36988 No. 24 / July 2006 Post-Conflict Security Sector and Public Finance Management: Lessons from Afghanistan In recent years, international organizations like OECD and the World Bank have concluded that standard principles of Public Finance Management (PFM) are equally applicable to all areas of the national budget, including the security sector. To date however, very few reviews of PFM systems have included the security sector, not least because many governments tend to be overly protective about scrutiny of public finances in this sector, and as a result most donors have been reluctant to engage. As a result, the bulk of public expenditure reviews have focused on non-security components of the national budget, which represent an important but incomplete slice of national spending. Despite growing awareness of the importance of extending PFM reviews to the security sector, so far the challenge of moving beyond basic principles toward the adoption of a more comprehensive approach to building an effective and fiscally sustainable post-conflict security sector remains elusive. In countries such as Afghanistan, Iraq and Sierra Leone, national authorities and donors are struggling to regain control of unaffordable levels of security sector spending, much of it financed directly by donors. In many cases long-term external assistance may be required for the security sector, generating severe trade-offs with other priority sectors which also require long-term external support. Overcoming the legacy of a fiscally unsustainable and poorly managed security sector calls for full application of PFM principles to support the establishment of checks and balances required to establish a wholly accountable security sector. The recent World Bank PFM review of Afghanistan, perhaps the first example of such a review, provides a number of lessons, summarized in this note. SECURITY, PUBLIC FINANCE AND of public resources--both critical to the achievement DEVELOPMENT of public policy objectives and the establishment of a The importance of security for development legitimate state. Critical dimensions of a PFM effort Security in post-conflict situations is a key condition include: policy-based budgeting; predictability and for a return to political normalcy and conversely, control in budget execution; accounting, recording and development is also needed for security. Protracted reporting; and external scrutiny and audit. These are all conflict has a devastating impact on the delivery of important parts of the budget cycle. Key cross-cutting basic services, encourages illegal and illicit activities, features include comprehensiveness, transparency and undermines the evolution of an accountable and `out-turns' of the PFM system, namely the credibility transparent government, and discourages private of the budget itself. investment inhibiting growth and further limiting Comprehensiveness and discipline are key to PFM. revenue generation opportunities. Ongoing conflict The annual budget process is the main mechanism undermines the state and diminishes public confidence available to discipline government decision-making. in its institutions. Both human and social capital are-- The budget should encompass all government fiscal for generations--irreversibly damaged. operations--as all policy decisions which have Donors and the security sector. Traditionally, donors financial implications have to be considered against have ignored the security sector, in favor of sectors hard budget constraints and prioritized against such as education, health, and infrastructure. However, competing demands. Comprehensiveness requires a in most post-conflict countries security sector spending holistic approach to the national budget, understanding (armed forces, police and judicial services) often all policy and institutional impediments to improved dominates both the operational and capital budget of performance. It requires the entire state and its government. Governments generally steer donors away institutions, to undergo a process of strategic policy from comprehensive scrutiny of the security sector, on making, planning, prioritization of resource allocation, the grounds that it is a national security matter, and the correction of any gross imbalances in although the provision of bilateral military training and spending. It also requires knowledge and monitoring of equipment is deemed acceptable. all expenditures financed by external assistance. Public finance principles Security as a public good Sound public financial management (PFM) The standard service delivery framework, as applied promotes accountability and efficiency in management to traditional sectors, remains relevant to the security 36988 sector. Security, like education and health, is an has integrated security and rule-of-law issues in its essential public good. The same basic principles of development strategy. public finance management and the basic tenets of International support to Afghanistan's security public administration and civil service reform are sector--long-term implications therefore equally applicable. While there are certain Resource allocation to the security sector has been unique aspects of the security sector (e.g., the costs of conducted in isolation from the overall national such services may change within a budget year budget. In meeting short-term security and stability depending on the nature of the threat, measuring and objectives, the international community, not monitoring performance is complex, and the government, determined the staffing establishments, intelligence aspect of security often limits disclosure) pay and grading structure of the security sector. This the fundamental principles of good governance--in was done in isolation from overall fiscal constraints particular those focused on institutions, incentives, and and other sectoral needs, and has heavily undermined accountability--are wholly pertinent to this sector. the government's ability to finance such costs through Cordoning off the security sector in terms of PFM state revenues over the longer term. Consequently, the often results in a national budget that is neither recurrent costs alone of the security sector will comprehensive nor realistic, particularly where the dominate government spending for many years to security sector budget dominates public spending. come, impacting negatively on other critical services. Consequently, it undermines: (i) the credibility of the High-level external support to the security sector has entire budget; (ii) the forecasting of budgetary been `fragmented' and `projectized.' In the absence of aggregates and overall fiscal discipline; (iii) the a multi-annual agreement with the international strategic allocation of resources across the whole of the community, external support for national security and fiscal envelope; (iv) the efficient utilization of law and order continues to be based on an annual resources; and (v) the overall control framework and project commitment basis. the application of fiduciary standards. The absence of Security sector budget