Report No. 34582-AF Afghanistan Managing Public Finances for Development (In Five Volumes) Volume IV: Improving Public Financial Management: Case Studies of Selected Sectors December 22, 2005 Poverty Reduction and Economic Management Sector Unit South Asia Region Document of the World Bank Table of Contents ACKNOWLEDGEMENTS............................................................................................................................ CHAPTER 1 HEALTHSECTOR . ............................................................................................................... 1 EXECUTIVE A.CURRENTHEALTH SUMMARY .................................................................................................................................. 1 2 B.PERFORMANCEOFTHEHEALTH STATUS....................................................................................................................... 5 Coverage and Quality o fthe Provision o f Health Care Services .............................................................. CARESYSTEM ....................................................................................... 5 Distribution of Services to the Poor and Non-Poor................................................................................... 8 c.ORGANIZATION Demand for Health Care Services ............................................................................................................. 9 OF THE HEALTH CARE SYSTEM AND GOVERNMENT P0L1C1ES ..................................... 10 Government Involvement inHealth........................................................................................................ 10 The Centrality o f Primary Health Care ................................................................................................... 11 Partnering with NGOs............................................................................................................................. 11 Policymalung........................................................................................................................................... 13 Administrative ReformProcess .............................................................................................................. 13 D.Grant and ContractManagement Unit .................................................................................................... 14 HEALTH CARE FINANCINGAND SUSTAMABILITY.................................................................................. 15 Efficiency Concerns ................................................................................................................................ 15 Recurrent Costs. Expenditures. and Affordability .................................................................................. 17 Threats to Sustainability.......................................................................................................................... 18 E.Additional ISSUES .......................................................................................... Sources o fRevenue............................................................................................................... 20 OTHERKEY INTHEHEALTH SECTOR 21 Maintaining a Focus on Results .............................................................................................................. 21 Expanding the Scope o f the BPHS Carefully.......................................................................................... 21 Integrationof Vertical Programs into BPHS........................................................................................... 22 EnsuringMoPHRetains Stewardship over the Sector............................................................................ 23 CHAPTER 2 EDUCATION . ........................................................................................................................ 24 EXECUTIVESUMMARY A.INSTITUTIONALAND SERVICEDELIVERY ................................................................................................................................ 24 FRAMEWORK THEEDUCATION IN SECTOR ........................... 26 Definition o fthe Sector ........................................................................................................................... 26 Institutional Framework.......................................................................................................................... 27 Demand and Supply o f Services ............................................................................................................. 29 a. Primary and Secondary Education............................................................................................. 29 b. Higher Education ....................................................................................................................... 35 B.THEGOVERNMENT'S STRATEGY AND POLICIES INTHE EDUCATION SECTOR ....................................... 37 Rationale for public intervention............................................................................................................. 37 c.FISCALSHAPEOF Government's strategy inthe sector ........................................................................................................ 38 THE EDUCATION 38 Public spending on education.................................................................................................................. SECTOR ........................................................................................... 38 InternationalComparison........................................................................................................................ 40 D.Public finance and gender and regional equity ....................................................................................... 42 IMPLEMENTATIONISSUES FRAMEWORK AND ACCOUNTABILITY ........................................................... 43 Budget processes..................................................................................................................................... 43 Capacity ofthe Ministries ....................................................................................................................... 45 Monitoring of the Expenditure and Performance.................................................................................... 46 46 E.PROSPECTS.............................................................................................................................................. The Role ofthe Private Sector ................................................................................................................ 47 i Primary and Secondary Education.......................................................................................................... 47 F.SUMMARYOFRECOMMENDATIONS........................................................................................................ Higher Education .................................................................................................................................... 49 49 CHAPTER3 POWERSECTOR . ............................................................................................................... 51 EXECUTIVE SUMMARY ................................................................................................................................ 51 A.SERVICEDELIVERY AND INSTITUTIONAL FRAMEWORKTHEPOWERSECTOR................................... IN 52 Service Delivery...................................................................................................................................... 52 B.Institutional Framework.......................................................................................................................... 55 THEGOVERNMENT'SSTRATEGYANDPOLICIES INTHEPOWERSECTOR............................................... 56 Government Strategy and Policy Documents ......................................................................................... 56 Institutional and Regulatory Reforms ..................................................................................................... 57 Private Sector Participation..................................................................................................................... 58 c.FISCALSHAPEOFTHE DevelopmentalDisparitiesinthe Sector ................................................................................................. 60 POWER SECTOR ................................................................................................... 60 Operating Budget .................................................................................................................................... 60 DevelopmentBudget............................................................................................................................... 61 Power Utility(DABM) Finances ............................................................................................................ 63 D.BUDGETING IMPLEMENTATIONISSUES FRAMEWORK AND .............................. 64 E.SUMMARY OFRECOMMENDATIONS........................................................................................................ 66 AND ACCOUNTABILITY CHAPTER4 MINISTRY OF MINESAND INDUSTRIESWITHA FOCUSONEXTRACTIVE INDUSTRIES .................................................................................................................................................. 68 EXECUTIVE SUMMARY ................................................................................................................................ 68 A.INTRODUCTION ....................................................................................................................................... 69 B.SECTORDESCRIPTION ............................................................................................................................. 69 Fiscal Performance.................................................................................................................................. 73 C.INSTITUTIONAL FRAMEWORK ................................................................................................................. 76 Roles and Responsibilities of MMI......................................................................................................... 76 Structure o f MMI.................................................................................................................................... 77 Other Key Stakeholders .......................................................................................................................... 79 LookingAhead........................................................................................................................................ 81 D.Reforming AND ADMINISTRATIVESYSTEMS......................................................................................... 86 the Sector: Challenges........................................................................................................... 83 FINANCIAL ImplementationIssues and Accountability Framework.......................................................................... 86 Capacity Building.................................................................................................................................... 87 Administrative Framework ..................................................................................................................... 88 E.NEXT STEPS............................................................................................................................................. 89 CHAPTER5 HIGHWAY SECTOR . .......................................................................................................... 90 EXECUTIVE SUMMARY ................................................................................................................................ 90 A.THEROADSECTORAND HIGHWAY INVESTMENT PROGRAM ................................................................. 92 HistoricalBackground............................................................................................................................. 92 Afghanistan's. RoadNetwork.................................................................................................................. 93 Economic Significance............................................................................................................................ . 94 Role of the Government inthe Sector..................................................................................................... 95 Evolution o f Sector Strategy ................................................................................................................... Institutional Structure for Management o f Highways............................................................................. 95 96 B.Donor Response and Coordination ......................................................................................................... 97 THEHIGHWAY 99 Size and Shape ........................................................................................................................................ REHABILITATIONINVESTMENT PROGRAM..................................................................... 99 FundingArrangements.......................................................................................................................... 102 11 c.Priorities for the Future......................................................................................................................... 103 MPLEMENTATION EXPERIENCE AND ISSUES ........................................................................................ 104 Road Design. Construction. and Materials Standards........................................................................... 104 Contract Design..................................................................................................................................... 105 Procurement Arrangements and Competition....................................................................................... 106 Security Arrangements and Costs ......................................................................................................... 107 D.Project Costs and Value for Money ...................................................................................................... 108 MAINTAINING SUSTAININGTHEHIGHWAY AND SYSTEM .................................................................... 115 Maintenance Options and Arrangements .............................................................................................. 115 The Afghan Private Sector and Development o f a Construction Industry............................................ 116 Likely Future Maintenance Costs ......................................................................................................... 118 Fiscal Sustainability o f the Highway System........................................................................................ 118 E.CONCLUSIONS AND RECOMMENDATIONS ............................................................................................. 120 Summary Findingsand conclusions...................................................................................................... 120 Main Recommendations........................................................................................................................ 122 REFERENCES ............................................................................................................................................. 124 BOXES Chapter 2 Box 2. 1:A Summary o f Lessons from Experiences of Reconstructiono f the EducationSector inOther Post- conflict Countries............................................................................................................................................. 32 Chapter 3 Box 3. 1Forms of Private Sector Participation............................................................................................... 59 Box 5. 1:Financing the Road Sector, Recommendations o fthe Transport Sector Review........................... Chapter 5 119 FIGURES Chapter 1 Figure 1. 1:Trends inUnder-Five MortalityRate............................................................................................. 2 Figure 1.2: Under-Five Mortality Rate inDifferent Locations inAfghanistan ................................................ 3 Figure 1.3: Maternal Mortality Ratios (per 100.000 live births) inFour Locations inAfghanistan (with 95% Figure 1.4: Changes inPer Capita GDP and IMRinSingapore....................................................................... confidence intervals) ...................................................................................................................... 4 5 7 Figure 1.6: Out Patient Visits Per Capita per Year (Corrected for Under-Reporting) ...................................... Figure 1.5: Comparisono fImmunization and Vitamin A Coverage................................................................ 7 Figure 1. 7: Use o f Services by People Sick inthe Last Month......................................................................... 8 9 Figure 1.9: HospitalizationsinPublic Facilitiesper 100.000 Population......................................................... Figure 1.8: Source o f Care for People Sick inthe Last Monthby Income Quintile ......................................... Figure 1. 10: Outpatient Visits per Year in3 Health Centers inPakistan ....................................................... 9 13 Figure 1. 11:Expenditureper Capita inHealth (US$ per capita. Operating Budget only) ............................. 19 Chapter 2 Figure 2. 1:Education System inAfghanistan ................................................................................................ 26 Figure 2.2: Enrollment Growth (Grades 1-12)................................................................................................ 29 Figure 2.3: Net Enrollment Ratio Grades 1-6: 2003 ....................................................................................... 30 Figure 2.4: Supply Constraints on Enrollment................................................................................................ 31 Figure 2. 5: Girls Enrollment and Female Teachers ........................................................................................ Figure 2. 6: Enrollment Projection (Grades 1-6 and 7-12) .............................................................................. 31 35 Figure 2.7: Distribution o f Grades.................................................................................................................. 37 111 ... Figure2.8: OperatingPublic Expenditure per Student (Afs.in2004/05) ...................................................... 42 Chapter 4 Figure4. 1:Current Structure ofMMIExcluding Light Industry................................................................... 78 Chapter 5 Figure5. 1:Current Organizational Structure ofthe Ministryof Public Works ............................................. 96 TABLES Chapter 1 Table 1. 1:Key Health Indicators ...................................................................................................................... 2 Table 1.2: Nutrition Status inAfghanistan and South Asia.............................................................................. 3 Table 1.3: 2003 Coverage of Basic Health Services inAfghanistan Compared to South Asia........................ Table 1.4: Efficiency and Effectiveness of Partnering withNGOsto DeliverHealth Services..................... 6 16 Table 1. 5: Cost Effectiveness of SelectedHealth Interventions ..................................................................... Table 1. 6: EstimatedRecurrent Cost of EfficientHealth Services inAfghanistan ........................................ 16 17 Table 1. 7: Public Spending on Health ............................................................................................................ Table 1. 8: Public Expenditure on Health inAfghanistan Comparedto Other Low Income Countries..........18 18 Table 1.9: Utilization and Payment for Services by Income Quintiles........................................................... 20 Chapter 2 Table 2. 1:Educationinthe MillenniumDevelopment Goals (MDGs).......................................................... Table 2.2: Afghanistan's ProgressToward the MillenniumDevelopment Goals (Education) ...................... 27 27 Table 2. 3: Current FunctionalResponsibilities inPrimary Education ........................................................... 28 Table 2.4: Reasonsfor not BeingEnrolledinSchools in2003 (%)............................................................... 31 Table 2.6: Summary of Studentsand Professors inTertiary EducationinAfghanistan (2004/2005) ............36 Table 2.5: School Survey Summary ............................................................................................................... 33 Table 2. 7: Total Ordinary Budgetfor Education(AF million) and its Share of the Total Ordinary Budget..39 Table 2.9: Allocation of Ordinary Budgetby Category 2003/04-2005/06: Ministryo fHigher Education....39 Table 2. 8: Allocation of Ordinary Budgetby Category 2003/04-2005/06: Ministry of Education................39 Table 2. 10: ProposedDevelopment Budget for Educationand Vocational Training (million US$) and its 39 Table 2. 11:Ministryof Education, DevelopmentBudget 2004/05 and 2005/06 ........................................... Shareofthe Total Development Budget ...................................................................................... Table 2. 12: InternationalComparison of the Education Spending2000/2001............................................... 40 Table 2. 13: Primary Completion Rate: InternationalComparative Data........................................................ 41 41 Table 2. 14: 2004/05 Ordinary Budget Expenditure: Central MoE vs.Provinces (Afs) ................................. Table 2. 15: Key Parameters and Assumptions for Primary and Secondary Education.................................. 42 47 Table 2. 17: Summary of Recommendations................................................................................................... Table 2. 16: Costing Simulation for the Primary and Secondary Education: 2004-2015 ................................ 48 49 Chapter 3 Table 3. 1:InternationalComparators: Electricity Consumptionper Capita (kwh) ....................................... 52 Table 3. 3: DABM:EffectiveTariffs and Costs by Region, 2004/05 .............................................................. Table 3.2: Summary ofthe Power Sector....................................................................................................... 53 55 Table 3.4 MoEW Operating Budget (power), 2004/05 and 2005/06............................................................. 61 Table 3. 5: Development Budget for the Power Sector (US$ million) ............................................................ 62 Table 3. 6: DABM,Expenditure and Revenue, 2002/03-2004/05 (USD)....................................................... Table 3. 7: DABM, Structure o f Revenue and Costs, 2004/05 ........................................................................ 63 63 Table 3. 8: Summary of Recommendations..................................................................................................... 66 Table 3. 9: DABMOperating and Financial Statistics (2004/05) .................................................................... 67 Table 4. 1:Emergency Coal Assistance Program............................................................................................ Chapter 4 71 Table 4. 3: MMI's Operating Budget inmillion (Afsmillion)........................................................................ Table 4.2: ProvenNatural Gas ReservesinAfghanistan and its Neighbors at the Endo f 2003 ................... 72 Table 4.4: Top Seven Requests for Development Budget Submitted by MMIfor 2005/06........................... 74 75 iv Table 4.5: Challenges o f Implementation and Regulation.............................................................................. 84 Table 4.6: Legal. Fiscal. and Administrative Reforms ................................................................................... 86 Table 4.7: Overall Structure for Implementation............................................................................................ 88 Table 4. 8: Main Recommendations ................................................................................................................ 89 Chapter 5 Table 5.2: Current Development Programfor RegionalHighways.............................................................. Table 5. 1:Road Classifications and Lengths.................................................................................................. 93 100 Table 5.3: Current Development Program for National and Some Key Provincial Highways .................... 101 Table 5.4: Lengths o f Roads includedin Current Projects........................................................................... 101 Table 5.5: Priority Projects Proposed by the Government for the Next Five Years ..................................... 103 Table 5.7: Costs and ContributingFactors for Selected Projects.................................................................. Table 5. 6: Unit Costs and Various Features o f Highway RehabilitationReconstructionProjects............... 110 112 Table 5. 8: Applied UnitCosts for Main Materials UsedinRoad Building(Selected Afghan Highway Table 5.9: Applied Unit Costs for Projects inCentral Asia & Table 5. 10: Applied Unit Costs for Projects) ......................................................................................................................................... 113 Projects inPalustan........................................................................................................................ 113 V ACKNOWLEDGEMENTS As part o f the overall Public Finance Management Review (see Acknowledgements for Volume I), this volume was preparedby the following team: Chapter 1 (Health Sector): Benjamin Loevinsohn and Kayhan Natiq(SASHD) Chapter 2 (Education): Keiko Miwa (ECSHD) Chapter 3 (Power Sector): Julia Fraser, Michael Haney, and A. Wali lbrahimi (SASEI) Chapter 4 (Extractive Industries): Masami Kojima and Michael Stanley (COCPO) Chapter 5 (Highway Sector): William Byrd(SASPR), M.Qahir Haidari (SASEI), and Kim0Karini(Consultant, EC) The support providedby the European Commission with respect to preparation o f Chapter 5 on the Highway Sector i s gratefully acknowledged. This volume was processedby Juliet Teodosio (SASPR). The process of carrying out the PFM Review involved extensive interactions with the Ministry o f Finance and other Government agencies, whose valuable cooperation and support was indispensable for completing the review and also greatly benefitedthis report. vi CHAPTER 1. HEALTH SECTOR Executive Summary 1. The health o f the Afghan population is poor and the country i s decades behind its South Asian neighbors interms o f the under-five mortality rate (257/1000 vs. 93/1000 live births, i.e. 2.8 times higher) and the total fertility rate (6.8 live births per woman vs. 3.3). There are also very serious inequities between the urban and rural areas in terms o f outcomes, coverage o f services, and availability o f health sector inputs. The maternal mortality ratio i s 15 times higher in Badakshan than it i s in Kabul, immunization coverage i s three times higher in urban areas than in rural areas, and 42% o f the entire Ministryo fPublic Health(MoPH) staffwork inthe hospitals o fKabul. ii. Untiltheendof2003,theperformanceofthepublichealthsystemwasgenerallypoor(e.g. only 8% o f women receivedprenatal care), with the exception o f mass vaccination campaigns which achieved high coverage. Since the beginning o f 2004, there appears to have been a very significant increase in service delivery, about 90% o f it provided by NGOs. MoPH has made more progress than most other ministries in reforming itself and has also enjoyed a stable policy environment. This has allowed a consistent focus on the Millennium Development Goals and makingprogress inprimary health care. Thus far, public spending has been well aligned with this strategy, with the Basic Package o f Health Services (BPHS) being the main priority. This strategy i s appropriate for reaching the poor. However, serious issues remain, including inadequate quality o f care and gaps inthe coverage o f the BPHS. iii. Basedonactualexpenditures,itappearsthatdeliveringtheBPHScostsabout$3.50percapitaper year. Together with reasonable recurrent hospital expenditures, the Government should aim to spend about $5.80 per capita per year or about $140 million annually. This will require external assistance for the near future but should be affordable by the Government in the medium term with reasonable GDP growth, adequate revenue collection, and an increase in expenditure to about 1.5% o f GDP, in keeping withlevels seen inother low income countries. iv. Inorder to addressthe gross inequitiesandimprove service delivery everywhere, this chapter also recommends that: (i) MoPH should continue to focus on the BPHS and strive to ensure universal access to these basic services; (ii)MoPH needs to continue to partner with NGOs based on transparent assessment o f the results achieved, and should be similarly empirical about expanding the MoPH- Strengthening Mechanism; (iii) the Government should carefully monitor a small set o f key indicators, including coverage and quality o f care, as a central function o f the MoPH; (iv) the Government can carefully expand the BPHS based on explicit criteria o f costs and benefits; and (v) vertical programs should support the implementationof the BPHS. v. The greatest threat to financial sustainability in the sector i s unconstrained growth in the public hospital sector with associated large recurrent costs. The Government should keep hospital expenditures below 40% o f the total health care budget, requiring: (i) limitingthe number o f new public hospitals that are built (even with donor funds), particularly in large urban areas; (ii) ensuring that the donors financing hospitals help meet the recurrent costs o f the hospital they finance for at least the first 5-10 years; and (iii) encouraging growth o f private sector hospitals in the large urban centers. Care should also be taken in greatly expanding the number o f Basic Health Centers (BHCs) and Comprehensive Health Centers (CHCs) so as not to incur unreasonable recurrent costs. Channeling funds through the Government will reduce uncertainties in funding, enhance the coherence o f the policy framework, economize on costs (if appropriately competitive procedures are used), and ensure that MoPH maintains stewardship o f the sector. 1 A. Current HealthStatus 1.1 Poor Child Health Outcomes. The health status o f the approximately 24 million Afghans, particularly women and children, remains among the worst in the world. The under five mortality rate (USMR) in 2003 was 257 deaths per thousand live births (see Table 1.1), meaning that a quarter o f children born do not reach their fifth birthday. This needs to be seen in the context o f Afghanistan's history. As can be appreciated from Figure 1.1, under-five mortality rates inthe country have always been very high compared to its South Asian neighbors and developing countries as a whole. A quarter century o f war has exacerbated the situation and has left Afghanistan about 40 years behind the rest o f the developing world. Under-five mortality rate per 1000live births 257.0 Maternal Mortality Ratio per 100,000 live births (adjusted for under- 1900.0 reporting) Total Fertility Rate (children per woman) 6.8 Life Expectancy at Birth(years) 43.2 Population GrowthRate (1990-2003) 4.2% Figure 1.1: Trends in Under-Five Mortality Rate 300 n 250 200 150 100 50 0 I Source: Data are fromUNICEF (2005). 1.2 Inequitable Outcomes. Not only i s the under-five mortality rate (USMR) very high by international standards but it i s very inequitably distributed. In a rural and remote part o f Badakshan province, the USMR was recently estimated at 323 per 1000 live births, almost three times higher than what it i s inKabul (see Figure 1.2). The under-five mortality rate follows a clear gradient: the more rural and remote the area, the more likely children are to die inchildhood. 2 Figure 1.2: Under-FiveMortality Rate inDifferentLocationsinAfghanistai 350 , I ACC JLJ 300 250 200 150 100 50 0 Kabul (urban) Alishen, Laghman Maywand, Ragh, Badakshan (semirural) Kandahar(rural) (rural, most remote) I Source: Bartlett et al. (2005); data for Maywandwas missinginthe original. 1.3 High Rates of Malnutrition in Children. Over half (54%) o f Afghan children 6-59 months o f age were found to be stunted (i.e. 2 standard deviations below the mean on height for age) which i s considered "very high" by WHO and i s an indicator o f chronic malnutrition. By contrast, only 7% o f the children surveyed were wasted (i.e. 2 standard deviations below the mean on weight for age) which i s considered "medium" by WHO. Thus it appears that Afghan children suffer from widespread chronic, rather than acute, malnutrition (see Table 1.2). Consistent with this pattern i s widespread micronutrient deficiency. For example, among children 7-11 year old, 51% had moderate and severe iodine deficiency (urinary iodine below 50 pg/L) which compares poorly to the 20% target established by WHO/UNICEF. Iodine levels among pregnant women are even lower. Although some progress has been made in widening availability o f iodized salt, only 28% o f surveyed households were found to be consuming iodized salt. In addition, 50% o f children 6-24 months old suffered from anemia. This i s considered o f "high" public healthsignificance by WHO and will negatively impacttheir psycho-motor development. Parameter Afghanistan SouthAsia Under-weight(<-2 SD weight for age) 39% 46% I Wasting (<-2 SD weight for height) 7% 15% Stunting(<-2SD heightfor age) 54% 44% 1 1.4 Burden of Ill Health Falls Disproportionately on Women. The health o f women inAfghanistan has been often commented on because o f the very high maternal mortality ratio (MMR). At 1,900 per hundred thousand live births, the MMR i s extremely high by international standards. A s can be seen in Figure 1.3, the major problem, as with child mortality, lies in the rural areas o f Afghanistan where the estimated maternal mortality ratio i s five to fifteen time higher than it i s inKabul. Given the high fertility rate and highmaternal mortality ratios, a woman in rural Badakshan runs a one in three risk o f dying o f maternal causes during her lifetime. This highrate i s consistent with findings from UNICEF's Multiple Indicator Clusters Survey (MICS)' o f 2003, which found that skilled attendance at birth was highest in Kabul (53%) followed by rural Laghman province (14%), and lowest in rural Kandahar and rural Badakhshan (both had less than 2% slulled attendance). 'The ~~ MICS 2003 results refer to the data collectedby CSO and UNICEF as re-analyzedby Johns Hopkins University (JHU). See UNICEF (2003). 3 Figure 1.3: MaternalMortality Ratios (per 100,000 live births)in Four Locations in Afghanistan (with 95% confidence intervals) I 8000 , -- I I I 6 4 7 I 6000 4000 2000 418 774 0 I , I Kabul(urban) Alishen, Maywand, Ragh, Laghman Kandahar Badakshan (semirural) (rural) (rural,most remote) I Source: Barlett et al. (2005). 1.5 VeryHigh Fertility Rates. Afghanistan has the highest total fertility rate inAsia, with the average woman expected to have 6.8 children during her reproductive life. This i s more than twice as high as the average o f South Asia (3.3), and i s consistent with the findings from the 2003 MICS which found a contraceptive prevalence rate o f only 6%. By comparison, this rate i s 45% for South Asia as a whole. 1.6 Grim Consequences of High Fertility Rates. The socio-economic consequences o f persistently high fertility rates in Afghanistan are very serious. Reducing fertility rates would be expected to: (i) improve women's health and reduce overall maternal mortality by reducing the number o f high order birthswhich are muchriskier than low order births(e.g. a woman's eighthbirthis risluer thanher second or third birth); (ii) reduce infant mortality rates by increasing the time between births; (iii) empower help women by providing them choices about when and how many children to have; and (iv) provide a necessary condition for sustained andrapid economic growth (see below). 1.7 Burden of Disease is Mostly Due to Infectious and Preventable Causes. Most o f the burden o f disease results from infectious causes, particularly among children where diarrhea, acute respiratory infections, and vaccine preventable illnesses likely account for 60% o f deaths, although little highquality information i s available. The highrates o f infectious disease reflect poor personal hygiene, limited access to clean water, inappropriate sanitation, and low level o f parental education, indicating the need for a broad based assault on poor health. A survey in 1997 found that polio was a more important cause o f disability than injuries fiom land mines, although this has certainly changed as polio eradication efforts have brought down the number o f cases to just three in 2004, a tremendous accomplishment that Afghanistan shouldbe proud of. 1.8 Among adults, tuberculosis (TB) accounts for an estimated 15,000 deaths per year with 70% o f detected cases being among women. Malaria i s also an important contributor to the burden o f disease and leishmaniasis i s common. Depression and post-traumatic stress disorder are almost certain to be highly prevalent although little systematic information i s yet available. Currently, HIV prevalence is l o w as 4 measuredby the results blood screening in 12hospitals around the country. However, there i s widespread concern that there are important risk factors present for an HIV epidemic, including considerable drug use. Given the explosive epidemic o f HIV among injecting drug users in Palustan, Afghanistan cannot afford to be complacent. 