Document of The World Bank FOR OFFICIAL USE ONLY Report No. 126412-AF INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED IDA GRANT IN THE AMOUNT OF SDR 62.6 MILLION (USD 90 MILLION EQUIVALENT) AND A PROPOSED GRANT FROM THE AFGHANISTAN RECONSTRUCTION TRUST FUND IN THE AMOUNT OF USD 210 MILLION TO THE ISLAMIC REPUBLIC OF AFGHANISTAN FOR THE INCENTIVE PROGRAM DEVELOPMENT POLICY GRANT May 23, 2018 Macroeconomics, Trade and Institutions Global Practice South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Islamic Republic of Afghanistan GOVERNMENT FISCAL YEAR December 22 – December 21 CURRENCY EQUIVALENTS (Exchange Rate Effective as of April, 2018) Currency Unit US$1.00 = AF70.3 ABBREVIATIONS AND ACRONYMS ACBR Afghanistan Central Business Registry ACCA Association of Chartered Certified Accountants AF Afghanis (Currency) AFMIS Afghanistan Financial Management Information System Aftel Afghanistan Telecom AISA Afghanistan Investment Support Agency AK Asan Khedmat ALCS Afghanistan Living Conditions Survey AML/CFT Anti-Money Laundering and Countering Financing of Terrorism ANPDF Afghanistan National Peace and Development Policy Framework ARAZI Afghanistan Land Authority ARD Afghanistan Revenue Department ARTF Afghanistan Reconstruction Trust Fund ARTF IP Afghanistan Reconstruction Trust Fund Incentive Program ASA Advisory Services and Analytics BRT Business Receipts Tax CPF Country Partnership Framework CSO Civil Society Organization DAB Da Afghanistan Bank DABS National Electricity Utility of Afghanistan DiREC Displacement and Returnee Executive Committee DPF Development Policy Financing DPO Development Policy Operation ECF Extended Credit Facility FPIP Fiscal Performance Improvement Plan FSP FPIP Support Program GDP Gross Domestic Product GoIRA Government of Islamic Republic of Afghanistan HIPC Heavily Indebted Poor Countries HRM Human Resource Management IAS International Accounting Standards ICT Information and Communication Technologies IDA International Development Association IDP Internally Displaced People IFC International Finance Corporation IFRS International Financial Reporting Standards IMF International Monetary Fund IP-DPG Incentive Program Development Policy Grant 2 IPM Integrated Pest Management LTO Large Taxpayer Office MAIL Ministry of Agriculture, Irrigation and Livestock MCIT Ministry of Communication and Information Technology MOCI Ministry of Commerce and Industry MOE Ministry of Education MOF Ministry of Finance MTO Medium Taxpayer Office MTEF Medium-Term Expenditure Framework NATO North Atlantic Treaty Organization NEPA National Environment Protection Agency NPP National Priority Program NRM Natural Resource Management NRVA National Risk and Vulnerability Assessment NTA National Technical Assistants O&M Operations and Maintenance P&G Pay and Grading PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PFMR Public Financial Management Reform PFMRII Second Public Financial Management Reform Project II PIM Public Investment Management PMP Pest Management Plan RCW Recurrent Cost Window SDR Special Drawing Rights SESA Strategic Environmental and Social Assessment SIA Strategic Impact Assessment UNAMA United Nations Assistance Mission in Afghanistan UNDP United Nations Development Programme USAID United States Agency for International Development USIP United States Institute of Peace VAT Value Added Tax Acting Regional Vice President: Ethel Sennhauser Country Director: Shubham Chaudhuri Global Practice Senior Director: Carlos Felipe Jaramillo Global Practice Director: John Panzer Practice Manager: Manuela Francisco Task Team Leaders: Taehyun Lee and Tobias Haque 3 ISLAMIC REPUBLIC OF AFGHANISTAN INCENTIVE PROGRAM DEVELOPMENT POLICY GRANT TABLE OF CONTENTS SUMMARY OF PROPOSED DEVELOPMENT POLICY GRANT AND PROGRAM .................... 6 1. INTRODUCTION AND COUNTRY CONTEXT ........................................................................... 8 2. MACROECONOMIC POLICY FRAMEWORK ......................................................................... 10 2.1. ECONOMIC CONTEXT .................................................................................................................. 10 2.2 RECENT ECONOMIC DEVELOPMENTS ......................................................................................... 11 2.3 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ........................................................ 14 2.4 IMF RELATIONS ........................................................................................................................... 16 3. THE GOVERNMENT’S PROGRAM ............................................................................................ 17 4. THE PROPOSED OPERATION .................................................................................................... 17 4.1 LINK TO GOVERNMENT PROGRAM AND OPERATIONAL DESIGN ............................................... 17 4.2 PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS.................................................. 20 4.3. LINK TO CPF AND OTHER BANK OPERATIONS ............................................................................ 32 5. OTHER DESIGN AND APPRAISAL ISSUES.............................................................................. 33 5.1. POVERTY AND SOCIAL IMPACT ................................................................................................... 33 5.2. ENVIRONMENTAL ASPECTS......................................................................................................... 37 5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS ......................................................................... 38 5.4. MONITORING, EVALUATION AND ACCOUNTABILITY ................................................................. 39 6. SUMMARY OF RISKS AND MITIGATION ............................................................................... 40 ANNEX 1: POLICY AND RESULTS MATRIX ................................................................................... 44 ANNEX 2: LETTER OF DEVELOPMENT POLICY .......................................................................... 47 ANNEX 3: FUND RELATIONS ............................................................................................................. 51 ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE ................................ 56 ANNEX 5: GOVERNMENT 3-YEAR POLICY REFORM MATRIX ............................................... 58 4 The Incentive Program Development Policy Grant was prepared by a team comprising: Tae Hyun Lee (TTL, Lead Economist, GMF06), Tobias Haque (TTL, Senior Economist, GMF06), Saurabh Shome (Economist, GMF06), Shankar Narayanan (Senior Social Development Specialist, GSU06), Mohammad Yasin Noori (Senior Social Development Specialist, GSU06), Christina Wieser (Poverty Economist, GPV06), Nandini Krishnan (Senior Poverty Economist GPV06), Mohammad Sulaiman Akbari (Private Sector Specialist, GTC06), Bernard Haven (Public Sector Specialist, GG024), Yousif El Fadil (Senior Public Sector Specialist, GG024), Ahmed Rostom (Senior Financial Sector Specialist, GFM06), Syed Waseem Kazmi (Senior Financial Management Specialist, GGO24), Zohra Nooryar (Senior Financial Management Specialist, GGO24), Marcelo Acerbi (Senior Environment Specialist, GEN06), Mohammad Arif Rasuli (Senior Environment Specialist, GEN06), Fanny Missfeldt-Ringius (Lead Energy Specialist GEE06), Abdul Hamid Quraishi (Operations Officer, GEE06), Toru Konishi (Senior Water Economist, GWA06), Philippe Floch (Consultant, GWA06), Juan-Carlos Alvarez (Senior Counsel, LEGES), Atiqullah Ahmadzai (Senior Public Sector Specialist, GGOAP), Ahmad Shakeeb Safai (Consultant, SACKB), Keith Clifford Bell (Senior Land Policy Specialist, GSULN), Guillemette Sidonie Jaffrin (Program Leader, SACKB), Janmejay Singh (Lead Social Development Specialist, GSU06), Yasuhiko Matsuda (Program Leader, SACKB), Ghazal Shobair (SACKB), Asraful Alom (ITSCR), Abdul Baes Akhundzada (Power Engineer Consultant, GEE06), Mohammad Zubair Stanikzai (Power Engineer Consultant, GEE06), Wezi Marianne Msisha (Senior Operations Officer, SACKB), Muhammad Wali Ahmadzai (Operations Officer, SACKB), Victor Ordonez (Senior Finance Officer, WFACS), and Anastassia Alexandrova (Senior Country Officer, SACKB). Overall guidance was provided by Manuela Francisco (Practice Manager, GMF06), Abdoulaye Seck (Operations Manager, SACKB), and Shubham Chaudhuri (Country Director, SACKB). Peer reviewers were Kevin Carey (Practice Manager, GMTMN), Geoff Handley (Senior Public Sector Specialist, GGOAE), and Bill Byrd (Senior Expert, United States Institute of Peace). 5 SUMMARY OF PROPOSED DEVELOPMENT POLICY GRANT AND PROGRAM ISLAMIC REPUBLIC OF AFGHANISTAN INCENTIVE PROGRAM DEVELOPMENT POLICY GRANT Borrower Islamic Republic of Afghanistan Implementation Agency Ministry of Finance IDA Grant: SDR 62.6 million (US $90 million equivalent) Financing Data ARTF Grant: US$210 million Operation Type Development Policy Operation The Pillars and Program Development Objectives are: (i) strengthening Pillars of the Operation the policy framework to support state effectiveness, private investment, And Program and social inclusion; and (ii) improving the policy and institutional Development Objective(s) framework for public financial management Pillar 1: Strengthening the policy framework to support state effectiveness, private investment, and social inclusion Baseline Target (2019) (2017) • Technical functional specification developed for No Yes an interface of integrated government information technology (IT) system • Number of civil servants competitively selected 0 500 in line with the new recruitment process • Percentage of female civil servants at Senior 0% 15% Management Group level recruited through the revised process among competitively recruited civil servant positions • Percentage of line ministries for which the 0% 100% position of Deputy Minister for Administration & Finance has been competitively selected into a civil service position Result Indicators • Distance to Frontier score against the Resolving 23.2 33.2 Insolvency measure in the Doing Business Indicators • Distribution level losses in Kabul and Herat 20 (Kabul) <20 (Kabul) Provinces as a percentage of electricity supplied 26 (Herat) <26 (Herat) from substations • Number of property documents recognizing 0 150,000 or at women as full or part owners of land least 50% of total property documents issued • Irrigated wheat productivity 2.49 tons >2.49 tons per per hectare hectare Pillar 2: Improving the policy and institutional framework for public financial management Baseline Target (2017) (2019) 6 • Proportion of approved projects that have 0% 80% undergone strategic fit screening to the value of total investment budget • Domestic revenue collected by the large Af38.6 Af43.9 billion taxpayer office (LTO) and medium taxpayer billion office (MTO) • The proportion of LTO clients with access to 2% 100% fast-track filing • LTO share of total Afghanistan Revenue 27% 36% Department (ARD) revenue • Number of ministries that develop budget 0 4 proposals for operations and maintenance (O&M) expenditures using a norm-based method Overall risk rating High (i) Are there short and long-term climate and disaster risks relevant to the operation (as identified as part of the SORT environmental and social risk rating)? Yes If yes, (ii) summarize briefly these risks in the risk section and what resilience measures may help address them? Climate and Disaster Risks Climate change poses a threat to agricultural livelihoods, especially for those highly dependent on rain-fed agriculture. Resilience measures supported by this operation, including a new Irrigation Policy and Drylands Agriculture Policy will mitigate risks through supporting investment in irrigation restoration and improved management of water resources. Operation ID P164882 7 PROGRAM DOCUMENT FOR A PROPOSED DEVELOPMENT POLICY GRANT TO THE ISLAMIC REPUBLIC OF AFGANISTAN INCENTIVE PROGRAM DEVELOPMENT POLICY GRANT 1. INTRODUCTION AND COUNTRY CONTEXT 1. The proposed Incentive Program Development Policy Grant (IP-DPG) Operation supports continued progress with key reforms under the Afghanistan National Peace and Development Framework (ANPDF). Reforms supported by the operation are organized under two pillars: i) strengthening the policy framework to support state effectiveness, private investment, and social inclusion; and (ii) improving the policy and institutional framework for public financial management. The proposed operation will be supported by a US$90 million IDA grant and a US$210 million grant from the Afghanistan Reconstruction Trust Fund (ARTF), and is the first of three planned operations aligned with Government’s current three-year program of policy reforms. World Bank Board approval is sought for IDA financing in support of the program. The ARTF Management Committee will approve the ARTF grant financing in support of the program. 2. Afghanistan has made some substantial progress in strengthening institutions since the fall of the Taliban, but remains a deeply fragile and conflict-affected state. It has been in almost constant conflict for over 35 years with no durable political settlement established. Gross Domestic Product (GDP) per-capita is among the lowest in the world, poverty is deep and widespread, and Afghanistan continues to perform poorly against many social indicators. Substantial progress has been achieved through reconstruction efforts since 2001, however. Major gains include: i) re-establishment of basic public finances, with revenues now equal to 11.4 percent of GDP from negligible levels in 2001; ii) massive expansion in access to services, with accompanying improvements in social outcomes, including reductions in maternal and infant mortality, improved education access, and increases in life expectancy; and iii) adequate fiscal management, with Government maintaining a balanced budget and reducing external debt. 3. Recurrent cost support from donors has played a vital role in Afghanistan’s reconstruction. The ARTF was established in 2002 as a multi-donor funding mechanism to ensure coordinated support to reconstruction activities (see Box 1 for further details on the ARTF). From 2002, a Recurrent Cost Window (RCW) was established as an investment project instrument to provide ‘baseline’ financing to meet recurrent costs and re-establish the basic functions of government, including the payment of civil servant salaries. From 2009, modalities of recurrent cost support under the ARTF evolved to include an increased focus on incentivizing structural and public financial management reform, including the introduction of the Incentive Program which established: i) a revenue matching grant under which additional funds were disbursed if International Monetary Fund (IMF) revenue targets were exceeded; ii) a facility to incentivize increased recurrent allocations to operations and maintenance expenditure; and iii) a structural reform element, with disbursements conditional on the timebound completion of structural and public financial management reforms. Resources provided through the RCW have remained significant, accounting for around 20 percent of non-security recurrent expenditures, and between US$250 million and US$350 8 million per year since 2013. The World Bank has periodically used Development Policy Grants alongside the ARTF RCW to provide additional IDA resources as general budget support, most recently in 2017. 4. After fifteen years of successful operation, the Government and the World Bank are seeking to convert the ARTF RCW into a standard World Bank Development Policy Financing operation. This change has been discussed extensively among Government, World Bank, and development partners, and is supported by all parties. With the experience gained under the ARTF RCW, Government is now well positioned to have ARTF RCW funding channeled through the World Bank Development Policy Financing (DPF) instrument. Utilization of a standard World Bank instrument in the form of DPF reflects a shared desire to: i) provide the transparency and monitoring arrangements that are associated with standard World Bank program preparation, oversight, and review practices; ii) satisfy Government’s objective for increased alignment of donor budget support by allowing IDA and ARTF resources to be mobilized through a single operation; iii) avoid the risks of procyclical reductions in recurrent cost support in the event of revenue declines, which may occur in the event of potential political instability associated with upcoming elections;1 and iv) provide recurrent cost support conditional on structural reform progress, over which Government has relatively direct control. 5. The proposed operation includes several innovations over standard Development Policy Grant design. First, the operation will be composed of eight tranches. The first tranche of US$90 million of IDA resources is associated with three prior actions. Seven tranches of US$30 million each of ARTF resources are associated with tranche release conditions that are expected to be fulfilled by a specified Completion Date (November 15, 2018). Second, disbursement amounts associated with tranche release conditions will be timing dependent. The tranche associated with three prior actions will be released immediately and in full after the effectiveness conditions are met. The remaining seven tranches will be released upon the fulfilment of each tranche release condition. Tranches will decrement in amount if fulfilment of the tranche release conditions extends past the targeted Completion Date, providing continued incentives for the fulfilment of agreed reforms by Government. The use of a single operation, rather than a programmatic series, provides an opportunity to trial this innovative approach, while being sensitive to the Afghanistan context by providing flexibility to adjust and refine both the reform program and various elements of the program design over planned subsequent operations. 6. The proposed operation is fully aligned with priorities of ANPDF—the flagship national reform roadmap for the Government. Afghanistan currently faces important challenges in: i) stimulating growth in the context of a protracted slowdown; ii) generating jobs for the large number of Afghans entering the labor market; iii) improving livelihoods in the context of high widespread poverty; and iv) mobilizing revenues in the context of expected declines in aid over the medium-term. Addressing these challenges depends on strengthening institutions, fostering private investment, and improving government effectiveness. The first pillar of the operation aims to strengthen the policy framework to support state effectiveness, private investment, and social inclusion including through: i) the national roll-out of E- payments and mobile money; ii) supporting civil service reform; iii) improving the business enabling environment through legal and regulatory reforms; iv) improving financial management and sustainability 1 Parliamentary elections are scheduled on October 20, 2018, while Presidential elections are planned in the first half of 2019. 9 of the power utility; v) issuance of ownership certificates to strengthen land rights for current informal occupants of government land; and vi) establishing a legal and policy framework for improved management of irrigation and water. Under the second pillar, this operation will strengthen the policy and institutional framework for improved public financial management, including: i) strengthened public investment management; ii) improved tax administration through electronic tax services; and iii) improved processes and efficiency in Government O&M expenditure. 