allocations despite weak these conditions undermines the development process fiduciary capacity. Given the weak fiduciary capacities and limits progress toward good governance. in all security sector ministries, reconstituting an accountable PFM system, in line with international AFGHANISTAN: SECURITY SECTOR best practice, is considered an important aspect in the REFORM--A NATIONAL PRIORITY establishment of a sustainable security structure by key Security and the rule of law--priorities for the national actors and the international community. Government Security--a Millennium Development Goal for THE WORLD BANK AND SECURITY SECTOR Afghanistan. Twenty three years of conflict, including REFORM IN AFGHANISTAN occupation and other external interventions as well as How the World Bank engaged in Afghanistan internecine fighting, led to the political fragmentation Specific request from the Ministry of Finance. Given of the state and almost total collapse of public security the significance of security sector spending, the and law-and-order institutions. Following the removal Afghan Ministry of Finance requested the Bank to of the Taliban from power in November 2001, include the security sector in the Public Finance (re)establishing effective, efficient and accountable Management Review. The review was undertaken security sector institutions was perceived as both a jointly with DFID. While most skills required for the national and international imperative. review of PFM in the security sector were available in the Bank, some aspects (e.g., planning or monitoring in Afghanistan's main security institutions include: the security sector) required skills unavailable in the · Security management and oversight bodies such as Bank and were provided by a specialized consultant. the National Security Council, the Ministries of Comparative advantage of the World Bank. The Defense, Interior, Counter-narcotics, Border and Tribal Affairs, Justice, Finance and the Auditor Bank has substantial technical expertise in both PFM General's Office. and public-sector reform. Support in these areas is both · Security services such as the Afghan National Army within the Bank's mandate and its core functions-- (ANA), the Police, Border Guards, Counter-Narcotic poverty reduction through strengthening governance Forces, Security apparatus and Customs. · Justice and legal institutions such as the Judiciary, and reforming public institutions. Attorney General's Office, prosecutorial offices and Gradually built credibility and relationships. The non-statutory bodies (e.g., private bodyguards, Bank had already established credibility working with militia and armed factional groups). Afghan counterparts on counter-narcotics issues. The As a result, the Government decided to make Bank team was as concerned as government about the security its 9th Millennium Development Goal, and long-term fiscal sustainability of the security sector. Through the review, it engaged with Afghan security 36988 agencies by providing information on the affordability in the security sector, and provided PFM capacity- of security sector policies and expenditures, both in the building assistance to the security agencies. short run (annual budget) and the longer term. It Key challenges and recommendations demonstrated the process used to develop realistic The need for a holistic and integrated security sector budgets and the benefit of strengthening PFM capacity strategy and policy framework. In the absence of such in security agencies. The Bank coordinated donor and a framework, sound programmatic public expenditure government briefings, facilitated dialogue, and decisions (e.g., on force sizes, equipment) cannot be gradually built trust with key security agencies. It made. provided support in incorporating the security sector in Unsustainably high donor-executed spending the overall annual budget formulation process; through the external budget. High levels of spending subjecting it to aggregate fiscal constraints and sector outside the appropriated budget undermines coherence ceilings like any other sector; and fully incorporating of spending across and within security sub-sectors, and medium-term fiscal projections and planning. has implications for fiscal sustainability over the The Afghanistan PFM review objectives medium term when donor funding declines. Gain as complete an understanding as possible of Difficulties in coordinating and prioritizing security security sector expenditures. In its strategy documents expenditures and actions. Fragmented decision- the Government divided budgetary expenditures along making across donors undermined coherence, making four pillars: human capital development, physical it more difficult for the National Security Council to infrastructure, general administration, and security. fully implement its mandate in terms of strategy Security is considerably smaller than human development, leadership and coordination functions. development in the Core Budget, but twice as large in Concerns about the fiscal sustainability of security the External Budget. The ANA itself was the largest sector staffing levels. Early in the process, the salary single sector in terms of expenditures in 2004/05. structure of the national army was determined without Assess strategic coherence, consistency, and fiscal reference to fiscal constraints or pay elsewhere in the sustainability of security sector expenditures. The civil service. This has set a precedent which the police initial security sector reform plans were problematic. and other sectors aspire to--an expectation that will be Overall public expenditures have been extraordinarily fiscally costly. In 2005/06 security spending was high (equivalent to 57% of 2004/05 GDP) as a result of roughly five times domestic revenues. extremely high development spending. The security Imbalance in development of the ANA and other sector accounted for 39% of total spending in 2004/05. security institutions. Slow implementation of priority Review PFM processes in the security sector and public administration reforms and capacity building in assess extent to which sound PFM principles are security management and oversight institutions, and followed. With the recognition that security and fiscal lack of progress in some security sub-sectors (e.g., issues are closely linked, the team provided advice on justice and police), carry risks for the future. developing an overall `resource envelope' for the The need to develop good governance and sound national budget based on strategic priorities identified and sustainable financial management practices in the by the Afghan counterparts. Key PFM principles like security sector. Substantial capacity-building to comprehensiveness and transparency were applied. implement sound PFM principles in the security sector is still needed. Accomplishments so far: · Injected fiscal and PFM aspects which were missing in LESSONS FROM THE POST-CONFLICT the security sector debate. SETTING: GETTING THE FUTURE RIGHT · Brought much needed attention to fiscal sustainability issue. PFM practices