1.9 Socio-Economic Consequences of Poor Health. Poor health status o f a population appears to have serious long-term adverse effects on overall economic growth. While the relationship between health and economic growth i s complex, recent work, building on many previous studies, indicates that on average a one year increase in life expectancy i s estimated to raise a country's per capita GDP by about 4% (Bloom, Canning, and Jamison, 2004). Clearly this is not always the case as the experience in Sri Lanka and Kerala suggests. However, the experience o f the newly industrializedeconomies in East Asia indicates that mortality decline precedes, rather than follows, rapid economic growth. For example, in Singapore declines in the infant mortality rate (IMR) to the level o f developed counties occurred before its spectacular growth in gross domestic product (GDP) (see Figure 1.4). Figure1.4: ChangesinPer Capita GDP andIMRin Singapore Per Capita GDP $S 1990 4 GDpercapita - R 60 25,000 I 1950 1965 1980 1995 1.10 Increased Proportion of the Population who are Working Age is Key to Economic Growth: Previous work on the relationship between population growth and economic development led to conflicting results. However, more recent work has focused on the proportion o f the population who are o f worlung age and has found quite a large impact on economic growth by lower dependency ratios brought about by lower mortality and fertility rates. For example, inEast Asia between 1965 and 1990 the growth rate inthe working age population was significantly higher than growth inthe general population (2.39% versus 1.58%). According to one study (Wagstaff, 2002), this may have accounted for 1.68 percentage points of East Asia's annual rate o f economic growth duringthis period. This effect appears to hold true for most developing countries where a reduction o f 4/1000 inthe crude birthrate translates into an increase in annual economic growth o f 1.1percentage points (see Eastwood and Lipton, 1999). These analyses do not take into account the large losses that accrue at the household level due to illness among adults. For example, TB, malaria, and diarrhea can significantly reduce household earnings. B. Performanceofthe HealthCare System COVERAGEAND QUALITY OFTHE PROVISIONOF HEALTH CARE SERVICES 1.11 VeryLow Coverage of Basic Services until the end of 2003. On almost every indicator o f health service delivery, there was a great need for improvement. The results o f the MICS 2003 painted a fairly bleak picture o f the coverage o f basic services throughout the country. It also reconfirmed the huge 5 differences between rural and urban areas. While there was and i s room to improve access to services in urban areas, the situation in 2003 in the rural areas was gnm compared to South Asia as a whole (see Table 1.3). The coverage achieved was typical of post-conflict situations and, without dramatic improvement, would have resulted in continuously highlevels o f morbidity and mortality. Source: UNICEF (2003) for Afghanistanand UNICEF (2005) for SouthAsia 1.12 Large Changes due to Campaigns but Only Small Improvements in Routine Services from 1997 to 2003. While the overall level o f service delivery found by the 2003 MICS was very low, there have been some improvements compared to the finding of the MICS conducted in 1997 (see Figure 1.5). The gains in measles immunization and Vitamin A coverage were very impressive and reflected a measles campaign carried out in 2002 and the ongoing polio eradication efforts which have also provided Vitamin A to millions o f children. However, the changes inroutine health services as measured by DPT3 and antenatal care coverage were modest, and coverage levelsremainedunacceptably low. 1.13 Improvement Since the end of 2003. As a result o f clear policies and leadership from the Ministry of Public Health (MoPH), there appears to have been a significant increase in service delivery since 2003. For example, in eight provinces where the Government has performance-based partnership agreements (PPAs) with NGOs to deliver basic health services, it appears that the number o f outpatient visits has tripled (see Figure 1.6) and the coverage o f prenatal care has gone up from 4.6% to 31%. Upcoming household survey information will confirm whether this trend, based on data from the health management information system (HMIS), accurately reflects improvements in the performance o f basic health services overall. 6 Figure1.5: ComparisonofImmunizationandVitaminA Coverage between1997 and 2003 MICSin % 100 80 - 60 - W MICS 1997 40 - DPT3 TT2+ Measles Vitamin A Source: UNICEF (2003). Figure1.6: OutPatientVisits Per Capitaper Year (Correctedfor Under-Reporting) since 1/2004/05 in SelectedProvincesWhereNGOs are Working 1.20 X 1.00 I I ti + .Balkh 0.60 4 mSarlpul -g "*-- Samangan +K .Wardak i 0.40 0.20 /--- 0.00 I-4 I 2 3 4 5 6 7 a 9 1 0 1 1 1 2 Month Source: MoPH-HMIS 1.14 Quality of Care is a Serious Problem. Health facility assessments carried out in September 2004 by MoPHwith assistance from Johns Hopkms University; indicate that there i s still considerable work to do on improving the quality o f care in all health facilities. The knowledge o f staff on how to manage common but potentially serious illnesses i s modest, even in the case of doctors. Providers were given a series o f role plays and the average score was only 51%. Even worse was the observed interaction between providers and patients. Inspite o f being watched, providers carried out only 10% o f the actions deemed necessary for a proper consultation, such as greeting the patient, asking about the duration o f an illness, carrying out a physical exam, providing a diagnosis, explaining how to take the medicines, etc. 7 1.15 Publicly-Financed ServicesAre Providing Most of the Care. The recent national health facility performance assessment surveyed people living within one hour's walk o f a public health facility. It found that o f those who had been sick in the last month, 88% had sought care outside the house. Of the large proportion who sought care, 65% used publicly financed services (although 90% o f these are managed or supported by NGOs), and almost half used basic health centers (BHCs) and comprehensive health centers (CHCs) as can be seen in Figure 1.7. These data need to be interpreted cautiously because the sampling was done around public health facilities. Nonetheless, it does indicate that publicly financed facilities are providing the great majority of the health services in rural areas. There i s little information on the role o fpublicly financed services inurban areas. Figure 1.7: Use of Services by People Sick in the Last Month I other 2% Rivate W B H C 52% Hospital 10% Source: MoPH (2004). DISTRIBUTION SERVICESTOTHEPOORANDNON-POOR OF 1.16 BHCsKHCsare Pro-Poor, Hospitals Are Not. The health facility assessment also found that the poor tend to use the BHCs and the CHCs more than their better-off neighbors (see Figure 1.8). However, the rich are almost twice as likely to use district and provincial hospitals as people inthe bottom income quintile. 1.17 BeneBts of Hospitals Accrue Disproportionately to the Wealthy. The finding that the poor use hospitals less i s consistent with data from other developing countries, which has consistently shown that investments in publicly financed hospital services are disproportionately captured by the better-off. For example, in India (see Figure 1.9), the richest 20% have almost four times as many hospitalizations in public sector hospitals than the poorest 20% o f the population. The inequity i s even worse than these figures indicate, given that the poor have worse health status and tend to need more hospital care. Hence the challenge i s how to ensure that hospital services actually reach those who need them most. This relates to the political economy o f hospitals. People want to take pride in having modern hospitals with up-to-date equipment, the better o f f want to be able to receive high quality modern care at home without having to travel, and doctors are interested in having the latest technology both out o f professional pride but also because it can provide additional income. The doctors and wealthy have political voice and their interestswill be givenpriority. 8 Figure 1.8: Source of Carefor People Sick inthe Last Monthby Income Quintile 70 - _ _ ._ 60 I 1 Nearest public health District or provincial Private doctorlciinic clinic hospital Source: MoPH (2004) Figure1.9: HospitalizationsinPublic Facilitiesper 100,000 Population I 1200 , by IncomeQuintileinIndia 1000 800 600 400 200 0 1st (poorest) 2nd 3rd 4th 5th (richest) Source: World Bank (2002). DEMAND HEALTH SERVICES FOR CARE 1.18 Demand for Health Services is High. The national health facility performance assessment (NHFPA) also showed highdemand for curative services. Nineteenpercent o frespondents indicated they were sick inthe previous month, with 22% o f women reporting an illness. Interestingly, sick women were equally as likely as men to go outside the home to seek curative care (87%, compared to 88% of men). These results may reflect the impact o f increases in the number o f female health workers. In eight provinces covered by performance-based partnership agreements (PPAs), the proportion o f health facilities with trained female health workers (ie., not including vaccinators) has increased from 25% to 62% over the last two years. One o f the most difficult issues on the demand side i s reproductive health services, particularly delivery care. Despite the existence o f 24 hour emergency obstetrical care in many provinces, only 9% of deliveries are attended by shlled birth attendants. This indicates the continued existence o f social and cultural impediments to the use o f such services and points out the potential importance o f incentives (such as baby blankets etc.) that have been successfully used inAfghanistan and elsewhere. 9 1.19 Communities Want Health Facilities: The 2003 National Risk and Vulnerability Assessment (NRVA) showed that communities place a high value on health facilities. Having access to health facilities was in the three top priorities for 70% o f households, compared to 55% for education facilities, and 44% for irrigation systems. This i s consistent with the NHFPA results, which indicated that access was perceived to be an issue even when people lived within one hour's travel o f a publicly financed health facility. Ofrespondents who reportedbeing sick inthe last monthbut not receiving care outside the home, 20% said they lacked transport, 36% indicated that the illness had not been severe enough to warrant care, 30% said the cost o f care was too high, and about 8% indicated that the problem was lack o f drugs or poor quality care. C. Organizationof the HealthCare SystemandGovernmentPolicies GOVERNMENT INVOLVEMENTINHEALTH 1.20 The Government'sRole in the Health Sector. There are a number o f arguments for Government intervention in the sector, not necessarily by providing services, but by financing them and establishing regulations. First, certain components o f public health, such as vector control, sanitation, mass education, or programs to provide clean water - compose public good - it is unlikely that the private sector will provide them. Second, many health goods are "merit goods": individuals would not invest enough in vaccination, family planning, or specialized treatments because their value for the society is larger for any individual (i.e., they have positive externalities). Third, Government intervention can be justified on equity grounds since the poor often cannot afford health care. However, these arguments should be weighed against Governments' performance in the health sector, as there is, in many countries, evidence o f misallocation of public resources (e.g. resources not reaching the poor, use o f non cost-effective treatments, investment inunutilized hospitalbeds, etc.). 1.21 The Government as a Financier of Public Health. In Afghanistan, Article 52 o f the 2004 Constitution states that "the state i s obliged to provide free means o f preventive health care and medical treatment, and proper health facilities to all citizens o f Afghanistan in accordance with the law" and "the state encourages and protects the establishment and expansion o f private medical services and health centers in accordance with law". Government policies have been stated in the 2004 Securing Afghanistan's Future report as well as a number o f separate policy statements, including the February 2004 Hospital Policy EPHS. In addition, the Government has committed itself to achieving the Millennium Development Goals (MDGs). In meeting its constitutional mandate and to achieve the MDGs, the Government will have to continue investingindelivery o fhealth services. 1.22 Other sectors are involved in health. Other ministries and institutions (e.g. Ministry o f Education, Ministry of Rural Rehabilitation and Development, Ministry o f Women's Affairs, Municipalities, Ministry of Agnculture) are mainly involved in health education activities, safe water systems, control o f zoonosis, etc. Some ministries (Ministryo f Defense, Ministry o f Interior, and Ministry of Mines and Industries) run a limited number o f health facilities, mainly hospitals, for their own staff. MoPH has established a large Consultative Group for Health and Nutrition (see below) for coordinating the activities o f other sectors that are involved in health. Recently, MoPH has started work on improving the performance o f the CGHN beyond information sharing through a number o f measures like defining the roles and responsibilities o f other line ministries in the health sector. This will hopefully reduce duplications and strengthen synergies. 10 THECENTRALITY OFPRIMARYHEALTH CARE 1.23 Priority Given to Primary Health Care. MoPH has given priority to delivering a Basic Package o f Health Services (BPHS) to all Afghans, an approach consistent with the focus on the MDGs. The BPHS concentrates on a limited set o f simple but effective preventive and curative services, including immunization, family planning, prenatal care, tuberculosis (TB) control, treatment o f acute respiratory- tract infections (ARI)and diarrhea. The services included in the BPHS are appropriate for Afghanistan, and if widely delivered would almost certainly have a large impact on the health status o f the population. The BPHS also specifies the organization o f rural health services, which includes basic health centers (BHCs, designed to cover 15-30,000 population), comprehensive health centers (CHCs, meant to cover 30-60,000 population), district hospitals (meant to cover more than 120,000 population), and community health workers (CHWs). The staff, medicines, and equipment that are supposed to be available in the BHCs, CHCs, and district hospitals are also stipulated inconsiderable detail inthe BPHS. 1.24 Progress Made on Physical Expansion: MoPH and partners have made considerable progress in expanding physical access to the BPHS. Inthe eight provinces where MoPH has PPAs with NGOs, there has been a 66% increase inthe number o f functioning health facilities, and 97% o f the target number o f facilities have been made operational. There also has been progress in other provinces, and a number o f district and provincial hospitals have been rehabilitated. Progress has been made in rationalizing the distribution o f health facilities in some provinces near major cities, where previously, uncoordinated efforts had led to the establishment o f health centers in locations that duplicated other services and left gaps inmore remote areas. 1.25 Recommendation: Retain the Focus on the BPHS and Ensure Universal Coverage. Because the BPHS represents the most effective, efficient, and equitable means o f improving the health of Afghans, the Government and its partners need to ensure that it remains the number one priority. This means that the gaps in BPHS financing need to be filled as quickly as possible, and that the BPHS receives the first call on available resources. As of June 2005, about 77% o f the Afghan population lives inareas withthe fundinginplace for delivery of the BPHS. Ensuringthat the remainingpopulation gets access to basic services i s both important and achievable at relatively low cost. Filling the gap in BPHS will cost about $15 millionper year. PARTNERINGWITH NGOS 1.26 Historical Role of NGOs in the Health Sector. As there i s now considerable controversy about what the role o f the Government and NGOs should be in future health service delivery, the historical context is important and needs to be kept inmind.Duringthe period o f Taliban control, fewer restrictions were imposed on the health sector than on other social sectors, and as a result significant external assistance continued, with externally-funded NGOs playing a dominant role. When the Taliban were removed from power in late 2001, 80% o f health facilities in the country were managed or supported by NGOs. However, there was little coordinationo f activities, there was no BPHS, and the Government had very little influence over the activities o fthe NGOs. Health facilities were primarily situated inurban and accessible and more secure rural areas, leaving large parts o f the population un-served. Inaddition, NGO activities focused around individual facilities rather than clearly defined geographical areas and populations. This resulted in: (i) an irrational distribution o f services with a patchwork o f NGO clinics with obvious duplication and inefficiencies; (ii)lack o f services in remote rural areas; (iii)o n accountability o fNGOs for tangible results; and (iv) limited focus on community and outreach services. 1.27 MoPHHas Successfully Asserted its Stewardship. Since the beginning o f 2004, MoPH has been able to assert its stewardship over the sector through performance-based partnership agreements (PPAs) and grants from other donors. Usingthese mechanisms, the Government has been able to ensure that: (i) 11 all providers, including all NGOs, are implementing the BPHS and following the technical guidelines o f MoPH; (ii) all providers are clearly responsible and held accountable for defined geographical areas and populations; (iii)about 77% o f the population now have access to services; (iv) quality o f care i s independently measured on a regular basis and results are widely available; (v) health activities are coordinated through Provincial CoordinationCommittees (PCCs) and through the central Ministry; (vi)in most provinces NGOs are selected through a competitive and transparent process; (vii) all publicly- financed health facilities, whether operated by an NGO or not, are clearly marked as being provided by the Government; and (viii) the amount o fresources going to NGOs i s known to M o P H (inthe case o f the PPAs, financial information from the NGOsi s provided on a quarterly basis and audited financial reports are provided annually). 1.28 MoPH is also Delivering Health Services. MoPH i s also delivering services itselfincooperation with NGOs.Through the MOPH Strengthening Mechanism(MoPH-SM), services inthree provincesnear Kabul (Panjshir, Kapisa, and Parwan) are managed by the MoPH with technical assistance provided by local consultants. MoPH staff in the three provinces receive salaries comparable to those provided by NGOs (and in keeping with the national salary policy). Financial resources are channeled through the provincial departments with financial management support provided by local consultants. In addition, NGOshavebeen contracted to train community mid-wives and community healthworkers. 1.29 The Arguments For and Against NGO Involvement. Some argue that in the medium and long term the Government should be responsible for service delivery because it i s more "sustainable" and health service delivery i s a natural function o f the state. Others argue that the NGOs will do a better job o f delivering services and therefore will save more lives. In addition, they argue that some Government officials are interested in providing services because o f the prestige, power, and opportunities for corruption that arise through making personnel decisions, managing finances, and loolung after procurement. The NGOshave been fairly quiet on this issue. 1.30 Evidence from Afghanistan is Still Limited. There i s only limited evidence currently available from Afghanistan on the relative performance o f NGOs and the Government indelivering services. More information should be available in the next few months with before and after data available fiom household and health facility surveys. The initial health facility performance assessment survey provides only a cross sectional view, but does indicate that the community feels that the technical quality o f services i s better inNGO-run clinics than in Government operated ones. However, there i s n o significant difference on overall patient satisfaction or on the patient-provider care index, a summary o f the quality o f patient-provider interaction. One possible area o f concern i s the absorptive capacity of the Government. The MoPH strengthening mechanism (MoPH-SM) provinces initially suffered from slow disbursement which resulted in a shortage o f medicines. This situation has improved recently. The MoPH-SM also relies heavily on consultants and NGOs. It i s too early to conclude which approach works better inAfghanistan, but it certainly makes sense for the Government to make decisions based on actual results. 1.3 1 Global Experience Suggests that NGOs will Perform Better. The accumulating evidence from other countries indicates that contracting with non-governmental entities will provide better results than government provision of the same services. In a recent review o f global experience, ten evaluated examples o f contracting were found and all ten concluded that contracting is very effective and that improvements can be rapid (Loevinsohn and Harding, 2005). Four o f the ten cases had controlled before and after evaluations, and they demonstrated a large impact ranging from 3 to 26 percentage points on important indicators of performance.2 Six o f the ten studies compared contractor performance to As measured by the median double difference (follow-up minus baseline in the experimental group minus follow-up minus baseline inthe control). 12 Government provision o f the same services and all six found that contractors were more effective than the Government in providing services. NGOs performed better even when they had the same or fewer resources than public institutions. One experience inPakistan i s illustrative. When three health centers in Punjab Province were turned over to an NGO to manage, outpatient visits increased rapidly to almost three times what they had been when the health centers managed by the Government. When the Government took back the health centers to manage, outpatient visits fell back to previous levels (Figure 1.10). Figure 1.10: OutpatientVisitsper Year in3 HealthCentersinPakistan Givento an NGO to Manageand thenReturnedto the Government Source. National Rural Support Program- Pakistan. 1.32 Recommendation: Continue Partnering with NGOs. The Government should continue to work with NGOs on a large scale to deliver the BPHS. The decision about whether the Government should provide services in the long term should be based on the evidence on effectiveness and efficiency that comes out o f ongoing evaluations. Expansion o f the MoPH-SM should be done carefully with rigorous evaluation mechanisms inplace. POLICYMAKING 1.33 Strong Progress. As indicated above, MoPHhas made good progress inasserting its stewardship o f the health sector. This i s evident from the national health policy 2005-2009, national health strategy 2005-2006, and other policy documents, standards, and guidelines developed by MoPH and partners. In line with national policies, MoPH has created the Consultative Group for Health and Nutrition (CGHN). The large CGHN, including representatives from other ministries, donors, the UN, and selected NGOs, meets once a month, chaired by MoPH. A working CGHN meets weekly and serves as a venue at in which to discuss technical and policy issues. All partners in the health sector are welcome to participate in this meeting, and key recommendations for policy are referred here for review. In addition to the CGHN, MOPH has established 24 Task Forces to provide inputs on specific technical issues. Their objective i s to provide policy and implementation guidelines, intervention strategies, or program recommendations. These recommendations are then forwarded to both the CGHN and the Technical Advisory Group for review prior to being forwarded to the Executive Board o f MoPHfor approval. ADMINISTRATIVEREFORMPROCESS 1.34 PRR Process. The Priority Restructuring and Reform (PRR) process i s a fast-track civil service reform effort through which ministries that implement an administrativereformprogram get an allocation 13 to pay higher salaries to their employees. It i s led by the Independent Administrative Reform and Civil Service Commission (IARCSC) and employs competitive selection o f staff solely on the basis o f merit. The recruitment is for a renewable 12-monthperiod and provides an `interim additional allowance' on top o f the staffs existing civil service salary. In case the post holder is `transferred' due to unsatisfactory performance, shehe would lose this interim additional allowance and would thus revert to her original salary and benefits (in the range of Afs. 2,500 or about $50 per month). The maximum additional allowance is currently Afs. 11,750 per month ($245 per month), although, for exceptional positions there i s a so-called "super scale" which envisions an allowance in the range o f $500-$600 per month (up to $2,000 in exceptional cases). MoPH submitted and received approval for a proposal to PRR the Provincial Health Liaison Office, the Provincial Health Offices, and the General Directorate o fPolicy and Planning. Inaddition, almost 700 staff inParwan, Kapisa, and Panjshir provinces were PRR'ed under the MoPH-SM. 1.35 Some Progress on PRR: MoPH has been a leading ministry in the Government in terms o f implementing the PRR process. MoPH has so far recruited almost 850 staff under PRR, including some 700 in the MoPH-SM provinces, about 80 in provincial health departments, and the remainder in the central office o f MoPH. This represents 70% o f the planned number in the original PRR proposal accepted by the IARCSC and more staff are inthe advanced stages o f selection. Inrecognition o f its rapid work on the PRR, M o P H has been given a rewardby the IARCSC. More importantly, it appears that the PRR process may be having an effect on performance. The provincial health director (PHD) o f Kapisa has `fired' (transferred out of the PRR-ed positions) five out o f his 279 staff, due to underperformance. Absence from work without leave, or underperformance in general, i s being acted upon. Anecdotal evidence suggests that the PRR process has increased efficiency but there i s little systematic evidence o f this. GRANTAND CONTRACT MANAGEMENT UNIT 1.36 Background on the GCMU. At its creation in 2003, the role o f the Grants and Contracts Management Unit (GCMU) was envisaged to be coordination and oversight o f NGOs who were implementing the BPHS through out the country. It was also intended to manage the PPAs financed by the World Bank as those resources are coursed through the Government budget. In addition to these original functions, the GCMU i s now also carrying out the following: (i) providing technical assistance and management support to many line departments in the MoPH; (ii) assisting in the implementation o f Global Alliance for Vaccines and Immunization (GAVI) and Global Fund for AIDS, Tuberculosis, and Malaria (GFATM) activities ;(iii) donor coordination, including chairing and secretarial functions at the Consultative Group for Health and Nutrition (CGHN) Working Group meetings (once per week), the "large CGHN" (once per month), and the National Technical Coordination Committee (NTCC) meetings (once per month); and (iv) responding to urgent requests from the Minister and Deputy Ministers, including a variety o f policy related activities such as helping to develop the Essential Package of Hospital Services (EPHS) and membership on technical workmg groups such as the Health Care Financing and Sustainability taskforce and the HumanResources taskforce. 1.37 StufJins. The GCMU i s comprised exclusively o f local consultants who were recruited competitively by an evaluation committee comprising senior M o P H managers and representatives o f the development partners. The GCMU consultants are paid about market wages, i.e., what NGOs are paying for similarly qualified staff. Their relatively high level o f compensation has created some resentment elsewhere in MoPH, but it has also helped stem brain-drain from the M o P H to NGOs and the other development partners. There are now 14 local consultants working "in" the GCMU although nine work fulltime inother departments of the MoPH, carrying out tasks well beyondthe original responsibilitieso f NGOcoordination and PPAmanagement. 14 1.38 Recommendation: Continue the GCMU over the Medium Term. The GCMU appears to have performed quite well since its inception two years ago. The senior management o f M o P H has expressed their confidence in the GCMU in spite o f the fact that the consultants were selected by the previous Government. Donors besides the World Bank have expressed their wish to channel funds through MoPH, partly reflecting confidence in the GCMU's ability to properly manage contracts and accounts. The GCMU also appears to have a good reputation among development partners interms o f policy analysis and donor coordination. In objective terms, the GCMU has helped ensure rapid disbursement o f World Bank project funds (45% disbursed after 51% elapsed period) and were able to contract NGOs transparently and fairly in 6 months when the same process took 2 years inPakistan. MoPH would like the GCMU to continue inits present form at least for a few more years as a way o f ensuring continuity. If the PRRprocess i s continued, the G C M U consultants should eventually be mainstreamed. D.HealthCareFinancingandSustainability 1.39 This section explores different aspects o f financial sustainability in the health sector in Afghanistan, including: (i) efficiency o f different approaches to health service delivery; (ii) the the recurrent costs o f an efficient public health sector and current health sector expenditures by the Government and development partners; (iii) threats to sustainability and how can they might be avoided; and (iv) how to raise more revenue to cover health care expenditures. EFFICIENCYCONCERNS 1.40 Efflciency of Different Ways of Organizing Health Services. The discussion above on delivery mechanisms could have financial implications. It i s too early to tell in Afghanistan whether contracting/partnering with NGOs i s more efficient than Government provision o f health services. However, experience from other countries in Asia where data are available suggests that partnering with NGOs i s consistently more effective and more efficient than Government provision o f the same services (see Table 1.4). The ratio o f Governmenthontractor cost effectiveness varies from 1.13 to 1.99, meaning that partneringi s between 13% and twice as efficient interms o f cost per unit o f health services delivered. The greater efficiency o fNGOs appears to be due to lower overheads and greater staff productivity. 1.41 There are, however serious limitations to measuring efficiency simply as cost per unit o f service delivered. For example, it may cost $2 million to immunize 20% o f the approximately 1 million Afghan children born every year and may require $12 millionto immunize 80% (these figures are estimations but they are realistic). This would imply a cost o f $10 per child immunized at 20% coverage and $15 per child immunized at 80% coverage, suggesting that lower immunization coverage i s more efficient. (This seemingly counter-intuitive conclusion results from the higher marginal costs o f reaching children in more remote areas, an obvious concern ina country with Afghanistan's geography.) However, this type o f analysis obviously fails to take into account: (i) the benefits to the child, family, community, and the economy o f having healthier children; (ii)the greater costs to the family and the state of treating vaccine- preventable diseases in the group with lower coverage; and (iii) the benefits o f having a lower infant mortality rate. Most health economists have shied away for technical and ethical reasons fkom doing the hnd o f cost-benefit analysis that would address these issues. A solution to this issue is to examine the efficiency o f different programmatic interventions interms o f cost-per-life (or DALY) saved. 15 Table -4: Efficiency and Effectiveness of Partnering with NGOsto Deliver Health Services Effectiveness I Efficiency Measure of Setting Measure of Government Government Effectiveness Contracting Provision cost/ Contracting effectiveness provision Cambodia % o fpeople I Per capita (PHC) sick inthe cost/ last month 33.4% 12.6% percentage $0.116 $0.131 using point use of publicly public facility financed 1 facility 1 I I Numberof Costper outpatient outpatient visits per 0.53 0.18 visit $ 0.710 $1.410 capita per year India (TB) TB Cost per Treatment 94% 80% successfully $118.00 $138.00 Success Rate treated patient Bangladesh Change in Annual per (urban index o f capita cost/l PHC) coverage o f 46.6 25.1 point change $0.007 $0.012 PHC services inPHC service index ource: Basedon Loevinsohnand 1.42 Efficiency of Interventions. Efficiency can be ascertained by loolung at whether MoPH concentrating on the programmatic interventions that are the most cost-effective as judged by the cost per DALY saved. (DALY is a Disability Adjusted Life Year, which provides a common measure for comparing the burden o f disease taking into account both death and disability arising from illness.) An intervention that costs less than $200 per DALY saved (i.e. about the per capita GDP) i s generally considered a "good buy", whereas higher priced interventions are seen as inefficient use of resources. The BPHS that MoPH has made its highest priority contains the most cost-effective interventions such as tuberculosis treatment, measles vaccination, and treatment o f diarrhea. Hospital treatment o f diseases like leukemia and outpatient treatment o f depression clearly constitute less efficient use o f resources and should receive less funding. Decisions on priority allocation o f budgets need to take into account other factors besides cost-effectiveness, however, and this i s discussed inmore detail in Section E. Table 1.5: Cost Effectiveness of Selected Health Interventions World Bank(1993).. WHO-CHOICE:ChoosingInterventionsthat are Cost Effective - httu://www3.who.int/whosis/menu.cfm?path=evidence.cea&language=en~lish 16 RECURRENT COSTS, EXPENDITURES, AFFORDABILITYAND 1.43 Recurrent Cost of Efficient Delivery of Health Services. Given that NGOs are likely to deliver BPHS services more efficiently than the Government, it makes sense to use the NGOs' actual expenditures as an indication o f the future cost o f delivering the BPHS. In the eight provinces with performance-based partnership agreements (PPAs), the median bid price was $3.61 per capita per year. The actual median expenditure by the NGOs over the last two quarters was equivalent to $3.22 per capita per year. From this data, it appears reasonable to assume that the BPHS will cost about $3.50 per capita per year, or about $84 million per year for the whole country. The cost o f efficient hospital care is much more difficult to calculate, although MoPH has formulated a policy on the essential package o f hospital services (EPHS) that calls for no more than 40% of the total government health budget to be spent on hospital care. This seems reasonable given the greater efficiency o f the services included inthe BPHS and is consistent with better performing low-income counties. This then implies an EPHS budget of $56 million per year and a total public health recurrent budget o f $140 million per year or about $5.80 per capita per year (see Table 1.6). There are some capital investments that are needed in addition to the small-scale ones are included inthe above costs. The larger capital costs are dealt with below. 1.44 Affordability of Needed Public Health Expenditure. Currently, Afghanistan i s spending less than 1% of its GDP on health (i.e. through the core budget), but more than 3% if the external budget is included (Table 1.4). Public spending from the Government's core budget i s considerably less than in its South Asian neighbors, low income countries in general, or heavily indebted poor countries (HIPC, see Table 1.8). At current levels o f GDP, even if Afghanistan were to spend 1.5% o f GDP on public health services as in other low income counties, it would still require significant external support to sustain needed recurrent expenditure. However, Afghanistan will be able to afford this type o f recurrent expenditure by itself when its per capita GDP grows to about $400, assuming that revenue collection keeps pace with economic growth (and public expenditure on health became 1.5% o f GDP as in other low-income countries). A per capita GDP o f $400 (from current GDP o f about $250) i s something Afghanistan could reasonably achieve inthe next 10 years or sooner. Thus it does appear that the current requirements o f the BPHS and the EPHS are sustainable inthe longrun. Table 1.6: EstimatedRecurrent Cost of Efficient Health Services in Afghanistan Source: StaffEstimates. 