2. MACROECONOMIC POLICY FRAMEWORK 2.1. ECONOMIC CONTEXT 7. Afghanistan remains an undiversified economy, heavily dependent on aid. The private sector is extremely narrow, with employment concentrated in low-productivity agriculture (44 percent of the total workforce works in agriculture and 60 percent of households derive some income from agriculture). Investment since 2001 has focused around the aid-driven contract economy. Private sector development and diversification is constrained by political instability, weak institutions, inadequate infrastructure, widespread corruption, and a difficult business environment (Afghanistan was ranked 183rd of 190 countries in the 2017 Doing Business Survey). In the absence of a strong domestic private sector, foreign grants currently finance more than 56 percent of budget expenditure and substantial off-budget security needs. Aid flows to Afghanistan were equal to around 37 percent of GDP in 2017, financing a large share of both total civilian and security expenditures. Security expenditures (national security and police) are high at around 23 percent of GDP in 2017).2 Military spending is around 11 percent of GDP, compared to a low-income country average of around 3 percent of GDP. 8. Illicit activity remains central to the Afghan economy. Opium remains Afghanistan’s largest export (estimated at US$2 billion, compared to total formal exports of just US$720 million). Poppy production almost doubled to 9000 tons in 2017 and the area under poppy cultivation increased to 328 thousand hectares–over 63 percent growth since last year and the highest ever recorded. This increase was due to the absence of diseases that impacted the 2016 crop, reduced government control in some opium-growing areas, and increased uptake of fertilizers, and pesticides by opium farmers. More generally, the opium economy is driven by weak rule of law, easy access to key trade routes, and absence of alternative livelihood generating activities. The major role of illicit activity in the Afghan economy, including opium production and smuggling, weakens overall governance and deprives government of much-needed revenues. 2 This includes off-budget security costs. 10 9. Following a sustained period of impressive development progress after the fall of the Taliban, Afghanistan has faced intensifying and interlinked economic, security, and political challenges. With an influx of aid since 2002, Afghanistan sustained rapid economic growth and improvements against important social indicators for more than a decade. Annual growth averaged 9.4 percent between 2003 and 2012. Since 2012, however, a range of factors have slowed economic and social progress. Aid flows decreased from around 75 percent of GDP in 2012 to 37 percent of GDP in 2017 (with the number of North Atlantic Treaty Organization (NATO) troops declining from more than 130,000 in 2011, to around 15,000 by end-2014). Reduced aid and security presence led to a rapid weakening of demand, especially in construction and other service sectors, with follow-on impacts across the economy. The security situation deteriorated, with increased activity by anti-government forces leading to a large increase in civilian casualties from 5,969 in 2009 to 10,453 in 2017.3 Impacts on confidence and investment were magnified by political instability, including the disputed outcome of the 2014 election and various challenges to central government authority by powerful regional strongmen. 10. Increasing displacement threatens a humanitarian crisis in a context where poverty remains stubbornly high and inequality is growing. Afghanistan currently faces a humanitarian crisis arising from large numbers of returning migrants (more than 2 million since 2015) and a large and growing internally displaced population (1.7 million). Internal displacement and the returnee population represent both a risk and an opportunity to the economy. Successful integration into productive employment of generally better-educated returnees could provide a boost to productivity and growth. On the other hand, concentration of returnees and the displaced in urban centers risks overwhelming services and generating large humanitarian needs. Over recent years, the rate of economic growth has lagged population growth. The poverty rate increased sharply from 38 percent in 2011/12 to 55 percent in 2016/17, with poverty increasing in both urban and rural areas. 2.2 RECENT ECONOMIC DEVELOPMENTS 11. Growth has slowed over recent years. Real GDP growth slowed to 1.3 percent in 2015, reflecting declining public-sector spending, political instability, and a deteriorating security environment, recovering slowly to 2.4 percent in 2016 and an estimated 2.6 percent in 2017. The agriculture sector grew by only around 1.4 percent in 2017. Service and industry sectors recorded slightly faster growth of 3.4 percent and 1.8 percent respectively, reflecting a bottoming out and slight recovery from the crisis of business confidence following the withdrawal of international security forces. 12. Inflation remains at moderate levels. After declining by 1.5 percent (period average) in 2015, driven by the fall in global commodity prices and weak domestic demand, prices increased by 4.4 percent in 2016, and 5 percent in 2017. The slight increase in 2017 reflected higher food prices and depreciation during the early period of the year. After peaking at 7.5 percent in June, inflation slowed steadily to 3.1 percent in December as the exchange rate stabilized. High levels of dollarization and a narrow financial sector weaken monetary transmission channels. Inflationary pressures are strongly linked to import prices. 3 UNAMA Protection of Civilians in Armed Conflict Report, 2018. 11 13. The external reserve position is comfortable. Exports (primarily dried fruits, nuts, and textiles) were around 6 percent of GDP in 2017 while imports remain at around 35 percent of GDP. Despite the large trade deficit, aid inflows have allowed the current account to remains in surplus (4 percent of GDP in 2017) and foreign exchange reserves to remain at comfortable levels (10 months of prospective imports). The Afghani depreciated by around 4 percent against the US dollar during 2017 (end period) driven mostly by declining private foreign exchange inflows and slowing foreign direct investment. 14. Reforms have helped manage short-term fiscal pressures. Reforms over recent years have seen revenues increase to 11.9 percent of GDP in 2017, after falling to 8.5 percent of GDP in 2014.4 But, with Afghan security forces taking on greater responsibilities with the draw-down of international forces, on- budget security expenditure remains a large share of total expenditure, and domestic revenues finance only 44 percent of civilian expenditures. Slight growth of on-budget non-security expenditure (around 2 percent of GDP since 2013) has been driven by increased O&M costs, as government takes control of donor-built assets, and a changing civil service salary structure. Despite pressures, the Government has run a largely balanced budget (including on-budget grants). The 2017 outturn saw a very small surplus with under-execution of the development budget offsetting a shortfall in expected grants. 15. The security sector continues to dominate the budget, placing pressure on other expenditure priorities. Security accounted for around 42 percent of budget expenditure in 2017. Education and agriculture only accounted for 12 percent and 5 percent of total expenditures, respectively. Health only received 3.9 percent of the total budget. 16. Afghanistan’s financial sector remains underdeveloped and vulnerable. Confidence in the banking sector is yet to fully recover from the Kabul Bank crisis of 2010, during which massive fraud led to a run on Afghanistan’s largest bank, necessitating a government bail-out and undermining confidence in the sector. Profitability of private banks remains marginal. Average return on assets across the banking sector was negative up until the end of 2015 but turned positive in 2016, while non-performing loans were equal to 17.9 percent of total gross loans at end of Q2, 2017. While banks are highly liquid, credit growth is sluggish due to risk aversion in the context of increasing insecurity and political uncertainty, relatively heavy collateral requirements, and a generally underdeveloped financial sector. Credit to the private sector has expanded only slowly, with recent growth barely offsetting a 6.6 percent contraction in 2014. 4 In 2015, a 10 percent telecom services fee was introduced and a Functional Review of the ARD was completed. Risk-based audit and the Standard Integrated Tax Administration System (SIGTAS) IT system were progressively implemented in all major provinces during 2017. A revised Income Tax Law was submitted to the National Assembly in late 2017, reflecting tax policy recommendations from the World Bank and the IMF. Risk-based compliance measures have been introduced in customs leading to a substantial reduction in misdeclarations. Efforts to recover arrears have been intensified, leading to significant recoveries. 12 Table 1: Selected Economic Indicators 2014 2015 2016 2017p 2018p 2019p 2020p % GDP (unless otherwise noted) Real economy Nominal GDP (billion Af) /1 1,183 1,228 1,321 1,422 1,524 1,639 1,775 Nominal GDP (billion US$ ) /1 20.6 20.0 19.5 20.5 21.6 22.8 24.2 GDP per capita (US$ ) 629 593 563 580 595 612 635 Population (million) 32.8 33.7 34.6 35.4 36.3 37.1 38.1 Real GDP growth /1 2.7 1.3 2.4 2.6 2.2 2.5 3.3 Prices CPI inflation (period average) 4.6 (1.5) 4.4 5.0 5.0 5.0 5.0 Fiscal Total Revenue and Grants 49.8 53.7 53.1 48.9 47.4 46.0 44.3 Domestic revenues 8.5 10.0 11.6 11.9 12.0 12.1 12.1 Grants 41.3 43.8 41.5 37.0 35.5 33.9 32.2 Security grants 19.5 21.3 18.4 17.5 16.9 16.3 15.7 On-budget 8.9 8.7 8.0 7.4 7.1 6.7 6.4 Off-budget 10.6 12.6 10.4 10.1 9.9 9.6 9.3 Civilian grants 21.8 22.5 23.1 19.5 18.5 17.6 16.6 On-budget 7.1 6.9 8.0 7.5 7.8 8.1 8.3 Off-budget 14.7 15.6 15.1 12.0 10.7 9.5 8.3 Total Expenditures 50.7 54.1 52.3 48.9 47.5 46.2 44.6 Security spending 22.5 24.3 21.4 21.3 21.4 21.3 21.3 Off-budget security 10.6 12.6 10.4 10.1 10.0 9.7 9.5 On-budget security 11.9 11.7 11.1 11.2 11.4 11.6 11.8 Civilian spending 28.3 29.8 30.9 27.6 26.2 24.9 23.3 Off-budget civilian 14.7 15.6 15.1 12.0 10.7 9.5 8.3 On-budget civilian 13.6 14.2 15.7 15.6 15.5 15.4 15.1 Budget deficit 0.9 0.3 -0.8 0.0 0.0 0.1 0.1 Budget deficit excl. grants 17.0 15.9 15.2 14.9 14.9 14.9 14.7 External Sector Exports of goods (million US$ ) /2 783 667 687 727 785 848 915 Imports of goods (million US$ ) /3 8711 7867 7986 6735 7349 7900 8793 Trade balance -38.5 -36.0 -37.5 -29.3 -30.4 -31.0 -32.6 Net current transfers 40.8 40.6 41.7 33.4 32.7 32.9 32.8 Current account balance 2.3 4.6 4.2 4.1 2.3 1.9 0.2 Gross foreign exchange reserves (million. US$ ) 7360 6864 7255 7783 7800 7850 7900 Gross foreign exch. res. (months of imports) 9.8 9.0 9.5 9.2 8.6 8.2 8.2 External debt 8.7 9.1 6.5 5.7 5.8 6.6 5.4 Exchange rate (AFN/USD, period average) 57.4 61.4 67.9 69.2 … … … Monetary Broad money (M2) 34.9 34.4 35.1 35.8 36.3 36.9 36.9 Total deposits 16.6 15.9 17.4 17.7 18.1 18.4 18.8 Credit to private sector, commercial banks 3.8 3.9 4.2 5.0 5.3 5.4 5.6 1/ National Accounts data exclude opium value added. 2/ Exclude sales of goods to nonresidents in the country. 3/ Include estimated unofficial trade or smuggling. 13 Source: Bank staff estimates. Table 2: Central Government Budgeted Operations 2013 2014 2015 2016 2017 2018p 2019p 2020p In percent GDP, unless otherwise indicated Total revenues 25.9 24.5 25.6 27.6 26.8 26.8 26.9 26.8 Domestic revenues 9.5 8.5 10.0 11.6 11.9 12.0 12.1 12.1 Direct taxes 3.0 3.0 3.1 4.0 3.1 3.1 3.2 3.2 Indirect taxes 4.0 3.6 4.2 4.5 4.7 4.7 4.7 4.7 Nontax revenues 2.5 1.9 2.6 3.1 4.2 4.2 4.2 4.2 Donor grants 16.4 16.0 15.6 16.0 14.9 14.9 14.8 14.7 Security 8.4 8.9 8.7 8.0 7.4 7.1 6.7 6.4 Civilian 8.0 7.1 6.9 8.0 7.5 7.8 8.1 8.3 Total expenditures 24.3 25.4 25.9 26.8 26.8 26.9 27.0 26.9 Security 11.2 11.9 11.7 11.1 11.2 11.4 11.6 11.8 Civilian 13.1 13.6 14.2 15.7 15.6 15.5 15.4 15.1 Wages and salaries 4.2 4.5 4.5 4.4 4.4 4.5 4.6 4.6 Operations and maintenance 4.3 4.4 4.3 5.1 4.8 4.7 4.8 4.5 Capital expenditures 3.6 3.0 3.8 4.3 4.5 4.5 4.2 4.2 Social transfers 0.9 1.6 1.5 1.7 1.7 1.7 1.7 1.7 Interest payment 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Overall balance 1.7 -0.9 -0.3 0.8 0.0 0.0 -0.1 -0.1 Overall balance excluding grants -14.7 -17.0 -15.9 -15.2 -14.9 -14.9 -14.9 -14.7 Borrowing 0.1 0.2 0.1 0.1 0.1 0.1 0.1 0.1 Change in Government deposits 1.8 -0.8 -0.2 0.9 0.2 0.1 0.0 0.0 Source: Bank staff estimates 2.3 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 17. Growth prospects are limited in the short-run. Growth is projected to slow to 2.2 percent in 2018, increasing slightly to 2.5 percent in 2019. Slow growth in 2018 reflects low rainfall and higher temperatures over the recent wet season, which will adversely impact snow accumulation, which is vital for agricultural production. Output will also be adversely impacted by weak confidence and potential disruptions amid upcoming parliamentary elections (scheduled for October 2018). Slightly stronger growth in out-years is predicated on improvements in security, reform progress, and continued high (although slowly declining) levels of aid. With poor agricultural performance, rapid population growth, and benefits of economic growth unevenly distributed, the poverty rate is expected to worsen. 18. Prices are expected to remain stable and the current account to remain in surplus. Inflation is expected to remain at around 5 percent and within the Central Bank’s target range. The current account surplus is expected to narrow to around 0.2 percent of GDP by 2020, driven by declining aid and a slight further deterioration of the trade balance as growth picks up. Credit to the private sector is expected to grow modestly. Impacts of slow growth and weak confidence will continue to constrain credit growth, despite efforts to support financial inclusion and improve financial sector corporate governance. 14 19. The fiscal outlook is challenging, and outcomes are sensitive to the level and modality of aid flows. Afghanistan currently has limited capacity to borrow, given that domestic debt markets remain underdeveloped and major donors provide assistance on grant terms. The budget is expected to balance in 2018, after expected grants. On-budget Government expenditures are expected to remain stable at around 27 percent of GDP to 2020. On-budget security expenditure is expected to grow as responsibilities are transferred to Afghan forces, increasing by around 0.4 percent of GDP by 2020. Increasing security expenditures will place pressure on non-security expenditures posing daunting challenges to maintaining current service levels to a growing population, providing essential infrastructure, and undertaking necessary maintenance of aid-financed assets recently transferred to government ownership. If government can sustain recent improvements in compliance and administration, domestic revenues are projected to reach 12.1 percent of GDP by 2019. Fiscal sustainability analysis undertaken by the World Bank suggests that non-security aid commitments will be sufficient to finance existing service levels and some key infrastructure investments, but only if these resources are tightly aligned with government priorities and with a growing proportion delivered through the budget. At current expected aid levels there is very limited fiscal space over coming years for programs to stimulate aggregate demand and spur increased growth. 20. Afghanistan is at high risk of debt distress under the World Bank/IMF Debt Sustainability Framework. The most recent World Bank/IMF debt sustainability analysis (December, 2017) finds Afghanistan at high risk of debt distress despite very low levels of public debt (6.6 percent of GDP), nearly all of which is external and comprises mostly of highly concessional debt to multilaterals. The “high” risk rating is driven by the inclusion of a customized “low grant” scenario which illustrates the sensitivity of Afghanistan’s debt sustainability to the continued availability of external grants. While there are no breaches of any policy thresholds under the baseline, the customized scenario shows significant and sustained breaches of the PV-of-debt-to-exports ratio (more than 200 percent by 2030).5 The customized scenario illustrates that, despite low levels of debt and no breaches of thresholds under the baseline, Afghanistan’s external debt sustainability remains subject to substantial downside risks, including aid shortfalls, the fragile security situation, political uncertainty, domestic revenue shortfalls, and exchange rate depreciation. The standard shock scenario based on historical export growth also shows a breach of the PV-of-debt-to-exports ratio. 5 The customized scenario is predicated on a change in the financing mix, with 15 percent of grants (included under the baseline) replaced by external borrowing from 2020. Given Afghanistan’s inability to raise debt on domestic or international debt markets, loss of access to grant financing would most likely result in a collapse of Government services rather than unsustainable debt acquisition. 15 Figure 1: PV of debt-to-exports ratio Figure 2: PV of debt-to-GDP ratio 21. Conditional on continued reform progress and realization of expected aid levels, Afghanistan’s macroeconomic framework is adequate for the operation, but exposed to substantial downside risks. Fiscal policy is adequate, even though under any scenario, Afghanistan will rely on elevated levels of external assistance until at least 2030. Current domestic revenues are insufficient to finance even current on-budget civilian expenditures. Government is currently working closely with the World Bank to improve alignment between the budget expenditures and policy priorities established in the ANPDF as well as improving the selection, assessment, and execution of development projects through strengthening systems for Public Investment Management (PIM). The new Fiscal Performance Improvement Program, implemented with World Bank support, is also intended to strengthen the fiscal position and reinforce resilience to shocks. Monetary policy is adequate to ensure price stability. Main macroeconomic risks now include: i) a premature withdrawal of aid, which would undermine fiscal sustainability; ii) further deterioration in the security environment, which would undermine confidence and further slow growth; iii) political instability which would have highly unpredictable impacts on the security situation, business confidence, and external support; and iv) regional economic or political developments that may see renewed flows of returning refugees and disrupted remittance flows. 