Facilitation Systems Afghanistan has a substantial number o f transit altematives and is thus not dependent on any single route. It is, however, faced with substantial problems and hightransit-related trade costs: Attachment 6: Trade& Transit Page97 a) Cargo Transshipment - With limited exception o f some direct road transport from Karachi to Kabul, all o f Afghanistan's foreign trade i s transshipped. Often the cargo is transshipped from one truck to another truck at the border, and then offloaded into warehousing at the nearest regional center and then loaded again for transport to the final destination. Transshipment i s time-consuming and costly both in terms o f direct (handling charges) and indirect costs (loss and damage). b) Container Restriction - Modem international trade logistics, for non-bulk cargo, i s now largely based on containers and inter-modal transport. Afghanistan i s presently excluded from these systems as the international shipping lines do not allow their containers into the country. If cargo i s transported by container, the containers have to be purchased from the shipping line. Containers are mostly un-stuffed at either the port or atinear the border. Most o f the cargo, subjected to multiple handling, i s thus breakbulkcargo, and most vulnerable to handling loss and damage. c) Lack of Insurance - It i s impossible to obtain insurance for cargo moved within Afghanistan41. Insurance cover can be obtained up to the border but thereafter the cargo moves under either owners' riskor carriers' liability, at much higher freight rates. The absence o f either an insurance sector or functioning formal banking sector also prevents the development o f a bonding or monetary guarantee system for either vehicles or cargo in transit, thereby restricting the opportunities for streamlined transit systems to allow clearance at final destination rather than at the nearest regional center. d) Limited Afghan Participation - Except for participation on the Kabul - Torkham - Peshawar route, Afghan participation in the transit system outside o f Afghanistan i s confined to limited activity into Turkmenistan and Uzbekistan. This lack o f participation has resulted in the very restricted access given to foreign trucks and thus the need for transshipment at the border. Reciprocal access rather than reciprocal non-access would result inan substantial improvement to the overall transit system. e) High Transit Costs within Afghanistan - Transit -transport costs within Afghanistan are highbut are within Afghan power to control/reduce. These costs are the result of: very poor condition o f the road network - rehabilitation i s underway on several sections, but it will be a number o f years before the rehabilitation o f main road network is completed; short internal hauls on many of the transit routes - the breaks in the transport system at the borders result inrelatively short-hauls which are always expensive; insecurity in parts o f the country - this imposes limitations on operating hours, restrictions on the flexibility o f truck operations, and sometimes convoy systems; 0 numerous checkpoints along the routes - costs are raised directly by the multiple fees and taxes, and indirectly by the delays and uncertainties that the checkpoints impose. "9 Poor Communication Systems - The transit system i s disjointed with transshipment, border formalities, customs clearance at provincial capitals, and numerous check-posts en route. Coordination between transporters inAfghanistan and transit countries, and between shippers and 41One transporter managed eventually to obtain some cover orhigh value cargo from Lloyds London, at high cost and long delay. Attachment 6: Trade & Transit Page98 customs officials i s poor because o f the lack o f professional transit agents and poor communications. Overall, despite the low transport costs on the routes o f some o f its transit partners, Afghanistan faces a transit system which, unless improved, will impose major constraints on the development o f its foreign trade and thus economic and social development. Some o f these constraints can be relaxedby actions within the control o f the Government o f Afghanistan while others will require joint action with its partner states. This project will assist the Government to resolve some o f the major internal issues and will also fund assistance to help Afghanistan prepare proposals which will both improve the transit system and benefit its transit partners. Further details are provided inAttachment 6 onthe trade andtransport facilitationproject component. (v) Developing Afghanistan's InternalTransit System-A Needs Assessment While the project's detailed strategy on trade and transport facilitation i s provided in Attachment 6, this section provides an outline needs assessment for improving Afghanistan's internal transit system. It must be remembered that not all constraints in the development o f a more effective transit system, as identifiedbelow, can be addressed by this or any single project. a) Improve Security - This i s fundamental for the revival o f Afghanistan and the improvement o f the transit system. Better security would help to: (i) encourage foreign truckers to make direct deliveries and thus reduce transshipment; (ii)reduce costs on some routes where trucks operate under convoy conditions; (iii) remove the prohibition on the entry o f shipping line containers, or at least reduce the level o f container deposits. b) Complete Road and Communications Rehabilitation - Better roads and communications will reduce costs, improve transit times and improve customer service. The Government will need to ensure that, once the roads are rehabilitated, the improved standards are sustained. This will require systems for both maintenance funding and maintenance delivery. Decisions will also have to be taken regarding vehicle standards and permissible vehicle and axle-loads. At present, no standards or load limits are enforced and very heavy vehicle loading contributes to the very low freight rates in much o f the country. The Government will need to assess the optimum balance between the advantages o f low road freight rates, the costs o froad damage and poor road safety standards, and the acceptability o f Afghan trucks inneighboring countries. c) Streamline Border Procedures - A high priority should be the streamlining o f border crossing formalities and the reduction to a single document. This would reduce the high documentation and time costs at the borders. Establishing a single document, conforming to international conventions with multi language instructions in regional languages, would also facilitate Afghanistan's potential role as a transit link for Central Asia. d) Re-establish Formal Financial and Insurance Systems - Without the ability to provide transit bonds and insurances, Afghanistan will be restricted to rudimentary transit systems such as convoys or duty deposits. The re-establishment o f financial institutions should have very high priority. Insurance for goods and containers would allow significant transport cost savings. e) Implement a National Customs and Transit System - Present arrangements combine both national and regional rules and regulations. While primarily a fiscal issue, it has transit ramifications and reduces service quality. The regional rules lack consistency and predictability and there appears to be a considerable measure o f discretion involved in some o f the arrangements. Government should introduce a uniform national system which allows the shipper Attachment6: Trade & Transit Page99 to select whether to clear cargo at the nearest provincial capital or at the final destination. This should be accompanied by the provision o f the legal framework for the freight forwarding and customs clearing which would, inter alia, establish the qualifications, experience and resources required for a C/F license. To help integrate Afghanistan into world trade and relax the restrictions appliedto containers, international C/F companies should be encouraged. J7 Provide for Direct Transit - While reciprocal open access should be sought, transshipment to Afghan trucks at the border for short distance trips to regional clearance centers has a net negative impact to the economy. Afghan Truckers may gain, but their gains will be more than offset by the costs to the shipper. g) Reduce Checkpoints and En-route Inspections - Fuel tankers are stopped 16 or 17 times on a round trip between either Herat or Hairatan and Kabul and have to pay at least that number o f taxes and fees. Trucks are stopped 4 or 5 times on the road from Torkham to Kabul. The individual fees may be small but they delay the vehicles, provide the opportunity for informal payments and introduce uncertainty. These checking-posts shouldbe removed and a single transit fee charged at the border. h) SimpliJL the Transport Commission - Presently, a transport commission i s charged according to distance, route, weight and commodity, which generally amounts to roughly 2-3% o f the cargo value. This provides the Transport Ministry with the power to inspect cargo. The tax should be simplified and based simply on weight and distance (possibly also the number o f axles on the truck), which would allow monitoring at a border weighbridge. (vi) Developing Afghanistan's External Transit System-A Needs Assessment Developing and implementing an action program with transit partners i s more difficult than taking unilateral action on internal constraints. The actions to benefit the landlocked country are often resisted by vested interests. There i s scope for agreement which would benefit both Afghanistan and its transit partners but agreement on revisions to the present transit arrangements might be problematic. Fortunately, Afghanistan's transit neighbors also wish to transit Afghanistan on new trade corridors and this may permit more flexible negotiating positions in order to achieve change for mutual benefit. The following actions could be envisaged: a) Re-activating the Rail Route to Europe - The rail system, through Russia, to Europe still provides a reliable and cost-effective route and dominates CAR'Sexternal transport. It would also provide a cost-effective routing for Afghan trade with Europe through Russia andor the TRACECA routes. A formal working agreement needs to be reached with Uzbelustan to allow direct delivery and dispatch o f all categories of cargo to/from Hairatan, across the Friendship Bridge. Afghanistan should also try to participate in discussions to establish through rates on the rail network to replace the aggregation o f individual national tariffs. Improved transit facilitation would increase traffic on Uzbek Railways and provide the environment for facilitating Uzbek transit traffic through Afghanistan. b) Streamlining Transit through Pakistan - The Karachi routes offer the lowest costs to the sea for much o f Afghanistan as well as Tajilustan and Uzbelustan. The basic arrangements were established in 1965 and need to be revised to reflect the changes in the transport sector. Three actions would substantially reduce costs andor enhance the effectivenesdqualityo f the route: Remove the negative list o f goods: it reduces transit through Karachi route, and there i s little evidence that the policy i s achieving its objectives. The policy might be modifiedto require shipment incustoms sealed containers. Attachment6: Trade & Transit Page 100 0 Allow direct road transit for all goods: Pakistan's roads have improved and the performance o f Palustan Railways has declined. The transit system would be substantially enhanced by extending direct road transit to all goods, accompanied by an extension o f the bond systemon the basis o f transporter, shipper or consignment. 