1.45 Current Public Expenditure. O f the $182 million spent in2004/05 (Table 1.7), $136 million or 75% was in the external budget (i.e. funds disbursed directly by donors to NGOs or contractors), for which data are less reliable than per expenditures in the core budget, which are recorded in the Government's accounting system. The large differences between external budget amounts and actual external expenditures underlines the difficulty o f accurately obtaining such information. Hence it i s a bit difficult to draw definitive conclusions about current public expenditures, but a few things are clear: (i) most expenditures on health services are outside o f the Government's control; (ii) external expenditures appear to be erratic and are difficult to predict; (iii) ifefficiently used, the totalresourcesavailable should be sufficient to deliver the BPHS and essential hospital services; (iv) the Government is spending almost 17 all of its core budget; and (v) as a percentage o f GDP, core Government expenditures on health are roughly constant at about 0.8% o f GDP. Total Core 0.5 0.4 0.6 0.7 0.8 0.8 0.8 0.7 0.4 Total Expenditures 0.5 0.6 4.8 3.8 5.4 3.1 2.0 1.1 0.7 Country PublicExpenditureon PublicExpenditure Health as YOofGDP as % of TotalHealthExpenditure Afghanistan 0.8% 8.4% SouthAsia 1.3% 24.2% Low Income Countries 1.5% 27.8% HIPC 2.2% 41.6% 1.46 Recommendation: Increase Government Expenditures on the Health Sector. The Government should increase its health sector expenditure in the core budget, probably to around 1.5% of GDP inline with other low income countries. This shouldbe accomplished inthe next few years. THREATS SUSTAINABILITY TO 1.47 Large Capital Investments in Hospitals are a Threat to Sustainability. The most serious threat to the MoPH budget i s explosive growth in the number o f hospitals, a clear example o f where not talung into account operating costs in investment decisions can have dramatic consequences (for the investment itself, for the sector, and for public finances more generally). A number o f donors have promised to build new hospitals, many o f them in the large cities. These "gifts" (actually Trojan Horses) will leave the Government with a large stream o f recurrent costs that could easily ruin attempts to achieve financial sustainability. Typically, a hospital requires 3040% of the capital investment in recurrent costs every year. Hospitals built by donors worth $100 million would be expected to cost the Government $30-40 million inrecurrent costs every year. 1.48 Not Meeting Hospital Recurrent Costs Has Predictable Effects. Based on the experience in other developing countries, not covering the large recurrent costs required for hospitals will result in the following: (i) nearly empty hospitals that cause embarrassment to the Government; (ii) hospitals will quickly running down with inadequate attention to maintenance, resulting in degraded services and equipment; (iii) charging patients informally ("under the table") in order to increase the incomes o f staff and to obtain needed inputs (drugs, IV sets etc.), which will further reduce the use of hospitals by the poor; and (iv) diversion of resources from the BPHS, further worsening the availability o f services in rural areas. Sadly all four of these problems could occur at the same time. 1.49 Recommendations: Controlling Hospital Recurrent Costs is Possible. It i s worthwhile to take several measures to control the growth inrecurrent costs for hospitals, including: (i) limitingthe number o f new public hospitals that are built (even with donor funds); (ii) stopping construction o f new hospitals or expansion o f hospitals in Kabul or other large cities and ensuring that new hospitals are built inrural areas where the private sector will not go; (iii) ensuring that the donors o f the hospitals help meet the recurrent costs o f the hospital for at least the first 5-10 years; (iv) encouraging the growth o f private sector hospitals in large urban centers, while purchasing services from these hospitals for the poor; and (v) giving autonomy to existing Government hospitals and contracting-in management. 1.50 Unplanned Growth of BHCs and CHCs is also a Threat to Sustainability. MoPH and NGOs are under considerable pressure from politicians and communities to build additional BHCs and CHCs. Sometimes construction o f additional facilities makes sense in order to improve delivery o f the BPHS. However, it i s important that such new facilities are staffed, equipped, and supplied. Newly built but non- functional facilities could become a source o f embarrassment for MoPH and a waste o f scarce resources for the country. Dealing with this issue requires a clear policy by MoPH which ensures that: (i) in construction o f new clinics, priority will be given to construction o f purpose-built facilities where BHCs and CHCs (inrented houses or houses given by the community) already exist; (ii) recurrent costs o f the the new facilities can be met from existing resources, or the donor buildingthe new facilities will meet the recurrent costs for the next 5-10 years; and (iii) the planning for such new facilities i s done in association with the MoPH. 1.51 Growth and Inefficiency in the M O P H Wage Bill. Another major threat to financial sustainability inthe health sector would be rapid growth inthe MoPH wage bill. This could happen from increasing the size o f MoPHor significantly increasing salaries. Inparticular, dealing with the highlevel o f employment inKabul will be important. According to MOF and the HR Department o f MoPH, 51% o f the staff on the MoPHpayroll are based inKabul, where less than 15% o f the Afghan population lives. This inequity inthe distribution o f staff cannot be explained by the presence o f the central ministry. It is estimated that only about 1,200 staff are actually based in the central ministry. The remaining 6,800 MoPH staff in Kabul, representing 42% o f the MoPH workforce, are working mostly in the seriously over-staffed hospitals. Figure 1.11 demonstrates the effect o f this on where MoPH funds are spent. Instead o f paying excessive numbers o f people to work in places where they are not needed, these staff should be encouraged to work inprovince and in rural areas. Large increases in salaries, or putting large numbers o f health staff at the central level into PRR positions would also be serious threats to sustainability. Figure 1.11: Expenditure per Capita inHealth (US$ per capita, Operating Budget only) 5.0 4.5 4.O 3.5 3.0 2.5 2.0 1.5 1.o 0.5 I Source: MoF for expenditures, CSO for population. 19 1.52 The Challenges of External Assistance. While significant progress has been made toward a sound budget, two key challenges related to external assistance remain. First, the amount o f external assistance and the nature o f the sector implythat the policy framework can be at risk o f being diverted by external interventions (see above the example of hospitals). Second, the uncertainties related to external assistance create a risk for the overall fiscal framework, as it remains uncertain whether resources provided on the external budget - and the services delivered with them -will be continued. ADDITIONAL SOURCES OFREVENUE 1.53 Other Sources of Revenue. There has been considerable discussion in the health sector about how to generate additional revenues, possibly through user-charges or Community Health Funds (CHFs). Supporters o f user charges and CHFs see an opportunity to increase the resources available for health care, improve the accountability of service providers, and ensure proper utilization o f services by patients. They point to the large total out-of-pocket expenditures for private care (averaging about $26 per capita per year) as an indication o f willingness to pay, and emphasize the low cost to patients o f BHC and CHC services (see Table 1.9). Advocates for free, publicly- funded health services want to ensure access to care for the poor and w o n y that user charges and CHFs will decrease utilization. They also fear that health expenditures will push households into poverty and point to the large number o f families that had to borrow money or sell assets to cover health care costs. This sometimes heated discussionneeds to be kept in context. Even those NGOs who are currently charging for services or drugs are generally recouping less than 15% o f total operating costs. Thus proportionately more attention needs to be focused on other sources o f hnding (tax revenue and donations) than on user charges and CHFs. household possessions; b) mortgagingor sellingland; c) borrowing from afriend or relative; d) borrowing from some one other than afriend or relative; e) sellingblood for money; andor f ) work/labor to earn additionalmoney. Source: Johns HopkinsUniversity(2004). 1.54 Community Trial of Different Approaches to Financing. In order, to deal systematically with the issue o f user charges and community financing, MoPH, with assistance fi-om Johns Hopluns University, i s carrying out a randomized controlled study o f three different approaches: (i) completely free services; (ii) user charges in keeping with the MoPH's guidelines; and (iii) Community Health a Fund (CHF) which is essentially a pre-payment scheme controlled by the community. The study has received ethical clearance from the MoPH, baseline studies have been completed, and the implementation of the study interventions i s about to begin. Final results should be available around September 2006 and 20 should provide high-quality evidence for effective policy formulation. There are also a few pilots o f different approaches to helping finance hospital care, primarily through user charges. Unfortunately, these pilots are too recent to evaluate systematically. E.Other KeyIssuesinthe HealthSector MAINTAINING A FOCUS ON RESULTS 1.55 Government has done Well in Measuring Performance. MoPH and other parts o f the Government have thus far done a credible job o f monitoring and evaluating health sector performance. There has been a large increase in regular reporting from the health management information system (HMIS). Health facility performance assessments are being carried out with third party technical support and provide a sensible way o f tracking the quality o f care inpublicly supported facilities. The 2003 MICS survey provided provincial level household data on health outputs (e.g. immunization and prenatal care coverage, contraceptive prevalence, etc.) and this same approach will be used in the 2005 national risk and vulnerability assessment (NRVA). Thus there will be an opportunity to determine what progress has been made over the last few years inimproving coverage o f services. Relatively little data i s available on key outcome variables such a mortality rates, cause o f death, and fertility. 1.56 Recommendations: Give M&E a More Prominent Role as a Central Function of MoPH. Building on the monitoring and evaluation (M&E) systems it has already put in place, MoPH needs to continue focusing on actual results on the ground so that sector objectives can be achieved. M&E i s a central function o f health sector stewardship, so senior management needs to pay careful attention to it. ("You manage what you measure.") Inpractical terms, this impliesthat: (i) BPHS and EPHS should the be revised to include a limited set o f output indicators by which to judge the success of primary care and hospital services; (ii) a person who tracks health system performance should be included on MoPH's Executive Board and be given the opportunity to regularly provide senior management an independent assessment o f progress in the sector; (iii) household surveys that provide provincial level output data should be carried out at least every two years; and (iv) mechanisms for regularly obtaining health outcome data need to be put in place. The latter could include demographic and health surveys or implementation o f demographic surveillance with verbal autopsies alun to the sample registration system inIndia. The latter approach could provide annual estimates of infant and child mortality, fertility, and cause o f death. EXPANDING SCOPEOFTHEBPHSCAREFULLY THE 1.57 PrioritizingAdditions to the BPHS. Given the resource constraints facing the health sector, it i s important that the Government carefully prioritize what it adds to the BPHS. A limited set o f criteria should be appliedto any proposed addition: (i) the burden o f diseasepreventedor cured by the intervention should be large; (ii)the efficacy o f the intervention should be clear, and the quality o f the scientific evidence supporting it shouldbe rigorous; (iii) it shouldbe easyto implement taking intoaccountboth supply-side and demand-side factors; (iv) it should be low cost and cost-effective compared to other interventions; (v) it should provide disproportionate benefit to the poor, women, and other vulnerable groups; and (vi) ideally it should be a public good or exhibit positive externalities (i.e. it provides benefits the society that are greater than simply the sumo findividualbenefits). 1.58 Iodine Supplementation as a High Priority Intervention. As an example o f a high-priority intervention, iodine supplementation followed by salt iodinationresponds to a very large problem(see section A). Iodine supplementation is clearly very effective, and the scientific evidence supporting its use is 21 incontrovertible. It is also an intervention that i s easy to implement inthe field usingexisting mass campaigns (although salt iodination may take more effort). The high level o f coverage achieved in other campaigns indicates that it will be easy to implement the intervention (supply-side issues) and there appear to be no demand side issues. Iodine supplementation i s low cost and, at $8-19 per disability adjusted lifeyear (DALY) saved, it compares very favorably to other interventions in terms o f cost-effectiveness. Iodine supplementation would also be expected to have a disproportionate impact on the poor and those living in remote mountainous areas. There i s also a public goods aspect to iodine supplementation because the community may not know how iodine deficient they are and will likely use less iodine supplements or iodized salt than i s socially optimal. Thus on all the criteria, iodine supplementation is very attractive. 1.59 Mental Health Not Currently a Priority Intervention. An example o f something that should probably not be seen as an immediate priority i s community mental health activities provided through the primary health care system. While there i s no argument about the large burden o f mental illness, there i s considerable controversy about whether community based services can make a difference. The evidence supporting these interventions i s modest. The interventions may be difficult to implement in the field partly because they require a lot o f training and supervision, and the stigma attached to mental illness further contributes to the complexity o f its successful implementation. Community-based mental health activities are also expensive compared to other interventions, and given the lack o f evidence on its efficacy, its cost effectiveness i s difficult to calculate. Nevertheless, simple treatment of depression in a PHC setting i s calculated to cost about $827 per DALY saved according to WHO. Given these concerns, community mental health should not be introduced into the BPHS at this stage. However, a sensible approach to the large burden o f mental health i s to pilot test and rigorously evaluate large-scale community mental health interventions. This i s being done by MoPH and HNI(HealthNet International), although it i s not clear whether the study has collected sufficient baseline data from experimental and control areas to reachconclusions about effectiveness. 1.60 Recommendations:Expand the Scope of the BPHS Carefully. Decisions to expand the scope o f the BPHS should be made carefully and based on clear criteria. Interventions such as iodine supplementation and fortification should be implemented as a priority. More contentious interventions like community mental health should be carefully evaluated by pilot tests before being incorporated into the BPHS. INTEGRATIONINTOBPHS OFVERTICAL PROGRAMS 1.61 It is clearly important to have vertical programs like EPI, TB, malaria, etc. that concentrate on supporting specific activities by setting technical standards and guidelines, conducting training, carrying out supervision, defining reportingrequirements, and providing special logistic needs (such as vaccines or TB drug blister-packs) that are otherwise not readily available. Inmost developing countries, there is a tension between the vertical programs and the managers responsible for delivering health services inthe field. This tension can be creative. However, it could also impede delivery o f the BPHS unless clear principals are laid out. There are already examples o f situations where vertical program staff at the provincial level, in their desire to push the program, have interfered with and duplicated the efforts of field managers charged with implementing the BPHS. MoPH needs to formulate an explicit policy regarding the relationship betweenvertical programs and managers o f field programs. 1.62 Recommendations: Clarijj the Role of the Vertical Programs in the BPHS. MoPH should ensure that: (i) there are no vertical program staff below the level o f the provinces; (ii) incentives no should be paid by vertical programs (or their donors) to staff below the provincial level to work on particular programs; (iii) the number o f vertical program staff in the provincial health office should be kept modest (maximum 2-3); (iv) the vertical programs and their staff refrain from telling field managers how to organize or manage health services because the latter are the ones responsible for service delivery 22 and have more insight into how things are working on the ground (for example, EPI staff should focus on the what of service delivery by ensuring that high coverage i s being achieved, that the vaccination schedule i s being followed, and that the cold chain i s being properly maintained, they should not tell managers how to organize EPI services); and (v) new reporting requirements by the vertical programs should be approved by the monitoring and evaluation department. ENSURING MOPHRETAINS STEWARDSHIP OVER THE SECTOR 1.63 Health Sector Development will be Dependent on External Resources. Given economic conditions in Afghanistan, it i s likely that the Government will be heavily dependent on external financing o f the health (as well as virtually every other) sector inthe medium- and even long-term. While this is hardly desirable, the alternative - a limited investment in human capital development through improved health i s even worse. Thus the Government needs to be realistic about the prospects external - financing. Many Afghans, based on their experience in the early 199Os, are very concerned that external financing will disappear in the near future. (Ifthis does happen, then virtually all health sector activities will be negatively affected, not just those being implemented by NGOs.) More realistically, external donors will continue to invest inthe health sector as has happened in almost all post-conflict situations in the last two decades. Places like Timor Leste, Cambodia, Rwanda, and Mozambique have all seen consistent and continuing external assistance inthe health sector. 1.64 Recommendation: Resources should be Channeled Through the Government. Seeing as the health sector will be largely financed by external resources over the medium term at least, it i s important for the Government that donor funds be channeled through the budget process (see section D on some o f the financial issues). This will allow MoPH to retain its stewardship o f the sector and ensure that activities are well coordinated and consistent with its policies. MoPH has a good track record o f managing World Bank resources, which should encourage other donors to use a similar approach. Inthe next few years, MoPH should work with its major donors to set up a sector-wide approach (SWAP) whereby resources would be pooled and go through the budget. Donors would be less involved inday-to- day activities and instead could limit their involvement to policy discussions, analysis, and technical assistance. 23 CHAPTER 2. EDUCATION Executive Summary i. There has been an unprecedentedleap in student enrollment. The first three years of reconstruction in Afghanistan witnessed a large jump in student enrollment, reaching by far the highest level in the history o f Afghanistan. Female enrollment in primary schools far exceeds that in the pre- Taliban period, although it remains well below the figure for boys. In 2003, the net enrollment rate for boys inprimary schools was 67%; for girls 40%. Higher education has also seen a substantial increase in the number o f students, with enrollment jumping from 4,000 students in 2001 to 38,000 in the fall o f 2004. ii. Therearepersistentlargegenderdisparities,especiallyinthesouthernprovinces. Although girls account for 34% o f total enrollment in aggregate (primarily due to high enrollment in the Kabul, Mazar-i-Sharif, and Herat cities), wide gender disparities persist in southern provinces where girls represent less than 15% o f total enrollment. Supply-side constraints (schools' geographical proximity from home, separate classroomdshifts for boys and girls, female teachers, etc.) seem to be more pronounced than limitations on the demand side (parents' willingness and ability to enroll their daughters). iii. The quality of education needs to be substantially improved. While no output indicators (student learning achievement, completion rates, etc.) are available to ascertain the current status o f the quality o f education in Afghanistan, the available input indicators (teachers' background, curricula, textbook quality and availability, conditions o f physical learning space, time on task, etc.) strongly suggest that quality i s generally poor. The lessons learned from other post-conflict countries suggest that an early focus on the quality o f education - not only access - i s key for rebuilding the education sector. The financing strategy in the education sector has to be closely aligned to the policy objective of quality improvement. iv. Overall spending levels in education must be sustained, and budget allocations within the sector should be more targetedand strategic. The current level o fpublic spending ineducation needs to be sustained in order to: (i)meet the increasing demand for education, (ii)improve the quality o f education, and (iii) narrow gender and regional gaps. Inaddition, the available resources need to be more targeted and used strategically. Policy objectives and spending patterns need to be harmonized (e.g. increasing the share of non-salary recurrent expenditures to meet the quality objective), and the effectiveness o f the use of limited resources must be improved. To this end, better indicators and monitoring systems for budget execution are critical. Allocations o f tashkeel and non-salary budget to schools, districts, and provinces should be made on a transparent basis, and the information should be available at all levels. A simple fundingformula for education budgets shouldbe developed. V. Educational administration needs to become more de-concentrated. Some o f the administration and budget execution functions, such as for use o f non-salary recurrent budget, should be delegated to the province or school level in order to increase the efficiency o f expenditure, improve the management o f schools, and enhance the responsiveness to demand. It i s equally important that Provincial and District Education Departments as well as schools participate in budget preparation. Communities and parents should be encouraged to participate in school management, for example monitoring attendance o f teachers and students, supervising minor repair work, and organizing extra-curricular activities. The geographical and logistical difficulties faced in Afghanistan are such that centralized management will 24 not improve the quality o f education at the school level. In addition, the widespread demand and enthusiasm for education shouldbe productively tapped and exploitedbeforethey fade away. vi. Strategies to respond to the anticipated large sudden increase in the demandfor secondary education should be developed. As the current bulge of students inthe Grades 1-3 moves up the system -itishopedwithout toolarge adrop-outrate-thedemandfor secondary educationisexpectedtorise significantly by 2008/2009. The present supply i s not prepared to meet a sudden increase in demand, either physically or institutionally. It is critical to develop and implement appropriate strategies, including pre- and in-service training programs for secondary teachers, secondary curriculum revision, upgrading andor expansion o f physical space with laboratories, etc. in a phased and timely fashion. Detailed costing o f such strategies for both investment and recurrent budget i s essential. vii. Higher Education needs to be revamped, with sustainablefinancing strategies. The quality o f higher education i s extremely poor, as indicated by (i) the lack o f qualified professors; (ii) outdated curricula; (iii) absence o f textbooks, reference materials, libraries, and laboratories; and (iv) poor physical environment. The governance and management system is obsolete, with over-centralization and lack o f autonomy and accountability at the university level. Universities are totally dependent on government financing and support from donors. Tuition including dormitory and food i s free. Current financing i s unsustainable, and not enough to make any improvements in the quality o f higher education. There is an urgent need to diversify financing and to find strategies for cost-sharing or cost-recovery. 25 A. Institutional and Service Delivery Frameworkinthe Education Sector 2.1 The potential contribution that the revitalized education system can make to the resolution o f various difficult issues is immense inAfghanistan. Educationi s expected to meet Afghanistan's daunting and complex social, economic, historical, and political objectives and aspirations. Enhanced human capital i s a necessary ingredient for private-sector dnven growth and poverty reduction. It i s fair to say that the future of Afghanistan depends on what and how it invests in the education sector today. There are, however, other sectors and government programs which also claim the same centrality and public resources in post-conflict Afghanistan. Moreover, the public resources domestically generated and externally financed are limited and often unpredictable. In such a situation there i s n o alternative to prioritizing and maximizing the effectiveness o f expenditures, bothwithin and between sectors. 2.2 The objectives o f this chapter are to: (i) the institutional framework and current status o f outline the education sector; (ii) review Government strategies and policy; (iii) analyze the fiscal shape o f the education sector; (iv) highlight implementation issues; and (v) recommend practical actions to improve the use of public resources and the performance o f the system. This chapter analyzes formal primary, secondary, and higher education. Vocational and technical education, non-formal education, literacy, early childhood development, and continuing education, although they are important topics, are not includedinthe analysis here. DEFINITION OFTHE SECTOR 2.3 InAfghanistan, primary education consists of Grades 1-6 starting at age 6, lower secondary education consists o f Grades 7-9, and higher secondary education Grades 10-12. According to the new Constitution, compulsory education comprises o f Grades 1-9. Education i s provided for free at public institutions from Grade 1 until the undergraduate level. Tertiary education starts from Grade 13. It includes university education for 4-6 years and teacher training for two years for primary school teachers and four years for secondary school teachers. Higher education i s available in universities, pedagogic institutes, and teacher training colleges. n Figure 2.1: EducationSysteminAfghanistan Age 1 Nursery 2 3 4 Kindergarten 5 6 Primary (Grades 1-6) Non-formal 7 8 Accelerated e K E 9 learning 10 Literacy 11 Es Skills Development 12 3 Secondary (Grades 7-9) 13 8 B 14 15 Upper Secondary (Grades 10-12) 16 General Vocational 17 18 Tertiary (Grades13-16/17) 19 20 Teacher Training College (2years) 21 University, Pedagogic Institute (4 years) 22 Medical Institute (5 years) 26 Targets Monitoring Indicators Target 3 :Ensure that, by 2015, children 1Net enrollment ratio inprimary education everywhere, boys and girls alike, will be able to 1Proportionof pupils starting grade 1who reaches complete a full course o fprimary schooling. grade 5 1Literacy rate o f 15-24 years old Target 4 :Eliminate gender disparity inprimary 1Ratio of girls to boys inprimary, secondary and and secondary education, preferably by 2005, and tertiary education to all levels o f education no later than 2015. 1Ratio of literate women to men, 15-24 years old 1Share of women inwage employment inthe non- agricultural sector 1Proportionof seats heldby women inthe national barliament 2.5 Afghanistan has a long way to go; the net enrollment rate was 54% (67% for boys and 40% for girls) in 2003, the completion rate i s not available as the bulk o f students "came back" to school three years ago, and girls account for approximately one-third o f the total enrollment. The MDGs are not unattainable, but require dedicated and sustained financial and more importantly institutional and human resources to achieve them. T na -The *** Grossfigures enrollment rate for 2020 are indicative targets data not available INSTITUTIONAL FRAMEWORK 2.6 Key stakeholders in the education sector are officials o f the Ministry of Education (MoE), educational administrators in the Provincial and District Education Departments, principals and teachers at schools, students, parents, community leaders, NGOs who are providing services in the education sector, employers who recruit graduates from the education system, and development partners who support the education sector through either the core budget or the external budget. 27 Table 2.3: Current Functional Res~oiibilities in Primarv Education Levelof Governmental FundedInternally External FundedExternally Administration (governmentalbudget) Provider (wholly or partially) Ministryo f Development o f policy and NGOs Textbook printing Education strategies Donor agencies Technical assistance Budget preparation and execution Private (education policy and Staff allotments, funding o f contractor strategies; curriculum salaries, material, equipment development; textbook Staffappointments above grade 6 development) School registration, coordination School construction & o f school construction & rehabilitation rehabilitation Salaries, material, Development and implementation equipment management o f teacher training Curriculumand textbook development Provincial Staff appointment for grade 6 & NGOs Provision o f supplies, Education below Donor agencies materials, salaries, Department Distributiono f materials Private equipment (PED) Inspection o f schools contractor Supervision Academic supervision Teacher training (in-service) School construction and rehabilitation District Education Inspection o f schools NGOs Provisiono f supplies, Department Identification o fneeds for materials PED) teachers, material, equipment, Supervision construction and repair Teacher training (in-service) School construction and rehabilitation Community mobilization Schools Provision o f education Communities Contribution to school NGOs construction, rehabilitation &maintenance (provision o f land, labor, material) 2.7 M o E has overall policy responsibility for primary and secondary education. The system i s highly centralized, with MoE making most o f the budget and policy decisions with little consultation with the provinces, districts, and schools. Nevertheless, some Provincial Education Departments and schools take "practical" actions, especially with regardto selection o f contract teachers when positions and budget are allocated. 2.8 By far the greatest provision o f education is in Government schools (97%).' NGO-run schools account for 2% and mosque-based schools less than 1%of total students' enrollment. Interms o f types o f schools, 97.5% are general schools, 1.6% madrassas, 0.7% home-based schools, and 0.1% vocational schools. 2.9 The degree o f participation of parents and communities in school management varies depending on location, and remains weak in general. Many schools have established Parent Teacher Associations (PTAs) includingrepresentatives ofteachers andparents and/or SchoolManagement Committees(SMCs) with school principals, representatives of teachers, community leaders, and parents. These committees are beginning to take on some responsibilities such as preparing school improvement plans and 'UNICEF (2003). 28 The net enrollment rate in 2003 was as high as 87% in Kabul city (boys 92%, girls 81%), 86% in Herat city (boys 84%, girls 88%), and 85% inMazar City (86% boys, 85% girls). These are indeedremarkable achievements. At the other extreme, however, the picture i s bleak. The total net enrollment rate was less than 20% in 2003 inthree provinces, Badghes, Helmand and Uruzgan. The net enrollment ratio for girls was as low as 1% in Badghes and Zabul provinces. Disparities are also noted depending on languages, notably with enrollment o f Pashto speakers much lower than average. Figure 2.3: Net Enrollment Ratio Grades 1-6: 2003 100 90 80 70 60 50 40 30 20 10 Source: UNICEF (2003). 2.14 Major constraints contributing to low enrollment seem to be on the supply side. According to the Multiple Indicator Cluster Survey (MICS) 2003, schools being "too far" (37.2%) or having "inadequate facility" (25.8%) or "no separate school (for boys and girls)" (22%) are the most frequently cited reasons for children not enrolled in schools (Table 2.4). These supply constraints are more pronounced inrural in urban areas. According to the school survey carried out by the Ministry o f Education in 2004, 73% of existing schools have not yet been rehabilitated, 20% o f schools have been rehabilitated (or constructed), and rehabilitation i s ongoing in 7% of schools. Only 15% o f all schools are for girls only, against 44% for boys (the remainder being mixed schools). 2.15 Another important constraint on the supply side i s the number o f teachers. While it has been increasing steadily, it is clearly a constraint inthe sense that provinces with more teachers per school-age children tend to have higher enrollment ratios (Figure 2.4b). This correlation appears stronger than the linkbetweenschool facilities andenrollment(Figure 2.4a). 30 Source:UNICEF (2003). Figure2.4: Supply ConstraintsonEnrollment - i I 70 **'; , 5e6 0 - * -5-E **** I 50 - ' * 40 - **+*'*. .:.. I . ~ I 30 - I Y 20 I 10 1 0 2.16 The supply side also seems to constrain enrollment for girls. While the correlation i s weak, provinces with a larger proportion o f female teachers tend to have higher girls' enrollment rates (Figure 2.5). This reflects in particular a similar correlation between availability o f schools for girls and girls' enrollment and the correlation between female teachers and schools for girls. tI 70 Ti . 60 i --e * I ! * . g 5 0- I * . I t I I ' E 4 0 I * I I I:30 - . I + . * 4 r 5 2 0 *. 10 5 I 0 ' Note: Eachpointrepresentsaprovince. Source: UNICEF (2003) for enrollmentdata and 2004 school survey. Box 2.1: A Summary o f Lessons f r o m Experiences o f Reconstruction o f the Education Sector in Other Post-conflict Countries Lessons applicable to Afghanistan include the following: Conflict generates serious backlogs in education. Damage to physical infrastructure is relatively easy to rectify. A more difficult challenge is the loss o f human and institutional capacity that frequently accompanies conflict. Teacher training frequently collapses, learners drop out, management and policy development break down, and resources are channeled to military expenditure and away from education, leaving schools without textbooks and learning materials, teachers unpaid, and schools unsupervised. Not business as usual. The added demands created by conflict, the scale o f the reconstruction challenge, the urgency o f preventing relapse into violence, and the extremely difficult operating conditions call for innovative strategies and programs that address the usual development challenges along with the additional problems created by conflict. Even though many o f the development tasks are familiar, education programming inpost-conflict societies cannot be "business as usual". Education is a development activity. While education may be an important element o f humanitarian assistance and critical for child and social protection, it i s also, fundamentally, a development activity. It should be oriented towards the country's social, economic, and political development and the longer-term interests o f the learners and society. Decentralize the system and encourage parental involvement. During most conflict situations the energy to sustain delivery o f education shifts to communities and schools, and inthe early reconstruction phase this energy can provide critical momentum to get schools reopened and the system running again. It is important that efforts to reconstruct the system do not undermine the level o f community involvement and participation that i s frequently engendered during conflict. Community action, involvement, and ownership will be key to the security and sustainability o f reconstruction efforts. Enhancing community participation can promote the effectiveness and efficiency of implementation. Central government can best convince communities o f its legitimate leadership through provision o f support to communities inways that empower them. At the same time, mechanisms that deliver resources directly to schools and communities must be progressively integrated into the emerging administrative and monitoring system, to avoid the emergence o f parallel bureaucracies. Acknowledge the importance of ongoing commitment to quality improvement. The most profound and lasting impact o f conflict on education i s o n quality rather than on access. Post-conflict situations often induce an "access first, quality later" approach. Rebuilding quality i s one o f the most significant challenges inreconstruction, and should be a consideration from the outset. Quality is a concern ofall communities, parents, teachers, and students. Strategies to address it are most successful when implemented as an ongoing process rather than as a response to some standard determined historically or externally. Involving communities, parents, and teachers in discussing quality improvement pays good dividends in terms of recognizing quality improvement as a process. Discussions about how to improve the quality o f learning and o f the learning environment are as important intemporary learning spaces under trees or canvas as they are in established systems. Teachers are the most critical resource in education reconstruction. It i s vital to make early moves to consolidate the teaching corps and ensure their appropriate remuneration, utilization, and training. Conflict usually has profound and negative impact o n a country's teacher corps, which frequently becomes dispersed, sometimes killed, and often unpaid or underpaid. Teacher supply presents a complex array o f problems foI reconstruction. Reconstruction usually begins with a cohort o f existing teachers inherited from previous systems and from community or private initiatives that sprang up during conflict. In the early post-conflict period, qualified teachers may be attracted out o f the teaching profession to more rewarding opportunities. while a large number of unqualified teachers may be drawn into the system, creating a need for botk rationalization and professional development. Source: Buckland (2005). 