2.4 IMF RELATIONS 22. Afghanistan’s macroeconomic policies and reform are supported by an Extended Credit Facility (ECF) arrangement with the IMF. The IMF Executive Board approved a US$44.9 million three-year ECF program for Afghanistan in July 2016. The program aims to consolidate recent gains in macroeconomic management and structural reform and catalyze donor support. In relation to fiscal management, the program supports tax administration and policy reforms, improvements to budget formation and execution, and strengthened cash controls and commitment management. On the financial sector, the program supports improvements to the central bank’s regulatory and supervisory framework. The program also supports resolution of Kabul Bank crisis legacies, new anti-corruption measures, and reform of the State-Owned Commercial Banks, the latter effort being led by the World Bank. The second program review was undertaken by the IMF Board in December 2017, and concluded that the program was on 16 track, with all performance criteria met, five of seven structural benchmarks met, and the remaining two fulfilled with delay. The third program review is on track and will be considered by the IMF in May. The IMF and the World Bank have been closely collaborating on supporting key economic reform programs, including regular participation of the World Bank in semiannual ECF review missions of IMF staff. 3. THE GOVERNMENT’S PROGRAM 23. Government strategy is outlined in the ANPDF, while Public Financial Management (PFM) reform priorities are presented in the Fiscal Performance Improvement Plan (FPIP). The strategic vision of the Government of Afghanistan is presented in the ANPDF. The main priorities identified in the ANPDF are: i) improving governance and state effectiveness through public sector reform, rooting out corruption and strengthening subnational governance; ii) building social capital and nation building through reforming the justice sector and building national identity; iii) economic growth and job creation through agriculture development, private sector–growth, and mineral and resource development; and iv) poverty reduction and social inclusion through improving the quality of health and education programs. Government’s public finance reform strategy is presented in the Fiscal Performance Improvement Plan (FPIP). The FPIP was developed as a five-year rolling roadmap for PFM reform, with the first five-year rolling plan approved in February 2016, with an objective to deliver: (i) more efficient and effective public services; (ii) significantly improved fiscal discipline; and (iii) more strategic use of fiscal policy as a tool for development. To this end, the FPIP targets three key PFM reform areas, including: (i) improving investment performance through strengthened macro-fiscal planning and policy coordination; (ii) ensuring a more accurate, transparent and accountable budget through improving budget preparation and reporting, treasury and procurement functions, and revenue and customs management; (iii) building capacity to manage reforms in the areas of HR, administration, finance, IT and communications. 4. THE PROPOSED OPERATION 4.1 LINK TO GOVERNMENT PROGRAM AND OPERATIONAL DESIGN 24. The proposed IP DPG operation will support selective reform areas of the two flagship reform programs of the Government: the ANPDF and the FPIP. This DPG aims to support the Government in improving economic and fiscal self-reliance by supporting: (i) select reform areas of the ANPDF; and (ii) key PFM reforms pursued under the FPIP. These integrated reform agendas constitute the main pillars of the DPG. Policy actions supported by the operation are part of Government’s 3-year Incentive Program Reform Plan, included as Annex 5, which provides a roadmap for sequential policy reforms and implementation steps in relevant policy areas. Reforms reflect priorities identified in recent analytical work on Afghanistan’s economic development priorities. This work highlighted: i) the need for improvements to the business environment to facilitate investment during a period of prolonged stagnation; ii) the need to improve public investment management processes to ensure the greatest growth dividend from scarce public resources; and iii) the need to improve performance of the agriculture sector, which continued to underpin livelihoods for the majority of Afghans. 25. The proposed operation introduces several innovations on standard Development Policy Grant design, but remains aligned with World Bank’s DPF Policy. First, the operation will be composed of eight tranches. The first tranche of US$90 million of IDA resources is associated with three prior actions. Seven 17 tranches of US$30 million of ARTF resources each are associated with tranche release conditions that are expected to be fulfilled by a specified Completion Date (November 15, 2018). Second, disbursement amounts associated with tranche release conditions will be timing dependent. The tranche associated with three prior actions will be released immediately and in full after the effectiveness conditions are met. The remaining seven tranches will be released upon the fulfilment of each tranche release condition. Tranches will decrement in amount if fulfilment of the tranche release conditions extends past the targeted Completion Date. Tranche amounts will decrement proportionally for six months each month after the targeted Completion Date. Tranche amounts will be subject to 100 percent forfeiture of the tranche if tranche release conditions are not met six months after the targeted Completion Date. This provides a hard fiscal incentive for the fulfilment of agreed reform. 26. World Bank Board approval is sought for the utilization of IDA resources associated with prior actions. The ARTF Management Committee will approve ARTF resources in support of tranche release conditions. Policy actions and the source of financing for disbursements associated with those actions are shown in the table below. Table 3: Policy Actions and Resources Policy Action Type Financing #1. The President issues a decree formalizing and defining Asan Khedmat (AK) Tranche ARTF Release responsibilities for integrating national IT infrastructure necessary to roll out the E- Condition money and digital payment system. #2. The Recipient’s Cabinet has approved and submitted to the National Assembly Prior Action IDA an amendment of the Civil Servants Law that: (i) establishes a career track for specialist staff; (ii) enables positive gender discrimination within civil service appointments; (iii) introduces merit-based and tailored recruitment into the civil service; (iv) establishes Deputy Minister positions within the civil service framework; and (v) enables transfers, sanctions, transparent grievance redress, and civil service renewal. #3. The Recipient’s Cabinet has approved and submitted to the National Assembly Prior Action IDA an insolvency law which adequately addresses insolvency proceedings, reorganization provisions for insolvent companies, creditor rights, and treatment of insolvency in viable businesses. #4. DABS and MoF sign a Partnership Agreement to improve DABS’ performance Tranche ARTF over 2018-2020, including: i) a number of annual performance targets to be met by Release DABS; and ii) restructuring of DABS debt to MOF, conditional on performance Condition improvements. #5. The Recipient’s Cabinet has approved the Regulation on Managing Affairs of Prior Action IDA Informal Urban Properties allowing for the distribution of Property Documents (Sanad-e-Mulkyat) to occupants of informal settlements on urban land. #6. The Recipient’s Cabinet approves an Irrigation Policy and a Dry Lands Agriculture Tranche ARTF Release Policy to increase the resilience of agriculture-based livelihood activities against Condition climate change and strengthen management of water rights. #7. MoF issues a revised Budget Circular 1 that: (i) clearly defines the time-bound Tranche ARTF process and requirements for project proposal submission from ministries and Release agencies, including the submission of project concept notes according to the Condition standard template and guidelines provided by the MoF; (ii) requires all projects proposals to include cost estimates for operating and capital expenses needed for the project life-cycle. 18 Tranche ARTF #8. ARD rolls out an electronic taxpayer management system by making fast-track Release tax filing available in LTO. Condition #9. ARD reviews and revises LTO and MTO client lists to ensure correct Tranche ARTF Release categorization of tax-payers and risk-commensurate compliance and enforcement Condition efforts. #10. Cabinet approves a revised O&M Policy to: (i) improve O&M expenditure Tranche ARTF Release management; and (ii) mandate piloting of the revised O&M Policy by four line- Condition ministries in preparing their 2019 budget. 27. Proof of concept for several design elements of the proposed operation has been demonstrated by the ARTF Incentive Program since 2009. Afghanistan’s experience shows that significant lead time for ground work, Technical Assistance (TA), and consultation, is often required between identifying and undertaking reform actions. Incentive funds linked to timing-dependent disbursement have proven effective in managing the risks associated with an ambitious reform program, given realities of low capacity and political volatility. By allowing decrementing disbursements for delayed completion of reform actions for a limited period, the proposed operation would reduce the risk of disrupting the budget, while maintaining incentives for the government to swiftly fulfil targeted reforms as the fiscal cost of delayed reform accumulate every month. Prior actions supported by the operation have already been completed. Box 1: The Afghanistan Reconstruction Trust Fund The World Bank administers the Afghanistan Reconstruction Trust Fund (ARTF), which was established in 2002 to provide a coordinated financing mechanism for the Government of Afghanistan's budget and priority national investment projects. More than US$10.3 billion has been mobilized through the ARTF from 34 donors. The World Bank as Administrator jointly chairs with the Minister of Finance the ARTF’s highest governance body - the Steering Committee, which endorses the ARTF’s overall strategic directions, and financing programs. The Administrator also chairs the ARTF Management Committee, which is responsible for approval of financing allocations to individual ARTF programs, in line with the Steering Committee endorsements. Alongside investment project financing, the ARTF has provided support to Government’s recurrent costs through the Recurrent Cost Window Incentive Program. The Incentive Program (IP) has provided between US$250-$350 million per year to help Government finance ongoing recurrent costs. It has been structured around a 3-year program of policy reforms, with three components that determine total disbursements: (i) the Revenue Matching Grant, through which recurrent cost support has been provided on the basis of achievement of revenue mobilization targets; (ii) the Structural Reform Scheme, through which recurrent cost support has been mobilized against the achievement of structural reform actions; and (iii) the O&M Facility (launched in 2013), through which additional resources have been provided against marginal increases in government allocations to operations and maintenance. The proposed operation will be supported through the ARTF RCW. The ARTF RCW may in addition continue to provide additional recurrent cost support through complementary instruments The Ministry of Finance has been the main implementation partner of the IP and coordinated cooperation with participating Ministries. The World Bank, in collaboration with ARTF donors, has provided technical support to the implementation of reforms under the IP. An independent, Third Party Monitoring Agent audits expenditures financed through the RCW and IP to ensure that resources disbursed do not exceed the level of “eligible 19 expenditures” against which compliance with appropriate fiduciary procedures and controls has been assured through audit of a representative sample of expenditure transactions. External review and validation is an important part of the accountability framework of the ARTF. The ARTF has controls in place to: 1) monitor the entire civilian operating budget to ensure funds are used in accordance with government rules and the legal agreement between the World Bank and the government; and 2) carry out asset verification, quality assurance, and data mapping of national infrastructure projects (by using among other methods smart phones, citizen monitoring, satellite imagery and innovative technology). The World Bank constantly works with ARTF donors to strengthen monitoring of ARTF program implementation. For example, the recent report by the Special Inspector General for Afghanistan Reconstruction (SIGAR) on ARTF provides useful insights on how to strengthen ARTF's results and accountability. 4.2 PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS PILLAR I: STRENGTHEN THE POLICY FRAMEWORK TO SUPPORT STATE EFFECTIVENESS, PRIVATE INVESTMENT, AND SOCIAL INCLUSION Policy Action #1 (Tranche Release Condition): The President issues a decree formalizing and defining Asan Khedmat (AK) responsibilities for integrating national IT infrastructure necessary to roll out the E- money and digital payment system. 28. Financial inclusion remains a significant challenge in Afghanistan. More than ninety percent of adults are financially excluded, with men being almost four time as likely as women to have an account with a formal financial institution. Lack of access to digital banking services plays an important role, given the long distances to nearest access points, restrictions on women’s travel, and insecurity deterring physical access (financial institutions remain frequent targets of terrorist attacks). At the same time, the number of regulated deposit-taking institutions in Afghanistan is also very low compared to the regional average and comparable conflict-affected countries: Afghanistan has three access points (bank branches, ATMs and point of service terminals) per 100,000 adults, compared to 31 in Sudan or 10 in Burundi. 29. Promoting digital financial services will help address the major causes of weak financial inclusion. Digital financial services can contribute to bridging the inclusion gap as well as encouraging access to financial services by women who are especially affected by security concerns. The Government, as a major sender and recipient of payments, can stimulate faster development and adoption of digital financial services. Currently, a substantial portion of government-to-person payments (salaries, social transfers for martyrs, and old-age pensions) and payments to the government (tax and customs) are frequently made in cash at branches of the central bank. Digitization of incoming and outgoing government payments could offer multiple gains, such as improving control over the process; greater transparency; simplifying reconciliation; improving timeliness; and reducing cost to citizens. Digitization of salary payments, an important boost for financial inclusion, requires several preconditions to be in place. Identification processes need to be decoupled from the payment flow to ensure that the system is not abused by “ghost workers” while preserving the freedom of salary recipients to use different payment instruments most suitable for their financial needs. At the same time, interoperability must be embraced by participating financial institutions. 30. Formalizing and defining responsibilities for integrating the national IT infrastructure is a vital first step towards an enabling environment for digitization of government payments. The proposed operation will support the issuance of a Presidential Decree establishing and delineating responsibility for 20 integrating the national IT infrastructure. Under the Decree, AK will be allocated responsibility for integrating national IT infrastructure necessary to roll out the digitization of government payments, such as the Afghanistan Financial Management Information System (AFMIS), Human Resource Management Information System (HRMIS), and Da Afghanistan Bank (DAB) system. Coordination by a single entity is necessary to ensure that secure and robust interfaces are maintained between various IT systems operated by the government and the central bank. 31. Results and results indicator. Supported reforms are expected to create an enabling environment for longer-term improvements in financial inclusion, beginning with more effective delivery of government-to-person payments, and more robust collection of taxes and customs duties. The results indicator is: AK develops technical functional classification for an interphase of integrated government IT system necessary for E-money and digital payments, the first major step towards digital government payment. Policy Action #2 (Prior Action): The Recipient’s Cabinet has approved and submitted to the National Assembly an amendment of the Civil Servants Law that: (i) establishes a career track for specialist staff; (ii) enables positive gender discrimination within civil service appointments; (iii) introduces merit-based and tailored recruitment into the civil service; (iv) establishes Deputy Minister positions within the civil service framework; and (v) enables transfers, sanctions, transparent grievance redress, and civil service renewal. 32. State capacity is central to Afghanistan’s self-reliance agenda and significant challenges must be overcome. Key amongst these challenges is that (despite the sharp growth6 in the size of the public administration over the last 10-15 years) the pool of qualified and educated core civil servants remains limited. Development budget execution rates are low for key service delivery ministries, reflecting low capacity in budgeting, procurement, and management. The average level of education in the civil service remains low, limiting effectiveness. For example, in the Ministry of Agriculture, Irrigation and Livestock (MAIL), 42 percent of staff hold only a primary education. In addition to these challenges, subnational capacity is constrained due to inflexibility in the establishment control system. The Tashkeel is often not aligned with the ground realities, especially in provinces, resulting in uneven staffing levels and difficulties in mapping employees to positions in the Tashkeel. As a result, line ministries and agencies face the added challenge of variable provincial level staffing structures. 6 The non-security civil service grew from approximately 200,000 in 2002 to 398,863 in 2016, primarily the result of teacher recruitment which accounted for 82 percent of the net change over this period. 