0 Increase Afghan participation: Afghan trucking companies should be allowed to compete more fully in the sector. Ideally there should be free flow o f Afghan trucks to Karachi and free flow o f Pakistan trucks to final destinations within Afghanistan with transit fees established on the size o f truck and the distance traveled. An interim arrangement might be based on a quota system o f transit permits. If Palustan wants to develop its tradehansit routes to Central Asia, it will need direct transit through Afghanistan, and reciprocal access to Karachiwill almost certainly be needed. c) Streamlining Transit through Iran - The Government o f Iran i s promoting the use o f its ports for both Afghanistan and the CAR. There are many reports that Iran discriminates against foreign trucks in favor o f its national operators. There may be in substance in these complaints but there are also very large differences in the technical standards and vehicle/axle weights allowed in Iran and in Afghanistan. Until Afghanistan's trucking sector re-equips with international standard vehicles, it may be difficult to negotiate full reciprocal access. There may be greater potential for negotiating access on specific corridors, in retum for allowing access for Iranian trucks: The construction o f the Bafq-Mashad rail link will substantially reduce rail distances and make rail a competitive mode for Afghan traffic to Bandar Abbas. Unless the Iranian rail system i s extended to the border, Afghanistan should try to negotiate a specific corridor agreement for Afghan and perhaps Uzbek trucks to the railhead. 0 Iran i s trying to encourage the use o f Chabahar as a transit port for Afghanistan and the CAR. Chabahar has limited draft, slow handling and, at present, very few vessel calls (less than one a week). The port may be an alternative for bulk traffic but the charter costs will be higher than to Bandar Abbas or Karachi. To offset these costs and encourage use o f the port, arrangements might be agreed for Afghan trucks to operate along a specific corridor between Chabahar and the border at Zaranj. These arrangements could benefit Afghanistan significantly, and they would also provide potential benefits to Iran, through greater use o f their ports and railways. Iranian truckers would also benefit from allowing direct access to Herat. (vii) WorldBank Assistance to the Transit-Transport Sector Presently, there are two ongoing projects o f the Bank inthe transport sector, impacting upon also the transit infrastructure. These include: a) The Emergency Transport Rehabilitation Project (ETRP) - This project devotes more than half its finds ($70 million) for the restoration o f an adequate connectionbetween Kabul, the northern provinces, and the countries along Afghanistan's northem border. This includes the rehabilitation o f 2 key links on the Afghan ring road system - the Kabul-Salang-Doshi road and the Doshi-Pol-e-Khumri-Kunduz segment o f the Pol-e-Khumri-Kunduz road, ensuring a dependable linkbetween Kunduz and the border town o f Sher Khanon the Tajikistan border. Attachment 6: Trade & Transit Page 101 Additionally, about 250 km of rural roads linking to the improved northem corridor will be improved under this project. Other related components of the ETRP that compliment the outcomes of the proposed customs and TTF project include significant improvements at Kabul airport, minor communications improvements at 15 domestic airports, and studies for a transport sector review, the development of a revisedtransport sector policy, and pre-feasibility studies for key transport investments, including the feasibility of undertaking upgrading of the important Herat-Chaghcharan-Bamiyan-Kabullink. b) The National Emergency Employment Program for Rural Access (NEEPRA) - This project i s expected to rehabilitate a minimum 2,000 km o f road roads and 2,300 m o f bridges. Not only will this improve transport conditions in the subproject areas, but also improve secondary rural access infrastructure and provide/erect of removable bridges at key locations that would serve the provincial and national transport systems through the restoration of key road linksandtheir integrationwiththe coreruralnetwork. Attachment 7: Trade Facilitation Page 102 ATTACHMENT 7 TRADE FACILITATION Contents A. Ministry of Commerce B. BureauofStandards andMetrology C. Trade and Transport Documents D. Current RegionalBilateral Agreements E. Afghanistan's TIR Convention Status F.BondedTransit Operations-ThePresent Situation G. Trade Logistics Costs H.Transport Services I. OwnedEnterpriseslinkedtoTradeFacilitationIssues State J. Trade FacilitationObjectives & GuidingPrinciples K.TheFacilitationStrategy Appendix-6a: Organizational Chart of theMinistry of Commerce Appendix-6b: Organizational Chart of theMinistry of Transport Attachment 7: Trade Facilitation Page 103 A. Ministry of Commerce Other than transport sector regulation (under the purview o f MOT), Ministry o f Commerce (MOC) i s the main institution dealing with transit and trade facilitation issues-the 1344Law on the Basic Administration o f Afghanistan provides that the Ministry o f Commerce is responsible for the `subscribing to the development o f national income' and `regularizing the imports and exports inthe interests o f the nationaleconomy'. MOC i s tasked with developing and implementing policies that facilitate economic expansion, trade, and foreign investment. It has twelve departments, fifteen subordinate units, and 51 percent share in 15 Afghan State Owned Enterprises (AS0E)-and has specific departments for border trade, international transit, and foreign trade, and transit sub-departments in border provinces. It also owns and operates certain parts o f the trade and transit infrastructure inAfghanistan. A detailed organization chart for M O C i s given inAppendix 6a. The M O C i s currently in the process o f trying to move from [the sometimes conflicting role] as a state trader [imposed by its current structure and precedents] to the role o f a state regulator and facilitator o f trade. The M O C i s currently in the process o f assessing the requirements for structural and civil service reforms to support this re-orientation. It i s only after this that any true trade facilitation steps can be implemented. B. Bureau of StandardsandMetrology Trade facilitation encompasses trade related technical assistance. To be effective the trade related technical assistance has to attend to the whole "product to market" chain. Standards are meant to make trade between countries easier and to ensure product quality and safety. However, these standards often end up being non-tariff barriers if any one o f the trading country i s not equipped to impose and maintain standards. Afghanistan's participation in internationaltrade and investment flows can be a major contributing factor to its economic growth. Afghanistan's capabilities related to supply capacity and competitiveness in conjunction with infrastructure for standards, metrology, testing and quality, have to be established urgently. This i s a basic requirement to participate inthe trading system-but Afghanistan has n o relatedcapacity. The absence o f a B S M and associated testing laboratories has an even greater impact on Afghanistan's economy in the context o f its imports. Since TISA cannot check the quality and safety o f its imports, substandard [and often smuggled] products compete with legitimately imported quality products and drive these out of the market given the absence o f information to the consumer and the thriving informal markets. This not only hurts the consumer and the economy, but also i s a colossal barrier to formal and legitimatetrade. C. Trade and Transport Documents The single language and use o f local characters, and the non-conformity to intemational formats ("Layouts") o f all documents i s a substantial barrier to foreign trade. Imports require a license from MOC and a transit form, supported by the usual commercial invoice, a packing list, and the Bill o f Lading4*. Additional, indigenous documents required to cross the border: a permit from the political provincial agent at the border; two specific additional documents ("Bar Nama" and "Ilm-0-Khabar"); and a route permit ("Rahdari") issued by Afghan transport authorities. Discharge o f imported consignments requires about 26 steps and may need a query from the 42 Inmost cases, the InternationalConsignment Note ofthe CMR Convention. Attachment 7: Trade Facilitation Page 104 office o f origin. Inaddition to these requisites, once the goods vehicles cross the border, they may be subject to various other documentation requirements by the provinces that they may have to transit through, as often a province may not recognize documents attained from the previous province. D. Current RegionalBilateral Agreements (i) Pakistan Afghanistan has a number o f bilateral agreements o f which the most relevant in terms o f traffic i s the 1965 agreement with Pakistan. Since then, this agreement has been unilaterally modifiedby Pakistan-primarily through the introduction o f a negative list o f imports-due to its concerns regarding large volumes o f goods which find their way back to Pakistan as informal Afghanistan exports (re-exports). Post 9/11, both governments have re-opened negotiations on this issue and have substantially reduced the negative list which stood at 24 items at one time. Once the new customs tariff regime i s implemented by Afghanistan, there i s a good likelihood that this negative list will be abolished by Pakistan. Another key bottleneck in this treaty i s the over-reliance on Pakistan railways, which has since deteriorated rapidly and now carries but five percent o f the total goods traffic in Pakistan. This reliance on rail was justified in the 1960s for secure movement and controlling diversion o f Afghan cargo as it moved through Pakistan. But, today in the absence o f the railway, Pakistan is continuing using para-statal carriers such as the National Logistics Cell (NLC), in lieu o f the rail, for the same reason. Today when 90 percent o f cargo inPakistan i s hauledby extremely efficient private concerns, these arrangements need to be reviewed, given the importance o f this transit corridor to both Afghanistan and Pakistan. (ii) Iran The transit agreement with Iran allows reciprocal access for trucks but remains inoperative for technical reasons. A new MOU has also been signed post 9/11 which offers large discounts to Afghan trade on customs (90%) and port fees and warehousing charges (50%) at certain Iranian In spite of the Iranian incentives, it is difficult to believe that Iran will forego its vehicle regulation^^^ and that both countries will agree on reciprocity in allowing cross border truchng operations to take place on both sides. The participation o f India in the negotiations lends other encouraging prospects. India will be provided with access to the preferentialtariff at Chabahar and with a right o f transit for Indian goods through Afghanistan. In compensation, India will co-finance the upgrading o f the 210 km road between Zaranj and Delaram with Iran. This road should significantly facilitate access to Chabahar. (iii) Uzbekistan,Turkmenistan,andTajikistan Afghanistan has also negotiated4' bilateral agreements with Uzbekistan, Turkmenistan, and Tajikistan. These agreements provide Central Asia Republics with alternative corridors for access to the Indian Ocean, in particular Karachi. The Uzbekistan agreement, which i s not fully 43 Inparticular at the "economic zone" ofChabahar transitport, which is mainly abulktraffic port. 44Afghan trucks do not meet the technical standards requiredby Iran, and Iranian trucks do not want to enter Afghanistan for technical reasons. 