32 2.17 In addition to constraints on the overall supply, there are concerns about the quality o f the existing supply of services. Although no output indicators (student learning achievement, completion rates, etc.) are available to ascertain the current status o f the quality o f education in Afghanistan, the available input indicators (teachers' backgrounds, curriculum, textbook quality and availability, status o f physical learning space, time on task, etc.) indicate that the quality o f education i s poor. According to the 2004 school survey, only 14% o f permanent teachers ("karmand'? had two years o f education beyond high school. About half o f them are high school graduates or equivalent, and one-third have the qualification o f grade-11 education or below. Inaddition, approximately one-third o f schools run double shifts and 23% o f schools triple shifts. While this does not mean that teachers inthese double- or triple- shift schools actually teachdouble or triple shifts (usually they have differentteachers for different shifts), some actually teach more than one shift. This often has a negative impact on the quality o f teaching, as teachers do not or cannot spend enough time on preparation and tend to be more tired. Finally, non salary expenditures in schools represent less than 10% o f operating expenditures (see below). 2.18 Overall, the lessons learned from other post-conflict countries suggest that an early focus on the quality o f education -not only access - is key for rebuilding the education sector and gaining the confidence o f parents that the system can deliver. In Afghanistan, this i s particularly important because parents needa good reason to keep their children in school as the opportunity cost is high. 2.19 Reform in the quality o f education i s taking place. M o E i s implementing a comprehensive and systematic Teacher Education Program (TEP) which aims to address teacher education requirements in Afghanistan in a coordinated manner with support from multiple donors. It includes the development o f teaching standards and a unitary teacher education curriculum as well as a national in-service training system. It will also include the development o f a national pre-service teacher education system addressing issues of institution accreditation and individual teacher certification. Curriculum and textbook revision also started in 2003. The new curriculum framework has been developed for primary education, new textbooks for grades 1, 2, 4, and 5 have been completed, and work i s ongoing on textbooks for grades 3 and 6. 2.20 Demand-side constraints for school enrollment and attendance also exist: parents cited the need for children's "domestic work" (17.2%), education being "not necessary" (15%) and "household income" (7.1%) as the reasons their children were not enrolled in schools (Table 2.4). Children who work or who are orphans have a higher risk o f not being enrolled (NICS, 2003). To address these issues, some programs are in place, including, food for education for students, girls, and teachers, and social mobilization activities carried out by the SMCs andor PTAsto encourage parents to send their children to schools. However, the impact o f these interventions has not been systematically evaluated. 2.21 Demand i s expected to grow in particular for secondary education in three years time. If the current cohort o f students in primary education moves up through the grades without dropping out, and new students at age o f six continue to flow into the system, the bulge o f students i s expected to move into secondary schools from 200812009 onward. In a high case scenario (95% or the appropriate age cohort start grade 1, drop out rate is less than 5% from grade to next in secondary education), the number o f students graduating from grade 12 will be more than 200,000 by 2013 (Figure 2.6). 34 h. 35 consolidation facilitates the possibility o f institutions attaining a size that is economically viable and thus leads to a better chance o freaching reasonable quality standards. 2.25 Similarly to lower levels, the quality o f supply i s also problematic ifjudged by a number o f input indicators. The proportion o f PhDs in the faculties i s very low (0% in several of them). Also, higher education institutions in Afghanistan do not have a tradition o f linkages with the productive sectors. Faculties and departments work inisolation from employers. Neither the universities nor the polytechnics have a Board o f Trustees with representatives from the world o f employment and civil society. Creating such linkages and conducting tracer studies on a regular basis will be an important aspect o f improving the relevance o f higher education programs. 2.26 While the demand for higher education is rising, as shown in the increase in enrollment during the past three years, it will still be manageable for the next 6-8 years, as the stock o f students who are in secondary schools remains small. The demand i s expected to rise substantially from 2012 or so onward, when the current bulge o f students inGrades 1-4 move up to the universityentrance level (Figure 2.7). Source: MinistryofHigher Education data, 2004. 36 Figure2.7: Distributionof Grades 100% Grade 14 90% - - 80% 70% 60% - Source: Table 2.5. B. The Government's Strategy andPoliciesinthe EducationSector RATIONALE FOR PUBLIC INTERVENTION 2.27 While public intervention and financing in education i s often taken for granted, it i s useful to review briefly the grounds on which the use o f public resources in the education sector can be justified. Conventionally, the arguments o f both economic efficiency and equity have been used. First, public intervention i s justified on efficiency grounds when reliance on private markets would be socially less than desirable, because of externalities, public goods, non-competitive markets, and lack o f information for "consumers". Indeed, in addition to positive benefits captured by the individual (e.g. higher wages, higher social status, etc.), education has positive externalities for the collectivity, such as better health practices that limit the spread o f infectious diseases and decrease maternal and child mortality, higher voter participation, contributions to research and development, etc., and these larger benefits are underestimated by individuals. Second, public intervention can also be justified through a concern with the equity o f the distribution o f services, i.e. to help people that cannot afford to send their children to school or to a university. While in theory there should be a financial market to provide this financing, currently it does not exist in Afghanistan and i s likely to remain weak in the foreseeable future. Nevertheless, each o f these cases for public intervention needs to be made carehlly. None justifies the complete subsidization o f services: an equally important question to "why" the government should intervene i s "how" -i.e. the form o f public intervention. 2.28 From a legal perspective, the new Constitution o f Afghanistan provides a right to education for every citizen o f Afghanistanup to the undergraduate level. Afghanistan i s a signatory o f the International Convention o f the kghts o f the Child, which stipulates that the state should make primary education compulsory and available free to all. The new Constitution specifies grades 1-9 as compulsory education. 2.29 Inthecaseof educationinAfghanistan, itisarguedthatkeygovernment functionswouldinclude: provision o f services (managed at different levels o f sub-national administration); financing, regulation, information gathering and dissemination; and creating incentives for communities and the private sector to participate. Currently the core educational service in the education sector -- namely management o f teaching learning in schools -- i s mainly provided by the Government. Privately-provided schooling opportunities are very limited. However, NGOs and private contractors provide services in the form o f 37 building schools, organizing teacher training, printing textbooks, etc. This form o f public-private partnership i s and will be critical for education inAfghanistan. There have also been home-based schools supported by NGOs, especially for girls, and they will likely remain important in certain provinces for some years to come. 2.30 For primary education, which i s compulsory and most critical part o f the entire education system, Government financing and provision remain important. However, for secondary and higher education, where private rates o f return are higher than in primary education, private financing and provision will become increasingly important. This i s especially the case in Afghanistan at present, where public financial resources are very modest and the implementation capacity o f the Government is limited. The Government should consider the option o f encouraging the private sector to enter and provide educational opportunities at secondary and higher levels in order to lessen the pressure on the Government and to increase the opportunities for students. This o f course requires a proper regulatory framework to protect equity and quality. GOVERNMENT'S STRATEGY INTHE SECTOR 2.3 1 Since 2002 a number o f "policy" documents have been prepared by the Ministries o f Education and Higher Education, special commissions, and the Transitional Islamic State of Afghanistan. They include: a report by the High Commission for Education (2003), a draft medium-term policy framework by the Ministry o f Education (2004), Technical Annex on Education in Securing Afghanistan's Future (2004), and the Strategic Action Plan for the Development o f Higher Education2004-2008 (2004). These documents outline a vision to provide good-quality education for all and opportunities for secondary and higher education o f international standard. However, the new Ministry o f Education, after President Karzai was elected, has not yet made any official statement with regard to the policy or strategies for the education sector. Inprimary and secondary education, a coherent and comprehensive sector strategy i s yet to be developed by the new Islamic Republic o f Afghanistan. 2.32 M o H E has prepared a strategic plan for the higher education sub-sector from 2004 to 2015. The strategy forms a good foundation, although it will benefit from further prioritization and sequencing o f activities. The draft higher education law has also been prepared by the Ministry. The draft law stipulates the responsibilities o f the state, public and private providers, with an emphasis on increased institutional autonomy and accountability o f higher education institutions. It classifies different types o f higher education institutions, and provides a framework for their organizational structures. Furthermore, for the first time ever, the Government i s allowing private institutions to operate in Afghanistan. For example, the American University in Afghanistan is currently being established, and it i s expected to open its doors to students in the spring o f 2006. The adoption and implementation o f the law will be a major step forward inthe reform and revitalization o f the higher education systeminAfghanistan. C. Fiscal Shape of the Education Sector PUBLIC SPENDINGON EDUCATION 2.33 The Government has spent a large portion o f its public financial resources on the education sector over the last three years. The operating budget increased by 250% from 2002103 to 2005106. Teachers constitute one o f the largest portions o f the civil service. The budget for MoE, however, has been declining both in absolute terms and as a share o f the total ordinary budget. The share decreased from 22.7% to 17.3% between 2003104 and 2005106. It somewhat increased for M o H E over the same period. 38 2002103 2003104 2004105 2004105 2005106 Planned Estimates Ministry ofEducation 1,912 12.2% 5,630 22.7% 6,000 19.8% 5,084 19.1% 5,705 17.3% Min.ofHigher Education 183 1.2% 331 1.3% 342 1.1% 388 1.5% 591 1.8% Total OrdinaryBudget 15,623 24,750 30,332 26,605 32,883 2.34 The tables below show the allocation o fthe ordinary budget for the education sector by economic categories. For MoE, approximately 90% o f the recurrent budget during the past three years has been allocated and spent for teachers' salaries. For the MoHE, approximately 50% spent for salaries and 40% for the runningcost and food at dormitories. Similar to MoE, less than 10%has been allocated and spent for non-salary and non-dormitory expenditures. Very little resources are available for the purchase of indispensable pedagogical inputs such as internet access, textbooks, journals, and lab materials. Available resources such as classroom space are not used efficiently, and most university classes finish at 1:00 pm. In addition, the public universities are unable to charge tuition fees as the new Constitution guarantees fiee education up to the undergraduate level. As a consequence, financing and per-student expenditures for higher education are very limited. Table 2.8: Allocation of Ordinary Budget by Category 2003104-2005106: Ministry of Education Source: MinistryofFinance. Table 2.9: Allocation of Ordinary Budget by Category 2003104-2005106: Ministry of Higher Education Source: Ministryof Finance. 2003104 2004105 2005106 Educationand VocationalTraining 250 I 15% 475 I 18% 600 116% Total InvestmentBudget 1,718 2,680 3,666 39 2.35 In terms of actual expenditures of the ordinary budget (recurrent cost) in 2004105, 94% o f the budget i s spent for salaries for teachers and administrative staff and only 5% i s spent for non-salary expenditure. If the recurrent expenditures in the development budget (textbook printing and teacher training) are added, the share ofnon-salary expenditure increases to 15%. However, it i s still much below the Education for All (Fast Track Initiatives) "benchmarks" o f the share o f the non-salary expenditure at 33%. Materials such as textbooks, stationery for the schools, students' ht, etc., are all provided to schools "in kind" by MoE, NGOs, or UNagencies such as WFP (World FoodProgram) and UNICEF. 2.36 The requested amount o f development (investment) budget for education and vocational training, which includes requests from the Ministries of Education, Higher Education, and Labor and Social Affairs, has been increasing since 2003/04. However, the development budget i s not fully funded, so this increase means very little in practical terms. The development (investment) budget o f M o E for 2004/05 was $187 million (requested amount), half o f which was actually disbursed by the end o f the fiscal year. Eighty-nine percent o f the disbursed amount was spent for infrastructure, mainly school buildings. K e y program activities in the development budget o f the education sector are shown in the following table. The request from M o E and MoHE for investment budget in 2005/06 has increased to more than six times o f the actual expenditure in 2004/05; this appears unrealistic both interms o f availability o f funds and the absorption capacity. Table 2.11: Ministry of Ei 2004105 2005106 Sub-program Key Activities Education TA for policydevelopmentand 0.92 0.42 0.50 6.62 2.49 education I buildin Source: Ministryof Education. INTERNATIONAL COMPARISON 2.37 Compared with other countries inthe South Asia regon (Table 2.12), education's share o f public expenditure inAfghanistan i s average if one excludes the external budget, but low once it i s included (the external budget includes significant security expenditures and large infrastructure investment projects). However, countries in the South-East Asia region such as Malaysia and Thailand allocate more than 20% o f the public expenditure for education, well above the 14% o f core budget spending on education in Afghanistan. The share o f the education budget in public expenditure, irrespective o f key educational 40 output indicators in Afghanistan such as enrollment and completion ratios remain among the worst in the world (Table 2.13). Table 2.12: International Comparison of the Education Spending 2000/2001 Country Share inthe GDP Share inthe Public Data (YO) Expenditure(YO) source UNESCO (2005); UNDP (2004); Social Republic of Vietnam and the World Bank (2005); and Ministry of Finance, Afghanistan (first number = core budget only; secondnumber = total, including external budget) Table 2.13: Primary Completion Rate: International Comparative Data 1990 and Most E :ent Years Country Primary - Most RecentYea - Year Girls Progress Rating Boys Total - Year Afghanistan 6 14 29 22 1989 0 15 8 1999 Seriously off track Bangladesh 5 47 54 50 1990 72 68 70 2000 Ontrack Cambodia 6 32 46 39 1997 na na 70 2000 Ontrack India 5 61 78 70 1992 63 88 76 1999 Offtrack Iran 5 88 101 94 1990 89 95 92 1996 Offtrack Korea 6 96 96 96 1990 98 95 96 2000 Achieved Malaysia 6 91 91 91 1900 90 89 90 1994 O f ftrack Nepal 5 29 67 49 1988 58 70 65 2000 Offtrack Pakistan 5 30 57 44 1989 na na 59 2000 O f f track Philippines 6 91 88 89 1989 na na 92 1996 Ontrack Sri Lanka 5 94 106 100 1990 114 108 111 2001 Achieved Tajikistan 4 na na na 75 80 77 1996 Offtrack Thailand 6 90 95 93 1990 na na 90 2000 O f ftrack Timor-Leste 6 na na na 43 55 54 2001 Offtrack Turkey 5 82 99 90 1900 89 95 92 1994 Ontrack Vietnam 5 1 na na na - 98 104 101 -2001 Achieved Source: Achievin; Jniversal Primary Education by2015: A 'hance Every Child Note: Ratingis based on the 2015 PCR estimated usingthe historical trend of increaseinthe PCR (PCR annual increase) 41 PUBLICFINANCE AND GENDERAND REGIONAL EQUITY 2.38 Eighty percent of the ordinary budget is spent in the provinces while the remaining o f 20% is spent in M o E in Kabul (Table 2.14). By contrast, the non-salary portion o f the recurrent budget expenditure is split 66% inprovinces and 34% inMoE. Table 2.14: 2004/05 Ordinary Budget Expenditure: Central MoE vs. Provinces (Afs) Salaries and Grand Allowances Non-Salary Total Center 902 109 1011 MOE 19% 33% 20% Provinces 385 217 4072 81% 67% 80% Total 4756 326 5083 100% I 100% I 100% I Source: MoF / AFMIS 2.39 Significant disparities seem to exist ineducational inputsand outputsby province and urban-rural locations. As shown in the Figure 2.3, for example, the net enrollment ratio i s as high as 85-87% in Kabul, Herat, and Mazar cities for Grades 1-6 (an average o f boys and girls) whereas it i s 20% or below inBadghis, Hilmand, andUrzuganprovinces. Figure 2.8 highlightssignificant disparities withregards to per student recurrent expenditure across provinces. The Education Public Expenditure Traclung Survey shows that the bulk o f non-salary expenditure i s provided in kind by the UN agencies and NGOs, with significant disparities across provinces. Figure 2.8: Operating Public Expenditure per Student (Afs. in 2004/05) I INote: Kabul i s not representative as some expenditures are miscoded to "central government" as opposed to Kabul province. Source: 2004 school survey for number o f students and MoF for expenditures per provinces. 2.40 Currently, the Government ordinary budget for primary and secondary education i s not specifically targeted at poor or female students. Some provinces, districts, or schools try to recruit more female teachers (which i s an important element in encouraging girls' education, Figure 2.5), but these efforts are not systematic and there i s no clear policy or strategy fkom the central MoE. The World Food Program(WFP) provides food for education, some o fwhich i s targeted at female students and teachers. 42 2.41 To address equity issues and also improve the transparency and accountability o f the system, it i s critical that the MoE moves towards a simple formula based funding, for example, budget allocation to schools and/or provinces based on per student number. D.ImplementationIssuesandAccountabilityFramework 2.42 From curriculum development to teacher training, approval o f the recruitment o f teachers and administrative staff, development, production and distribution o f textbooks, and especially planning and management o f the budget, M o E in Kabul manages most decision-making. Some production functions related to the supply of education, such as school construction, textbook printing, and teacher training, have been outsourced to private contractors and NGOs. This form o f public-private partnerships appears to have been instrumental in generating efficient services without compromising the Government's legitimacy or increasing the size of civil service. NGOs' contribution in mobilizing communities and establishing PTAs and SMCs also has been useful. The challenge remains how to delegate some administrative functions, such as operations and maintenance o f school buildings and management of associated expenditure, school mapping and selection o f construction sites, implementation o f teacher training activities, to province, district, and school levels. BUDGETPROCESSES 2.43 The recurrent budget of the education sector n the last three years has been prepared in a rather arbitrary fashion including "bargaining" between the M o F and MoE. Mainly the Minister o f Education and the Director o f Administration and Finance in MOE are involved in the preparation o f the budget. Consultations with line departments and Provincial and District Education Departments in the budget preparation process have been minimal. 2.44 Approximately three months before the end o f the fiscal year, individual schools prepare an assessment of the number o f staff that they will require in the following year. This i s based on current staff on the payroll, expected number o f new students in the following year, retirement o f staff, etc. Schools submit this tashkeel request to the District Education Department (DED). The Tashkeel includes four categories: (i) permanent teacher staff (teaching karmand); (ii) contract teaching staff (teaching agir); (iii) permanent administrative staff (staff karmand); and (iv) contract administrative staff (staff agir) . 2.45 The DED verifies the tashkeel submitted by the schools, through visits to schools or discussions with principals, and then forwards the request to the Provincial Education Department (PED). In some cases the DED prepares a summary of the total tashkeel for its district, whereas in other cases the DED merely forwards to the PED individual school requests with their sign o f approval. On the basis o f the tashkeel receivedfromthe different districts, the PEDprepares a consolidated request for the province as a whole and forwards it to MoE. MOE makes a budget based on the average cost o f a staff member and submits both the salary-budget request and the staff request to MoF. On the basis o f several rounds of consultations, M o F finally approves the total tashkeel that can be recruited by the MOE, and the total budget o f the MOE separated into different spending categories. 2.46 MOE on the basis o f the total approved staff allotment and budget, tashkeel request from Provinces, performance of each province in the previous year and its own experience, allots to each Province: (i) staff that can be recruited and (ii) budget that can be spent. On the basis of the annual the allotment, the M O E also prepares a quarterly takshis by Province outlining the staff that can be paid and 43 the budget that can be spent under different account heads. MOE then sends the details o f the quarterly tahhis and the total staff allotment to the individual Provinces and the Provincial Mustoufiat. This has generated some confusion as MoF usually also transmits these details to its Mustoujats, with the data not always reconciled. 2.47 The PED on the basis o f the staff allotment received prepares a plan for recruitment o f the additional staff. Teachers and staff are appointed by the Province and sent to individual schools based on priorities decided by the PED. Incase adequate qualified teachers are not available at the Province level, the Province instructs the schools to directly appoint a specific number o f contract staff (agir). The schools receive applications from local youth and appoint them as contract staff. Once the permanent staff is allotted by the PED, these contract staff are let go. 2.48 According to the Education Expenditure Trachng Survey, 50% o f sampled schools, 53% o f districts, and 89% o f Provinces reported that they had prepared a tashkeel requesting staff for 2005/06. Butonly 6% o f schools, 17% o fdistricts and 55% o fProvincesreported that they hadprepared non-salary budgets for 2005/06. MOE prepares the budget by extrapolating fiom the previous year's actual expenditure and adding costs o f certain large requests received from Provinces. 2.49 Schools are more involved in the actual expenditure than in the planning of non-salary budgets. For all non-salary payments (e.g. purchase o f desks, purchase o f stationery, purchase o f oil for vehicle, repair o f windows), the school prepares a request giving details in a standard form and sends it to the DED. This request may or may not have estimate o f the financial cost o f the request. The DED after verifying the legitimacy o f the request and making its own estimate o f cost (in case the school has been unable to do so) forwards it to the PED. The PED, once convinced o f the necessity o f the request and that they have adequate budget for its requests the mustouJiat to pay the amount. The school then collects the amount from the mustoufiat and incurs the expenditure. 2.50 A major challenge in channeling non-salary recurrent budget to schools i s an efficient flow o f funds to schools using the Government system. There has been some confusion among MoE, MoF, PEDS,and mustoujats about necessary steps, authorized signatories, and forms to be completed, which has resulted indelays infund transfer. 2.51 The development budget o f the education sector (which includes some recurrent spending such as teacher training costs, textbook printing) has been prepared by key departments in M o E in consultation with donors. First,the Minister organizes a meeting with directors o f various departments (construction, teacher training, compilation and translation, planning, administration and finance, vocational education, etc.) and instructs them to prepare the list o f projects and budgets: Once such project proposals and budgets are prepared, the list i s simply complied without much deliberation or effort at prioritization or consolidation. Meanwhile, donors also prepare a list o f possible projects to support in light o f the MoE lists. The Minister and directors of M o E meet with donors and discuss the budget proposals. It is M o E that makes the final decision on the projects to be included or dropped in the final submission to MoF. M o E negotiates with M o F on the "ceiling" o f the budget although the development budget is not fully funded. 2.52 For higher education, the Director o f Planning in MoHE takes the lead in preparation o f the budget. The participation o f the universities inpreparation o f both recurrent and investment budgets has been limited. It i s strihng that the Deputy Chancellor responsible for administration and finance inKabul University in 2004/05 was not aware o f the budget amount for Kabul University. Chancellors o f other universities similarly are not aware o f their recurrent budget. Until 2004/05, the chancellors of universities were authorized to sign purchase requests only up to the Afs 1,000, and any procurement above this amount had to be authorized by MoHE. This ceiling was subsequently raised, however. 44 CAPACITY OF THE MINISTFUES 2.53 The capacity o f M o E and MoHE remains weak in terms o f preparing the budget, implementing and overseeing public expenditure in the sector, and achieving good real learning outcomes. For example, the drastic increase in the 2005/06 budget without corresponding implementation capacity and funding is an indicator o f weak technical and administrative capacity of these Ministries. The low investment budget i s partly a reflection o f the sector's limited absorption capacity. The Education Consultative Group has been dyshnctional since the summer of 2004. and coordination among and between the ministries and donors i s weak. The different and often short budget cycles o f donors provide little budget predictability for M o E and MoHE. 2.54 M o E i s currently preparing its second-stage proposal for the Priority Restructuring and Reform (PRR) program (the Government's targeted administrative reform program). The proposal mainly focuses on the configuration o f the Ministry inKabul, e.g. a reduction o f the number o f departments and appointment o f the secretaries as chief executive officers while the Minister and Deputy Ministers remain political positions. It does not address the issue o f the relationships between the central Ministry, Provincial EducationDepartments, District EducationDepartments, and schools. 2.55 The accountability framework in the education sector i s weak, but improving gradually. The Education Management Information System (EMIS) has been set up in M o E (see next section) and i s expected to enhance accountability by generating more information. In addition, visits to schools by PEDSand DEDs appear to contribute to better monitoring and also timely provision o fnecessary support. 2.56 It is critical that the Government adopts an approach for achieving quality education for all, which includes broad-based participation at all levels o f Government administration (national, provincial, and district) and communities (schools) in taking responsibility for planning and implementation o f education services. The goal i s to gradually introduce systems o f mutual accountability between Government at different levels and communities for ensuring that schools are performing their best. An accompanying goal i s to incrementally delegate greater decision-malung and spending authority to provinces, districts, communities, and schools. Inthis way, all national stakeholders will be responsible for frank performance evaluations o f the education system and for identifying problems and putting things right. 2.57 A first step has been the creation o f School Management Committees (SMCs), in many provinces, which include the school principal, teachers' representatives, community leader(s), and a representative from parents. Seventy-three percent o f schools surveyed in the Education Expenditure Trachng survey had SMCs. Some SMCs have developed their own school improvement plans, which summarize a simple strategc plan o f the schools and prioritize key activities and needs. The schools in Badakhsan, Bamyan, Kapisa, Logar, and Parwan provinces, under a World Bank-financed project, have been provided with school grants to implement their plans. This i s expected to be an annual grant, rangng from $1,000 to $10,000 depending on the number of students enrolled, with renewal subject to satisfactory performance. The progress o f school grant implementation and the statement o f expenditure i s posted in the schools for transparency (see picture below as an example). Preliminary findings based on field visits and interviews indicate that this has enabled schools to obtain essential items inan efficient manner and has strengthened community involvement in school management. 45 as p ,t" ccf tvatc sctiools) is almost non-ex .A ai' I 46 language training are springing up in major cities o f Afghanistan. The legal framework to monitor and ensure the quality o f services provided by these private schools i s weak and should be developed. Beyond direct education service provision, the private sector could be used as contractors for school construction and textbook printing. Currently, different modes o f school construction are implemented, but no systematic comparison of the different approaches is available. Before scaling up activities, an evaluation o fthe various approaches i s essential. E.Prospects PRIMARY AND SECONDARY EDUCATION 2.63 The overall level o f ordinary budget spending in education i s considered adequate in terms o f its percentage against total public expenditure and GDP. However, the non-salary portion o f the ordinary budget remains marginal, and expenditure patterns do not show any particular strategy interms o f gender- or poverty-focus. Overall spending (disbursement) o f the investment budget i s rather low for the reconstruction needs o f the country; this appears to be due to weak implementation capacity in the Ministries. Given the gigantic needs for reconstruction o f schools and universities, capacity building o f teachers and university professors, and the bulge o f students moving up the grades, the investment budget and its expenditure need to be increased substantially and sustained at least for the next decade. The costing simulation below shows a steady increase in the requirement for both recurrent and investment costs from 2004 to 2015, based on the current number o f students, teachers, and schools and a set o f unit cost assumptions. It i s anticipated that the total recurrent cost will increase to approximately $425 million (assuming teacher salaries increase at the same pace as per capita GDP); and investment costs will rise to approximately $255 million by the year 2015. The annual per student recurrent expenditure (excluding investment and technical assistance) i s expected to rise from the current level o f $3 1to approximately $56 by 2015. The pace o f this increase is in sync with, but slightly lower than, the anticipated growth o fper capita GDP. *The assumption employed in the simulation is that existing schools will be rehabilitated by 2007 47 HIGHER EDUCATION `- The current proliferation o f public higher education institutions and these total dependence on government financing, including for dormitory and food, i s completely unsustainable. It is almost impossible to improve the quality o f education as well as to expand access at tertiary level solely with public financing. Although the Constitution assures "free" education until the undergraduate level in public institutions, there need to be strategies for cost-sharing and approaches to user fees. In addition, the private sector should be encouraged to provide services within an appropriate regulatory framework and quality assurance mechanism. F.SummaryofRecommendations Table 2.17: Summary of Recomme lations Issues Recommendations ConcreteNext Steps Gender disparity in Address supply-side constraints: Assign priorityto girls schools enrollment and more schools (including satellite and schools for bothboys and attainment schools) ina close geographical girls section for school proximity for girls, safe school construction and rehabilitation. . environment with proper sanitary Review the impact of food for facilities, more female teachers. education for girls. Develop targeted approaches, Develop culturally and socially including demand-side strategies, in appropriate communication . the provinces where girls' strategies to promote girls enrollment i s low. education. Develop strategies to recruit more female teachers where girls enrollment is low. Review . teacher recruitment Develop more targeted financing Establish reliablebaseline data on within provinces) programs. the educational input and output disparity inenrollment Explore options for demand-side indicators byprovince/district. and attainment interventions. Develop a simple formula based financing mechanism, e.g. per capita . based Define quality standard, ascertain Set a minimumstandard for input primary and secondary baseline, and monitor progress. quality at school level: teacher's education Start monitoring learning outcomes. qualification, school building Increase non-salary recurrent budget standard, minimumtextbook and . and expenditure. learning materials requirement. Develop simple assessment tools. Increase non-salary recurrent budget and expenditure. Accelerate curriculum and textbook . Begin the curriculum and secondary education in reform for secondary education. textbook reform for Grades 7-9 . 2008109 Accelerate bothpre- and in-service immediately. Gather international . teacher training for secondary good practice. schools. Review the current qualification Accelerate school construction for and experience o f secondary secondary schools withappropriate teachers. 49 Table 2.17: Summaryof Recommei ations Issues Recommendations ConcreteNext Steps laboratories and ITbasedonrational 1 Update and complete the GIS part school mapping. o f the EMIS. 1 Develop strategies andpolicies on 1 Organize consultations and debate private secondary education. on the role o f the private sector in secondary education. 1 Assess willingness and ability to pay for secondary education. 'oor quality and 1 Overhaul the academic programs Establishpartnership .elevanceo f hgher and course structures, and arrangements (fellowships, :ducation substantially upgrade the scholarships, faculty exchange, qualifications o f faculty members. TA for curriculum development) 1 Increase the overall level and with foreign universities and efficiency o f financing. faculties. 1 Develop quality assurance and Consolidate smaller institutions accreditation mechanisms for higher for efficiency gains and diversify education institutions. sources o f funding including cost sharing and recovery from users. Encourage privateuniversities to enter to stimulate competition and to absorb excess demand. Examine quality assurance andor accreditation bodies inthe Region and explore possible linkages/partnerships. Heavily centralized 1 De-concentrate some o f the Review the current functions at Educational administrative functions to PEDS each level and identify admmistration andor schools where it makes inefficiencies. sense. Assess the institutional capacities at each level o f the educational administration. Increase the role o f schools in budget preparation Increase reporting onbudget management Limited and 1 Promote sector-wide approachesand 1 Assess the current capacity and unpredictable public harmonization o f donor funding, prospect for SWAP and capacity financing for education financial management and building requirements. procurement according to the 1 Develop national education national system, as appropriate. program strategy and framework 1 Develop regulatory framework to with costing, prioritizing, and encourage private financing and phasing o f activities. provision, especially at secondary 1 Review international good and higher levels. practice interms o fthe regulatory 1 Charge user-fees for services such framework for private education, as dormitories, food, and and tailor it to the Afghan context. examinations. 