21 33. Closely linked to this challenge are shortcomings in recruitment processes, in the Pay and Grading (P&G) system and Human Resource Management (HRM) policies and practices, all of which weaken state capacity: • Recruitment processes have largely failed to facilitate the recruitment of more qualified and competent civil servants. These remain convoluted and vulnerable to political intervention, with senior appointments particularly subject to political bargaining. The redress mechanism of appeals is open to political influence and remains cumbersome. They have also failed to overcome traditional barriers constraining gender equity/equality in civil service recruitments, with women accounting for only approximately 21.9 percent of the civil service and 6.6 percent of senior positions. • Gender equity/equality in civil service recruitments has been particularly constrained by vulnerabilities in recruitment processes. Women account for approximately 21.9 percent of the civil service and only 6.6 percent of Senior Management Group7 (SMG) positions. This is partly a result of a relatively lower availability of qualified women in the labor market but it is often the case that qualified female candidates are excluded by selection processes that are heavily male-dominated. As a result of such traditional gender barriers, fewer women are encouraged to apply for public sector positions, particularly at SMG level. The original Civil Servants Law inadvertently constrained the potential for positive gender discrimination through a clause prohibiting gender-based preferencing in any form. This has limited the opportunity for creative solutions to increase female employment in the public sector such as through female-only positions or hard quotas which the law rendered illegal. • P&G reform has had unintended consequences for technical staff. In principle, the position-based P&G model offers open lateral entry to all positions. However, pay is differentiated only by grade and not based on technical skill. This has undermined capacity of government to hire and retain specialist staff in non-management positions. Current arrangements lack flexibility in adjusting salary levels to special circumstances, such as areas with higher levels of insecurity, and Government is unable to compete with pay of staff (National Technical Assistants or NTA) on internationally- financed programs. • HRM practices are disconnected, further undermining the long-term sustainability of the civil service. Ambiguity over HRM is even more pronounced at the sub-national level. Career development is not encouraged by the current system of civil service management. Performance appraisal and training are also often not well coordinated. Training programs have often focused on NTA staff, and no comprehensive training program has been designed for core civil servants.8 7 SMGs include all Director General (Grade 1) and Director (Grade 2) positions. Deputy Ministers are also to be integrated into the civil service within the SMG cohort. 8 The World Bank has provided formal and on the job training for public finance officials through successive financial management projects. USAID has similarly routed considerable development resources for improving the skills of civil servants through its projects. Development partners such as Japan, India, UK, Malaysia and other countries have also provided financial support for civil servants to pursue short term, undergraduate and graduate programs in their universities. 22 34. Many weaknesses can only be resolved with changes to laws and accompanying regulations. The current law does not differentiate between “administrative” and “technical” sectors/areas. It requires the application of uniform provisions to all sectors regarding conditions of recruitment. Uniform provisions also apply to performance appraisal and salary scales. The law is unclear on promotion procedures, lacks provisions for transfer on rotation and performance management, provides no mandatory training provisions, and lacks immunities for civil servants. The law as currently drafted, also constrains positive gender discrimination and the establishment of cadres or professional groups in key common function and technical areas. 35. As a prior action for the proposed operation, Cabinet has approved and submitted to the National Assembly an amendment of the Civil Servants Law. The law: (i) establishes a career track for specialist staff; (ii) introduces merit-based and tailored recruitment into the civil service; (iii) enables positive gender discrimination within civil service appointments; (iv) establishes Deputy Minister positions within the civil service framework; and (v) enables transfers, sanctions, transparent grievance redress, and civil service renewal. A cadre system will be introduced for those in specialist (e.g. engineering, agriculture, customs) and common function (e.g. procurement, financial management, HR) areas, supporting enhanced civil service professionalization and capacitation. Cadre specialists would be deployed depending on the needs of the organization and could benefit from a progressive career path throughout the length of their working lives. Because the current position-based model will be retained in parallel, the civil service will not become closed from mid-career entrants or new recruitment to fill required additional positions. Under a cadre-based system, all public institutions would be divided into common service or functional sectors (e.g. procurement, financial management, HR, etc.), which would cluster positions into distinct homogenous groups (cadres). The cadre-based system would enable Government to recruit professional staff in batches at entry, and provide batch recruits with systematic training and experience through job rotation. On the other hand, the existing position-based system would concurrently allow Government to recruit mid-career professionals into technical and managerial posts in the core civil service from parallel systems or from outside of the public sector while it builds staff capacity at entry. The amendment of the Civil Servants Law also includes provisions to bring the Civil Service position of Deputy Minister into the civil service ranks, which is currently politically appointed as “Higher Level Officials”, without security of tenure or technical/professional requirements. 36. Results and results indicators. Adoption of the amendment of the Civil Servants Law is expected to provide greater transparency, civil service renewal, probity, positive gender discrimination, sanctions and a transparent grievance redress, in-service skills development, and a commitment to public service through specific provisions including for the proposed cadre structure. The results indicators are: i) the number of civil servants competitively selected in line with the new recruitment process increases from zero in 2017 to 500 by end-2019; ii) the proportion of female civil servants recruited at level through the revised process among competitively recruited civil servant positions increases from 0 percent in 2017 to 15 percent by end-2019; and iii) the proportion of line ministries for which the position of Deputy Minister for Administration & Finance has been competitively selected into a civil service position increases from 0 percent in 2017 to 100 percent by end-2019. Policy Action #3 (Prior Action): The Recipient’s Cabinet has approved and submitted to the National Assembly an insolvency law which adequately addresses insolvency proceedings, reorganization provisions for insolvent companies, creditor rights, and treatment of insolvency in viable businesses. 23 37. The Government has recognized the need for a more conducive business enabling environment to restore private sector confidence and investments, and to create much needed jobs. Addressing the country’s development challenges requires private sector growth to help the country in reducing its dependence on international aid, as well as reducing its economy’s reliance on the volatile and weather- dependent agriculture sector. Major reform efforts are needed to improve the business enabling environment: the country ranks 183 (out of 190 economies) in the 2018 WBG Doing Business Report. This operation will pursue the efforts to simplify the business registration and licensing process and strengthen the regulatory framework for resolving insolvency. 38. As a prior action for the proposed operation, Cabinet has approved and submitted to the National Assembly an insolvency law which adequately addresses insolvency proceedings, reorganization provisions for insolvent companies, creditor rights, and treatment of insolvency in viable businesses. The new Insolvency Law will ensure the survival of economically efficient firms and allows the reallocation of resources of inefficient ones. It also facilitates access to credit, by clarifying the expectations of creditors and debtors on the outcome of the insolvency proceeding. While the absence of a legislative framework for insolvency is not currently among the most-pressing constraints to business activity, the reform will help signal reform intent, improve Afghanistan’s international Doing Business score and ranking, and provide marginal benefits to firms facing insolvency, their employees, and their creditors. 39. Results and results indicators. Proposed measures are expected to contribute an improved business regulatory environment, which would in turn facilitate private sector development. The results indicator is: Afghanistan’s Distance to Frontier score against the Resolving Insolvency measure in the Doing Business Indicators improves from 23.2 in 2017 to 33.2 by end-2019. Policy action #4 (Tranche Release Condition): DABS and MoF sign a Partnership Agreement to improve DABS’ performance over 2018-2020, including: i) a number of annual performance targets to be met by DABS; and ii) restructuring of DABS debt to MOF, conditional on performance improvements. 40. The availability and reliability of power has been a key constraint to economic growth and investment. About two-thirds of the Afghan population has no access to the electricity grid. The number of customers of the Afghan power utility Da Afghanistan Breshna Sherkat (DABS) increased during the last six years from less than 0.3 million to 1.4 million in 2018. But barriers to electricity access remain high. It is costly to obtain a new connection; even once connected, energy supply is unreliable. The shortage of electricity and poor quality of supply, such as voltage fluctuations and outages, affect industry and services. According to the 2014 Afghanistan World Bank Enterprise Survey, Afghan businesses on average suffered power outages for 524.40 hours per year. As a result, many Afghans rely on diesel generators, which can retail for up to USD 20,000. In Kabul, nearly half of small and medium enterprises (SMEs) own such generators. Firms identified lack of electricity as the fourth biggest obstacle to investment in the Enterprise Survey. The cost of accessing electricity for businesses is among the highest in the South Asia region. 41. DABS’s precarious financial position is constraining investment in stable and reliable power supply, while electricity demand grows rapidly. DABS’ financial performance has been rapidly deteriorating. The working ratio increased from 84 percent to 108 percent while the operating ratio increased from 93 percent to 124 percent between FY2014 and FY2016, warranting urgent action to 24 enhance DABS financial strength. DABS’s large upcoming debt service obligations will increasingly undermine financial soundness and investment capacity. DABS outstanding debt service obligations to MoF are around USD 750 million in principal and interest payments. A recent financial analysis shows DABS will not be able to meet operating and capital expenses without significant restructuring of this debt. Significant commercial and technical losses and overdue payment of electricity bills add to DAB’s financial stress. Commercial and technical losses account for around 35 percent of total electricity imports and domestic generation, and almost half of total electricity sales to final consumers. In early 2018, DABS receivables reached over 12 billion Afs, accounting for over 6 percent of its total asset. 42. As a tranche release condition for proposed operation DABS and MoF will sign a Partnership Agreement to improve DABS’ performance over 2018-2020, including: i) a number of annual performance targets to be met by DABS; and ii) restructuring of DABS debt to MOF, conditional on performance improvements. Reduction of DABS debt will reduce the current unsustainable debt service burden and provide more financial capacity for adequate operational and capital expenses. The Partnership Agreement will also include measures to reduce commercial losses, through improved revenue collection and billing. The conditional nature of debt restructuring under the Partnership Agreement will both ensure continued incentives for performance improvements on behalf of DABS, while creating a pathway to financial sustainability that would be unachievable through performance improvements alone. 43. Results and results indicators. The reform actions supported by the proposed operation are expected to contribute to improving financial soundness and investment capacity of Afghanistan’s power utility. The results indicator is: distribution level losses in Kabul and Herat Provinces decline as a percentage of electricity supplied from substations. Policy Action #5 (Prior Action): The Recipient’s Cabinet has approved the Regulation on Managing Affairs of Informal Urban Properties allowing for the distribution of Property Documents (Sanad-e- Mulkyat) to occupants of informal settlements on urban land. 44. The capacity of internally-displaced people and returnees to take advantage of services and economic opportunities is constrained by insecurity of land rights. Reflecting external push factors, the rate at which former-refugees are returning to Afghanistan continues to accelerate, with around 1.5 million returnees estimated to have entered Afghanistan in 2017. An estimated 1.7 million Afghans are currently internally displaced and all provinces are now hosting displaced populations. The current Internally Displaced Persons (IDP) and returnee crisis is increasing risks related to inadequate land management, with population influx to both urban and rural areas placing pressure on land and potentially driving conflict – especially in the context of already-rapid urbanization (the urban population is growing at 5.2 percent per year). The capacity of returnees and urban arrivals to successfully access land for occupation and livelihoods will influence whether their potential economic contributions of newly-settled populations can be realized and the extent to which conflict and fragility risks will eventuate. 45. Government made major steps towards formalizing the land rights of those occupying Government-owned urban land. In 2017, Cabinet approved a cross-government policy framework guiding a coherent policy response to the current displacement and returnee crisis. A key element of the policy was the provision of land rights to returnees and internally displaced occupying informal settlements in urban areas. Government also passed a new Land Management Law, which provides a legal 25 foundation for the issuance and recognition of Property Documents (Sanad-e-Mulkyat) through which IDPs, returnees, and newly-urbanized populations can be provided with certified land rights over land that they are occupying. 46. As a prior action for the proposed operation, Cabinet has approved the Regulation on Managing Affairs of Informal Urban Properties allowing for the distribution of Property Documents (Sanad-e- Mulkyat) to occupants of informal settlements on urban land. This regulation has established a process through which land occupants with confirmed possessory rights can obtain a registered Property Document. Under the new regulation, women’s rights will be compulsorily recorded and protected, including full ownership rights for single women and joint-ownership for married couples. The independent land administration agency, ARAZI, will be responsible for ensuring full coverage of informal occupancy on state lands to ensure all occupants are provided with Property Documents. To enable ARAZI to undertake this work, personnel will be trained and equipped as required under the approved procedures. A public awareness raising campaign will be prepared and undertaken to ensure maximum participation, including by women. 47. Results and results indicators. The issuance of Property Documents is expected to provide security of tenure for those informally occupying government-owned urban land, facilitating economic participation and access to services. Property Documents will fully recognize women’s ownership rights, facilitating women’s economic participation. The results indicator is: the number of property documents recognizing women as full or part owners of land increases from zero in 2017 to 150,000 by end-2019 or at least 50 percent of total Property Documents issued. Policy Action #6 (Tranche Release Condition): The Recipient’s Cabinet approves an Irrigation Policy and a Dry Lands Agriculture Policy to increase the resilience of agriculture-based livelihood activities against climate change and strengthen management of water rights. 48. Inadequate irrigation has been a major constraint to agriculture in Afghanistan. Agriculture is vital to Afghanistan’s economy. Over 80 percent of the population and 90 percent of the poor are engaged in agriculture for livelihoods. Despite its significance in the economy and livelihood, agricultural production has been significantly vulnerable to water scarcity and security under the arid and semi-arid climate. Adequate irrigation is critical to address the mismatch in the timing of water supply (from mainly melted snow) and demand (crop production). Lack of irrigated land has been a serious challenge. While about 80 percent of agriculture production comes from irrigated agriculture, only 2.45 million hectares are currently under irrigation out of the 4.4 million hectares of potentially irrigable land, warranting improved water and irrigation management urgently. 49. Supporting the drylands agriculture sector is also vital for agricultural development. Rainfed agriculture in Afghanistan is concentrated in the northern parts of the country, which allow agricultural production under rainfed conditions as a result of total rainfall, adequate soils and timing of water availability. The most dominant crop in this agro-environment continues to be wheat, while barley has recently become more prominent. Because of its dependence on rainfall, total production varies significantly from year-to-year, and in good years accounts for about one third of total cereal production 26 in Afghanistan, while in dry years this is reduced to about 10 percent 9 . Recent analytical work has highlighted potential drastic impacts of climate change on the dry land agriculture, with certain scenarios indicating that current rain-fed wheat yields, which are the subsistence crop for the rural poor, could be reduced by as much as 25 percentage. This would potentially induce serious food security issues. 50. As a tranche release condition for the proposed operation, Cabinet will approve an Irrigation Policy and a Dry Lands Agriculture Policy to increase the resilience of agriculture-based livelihood activities against climate change and strengthen management of water rights. These policies will set the broad direction for reform in the Irrigation and Drylands Agriculture sectors, including a range of efforts to: i) clarify the mandates and roles of various agencies operating in the sector; ii) shape necessary legislative revisions; iii) direct required public investment programs; and iv) establish performance targets. The overall goal of the draft irrigation policy is increased productivity of irrigated agriculture and performance of the irrigation sub-sector. This is to be achieved by (a) rehabilitating, modernizing and expanding irrigated lands; (b) improving the productivity of land- and water use; and (c) strengthening the legal and institutional framework, including the capacity of stakeholders. By 2030, this is intended to create an additional 550,000 full-time equivalent additional jobs in irrigated agriculture; bring land under irrigation from the current 2.45 million hectares to 3.14 million hectares; raise wheat yields in both irrigated and rainfed agriculture; and reduce non-beneficial water losses in irrigated agriculture. The goal of the dry land farming strategy/policy is to ensure that Afghan communities living in water restricted areas benefit from improved production, productivity, household food security and livelihoods. Key medium-term objectives include (a) increasing the reliability and overall productivity of rainfed cereal grain production; (b) increased drought resilience and diversity of rainfed farming systems; (c) improved water capture and water management systems across critical dry land watersheds; and (d) improved government capacity, institutional structures, and partnerships to service the needs of dryland farmers. Amongst others, this is intended to result in increase and more consistent rainfed production, increased farmer income, reductions in seasonal food shortages, and increased climate change resilience. 