45The true legal status of these agreements couldnotbe ascertained due to conflicting information available both inthe literature and that forthcoming during the appraisal mission. Attachment7: Trade Facilitation Page 105 operational at present, could provide transit from Termez inU ~ b e k i s t a nto~Herat onwards to the ~ , Islam Qalla Iranian border, and up to the Indian ocean. This arrangement would by-pass the AfghanPakistani dispute over smuggling and would incline the transit and political balance towards northernAfghanistan and Uzbek ethnic interests. E. Afghanistan's TIR Convention Status The TIR procedures, documentation and liability system allow specifically approved vehicles and operators o f member associations and States to transit through as many member countries as necessary. This i s possible by means o f a single document, "the TIR camet", without payment o f duties or examination o f the goods. Transit i s contingent on technical standards o f the vehicle guaranteed by: the local member association; the operator; customs and seals; and the security o f the cargo compartment design in accordance with TIR specifications. The liability mechanism for guarantee o f customs duty, should the goods fail to show at the specified destination (the "liability chain"), i s based in the overlapping responsibilities o f the operator, of the local member association in the operator's country, and in the overall authority and responsibility o f the IRU. The "Convention o f the International Transport o f Goods under TIR Carnets" o f 1975, was ratified by Afghanistan through the Afghan Chamber o f Commerce at the date o f accession. According to Afghan sources, its TIR ratification was suspended inMarch 1983. On the contrary, the denies having received the request for suspension in Geneva. Ironically, Afghanistan continuedto pay its dues until 1995. TIR ratificationremains a potential long-term option for seamless transit to, through, and out of, Afghanistan, provided the terms and conditions o f accession can be met. Full updating o f IRU membership and TIR privileges for Afghanistan would require a formal request by the Afghan Chamber o f Commerce (ACOC)48, to the IRU. The request should seek to clarify both Afghanistan IRU membership status and the current requirements to reinstate Convention privileges. The request must be made by the Afghan Chamber o f Commerce as a member association, inthe name o f Afghanistan as member State. Fullreinstatement o f IRUmembership for Afghanistan will be contingent on the Afghan Chamber o f Commerce meeting technical and financial conditions to accede to the "liability chain guaranty" responsibilities associated with TIR transport. This would also entail a technical capacity up-gradation o f Afghanistan's trucking industry. F. BondedTransit Operations The PresentSituation - Bonded transit operations as such do not exist in Afghanistan but transit inthe Torkham- Jalalabad corridor, as an example, i s authorized under special procedural conditions "in lieu o f bond" which provide adequate security to Customs. These procedures involve the surrender o f the vehicle and driver documentation to the Customs Authorities at the border and release o f the same upon completion o f Customs procedures. These conditions cannot, however, be considered 46 Through the inter-modal port facility (roadraivwater) o f Hairatan. 47 InternationalRoad Transport Union, which administers and i s responsible for implementation o f the convention. 48The original association so named inthe accession documents for holdingthe liability chain. Attachment 7: Trade Facilitation Page 106 as standard practice, and may change without notice and are specific to that border. The reasons for this lack o f consistency include the weak applicability o f laws and administrative norms, which depend on political authorities and provincial uses. It is also a consequence o f lack o f a proper financial mechanismfor bonding. Although the current Afghan system for transit including bonding securities indocuments or in kind (30% o f goods), may seem weak, confusing and poorly organized, the current administrative reality i s different. InAfghan perception, the present surrogate for a bonded transit system i s in line with other aspects o f current Afghan transit logistics-in certain cases, standards do not seem either necessary nor applicable to scenarios where Afghan cultural factors are predominant and locally understood. G. Trade Logistics Costs The costs o f trade comprise large group o f direct and indirect costs that are now generally termed "trade logistics costs"--over and above the transport charges. These are shown in the table below4'. Type Direct Logistics Costs Indirect Logistics Costs Overhead Opportunity Costs Inventory Costs Lost Sales Management Time Customer Service ITCosts Obsolescence ITMaintenance Activity Costs Transport And Cargo Handling Packaging WarehousingIStorage ITPersonnel Insurance Cost o f Capital Employed Documentation Administration Telecommunications Ina well functioning market economy, with highly developed transport and distribution networks, measurable logistics costs are usually less than 10 percent o f the sale price o f manufactured goods. In developing or emerging economies, with poor transport networks and inadequately developed logistics' systems, the costs can be much higher and for raw materials or basic commodities such as grain or cement the costs can exceed 50 percent o f the sales price. Landlocked countries like Afghanistan are particularly disadvantaged as they have to depend up the transport networks o f third counties and their trade is often subject to additional administrative restrictions and procedures. Transport costs are normally the largest single element o f logistics costs and major investments may be required to reduce these costs. But very substantial reductions in total logistics costs can be achieved by streamlining the systems within which transport and trade operates. Unfortunately, the total logistics costs o f trade are always difficult to assess as there i s often a lack o f transparency in prices and tariffs and informal costs can be important. It i s generally recognized that delays and cargo damages partly related to complex procedures and documentation immobilization account world wide for between 1.5% and 3% o f the final cost o f commodities at destination. There i s a definite need to understand the structure and intensity o f current costs imposed by poor trade facilitation inAfghanistan in order to undertake measures to reduce the same. 49 This section contains excerpts from "Trade and Regional Cooperation Between Afghanistan and Its Neighbors", Discussion Paper prepared for RegionalTrade Meetings, Dubai, UAE, September 22, 2003, Report No. 26769, The World Bank. Attachment 7: Trade Facilitation Page 107 H. Transport Services (i) Trucking There are approximately 80,000 trucks registered with the Transport Special Sector Department (TSS) o f the Ministry o f Transport o f which 35,749 are based in Kabul. The truck capacities within this fleet vary from 5 to 50 tones. The structure o f public regulation o f the industryis old and not similar to that inthe Indo-Palustan sub-region. The Ministry of Transport (MOT) manages the govemment-owned vehicle fleet (buses & trucks) and regulates the private sector transport industry. It has two parallel structures to deal with govemment-run and private transport services, with an overarching central hierarchy which provides oversight and planning for public and private sector operations. These parallel structures are shortly described below, while an organizational layout o f the ministryi s included inAppendix 6b. The public transport services are managed centrally by the MOT'S operations department. Thirteen (13) regional offices manage passenger service operations, while goods transportation i s handled through nine state-owned Kamaz authorities. The current level Enterprises, out o f which at least 2 are not currently operational. The private sector operators are licensed and regulated by the Transport Special Sector (TSS)-a quasi- autonomous operational arm o f the MOT. The TSS encompasses and regulates all private sector transport undertakings, and was established in 1933 as a department o f the MOT. It operates through a private sector general directorate at Kabul as its central office, with regional sub-offices in 32 provinces, boundary offices in border districts, TSS branches at 3 ports, and TSS foreign offices in 4 neighboring countries. It has a total staff of about 700, out of which about one third constitutes provincial staff. The TSS i s responsible for registering (and hence authorizing) transport companies and associations, issuing route permits, fixing and enforcing transport rates for the transport o f government cargoes by the private sector, carrying out inspections, insuring cargo operations through pledged trucks, processing route pass applications for passage, collecting transport commission over transit transport operations (domestic and foreign), issuing route passes for incoming foreign trucks, and other regulatory and enforcement functions including the levy o f fines over non-compliance with the set rules andregulations. The TSS was re-organized by a as a result o f a proposal prepared by the Ministry o f Commerce and enforced by the Ministry o f L a w and Justice in March 1967. The notified rules, regulations, job descriptions and functions are still effective, although some have been subject to various amendments. Key features o f the re-organization (that are still effective) are as follows. There are prescribed procedures for: issuance o f route permits (establishing ownership) and traffic permits (change o f ownership); transport card or note book for routes (domestic only); and, transit document (border-crossing permission). Trucks are not allowed to cross borders without the "notebook for route" and the "transit document"; and the associations, companies or individual owners must guarantee safe return o f vehicles going outside Afghanistan. The "Rules" also stipulate that goods transport will be Attachment7: Trade Facilitation Page 108 organized into companies and associations and that transport operators will be entitled to a reasonable fare. It further sets technical capacity conditions for vehicles and operators and punishment orders. The core o f the TSS-the PS transport industry-is organized in companies and associations registered with TSS through a pledge of a minimum of ten trucks (called companies) and of fifty trucks (called associations). The pledge i s a form of warranty covering any losses during the operational term of licenses which have a term o f 3-4 months before renewal. The trucks are pledged to TSS through a Court guarantee, under which any losses are compensated by TSS. The number of trucks owned by associations may be between fifty and several hundred. Trucks may, however, belong to individual owners under the common lien of the association. Under all this regulation, the private sector trucking industry is based on traditional means of ownership and collateral financing, which work as they are simple and adapt well to existing traditional instruments of