1 Increase the institutional autonomy o funiversities for revenue generation. 50 CHAPTER 3. POWER SECTOR Executive Summary 1. Demand for electricity is high in Afghanistan, from households as well as potential or existing investors. Despite poverty, numerous Afghans willingly are paying very high prices for power in areas not served by the country's small, fragmented electricity grids. Supply remains very weak. Only 10% o f the population has access to gnd-supplied power, one o f the lowest ratios in the world. In addition, the quality o f service i s poor, including in Kabul. Technical losses, even though poorly measured, are very high. ii. ThefirstchallengeistoexpandAfghanistan'spowersupplycapacity. Thisrequirescareful planning o f investments as well as effective implementation. The existing Power Master Plan provides a rational sector plan for developing the supply o f power, with an emphasis notably on the Northern Transmission Line to import low-cost electricity from Uzbekistan and later other Central Asia Republics. The Power Master Plan can be an effective vehicle for donor coordination. It is important that investments be made in line with this plan. Interms o f effective implementation, this chapter identifies important challenges to develop the capacity o f the Ministry o f Energy and Water (MoEW) to implement and oversee this investment program, notably its capacity to budget and procure contracts (see below). Related to the issue of power supply expansion i s the issue o f geographical disparities. These are evident between cities, depending in particular on their geographical location with respect to access to imported electricity and/or existing hydroelectric facilities. But even more fundamental i s the gap between urban and rural areas, so there i s a needto develop a strategy to expand access to electricity inrural areas. iii. The second challengeisto operate and maintainthese investmentsinan effective and sustainable way. Costrecovery i s critical inthis respect. The average tariff collected by D a Afghanistan Breshna Moasessa (DABM) i s currently o f only five cents per kwh, compared to an average unit cost above 12 cents per kwh. A recent decision to reduce the power tariff inHerat has increased this gap. A clear tariff policy, aimed at moving toward financial viability, i s required. Efforts should be made to improve billing and collection; Government agencies should set a good example in this regard. In addition, the management o f operations and maintenance (O&M) will have to be modernized, possibly through some private sector participation. iv. Relatedto this issue is the need to restructureDABM. In2004/05, the utility showed a small positive net revenue, but this does not account for the fact that most o f its operating costs (fuel supplies) are paid by donors, outside o f DAl3M's accounts. Hence efforts to restructure and corporatize DABM should be given high priority. This entails the recruitment o f a new management team, legal and regulatory reforms to corporatize the utility, and computerization o f accounts, billing, and collection systems. v. Finally, institutional capacity needs to be built up. Capacity development in the M o E W i s a priority. The focus should be on (i) the capacity to oversee the investment program (notably by developing the planning, procurement, and financial management capacity o f the Program Implementation Support Unit) and (ii) the capacity to regulate the sector. This also requires the Ministry to focus on these responsibilities, leaving other tasks to the private sector. 51 A. Service Delivery and Institutional Frameworkinthe Power Sector 3.1 This review o f public expenditures in the power sector focuses on the Ministry o f Energy and Water (MoEW) and its State-Owned Enterprises (SOEs) which relate to the power sector. It excludes the irrigation sector which i s part o f the newly merged MoEW. Public expenditures are reviewed in the context of: (i) service delivery and institutional fkamework o f the power sector; (ii) Government's the strategic and policy framework; (iii) the fiscal shape o f the sector; and (iv) implementation issues and accountability framework. The chapter concludes with a summary o f recommendations. SERVICE DELIVERY Table 3.1: InternationalComparators: Source: World Bank (2002). 3.2 Access to Service. The energy sector i s characterized by a very low level o f development both in terms o f access to modem energy services and the institutional and technical capacity in the sector. Officially, only about 10% o f the population has access to grid-supplied power - one o f the lowest ratios inthe world. This low level of access is also reflectedinone ofthe lowest per-capita consumptionrates o f electricity (Table 3.1). Some 230,000 customers are connected to the public grid, of whom approximately 37% are in Kabul. The other provinces have even lower access rates, with rural areas virtually unserved. 3.3 These data reflects the number of so-called main consumers, i.e. those who have service contracts with the utility and whose consumption is supposed to be metered. The power supply code that was adopted some 20 years ago allows main consumers to provide power through their meters to so-called minor consumers. Statistics from the utility on the number o f metered consumers understate the number o f actual consumers, as a main consumer can connect several neighboring households (minor consumers) to hisher meter. Moreover, these statistics do not capture electricity provided by other (non-gnd) sources, e.g. private generators, small diesel or hydro schemes not operated by the utility, etc. It i s virtually impossible to assess but clearly access i s extremely l o w by international standards the actual access to and consumption o f electricity given the scarcity o freliable data inAfghanistan. 52 450 MW Available 271 M W Hydro 261 M W (instal ReconstructionProject (closing Dec 2605) IEmergency Power $125 million (closing- Jan 2009) Rehabilitation Proiect III I 3.4 Quality of Service. Distribution systems in Afghanistan have suffered severely as a result o f physical destruction, insufficient investment, lack o f maintenance, and outright theft o f materials over the last quarter-century. The substations and low voltage distribution networks are dismantled and overloaded; very few components of this system could be used in the future. Quality o f supply i s poor and technical losses are high. The existing facilities provide unreliable service, inmost places for only a few hours a day. Of the about 450 MW o f installed generating capacity, only 270 MW are available, and most o f the unitsrequire overhaul or replacement. Most people meet their energy needs through reliance on non-commercial forms o f energy such as biomass, supplemented with commercially available wood and coal. Recent years have seen the beginning o f the rehabilitation o f the country's power system, but many more years will be required before the power system will be able to function adequately and meet the economy's demand for electricity. 3.5 Technical Losses. The substations and low voltage distribution networks o f Kabul and other cities are grossly inadequate, overloaded, and mostly outdated. Substantial reconstruction and expansion of the distribution systems, based on modem least-cost design concepts, will be required. Aside from this state o f disrepair and network inadequacy, there i s another issue which i s resulting in high economic losses for Afghanistan. Kabul's public network currently supplies consumers through roughly 84,000 electricity meters. These are the meters o f those customers which the electricity authority, D a Afghanistan Breshna Moasessa (DABM), has contracted to supply. However, the actual number o f households and commercialproperties which are connected to the network, while unknown, i s clearly far in excess of 84,000. The meters are mainly mounted on the pole from which the customer is fed or grouped in metal cubicles placed on the walkways, and each measures the supply o f electricity to the officially contracted customer. Besides the contracted customer, the meter also measures the supply to the several other consumers that the contracted customer may agree to have connected to his meter. Although it i s known that illegal (and un-metered) connections exist, there is n o good data on the extent 53 o f this problem. The resulting extensive reticulation consists o f very small diameter wires, which often runfor hundreds ofyards to the consumers' premises. The wire is procuredand owned by the numerous consumers, and because o f its small diameter and long length, it results in poor voltages and high technical losses, which ifsaved could be used to supply other consumers. This i s especially important under the circumstances which prevail inKabul, namely constrained generation supply and highmarginal costs o f production of about US$ 18-28 per kwh (depending on the cost o f fuel) compared to an average tariff o f US$2.1per kwh. 3.6 Cost Recovery and Pricing Reform. The most recent data available from DABM (for 2004/05) indicate that the average effective tariff (revenue collected from sales o f electricity per kwho f electricity billed) in Afghanistan i s approximately US$5.1 per kwh (if the utility's miscellaneous revenue is included, the figure rises to US$ 5.5/kwh), while the utility's costs expressed in terms o f kwhbilled i s US$ 12.3. There is, thus, a significant gap between costs and revenue on a system-wide aggregate level. These averages, however, conceal large regional variation and are primarily determined by the operating parameters for Kabul, which accounted for slightly more than half o f the power billed in the indicated period (Table 3.3 below). In cities with imported power and diesel generation, such as Mazar-e-Sharif and Kunduz, average tariffs are generally higher than in cities where the power supply is based (or was based historically) on low-cost hydropower (such as Kabul and Kandahar). The data from DABM indicate that the average cost recovery rate at on the level o f the utility i s about 40% largely due to the great gap between total costs and total collections inKabul. 3.7 InKabul, cost recoveryis muchlower given the higher cost of supply when the 45 MW North West Kabul thermal power plant i s operating. This plant provides average on 3040% o f Kabul's electricity. Kabul i s dependent on this plant to supplement the unreliable hydro power and to maintain what little electricity i s provided to the city. In SY 2003/04 the cost o f operating this plant was an estimated US$ 11-15 per kwh. The increase in world fuel prices raised the operating costs to an estimated US$ 18-28per kwhduring2004/05 depending on the price o f diesel fuel.' Neither DABMnor the Government pays for, or can afford to pay for, this fuel. In 2003/04, the fuel cost was paid for by IDA, ARTF, and USAID. In2004/05, USAIDassumed fullresponsibility for paying for the fuel and for plant operation, which required well over $40 million. USAID and other donors recognize the need to continue paying for fuel for this plant until less expensive imported power can be transmitted from the Northern Transmission System (NTS); however, it i s not clear that funding will continue to be available. The NTS i s not expected to be completed before October 2008. The cost o f diesel fuel was inthe range of US$25-30 per liter in 2003104 compared to US$35-50 per liter in2004/05. 54 Region I Effective Power Billed Tariff System Total (US#/kWh) Kabul* 2.1 15.4 49% Kunduz 4.6 II 3.2 4% Herat* * 2.5 5.2 7% Nangarhar 7.3 1.3 6% Kandahar 3.3 1.1 14% NATIONALAVERAGE 5.1 12.3 3.8 The power situation in Kabul remains poor, with little or no reprieve in sight before the N T S i s operational (i.e. three years from now). In response to crisis, MoEW has purchased several diesel generating sets for installation in various locations in the city. Notwithstanding the technical problems associated with the installation, operation, and maintenance o f these units and the substandard way they were procured (see para 3.41), it i s unclear where the estimated $10 million per year for the required diesel fuel will be sourced in order to operate these units, as the utility does not generate sufficient revenue to cover this expense. This case reflects both the pressure to improve the supply o f electricity and the reluctance o f the utility and the Government to address cost recovery as a means to improve operations. 3.9 InJune 2005, MoEW substantially reduced the power tariff inHerat, reflecting the lower cost of imported power from Iran and Turlanenistan (which displaced the previous inefficient and costly diesel units). The new rates are Afs 2 per kwh for residential and Afs 5 per kwh for commercial customers, compared to Afs 4 and 7 per kwh previously. This decrease will negatively affect Herat's ability to expand its distribution networks from internal revenue sources. It i s recommended that future tariff decreases are put on hold untilproper cost recovery analysis can be completed. INSTITUTIONAL FRAMEWORK 3.10 Organization of the Public Power Sector. M o E W manages, controls, and operates the power sector o f Afghanistan through eight departments and four SOEs, o f which the largest i s DABM. 3.11 The Government established five enterprises for the management o f the power sector under the 1980 Enterprises Act, which are theoretically separate and autonomous but in practice are closely controlledby M o E W (one o fthem has been convertedinto a ministerial department): Da Afghanistan Breshna Moasessa (DABM), in charge o f generation, transmission, and distribution o f electricity inAfghanistan (542 1employees). Spinghar Construction Unit (SCU), in charge o f civil works for power stations and substations and for all civil works relating to the power sector (385 employees). Power Construction Unit (PCU) incharge o f erection o f all electrical works like transmission and distribution lines and substations (420 employees). 55 Water and Power Engineering Consultancy Authority (WAPECA) responsible for design (including field survey) o f new generation, transmission and distribution projects (182 employees). WAPECA has now been converted into a department o f MoEW. 0 New and Renewable Energy Research and Development Centre (Jadid Energy Enterprise), responsiblefor activities relating to development o frenewable energy (149 employees). 3.12 The state utility, DABM, is responsible to MoEW for operation and maintenance o fthe country's generation, transmission, and distribution assets, as well as for metering, billing, and revenue collection for the electricity it produces and distributes. DABM lacks the appropriate governance structure, technical competence, and financial resources to improve the country's electricity services. In spite o f being defined in Afghanistan's 1986 Usage o f Electricity Act as an autonomous enterprise, DABM i s in practice closely controlled by MoEW and depends heavily on donor support for its non-salary operational and investment funds. As mentioned earlier, USAID provided in excess o f $40 million for diesel fuel to operate the NW Kabul Power Plant in 2004/05. This is roughly double the total expenditure reportedby DABManddwarfsthe $1millionDABMshows asnetrevenue (see Table 3.6 inSection Cbelow). 3.13 The four remaining enterprises (i.e. not including WAPECA, which i s now a department o f MoEW) are viewed as SOEs by the Ministry o f Finance. As such they are required to submit quarterly financial statements, to pay taxes on gross revenue and turnover, and not to receive subsidies from the government budget. However, there i s no evidence that DABM has submitted quarterly statements to date. 3.14 Inaddition, it is not likely that the SOEs, other than DABM, have the potential for achieving viability on their own without financial support for equipment and technical assistance to inject modem management and commercial practices. It is recommended that the SCUbe liquidated as there are several private sector civil construction companies in Afghanistan which have the capability to carry out this work. The larger portion of the most qualified staff in the PCU, which carries out more specialized electrical work, have left for higher paying jobs. It i s not clear that PCU needs to remain as an SOE, although additional analysis i s required. For the PCU to be a viable enterprise, it will need assistance to build its technical, commercial, and managerial skills. This could be done by the private sector through sale o f the company, or another option i s to work with the PCU to buildits capacity to compete through utilizing its services to build distribution systems currently under assessment by various donors. However, based on experience under the first IDA Emergency Infrastructure Reconstruction Project, the second option requires significant technical assistance and oversight by donors to ensure efficient and good-quality work by PCU. Some maintain that as long as external donor fimding continues to flow to foreign companies for inffastructure development within Afghanistan, all reasonably talented staff will flee SOEs to more lucrative positions. While this builds capacity for individual Afghans, it undermines the longer-termdevelopment o f local companies such as the PCU. B. The Government's Strategy and Policies inthe Power Sector GOVERNMENT STRATEGY AND POLICY DOCUMENTS 3.15 The Government o fAfghanistan has identifiedthe power sector as a major constraint to economic growth and, in various high-level strategy and policy documents, has called for the power sector's development as an urgent priority. There i s a strong rationale for public financing o f the capital requirements o f the entire power chain (generation, transmission, and distribution) under present and foreseeable conditions inAfghanistan: the massive financing required for rehabilitation and, inparticular, 56 for expanding access; the power sector's current lack o f attractiveness to private investors; and the monopoly character o f the transmission and distribution functions. 3.16 This rationale for public interventionshould not be viewed as ajustification for free provision o f power, or even for a government monopoly on activities related to the power sector. First, the leading role o f the Government (andor donors) in providing the capital needed by the sector should be complemented by efforts to fully recover the recurrent costs incurred in the delivery o f power to consumers, but this i s not clearly articulated in Government policy. Second, there i s some scope for increasing the private sector's participation in the sector, most likely through management contracts and operation o f selected investments (see below). 3.17 The Government's formal strategy for power sector development i s embodied in three documents: (i)the National Development Framework (NDF) that was presented by the Government in April 2002, one o f the three pillars o f which is physical infrastructure, including energy; (ii) Securing Afghanistan's Future (March 2004), which detailed a public investment program for the power sector over the period 2004-2010; and (iii) the "Electricity Sector Policy" which the Government o f Afghanistan approved inAugust 2004. 3.18 The "Electricity Sector Policy" outlines an ambitious vision according to which, by 2010, the power sector should consist o f "autonomous, financially viable enterprises providing reliable, low-cost electricity supply service to all Afghan citizens inan environmentally responsible manner, consistent with sound business practices." This vision, which calls for the Government to relinquish its role as operator of the sector, i s to be realized through a combination o f measures: (i)rehabilitation o f existing infrastructure and construction o f new physical assets in generation, transmission, and distribution; (ii) improving utility operational efficiency (reducing losses, improving collections); and (iii) establishing an independent regulator. Emphasis i s given to promoting private sector participation inthe sector, although it is clear that for the foreseeable future it will be most appropriate for DABM to remain under State ownership. 3.19 While there i s a highdegree o f consistency inthe policy orientation o f these three documents, the challenges o f securing financing and ensuring the timely implementation o f specific priority projects as well as advancing policy reforms have been formidable, and progress to date has been mixed. Most noteworthy are achievements in generation (e.g. re-commissioning o f the 45 MW NW Kabul Power Plant and the ongoing rehabilitation o f hydropower plants). The transmission line that i s presently being built from the border with Uzbehstan to Kabul is one o f the most significant infrastructure projects currently being carried out inthe country and, when completed, will enable import o f lower-cost power to Kabul and points along the route. The challenge o f the rehabilitation o f distribution systems and expanding access to grid-based power i s greater, and that o f expanding rural access to electricity greater yet (see below). INSTITUTIONAL AND REGULATORYREFORMS 3.20 Reform o f DABM i s central to the institutional reform o f the power sector (see Section 4 for a detailed discussion of the restructuring o f DABM). The "Electricity Sector Policy" calls for the separation o f utility functions from MoEW and for the creation o f a Board o f Directors for DABM, including representatives o f the Ministry o f Finance (MoF) and other stakeholders. But no steps have been taken to realize this important institutionalreform. 3.21 Interms of the sector's regulatory framework, the two most significant aspects called for under the Government's policy are the establishment o f an independent regulator and the revision o f the electricity law (last revised in 1984) to allow for, among other things, private sector participation in the 57 sector. Here, too, there has been no progress to speak of, but in view o f the present state o f the sector, these reforms are not on the critical path. Given the power sector's low level o f development and the overarching need to build capacity in the responsible ministry, there i s no compelling argument for the establishment of an independent energy regulator inthe coming years. Instead it i s envisaged that MoEW would enhance its regulatory capacity. This i s provided for in the proposed new organizational structure o f MoEW. UntilDABMbecomes a credit-worthy entity and there i s transparent regulation, there will be limited or no large-scale private investment attracted to the power sector in Afghanistan. These are both necessary, although not necessarily sufficient, conditions as concerns about rule o f law and security remain serious constraints. PRIVATE SECTOR PARTICIPATION 3.22 While Government policy calls for increased participation o f the private sector in the economy, the application o f this policy to the power sector i s likely to be more limited than in other spheres of the economy. The prospect o f private (in particular, foreign) financing to rehabilitate and expand power services i s unlikely given the low level o f cost recovery in the sector. In addition, any private participation that involves even limitedfinancial risk i s likely to be constrained by current perceptions o f security and political risks. Nonetheless, there i s some potential for private sector participation in the development o f the power sector in Afghanistan. The most promising prospect based on current information would be an integrated gas-to-power project at Sheberghan, which could be structured as a build-operate-maintain contract in which international donors assume the capital financing risk and the private operator takes the operating risk. In such a transaction the commercial risk (i.e. the payment for the power produced) would likely be taken by the Government and backstopped by the international donors. However, the more likely structure will be a turnkey EPC2contract with a 5-7 year operation and maintenance agreement.3 Box 3.1 describes various types o f public-private partnerships to build and operate power assets. 3.23 There i s also potential for the deployment o f small-scale private domestic capital in the power sector, particularly inrural areas and inurban areas not served by the public utility. Anecdotal evidence suggests that small-scale, informal private provision of power from individually owned generator sets i s talung place; an appropriately "light-handed" regulatory regime could potentially increase the importance o fthis source o fprivately produced and distributedpower inthe economy. * Engineering, procurementandconstruction This i s basedon discussionswith USAID which i s undertakingthe feasibility study andhas expressedinterest in structuringand financingthe contract. 58 Box3.1 Forms of Private Sector Participation There are numerous forms o f public-private partnerships. A typical way o f presenting them in a simplified way shows the main categories on a horizontal axis, where the extent o f participation o f the private sector grows from left to right: Public Private Partnership I Works Build Full & Operate Privatization/ Services Transfer Sales of Assets Extent of PrivateSector Partnership Works and services contract: A works and/or services contract is an arrangement in which the public utility contracts out specific works (e.g. rehabilitating and expanding a distribution system, construction o f a new power plant, etc.) or services (e.g. technical assessments or project management for large works contracts) to the private sector. Operation and maintenance contract: An operation and maintenance contract i s an arrangement by which a private company is entrustedwith various types o f tasks usually performed by the public authority, such as the day-to-day operation and maintenance o f existing electricity operations (e.g. power plant). Concessions: A concession is an arrangement under which a public entity, owner o f the power asset (e.g. generation plant, transmission line, etc.), delegates to a private entity (concessionaire) the responsibility for providing and maintaining a specified level o f service to electricity users in exchange for the right to collect revenue from those users. Unlike the previous forms of public- private partnerships, a concession shifts some o f the financial risk to the private sector. Concessions may take various forms: 0 Under a Build Operate Transfer (BOT) concession, the responsibility o f the concessionaire i s not limited to operation and maintenance of the infrastructure but also comprises initial construction, upgrading, or major power rehabilitation component. Large investment and consequent mobilization o f private funding sources is therefore required from this company and is to be repaid from the revenue collected from electricity users through the tariff. BOT stresses the responsibility of the private entity during construction and operation o f the power asset and the handing over (transfer) o f the assets to the public entity at the end o f the concession period. The lugh initial investment required from the private sector and the consequent long concession period make the distribution o f risk between the parties a key element o f success in such schemes. Many variations o n this type o f contract have been implemented with a growing number o f acronyms used to label them: o BOO: Build,own, andoperate type project financing o BOOT: Build, own, operate, andtransfer type project fmancings o BOT: Build, own, andtransfer type project fmancings 59 DEVELOPMENTAL DISPARITIESINTHE SECTOR variation in tariff levels and tariff structures - despite demonstrated willingness and ability to pay, in 3.24 There are two power sector-related disparities that have a developmental impact: (i)regional Kabul tariffs are considerably lower than in other regions, and far from cost-reflective; and (ii) urbadrural disparity - public funds spent on the power sector overwhelmingly benefit the generally urban the consumers o f gnd-supplied electricity, while the population o f the country i s overwhelmingly rural. While the "Electricity Sector Policy" calls for MoEW to "encourage the expansion o f access to underserved and rural communities", at present little financing i s being devoted to rural energy issues through the M o E W (or DABM)budget. Some small-scale power projects have been financed through the National Solidarity Program (NSP), administered by the Ministry o f Rural Rehabilitation and Development. According to NSP data, over 2,600 sub-projects with a budget o f over $50 million have been approved for small power projects in villages across the country. The overwhelming majority o f these projects (over 90%) are for diesel generators; the remaining are micro-hydro schemes. It is estimated that these projects will provide an estimated 1.6 million Afghans access to electricity. However, there are serious concerns about the sustainability o f the diesel generator projects from a technical, financial, and environmental perspective. It i s unclear that the villages have the capacity to operate and maintainthe generators and to pay for the fuel to keep them operating. These aspects are now being addressed by the NSP oversight consultant. C. Fiscal Shape of the Power Sector 3.25 The fiscal dimensions of the power sector are defined largely by the revenues and expenditures o f the relevant portions o f the national budget administered by MoEW. The budgets o f M o E W and DABM are essentially separate, including on the level o f staff (i.e. no DABM staff are on the M o E W payroll as far as i s known). There are no transfers from M o E W to DABM. At the same time, it should be noted that there are some minor and/or indirect links between DABM and the budget. DABMpays corporate taxes and, as an SOE, its liabilities are ultimately backstopped by the Government. Moreover, DABM as an entity benefits from development projects that are administered by M o E W and not reflected on DABM's books. 3.26 Inview ofthe effective separationo f accounts, the discussion that follows treats the finances and budgets o f MoEW and DABMseparately. OPERATINGBUDGET 3.27 Inthe context o f the overall national operating budget, operating expenditures on power are a small portion o f the total: in 2004/05 and 2005/06, 0.6% o f the total operating budget was spent on the subprogram Energy, Mining, and telecommunication^.^ Table 3.4 below presents data on MoEW's total approved allocated operating budget for 2004/05 and the analogous proposal for 2005/06 (power only). These figures correspond to about (500) staff who worked inthe Ministry o f Water and Power which was recently merged with the Ministry o f Irrigation to create the MoEW. The overall M o E W proposal for the 2005/06 operating budget (Afs 200 million) covers the merged ministryand uses three main categories in place o fthe categories usedpreviously. The available data do not disaggregate for the power sector alone; accordingly, the actual figures for the power sector would be less than the figures noted here. 60 2004/05 I 2005/06 1 Sources:2004/05: Afghanistan OperatingBudget,An Overview for FiscalYear 1383, Ministryof Finance; 2005/06: Datafrom CounterpartChiefFinancialOfficer, MoEW 3.28 In terms o f the breakdown o f the operating budget by economic classification, MoEW is not outside the norm for other ministries. The percentage breakdown for M o E W across codes 21,22, and 25 i s 51%, 34%, and 16% respectively. This compares to the mean average for all ministries o f 56%, 35%, and 9%. DEVELOPMENTBUDGET 3.29 The Power Sector Master Plan (final report dated October 2004) provides the basis for investment decisions. This Power Sector Master Plan was also usedas the basis for defininginvestments inSecuring Afghanistan's Future. The investment priorities as described in the Power Sector Master Plan and Securing Afghanistan 's Future are still relevant, and the 2005/06 National Budget broadly reflects these priorities. These priorities were determined on the basis o f a least-cost expansion plan taking into account specific features o f the power sector inAfghanistan today (notably the emergency need for power supply inKabul, and the benefits of diversification o f supply) and projected demand growth invarious parts o f the country. (See followingparagraphs for key deviations.) 3.30 In 2003/04, only 55% o f the approved budget o f $86.1 million for the power sector was committed. (This was prior to the requirement to approve a fully funded budget.) Only $8.4 million was reported as disbursed, equivalent to 18% o f the committed amount, although this may be understated since MOF did not have full information on the external budget. The approved development budget for the power sector almost doubled in 2004/05 to $160.7 million (subsequently increased to about $178 million). Disbursement ratios also improved over the previous year to 42%. The recently approved budget for 2005/06 shows an 11% drop in the development budget approved for the power sector (Table 3.5). 3.31 The large majority o f funds in 2004105 were to begin the rehabilitation o f all the large hydro plants, related key transmission links, re-commissioning the Kabul NW power plant - which effectively doubled the amount o f electricity delivered to Kabul in the winter - and rehabilitate part of the Kabul 61 distribution network. With the exception of the Kabul NW power plant which was re-commissioned in January 2003 (about 6 months after contract signature), the implementationperiod for rehabilitating other power assets requires significantly more time (18-36 months), depending on the scope o f work. Most o f the contracts to rehabilitate generation plants were issued to the original equipment manufacturers given the emergency nature of the early investments. This resulted in high costs which were compounded by the security risk being charged by firms. Even when items were competitively tendered, the number o f bidders have been few and prices have consistently exceeded cost estimates - even when such estimates were increased to reflect country risk. FY TotalApproved Core External Unfunded Disbursed 2003104 86.1 * 38.4 8.4 2004105 160.7 53.4 107.3 74.1 2005106 142.6 84.2 58.4 135.0 3.32 Roughly half o f the projects put forward for financing in 2005/06 are unfunded. The large number o f unfunded projects and the decrease in external financing in comparison to 2004/05 is inpart attributable to a few key donors, notably USAID, who were not able to commit financing until such time as the financing was approved formally by their respective g~vemments.~However, also included are several projects which were added late in the budget process and without consultation with the donor group. A particularly egregious (unfunded) example i s the $210 million project ($10 million in2005/06) for the feasibility study and construction o f the transmission line from Herat to Kandahar to Kabul. This i s a remnant of the Soviet planning days to build a transmission ring around the country, although it was clearly rejected in the recent Power Sector Master Plan as being uneconomic in the medium term due to the long distances between relatively small load centers. 3.33 Future Investment Strategy. InSecuring Afghanistan s Future, the Government articulated its plan to extend the availability of electric power inthe main regions o f the country by (i) investing heavily inrehabilitation of the existing system, (ii) increasing supply, in part by relying more on power imports; and (iii)expanding the country's generation, transmission, and distribution infrastructure. The Government has set a target o f adding 730,000 connections by 2010. This would result in an increase o f the access ratio in urban areas from the current estimated 27% to 77% by 2010, and an increase in the access ratio countrywide from the current 10% to almost 25% by the same date. Under this ambitious plan, by 2015, the urban access ratio would increase to almost 90% and overall access to 33%. Approximately $2.8 billion may be neededbetween 2004 and 2010 to make progress toward these targets. This requires about $350 million to be committed each year on average. To date, commitments have been substantially less. 3.34 Donor Consultative Group. There i s generally good coordination among the donors inthe power sector and regular coordinationmeetings are convened by MoEW. There are six key donors inthe power sector: two multilaterals (ADB and The World Bank) plus ARTF which contribute through the core budget and four bilaterals (Germany, India, Iran, and United States) which contribute through the external budget. To date, ADB, WB, and ARTF have committed (i.e. approved) $260 million in funding for the power sector, with about an equal amount from the four bilaterals. The total commitments to date exceed $500 million. The disconnect with the figure inthe National Development Budget i s due to the fact .that donor commitments are multi-year whereas the budget figures reflect what i s expected to be disbursed in the given fiscal year. USAIDbudget approval came through after the finalization ofthe Afghan budget. 62 POWERUTILITY(DABM)FINANCES 3.35 Revenues in the power sector are collected through DABM. The revenues collected only cover staff salaries and minor operating expenses and are not supplemented with transfers from MoEW. Although fuel and raw material purchases account for a large part o f DABM's total expenditures (some 46% in 2004/05), the company's revenues do not suffice to meet major operating expenses, such as fuel to run the NW Kabul Power Plant (about $40 million per year) and fuel assistance elsewhere in the country, routine and periodic maintenance o f facilities, or to contribute to rehabilitation and expansion o f the infrastructure. Implementation o f basic efficiency measures (loss reduction, improved collections) together with the needed tariff rationalization (particularly in Kabul) would greatly increase the sector's revenue-earning potential and ability to finance its long-term rehabilitation and expansion. Table 3.6 provides summary data on DABM's revenues and costs inrecent years, and Table 3.7 shows an overview o f the revenue and cost structure for 2004/05. (See Table 3.9 for detailed data by DABMregional office.) Year 2002/03 2003104 2004105 Expenditure 9,018,264 18,761,909 31,794,936 Revenue 9.975.771 19,864,944 32,898.959 1Net Revenue I 957,507 I 1,103,035 I 1,104,023 1 Note:Net revenuebefore interest, taxes, depreciation mln Y O Afs Revenue Sale o f electricity 1,461.6 93% Miscellaneous 117.6 7% Total 1,579.2 100% costs I Wages I 227.6 I 15% I Fuelandraw materials* 702.6 I 46% ImDorted electricitv 337.1 1 22% Miscellaneous 208.8 14% Total 1,526.2 100% 3.36 DABMpays the usual corporate taxes (2% turnover tax on gross revenues and 20% profit tax), reportedly havingremittedAfs 47.5 millionto M o F for 2004/05. 