51. Results and results indicators. The new Irrigation and Drylands Agriculture policies are expected to improve agricultural productivity, reduce vulnerability of agricultural production to weather conditions, and ensure equitable access to water resources. The results indicator for this action is: an increase in irrigated wheat productivity from its current level of 2.49 tons per hectare by end-2019. PILLAR II: IMPROVE THE POLICY AND INSTITUTIONAL FRAMEWORK FOR IMPROVED PUBLIC FINANCIAL MANAGEMENT Policy actions #7 (Tranche Release Condition): MoF issues a revised Budget Circular 1 that: (i) clearly defines the time-bound process and requirements for project proposal submission from ministries and agencies, including the submission of project concept notes according to the standard template and 9 MAIL, 2014. Dry Land Farming Strategy. Ministry of Agriculture, Irrigation and Livestock. Government of Afghanistan 27 guidelines provided by the MoF; (ii) requires all projects proposals to include cost estimates for operating and capital expenses needed for the project life-cycle. 52. The FPIP prioritizes improving execution of the development budget. A key objective of Government is to improve the execution rate of the development budget and the efficiency and effectiveness of development projects. Sound investment decisions require choosing between different alternatives to achieve desired policy objectives based on accurate and systematic information. An efficient PIM system should enable such investment decisions in a consistent and systematic manner, allowing for the transformation of “investment ideas” into “investment projects”, and then into “investment decisions”. 53. Assessment of the PIM system in Afghanistan has identified important weaknesses. An assessment of the existing PIM system in Afghanistan revealed five key areas for improvement. First, lack of proper project evaluation allows for undesired projects to be included in the budget thereby resulting in allocative inefficiencies. Second, fragmented management of the investment pipeline with parallel channels in the pre-investment stage has led to a segregation of the Public Private Partnership investments from broader public investments. Third, short-sighted annual investment decision-making process focused on a one-year budget horizon leads to a lack of proper medium-term costing and investment planning. Fourth, there is a lack of clarity on roles and responsibilities leading to dysfunctional project development and dispersed capacity. Finally, weak project monitoring and evaluation weaken the ability to detect problems during project implementation, leading to avoidable delays, cost overruns and inefficient management of scarce fiscal resources. 54. As a tranche release condition for the proposed operation, MoF will issue a revised Budget Circular 1 that: (i) clearly defines the time-bound process and requirements for project proposal submission from ministries and agencies, including the submission of project concept notes according to the standard template and guidelines provided by the MoF; (ii) requires all projects proposals to include cost estimates for operating and capital expenses needed for the project life cycle. The existing Budget Circular 1 does not provide detailed quality benchmarks for project proposals hence there is a wide variability in the quality and formats of the submitted proposals. Consequently, the procedure to screen and evaluate them is not standardized. The revised circular will clearly and in a detailed manner lay out the requirements of the submission of project proposals such as timelines for the proposals, format of the proposals, alignment with national development priorities, preliminary cost estimates for operating and development components of the proposals and other quality requirements. This is the first step in a plan to strengthen public investment management, including mandating standardized project appraisal and selection processes across government. 55. Results and results indicators. The revised PIM process is expected to lead to improved development budget execution and greater allocative efficiency in the use of public resources. The results indicator is: the proportion of approved projects by share of total investment budget that have undergone strategic fit screening increases from 0 percent in 2017 to 80 percent by end-2019. Policy Action #8 (Tranche Release Condition): ARD rolls out an electronic taxpayer management system by making fast-track tax filing available in LTO. 56. Improved revenue collection is central to Afghanistan’s self-reliance agenda. Afghanistan continued to suffer from a narrow tax base, low capacity, weak internal controls, and a decentralized tax 28 administration. The GoA also faces a difficult trade-off in balancing efforts towards improved compliance with maintaining a conducive business environment for the small number of taxpayers. 57. Authorities are committed to improving tax performance. A Value Added Tax (VAT) is planned for implementation by 2020. Ongoing technical assistance for business process simplification, IT, risk- based audit, and VAT implementation is provided through the World Bank financed Fiscal Performance Improvement Support Project (FSP), while policy support for VAT implementation is provided through the EU’s State Building Contract. While this progress is encouraging, the implementation of these activities requires significant ongoing support. Taxpayer compliance costs remain high, negatively affecting the business climate. Paper-based processes require excessive steps and frequently result in data entry errors and application of penalties that consume ARD compliance resources. 58. The ARD is currently developing systems for Fast-Track Filing (FTF) to improve taxpayer services and reduce administrative steps. FTF refers to the implementation of an electronic taxpayer management system in which the taxpayer maintains an electronic profile and submits electronic tax return filings. As the current legal framework also requires physical signature, a simple paper printout is certified by the taxpayer and submitted as part of the payment procedure. FTF has been developed and is currently being piloted in the LTO. While progress is encouraging, procurement delays and staff turnover have hampered implementation of the new systems. 59. As a tranche release condition for the proposed operation, ARD will roll out an electronic taxpayer management system by making FTF available (but optional) in LTO. The current pilot of FTF will be rolled out across the LTO, with FTF available to all LTO clients for optional use. FTF is expected to be rolled out across medium- and small-taxpayer offices over subsequent years. 60. Results and results indicators. The tax administration reform measures supported by this operation are expected to increase tax revenues through improved taxpayer compliance while reducing compliance costs. The introduction of electronic taxpayer services will address key taxpayer concerns about the use of outdated paper forms such as burdensome filing time, data entry errors, long assessment timelines, and inaccurate calculations. The results indicators for this action are: i) domestic revenue collected by the LTO and MTO increases from AFS 38.6 billion in 2017 to AFS 43.9 billion in 2019; and ii) the proportion of LTO clients with access to FTF increases from 2 percent in 2017 to 100 percent in 2019. Policy Action #9 (Tranche Release Condition): ARD reviews and revises LTO and MTO client lists to ensure correct categorization of tax-payers and risk-commensurate compliance and enforcement efforts. 61. Alongside roll-out of FTF and registration processes, ARD is pursuing important reforms to enhance the focus of compliance activities on large taxpayers. The existing LTO and MTO client lists are outdated, with many large taxpayers erroneously categorized as medium taxpayers, and therefore avoiding appropriate levels of scrutiny. The erroneous categorization is likely already contributing to significant revenue loss, and must be addressed as a matter or priority before the implementation of the planned VAT, given that LTO clients will comprise VAT taxpayers. 62. As a Tranche Release Condition for the proposed operation, ARD will review and revise LTO and MTO client lists to ensure correct categorization of tax-payers and risk-commensurate compliance and enforcement efforts. This review will take place with World Bank technical assistance and involve the strict application of revised classification criteria to all firms on the current MTO and LTO lists. The 29 classification system will be developed with World Bank technical assistance and reflect new VAT thresholds. This review is expected to lead to a substantial reallocation of firms from MTO to LTO classification. 63. Results and results indicators. Revising tax-payer lists to ensure accurate and standardized classification is expected to ensure appropriate scrutiny, leading to improved compliance and higher revenues. The results indicator is: LTO share of ARD revenue increases from 27 percent in 2017 to 36 percent by end-2019. Policy Action #10 (Tranche Release Condition): Cabinet approves a revised O&M Policy to: (i) improve O&M expenditure management and (ii) mandate piloting of the revised O&M Policy by four line- ministries in preparing their 2019 budget. 64. Ensuring adequate and appropriate O&M expenditure is a particular challenge in Afghanistan. During the reconstruction period, development partners led substantial investment in much-needed infrastructure and other capital works. As responsibility for operating and maintaining capital projects has been transferred to Government, pressure on overall resources has increased. Problems of scarce resourcing are likely to be exacerbated over coming years as aid inflows decrease and government revenues and the core budget are relied on to deliver a broader range of investments. It will be vital that sufficient resourcing is devoted to O&M expenditure to prevent the deterioration of recent capital investments and support the efficient delivery of services. 65. Government approaches to budgeting for O&M expenditure have been inadequate to date. The Government budget has typically been run on a largely incremental basis, with cost-based increases in resources being allocated fairly evenly across all government agencies, regardless of need or justification, during each budget process. There has been no attempt to inventory assets, determine O&M requirements based on calculated operating and maintenance costs, and appropriate adequate resources to meet O&M needs. Accordingly, there has often been a wide mismatch between the allocation of resources for O&M and actual needs. Afghanistan’s highly centralized budget system exacerbates this problem, limiting managerial discretion to reallocate resources between competing priorities at the level of service delivery units. 66. Government has recognized these issues, and developed an O&M Policy to strengthen the linkage between O&M allocations and actual needs at the Ministry level. The policy reflects the adoption of a norms-based, rather than incremental, approach to O&M expenditure. Key policy elements include: i) setting realistic targets for service delivery levels taking into account the available budgetary resources (budget ceilings); ii) establishing norms for the O&M costs for each main line of service delivery (object codes); iii) aligning budget allocation process with pre-agreed norms for each line of service delivery; iv) establishing an asset management information system; and v) development of robust procedures for identification, appraisal and approval of proposed capital investments (including donor funded projects) which incorporate full estimates of recurrent O&M costs associated with utilization and maintenance of new assets. Under the policy, the ongoing costs of existing asset portfolios will also be recorded and used to inform medium-term expenditure profiles under the medium-term fiscal framework. 67. As a tranche release condition for the proposed operation, the Cabinet will approve a revised O&M Policy that aims to improve O&M expenditure based norm-based costing and budget allocation 30 and will mandate piloting of revised O&M Policy by four line-ministries in preparing their 2019 budget. Because the new O&M policy represents a substantial improvement over the existing method of allocating O&M expenditures, and requires the development of new capacities in some line ministries, it cannot be rolled out immediately across all of Government. Through piloting in four key line-ministries, new approaches and their cost implications will be verified, and necessary adjustments incorporated into the policy. Full roll-out across all line ministries and agencies is expected to follow the pilot period, on a phased basis. 68. Results and results indicators. The new O&M policy is expected to lead to improvements in the allocative and technical efficiency of O&M expenditures, underpinning broader improvements in service quality. The results indicator is: number of ministries that develop budget proposals for operating and maintenance expenditures using a norm-based method increases from zero in 2017 to four in 2019. Table 4. Analytical Underpinnings and Complementary Support Programs Reform Areas Analytical Underpinning Parallel Support Program Pillar I: Strengthen the policy framework to support state effectiveness, private investment, and social inclusion #1. The President issues a decree formalizing and WB (2018) “Developing WB Digitalization of Civil defining AK responsibilities for integrating national Afghanistan’s Mobile Money Service Payments Project IT infrastructure necessary to roll out the E-money and Financial Technology” (Pipeline) and digital payment system. #2. The Recipient’s Cabinet has approved and submitted to the National Assembly an amendment WB (2018) “Discussion Note: of the Civil Servants Law that: (i) establishes a career New Civil Service Program.” track for specialist staff; (ii) enables positive gender WB (2016-17), “Wage Bill Analysis and Modeling” WB, Tackling Afghanistan’s discrimination within civil service appointments; (iii) WB (on-going), “Assessment Government HRM and introduces merit-based and tailored recruitment of Human Resource Institutional Reforms into the civil service; (iv) establishes Deputy Minister (TAGHIR) Project (Pipeline) Management Information positions within the civil service framework; and (v) System” enables transfers, sanctions, transparent grievance WB (2017-), “Functional redress, and civil service renewal. Reviews” #3. The Recipient’s Cabinet has approved and submitted to the National Assembly an insolvency WBG (2018) Doing Business USAID funded Trust Fund - law which adequately addresses insolvency Reform Memorandum Investment Climate proceedings, reorganization provisions for insolvent Program Afghanistan companies, creditor rights, and treatment of insolvency in viable businesses. #4. DABS and MoF sign a Partnership Agreement to improve DABS’ performance over 2018-2020, WB (2017), “Financial “DABS Planning and including: i) a number of annual performance Evaluation of DA Capacity Support Project”, targets to be met by DABS; and ii) restructuring of AFGHANISTAN BRESHNA and “Afghanistan Energy DABS debt to MOF, conditional on performance SHERKAT-DABS” Study” improvements. #5. The Recipient’s Cabinet has issued and published World Bank (2013) Land Afghan Land the Regulation on Managing Affairs of Informal Governance Assessment Administration System 31 Urban Properties allowing for the distribution of Framework Afghanistan: Project (P164762) Property Documents to occupants of informal Final report. (Pipeline) settlements in urban areas. #6. The Recipient’s Cabinet approves an Irrigation On-going technical Policy and a Dry Lands Agriculture Policy to increase WB (2018) Climate Change assistance under On Farm the resilience of agriculture-based livelihood Impacts on Hydrology and Water Management activities against climate change and strengthen Agriculture (P162117) Project (P152870) management of water rights. Pillar II: Strengthen the policy framework for an improved public finance system #7. MoF issues a revised Budget Circular 1 that: (i) WB (2017), “Afghanistan: clearly defines the time-bound process and Developing an Efficient PIM requirements for project proposal submission from WB FPIP Support Project System” ministries and agencies, including the submission of (FSP): IPF TA support WB (2017), “PIM Conceptual project concept notes according to the standard WB FPIP Advisory Facility: Framework in Afghanistan” template and guidelines provided by the MoF; (ii) Programmatic Analytical WB, (forthcoming), requires all projects proposals to include cost Services and Advisory “Assessment on estimates for operating and capital expenses Afghanistan’s PIM system” needed for the project life-cycle. WB (2015) “ARD Functional Review” WB (2016) “LTO Business WB FPIP Support Project #8. ARD rolls out an electronic taxpayer Process Mapping” (FSP): IPF TA support management system by making fast-track tax filing ARD (2016) “ARD Tax WB FPIP Advisory Facility: available in LTO. Administration: Re- Programmatic ASA Organization and Modernization Proposal 2016-2021” WB (2015) “ARD Functional Review” WB (2016) “LTO Business #9. ARD reviews and revises LTO and MTO client WB FPIP Support Project Process Mapping” lists to ensure correct categorization of tax-payers (FSP): IPF TA support ARD (2016) “ARD Tax and risk-commensurate compliance and WB FPIP Advisory Facility: Administration: Re- enforcement efforts. Programmatic ASA Organization and Modernization Proposal 2016-2021” WB (2018), “Public #10. Cabinet approves a revised O&M Policy to: (i) WB FPIP Support Project Expenditure and Financial improve O&M expenditure management; and (ii) (FSP): IPF TA support Accountability (PEFA) mandate piloting of the revised O&M Policy by four WB FPIP Advisory Facility: Assessment” line-ministries in preparing their 2019 budget. Programmatic ASA 4.3. LINK TO CPF AND OTHER BANK OPERATIONS 69. The proposed operation is fully consistent with the priorities and approach established in the World Bank’s Country Partnership Framework (CPF) for Afghanistan (FY2017-FY2020) No. 109589-AF which was discussed by the Board on October 27, 2016. Building on a Systematic Country Diagnostic completed in 2016, the CPF is structured around three pillars: i) building strong and accountable institutions; ii) supporting inclusive growth; and iii) social inclusion. Reforms supported under both pillars 32 of the proposed operation directly contribute to all three pillars of the CPF, through an emphasis on institutional, legal, and regulatory reforms that both expand access to economic opportunities to disadvantaged groups and support private sector development. Actions to improve the business environment are also complementary to ongoing IFC and MIGA activities intended to mitigate risks faced by private sector investors in fragile contexts through risk sharing and guarantee facilities. 