barter, collateral responsibility and informal trading currently inuse byAfghans. Observance, applicability andenforcement ofnorms ishowevercontingent on the same informality as that o f the social environment inwhich transport operates. Hence inways and means of operation, the Afghan goods transport industry i s similar to industriesin the Indo- Pakistan sub-region. It is, however, very different inoperational means when compared to Iran or to the trucking industries in the CIS countries. As a result, by and large, Afghan trucks do not operate into any o f the neighboring countries except Pahstan-and that only into Peshawar to pick transshipped cargo. Transport prices vary throughout Afghanistan based on season, local levels of demand, "spot" requirements of local capacity from NGO's, and contracts from international freight- forwarding principals. It has been practically impossible within the short appraisal period, to gather confirmed evidence of the current cost and pricing levels. However, roughly, they seem to oscillate from less than US$0.02 to about US$0.20 per todkm for long-haul tractor semi-trailer combinations. This wide price range is the result of different load factors5', ways of operation, and vehicle-operating-costs. These low and regionally competitive prices are a function of inter alia: the age, origin and capital cost o fvehicles; domestic availability of cost-effective spare-parts including for maintenance; and, the typical ways and means of operation of companies or associations,notwithstandingperils o f overloadingand safety. (ii) Freight-forwarding Although formally non-existent today, the domestic freight-forwarding (shipping, insurance and banhng) industryexisted and was very active prior to 1975. There are no norms of accreditation for freight-forwarders and the few domestic agencies acting on commission to secure transport capacity or retum-hauls (including agencies at border-crossing posts) are not cognizant of, or working on, modem freight forwarding rules. However, international freight- forwarders are operating inAfghanistan post September 11,200 1. According to information gathered by the mission, their operations are expanding rapidly. These service the bulk of the international cargo transactions of international development agencies, NGO's and o f those o f commercial origin. This i s a very substantial business moving both container and bulk cargo, over-size equipment, general cargo and containerized house-hold goods. The international freight-forwarding business i s operating normally, although through foreign operators and financial instruments. It operates on "thru-bill-of-lading" standard An average of54% for an annual distance ofbetween 90,000 and400,000 km. Attachment7: TradeFacilitation Page 109 international documentation and foreign-negotiated "thru-insurance" liability from origin to destination (at average rates o f 1%o fvalue). Insome cases, logistic import operations are broken into two separate financial parts: up-front collection o f "door-to-destination-port'' dues at origin, and final destination payment o f inland freight charges from port o f entry to final destination in Afghanistan. The participation of domestic freight-forwarding capacity inthe above operations i s so far nil. The informal character o f border transit payments and options to "facilitate" these international transport operations varies from border to border. I. StateOwnedEnterpriseslinkedtoTradeFacilitationIssues There are more than 140 state owned enterprises (ASOEs) inAfghanistan, many o f which are defunct and none o f them are operating at full capacity. An initial overall review o f these ASOEs has indicated that TISA divide these ASOEs into three distinct categories: those which need to be liquidated and their assets sold; those that should be sold over the short-term as going concerns; and those that should be retained in the state-sector over the mediumterm (with a view to future privatization). Of these MOF, MOC, and MOT own at least 10, 20, and 14 ASOEs, respectively. Some o f these are directly related to customs, trade, transit, and transport facilitation, in ways such as some control the transithansport`trade infrastructure, some are previously bonded companies, some are bonded transport carriers, some are state insurance and banking companies, etc. Inall cases they are currently a part o f the trade facilitation regime, provide employment to substantial number o f people, and often play irrational roles (vis-&vis a modem trade facilitation environment). M O C i s now planning review o f the roles o f these ASOEs, directly holding a stake in trade facilitation, with a view to decide on the future course o f action that it should recommend to TISA. J. Trade FacilitationObjectives & GuidingPrinciples (i) Obiectives Complementary to the objectives o f customs modernization, trade facilitation to be undertaken under this project has two distinct targets: first, to develop the enabling regulatory, physical and commercial environment for fiscal control o f trade revenues; and second, to increase trade and transport competitiveness by reducing logistic cost. (ii) GuidingPrinciples Transport and trade activities are deeply ingrained in the social context o f countries and inAfghanistanthe prevailingsocial attitude is informalrather thanformal. This is critical to the approach that needs to be taken to influence a gradual change from informality to formality, and adoption o f modem options for cross-border transport operations, bonded systems for freight intransit, insurance and financial trade practices. This gradual change would condition the Afghan society to accept legal limitations, and could minimize the effects of economic and social trauma when regulations are enforced. Attachment 7: Trade Facilitation Page 110 It is also important to make sure that private sector stakeholders in trade, transport, and transit, are not only consulted but that avenues are created to ensure that they have an equal. ifnot higher, stake in the new formal system. K. The Facilitation Strategy The strategy that has emerged from the above review and analysis o f various trade, transit, and transport, facilitation issues and the mission's discussion with the ACD and MOC, i s described in this section. The basic strategy would be to "fix the basics" and simultaneously undertake detailed butrapid assessmentsto understand the practical trade facilitation gaps. This will involve provision o f consultants, conduct o f studies, and data collection inthe following areas: e policy and overall strategic framework for restructuring o f key departments in MOC (including support to M O C PRR); 0 Bureau o f Standards and Metrology (BSM); 0 alignment o f national trade documents (priority to ASYCUDA related documents) to UNLayout Key (UNLK) Standards; e transit treaties and corridor agreement; e implementation o fTIR; e rationalizationo f the role o f MOC's state-owned enterprises; e developing the role o f private sector; 0 benchmarking o f trade and goods transport logistics costs and time; e a review o f MOT'Sorganizational structure and it's the transport services regulatory environment; and, e ad hoc advice inmatters o ftrade facilitation The project will also support the incremental operating costs o f MOC, and provide some basic infrastructure and equipment to support the establishment o f the BSM and to the restructuringo f selected departments within MOC. 1 I U1 ~ .- $ P &L2 d I E 8 6 t; d d ~ 8 ~ 1 0 e u c .-*kE 0 v) E I 1 I I I I I I I I I 1 1 I I I I I I I I I I I I I I I I I I I I I I I 1 I I I I I 9x I I I I I I I g iI * %b I I I I P I 1 I I n I 4 e, I I I 0 I I g L I I I I I v I 2 ; -2 I I I I I I Attachment 8:Civil Service Reform& RestructuringinACD Page 113 ATTACHMENT 8 Civil Service ReformandRestructuringinAfghanistanCustomsDepartment:A Review The Priority Reform and Restructuring Decree (PRR) is aimed at ACD. ACD functions both within MOC and MOF but here only the MOF is reviewed. ACD was the first departmend agency to have its reform proposals approved by the Independent Administrative Reform and Civil Service Commission (IARCSC). This following of due procedure i s significant bothfor the department and also for establishing the writ of the civil service as a whole. 0 IARCSC i s responsible for approving PRR proposals; for allocating Interim Additional Allowances (IAA) from the Civil Service Reform Funds to employees transferred into the higherinterim salary scales, andprovidingmodest support for equipment. 0 Approval o f the PRR decree highlights IARCSC's growing capacity to implement reforms. The IARCSC has an advisory and oversight role in supporting the implementation of institutional reforms. Therefore, IARCSC and the Ministerial Advisory Committee require that agencies affected by PRR submit periodic reports for evaluating the Public Administration Reforms. IARCSC also evaluates appointments of staff not only to the IAA scales, but also to normal civil service positions. This causes institutional strengthening o f ACD through PRR, under due IARCSC supervision. The supervisory capacity of the Commission will be enhanced when the Second Emergency Public Administration Reforms under the World Bank/DFID become operational. 0 Key components of the Customs reform plans are detailed in the PRR Stage 2 Application by Customs Department. 0 A significant part of the reform environment in Customs is that the MOF as a whole is deeply committed to institutional strengthening through administrative reforms. The Budget Department is in the first phase of implementing the reforms, and MAC and IARCSC have cleared the Treasury Department of the MOF to proceed to the second stage. Thus, it would be possible to roll out the PRR process across the entire MOF in Kabul by mid2004. 0 The World Bank will support PRR through TA to be provided by its field public administration specialist. Towards the end of December 2003, the IARCSC will review the performance ofall stafftransferred or appointed to the higher IA scale. The Civil Service Reform Fund can only provide support for the salary difference between the existing pay scale and the higher IAA allowances for those transferred to the IAA scale. This is obviously not enough to sustain the reform or to even to provide the supportive environment to implement the reforms. From the rapidly unfolding PRR process now underway across ministries, it is clear that when donors fund non-salary components o f PRR proposals, it helps to provide the enabling environment for administrative reformand institutional strengthening. Attachment 8: Civil Service Reform& RestructuringinACD Page 114 The World Bank is, therefore, requestedto consider financing the non-salary components necessary for the full implementation o f the PRR proposal as detailed inthe Stage 2 PRR applicationo f the ACD. Attachment 9: Civil Services Reform& RestructuringinMOC: A Review Page 115 ATTACHMENT9 CivilServiceReformandRestructuringinMinistryof Commerce:A Review 0 The Priority Reform and Restructuring Decree (PRR) provides a vehicle to promote institutional reformwithin Government structures. Ministries may apply for reform status by submitting detailed proposals to the Ministerial Advisory Committee on Public Administration Reforms, which i s headed by the Chairman o f the Independent Administrative Reform and Civil Service Commission (IARCRC). 0 Through PRR, the applying agency i s enabled to transfer or appoint key employees to a higher PRR salary scale, seek resources for equipment and modest refurbishmend upgrading o f office infrastructure (PRR Procedures, Attachment 8). 