3.37 Given the power utility's insolvent state and the likelihoodthat grant financing o f fuel for the NW Kabul plant most likely will be o f limited duration,6 there i s significant fiscal and operationalrisk implicit inthe very low tariffs inKabul. This risk is heightened by GOA'Sintentionto install additional generator sets in Kabul to respond the capital's power crisis; n o source o f financing for the fuel has been identified for the new generator sets. Movement toward cost-recovery through tariff rationalization i s thus a matter ~~ USAIDfundingis approvedon ayear-to-yearbasis, andas is the casewith any donor, the generalintentionis to move away from fundingrecurrent expensesas soon as possible 63 o f urgency. Inorder to develop proper cost recovery, it i s essential that DABMdevelop an understanding o f its actual cost of service, which is currently impossible due to weak internal accounting practices and lack o f technical data. D.BudgetingandImplementationIssuesandAccountabilityFramework 3.38 Overview: Weak Capacity. Overall, the capacity in the power sector to carry out core accountability functions i s weak, both at MoEW and DABM. This i s particularly evident in the implementation by M o E W o f the major capital investments that are being made in the sector, and in specific areas such as procurement and financial management. While development projects that are funded from the core budget benefit from the availability o f the Project Implementation Support Unit (PISU), a team o f foreign consultants funded by ARTF and are managed inaccordance with the fiduciary requirements o f the international contributors to the core budget, there i s a clear need for capacity- building in the implementation o f all development projects (including those financed directly by donors and those financed from the national budget), so that Afghan staff can eventually take over responsibility for these functions. The integration o f PISU into the routine operations o f M o E W will be an important step in building capacity in these areas. In addition, significant capacity building i s required for other, non-projectrelated areas which are fundamental for management o f the Ministry 3.39 As is common in other sectors, the low civil service pay scale is not sufficient to retain professional staff (most have left for higher-payingjobs with donors, NGOs, the UN, etc.) and to attract younger, professional Afghans who can replace the aging workforce which possesses technically outdated skills. The younger staff currently employed by the Ministry typically lack even the most basic qualifications. Motivation to perform well i s minimal, as staff often have other jobs to make ends meet and there i s no career planning available. The majority o f work i s carried out by a relatively small number o f Ministry employees. The Priority Restructuring and Reform (PRR) process has begun in the Ministry,althoughprogress has been extremely slow and the results far from certain. Ithad earlier been agreed that the PISU would be the first to qualify under PRR. However, this appears to have been rejected by the Civil Service Commission, resulting in inability on the part o f the Ministry to attract suitable candidates to the unitresponsible for ensuring that the development budget i s implemented. 3.40 Budget Preparation. MoEW's capacity for preparingthe budget and overseeing public spending inthe sector is weak, butinthe last year MoEW has hadmore support from externaladvisors. There is a general concern that more realism i s required in the budget-planning process, i.e. that the initial budget requests prepared by the Ministry should better reflect actual implementation capacity. For 2005/06 the ministryrequested an operating budget allocation on the order o f Afs 1billion, but this was reduced to about Afs 200 million by the Ministry o f Finance (for the entire merged ministry). The preparation o f the development budget i s generally good, although it i s difficult for M o E W to prioritize projects (all projects are considered priorities). In addition, the process i s still fragle with respect to including uneconomic projects in the budget (e.g. the Herat-Kandahar-Kabul transmission line). The counterbalance i s that donors are unlikely to fund such projects, and the Government does not have sufficient discretionary resources to fundthem. 3.41 Procurement. The structure o f MoEW includes a Procurement Unit (reportedly with a staff o f 60) which requires considerable strengthening both interms o f its technical (engineering) capacity and in procurement principles and practice. Some recent cases o f procurement illustrate the extent and range of procurement implementation issues. In 2004/05, the Ministry o f Finance approved, in two separate allocations, a total of $13.5 million in domestic resources to be used by M o E W for rehabilitation o f microhydel schemes ($8.5 million) and to purchase diesel generator sets for Kabul ($5 million). While a 64 contract was signed for the latter purpose within weeks o f approval, no contract has been signed to date for the rehabilitation of microhydel schemes (repeated tenders failed due to, among other reasons, the absence o f engineering specifications in the procurement documentation). Both the extreme quickness with which the contract was signed for the diesel generator sets and the extreme delay inthe contract to rehabilitate the microhydel plants reflect lack o f implementation capacity and objective and transparent internal procedures within the line ministry to ensure good governance. Moreover, the delivery o f the diesel generator sets is incomplete long after the agreed delivery date, which further illustrates a basic implementationproblem. 3.42 Recent experience also includes instances o f procurement that were rejected by M o F due to unspecified tender procedures or procedural violations. The fact that MoF exercised control in these cases i s encouraging but does not obviate the need for considerable improvement in MoEW's capacity to carry out procurement and the transparency with which this function i s executed. 3.43 DABMalso carries out procurement for operating expenses (e.g. fuel andraw materialpurchases accounted for 46% o f DABM expenditures in 2004/05), but the limited information on how this procurement takes place makes a meaningful assessment o f the process impossible. Over 2002/03- 2004/05 miscellaneous expenditures have grown from 8% o f DABM's total expenditures to 14%. Little i s known about the composition o f these expenses and the procedures followed in malung them; given their growing significance in overall DABM expenditures and the need to understand the actual cost o f service, these expenditures should be better accounted for. 3.44 Inadequate and Unreliable Data Collection by the Power Utility. The overall framework for collection, analysis and use o f information for management decisions i s inadequate. The utility, which accounts for most o f the sector in terms o f both employment and revenue collection, lacks a commercial orientation and the basic organizational and information infrastructure (including such basics as computers with standard office software) required to collect and process data on utility operations. Data on power load, production, dispatch, and imports are often not available inthe utility's central office, and data on financial and physical parameters are unreliable. All data are recorded by hand, which increases the likelihood o f errors indata recording and considerably complicates any analysis. 3.45 An important measure o f the efficiency o f power sector operations is the level o f aggregate technical and commercial losses, but the available data in Afghanistan do not allow for a robust calculation o f this parameter. Technical losses, as reported, are highby developed world standards, but not by developing country standards. However, commercial data, to the extent that they are reported, are not reliable, and without this information, it i s ultimately impossible to obtain a credible measure o f the sector's efficiency and o f the extent to which theft and corruption are problems. 3.46 Despite this generally negative assessment o f implementation capacity and accountability in the power sector, improvements are slowly occurring in some areas, for example in the recently introduced requirement for DABM to submit quarterly financial statements to MoF. These statements are not yet audited, but this development represents the beginning o f efforts to increase accountability inthe sector. 3.47 RestructuringLReform of DABM. The reorientation o f DABMto a commercial utility i s central to the on-going efforts to improve the performance o f the power sector in Afghanistan. The particular challenge in this regard i s to effect a fundamental change in the utility's workmg culture and to create a commercial orientation to the utility's operations. Absent these reforms, the risk i s significant that the power systemwill remain a serious impediment to the country's economic development for a long time to come. 65 3.48 MoEW is in the process o f contracting an international firm that will provide management and advisory services to define and perform all o f the tasks required to incorporate DABMas an independent company with four operationally autonomous Regional Business Units (RBUs). The advisors will manage the recruitment process for new management teams in each RBU and assist the management o f each RBUin improvingefficiency, commercialization, and expansion. New billing and accounting and asset management systems will be implementedas part o f this assistance. A key question to be resolvedi s whether fiduciary functions such as procurement and financial management would be most appropriately handled on a centralized or decentralized basis (as effectively happens now), and whether other administrative functions should be centralized. Whatever organizational model i s selected, it i s clear that there i s a need for additional institutional capacity building in these important functional areas. Moreover, without addressing the issue o f pay scales, DABMwill flounder and will be unable to maintain or attract sufficient numbers o f qualifiedpersonnel. E. Summary ofRecommendations 3.49 Based on the analysis in this chapter, summary recommendations are put forward in Table 3.8 below. Table 3.8: Summary f Recommendations Issue Recommendation CostRecovery and TargetedSocial Assistance. Ifproper (i) calculationofthefullcostrecoveryofhydro-based The pricingof electricityis neglected,no investmentprogram electricitydistributedinKabul(even ifsekminglyfully will beable to cope with the loadincrease fuelledby under- depreciated) shouldbe a priority. The minimumobjectiveis to pricedand/or non-paid-forelectricity. The Governmenthas raiseelectricity tariffs to a levelinline with energycamers shownwillingnessto raise tariffsby doublingthemduring competinginthe heatingsector (e.g., fuel wood, LPG, other thewinter two years ago. However, defininga tariffpathto liquidfuels). full cost recoverylevelsrequires anunderstandingof the (ii) Refrainfrom loweringtariffs inother cities (e.g. Herat, full cost of serviceandwill needto beinline with Mazar, etc.) where consumershave a track recordofpaying improvementsinthe quality of service. Inaddition,tariffs close to costrecoveringprices were recentlyloweredinHerat. (iii) Governmentministries andagenciesto fully budget for their Governmentanddonors cannotbeexpected(nor canthey power consumptionandpaybills on a timelybasis. afford) to paythe full cost for expandingaccess. Alternatively, directbudgettransfers to DABMcouldbe Consumerswill needto pay connectionfees (which considered. apparentlyalreadyoccursincities like Herat). Targeted subsidy schemes shouldbedevelopedto connect thepoor. (iv) MoEWto developeconomic regulatorycapacity. The Governmentwill needto becareful to target capital (v) Fast-trackcompletionof the Northto Kabultransmission line subsidiesandnotprovideacross-the-boardconsumption to allow least-cost importedpower to besuppliedto Kabuland subsidieswhichencouragewaste andtypicallybenefitthe reducethe needfor expensivepower generatedusingdiesel fuel. better-off. Definerespectiveroles of Governmentandthe private Pursueprivatesector participationon apilot basiswith the sector inthe power sector. Define specific institutional- Sheberghangas-to-powerproject. legalandregulatoryrequirementsneededto laythe foundationfor future privateinvestment. Modemizeistrengthenbasic commercialand (i) Restructure/reformDABW to allow for commercial accountabilityfunctionsat the utility orientation;corporatize under new Board of Directorswith new management teams (ii)ComputerizeDABM'saccountsandbillingandcollection (iii) Implementprocurementtraining course for all procurementstaff Building MoEW capacity (i) RecruitAfghan counterpartsto PISUwith adequate salariesto attract qualified staff (ii) PISUforimplementationofallcorebudgetprojects Use to ensure transparent internalcontrolswith respectto procurementandfinancialmanagement Prioritizationof investmentprojects Adhere to the Power SectorMaster Plan, following principles of least-costexpansionanddiversification of supplysources 66 CHAPTER4. MINISTRY OF MINESAND INDUSTRIESWITH A FOCUS ONEXTRACTIVEINDUSTRIES Executive Summary 1. Extractive industries, principally miningand hydrocarbons, offer excellent potential for counties like Afghanistan, by providing a direct source o f economic growth and diversification o f the economy as well as fuels and materials that are essential for fostering growth in other sectors. Exploitation of mineral resources will contribute significantly to Government tax revenues, export earnings, job creation, and value-added activities in the economy. The Government o f Afghanistan has adopted the strategic policy o f private-sector led growth across the economy and within the natural resources sector (extractive industries) inparticular. The Government i s demonstrating its commitment to attracting private local and foreign investment to the sector through a number o f significant policy and action steps, including promulgation o f adequate legislation and reform o f government oversight institutions. But there are a number o f challenges in the sector that need to be effectively addressed in order for extractive industries to realize their economic potential. ii. First, despitesignificantprogress, muchremainsto bedoneto completethe regulatory framework for the sector. The approval o f the Minerals Law i s an important achievement. But this needs to be operationalized by regulations. A complementary Hydrocarbon Law also i s necessary. These elements o f the legal framework, combined with a clear vision o f the sector put forward by the Government, are essential to create a climate conducive to private investment and growth inthe extractive industries sector. The private sector will require a clear vision o f the sector as well as some predictability (and credibility) in policies. Developing clear directions interms o f pricing policies (for instance in the case o f gas pricing) also i s critically important as a means o f demonstrating that private investments will be viable. A competitive and stable taxationpackage also i s necessary inthis regard. iii. TheMinistryofMinesandIndustryverymuchneedstodevelopitscapacitytoexertits regulatory functions. This will require important administrative reforms and appropriate capacity buildingwithin the Ministry. Important among these reforms will be to develop a capacity to coordinate external assistance, effectively allocate budgetary resources within the sector, and oversee the implementation o f the budget for the sector. Weak fiscal data on the sector and poor coordination across donors highlightthe need for such capacity to be developed. Also important among these reforms i s the capacity to implement the regulatory framework. Developing the capacity to tender some underground resources, such as the major Aynak copper deposit, is urgent. iv. As the Ministry focuses on its regulatory functions, it should take steps to prepare State- Owned Enterprises under its control for privatization or liquidation. This requires in particular strong coordination with the Ministry o f Finance and implementing the policy framework adopted by the Cabinet inNovember 2005. 68 A. Introduction 4.1 The Government o f Afghanistan has adopted the strategic policy o f private-sector led growth across the economy and within the natural resources sector (extractive industries) in particular. The extractive industries, Principally mining and hydrocarbons, offer excellent potential by providing a direct source o f economic growth and diversification o f the economy as well as fuels and materials that are essential for fostering growth in other sectors.' Exploitation o f mineral resources will contribute significantly to government tax revenues, export earnings, job creation, and value-added activities in the economy. The Government i s demonstrating its commitment to attracting private local and foreign investment to the sector through a number o f significant policy and action steps, including promulgation o f adequate legislation and reform o f government oversight institutions. 4.2 The Ministry o f Mines and Industry (MMI) i s talung steps to reposition and transition into a policy-malung and regulatory agency to ensure good governance o f Afghanistan's mineral resources. However, with the Ministry responsible for 21 State Owned Enterprises (SOEs) as well as a lesser number o f budgetary units that function as SOEs, partial restructuring solutions will not lead to meaningful results. This review o f the finance and management o f MMI takes a forward-loolung perspective - focusing on the extractive industries that will contribute to economic stability and government revenue. But in the interim, broad financial and technical assistance is needed so that new regulatory capacity does not become encumbered by a legacy o f dysfunctional SOEs. This chapter i s intended to assist MMIwith long-range financial planning through more strategic investment decisions based on rationalization o f core and external budgets. The chapter i s also i s intended to support broader reforms inMMIto transform MMIinto a regulatory agency with a special focus on extractive industries. Developing the requisite financial and administrative capacity i s indeed essential to private-sector led growth and fulfillment o f the broader mandate of the Government. Therefore this chapter complements the Government's Public Administration Reform and Economic Management (PAREM) program. The central goals o f PAREM are to establish an effective public administration that i s small and focused on core functions and to improve financial management inbudget planning and strategic resource allocation decisions. An essential tool o f this reform i s the Priority Restructuring and Reform (PRR) scheme, which i s an administrative reform plan including a clear organizational structure and clear objectives for the agency. At the time o fthis report, the MMIhas completed PRR stage 1. 4.3 This chapter is divided into four sections: Section B:Sector Description gives a broad overview o fpast and current sector activities. Section C: Institutional Framework discusses the roles and responsibilities o f MMI, activities by enterprises and stakeholders, demand for services, and strategies andpolicies inthe sector. Section D : Financial and Administrative Systems considers improvements in financial management, budget planning, revenue.streams, and budget formulation. Section E: Next Steps presents core recommendations for MMIin terms o f frameworks and key actions. Additional details will emerge as essential sector policy and strategy work, a core "next step," begins. B. Sector Description 4.4 The Afghanistan minerals sector mainly includes five major commodity groups (i) hydrocarbons, principally gas, (ii) solid fossil fuels, principally coal, (iii) and ferrous metals, (iv) construction base 'SeeWorld Bank(2004). 69 materials, principally crushed stone and cement, and (v) dimensional stone and gemstones. These industries were much more productive in the 1970s and 1 9 8 0 ~whereas existing mineral production i s ~ now limited to small coal operations in Baghlan and Bamyan provinces, limestone for three operating cement plants, construction materials (sand, gravel, crushed rock) nationwide, and gemstones and dimensional stone from artisanal operations. Hydrocarbon production is natural gas in the Sheberghan area. There has been limited production o f oil in Sar-i-Pul, but this has been shut in. Current production falls far short o f the sector's potential. Although still operating, all existing operations suffer from chronic neglect, damage from war, and severe under-funding. The resource endowment could support substantially larger operations. Furthermore, there are identified deposits o f other minerals that have not been exploited. The most important are Aynak copper and Hajigak iron ore deposits. 4.5 MMI, through its gas and mining enterprises, produces commodities that can contribute significantly to increasing public welfare and economic growth: (i)energy fuels for residential and industry, (ii) for export, and (iii) metals construction materials for reconstruction and new infrastructure. The energy fuels are currently primarily: 0 Gas produced in the northern Sheberghan field, much o f which i s consumed at M M I ' s fertilizer plant. 0 Coal produced across the north o f the country and consumed by thermal industries (cement, brick manufacturing, and other light industry)and for space heating. Coal 4.6 Coal production currently comes from very small mines for which chronic under-funding has led to irrational mining practices. These mines are located along transportation corridors near to end-use markets or within truchng distance to larger centers such as Kabul. Duringthe 1980s, the Russians began a program to (i) rationalize existing operations and (ii) significantly increase coal supply through large- scale development o f the high-quality, larger Dara-i-Suf deposit.' The surface installations built at Dara- i-Suf were subsequently destroyed leaving only small-scale production that continues to degrade through exhaustion o fremaining equipment. 4.7 Coal i s an essential input for space heating and thermal industries (principally inthe manufacture o f cement and construction products). A greater than 80% reduction in the supply o f coal has resulted from mining assets that are financially and physically exhausted. Official production has fallen to about 30,000 tons, with an additional 60,000 tons produced informally. Just ten years ago, official production levels stood closer to 250,000 tons. 4.8 . Current operations now lack basic health, safety, and environmental standards, and have no working capital to improve operational efficiency. As operations revert to manual labor, end-users are shouldering the burden of these inefficiencies with coal prices that have risen to as high as $70 per ton from historical prices o f $20 per ton. At current prices, there has been substitution o f firewood for coal, exacerbating deforestation. 4.9 Reviving the coal sector to achieve past production levels i s a priority to address essential heating and industrial needs. An immediate investment o f $5 million, provided from the consolidated budget as 'The Dara-i-Suf deposit o fhigh-grade coking coal is connected to the transportation network, shipping small quantities of coal to regional markets from the partially developed underground workings established in the 1980's. With proven reserves of 49 million tons and inferred geological reserves in excess of 75 million tons, the deposit is one of several along a belt that offers potential for large-scale commercial operations. The field i s being assessed further by the U.S. Geological Survey as part of the nationwide coal assessment program 70 part o f the Emergency Coal Assistance Program, and an additional investment o f $4 million over three years will be needed to return coal supplies to about 190,000 tons per year (Table 4.1). Thereafter, additional mine planningand further technical assistance will be neededto further improve production. Table 4.1: EmergencyCoalAssistanceProgram Mine IncreaseinOutput / Reduced ExpectedChangesinEnd-Use Demand ProductionCost (Current coal demandfor (i) domestic andlight industrialuses is estimatedat 155,000 tpy and(ii) cement end-useat 200,000 tpy) Kar Kar I Current production about 30,000 tpy, Puli Khomi Cement - Ghori 1 current output o f Doodkash can be increased to 75,000 tpy over 3 120,000 tpy requiring about 48,000 tpy coal, but years with $3 million total investment. theplant is insevere decay andmay close. Ghori Phase 1: $1.5 investment increases 2's fbture output i s estimated at 300,000 tpy, production to a minimum o f 45,000 requiring about 150,000 tpy coal. tVV. Nahreen Current production i s 0 tpy but can be A portion o f the coal supply fYom thls mine increased to 25,000 tpy over a 1.5 year could be used to satisfy demand by the Ghori 1 development period. This operation & 2 cement plants. Otherwise, the 25,000 tpy could provide up to 70 permanent jobs. would be used for residential / light industrial end-uses.' Ishpusta Current production i s zero but can be 45,000 tpy would be used for residential / light increased to 45,000 tpy over a 6 month industrial end-uses. development period. The mine could produce up to 70 newjobs. Sabzac Current production i s zero but can be A cement plant proposed for Herat (Sabzac) increased to 12,000 tpy after 2 years o f would have a production capacity of 210,000 tpy development. The operation would and consume about 84,000 tpy o f coal (after employ 70 full time. three years). An additional 12,000 tpy would be demanded by nearby residential end-uses. Dara-i-Suf Current production i s zero but can be Total coal demand for home heating and light increased to about 36,000 tpy after 2 industry inSamanganProvince is unknown. years. The mine can supply ferrous industries within the region. There i s a need to investigate obstacles to iron ore and other foundry industries within the area. Source: La] ~ ;(2004). Cement 4.10 The cement industry has generated investor interest, and actions to enable the sector to recover and grow are closely related to coal supply (as noted above). A current assessment sponsored by the U S Trade and Development Agency (USTDA) will take a holistic view of both existing capacity and the opportunity for a new Greenfield plant. Once this analysis i s completed in early 2006, MMI will understand options and alternatives for this reconstructiono f essential industry. 4.11 The cement market is open to competition, with 2 million tons per year imported at an approximate price of Afs 200 per 50 kg bag (about $160 million per year). Absent end-use material standards, there i s no product discrimination, and price undercutting o f domestic products by inferior imports occurs. End-use material standards would help the domestic industry and improve the performance o f infrastructure projects. 4.12 There i s a clear linkage between cement and coal. The Ghori 1 cement plant produces 120,000 tpy, requiring about 48,000 tpy o f coal. A partially constructed Ghori 2 plant will have an estimated 71 production capacity o f 300,000 tpy, requiring about 150,000 tpy o f coal. A new, larger cement plant with having improved efficiency will still consume more than 200,000 tpy. ConstructionMaterials and Gemstonesand Dimension Stone 4.13 The production of gravel, sand, and crushed stone for infrastructure development has largely been by the informal sector. Absent end-use material specifications, inferior product has been provided to major infrastructure development projects, and increased repair and maintenance costs are now an issue. The production o f gemstones and dimension stone i s for export by the informal sector, and significant royalties and taxes are being lost to the government. Hydrocarbons 4.14 The majority o f key geological data date back to the 1970s and 1980s. According to the data available inAfghanistan, one estimate the amount o f remaining proven and probable recoverable reserves in the seven discovered gas fields is 1.5 trillion cubic feet (tcf) or 42.5 billion cubic meters (m'), with another 0.8 tcf o f possible reserves. There are 18 gas prospects or leads with an additional 0.9 tcf o f "risked" reserves (scaled according to calculatedprobability of success o f discovery). 4.15 To put Afghanistan's gas reserves in perspective, Table 4.2 compares proven gas reserves in Afghanistan with those o f its neighbors. The amount o f gas in Afghanistan i s very much smaller, but nevertheless it will be adequate for meeting domestic energy needs for a long time. If, for example, all proven gas reserves were used for power generation, 1 tcf could generate 128,000 GWh. Power consumptioninAfghanistan in 2001was 510 GWh. Ifper-capita consumption o f power were to increase to that in Palustan, annual power consumption would rise to 12,000 GWh. Even so, 1 tcf could provide power for the entire country for 10 years. Country Afghanistan Iran Turkmenistan Uzbekistan Pakistan Tcf 1 942 102 65 27 4.16 Although supporting data do not exist in Afghanistan, estimates o f the ultimate gas reserves o f northern Afghanistan have reportedly been around 9-10 tcf in shallow prospects and 25 tcf in deep prospect^.^ The absence of exploration data in Afghanistan makes it difficult to say much about these estimates, but these previously stated reserve estimates would suggest that further exploration might be worth undertaking inthe long run. 4.17 There are no proven oil re~erves:~probable recoverable oil reserves amount to 11.5 million tons, and there are possible reserves o f 1.6 million tons. Nine oil prospects or leads provide another 3 million tons o f risked reserves (Sofregaz and Energy Markets 2004). Given that 5 million tons per year i s generally considered an economically viable size for refinery, the very small size of oil reserves would make economic development o f Afghanistan's oil reserves difficult even in a country that imports nearly all o f its petroleumproduct demand. Sofregaz and Energy Markets 2004 4 HillInternational 2004 Although some oil production is occurring, the quantities involved are so small that Sofregaz and EnergyMarkets assigned no proven oil reserves on the grounds that no economic development can be assessed with the available information. 72 4.18 Gas was first commercially produced inAfghanistan in 1967, with Soviet aid which was designed to promote gas exports to the Soviet Union. Domestic consumptiondidnot begin until 1975. By the mid- 1980s, annual gas production averaged 2.5 to 2.6 billion m3.After the withdrawal o f Soviet specialists and capital in 1989, production began to decline. Productionduringthe first half o f fiscal 2003/04 was 90 million m3,an order o f magnitude lower than the historical peak level o f production. Gas i s currently priced much below the sustainable cost o f production, and moreover payments for gas consumption are not always made. 4.19 Factors that deter (i)the State Gas Enterprise from operating effectively as a gas producer and (ii) the private sector from investing capital include: 0 Absence o f economic gas pricing principles. 0 Late and non-payment by consumers, notably the KudBergh FertilizerRower Plant. 0 Neglect for a decade or more o f maintaining technologies that were already obsolete, and drillingrigs indisrepair. 0 Lack of adequate geological and geochemical data. 0 Lack of funds to do anything beyond meetingwage payments. FISCAL PERFORMANCE 4.20 There are two sources for data on the fiscal performance o f the sector, MMI and MoF. Reconciling these sources i s difficult, and there appears to be major underreporting to MoF. One seems to be the reporting o f net revenue, which i s basically a cash profit number. This practice i s likely to have led to underreportingo f expenses and total revenue. MMIdata appear better, but unfortunately MMIwas able to provide data only for the first six months o f 2004/05, for SOEs, and not for the preceding years due to personnel changes. Coordination with the work carried out by MoF's SOE Department might generate more reliable data, but there also seem to be major gaps in the data available at MMI. For example, it i s not clear that there are historical and current records o f actual payments made by and to SOEs; this i s especially a concern as regards payments for gas consumption. To cover their expenses, some SOEs have diversified into non-core activities which in turn cross-subsidize their core activities. Financial accounts need to be unbundled (separate accounts for different activities) and cross- subsidization made transparent. OperatingBudget 4.21 The operating budget, funded from domestic revenues and external grants, covers most recurrent costs and some minor capital investments. The MMI's operating budget i s relatively small (0.5% o f the total national budget in2005/06), but it has been growing somewhat over time (Table 4.3). This probably reflects some uncertainty in the way SOEs are budgeted (see below), as well as the transfers of functions from the Ministry of Food and Light Industry(textiles, cement, fertilizer, food processing, and carpets) as a result o f the Cabinet reorganization inDecember 2004. 4.22 Available MMI data indicate that the operating budget finances the core operations o f the Ministry,including the Afghanistan Geological Survey (AGS) and Oil and Gas Exploration Department, with relatively small amounts o f the Operating Budget going to the Herat Zabsak Coal Mine Project and Herat Cement project (Afs 3.3 million) which are classified as under construction (these projects were started many years ago but have not been completed). For 2004/05, the reported operating expenditures for MMItotaledAfs 124 million. 73 n/a not available Source: MoF. 4.23 The eight enterprises are reported as having no operating budget. However, their revenue i s reported as both gross and net. MMI stated that each SOE prepares its own operating budget which i s financed by its operating revenues. Further investigation is needed to determine the level o f support provided by MoF, whether revenues are paid to the Treasury, and whether the operatingbudget funds are paid to the enterprises by MoF. Assuming that the operating budget o f each enterprise i s the difference between its gross and net revenue, the total operating budget for all the entities within MMIi s calculated to be about Afs 1billion on an annualized basis. Development Budget and Programs 4.24 The Development Budgets in 2002/03 and 2003/04 understandably focused on (i) consolidating available data, (ii) assessing the state o f the sectors that fall under MMI, and (iii) emergency some rehabilitation work, including buildingrehabilitation. A number o f sector assessment studies have been carried out with funding from ADB, the U S Trade and Development Agency (TDA), USAID, and the World Bank. These external funds have also been used to help design regulatory and contractual frameworks and sector master plans. 4.25 The Development Budget for 2004/05 comprised rehabilitation o f government buildings, sector assessment and pre-feasibility studies, and emergency work inthe coal sector. For 2005/06, the approved Core Development Budget for MMI totals $8.6 million, consisting o f emergency rehabilitation work funded by ADB (gas pipeline and wells) and a coal project funded by the Government o f Afghanistan. The External Development Budget set aside $1.9 million, funded by Japan, for a study on ground water resource potential. 4.26 Against the total allocation o f $10.5 million, MMIhad requested $153 million for 57 projects. It i s informative to look at the seven largest requests, amounting to $106 million and shown inTable 4.4. 4.27 Five o f the seven projects raise questions about the extent to which various studies and assessmentsconducted to date have been informingMMI's strategy and priorities: 0 New industrial parks. Given the amount o f work requiredto transform MMIinto a regulatory body for its core functions, it is far from clear that launching a number of new industrial parks around the country i s a highpriority for MMIinthe immediate future. Gas pipeline to Kabul. This project, which would cost $0.5 billion for the transmission pipeline alone, would need to be anchored on credit-worthy large consumers in Kabul, such as power producers. The total project cost, including investments needed for gas production, would be well in excess o f $1 billion. Hill International, which carried out a pre-feasibility study for this pipeline, recommends that this project be reviewed in five years. The merit o f 74 carrying out a more detailed techno-economic study at this point in time i s highly questionable. 0 Oil and gas assessment. This will be a useful exercise in the medium term, but the highest priority is to obtain more geological and geophysical information on the already discovered fields inthe Sherberghan area, with a view to developing a viable gas market in the north, as commercial oil and gas production in the south, even if aerial surveys give promising findings, will be a long-termprospect. 0 Paper production factory. This proposal i s not consistent with the Government's policy stance that the Government should not invest in commercial and industrial activities that are normally carried out by the private sector. 0 Fertilizer and Powerplant. A detailed analysis o fthis complex by HillInternationalindicated that there i s no economic way o frehabilitatingthe fertilizer plant. Evenreplacingthe existing plant with a much larger and modernplant would be at best marginally economic. Table 4.4: Top SevenRequestsfor DevelopmentBudget SubmittedbyMMIfor 2005/06 ProjectDescription US$ million requested Construction o f new industrialparks in 8 provinces; rehabilitation and equipment o f industrials parks inKabul (Pule Charkhi, Dehsabz, Kamari, and Bagrami), 61.30 Wardak, Ghazni, Khost, Paktia, Kandahar, Herat andNangarhar. Technical economic studies o f North-Kabul gas transmission pipeline and distributionnetwork System for Kabul City 10.00 Oil and gas resource assessment inKatawaz and Helmond as well as nationwide air magnetic survey 10.00 Establishing o fpaper production factory inKundoz . 