4.4. CONSULTATIONS, COLLABORATION WITH DEVELOPMENT PARTNERS 70. This operation has been developed in close consultation and collaboration with development partners, particularly through the ARTF donor group. Donor aid coordination in Afghanistan is strong and frequent. Policy reforms and technical assistance efforts are coordinated on different donor-government platforms, among others the Joint Coordination Monitoring Board, head of agency meetings, the ARTF Strategy Working Group and other technical working groups. During the preparation phase of this operation, discussions have been held with the IMF and all ARTF development partners, including multilaterals such as European Union (EU) and Asian Development Bank (ADB) as well as bilateral donors participating in the ARTF. Overall strategic coordination on outcomes and reform priorities has been supported through the ARTF IP technical working group, which is monitoring implementation of the IP triggers and supporting the country’s high-level structural reform priorities. The World Bank team has been also closely cooperating with the IMF, including regular participation in IMF ECF quarterly review and day-to-day collaboration on macro-monitoring and assessment. 71. Reforms supported by the operation have benefited from wide consultation. Reforms supported by the operation are aligned with the ANPDF, which was developed through extensive consultations with civil society and the private sector. Private sector reforms, including to insolvency proceedings, business licenses, tax administration, and energy were subject to extensive private sector consultations through the PriSEC group, co-chaired by the Ministry of Commerce and Industry (MOCI), Office of the Chief Executive, and the World Bank. Land actions were subject to extensive community consultation through reviews of the Land Management Law, led by ARAZI. Extensive further consultation will be involved in development of the Irrigation and Dry-Land Agriculture Policy, and the amendment to Water Law. Consultations will be carried out in five different river basins inviting irrigation farmers (mostly in traditional mirab systems), representatives from private industries which are large water users (e.g., food industries and mining), DABS, NGOs, and local government (provinces, districts, and CDCs). In revising the Civil Servants Law, the IARCSC carried out extensive upfront consultations across Government, including within the relevant Development Council “the High Council for Good Governance and Administrative Reforms” - including the Administrative Office of the President (AOP), the Ministry of Finance, Ministry of Economy, and Ministry of Labor, Social Affairs, Martyrs, and Disabled (MoLSAMD) - and with the Ministry of Justice. 5. OTHER DESIGN AND APPRAISAL ISSUES 5.1. POVERTY AND SOCIAL IMPACT 72. Assessment of the policy and institutional reforms supported by the operation suggest significant positive or neutral poverty and social effects over the longer-term. Poverty and social effects have been assessed based on: i) recent World Bank analytical work regarding IDP and returnee 33 demographics and living conditions;10 ii) governance and policy assessments of land in Afghanistan;11 iii) a series of recent poverty and social impact assessments of land laws, including several commissioned specifically for the Bank-supported Inclusive Growth Development Policy Operation (approved in June 2017);12 and iv) a poverty and social impact assessment of the Irrigation and Drylands Agriculture policies commissioned for the purposes of this operation.13 No policy actions supported by the operation are expected to have significant unmitigated negative poverty and social effects in areas currently under Government control. 73. Distribution of property documents to informal occupants of state owned land is expected to have positive poverty effects if the policy is implemented according to plan. Recent World Bank analysis shows many internally displaced and returnees are highly vulnerable, particularly in terms of accessing services and engaging in vulnerable forms of employment (such as being unemployed and/or underemployed). A recently undertaken phone survey of returnees shows that over 80 percent of returnees work in vulnerable employment as daily wage laborers or are self-employed. About 58 percent of responding households report having only one breadwinner, earning on average between 500 and 1000 Afs per household member per month. At least one household member had to skip a meal due to a lack of food in 37 percent of all returnees households and less than half of returnee households live near both, a primary and a secondary school. Most migrants have returned involuntarily and a large proportion are undocumented and therefore face constraints to accessing services. Some returnee households are particularly vulnerable. Around 10 percent of households report having no adult male, and are generally reliant on loans, savings and remittances for income. Positive social and poverty effects are expected through the issuance of property documents to formalize land rights of those informally occupying Government land. This measure is expected to provide increased security of tenure, support improved access to services, facilitate investment in productive activities, and enhance access to finance. Under established procedures, women will be recognized as joint-owners of land when land rights are issued to families, and a substantial proportion of Property Documents are expected to be issued to women as joint or single owners. This measure is expected to facilitate women’s economic participation and access to services, while providing a potential source of collateral to access finance. This will help address existing disparities in access to land and housing, with only 10 percent of Afghan women owning land compared to 66 percent of men. 74. International experience highlights potential risks with processes for the formalization of land rights in fragile state settings.14 Firstly, formal titling processes may enable expropriation, with state 10 World Bank and UNHCR (2016) “Fragility and Population Movement in Afghanistan” available at: http://documents.worldbank.org/curated/en/315481475557449283/pdf/108733-REVISED-PUBLIC-WB-UNHCR-policy-brief- FINAL.pdf and interim results from 2018 returnee survey. 11 World Bank (2013) Land Governance Assessment Framework Afghanistan: Final report. World Bank, Kabul. 12 Wily, L. (2008) The Land Management Law 2008: Social Assessment, World Bank, Kabul; Wily, L. (2013) A Social Analysis of Land Expropriation Law of Afghanistan, World Bank, Kabul; Upadyay, S. (2015) Assessment of Proposed Changes to the Land Management Law of Afghanistan (2012), World Bank, Kabul; Upadyay, S. (2015) The Proposed Amendments To The Land Acquisition Law Of Afghanistan, 2014: Does it secure private investment and ensure tenurial security?, World Bank, Kabul; Reshdya, S. (2017) Comparative Analysis of The New Land Management Law of Afghanistan With the Previous Land Management Law 2008, World Bank, Kabul; Reshdya, S. (2017) Comparative Analysis of the land Acquisition law 2017 with the Land Acquisition law 2009, World Bank, Kabul. 13 Floch, P. (2018) Poverty and Social Impact Assessment of Irrigation and Drylands Agriculture Policies. 14 For examples see: Unruh, J. and R. Williams (2013) ‘Land and Post-Conflict Peace-Building’, Routledge, New York. 34 institutions and vested interests being empowered to distribute land rights to special interests. Secondly, formal land titling processes may fuel corruption, if governance is weak within new institutions established to manage disputes. Thirdly, new processes may lead to frustration if processes for issuing rights are slow or viewed as unfair. Several factors mitigate these risks. Firstly, processes are in place to control land grabbing. ARAZI has detailed information on instances of land grabbing, and the practice has been criminalized through recent legislative reforms. Secondly, Property Documents are being issued in urban centers (municipalities) where government administrative reach and oversight arrangements are strongest. Thirdly, the land authority – ARAZI – is a high capacity agency with established administrative dispute resolution processes. Finally, the World Bank has a long history of engagement in land in Afghanistan, beginning with providing technical assistance to the development of a Land Policy in 2008, sustained technical support to ARAZI, and most recently supporting substantial revisions to key land laws (the Land Acquisition Act and the Land Administration Act) through a Development Policy Grant in 2017. Based on the accumulated deep knowledge of the sector and strong relationships with key stakeholder, the World Bank will support ARAZI in issuance of Ownership Documents, providing capacity building and institutional strengthening under a dedicated project, with an explicit focus on ensuring pro-poor and gender-sensitive outcomes. 75. Irrigation and Dryland Agriculture policies are likely to have positive poverty effects. A Poverty and Social Impact Assessment of the new Irrigation and Drylands Agriculture policies concludes that they are unlikely to have significant negative poverty or social effects and ‘likely to have significant positive effects on poverty alleviation, food security and sustainable livelihoods’. Investment in restoration of irrigation as a result of the new policies is likely to increase agricultural productivity, with positive effects for livelihoods and poverty.15 Ownership of irrigated land in Afghanistan is relatively deconcentrated, so improved irrigation as a result of the new policy is therefore likely to provide moderate benefits to a large number of households, rather than concentrated benefits to a small number of landowners.16 The policy specifies that new investments must be consistent with a plan agreed by communities and subject to a prioritization process, further safeguarding against monopolization of benefits by elites. Policy measures under the Drylands Agriculture policy are also expected to bring poverty benefits, given that the rural poor in Afghanistan are disproportionately reliant on rain-fed subsistence agriculture and highly vulnerable to reduced rainfall due to climate change. Benefits to poor households will accrue from: i) increasing the reliability and overall productivity of rainfed cereal grain production; ii) increased drought resilience; and iii) improved water capture and water management systems. The policy envisions the replacement of traditional ‘mirab’-based water management arrangements, that have decayed over years of conflict and 15 World Bank analysis shows that irrigation restoration can improve household incomes by $40-$100 dollars per year. 16 Eight percent of all households in Afghanistan (est. 1.4 million households) own irrigated farm land, and two-thirds of these households own less than 4.0 jeribs (0.8 hectare). 35 are now vulnerable to elite capture, with a modernized community-management model, which is expected to improve transparency and governance. While the possibility that rehabilitation of irrigation systems under the Irrigation Policy may facilitate opium production on some land cannot be ruled out, there is no evidence that irrigation expansion has previously led to increased opium cultivation. Most opium farming takes place on unirrigated land and evidence suggests that improving alternative livelihoods is the most appropriate approach to dis-incentivizing opium farming. Increased returns to licit agriculture through irrigation should weaken incentives for opium production, while loss of assets and low incomes have been shown to drive household participation in the opium economy.17 76. Unforeseen problems with land and irrigation reforms may arise in the context of active insurgency. A substantial proportion of Afghanistan’s land area is either contested or under the control of insurgent groups. It is not known whether or how new institutional frameworks and irrigation infrastructure would be utilized in areas beyond the effective reach of Government. These risks cannot be effectively mitigated given information gaps relating to the nature of the specific risks and the limited capacity of Government and the World Bank to effectively implement mitigation measures in areas beyond Government control. 77. Several policy actions supported by the proposed operation are expected to have indirect positive poverty effects through facilitating investment and private sector development. Business environment reforms to strengthen insolvency proceedings is expected to support entrepreneurship and investment. Reform of insolvency proceedings is not expected to have any negative poverty impacts, as encouraging formalization of insolvency should strengthen the rights of employees relative to the current unregulated status quo. Energy sector reforms do not involve any increase in tariffs for residential users, while clearance of DABS debt should lead to lower costs and easier access, facilitating private sector development. To the extent that improvements in the business environment lead to increased productivity, employment growth, and increased wages, overall poverty effects are expected to be positive. 78. Reforms to improve the effectiveness, efficiency, and accountability of government are likely to have indirect positive poverty effects. Civil service reforms supported by the operation do not involve any retrenchments or target any overall change in salaries and wages, and are therefore not expected to have direct poverty impacts. Reforms are expected to lead to improved efficiency and effectiveness in government operations, with resulting improvements in revenue mobilization and service delivery ultimately expected to support improved service delivery benefiting all citizens. Reforms to public investment management and the introduction of an operations and maintenance expenditure policy should lead to improved efficiency in public resource use, with potential positive poverty and social effects. 17 Byrd A. W 2008 (IBID) indicated that erosion or loss of assets often constitutes an important push-factor for households to become engaged in the opium economy: (a) research in the northern province of Balkh points to local population growth and dilapidated irrigation systems alongside reduced water availability, as having made poppy cultivation relatively more attractive; and (b) in Ghor province, loss of livestock due to severe droughts has been highlighted as important factors for both traders and farmers to get involved in the opium economy. 36 5.2. ENVIRONMENTAL ASPECTS 79. The policy and institutional reform actions supported by this operation are not expected to have significant effects on the environment, forests, or other natural resources. 80. Supported formalization of land rights for informal occupants of Government land may have potential positive and negative environmental effects. Better security of land tenure under supported administrative reforms for land is expected to facilitate investment and development, including of agricultural land. Increased land use for agriculture and other purposes may lead to pollution and pressure on water resources, depending on the scale and type of new investment. But at the same time, security of property rights may increase incentives for sustainable land management on behalf of land owners in some cases. Negative impacts arising from intensified use will be mitigated through a range of current government initiatives to improve the overall legal and regulatory framework for environmental protection (discussed below). 81. Energy reforms may have potential modest positive effects. Reforms supported by the operation are expected to lead to improved financial management and efficiency at the power utility, ultimately leading to reduced prices. Reduced tariffs may lead to reduced reliance on more environmentally- damaging energy sources, such as firewood and kerosene. In 2014, only 10 percent of the rural population was connected to the electricity network 18 , and while demand is growing the rural population is particularly vulnerable to indoor air pollution. In fact, Afghanistan has the highest rate of deaths due to household air pollution in South East Asia19. Supported reforms will not lead to any new investment in generation capacity of infrastructure. 82. The Irrigation and Dry Lands Agriculture Policies are likely to have positive environmental effects, including in mitigating the effects of climate change. Afghanistan is an arid to semi-arid country, and therefore one of the keys to ensuring agricultural yields is fully harnessing and efficiently utilizing the country’s water resources. On-going study on Climate Change Impacts on Hydrology and Agriculture (P160070) confirmed the evidence that climate is already changing in Afghanistan including rising temperature, increasing length of the growing season, and decreasing average winter snowpack. Further, the study also revealed that while irrigation is critical to offset the increased crop requirement resulting from increased temperature, rainfed agriculture, which is mainly to produce wheat, would be much more impacted, as variability of the precipitation would substantially increase. The proposed policy measures in the agriculture and water sector, namely the Irrigation and Dry Land Agriculture Policies, would provide the Government of Afghanistan with an underpinning policy framework to broadly commit to more efficient use of water resources water reuse, formulate a comprehensive investment program to furnish infrastructure and establish climate resilient agriculture practices. If Dry Land Agriculture Policy is implemented properly it will reduce the hilly area soil erosion as right now plowing and cultivation is happening across the contour line and causes erosion by flush floods and rain water. 