0 MOC is a prime candidate for reform. However, it i s unlikely that the whole o f the M O C comes under the PRR umbrella. M O C must evaluate and prioritize its functions and services, and strategically select units needing reform. Dialogue would also be required between the Bank, IARCSC and a reformteam to be appointed by the MOC. 0 The reform team would decide to selectively its target candidates, like Border Trade and the Minister's office. Once these key units are strengthened and their management capacity improved, the reforms could be expanded to other departments. This approach has already proven successful inMOF. The Bank encourages such a strategic approach. 0 To promote dialogue and reform, the Bank supports the following: a. Establishment o f a team within the MOC to develop and design reform proposals under the PRR umbrella. The World Bank and key donors would be a part o f this team. b. Provision o f a technical assistant for a period o f 3 months to work with the reform team. The TA would provide administrative and professional support to the PRR team. c. Development o f PRR proposals by December and submission for approval to MAC and IARCSC. d. Interactionbetweenthe PRR team and other key stakeholders inthe dialogue leading to formulation o f the reform proposals. 0 Shouldthe PRR applicationbe successful, IARCSC would support the following: (i) AdditionalsalariesforthosetransferredtothehigherPRRscale (ii) Requiredequipmentandofficerefurbishment 0 The MOC will need additionalresources to develop and implement PRR such as: 1. An institutional development specialist to support the PRR team during two- months. 2. A HR andor institutional development specialist to assist the MoC to implement the PRR 3. Resources for missions to M O C establishments across Afghanistan. Attachment 9:Civil Services Reform& RestructuringinMOC: A Review Page 116 0 The Bank already supports MOC on this plan of action. Its further support would be contingent on completion of the PRR proposal for its priority unitddepartments. 0 0 0 0 Y Attachment 11:Project Performance Indicators and Monitoring Page 118 ATTACHMENT 11 Project PerformanceIndicators and Monitoring Measuring Project Performance at the Local Level Given the state o f development o f Customs and transit inAfghanistan, only one project performance indicator at the local level will be measured and monitored. Measurement of time for release 1. Principle The time to release trucks shall be measured throughout the entire project life at three pilot sites: Kabul inland clearance depot, Torkham, and Islam Qilla. The purpose o f the measurement i s to calculate the total time it takes to clear all the border procedures, including, when applicable, (i) immigration, (ii) processing by other agencies, (iii) processing by agents or brokers, and (iv) processingby Customs. The aggregate figures obtained shall, therefore, span the entire time spent between crossing into Afghanistan's border zone until exiting the border precinct (formal entry into Afghanistan), or until the release note for the goods i s issued by Customs (inland clearance depot located inside the clearance terminal). 2. Pumose The purpose o f the measurement is to evaluate the impact o f the project for trade facilitation. It i s not meant to evaluate the performance o f any individual agency involved in the processing. As a future step, the authorities may introduce a more detailed analysis leading to a breakdown in the time consumed between the different steps inthe clearance process. 3. Data Collection Period The measurement will be carried out over a period o f three consecutive days each month, altemating between peak and low traffic periods. 4. Resources and Methodolow Simple yet efficient forms for data collection will be developed by the project team. The measurement will be carried out by usinglocal staff resources and will cover the following ACD posts: 4.1. Border - Enty into Afghanistan: An observer posted at the border will note the registration number of trucks crossing the border entry point and the time o f entry; Another observer at the transshipment station will again note the incoming truck's registration number and the registration number o f the Afghan truck on which the goods are reloaded. For trucks that do not require transshipment, this step will be ignored; A thirdobserver at the exit gate will note the registrationnumber o ftrucks exiting; At the end o f each shift, the shift manager will collect the data sheets for analysis locally and at the national headquarters. Attachment 11: ProjectPerformanceIndicatorsand Monitoring Page 119 4.2. Inland - Timefor clearance: An observer posted at the entrance o f the terminal shall note the registration number o f incoming trucks and the time o f entry; This observer will also note on the data sheet (i)whether the goods or the vehicle was inspected, and (ii) ifany discrepancy, error, or irregularity was detected. The truck number shall be entered on the clearance declaration (ACCD or SAD). The officer authorized to release declarations will note on the declaration the time when the goods are released. At the end o f each shift, the data sheets will be matched against the declarations, and sent to national headquarters for processing. 5. Targets Despite the difficulty arising from the absence o f a clear baseline, current estimates for truck clearance time are 200 minutes for the borders and 300 minutes for the inland clearance stations. These estimates should be interpreted cautiously, and will be subject to review after the first collection. Subsequent clearance time targets shown in the following table could be reviewed concurrently: Table 1:ProposedTargets for Release Times Location for Baseline Baseline Jun 2005 Jun 2006 Jun 2007 Measurement Sep 2003 (modified) Jun 2004 Kabul ICD 300 260 180 90 Border stations 200 150 75 40 6. Monitoring ACD management will provide the Bank monthly results o f each three-day collection period. In cases when the clearance targets are not met, the ACD will provide a description o f (i) causes the o f delay due to ACD clearance procedures (ii)hurdles caused by other agencies or operators involved in the clearance or the border processing, if any, and (iii) the remedial action taken. The ACD management and the Bank will periodically review performance results o f this monitoring procedure and may recommend more specific analysis or measurement, as well as any other appropriate action. Attachment 11: Project Performance Indicators and Monitoring Page 120 MeasuringProject Performanceat the National Level Table 2 provides the possible national level indicators that will be monitored during project implementation period. These indicators will be reviewed upon receipt o f the first set o f project data. Monitoring will be conducted as explained earlier. Source from June 2004 Indicator which Baseline (modified June 2005 June 2006 June 2007 monitored 2003 baseline) customs Revenue, ACDMOF 50-60 120 (?) 150 225 280 US$ million Trade MOF/IMF/CSO 2000 2,200 2,420 2,602 TBD million "$ Total number o f ACD/MOF 100,000 110,000 137,500 171,875 declarations Total Customs staff ACDiMOF 1,100 900 850 900 Declarations per staff ACD/MOF 91 122 162 190 Transit Costs to trade, UNCTAD percent of Surveys - overall cost Monitoring Project Outputs The project team will also regularly monitor outputs. ProjectOutcome MonitoringOutputIndicators Goals Improvements inkey Customs Numberoffacilities More efficient Customs and and transit related infrastructure repairediconstructed and transit regime and communications hnctionally improved Connectivity o f Customs/transit facilities around the country Level o f office and operational automation achieved Attachment 11: Project PerformanceIndicators and Monitoring Page 121 Project Outcome MonitoringOutput Indicators Goals Improvements inthe capacity Progress on PRR within ACD More efficient Customs and for Customs and transit and roll-out to regions transit regime administration Progress on legislative and tariff reform Progress on rationalization o f "objectives matrix" for Customs and transit Increasedlevel o f automation in Customs declaration-level o f ASCUDA development and implementation Key trade and transit documents rationalized and conforming with UNLK Attachment 12: Project Justification and Economic Benefits Page 122 ATTACHMENT 12 PROJECTJUSTIFICATION AND ECONOMIC BENEFITS A. Project Justification The viability o f the project has been appraised in this section on the basis o f both conventional economic costs and benefits and in terms o f its contribution to TISA's overall strategy for re- establishing government and economic activity in Afghanistan. The narrowly defined terms o f an economic analysis alone cannot encompass the potentially huge benefits that the project may end up having in reinforcing and widening the writ o f the Afghan government across the whole country. (i) EnhancedGovernmentRevenue This project is justified on the grounds that its overall result should be substantially increased government revenue that, in turn, would provide sound financial basis for a functioning Afghan state. Receipt o f State revenues would be sustainedthrough: (d) Improvedand enhanced collection o f Customs duties, which are a relatively efficient means o f collecting State revenues. Customs duties are usually the major source o f government revenue for countries in which most activities are conducted in the informal sector, and where taxes on incomes, whether individual or corporate, are difficult to assess and collect. (e) Emergence o f an efficient and effective Customs service. This can both widen the revenue net, by bringing more o f the total trade into the official channels, and improve revenue collection. ( f ) Facilitatetransfer o f Customs revenues from the provinces to the central government. Increased Customs revenues will involve the transfer of resources from the private sector to government and might be considered as largely a distributional issue. However, in the case o f present day Afghanistan, the re-establishment o f government and its core functions would generate very substantial economic and social benefits for the people that, in the large picture, would be well above any loss to the fi-agmented informal sector. (ii) EnhancedTrade and Economic Activitv Afghan Customs and transit arrangements are cumbersome, slow and almost totally inconsistent with prevailing international norms and standards. The present system imposes major penalty upon both the trader and transporter, raises the cost o f trade and acts as a barrier to potential trade-oriented economic enterprise - especially those accustomed to modem Customs and trade regimes. This project will remove some o f the impediments to business enterprise and help create the enabling environment for enhanced economic activity and investment. In addition, a more efficient Customs service, with greater institutional capacity, could become an important frontline organization inthe govemment's efforts to control the flow o frestricted or prohibited goods. (iii) EnhancedTransitFacilitation Afghanistan i s a landlocked country and i s consequently dependent upon its neighbors for access to the sea and to its non-regional trading partners. Its present transit treaties are either inefficient Attachment 12: Project Justification and Economic Benefits Page 123 (Pakistan), ineffective (Iran) or indraft (Tajikistan). The result i s a very fragmented transit system due to repeated transshipment o f cargo, double-handling and very limited Afghan participation in