7.50 Rehabilitationof Afghanistan Geological Survey Buildingand Farming working Group 6.00 Rehabilitation and equipment for Mazar Fertilizer and Power Plants 6.00 Coal Project 5.00 Total 105.80 4.28 Out o f 57 projects proposed, eight were for rehabilitating existing production facilities, three for building new factories, and four for feasibility studies for establishing new companies. In the future, project proposals should be brought more closely in line with the Government's overall strategy toward public/private sector development. Inparticular, rehabilitation o f existing assets using Government funds should be carefully examined and undertaken only ifthere i s virtually no prospect o f private participation and the activity i s considered essential and bringssocial benefits (see also Volume 111, Chapter 4). Revenue 4.29 The data provided by MMI for the first six months o f 2004/05 indicate that the total annual revenues from SOEs are about Afs 920 million. However, in discussing these revenues with MMI, it was noted that they are projections rather than actual receipts. The major part i s based on hydrocarbons, with the power and fertilizer operation and gas production being the main contributors. Revenue from coal production i s only around Afs.70 million ($0.9 million). This i s substantially below the arithmetically estimated revenue of $1.6 million. Understanding this gap will require an in-depth review o f the production fields and the flows of funds. Revenue data for the full 2003/04 fiscal year would very useful to provide confidence and analyze any trends. 4.30 It is important to note that some o f the gross revenues shown involve intra-ministerial transactions. Notably, the bulk of gas produced by the State Gas Enterprise i s sold to the Kud Bergh 75 FertilizerRower Plant, although the latter reportedly does not pay regularly for natural gas. The sum o f net revenues properly accounts for intra-ministerial transactions. The figures indicate that total annual net revenues amount to about Afs 50 million. C. InstitutionalFramework 4.31 The overall objective o f MMIi s to facilitate supply o f hydrocarbons, coal, metals, construction materials, and gemstones/dimension stone to essential downstream industries at least cost to society and at a quality that is optimal for Afghanistan. Realizing this goal requires transforming these activities into competitive, efficient, safe, and environmentally sound activities that are able to attract the financing needed for rehabilitation or reconstruction, maintenance, and expansion o f their assets and activities. 4.32 International experience and economic analysis suggests that the Government should perform a regulatory function in this sector. Government intervention (not necessarily carried out by MMI; other ministries and government agencies may take the lead) i s needed under all circumstances to monitor and act upon price collusion; commercialmalpractice; non-compliance with health, safety, environmental, and technical standards; and monopolistic behavior in a potentially competitive market segment.6 Inaddition, economic regulation i s needed where there i s a natural monopoly (such as gas pipelines or large storage facilities) or where there i s inadequate competition. Finally, the Afghan Constitution itself grants underground property to the State (Article 9). On the other hand, there is very little justification for direct intervention in the sector: if activities are profitable, the private sector almost invariably proves itself more effective than the State. 4.33 Today, all hydrocarbon activities are controlled by the Government. Current small-scale coal mining is partially controlled by the Government, whereas mining o f construction materials and gemstones/dimensional stone are both unregulated and informal. Overall, the conditions o f hydrocarbon and small-scale coal mining activities are not conducive to private sector participation. Nonetheless, for these small coal operations there i s both an economic and humanitarian rationale for sustaining supply. Coal i s essential for necessary downstream industries and space heating in a nation where more than 250,000 children die each year from simple colds. Hence until such time as the private sector enters into this market to develop larger commercialoperations, active government involvement inthe sector beyond a regulatory role will remain duringthe interim. 4.34 Larger, commercial-scale coal, metal, and construction material mining will be o f interest to the private sector, subject to a competitive investment climate. Thus there i s little justification for direct government involvement inthese activities. 4.35 Therefore the near to medium-term will be a transition period to transform those state operations that can be independent of budget support and improve their financial basis (in the process o f corporatization and commercialization). This path sees the ultimate objective as having SOEs act no differently from any private sector firm, paying taxes, fees, and where applicable royalties, and receiving no budget support from the Government for their operations. ROLES RJCSPONSIBILITIESOFMMI AND 4.36 The Government has stated its intention to move toward a private sector-led model, with the Government carrying out regulatory function (see Afghanistan Government, 2002 and 2004, and more Some activities, typically those requiring large up-front investments, are potentially competitive but may take time to develop effective competition. Gas productioninAfghanistan i s one such example. 76 specifically the Policy Statement in World Bank, 2004). On this basis, the roles and responsibilities o f MMIfall into the following three mainareas: e Setting sector policy. The most important role o f the MMIi s to set and implement policies for the mining, hydrocarbon, and industrial sectors that fall under MMI.MMI will take the lead in formulating policies and drafting laws, regulations, standards, and model contracts. e Regulating natural resource production and industrial activities. MMIwill take the lead in (i)negotiating and issuing licenses and contracts and (ii) ensuring compliance with laws, regulations, licenses, contracts, and standards. Workmg closely with other ministries, MMI will also engage in economic regulation where there is a natural monopoly or little effective competition. Regulationrequires that MMIbe able to measure or verify production; calculate royalties, fees, and the Government's petroleum production share; and inspect and make necessary measurements to check compliance with health, safety, and environmental standards. e Moving to market- and private finance based sectors. At present, all or most activities in individual sectors are financed and managed by the Government. MMI i s therefore a regulator and an operator. The Government o f Afghanistan wishes to move all SOEs engaged incommercially orientedactivities out ofgovernment control indue course. The primary role of MMI will be to maintain an up-to-date database on natural resources and production, provide vital data and information (such as production, sale, exports, imports, prices) to private sector participants in a timely manner to help in investment and operation decisions, and promote the sectors to potential investors. Together with MoF, MMI will lead this transition from government-owned and controlled to private sector-run in mining, hydrocarbons, and industry. 4.37 However, absent a minister for much o f the past three years, no overarching strategy or prioritization of strategic investments has been formulated (see below). This has impeded reforms on policy formulation and implementation (for example, tender o f the Aynak copper mine) and has led to serious debates with very significant financial ramifications for the Government, on proposed programs that do not reflect high-priority MMIneeds. STRUCTURE OF MMI 4.38 For the past several decades, MMIhas been centered on the extractive industries and associated heavy industries: (i) mining o f minerals and construction materials, (ii) petroleum exploration and production, and (iii) the operation o f downstream industries that utilize extractive industry output. A December 2004 reorganization o f the Government expanded MMI'sportfolio to twenty one SOEs as well as a lesser number o f budgetary units that function as SOEs. Today, MMIno longer seeks to maintain this structure, but rather to transition to market-based operations where SOEs will be divested from the Ministry,except insofar asthe Ministryretains regulatoryoversight functions. 4.39 SOEs represent a significant financial, technical, and human resource liability for MMI. With external assistance, MMIhas formulated a strategy that would allow it to become a policy malung and regulatorybody over the course o fthe next 18 to 24 months. Adding essential regulatory functions to the overall dysfunctional structure o f MMIwill not lead to meaningful results. There i s a need for prudent, systematic, and comprehensive divestiture o f the SOEs, optimally over the next 2 - 4 years. A s this transition occurs, MMIwill reposition itself and transition into a policy-making and regulatory agency. If the SOEs are allowed to continue to stumble along as commercially non-viable entities, they will divert MMI's attention andlimitedresources. 77 4.40 The three sub-sectors have significant differences in terms o f industrial organization, leading to varying policy requirements and expenditurehevenue flows from the operating enterprises. In addition, MMI has several supporting departments whose "clients" are the enterprises and whose principal functions involve technical analysis. Duringthe ongoing PRR, MMImanagement i s seeking to rationalize this very complex organizational structure under two offices: (i) Deputy o f Industry, and (ii) of Deputy Mines. These offices would encompass all operating and non-operating enterprises together with key technical support departments. Remaining at the heart o f MMI would be the core functions of procurement, planning, and administration. 4.41 The principal SOEs have been identified and described as part o f ongoing work by the SOE Department o f MoF. The enterprises and departments include the Mines Extraction Company, North Coal Enterprise, State Gas Enterprise, Jabal Seraj and Ghori 1 Cement Enterprises, KudBergh Fertilizer and Power Enterprise, Jangalak Enterprise, Hydrology EngineeringResearch Service Enterprise, Afghan Geological Survey, Department o f Oil and Gas, and the Oil and Gas Exploration Department. Also mentioned are two non-operating enterprises: The Technical Services Enterprise and Rukhaman Marble Enterprise. The relationships between various administrative units o f MMIand the enterprises are shown inFigure4.1. Figure4.1: Current Structure of MMIExcludingLight Industry AFGHANISTAN MINISTRY OF MINESAND INDUSTRY ORCANI1AlTONALC M T f s t Resent) 1383(2004) ' 4.42 Important or large enterprises and departments are highlightedbelow: 0 Mines Extraction Company. The former Law o f Mines, now replaced by the new law, assigned to this company exclusive rights to all mineral and metal deposits other than coal and hydrocarbons. It enters into contracts with private firms for extraction o f minerals and metals. Revenues and expenditures appear to be neither recordednor reported. 0 North Coal Enterprise. This enterprise suffers from long-standing neglect of the mines, lack of development capital and maintenance budget, and the adverse effects o f poor past mining practices. Annual production i s down from 250,000 tons as recently as 15 years ago to 30,000 78 tons currently. The enterprise also purchases for distribution an additional 60,000 tons of coal per year from artisanal production. Capital investment o f $5 million i s needed immediately (and i s being provided as emergency assistance through the development budget), with an additional $4 million over the next three years to return production to 190,000 tons per year (tpy). Annual coal demand for cement alone could easily reach 200,000 tons in the not too distant future. 0 State Gas Enterprise. Fromthe daily peak productiono f 11million m3in 1978-79, the State Gas Enterprise i s currently producing 0.5 million m3 per day. Infrastructure for local production o f gas, treatment, and transport i s non-existent or is functioning inefficiently. 0 Cement Enterprises. Ghori 1 and Jabal Seraj are two operating cement enterprises. Ghori 2 and Herat cement plants are under construction and are classified as Project Units. Only Ghori 1 i s producing at a reasonable level (50% o f capacity). Coal and electricity shortages are the main constraints on production. All four enterprises use technology that i s obsolete and much less efficient than modernprocesses. 0 Kud Bergh Fertilizer and Power Plant. This plant uses inefficient and obsolete technology and suffers from high operating cost, extensive cannibalization o f equipment and machinery, and lack o freadily available spare parts. It i s not a viable entity, and even full rehabilitation is not expected to make this plant economic. The gas sold to the plant i s priced below the cost o f sustainable production. Even at the current low price, this plant has not been paying regularly for gas, the primary feedstock. 0 Afghan Geological Survey (AFG). AFG has been receiving assistance from the British Geological Survey (BGS) and the U.S. Geological Survey (USGS). There was significant geological mapping o f the country between 1967 and 1971 by Italian, German, Soviet, and Afghan geologists. Soviet and Afghan geologists have also in the past completed mineral evaluation studies on 110 deposits. 0 Department of Oil and Gas. Created in2003, this department i s responsible for the State Gas Enterprise and the Oil and Gas ExplorationDepartment. 0 Oil and GasExploration Department. This department has 1,800 employees with n o specific drilling tasks. There hasbeenno fundingfor field services for anumber o fyears. OTHERKEYSTAKEHOLDERS 4.43 The Government. As a regulatory agency, MMIhas principal relationships with the following ministries: 0 Ministry of Finance. MoF i s supposed to receive revenues into the General Consolidated Account from (i) M M I ' s assessment o f annual royalties on mineral production, (ii) the Government's share o f hydrocarbon production, and (iii)assessed fees on exploration or exploitation o f land holdings. MMI Mines Cadastre will interface with M o F on registering such payments and officially recording mineral rights as being in "good standing'' (subject to compliance with all other M o F taxes). M o F sets all fiscal policies relating to (i) taxation, including the prevailing 20% income tax and 20% withholding tax on dividends, and (ii) customs duties including on temporary importation o f equipment andor favorable customs rating o f equipment for use in export industries. M o F will also be closely involved in setting tariffs for gas, pipelines, and other goods and infrastructure that require economic regulation. M o F has also been tasked by Presidential Decree to assess the economic viability of SOEs and to recommend and oversee the necessary economic restructuringo f enterprises.' 'SeeVolume 111, Chapter4. 79 Ministry of Energy and Water. One significant future use o f natural gas is in power generation. Reliability o f gas production as well as its pricing will have a large impact on the electricity sector. Close collaboration with the Ministry of Energy and Water (MoEW) i s therefore needed.' Ministry of Commerce. The Ministry o f Commerce (MoC) focuses on trade and investment policies. Coordination between MMI and M o C i s important because M o C is charged with developing a sound business environment and i s in the process o f establishing a Standards, Metrology, Testing, and Quality unit. Ministry of Economy. The Ministry o f Economy i s expected to focus on macro-level economic modeling and forecasting, reviewing social and sectoral policies from an economic point ofview, and inparticular supporting line ministries inimplementation. Ministry of Justice. The Ministry o f Justice (MoJ) reviewed and submitted to Cabinet for approval the Minerals Law with technical support from MMI.The Minerals Law was passed inJuly 2005. A similarprocessis underwaywiththe draft HydrocarbonsLaw. Onan ongoing basis, MoJ will play an instrumentalrole inthe resolution o f mineral-relateddisputes. Inter-Ministerial Committee. A committee will be established by Cabinet Decree to assist, among others, MMI in negotiating mineral and hydrocarbon rights and contracts. The scope o f this committee and the precise areas that it will cover have not been decided. 4.44 The Donor Community. MMIinterfaces across the broader donor corqmnity and is continuing to face many challenges in coordinating donor activities. According to the new ministry structure and functions proposed by IARCSC, the Office of the Minister (OoM) i s envisaged as the first point o f contact for the donor community and will coordinate donor activities. The external budget provided by the donor community will be monitored by the Office o f the Chief Financial Officer. Principal donors involved inthe sector include the UnitedKingdom, the United States, Japan, the World Bank, and ADB. 0 British Bilateral Assistance. The British DFID i s providing about $5 million technical assistance to build professional capacity at AGS, create a Mining Cadastre office, perform mineral resource assessment, undertake sector promotion, and contribute toward rehabilitation o f the Kabul offices of AGS which were badly damaged duringthe war. United States Bilateral Assistance. The United States Geological Survey (USGS) through USTDA and others i s providing direct technical assistance for a mineral resource assessment, geophysical surveys and compilation across gas fields, geochemical surveys, cartographic mapping, hydrogeology studies, and professional development within AGS. USAID has contracted work on legal and regulatory reform, providing direct technical assistance to the MinisterofMMI.The US Embassy is contributing towardrehabilitationo f the AGS building. USAID has recently expressed interest in supporting a comprehensive program for the disposition o f MMI's SOEs. Japanese Bilateral Assistance. Japan, through JICA, i s assisting the Hydrology Engineering Research Enterprise. The World Bank. The World Bank has provided technical assistance in the preparation of draft Minerals and Hydrocarbons (Exploration and Production) Laws, the PFM Review, provision o f consultants to the Emergency Assistance to the Coal Sector program, and preparation of a preliminary energy strategy note for Afghanistan. Planned technical assistance includes "Emergency Coal Mine Rehabilitation / Stage 2: Mine Planning, Preparation o f Mining Regulations and possibly a Model Contract," creation o f a Mines Inspectorate, and the tender o f Aynak. The World Bank has also funded an assessment o f the * See Chapter 3 of this volume. 80 private investment climate inthe petroleum sector and, through USTDA, gas market analysis, gas production scenarios, and assessments o f future options for the fertilizer/power plant, a gas pipeline from Sherbergan to Kabul, and different commercial options for use o f crude oil. 0 The Asian Development Bank. The Asian Development Bank has been active in the natural gas sector, having undertaken a number o f studies and prepared a gas master plan, and i s now supporting an emergency program to rehabilitate gas infrastructure including 12 gas wells in Sheberghanand a pipeline. Its current technical assistance includes institutional strengthening provided by the Canadian Petroleum Institute and regulatory strengthening provided by EnergyMarkets. ADB isplanninga second gas sector project to begin in2007. 4.45 MMIcurrently has little oversight over production of constructionmaterials. Tens of millions of dollars' worth of these materials are being produced illegally and consumed by donor-executed infrastructure projects across the country. There i s no recording o f production and nor are materials standards inplace to ensure that funds used to purchase construction materials are well spent. MMImust gain control o f this sector to secure royalty payments and introduce materials standards. LOOKING AHEAD9 4.46 Prospects in the sector should take two key parameters into account. A first parameter i s time: should the country's key commercial energy resources be used for development today, or should they be held inreserve for future development? A second parameter i s to findthe appropriate balance betweenthe State and the private sector in leading energy sector development, and to derive the institutional and legislative reforms required to achieve this balance. Hydrocarbons 4.47 Preliminary analysis indicates that private sector participation in hydrocarbons i s unlikely in the near term, but improving the information base through conducting geological surveys, establishing market-based gas pricing principles, and restructuring and commercializing the State Gas Enterprise i s a highpriority. 4.48 There i s a consensus that gas development for power generation would be an important first step. Current estimates of the cost o f gas production make the price o f electricity from domestically produced gas comparable to the economic opportunity cost o f power, namely imported electricity. The gas market today has one large user which i s reportedly not paying regularly for gas, and a number o f small users. In principle, a large user (such as a power plant) that i s able and willing to pay a market-based price for gas promptly can make the production o f gas economic and financially viable. USAID i s in the process of completing a feasibility study for gas-to-power production at Sheberghan, with the objective o f supplying electricity inthe northernregion as well as to Kabul. 4.49 As for the rest o f the market, the following reform steps are neededbefore gas development can become commercially viable: (i) commissioning an inter-ministerial gas workmg group to establish gas pricing principles and formulas; (ii) establishing a functioning billing system; (iii) demonstrating prompt payment o f bills based on the gas pricing principles formulated by the inter-ministerial group; and iv) operating the State Gas Enterprise on market-based principles. To this end, improving the information base, establishing market-based gas pricing principles, and restructuring and commercializing the State Gas Enterprise are highpriorities. This section draws inpart on World Bank (2005).. 81 Mining 4.50 Across the four major commodity groups within the solid minerals sector, immediate attention i s equally focused among the top three: metals, construction materials, and coal. Across these commodities, there is differentiation between immediate private sector participation for metals and construction materials and an interim strategy to attract private sector participationinto cement and coal. Metals 4.5 1 Preliminary analysis indicates that private sector participation in copper exploration and development i s probable in the near term, subject to continued political stability and field security in Logar province. The Aynak copper deposit was discovered in 1973 and was progressing toward advanced feasibility studies when the war erupted. The World Bank has worked with MMI to define an internationally competitive tender process and application has been filed with TAFSU for funding. The process will be technically supported by the British Geological survey and Afghanistan Geological Survey. Although investor interest i s strong, Aynak faces challenges. It i s a good mineral resource that i s very remote from end-use markets and poor infrastructure linkages. Getting equipment in and finished product out could prove overly problematic. 4.52 Should mining proceed, it i s likely to progress to larger tonnages as the operation develops in stages. Both copper cathode (finished product) and copper concentrates could be exported. Preliminary indications from data compilation and field examination suggest that the Aynak mineral belt also has several additional known deposits, and that prospects are good for additional discoveries. Improving the information base through conducting geological surveys i s essential. 4.53 Large deposits o f iron ore, principally at Hajigak, have significant private sector investment potential. This i s a globally traded commodity experiencing historically high prices and strong demand within the region (notably China). At present these deposit are in need o f analysis to better understand deficiencies relating to infrastructure, a reliable supply o f energy, and the need for coking coal (the Dara- i-Suf coal field i s in the same region). Given the strong economic outlook for iron ore and steel, these deposits warrant high-priority attention and a better understanding as to what actions MMI and the Government more generally could take to facilitate private sector participation. ConstructionMaterials 4.54 Preliminary analysis indicates that the production o f construction materials is dominated by the informal sector. The demand for construction materials, principally crushed stone and cement, moves in parallel with infrastructure development and reconstruction. A common strategy to formalize this sub- sector i s by setting materials standards and legal/environmental compliance for material entering major infrastructure development projects. This i s in the best interest o f the donor community to ensure infrastructure performance and for MMI to develop materials standards and cooperative extension services. The remaining informal sector may continue in the interim to supply residential and other non- technical uses, but will also need to be formalized to prevent further environmental degration. Cement 4.55 Preliminary analysis of cement industries by international investors has led to expressions o f interest in investing in the sector, principally in the Ghori operations. Upon further investigation, investors have been deterred by technical and economic issues along with uncertainty in coal supply. Ongoing donor-funded highway and infrastructure projects and proposed infrastructure development projects are partially reliant on imported (and smuggled) cement having poor quality. In the near term, 82 MMIshould continue with development of an interim strategy to assess the commercial viability of the domestic cement industry and thereafter take warranted actions to attract private investors into the sector. Given the ongoing demand for cement in infrastructure development and reconstruction, this sector warrants a highpriority. Coal 4.56 Preliminary analysis o f small state-owned coal mines suggests that these operations are not commercially viable in their present state. Nonetheless, these operations are essential for downstream industry and space heating. As an interim strategy, MMI should continue with its current plan o f emergency technical assistance to provide basic equipment that can sustain current levels or return production to historical levels to reduce prices and lessen the social burden. Additional mine planning may further reduce operational costs and improve health and safety standards. Should these mines be privatized in the future, caution should be exercised to value the underlying coal resource in addition to the operating asset. Lessons learned elsewhere demonstrate how governments unintentionally give away large energy resources through the sale o f small, inefficient SOEs. 4.57 Preliminary analysis on the potential for a large coal mine in the Dara-i-Suf region suggests possible commercial viability. The USGS coal assessment program i s investigating sites for a new commercial coal mine that could supply expanding thermal industry demand (including colung coal for iron ore, additional cement production, and other light industry lost during the war) and future power development. Preliminary cost engineering calculations for Dara-i-Suf suggest large resources offering typical productioncosts o f less than $12 per ton. REFORMING SECTOR: CHALLENGES THE 4.58 Transforming MMI,from the owner/operator o f SOEs to carrying out primary functions o f setting and implementing sector policies and regulating private sector activities, poses a number o f challenges, as outlined inTable 4.5 below. 83 Table 4.5: Challenges of Implementation and Regulation Strategy MMIhas no experience informulating sector strategies and policies for private sector formulation growth. The absence o f an overarching development strategy and prioritization of strategic investments by MMI and donors directly impacts on financial planning. Decisions are poorly coordinated, often ad hoc, and not prioritized according to immediate, interim, and longer range planning horizons. During the last budget cycle, an effort was made to fill gaps inthe MMIbudget planning process and to minimize the overlap o f donor projects within the sector. This mitigated the adverse effects o f past problems some but did not result ina unified program for the Ministry. Strategy formulation entails gaining a better understanding o f the factors that make economic activities efficient, the optimal sector structure, appropriate legal and contractual framework inthe context o f Afghanistan, and how best to handle SOEs in the coming years. Improving In order to transform the sector from one that is dominated by SOEs into one that investment attracts private capital, the investment climate needs to be improved. This will entail climate establishing a clear, transparent, and stable legal, fiscal, and contractual framework; providing essential sector data and information to investors; establishing economic pricing principles where needed; fostering cultural acceptance o f payment for goods purchased at market-based prices; an efficient administration that can take decisions on investment and implement them in a timely manner; and working with other ministries to ensure that adequate supporting infrastructure (such as roads, telecommunication) i s provided. Where licenses or contracts are issued through competitive bidding, MMI needs to have the capacity to draft and issue tender documents, assess the qualifications o f bidders, evaluate bids, select the winning bid, and negotiate with the winning bidder. Being able to do this efficiently and in a transparent manner contributes to improving the investment climate. Economic Where there i s inadequate competition or a natural monopoly, economic regulation i s regulation required. MMI needs to establish tariff principles and formulas or price ceilings as needed, regulate transport (pipelines) and the use o f large storage facilities, and implement regulations effectively incollaboration withother affected ministries. Health, Current operations do not adhere to internationally acceptable health, safety, and safe&, environmental industry practice, in part o n account o f lack o f standards and environment, regulations. Uncontrolled coal fires, unacceptable surface and underground mining and social practices, the potential for methane gas poisoning and explosions, and widespread protection environment degradation persist. The need to address miningand community issues i s recognized, but as yet there i s n o plan for formally consulting and integrating communities into the decision makingprocess. To address these issues, the first step wouldbe the creation o f overarching mineralpolicies andlaws inwhich safety, social. and environmental standards are embedded in planning, operations, and closure documents. The prevalence o f unsafe and environmentally damaging practices i s a deterrent to attracting credible strategic investors into the sector. Enforcement Having established contractual and licensing obligations, regulations, and standards MMI needs to ensure their enforcement. Ensuring royalty payments requires thai production be accurately assessed and recorded and royalty calculations checked. Ir the case o f hydrocarbons, the calculation o f the Government's share o f productior needs to be certified. Enforcing gas pricing principles means that gas sold must bc metered, consumers billed ina timely manner, and payments collected promptly. Financial Under the leadership o f the Chief Financial Officer, MMI needs to strengthen it: management recording o f budget appropriations and revenues, grant and cash management, fisca reporting and accounting, internal control, andbudget execution. 84 Moving Forward 4.59 Successfully transforming MMI to handle its regulatory roles will require a number o f actions. The remainder o f this section summarizes key regulatory and technical steps, while the next section deals with financial and administrative reforms: Creating a Modern Legal and Regulatory Framework. The Minerals Law was passed inJuly 2005. Terms o f reference have been prepared to engage legal experts to help the Government draft mining regulations and a model contract during 2005. MMI is worlung with M o J to submit the draft Hydrocarbon Law to Cabinet. The regulations to implement the Hydrocarbons Law and a model contract for exploration and production sharing have been drafted, and the model contract will form a basis for negotiation o f new production. Both Minerals and draft Hydrocarbons Laws reflect international standards o f quality, apply to all investors local and foreign, and provide the basis for transparent allocation o f mineral and hydrocarbon rightsto private entities. Adopting an Internationally Competitive Fiscal and Mining Taxation Package. M o F completed preparation o f draft tax amendments for extractive industries in July 2005. The draft amendments exempt qualified extractive industrytaxpayers (QEITs) from the business receipts tax; provide for ring-fencing by license or contract area, accelerated depreciation, and unlimited loss-carry forward; and authorize the Minister o f Finance to grant tax stability to QEITswho agree to pay an income tax o f 30% rather than the standard 20%. Neither the Minerals Law nor the draft Hydrocarbons Law contains royalty rates. Draft mineral royalties give a range (minimumand maximum) o f rates to enable MMIto negotiate contract-specific rates incoordination with the Inter-Ministerial Committee. This allows MMIto provide some relief to more remote or otherwise higher-cost operations as an economic stimulus for development. For hydrocarbons, royalty rates are left to be defined in the contract. One significant difference between the two laws i s that contracts will take the form o f production sharing agreements (with the exception o f pure service contracts). Currently the model contract stipulates that, when the rate o f post-tax return exceeds 15%, production will be shared equally between the investor and the Government. Building Technical Capacity. Both BGS and USGS have strong programs targeted toward professional development within MMI,principally inAGS. SOE Reform. MoF i s responsible for overseeing SOE reform. Its SOE Department has already developed an approach to SOE reform and a preliminary classification o f SOEs. MMIneeds to fully engage MoF on this issue so that strategic considerations, such as the need to retain production o f certain essential commodities inthe short term given the lack o f private sector investment and technical sectoral expertise, are fully taken into account in the strategy and its implementation." Regularizing the Informal Sector. This i s neededto effectively regulate informal construction material operations to enforce legal, environmental, and social compliance. 4.60 These essential reforms and regulatory activities fall across legal, taxation, and institutional regimes, as summarized inTable 4.6. loSee Volume 111, Chapter4. 85 - I Legal & Regulatory Fiscal & Mining Taxation Institutional Strengthening Mineral Ownershiu: State Legislation: Tax legislation that i s Mines Cadastre: For the effective ownership o f all mineral resources; simple, clear, and stable; issuance o f mining rights and government authorization to grant attracting private sector assert government control; private access to mineral rights; investment through stability, Mining Inspectorate Unit: a Regulatory Authority: The state as transparency, and a level playing Monitor and control o f mining regulator o f private sector mining, field; sector activities as well as rather than as explorer, operator, or Competitive Fiscal Regime: transparent and uniform equity-owner; Royalties and production share enforcement o f laws and a Mineral Rights: Basic terms, and the that reflect international regulations; procedures for granting such rights - standards, and competitive tax Geological Survey: For acquiring made available to the private sector; concessions; and organizing geo-science Security of tenure: Transferability o f Effective Administration: information and supporting sector title, other investor rights; Ensuring that MoF and MMI promotion; a Disposition of State Assets: work closely on common issues One-Stop Shop: For investor Successful tendering o fkey assets; o f effective taxation, inquiries; Environmental Protection: Create administration, and collection; Develop environmental and effective environmental law and Setting Priorities: Focusing on social management capacity: regulations; near-term production and With emphasis on safeguard a Special considerations: Special royalties from ongoing production policies for vulnerable groups; regulation o f construction materials activities while seeking to attract SOE reform: Engage MoF to and small scale mining. new private sector investments. support SOE department process; Small Scale Mining: Extension services to improve the productivity and living/working conditions o f small scale miners. 