can take into consideration the most · The Bank increasingly was perceived to be providing complex and confidential issues without undermining intellectual leadership on the nexus of security, the application of the fundamental principles of development and public finance. accountability to elected civil authorities. Encouraging public finance, public administration and civil service Analyze the institutional framework for the security reform experts to support the security sector more sector and assess its capacity to apply sound PFM explicitly is vital if both post-conflict governments and principles. Resources appropriated for the security the international community are to work toward sector need to be used efficiently and effectively, developing reform programs that support development which implies full application of PFM instruments and in a sustainable way. processes in budget execution--thus the team assessed Security remains a critical concern in many country the control framework, information flows, contexts. In many post-conflict situations external procurement, and monitoring and evaluation systems actors risk leaving an unbearable fiscal burden on the government, while crowding out spending on other 36988 essential public goods. The weak application of PFM the mandate to approach the security sector through principles undermines national security directly and PFM, but donor coordination and partnerships are harms development. important to complement traditional fiscal approaches There is no justification for treating the security with broader security perspectives and, where sector as separate or sacrosanct, and not subjecting it appropriate provide additional skills that may not be to budgetary and fiduciary processes. The Afghanistan readily available within Bank teams. PFM Review suggests that donors can contribute to improving public finance management in the security Guidelines for future PFM reviews of the security sector sector by: (i) supporting development of an agreed Possible objectives for future reviews of security sector national security strategy and corresponding strategies expenditures, from both a PFM and development perspective, could include the following key issues: and policies for the individual sub-sectors (defense, · Gain as complete an understanding as possible of the police, justice, etc.); (ii) costing requirements in light current level and structure of security expenditures, of fiscal constraints; (iii) helping enhance the capacity recent trends, and likely future expenditure requirements of oversight actors (e.g., Auditor General, legislature) based on current plans; and economic managers (e.g., Ministry of Finance · Assess the extent to which coherent strategies, for the security sector and the major parts of the security sector, Budget Office) to address issues relating to financial guide public expenditure allocations; management in the security sector; (iv) channeling · Review processes for determining funding levels, more of their assistance to the security sector through expenditure allocations, budget execution, and post- the Core Budget; (v) for resources not channeled execution functions, and assess the extent to which they follow sound PFM principles; through the Core Budget, ensuring that timely and · Describe the institutional framework for the security accurate information is made available to the budget sector and ascertain the extent to which it embeds or is authorities, and maximizing use of internationally conducive to sound public financial management; and, acceptable procedures (e.g., procurement); (v) helping · Assess the fiscal sustainability of security sector expenditures. key security ministries strengthen their budget Entry points for dialogue: formulation and budget execution processes; and (vi) · The traditional fiscal perspective that applies to non- discussing medium- and longer-term availability of conflict countries also applies to countries emerging from external resources for the security sector. Donors need conflict. While national stakeholders must guide any to advocate the adoption of standard PFM principles, reform of the security sector, donors can provide technical, financial and material support; and reaffirm the budget as the core tool of government · Donors need to encourage governments to adopt a policy. broader perspective when conducting a PFM review, to There is strong justification for analytical work in include budget planning, execution process, the security sector from development and PFM transparency, and procurement issues for all key security agencies; perspectives. The experience in Afghanistan highlights · The Ministry of Finance is usually a key entry point, but that a security sector PFM Review can be effectively an explicit request to review the sector is a pre-requisite; conducted, using existing PFM methodologies and · Informing donors of the approach adopted in Afghanistan without interfering with issues of national security. may be useful, especially for cases where substantial external funding of the security sector is part of post- Reviewing security reform through a PFM lens conflict reconstruction. Conversely, large external funding reduces risks and costs to both the country concerned also means that donors have some interest in and donors. In the mutual interests of all parties understanding the sustainability of their funding. (government and donors), the application of sound · The benefits of working in partnership ensure that the PFM principles in a post conflict setting at the earliest country can make full use of specialized skills brought in by the international community to work toward sound stage of reconstruction is essential to lessen the long- fiscal health, stability and economic development. term burden of ill-informed fiscal decisions both on government, and on citizens. In addition, poor fiscal decisions on the part of donors and weak PFM planning will inevitably increase the burden on donors This note was prepared by Peter Middlebrook, Rima Simpson and Karene Melloul, based on the report: Afghanistan, Managing Public by raising costs and lengthening the period during Finances for Development, available on www.worldbank.org. This which the security sector will require external support. Note was also published as Social Development Note No. 105 and is Effective donor coordination and partnerships are part of a series intending to disseminate good practice and key essential. While donor coordination and the findings on conflict prevention and reconstruction. This series is edited by the CPR Unit in the Social Development Department of development of effective partnerships are important in the Sustainable Development Network of the World Bank. CPR any sector, the Afghanistan PFM Review makes the Dissemination Notes are distributed widely to Bank staff and are case that this is even more important in the security available on the CPR website http://www.worldbank.org/conflict and sector. As the Afghanistan case shows, the Bank has can also be requested via email at cpr@worldbank.org.