transit, outside the country. Improved procedures and a more efficient Customs service within Afghanistan could substantially reduce trade costs but ideally should also be accompanied by the streamliningo f the entire transit systems to allow a freer flow o f vehicles and reduced restrictions on trade. Such enabling environment would also include Afghanistan's entry into the international logistics system with through movements o f containers and the progressive elimination o f transshipment and double-handling. Afghanistan i s potentially a key link for transit routes from Central Asia to the Gulf and Arabian Sea. Though development o f such routes could generate transit earnings for Afghanistan, their real value would be the leverage gained to negotiate the terms and conditions for Afghanistan's own international transit. Efficient systems within Afghanistan will be essential to attract and develop effective and competitive Central Asia transit routes. This project will also provide technical assistance for developing the systems necessary for streamlined regional transit, including re-activation o f the TIR. Afghanistan's role as a transit country may not develop rapidly until important security and infrastructure constraints are remedied. This project will assist to lay the necessary foundations for the development o f such a transit infrastructure. B. EconomicAnalysis (i) Identification o f Benefits & Assumptions for Analysis A more efficient Customs service operating with streamlined border and clearance procedures will reduce both truck waiting times and cargo delay times. In addition, improvements to ACD may reduce the variability in transit and clearance times and thereby introduce greater predictability into the system. At present, the border and Customs formalities are cumbersome and time consuming, imposing significant delay and cost onboth trucks and goods, for example: Transport operators estimate that it takes three to four days to move between Peshawar and Kabul, a distance o f under 300 h s . The roads are poor, trucks are heavily loaded and security imposes operating constraints yet an effective daily distance o f less than 100 kms indicates additional constraints. Most truckers estimate that they need one or two days to undertake all the border crossing formalities - one operator said that though clearance should take one day, it sometimes takes three days and usually takes two days. This delay is reflected in the road freight rates: movement from Karachi to Peshawar (1730kms), for bagged freight, i s less than USq!0.95/ton-km, while for the movement from Peshawar to Kabul, it i s USq!4.5/ton-km. 0 On the Iranian and Chaman routes, most trucks" are unloaded at the border and the goods are reloaded onto Afghan trucks. The trucks are then driven a relatively short distance (<130 kms) and the goods are again unloaded. Under this system, additional unloading/loading time i s incurred. Also, likelihood o f loss or damage to the cargo is increased. There is evidence to suggest that some Pakistanitrucks canmake it into Afghan territory uponthe payment of a certain (variable) fee, contingent upontheir reaching an agreement with the local and regional authorities. Attachment 12: Project Justification and Economic Benefits Page 124 0 Most cargoes are also transshipped at least once on the routes between ports and destinations inAfghanistan. Transshipment between rail and road i s inevitable, but much o f the cargo i s also transshipped at the border from a foreign to Afghan truck, both for imports and exports. Goods are usually off-loaded again for Customs clearance and may be moved within the warehouses during the clearance procedure. Cargo i s almost never placed in containers, which means that the sacks, cartons, packages, etc. have to be handled individually. Each handling operation increases costs by US$1.5 to US$4.5 per ton, depending on the location and type o f cargo. These handling operations are usually carried out manually by untrained labor5'. Reducing the number o f transshipments and handling operations will reduce the percentage o f loss and damage. 0 Simplification o f transit and Customs clearance procedures will also reduce the administrative and management costs to importers, though it i s difficult to place numerical values on such savings. It is not possible to provide a precise estimate of reduction inoverall transit time that the project may achieve, but savings of, at least, one day for trucks and possibly more for cargo, would certainly be achieved. Greater savings will have to be made for Afghanistan to develop a modern trade regime and provide the basis for attracting foreign investment. Provision o f adequate cargo handling and storage facilities at the major clearance depots will also increase efficiency and provide more secure storage, with less chance o f loss or damage. (ii) QuantificationofBenefits This sectionprovides a quantificationo fthe above benefits ineconomic terms. a) Truck Operating Cost Savings - The World Bank financed a study of the Pakistan Trucking Sector in 2003, and the vehicle operating costs estimated in this study compare favorably with the actual rates charged for imports into Afghanistan. The data is, therefore, a reasonable basis upon which to estimate likely savings in vehicle operating costs from reduced delay time (Table 1). Table 1: Trucking Standing Costs: US$/day Medium Heavy Heavy 2 axle 3 axle 5 axle Driver Expenses Salaries 3 5 5 Meals 3 4 4 Misc 2 4 4 Total 7 13 13 Vehicle Cost Depreciation( 12yrs) 2 13 25 Interest (12.5%) on 50% o f value 2 8 18 Total 4 21 43 52Evidence obtained by interviews with various stakeholders by the mission. Attachment 12: Project Justification and Economic Benefits Page 125 Table 1: Trucking Standing Costs: US%/day Medium Heavy Heavy 2 axle 3 axle 5 axle Taxess3 Road tax 1 1 2 Route permit 1 1 1 Total 2 2 3 Other Overheads 2 9 21 Profit 1 5 12 Total 3 14 32 TOTAWworking day 16 51 91 Utilization of time savings (80%) US$ Total savingdday 13 40 73 Based on limitedobservations, approximately 15 percent of the vehicles are tractor-trailers. Thus, the averageunit cost saving for 3+ axle trucks i s US$45/truck-day. Prior to the appraisal mission, traffic counts were undertaken as part o f a survey of the border posts. The duration o f the counts conducted near Kunduz and at Torkham varied between one to three days respectively. Vehicle composition at Torkham was applied to entry points for which no data exists ontraffic composition. Table 2 summarizesthe results of these counts. Table 2: Cross-Border Freight Vehicle Flows (vehicles/day) Light Medium Heavy Total Torkham - Jalalabad 80 190 530 800 IslamQalla - Herat 20 40 115 175 Torghundi - Herat 10 20 60 90 Sher Khan Kunduz - 5 15 35 55 Aquina -Mazar 2 35 37 Hairatan-Mazar 14 1 59 74 Inthe analysis, the potentialbenefitto the light commercialvehicles (mainly pick-ups and station wagons) has been ignored as the benefit likely to be small. It i s also assumed that only import trucks would benefit from substantial saving in transit time, as the great majority of trucks are empty on the retumtrip. The total potential truck cost savings from reduction o f one day transit time is estimated at aboutUS$7.5 milliodyear, as shown inTable 3. Table 3: 2003 Import Truck Cost Savings (US$million) CommercialVehicle Cost Savings Truck:- Medium Heavy Total Torkham -Jalalabad 0.45 1 4.353 4.803 IslamQalla - Herat 0.095 0.944 1.039 Torghundi - Herat 0.047 0.493 0.540 53These taxes are paid to the PakistanGovernment and are thus a real economic cost to Afghanistan. Attachment 12: ProjectJustificationand Economic Benefits Page 126 Table3: 2003 ImportTruck Cost Savings (US$ million) CommercialVehicle Cost Savings Truck:- Medium Heavy Total Sher Khan - Kunduz 0.036 0.287 0.323 Aquina -Mazar 0.000 0.287 0.287 Hairatan Mazar - 0.002 0.485 0.487 Total 0.631 6.849 7.480 If streamlined transit and Customs procedures allowed a two-day reduction intruck times, the savings would double. The trucking sector in and around Afghanistan i s competitive and much o f the value o fthe truck cost savings would be reflectedinlower freight rates. b) Cargo Time Savings - Savings cargo time are conventionally valued on the basis o f the reduction in inventory costs. The limited evidence available suggests, however, that shippers' value reduced transit time over savings in inventory costs (studies in Kenya and South Australia suggest values o f >20 times the inventory cost value). Placing value on-savings in cargo time requires an estimate o f the total value o f imports, whereas precise estimates o f either the value or volume o f imports are not available for Afghanistan. Moreover, a significant proportion o f the cargo does not comprise commercial imports and time saving benefits probably do not occur. On the basis o f the level o f commercial imports estimated in the Trade Annex: US$2.36 billion and 5.2 million tons, and an interest rate o f 12.5%, the reduction in inventory cost from one day's saving in transitklearance time would amount to only US$0.81 million. It appears possible to reduce total delays to cargo (both transit and clearance time) by at least two days, generating total savings per year o f about US$1.6 million. This, however, should be considered as probably a gross underestimate o fthe value placedupon such time saving by the commercial sector. c) Cargo Damage Reduction - A considerable proportion o f Afghanistan's import traffic i s subjected to multiple handling operations during transit and Customs clearance. Streamlining the system, facilitating the use o f containers, reducing the number o f handling operations, moving to mechanical means, training the handlers, and improving both handling and storage facilities would reduce losses and damage. Studies o f other transit systems suggest loss and damage at 2% - 3% o f total cargo and these systems impose far fewer handling operations than in Afghanistan. - If some transshipment procedures could be eliminated, for example at the borders, it should be possible to significantly reduce losses and damage. Reduction inloss and damage o f 1%o f cargo value for the over 50% o f imports presently transshipped would result in annual benefits o f approximately US$14million. d) Cargo Handling Cost Savings - Cargo handling charges vary at different points in the transit chain, averaging around US$2.5/ton for each handling operation. Eliminating one handling operation for 50% o f the approximately 5.2 million tons o f import would result in savings o f US$6.5 million. These savings in handling costs would, however, be achieved through a reductioninunskilled employment, which might offset the social value o f the savings incosts. e) Overall Economic Bene$ts - The potential benefits from the project, if it i s successful in streamlining Customs and transit procedures and systems, are very large in relation to the expected costs: Attachment 12: Project Justification and Economic Benefits Page 127 Truck time savings US$7.5 million Cargo time savings US$ 1.6 million Cargo loss reduction US$ 14.0 million Cargo handling cost reduction US$ 6.5 million Total benefit US$29.6 million This benefit may well be an understatement as it assumes a low value o f cargo time, does not include imports on the Chaman to Kandahar route, nor the benefit for importers o f reduced management time. Moreover, even if the project achieves only 50 percent o f its rather modest targets, it will still generate substantial rates o f return. If the wider implications o f increased Customs revenues to State are included, the overall