18 http://siteresources.worldbank.org/SOUTHASIAEXT/Resources/223546-1398285132254/Afghanistan-Country- Snapshot-Spring-Meetings-2014.pdf 19 The 2015 age-standardized rate of deaths attributable to household air pollution from solid fuels was 263/100,000, well above India’s 95/100,000. Source: https://www.stateofglobalair.org/data/#/health/plot 37 83. Potential negative environmental effects will need to be mitigated. The Government has a basic legal and regulatory system in place to manage these effects. Government has stepped up efforts to improve natural resource and environment management with support from the World Bank and other development partners. To mitigate potential environmental effects such as depletion and pollution of groundwater and other natural resources, a new Pesticide Law has been approved by Parliament (respective regulations are forthcoming). The Government of Afghanistan has signed into law Pesticide Management Law and associated regulation will be adopted soon. The Environmental Law 2007, the Water Law 2009, the Forest Law 2013, the Rangeland Law, the Medicinal Plant Law, and the Wild Animal Conservation Law are in various stages of enactment. MAIL has developed a Pest Management Plan (PMP) and Integrated Pest Management (IPM) approach. New Environment and Social Impact Assessment regulations have recently been passed, but capacity building and technical assistance is needed 20 to enable the National Environmental Protection Agency (NEPA) to properly implement them. In 2017, the Government adopted the Natural Resource Management Strategy, which gives priority to using forests, pastures, and other natural assets sustainably, and requested Bank support with its implementation. This is a key step to address the possible environmental effects of the land management reforms. The Bank has been providing technical assistance under the Capacity Development for Natural Resource Management - ASA (P160847) to assess the capacity to sustainably manage natural resources and support the implementation of an action plan.21 5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS 84. The Public Financial Management System is the focus of ongoing reform effort. The 2013 Afghanistan PEFA assessment indicates that financial resources of the government sector are, by and large, tracked and reported within a budget which has contributed to aggregate fiscal discipline. The expenditures and financial position of Government are reported regularly in an understandable format and the National Assembly reviews the fiscal reports of the executive. Government’s commitments to financial transparency and accountability has supported mobilization of high levels of external support for both the recurrent and development budgets. Strengthening of the public financial management system is ongoing under the Public Financial Management Roadmap II, an inaugural 5-year rolling plan, and a detailed Rolling Fiscal Performance Improvement Plan (FPIP). These documents outline a number of high level objectives and targets to improve budget reliability, efficiency and effectiveness of government procurement systems, cash management, and monitoring and accountability systems. All budget documents are publicly available. 20 Shortcomings were identified by the Strategic Environmental and Social Assessment (SESA) prepared with Bank support as part of the Sustainable Development of Natural Resources Project II (P118925) in 2013. Phillips, D. and Hooge, L. Strategic Environmental and Social Assessment for the Extractives Industry Sector in Afghanistan (SESA--EI). Final Version. November 2013. Adam Smith International Limited. 21 This ASA assesses technical and institutional capacity of key institutions involved in implementation of the NRM Strategy, with the focus on forests, forests landscapes, and rangelands. The intermediate aims of this activity are to: (i) assess the available capacity to support the implementation of the newly adopted Natural Resources Management Strategy of key institutions involved in NRM, including Ministry of Agriculture, Irrigation and Livestock (MAIL), particularly its NRM department, at the national and provincial levels; National Environmental Protection Agency (NEPA); local governments (district councils, municipalities, village committees); and relevant CSOs; and (ii) identify key needs and provide recommendations, including with respect to specific capacity to step-up access to Climate finance. 38 85. The fiduciary risk is substantial mostly as a result of the volatile nature and the fragile country environment but also due to some instances of ineligible expenditure and concerns related to capacity challenges. The fiduciary risks are mitigated by the self-reinforcing actions committed to under the FPIP, the ARTF Incentive Program, and the World Bank-financed FPIP Support Program. The actions include (i) strengthening the budget in driving effective delivery of key priority outcomes; (ii) improving budget execution, and (iii) strengthening accountability and transparency. 86. The operation design allows for additional fiduciary protections through the ARTF Monitoring Agent mechanism. ARTF resources associated with tranche release conditions remain subject to ARTF fiduciary controls. Total ARTF disbursements under the program will be the lesser of: i) the value of tranches, after decrementing, associated with all tranche release conditions; or ii) total eligible expenditures estimated by the Monitoring Agent. If assessed eligible expenditures verified by the Monitoring Agent fall below the level of planned disbursements under the program, ARTF funds will not be available for withdrawal. This creates strong incentives to maintain and strengthen fiduciary performance while providing assurance to ARTF donors. 87. The IMF completed its most recent safeguards assessment of DAB in December 2017. It found that DAB had strengthened some elements of its safeguards framework since the previous assessment (2008), but an effective internal audit mechanism had not been established. The assessment made recommendations to address the risks emerging from the Kabul Bank fraud, including related to central bank autonomy and recapitalization. Since that time, some of the 2011 safeguards recommendations have been implemented, albeit with delay. Amending the law has been difficult, however, and the recommendation concerning the DAB’s legal structure remains outstanding. DAB has continued to publish on its website DAB’s financial statements audited by an international audit firm. 88. Funds flow and disbursement arrangements. A foreign currency account in dollars will be established at DAB. This will form part of the country’s official foreign exchange reserves. Upon notification by IDA of grant effectiveness, and with the submission by the recipient of a withdrawal application, the proceeds of the grant will be deposited by IDA into the Government dollar account in DAB. Upon receipt of funds from IDA, an amount equivalent to the grant proceeds will be credited to Government’s budget management system. The proceeds of the grant cannot be used for ineligible expenditures (i.e., to finance goods and services from IDA’s standard negative list as reflected in the financing agreement). If the proceeds of the grant are used for ineligible expenditures, IDA will require the Government to refund the amount directly to IDA. Amounts refunded to IDA shall be cancelled. The receipt of the grants proceeds would be promptly accounted for in the government’s budget system; transactions and balances of the government account will be fully incorporated into the government’s accounting records and financial statements, via the AFMIS. 89. Within 30 days of receipt of the grant, the government will provide to IDA: (a) a written confirmation that this transfer has been completed; (b) any other relevant information relating to these matter, including the exchange rate of the conversion from US dollars to Afghanis; and (c) any other information that IDA may reasonably request. Disbursements will not be linked to specific purchases and no procurement requirements will be necessary. 5.4. MONITORING, EVALUATION AND ACCOUNTABILITY 39 90. The Ministry of Finance is the delegated implementing agency and will be responsible for the overall monitoring and evaluation of the program. MOF has previous experience with monitoring results of World Bank DPO and will work closely with specific agencies with key policy responsibilities under the program, including: ARAZI, the PPP unit within the Ministry of Finance, the High Council on Migration, and the Afghanistan Telecommunications Regulatory Authority. Results indicators for the program have been selected based on data availability and generally rely on currently-available data sources. Tracking the results indicator related to registration of land under the new legislative framework will depend upon the establishment of new systems within ARAZI, to which the World Bank is planning a program of dedicated technical assistance support. 91. Performance of the operation will be assessed in terms of progress with the overall Government program, which is supported by both IDA and ARTF grants. Accordingly, the operation’s performance will be assessed against the full range of results indicators, including those associated with both prior actions and tranche release conditions. 92. Grievance Redress. Communities and individuals who believe that they are adversely affected by specific country policies supported as prior actions or tranche release conditions under a World Bank Development Policy Operation may submit complaints to the responsible country authorities, appropriate local/national grievance redress mechanisms, or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. 6. SUMMARY OF RISKS AND MITIGATION 93. The overall risk rating for the operation is high. Risks in five areas are most pronounced and could potentially jeopardize the achievement of program outcomes. These risk areas, discussed below, are: i) political and governance risks; ii) macroeconomic risks; iii) technical design risks; iv) institutional capacity for implementation and sustainability risks; and iv) security risks. 94. Political and governance risks are high. The proposed operation (June 2018 – May 2019) will span parliamentary elections (already three years overdue and scheduled to be held in October 2018, but may be further delayed) and presidential elections are scheduled for 2019. Election outcomes and potential political instability associated with elections present important risks to the operation. Firstly, political commitment to the current reform program cannot be assured given the potential for a change of government. Scope to manage this risk through consultation with opposition candidates or parties is constrained by the fact that Afghanistan lacks strong programmatic political parties. There are many political parties and many independent Members of Parliament. Party affiliations and allegiances are typically subject to transactional bargaining rather than based on ideology or policy platforms. Many candidates are also likely to contest the Presidential elections in 2019, and previous performance is not a good indicator of likely success. While policy actions supported by the operations are not highly politicized, the overall program may not reflect the priorities of an incoming President or government, indicating possibly weakening reform commitment after the elections. Secondly, elections themselves 40 may lead to periods of political instability with negative impacts on administrative capacity to complete policy actions. The outcome of the 2014 election was contested amid widespread electoral fraud accusations. Competing claims of victory were only peacefully resolved through international brokering of a power-sharing agreement. The process of negotiating the power-sharing agreement and subsequent political competition over key Cabinet roles and administrative appointments between the President and newly-created Chief Executive role disrupted government business for several years. Similar outcomes surrounding the elections would likely weaken the capacity of government to complete administrative procedures and approval processes, hence the reform schedules agreed with the current administration. While progress has been made, electoral institutions are still too weak to foreclose the possibility of widespread electoral fraud accusations and subsequent disruptive contestation over electoral outcomes, potentially including violence. This risk is partly mitigated through the use of a single operation, allowing for policy actions under planned future operations to be adjusted in response to changing government policies or priorities. 95. Macroeconomic risks are high. Afghanistan’s macroeconomic outlook is subject to substantial downside risks. Previous experience suggests that elections and associated political instability can have major negative impacts on growth, investment, and revenues: Revenues fell from 11.6 percent of GDP in 2013 to 8.4 percent of GDP in 2014 due to the combined impacts of withdrawal of international security forces and political instability following the elections. To the extent that the program provides more flexible and dependable budget support assistance, it helps to mitigate risks associated with aid dependency. However, if political instability undermines the progress of implementation of reforms, it is possible that associated reductions in budget support through decrements could pro-cyclically contribute to fiscal management challenges. Macroeconomic risks are further exacerbated by weaknesses in the financial sector including potential fiscal risks arising from state-owned banks. Financial sector risks are partly mitigated through planned World Bank technical assistance to reform state-owned banks. Broader fiscal risks are partly mitigated through the planned continued provision of recurrent cost support through a parallel ARTF-financed instrument that is not linked to progress against structural reforms.22 Risks are also partly mitigated by Government’s previously demonstrated capacity to maintain overall macroeconomic stability in the context of revenue declines, through effective expenditure control and maintenance of the monetary policy framework. 96. Technical design risks are high: While the Bank has engaged in extensive consultations with government and development partners, expectations of all parties may require further alignment given the long history of the IP, wide acceptance of its operating principles, and significant changes associated with the new program design. Misunderstandings and dissatisfaction regarding new decision-making processes may manifest if the revised operation design leads to non-disbursement of an important source of recurrent cost financing during a sensitive political period or amidst a negative economic shock. This risk can be partly mitigated through regular consultation with Government and the IP ARTF working group. 22 Government, the World Bank, and ARTF donors are currently working towards the design of a fiscal stabilization mechanism to provide contingent recurrent cost support in the event of economic disruptions over the election period. 41 97. Risks associated with institutional capacity for implementation and sustainability are high: The public sector in Afghanistan is characterized by highly uneven and thinly spread technical capacity. The context of long-term aid dependency had left some agencies and reform processes heavily dependent on international technical assistance, and vulnerable to associated delays, discontinuities, and coordination problems. Coordination problems and capacity constraints have been exacerbated by parallel bureaucracy and contestation over appointments under the National Unity Government. Lack of capacity is a particular constraint in the Ministry of Justice, which has important implications for policy actions requiring the issuance of new laws. To mitigate these risks, all policy reforms are being supported by technical assistance from the World Bank Group or other development partners. In addition, Bank experts will conduct close supervision and monitoring of the results. Policy reforms under the operation have also been selected on the basis of adequate existing capacity and leadership. 98. Security risks are high: Continued insurgent activity represents another source of risk to achievement of program outcomes. Deterioration in the security situation could divert government capacity and policy attention from supported reforms, impede the provision of technical assistance, disrupt monitoring arrangements, or undermine the expected impact of supported reforms. These risks are somewhat mitigated through the program’s focus on policy actions that should show positive impact even in the context of ongoing conflict. Previous experience has shown that the Bank can successfully monitor and support implementation of reform programs even in a difficult security environment. 99. Environmental and social risks are high: While positive social outcomes are expected from the distribution of property documents to informal occupants of urban land and from the new irrigation and drylands agriculture policies, social risks associated with these policy actions are high. Previous experience with land reforms in fragile states has highlighted how institutional reforms can be coopted by elites and benefits monopolized. Expansion in irrigation systems may be utilized to support illicit production of opium in some areas. Social risks are mitigated in areas under Government control by: i) relatively strong capacity in ARAZI; ii) substantive World Bank technical assistance engagements in both land and water management; and iii) evidence that expansion of irrigation networks is likely to support substitution of agricultural activity away from, rather than towards, opium production. Risks cannot be mitigated in areas beyond Government control given that: i) it is not known how or whether new institutional mechanisms or infrastructure would be utilized by anti-government elements; and ii) Government and the World Bank are unlikely to be able to effectively implement mitigation measures in areas beyond Government control. 100. In addition, risks in several areas are rated substantial, including: 101. Sector strategies and policies risks: Sector strategy and policy risks are substantial due to the inherent complexity of land title reform in fragile state contexts. Issuance of land titles to those informally occupying government land is associated with risks of elite capture and public dissatisfaction if the process is perceived as slow or unfair. This risk is mitigated by: i) the provision of World Bank technical assistance support to ARAZI in undertaking the issuance of Property Documents through a dedicated investment project; ii) recent improvements in administrative arrangements and the legislative framework for managing risks of land-grabbing, including the establishment of a database of grabbed lands and new legal provisions criminalizing the practice; and iii) relatively strong capacity at ARAZI and the existence of an administrative dispute resolution process at the agency. 102. Fiduciary Risks: Fiduciary risks are substantial despite good progress in most phases of budget operations. Previous DPF and investment operations (e.g., Public Financial Management Reform Project 42 II) have helped to put in place adequate processes and practices for financial management, procurement and control. However, fiduciary risks remain substantial due to low compliance with PFM rules and limited internal and external controls. For the most part risk mitigation relies on the self-reinforcing actions committed to under the Government’s FPIP, the ARTF Incentive Program and the proposed IP DPG, the IMF Extended Credit Facility and the FSP. The FSP, in particular, will be heavily focused on the timely implementation of PFM measures across the whole range of the PFM cycle in parallel with the PFM reforms supported by the proposed Incentive DPG operation. 