economic and social returns would be very muchhigher. Attachment 13: Domestic RevenueMobilization Page 128 ATTACHMENT 13 DOMESTIC REVENUEMOBILISATION (i) PresentRevenueSituation The 2002f03 ordinary budget, from which payroll operations and maintenance expenditures are funded, totals US$550 million. Government estimates that a total o f US$200 million will be mobilized from domestic revenues with the balance, US$350 million fi-om external revenue (donor assistance). If government reaches the SY1382 target for domestic revenue mobilization, collection will be over 50% higher than the US$83 million collected in SY1381. The vast majority o f revenue collection comes from the border Provinces. These revenues are not voluntarily remitted to the Treasury, but have required substantial collection efforts on behalf of the Ministry o f Finance. In the second quarter o f SY1382, revenues equaled 30.6% o f the ordinary budget with US$ 8.1 million from the Central Government and US$ 53.1 million from the Provinces. In addition, accumulated flight fees o f US$14 million and US$4.5 million in communication license fees were yet to be remitted for the remainder o f the year. Table 1 provides a summary o f domestic revenue54mobilization against expenditures for the first 5 months o f SY1382. Table 1 Summaryof DomesticRevenueCollectionAgainstRecurrentBudgetNeeds Annual Months Months YTD Yoof Budget Budget 1 2 3 Q1 5 Q2 Total 550.0 23.5 15.3 57.6 96.4 11.3 19.7 31.0 127.4 23.3% Revenue Domestic 200.0 23.5 12.7 13.7 49.8 7.4 4.0 11.4 61.6 30.6% Revenue Centre 2.1 0.5 0.7 3.3 2.5 2.4 4.9 8.1 Province - 21.4 12.2 13.0 46.5 4.9 1.6 6.5 53.1 Domestic 55.0 26.6 17.2 38.9 82.7 28.6 34.6 63.2 145.9 26.5% Expenditure Center 0.5 9.9 28.0 38.4 20.2 28.6 48.8 87.2 Province - 26.1 7.3 10.9 44.3 8.4 6.0 14.4 58.8 Source: MOF (2003) Table 2, shows the number o f provinces reporting expenditures and revenues as o f September 17 2003. The decline inmonth 4 and 5 are to be noted. Table2 Numberof ProvincesReDorting:ExDendituresandRevenues(1381/13821 Month 1 2 3 4 5 Expenditures 30 30 30 9 4 Revenue 27 29 28 8 5 Source: MoF (2003) 54The MOF Revenue Code Table classifies revenues by major areas, type and revenue items based on a revenue description. Direct Taxes are covered under code 01000. Indirect taxes are coded under 02000 with Customs revenues collected from the private sector (code 02100), semi-public companies (code 02200) and revenues from state owned enterprises (Code 02300). Attachment 13: DomesticRevenueMobilization Page 129 a) Increased Government Operating Expenditures - Unfortunately, increased revenue collection in 1382 barely keeps pace with increased expenditure requirements. By the 5" month o f 1382, expenditure was up 10% over the same period last year. As the pressure to allow pay reforms for police, teachers and health workers increases, the priority reform and restructuring (PRR) process expands and O&M payments to provinces increases, ordinary budget requirements will be higher than US$550/year over the medium term. The ordinary budget from domestic revenue collection (largely duties on imports) will therefore remain a major challenge. To underscore this, ordinary spending in SY1382 which was close to 20% higher than the previous fiscal year, and this trend i s likely to continue. Forecasts show that Government funding o f the ordinary budget will remain at a relatively constant base, therefore, declining as a percentage o f overall expenditure^^^. The fiscal plan needs to be underpinned by considerable increases in revenue collection in the short term. Extemal finance would require up to 60% to cover the recurrent needs o f the new administration. (ii) Revenue Implications o f the ProposedCustoms Laws6 Whilst the direct economic benefits o f the project are clear (savings in truck and cargo time, cargo loss and handling) there are wider economic implications related to the collection o f import duties that remain central to the locus o f this investment. Currently, revenues from import duties collected by Provinces are not routinely remitted to Kabul in accordance with the Customs law, and also standard rules and valuation procedures are not in operation. However, as the project will provide support for the development o f the Customs service and infrastructure, as well as overall policy development within the Ministries o f Finance and Commerce, improved revenue collection by central administration remains an important immediate and medium term objective. Based on the rather crude trade volume figures available, and the draft tariff structure outlined above, it is possible to make some basic calculation on the revenue eaming potential o f the current administration. However, to maximize duty collection in the medium term, it would be essential to covert unofficial trade into official trade through improved compliance. Much o f this depends upon buildingcapacities within the present Customs administration. Given that the exact volume o f imports and exports for 2003 are not known. The following estimates o f revenue eaming potential are based on the results o f a recent traffic census conducted by UNOPS. In drawing up this estimate, the following assumptions have been made: It is assumed that duty will only be charged on official imports at the draft tariff rates indicated above (0, 5, 10 and 20%). The average un-weighted tariff used in the scenario calculations therefore i s 8.75%. The calculations assume that valuation i s conducted usingmarket exchange rates and that valuation i s based on CF; and, Goods in transit will not be charged duty but only nominal service charges regulated by the transit framework agreements. ~~ 55Forecasts for revenues from ongoing tax reform (income, excise) are unlikelyto be a major source of revenue over the short term. 56At the time o fwriting this report, the revisedCustoms Law was yet to be approved. Mucho fthe analysis containedwithin the section is based on the final draft amendments to the CustomLaw and legislative framework for Customs administration. Attachment 13: Domestic RevenueMobilization Page 130 0 The import estimates are based upon 50% o f the total traffic flow - therefore assuming that, on average, flows are balanced in and out and that all trucks coming into Afghanistan are full o f imports goods. A recent (albeit limited) traffic survey conducted during September 2003 showed an average of 611 light medium and heavy vehicles entering Afghanistan every day. The following charts demonstrate the relative importance o f different border crossings in terms o f import volume (based on the truck census). Daily Light, Medium and Heavy Vehicles Cross BorderVehicle Flows (%) Across Different Borders .$m ha ralan. Mazar Aq. na.Mazar 8 Sherdnan-dJnoa % 6t zm IorgJnoi. Herat IslamQala- Herat Torhnam. Ja lalaoao f f 0.0 50.0 100.0 0 100 200 300 400 No. 0 Torgundi Herat - oSher Khan Kunduz - Q Light Medium Heavy The percentage volume o f in-coming traffic to Afghanistan i s as follows: Torkhum-Jelalabad (65%), Islam Qala-Herat (14.2%), Torgundi-Herat (7.3%) - these are the major revenue earning border posts that will need to receive particular focus under this programs7. Calculating the average axel loads and the assumed average US$ value per metic tonne o f cargo imported through different border crossings, i s a crude method for estimation o f revenue, once the un- weighted average tariff is applied. Table 3 below associates the volume o f traffic with an average value per tonne across different borders and i s further illustrated in Figure 2. The margin or error inthis calculationmay be significant, as data collected is not accurate. However, based on these calculations, the total value of imported commoditiesper year currently is inthe order o f U S 2 . 6 billion and, based on the un-weighted average tariff, potential revenue collection would be US$231 million for 1382. At present, less than 50% o fplannedrevenue collectionhas been achieved inthe first 8 months o f SY1382. This highlights considerable scope for improvement in collection, and centralisation. According to the 2"d Quarter these calculations o f SY1382, were only 26% per cent o f available importrevenue collected. Once the amendments to the Customs law are effective, it will be vital to monitor market response to the proposed tariff schedule and rates on compliance valuation. 57 The traffic survey didnot however present data of vehicle numbers for the Chaman - Kandahar corridor which is probably more important than some of the other corridors. The figures presented are therefore conservative estimates oftotal import volume and potential revenue earnings. 3 ci' 0 0 0 0 0 0 0 0 0 0 0 0 b 0-m 0-m m 3 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 9 9 9 9 9 9 S $ g % % a 3 Attachment 13: Domestic Revenue Mobilization Pane 132 Inforecasting the future revenue eaming potentialofthe Government, through indirecttaxation (import duties), one must identify the current location of highest revenue collection. Data provided by the Afghan Management Information System (AFMIS) presents the following revenue position of central and provincial administration for 1382. Currently, indirect taxes (as defined in foot note 3) constitute 13% of Central revenues and a little over 65% of Provincial revenue actually remittedto the Treasury. ~ Centre RevenueBrnlngs by Catearoy('4 ProvincialRevenue EarningsbyCateproy(o/J for SY 1382(First 5 months) for SY1382 (first 5 months) Loansand grants 1%1 Drect Taxes 7% Nett Taxes E M C 5.51% utile of gvnt pro mc48% 0 36% Rop Sale 8 and sew 6 77% I - 6% 65 17% Provincial revenue data providedby AFMIS highlightsthat during SY 1382, Provincial revenues were collected as follows: Herat (58.2%), Kandahar (17%), Nangahar (11%), Kunar (5.1%), Balkh (2.5%) and Khost (2%). The remaining 26 provinces contribute only 3.8% of the total indirecttaxation (primarily imports). Revenue Earning by Province for 1st 5 Monthsof 1382 Hirat Kandahar Nan arhar %mar Balkh Khost Nimroz Jawzjan Farah Paktiya Kunduz Hilmand Takhar v) 8 Ghami Baghlan Zabul '5 c Faryab Samangan Parwan Laghman W L X L Kapisa Bhanyam Sari Pul Uru an Pa8ika Ghor Nuristan Badghis Badakhsh Kabul 200,000,OO 400,000,OO 600,000,OO 800,000,OO 1,000,000,O 1,200,000,O 0 0 AS 0 00 00 Attachment 13: Domestic RevenueMobilization Page 133 There are clear gains to be achieved. The preceding projections show the potential importance o f Nangahar for revenue collection, as the primary route o f import into Afghanistan, both interms o f volume and value. Potential collections from Nangahar exceed Herat by over US$40 millionlyear however, presently import duty collection stands at only 16% o fHerat. (iii) Conclusion Inspite of the somewhat crude analysis conducted above, the importance of enhancing revenue collection and increasing remittances from the Provinces, i s in the interest o f national sovereignty. It i s also central to resolving the current fiscal crisis faced by the Central Government. The project will assist in re-establishing an effective and loyal Customs service, while investing ina logical sequence o f targeted policy and institutional reforms. Inessence, this will mean focusing on development o f a new infrastructure for administrative procedures and the modemisationlcomputerisation along the main import corridors. From an economic point o f view, the corridors from Torkhum through to Kabul and Islam Qala through to Herat and Kabul willremain important. Attachment 14:CustomsFinancialManagement Page 134 ATTACHMENT 14 CUSTOMSFINANCIALMANAGEMENT: ANINITIAL ASSESSMENT Funds received by Customs authority are a major source o f revenue for TEA. Hence, it is important that a strong Financial Management System i s in place to minimize the leakages and ensure adequate audit trail for accountability. An assessment was undertaken o f Kabul Customs facilities and the same was linked with the system in place at the central bank as well as the MinistryofFinance (MOF). Following aspects were considered for a proper Financial Management System in relation to Customs Revenues: 0 Ensuringproper assessmento f duties on all imports andexports Collection of duties as assessed 0 Transfer o f funds collected to appropriate accounts 0 Reporting o f income to the Treasury 0 Accounting o f the income inGovernment's accounts. Scope for Improvements Although systems put in place at the Custom Houses appear rudimentary in approach, but are effective in ensuring that duties are assessed, collected and transferred to the appropriate accounts. Hence, any modernization o f the present system should ensure that present strengths are retained and built upon. However, it must be again emphasized that this i s true for Kabul only, province assessment needs are yet to be made. Based on the attached assessment following main areas o f improvements inthe current Customs Financial Management system at Kabul have emerged: Separate accounts for revenues and expenditures - Presently one account i s used to deposit all revenues as well as incur all Operation & Maintenance expenditures. This i s not a good internal control practice as it creates scope for error. Possibilities o f having a separate account for revenues should be considered. This enhances control over income as reconciliation will relatively be easier. 