103. Stakeholder risk: Vested interests negatively affected by the provisions of various reforms could exercise undue influence on decision-makers in the government and parliament, undermining the effective implementation of the reforms. The intent and likely outcomes of reforms in land and water sectors may also be subject to misunderstanding and communication. Through a range of technical assistance activities and its broader engagement, and throughout the implementation of the reforms, the World Bank will continue conducting informed discussions on these issues, carrying out adequate consultations with the affected social groups, the private sector and civil society, and in identifying risks and mitigation measures. This will also involve assistance with media strategies and campaigns to ensure that Afghan citizens and investors are made aware of the rights extended to them through the changes in the different legislation. Risk Categories Rating 1. Political and governance High 2. Macroeconomic High 3. Sector strategies and policies Substantial 4. Technical design of project or program High 5. Institutional capacity for implementation and High sustainability 6. Fiduciary Substantial 7. Environment and social High 8. Stakeholders Substantial 9. Security risks High Overall High 43 ANNEX 1: POLICY AND RESULTS MATRIX Policy Action Type Financing Results Indicator Baseline Target (2017)23 (2019)24 Pillar 1: Strengthening the policy framework to support state effectiveness, private investment, and social inclusion 1) The President issues a decree formalizing and Tranche Release ARTF Technical functional specification No Yes defining Asan Khedmat (AK) responsibilities Condition developed by Asan Khedmat for an for integrating national IT infrastructure interface of integrated government IT necessary to roll out the E-money and digital system payment system. 2) The Recipient’s Cabinet has approved and Prior Action IDA Number of civil servants competitively 0 500 submitted to the National Assembly an selected in line with the new amendment of the Civil Servants Law that: (i) recruitment process establishes a career track for specialist staff; (ii) enables positive gender discrimination within Proportion of female civil servants at 0% 15% civil service appointments; (iii) introduces Senior Management Group (SMG) merit-based and tailored recruitment into the level recruited through the revised civil service; (iv) establishes Deputy Minister process among competitively recruited positions within the civil service framework; civil servant positions and (v) enables transfers, sanctions, transparent Proportion of line ministries for which 0% 100% grievance redress, and civil service renewal. the position of Deputy Minister for Administration & Finance has been competitively selected into a civil service position 23 Unless otherwise stated 24 Unless otherwise stated 44 3) The Recipient’s Cabinet has approved and Prior Action IDA Distance to Frontier score against the 23.2 33.2 submitted to the National Assembly an Resolving Insolvency measure in the insolvency law which adequately addresses Doing Business Indicators insolvency proceedings, reorganization provisions for insolvent companies, creditor rights, and treatment of insolvency in viable businesses. 4) DABS and MoF sign a Partnership Agreement Tranche Release ARTF Distribution level losses in Kabul and 20 <20 (Kabul) to improve DABS’ performance over 2018- Condition Herat Provinces as a percentage of (Kabul) 2020, including: i) a number of annual electricity supplied from substations. <26 (Herat) performance targets to be met by DABS; and ii) 26 restructuring of DABS debt to MOF, (Herat) conditional on performance improvements. 5) The Recipient’s Cabinet has issued and Prior Action IDA Number of property documents 500 150,000 published the Regulation on Managing Affairs recognizing women as full or part of Informal Urban Properties allowing for the owners of land distribution of Property Documents to occupants of informal settlements in urban areas. 6) The Recipient’s Cabinet approves an Irrigation Tranche Release ARTF Irrigated wheat productivity 2.49 tons >2.49 tons Policy and a Dry Lands Agriculture Policy to Condition per per hectare increase the resilience of agriculture-based hectare livelihood activities against climate change and strengthen management of water rights. Pillar 2: Improving the policy and institutional framework for public financial management 7) MoF issues a revised Budget Circular 1 that: (i) Tranche Release ARTF Proportion of approved projects by 0% 100% clearly defines the time-bound process and Condition share of total investment budget that requirements for project proposal submission have undergone strategic fit screening from ministries and agencies, including the submission of project concept notes according to the standard template and guidelines provided by the MoF; (ii) requires all projects proposals to include cost estimates for operating and capital expenses needed for the project life- cycle. 45 8) ARD rolls out an electronic taxpayer Tranche Release ARTF Domestic revenue collected by the Af38.6 Af43.9 billion management system by making fast-track tax Condition LTO and MTO billion filing available in LTO. the proportion of LTO clients with 2% 100% access to fast-track filing 9) ARD reviews and revises LTO and MTO client Tranche Release ARTF LTO share of total ARD revenue 27% 36% lists to ensure correct categorization of tax- Condition payers and risk-commensurate compliance and enforcement efforts. 10) Cabinet approves a revised O&M Policy to: (i) Tranche Release ARTF Number of ministries that develop 0 4 improve O&M expenditure management; and Condition budget proposals for operating and (ii) mandate piloting of the revised O&M Policy maintenance expenditures using a by four line-ministries in preparing their 2019 norm-based method budget. 46 ANNEX 2: LETTER OF DEVELOPMENT POLICY 47 48 49 50 ANNEX 3: FUND RELATIONS 51 52 53 54 55 ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE Prior actions/Tranche release conditions Significant positive or negative Significant poverty, social or environment effects distributional effects positive or negative 1. The President issues a decree No likely significant negative or positive No likely significant negative or positive formalizing and defining Asan effects. effects. Khedmat (AK) responsibilities for integrating national IT infrastructure necessary to roll out the E-money and digital payment system. 2. The Recipient’s Cabinet has No likely significant negative or positive No likely significant negative or positive approved and submitted to the effects. effects. National Assembly an amendment of the Civil Servants Law that: (i) establishes a career track for specialist staff; (ii) enables positive gender discrimination within civil service appointments; (iii) introduces merit-based and tailored recruitment into the civil service; (iv) establishes Deputy Minister positions within the civil service framework; and (v) enables transfers, sanctions, transparent grievance redress, and civil service renewal. 3. The Recipient’s Cabinet has No likely significant negative or positive No likely significant negative or positive approved and submitted to the effects. effects. Minor positive effects possible National Assembly an insolvency through lower tariffs over time. law which adequately addresses insolvency proceedings, reorganization provisions for insolvent companies, creditor rights, and treatment of insolvency in viable businesses. 4. DABS and MoF sign a Partnership Potential positive effects. Improving the No likely significant negative or positive Agreement to improve DABS’ financial sustainability of DABS will lead effects. performance over 2018-2020, over time to reduced tariffs, allowing including: i) a number of annual substitution away from more performance targets to be met by environmentally-damaging energy DABS; and ii) restructuring of sources. DABS debt to MOF, conditional on performance improvements. 56 5. The Recipient’s Cabinet has issued Potential positive and negative effects. Potential positive and negative effects. and published the Regulation on Security of property rights for informal Secure land tenure will provide security Managing Affairs of Informal Urban occupants of government land may lead to occupants, allowing increased to intensified use. However, individual economic participation and improved Properties allowing for the owners will face stronger incentives to livelihoods. Poor implementation of the distribution of Property Documents manage environmental degradation. policy could generate risks of elite to occupants of informal settlements capture, which are being mitigated in urban areas. through World Bank project support. 6. The Recipient’s Cabinet approves Likely positive effects. Improved land and Potential positive effects. Improved an Irrigation Policy and a Dry Lands water and irrigation management, water management is expected to Agriculture Policy to increase the identification of vulnerable lands not support increased agricultural resilience of agriculture-based suitable for dry land agriculture and productivity with positive benefits for livelihood activities against developing appropriate methodologies for farmers, and flow-on positive effects climate change and strengthen plowing and cultivating are expected to through reduced prices for basic foods. management of water rights. curtail environmental degradation and protect against the effects of climate change. Possible negative effects on water sources and soil quality. 7. MoF issues a revised Budget No likely significant negative or positive No likely significant negative or positive Circular 1 that: (i) clearly defines the effects. effects. time-bound process and requirements for project proposal submission from ministries and agencies, including the submission of project concept notes according to the standard template and guidelines provided by the MoF; (ii) requires all projects proposals to include cost estimates for operating and capital expenses needed for the project life-cycle. 8. ARD rolls out an electronic taxpayer No likely significant negative or positive No likely significant negative or positive management system by making effects. effects. fast-track tax filing available in LTO. 9. ARD reviews and revises LTO and No likely significant negative or positive No likely significant negative or positive MTO client lists to ensure correct effects. effects. categorization of tax-payers and risk-commensurate compliance and enforcement efforts. 10. Cabinet approves a revised O&M No likely significant negative or positive No likely significant negative or positive Policy to: (i) improve O&M effects. effects. expenditure management; and (ii) mandate piloting of the revised O&M Policy by four line-ministries in preparing their 2019 budget. 57 ANNEX 5: GOVERNMENT 3-YEAR POLICY REFORM MATRIX 2018 Reform Actions 2019 Reform Actions 2020 Reform Actions Medium-Term Baseline Target Results Indicator Pillar 1: Strengthening the policy framework to support state effectiveness, private investment, and social inclusion 1.1. Tranche release 1.2. To develop a regulatory 1.3. To further develop a regulatory Percentage share 0% 20% E-Payments and Mobile Money condition: The President framework for e-money and digital framework for e-money and digital (by volume) of issues a decree formalizing and payments: i) DAB and MOF issue a payments: i) DAB issues regulations customs and tax defining Asan Khedmat (AK) joint regulation allowing for electronic requiring participation of all commercial dues settled responsibilities for integrating payment of customs and tax dues; and banks in the Automated Transfer System through electronic national IT infrastructure ii) DAB issues regulations requiring (ATS); and ii) Cabinet approves the e- payments necessary to roll out the E-money participation of all mobile money governance law, allowing for recognition of and digital payment system. providers, payment card issuers, and e-signatures in online communications and acquiring banks in a regulated transactions. payment system (APS) to enable interoperability. 2.1. Prior action: The 2.2. Cabinet approves policies, 2.3. Cabinet approves revisions to Number of civil 0 500 Civil service reform Recipient’s Cabinet has procedures, and regulation to Establishment (Tashkeelat) Management servant positions approved and submitted to the implement the Civil Servants Law, procedures requiring that revisions to the competitively National Assembly an including provisions for: i) a stratified, tashkeel are based on links to government selected in line with amendment of the Civil Servants inclusive and gender-sensitive merit- policy priorities, are informed by the use of new recruitment Law that: (i) establishes a career based recruitment system; and (ii) a multi-year costings, and achieve equity process track for specialist staff; (ii) training, transfer, promotion, between provincial, central, and district enables positive gender dismissal, and renewal framework, staff. Proportion of 0% 30% discrimination within civil including for cadres and Deputy female civil service appointments; (iii) Ministers. servants introduces merit-based and competitively tailored recruitment into the civil recruited for civil service; (iv) establishes Deputy servant positions. Minister positions within the civil service framework; and (v) Proportion of cadre 0% 50% enables transfers, sanctions, recruitment in transparent grievance redress, common function and civil service renewal. and select technical areas 58 3.1. Tranche Release 3.2. To resolve delays in 3.3. Cabinet approves introduction of Distance to Frontier DB2018 DB2021 Business environment reform Condition: Cabinet has renewing business licenses, ARD a simple one-step, online business score against Resolving Resolving approved and submitted to the establishes a one-stop-shop for registration process through MoCI. starting a business Insolvency Insolvency National Assembly an acquisition of tax clearance as measured by the DTF: 23.62 DTF: 33.32 insolvency law which certificate. Doing Business adequately addresses insolvency Survey Ease of Ease of proceedings, reorganization provisions for insolvent Doing Doing companies, creditor rights, and Business Business treatment of insolvency in viable DTF: 36.19 DTF: 40 businesses. 4.1. Tranche release 4.2. To reduce the cost of 4.3. DABS develops and adopts a DABS working 108 (in 100 (in Power utility reform condition: DABS and MoF sign accessing electricity for commercial new mechanism to address exchange rate ratio Afghan FY FY2020) a Partnership Agreement to customers: i) DABS Board approves risks. 2016) improve DABS’ performance improvements to its subscription over 2018-2020, including: i) a model for commercial and industrial number of annual performance customers; and ii) DABS Number of new 0 100 targets to be met by DABS; and management approves an action plan electricity ii) restructuring of DABS debt to review and improve power connections to to MOF, conditional on purchase agreements (PPA) and industrial performance improvements. establishes a technical PPA customers provided negotiations team. through the simplified procedure Commercial losses 23% [TBD] as % generation 5.1. Prior action: The 5.2. The Supreme Court and 5.3. ARAZI takes additional vital Number of property 0 1,000,000 Land governance Recipient’s Cabinet has issued ARAZI sign a protocol transferring steps towards transition to an documents issued and published the Regulation on responsibility for deed registration to administrative land system, including: i) to informal Managing Affairs of Informal ARAZI in at least one province. approving new and standardized cadastral occupants of state Urban Properties allowing for surveying procedures; ii) establishing an land the distribution of Property electronic land administration system, Documents to occupants of including gender-disaggregated data on informal settlements in urban land holdings. Number of property 0 50% of total areas. documents number of recognizing women property as part or whole documents owners issued 59 Gender Not Available in disaggregated available ARAZI records of land digital ownership are registration available under the system ARAZI digital registration system. 6.1. Tranche release 6.2. The Recipient’s Cabinet 6.3. Cabinet approves and submits to Rainfed wheat 1.03 t/ha 1.12 t/ha resilience Water productivity and climate condition: The Recipient’s approves an implementation strategy Parliament revisions to the Water Law. productivity Cabinet approves an Irrigation for the Irrigation Policy and Drylands Policy and a Dry Lands Agriculture Policy, and the Ministry of Agriculture Policy to increase Agriculture carries out public the resilience of agriculture- consultations on revisions to the Water based livelihood activities law in at least 20 provinces. against climate change and Irrigated wheat 2.49 t/ha 2.95 t/ha strengthen management of water productivity rights. Pillar 2: Strengthen the policy and institutional framework for public financial management 7.1. Prior action: MoF issues a 7.2. MoF approves guidelines, 7.3. The five largest civilian development Ratio of the value 0% of At least 95% Improved planning and appraisal of projects revised Budget Circular 1 that: methodologies, and procedures for spending ministries apply simplified or full of projects that projects of projects (i) clearly defines the time- project appraisal; two select appraisal to 75 percent of projects included have undergone bound process and requirements ministries apply simplified or full in the budget submitted to Parliament. the new PIM for project proposal submission appraisal to 75 percent of projects process to the total from ministries and agencies, included in the budget submitted to value of projects in including the submission of Parliament. the development project concept notes according budget submitted to the standard template and to Parliament. guidelines provided by the MoF; (ii) requires all projects proposals to include cost estimates for operating and capital expenses needed for the project life cycle. 60 8.1. Tranche release 8.2. Fast-track tax filing 8.3. ARD fully rolls out electronic Domestic revenue AFN 38.6 AFN 59.5 Improving Tax Administration condition: ARD rolls out an mandatory for LTO and available for taxpayer management system: fast-track collected by ARD billion billion electronic taxpayer management optional use in MTO. filing mandatory in MTO and available for MTO and LTO. system by making fast-track tax optional use in STO. filing available (but optional) in LTO. Proportion of LTO 2% 100% and MTO clients with access to fast- track filing. 9.1. Tranche release 9.2. Cabinet operationalizes a 9.3. ARD implements a function- LTO share of 27% 45% condition: ARD reviews and Tax Dispute Resolution Board through based organizational structure (including domestic tax revises LTO and MTO client lists approving appointments to the Board, the NLTO). collection. to ensure correct categorization including private sector representation. of tax-payers and risk- LTO/MTO Cases 0 case 20 cases commensurate compliance and resolved by the Tax enforcement efforts. Disputes Resolution Board per year 10.1 Tranche release 10.2. MOF issues a budget circular 10.3 SAO conducts O&M budget Existing All Strengthened expenditure control condition: Cabinet approves a mandating additional line ministries performance/special audit of the piloting of allocation based on O&M policy ministries revised O&M Policy to: (i) apply O&M policy in preparing 2020 O&M policy standard norms for does not apply the specify standard improve O&M expenditure budget O&M costing and norms for norms and management; and (ii) mandate allocation O&M guidelines piloting of the revised O&M budget and for O&M Policy by four line-ministries in incremental costing and preparing their 2019 budget. budgeting is allocation. used. 61