8 Customs house-wise reconciliation - Funds received from different Custom Houses are deposited inone bank account. At present no Customs-house wise reconciliation with the funds deposited inthe bank account are done. Hence, no reconciliation is done to ensure that incomes reported by various Customs Houses are in agreement with the amounts received. Reconciliation of reports generated by different departments - The above reconciliation for Customs income becomes even more important considering the variations observed among different reports as produced by different departments. There should be a regular and up to date mechanism to reconcile income from different sources. Analytical checks on income generated - At present there i s no proper mechanism that undertakes assessment o f incomes from different Regions/Provinces. This is based on alternative data, rather than relying on information received from the Provinces and Attachment 14: Customs Financial Management Page 135 Customs Houses. A good Financial Management System would ensure that a check on the Customs income receivedis verified basedon alternative sources o f information. Streamlining the Customs declaration and assessment system - A declaration form (ACCD) passes through a large number o f hands, which creates confusion and delays. This is particularly the case at Kabul Custom House. The system needs streamlining to ensure efficiency, effectiveness and a proper balance between segregation o f duties. Computerization The computerization process at present i s mainly limited to compiling - ACCD database. The process should facilitates report generation and better FM. The System as recorded duringassessment i s attached as an Appendix to this attachment. Attachment 14: Customs Financial Management Page 136 Appendix KabulCustomsFacilities CurrentFMSProcedures - To ascertain the actual system in place, visits were made to Kabul Airport Customs, Kabul Customs House and related counterbranch o f the Da Afghanistan Bank. To complete this picture it is imperative to visit some o f the Provinces Customs Houses. This was not possible duringthis appraisal mission. While writing this note, effort has been made not to duplicate the system already described elsewhere in the Annex, as far as possible, though at places due to the context some duplication may occur. Systems being described below are more or less common to the two locations visited. Any specific variations have been highlighted wherever considered appropriate, The Customs House has a much larger volume o f business. It handles 200-250 transactions o f impoflexport on a daily basis, compared to 25-30 transactions at Kabul airport. (i) AssessmentofDuties Goods imported can be broadly classified under two categories, either falling under exempted category or taxable category: a> Exempted imports - Under the exempted category importers are mainly Diplomatic Missions, Foreign Military forces, NGOs, etc. As can be expected, at the Kabul airport there is a large volume of such imports. To regulate such exempted imports, the importers are required to obtain authorization (through an exemption form). The importer must submit this Authorized approval along with duly completed ACCD form (Declaration Form for goods imported) to the Customs Officials responsiblefor import assessment. b) Taxable Imports - All importers are required to be registered under the Ministry of Commerce. Based on this registration, each importer/exporter is issued an ID number. Normally the importer is required to have imports cleared at the Custom House, where he is registered. However many of the imported cars, are reported to be assessed and tax paid at Custom Houses located in the Provinces that the vehicle is passing through. The consignments are evaluated on values as provided by Chamber o f Commerce. Presently values are compiled through classifications contained in23 different groups. In case the value is not available inthese groups, it i s obtained through reference to Chamber o f Commerce. Tariff i s calculated based on these values and recorded on the ACCD form. Total custom duty payable is indicated on another form called Evaluation Form. Both ACCD as well as Evaluation Form require approval by the Head o f the Department or any o f his Deputies. The ACCD form, passes through a number o f hands, before approval, indicating segregation o f duties, perhaps even to the extent o f creating certain inefficiencies. The matter needs to be studied and, if necessary, harmonizedbetween internal check and efficient disposal o f ACCDs. At the end, all ACCD forms are filed ineach importer's file. At the Kabul Customs House this is done on the basis o f a serial number, considering large volume o f transactions. (ii) CollectionofDuties A DAB bank counter is available close to the Kabul Airport Customs office. Similarly, a DAB branch is housed in a building adjacent to the Kabul Customs House. At the Kabul Customs House each importer i s required to deposit the duty in the Bank, along with a pay-in-slip to facilitate payment. Duties are generally paid in cash to DAB. Transfer payments are allowed only if the dealer has an account inthe same branch. After receipt o f funds, the Evaluation Form Attachment 14:CustomsFinancialManagement Page 137 i s signed and stamped by the cashier and a senior DAB Officials. A receipt (also called Credit Memo) is providedto the customer for amount collected from the import/export of the goods. At the end ofthe day, the DABbranchprepares a summary, ACCD-wise, o ftotal funds collected. This is submittedto the accounting section ofthe Customs House. Such a report is very useful to reconcile the tax accounted inCustoms records with the tax collected on a daily basis. The same procedure i s followed at the Kabul Airport Customs Office, with certainminor variations. (iii) RecordingofIncome All ACCD forms are entered into a register at the Customs back-office. The duty amount is recordedinthis register according to amount payable to different agencies. This i s mainly to the Ministry of Finance as Custom Duty, including penalties, Municipality Tax (1%) and Red Crescent (2%). On certain items there are specific duties which are payable to Ministry of Commerce. Details of such a break-up are useful to ensure transfer o f funds to the appropriate agencies. It was not clear, if such a break-up is readily available at the Kabul Airport. (iv) Transfer of Fundsto Appropriate Accounts From the DAB counter at the airport, funds are transferred to its Head office on a daily basis. A report i s sent to the Treasury for funds transferred to MOF's A/c at Head Office on a daily basis. The Kabul Customs House provides a transfer advise to the DABbranch, indicating the amounts to be transferred from DAB branchto different agencies' bank accounts at the Head Office. This i s normally done on a Thursday afternoon, covering the entire week's transactions, i.e. from Saturday to Thursday. The DAB branch issues an advise to the Customs House indicating the amounts transferred to the respective account numbers along with a bank statement to various account holders on aregular basis. (v) Reportingof Income to Treasury Kabul Custom House reports weekly to the Treasury. The purpose of this report is to reconcile each transfer made to the Treasury. The report sent by the Kabul Customs House, provides the daily total collection. This amount i s further broken down among the various recipients o f taxes. The report also includes cumulative amount of tax collected for the fiscal year. From the Kabul Airport Customs a similar report i s sent to the Treasury. There may be some minor variation in the formatting of the report. Normally there are three copies of the report, to the Admin Department of the MOF, RevenueDepartment and the Treasury Department. (vi) Accounting of Income intoNational Accounts Based on reports received from the Custom Houses, the Admin. Department prepares income vouchers (M27) to credit the income in the accounting software. Normally a report corresponds to a transfer o f fund to the bank account. Thus an M27 i s prepared for funds transferred by the Custom House. At Kabul, mustofiats are not involved as the reports and funds directly reach MOF. However, incaseofProvinces, funds areroutedbymustofiat, who preparesM29, which is a summary o f M27s, and i s supposedto represent each transfer from the Province to MOF. Here it may benotedthat transfer offunds fromProvinces isnot regular. Attachment 14: CustomsFinancialManagement Page 138 (vii) Internal Checks MOF has appointed a group o f four controllers who are based at the Kabul Customs House, their primary objective i s to verify the correctness o f eachACCD form. (viii) Analytical and Other Control Measures There are very few analytical or cross reconciliationprocedures inplace to verify the accuracy o f the data beingcompiled by different departments. For example, though Cash Management Unit reconciles the bank account with accounting records, there is no attempt to reconcile income from different Custom Houses as accounted in the records and as reported. Further, there was no evidence of procedures inplace to reconcile ifthe Customduties collected are inline with various broad trade estimates, either for the country as a whole or o f a specific Region. Such measures could help provide alternative indicators for accuracy or otherwise of the income being reported by various Regions. (ix) Computerization Bearing Point, funded by USAID, i s presentlypreparing a database of Customs functions. It has formatted and finalized the format of ACCD form, the main custom declaration and evaluation form. It has also input all the data and values for 23 groups o f goods as compiled by Chamber of Commerce and used by the Customs department for valuation purposes. At present the ACCD forms are ina spreadsheetformat at Kabul Airport and Kabul Customs House.