4.6 1 To implement these steps, MMIneeds institutional strengthening and long-range budget planning to (i) improve public expenditure and financial management, (ii) a master development strategy, define and (iii) transform the ministry into an agency performing primarily regulatory functions. Actions to date have been donor-driven and ad hoc without an overarching strategy that reflects the long-range plan for sector growth. The next section focuses on the issue o f financial and administrative capacity strengthening. D.FinancialandAdministrativeSystems 4.62 The current problems infinancial accounting and budget planning have been discussed in Section A o fthis chapter. How they have arisen andissues that needto be addressed are discussedbelow. IMPLEMENTATION ISSUES AND ACCOUNTABILITY FRAMEWORK Accountability Framework 4.63 T o improve performance, the accountability framework should be strengthened (see also the section on administrative structure). MMIi s different from most other ministries inthat it has very limited direct contact with the public. Its services are directed to the Government and support o f SOEs. Under the State Owned Enterprise Law (1991), SOEs are legal entities with financial control by the SOE Department at MoF. Implicitly, operational control remains with MMI. Most o f the SOEs are theoretically commercial ventures although none operate on a commercial basis at present. There are no financial controls, and basic data collection is poor. Better accountability vis-$-vis the Government requires strengtheningMMI's capacity to formulate and execute its budgets. 86 Budget Formulation and Execution 4.64 MMIhas not established a formal budget allocationprocess. The operating budget allocated by M o F i s used for basic need and i s heavily weighted toward meeting payroll and operating expense for the Ministry,leavinglittle scope for discretionary spending. Little or none o fthe operatingbudget is allocated to programs that will change the direction o f the Ministry toward becoming a regulatory agency. The operating budget could be usedmore effectively ifthere is a rationalization o f the workforce, but this will require restructuring to realize the new mission o f the Ministry. 4.65 Allocation o f expenditures among provinces has not yet become an issue; funds have been going simply to maintain existing operations. In the future, once additional funds become available for data collection and other activities that go beyond the bare minimumneeded to continue ongoing operations, the regional allocation o fresources within Afghanistanmay require prioritization. 4.66 The Ministry has tended to be reactive to issues relating to the development budget and, as a result, the allocation for the mining investment program has been relatively small. The major projects have been initiated by donors. This has been done with varying levels o f discussion with Ministry staff. Most o f these projects have been aimed at developing the resource base or feasibility studies for other future projects. Fundingrequests from the Ministryhave been mainly for emergency projects to maintain existing production. The Ministry can also improve formulation o f requests to build basic management information systems. Suchrequests have not always matchedneeds. 4.67 The small size o f the development budget also reflects problems with donor-assisted programs. Issues include insufficient consultation duringthe design and preparationo f the program, the time it takes to prepare and implement a program, lack o f adequate communication from the donor regardingthe status o f the program and near-term steps required, and insufficient briefings and discussion once reports are delivered. There have been more concerted efforts between MMIand donors as well as among donors in recent months to coordinate activities, eliminate overlap, and identify the most pressing needs on a short- term basis. However, more discussion with donors i s needed to develop future plans, consider long-run objectives, and examine how individual projects would contribute to meeting sector objectives. CAPACITYBUILDING 4.68 Many o f the current problems with budget preparation stem from lack o f capacity; hence the need for capacity building. There is also a need for basic communication infrastructure improvements. The information systems in operation at MMI are a legacy o f Soviet record-keeping at a low level o f functioning. There i s no inter-connectivity o f operations at the communications level at MMI.Kabul and region-based MMI operations rely on inadequate mobile telecommunications, telegraph, and personal CommuniquCs to transmit information and data. There i s no computerized system for information management, and file keeping i s conducted by an entire department o f mid-level MMIstaff. All ministry correspondence i s tracked by hand by one individual who i s supported by a team o f three staffers. Government rules on ministry correspondence/filing need to be addressed as they relate to hand-written files. 4.69 There are only two computers at the Ministry with internet service, leading to poor communicationwith donors. There i s essentially no basic management information systemor information technology (IT) function. Ministry staff are virtually unexposed to computers. Computers are used at the Ministry to a limited extent, but primarily for data storage or as typewriters. There is no building-wide local area network (LAN) system. Some data are kept on computers in Kabul, but there i s no detailed analysis (and not much capacity to do the appropriate analysis). 87 4.70 A personnel needs assessment should be undertaken. Efforts to recruit recent college graduates should be given highpriority. This might include (i) one year on-the-job technical training to be a field technician or junior accountant, and (ii) two year "associate degree" programs inengineering, accounting, or general business. These programs might be undertaken with Kabul University or in cooperation with Western universities that have similar programs. 4.71 There remain gaps in the qualifications o f Ministry staff to undertake regulatory functions, particularly negotiating contract provisions with foreign investors. This will be a financial management issue duringthe Aynak tendering process. ADMINISTRATIVE FRAMEWORK 4.72 An administrative framework is needed that MMI could use to address these problems and possibly support broader reforms. This framework i s based on two considerations. First, the Government has defined an overall structure for implementation o f financial management and ministry strengthening. '' Table 4.7: Overall Structure for Implementation Office of the The Office of the Minister will act as the first point o f contact for the donor Minister community with MMI and will provide advice to the Minister on legislative and Cabinet affairs. Deputy Deputy Ministers, who are political appointees, help coordinate and supervise the Ministers preparation o f MMI's policies and programs and link with the work at the government level. Chief Financia1 The draft Public Finance and Expenditure Management (PFEM) L a w requires Officer each ministry to appoint a Chief Financial Officer (CFO). The CFO is responsible for the preparation and submission o f the draft budget to M o F and for fulfilling all o f MoF's reporting requirements. The CFO i s also required to record transactions, maintainaccounting records inaccordance with Treasury instructions, and provide copies o f the accounting records to Treasury when requested. SOEHigh The draft PFEM Law requires each SOE to have a HighCouncil and a Governing Council and Body. SOEs are required to keep accounts and financial records in accordance GoverningBody with International Accounting Standards and to keep records insuch a way that enables preparation o f financial statements and allows precise audits and reviews o f fmancial statements. SOEs are also required to prepare quarterly and annual reports o n operations, fmancial statements including a balance sheet, profit and loss statement, and related statements that present a true and fair view of their financial status. For the annual report, independently audited financial statements are also required. 4.73 Second, the previous section has identified new institutional needs, inparticular to provide (i) a point o f contact for donors and investors on overall sector strategies through a technical steering committee, (ii) overarching strategic planning, improved budget formulation, and direct supervision o f department heads and senior staff, and (iii) sound accounting practices that record transactions and produce audited financial statements. 4.74 A ProgramManagement Unit (PMU) is neededto manage MMIand its proposed change from a vertically integrated extractive industry conglomerate or "production ministry" to a policy-making This schematic description is based on the experience with PRR reforms in other ministries as well as draft laws, such as the Public Finance andExpenditure ManagementLaw and the Civil Service Law. Hence, this description cannot yet be considered as Government's policy. 88 government regulatory agency. Program management capacity needs to reach across the entire ministry in order to facilitate change functions and implement a completely revised corporate culture. These dramatic but necessary changes will require significant support to MMI: a critical mass o f slulled talent, working as a team, is vital to ensuring the transition at MMI. The current cadre of MMI staff do not include Afghan professionals with sufficient vision, market understanding, or imagination to facilitate the Ministry's transition to becoming a 21st century regulatory agency that facilitates the role o f the private sector in minerals and industrial development. MMI envisions a cadre o f professionals worlung in the PMU under the overall guidance o f the Minister to bring into existence the "new" regulatory and facilitative MMI,while at the same time helping to dismantle the "old" MMI. 4.75 MMIhas the authority to assess royalties on resource production. A factor cost of production, royalties are insensitive to changing economic conditions, and high royalties dissuade investment and sterilize lower quality resources. Today effective royalty regimes have low fixed rates that are published with the minerals law. M M I ' s newly passed Minerals Law had the royalty schedule removed during the Ministry of Justice's review, citing a government preference to negotiate rates on a project-by-project basis. Since MMI has no capacity for this, it i s more likely to lead to unsatisfactory results for the Government. Furthermore, inorder to attract grass-roots metals exploration, investors will needto know up-front the royalty rate. An investor i s not in a favorable position if required to negotiate after a significant discovery. To correct this problem, royalties could be published inthe Regulations. E.Next Steps 4.76 The overall objective o fMMIreformis for the Ministryto play primarily a regulatory role, and in the interim take steps to make SOEs commercially viable and prepare them for eventual privatization. Table 4.8 outlines key steps toward this objective. Table 4.8: MainRecommendations Meeting Overall Scoping MMIneeds in terms o f (i)fiscal, regulatory, and institutional frameworks to make Objectives, by Afghanistan globally competitive; and (ii)direct on-the-ground technical assistance to wrapping key enterprises. action items described to the Based on the scoping analysis, the following tasks are likely: right into a Create an overarching sector strategy for the development o f hydrocarbon and mineral comprehensive resources, so that Afghanistan can realize its full mineralwealth potential. strategic Define additional fiscal, legal, and institutional reforms that may be needed, and program corresponding policies - inparticular, publishroyalties as part o f the regulations for the Minerals Law. Define an implementationplanfor the overarching sector strategy. Define key strategic investment decisions that needto be taken by MMIand the private sector. For MMI investment decisions, define priorities, required actions, and estimated costs across the interim and longer term. Define an interim and longer-term strategy for SOEs -principally coal and cement Create a financial management framework including key offices, job descriptions, and accountability frameworks. NextSteps MMIto develou its VisiodNext Stem Identify funding needs to get the process going, including advisors, implementation unit, etc. Develop a sector-wide action plan and attract external assistance to finance it. Establish an inter-ministerial working group for Aynak Tender (stages 1 and 2). Define through further engineering analysis strategic investments to reduce coal mining costs. Establish an inter-ministerial gas working group to formulate reforms needed to stimulate commercial gas development, and to set gas pricing principles and formulas. 89 CHAPTER5. HIGHWAY SECTOR Executive Summary 1. The highway sector, and more broadly the road sector as a whole, plays a critical role in Afghanistan's development strategy. It i s an essential enabler o f economic growth, supporting trade, other economic interactions, and access to domestic and regional markets. Moreover, construction and maintenance o f highways can encourage business development in the construction industry and construction materials industry. Highways and roads promote national integration and help ensure that the Government in Kabul can reach out to provinces, and also provide the population served with better access to various services and increase people's mobility; hence they are greatly valued by Afghans. ii. Forallofthesereasons,theGovernmentanddonorsdecidedtoprioritizehighwayreconstruction for funding and rapid implementation. Other than the enormous spending on building up Afghanistan's security forces, the road sector has been the biggest recipient o f international assistance. The Government encouraged donors to invest in reconstruction o f the core national highway network, and donors responded, funding different segments with relatively good coordination for the most part. Gaps in the main network have been progressively filled over time, and the investment program for the Ring Road and key connections to neighboring countries i s basically fully funded, with most o f it under implementation. While implementation has not been as rapid as either the Government or donors originally hoped, good progress has been made on many projects. ... 111. Many difficulties have been encountered, however, including among others security problems and associated delays and costs; other factors pushing up costs; Government capacity limitations; lack o f financing for maintenance, etc. The main findings andrecommendations inthis Chapter are as follows. iv. First, maintaining the reconstructed and new highways is a top priority. Without due consideration for maintenance requirements, the sizable investments that have been made inthe highway sector will not fully achieve their expected economic impact. In terms o f financing, this challenge requires carehl prioritization within the highway sector as between maintenance and new road construction - greater benefits often are associated with maintaining an existing road than with starting a new investment. Beyond effective prioritization, additional resources will need to be identified for highway maintenance. While it i s not recommended at this stage o f Afghanistan's development to earmark specific revenues for this purpose, developing highway-relatedrevenues (most notably tolls) will both increase Afghanistan's revenues and pass part o f the cost o f maintenance to the users. And finally, the modalities for maintenance need to be well implemented, with an emphasis on use o f the private sector. v. Second, it is recommended to take a very cautious approach to large new highway projects. Given the reconstruction of the core national highway network that i s underway and the enormous need for public investment in other infrastructure sectors, it i s doubtful whether large investments in new highways are o f the highest priority for the Government and its partners at this stage. Moreover, some new investments - especially new highways to be constructed at high(and expensive) technical standards - might not be worth initiating on account of relatively low traffic forecasts and unaffordable maintenance costs. vi. Third, thefragmented implementationpattern dominated by donor-executedprojects has been reasonably successful but has had drawbacks. The approach taken allowed projects to start up quickly, ensured that donors focused on and were in some sense accountable for specific projects, "allocated" the different projects across donors so that all priority projects were eventually covered, and minimized the 90 burden on initially very weak capacity in MPW. There has been basic coordination on standards, and coordination o f investments was facilitated by the obvious need to reconstruct and complete the "Ring Road". However, the disadvantages o f this approach are increasingly evident - in terms o f high and varying costs, lack of Government leadership and ownership, reliance on temporary external capacity rather than building sustainable core government capacity, possibly making it more difficult for the Afghan contracting industry to develop, etc. Moreover, this kind o f approach made more sense in an "emergency" mode of reconstructing an existing network o f highways than it will for a future program o f new investments that will need to be cohesive, very carefully prioritized, limited, and cost-controlled in view o f resource constraints. And maintenance, the top priority for the future, i s best not managed in an institutionally fragmented manner. As "lumpy" investments, major road projects are more conducive to projectized funding, as opposed to sector/program funding, than i s the case in many other sectors. But Government-led prioritization and oversight, along with more harmonized approaches across donors, would yield substantial benefits inthe future. vii. This in turn raises the issue of developing the capacity of the Ministry of Public Works. Capacity constraints in this ministry have not been very well-addressed by fkagmented TA and ad-hoc structures created by donors to assist with their projects (e.g. Project Implementation Units, PIUs). As in other ministries, such approaches have not been greatly helpful in building sustainable core Government capacity. The Ministry should focus on its core functions, and substantial, permanent involvement by MPW or other public entities directly inroadmaintenance or construction shouldbe discouraged. viii. ... Finally, strong emphasis on valuefor money is required in the highway sector. There have been large variations inthe unit (per-kilometer) costs o f different highway reconstruction projects. Such differences would appear to be to a considerable extent explainedby objective factors (e.g. the state o f the road being rehabilitated), and by factors beyond the control o f the Government, donors, or implementing entities (e.g. changes in the security situation). However, part o f the variation in costs may be due to controllable factors (e.g. contract design, procurement process, cost o f materials from different sources), and hence need to be looked into further, with a view to talung remedial actions inorder to contain future costs. 91 A. The Road Sector and Highway InvestmentProgram 5.1 Following the end o f major combat in Afghanistan in late 2001, rebuilding Afghanistan's highway network was assigned top priority among infrastructure investments by both the Government o f Afghanistan and international partners. A large road reconstruction investment program with a total cost o f more than US$1 billion has been initiated. Considerable progress has been achieved, but there have also been significant problems and constraints. Experience in the highway sector provides valuable lessons for future road and other infrastructure investment programs in Afghanistan. There are also critical issues related to institutional capacity, financial management, maintenance, and fiscal sustainability in the highway sector. These aspects will determine whether the substantial investments made so far, as well as any future highway investments will fully reap their intended benefits and will be properly maintained so that they continue to provide such benefits to the Afghan people and economy. 5.2 This chapter first provides some historical background on the highway sector, its importance for Afghanistan's economy and development, the institutional structure for managing highways, and the condition o f the highway system at the start o f post-conflict reconstruction. The second section describes Afghanistan's highway investment program and discusses financing arrangements, and also looks at future priorities. The next section reviews the experience with implementation and associated issues and problems, including road standards, contract design and procurement, security arrangements, and costs and "value for money". Maintenance issues and fiscal sustainability in the highway sector are then discussed. The final section presents some conclusions and recommendations. HISTORICAL BACKGROUND 5.3 Prior to the war, Afghanistan had a small but high-quality modern national highway network, builtwith foreign assistance primarily from the USSR and USA, which linkedkey cities and a couple of the main border crossings. Consisting entirely o f well-paved single carriage way two-lane roads, this network sharply reduced travel times and opened up communications and markets across the country. Of particular importance was the main north-south highway going through the Salang Tunnel, which helped provide a much greater degree o f integration between northern and southern markets. The Kabul- Kandahar-Herat highway similarly provided much faster and lower-cost transportation on the East-West axis. Travel times were unprecedentedly fast (in relation to Afghanistan's previous history) on these routes.' There were also good road connections to four border points: two with Pakistan (Torkham and Chaman), one with Iran (Islam Qala), and one withthe former USSR, now Uzbekistan (Khairatan). 5.4 However, there were important gaps in the highway system, and most o f the country was not served by major roads providing access to the highway network, or even functional tertiary and rural roads, and offthe few main highways vehicle speeds were very slow and travel times long. Afghanistan's harsh topography and climate meant that many parts o f the country remained cut o f f during the winter, and snow, springfloods, and landslides etc. made secondary and tertiary roads impassable at times. 5.5 Duringthe longperiod o f conflict, a combination o f destruction (e.g. o fbridges), heavy military use, climatic conditions, and most important lack o f maintenance resulted in severe deterioration o f the highway network. Much o f it became unusable, with vehicles often driving on dirt tracks alongside the origmal road. Damage to bridges and tunnels caused bottlenecks to the movement o f people and goods. Travel times and vehicle operating costs sharply increased, in some cases going back to levels approaching those before the highways were built. This resulted in lack o f efficient transport between 'For example, it was possible in the 1970s for a passenger vehicle to travel between Kabul and Herat, nearly the length of the countryon the East-WestAxis, within a day, and Mazar-i-Sharifand other northerncities were easily reachable from Kabul ina day, as were Pakistanicities onthe other side of the border to the East. 92 Kabul and regional centers, hampering national integration. Paradoxically, however, rudimentary but usable vehicle tracks in some remote parts o f the country had to be developed for military purposes during the conflict and also were subsequently used for delivery o f humanitarianaid. So there ended up being somewhat better access, albeit on a limited and seasonal basis, in certain remote areas which had not been served by roads connecting them to the prewar highway system. However, the sustainability o f these remote routes i s doubtful. Experience during the conflict demonstrated the importance o f roads being kept open to stabilize market prices in remote parts o f the country (e.g. Badakhshan), and part o f the limited international assistance to Afghanistan duringthe 1990s was devoted to such efforts. 5.6 Insum,thelongperiodofconflicthadadevastatingimpactonroadinfrastructure inAfghanistan, due to three effects: (i) the existing highway network was very heavily damaged as a result o f military action and military use, lack o fmaintenance, and harsh climatic conditions; (ii) new highways, whether to fillgapsinthepre-warsystemortoopenupaccesstolargeswathesofthecountry,simplywerenotbuilt duringthe conflict; and (iii) Afghanistan missed out on the massive construction o f tertiary and farm-to- market roads which occurred in many other countries and became an integral part o f the development agenda during this period, in recognition o f the high economic and social returns o f such roads. As a result, the legacy o f the conflict was a huge backlog of highway rehabilitation requirements, obvious needs for additional highways to fill gaps and help cement together the country, and large needs for smaller local roads. There was enormous demand to address thisbacklog ina short period o f time. AFGHANISTAN'S ROAD NETWORK 5.7 As can be seen from Table 5.1, Afghanistan has a total road network o f nearly 35,000 km, the vast bulk o f which (roughly 27,000 km) are provincial and rural roads often o f very l o w standards o f quality and usability (graveled or earthen). The core regional highways have a total length o f 3,242 km, consisting mainly of the 2,300 km "Ring Road" (Kabul-Mazar-e-Sharif-Sheberghan-Maymana-Herat- Kandahar-Kabul. This includes a long section between Herat and Andhoy in the northwest that was not constructed in the first place as well as major links to neighboring countries totaling about 900 km. The physical condition of the national highway network (totaling about 5,000 km) varies but in general was not good at the time when major combat ended in late 2001. Only 26% remained in fair condition, 54% were inpoor condition, and large sections had deteriorated to unpaved status. I Table 5.1: RoadClassificationsandLengths RoadClassification I Length. km Regional Highway 3,242 National Highway 4,884 ProvincialRoad 9,656 Subtotal 17,782 Rural Road(estimate) 17,000 Total 34,782 5.8 A set o f new Interim Road and Highway Standards has been developed, which are being reviewed by the Ministry o f Public Works and are expected to be adopted by the Government. The functional road classifications proposed in the Interim Standards are defined as follows (see also Table 5.1): Regional Highways are the existing national primary highways, also termed "Super Corridors", and there are proposals to expand these roads to four lanes, which i s expected to foster regionaltrade and economic linkages betweenAfghanistan and neighboring countries. 93 National Highways (currently national secondary highways) are intended to promote internal trade and economic linkages and extend Regional Highways to provincial capitals, contributingto peace, security, stability, economic growth, and national integration. Provincial Roads improve the administrative, trade, and economic connections between district headquarters and respective provincial capitals, and between important district headquarters. Rural Roadsbringthe hinterlandinto contact with markets and local administration. 5.9 The technical road classifications proposed inthe Interim Standards are defined as follows: Expressways-Type I: Four lane paved roads with two lanes in each direction; lanes are 3.5 meters wide and the total roadway width i s 24 meters. Exterior shoulders are three meters wide and interior shoulders are two meters wide including median barrier. Expressways are designed for higher speeds and can accommodate heavy traffic volume between 13,000 and 30,000 passenger car unitsas average annual daily traffic (ADT). Expressways-Type 11: Four or more lanes, paved roads. They have two or more lanes in each direction o f traffic with a median separating the opposing lanes o f traffic; lanes are 3.5 meters wide. Divided highways have access control (e.g. entrance and exit ramps) and are designed for higher speeds and can accommodate traffic inexcess o f 30,000 ADT. Major Roads: Two lane paved roads with a seven meter wide carriageway and 1.5 meter wide shoulders. Major Roads are designed for average traffic volume up to 13,000 ADT. Minor Roads: Two lane gravel roads with a six meter wide carriageway and 1.5 meter wide shoulders, where possible. Minor Roads have low average daily traffic o f below 5,000 ADT. Their surfaces are compacted gravel or a similar material. Non-Standard Roads: Small roads and trails that are not significant enough to require engineering design or standardization. They typically have very l o w ADT and have gravel or dirt surfaces. Non-Standard Roads are not discussed inthis chapter. 5.10 The final draft of Master Plan i s also recommending establishment o f an additional road class based on the AASHTO (American Association o f State Highway and Transportation Officials) design guidelines for low-volume roads, which specify a gravel roadway width (carriageway plus shoulders) o f 6.0m for design speeds up to about 60 km/hdepending on type o f traffic. ECONOMIC SIGNIFICANCE 5.11 Infrastructure in general, and roads in particular, are essential for achieving sustained economic growth, and for political and social progress based on national integration (see Afghanistan Government, 2004, p. 39). More specifically, infrastructure like roads contibutes directly to economic growth, provides critical basic access to services to the people, promotes national integration, and serves as a highly visible index o f government performance. All o f these contributions are o f particular importance in the case of the road sector in Afghanistan - where there is no rail transport; opportunities for water transport are minimal; and low income levels, low population densities, and in many areas topography limit the ability to use air transport extensively for domestic travel. 5.12 From the perspective o f the wider Central Asia region surrounding Afghanistan, roads are the primary transport linkage with neighboring counties. Potential for transit trade through Afghanistan, as well as more generally opportunities for greater regional economic integration through trade and transit, depends on the highway network and its quality, among other factors. 5.13 While major highways encourage long-distance trade and integration o f regional and national markets, smaller tertiary and farm-to-market roads which link localities and villages can play a very 94 important role in enhancing local access to markets and services and spurring local economic development. Roads are also a major factor increasing access to social services. Although this chapter does not cover inany detail the programs supporting maintenance and construction o f secondary, tertiary, and farm-to-market roads, the economic returns and development impact o f such roads can be very high (including in terms o f access to schools and health facilities). Municipal roads, also not covered in this chapter, are very important for the economic hnctionality o f cities and towns, and for the quality o f life. 5.14 Insum, roads are Afghanistan's principalmeans oftransport for domestic and international traffic and therefore o f great economic importance for the country as well as the region. This chapter focuses on the highway sector, but the importance o f rural roads and municipal roads must be acknowledged, and appropriate strategies and programs put inplace for these components of the road system. ROLEOFTHE GOVERNMENT INTHE SECTOR 5.15 Economic analysis can hlly justify the role o f the Government in the highway sector, in particular with respect to financing the large capital investments required. Indeed, given their lumpiness, the associated financial risks, the long-term time horizon for fully reaping the benefits o f highways, the externalities associated with these benefits, and often network monopolies at the route level: public intervention i s justified to finance investments that would otherwise not be forthcoming from the private sector at appropriate levels. The role o f the Government in financing maintenance of highways is less clear, however. Inparticular, there i s a strong case for introduction o f partial or full cost recovery for maintenance from users (see Volume I, chapter 8 for a discussion on cost recovery in general). 5.16 Whereas the case for public financing o f investment inthe highway sector is strong, as discussed below there i s much less justification for direct public sector provision o f services in the sector, either construction or maintenance. These activities should be handled primarily if not entirely by the private sector, implying that the public sector needs to focus on its essential roles o f regulation, contracting, planning, monitoring, and financing (including through cost recovery). EVOLUTION SECTOR STRATEGY OF 5.17 In March 2002, a Transport Sector Review (TSR) was proposed by a Joint ADB/World BanWdonor mission and later carried out with funding from the Swedish International Development Cooperation Agency (Sida). The purpose o f the TSR was to prepare an overall vision and development strategy for the transport sector (covering aviation, roads, and road transport), consistent with the policies and development framework o f the Government. The Policy Statement o f the TSR can be seen as a proposal for an indicative transport policy for Afghanistan. Ithas a time perspective o f 10to 15 years and focuses onpolicy, and institutional, and capacity buildingissues inthe three main sectors. 5.18 SecuringAfghanistan's Future (SAF - Afghanistan Government, 2004), which was prepared by the Government with assistance from international partners, stated that the road development goal i s to rehabilitate and improve the road network and strengthen domestic linkages between the capital, all major cities, major commercial, industrial production, and mining centers, and provincial and district headquarters. Such linkages will achieve full connectivity o f the road network, enhance national integration, and strengthen international linkages with neighboring countries, thereby facilitating economic development and reducingpoverty by improving access to markets and services. It rarely makes sense to buildtwo significant roads along the same route, although such examples are not unknown. 95 5.19 The SAF report also re-emphasized policy recommendations made in the Transport Sector Review. Recommendations pertinent to road infrastructure development included: (i) private sector participation in construction and maintenance works; (ii) a modern asset management system, including toll collection; (iii) cross-border trade, and (iv) addressing cross-cutting issues, including environment, gender, capacity building, traffic safety, and regulation for promoting competition. A final draft Master Plan for the highway sector has beenprepared with assistance from ADB. 5.20 The Government i s currently preparing an Interim Afghanistan National Development Strategy (I-ANDs), which is expected to gve prominence to infrastructure in general and to the road sector in particular, as an important contributor to economic growth and national integration. INSTITUTIONALSTRUCTURE FORMANAGEMENT OF HIGHWAYS 5.21 The Ministry o f Public Works (MPW) i s responsible for construction and maintenance o f national and provincial road networks (see Figure 5.1 for summary schematic diagram of MPW's organizational structure). However, MPW currently has neither the institutional capacity nor the financial resources to undertake even routine maintenance o f the national road network. The Ministry of Rural Rehabilitation and Development (MRRD) i s responsible for small-scale rural infrastructure, including rural roads, and there are a number o f ongoing projects for maintenance and rehabilitation o f such roads. 5.22 MPW currently has about 2,200 staff, and its mandate covers the following activities: (i) road infrastructure planning; (ii) road construction and maintenance; (iii) tolls collection (discontinued in road 2002, see section on financing); (iv) survey and design; (v) maintenance o f h4l'W's own vehicles and equipment; (vi) airport design and construction (but not operation of airports); (vii) inland waterways terminals; and (viii)railways. However, many o f these functions are not being carried out at present. Figure5.1: Current Organizational Structure of the Ministry of Public Works Source: Ministryo f Public Works. Note: Aviation i s not included, and the provincial departments are not shown. 5.23 MPW was in the past responsible for virtually all Government construction and maintenance, using its own staff, labor force, and equipment (i.e. force account). This included roads and bridges, airports, public housing, water, etc. All aspects o f planning, design, construction, and maintenance were carried out in-house through a number o f MPW construction units. MPW was traditionally responsible for construction and maintenance o f national and provincial road networks in the country. In addition, MPW had a multitude of other responsibilities such as construction o f airports, housing, water supply, city planning, and collection o f road tolls. MPW was also involved in maintenance o f the airport pavements and managing several state-owned construction units for housing, roads, and airports (see Volume 111,Chapter 4). 96 5.24 However, MPW lost nearly all o f its resources for road construction and maintenance during the long period o f conflict, and what was left was outdated and difficult to keep operating due to lack o f spare parts. Many o f its staff, including slulled plant operators and dnvers, moved to neighboring countries and elsewhere (in the private sector), and most o f them never came back. The loss o f good plant operators, drivers, and skilled workers was very damaging to MPW, and moreover that fact that no new work was carried out due to the conflict resulted in the remaining work force finding it difficult to undertake even simple maintenance tasks effectively, such as resurfacing o froads and snow removal operations. DONOR RESPONSEAND COORDINATION 5.25 A number o f donors are involved in providing financial support for highway investments. USAID i s the largest donor, followed by the Asian Development Bank, the World Bank, and the European Commission. Other donors include Saudi Arabia, Iran, Japan, Italy, Sweden, Kuwait, and Palustan. A number o f donors provide financial assistance for smaller roads, including fundingchanneled through the Afghanistan Reconstruction Trust Fund (ARTF). Some donors are providing technical assistance (TA) inthe form o f project feasibility studies, engineering design and construction supervision services and training. 5.26 More specifically, in addition to assistance from Afghanistan Reconstruction and Development Services (ARDS) for planning and implementation o f projects, MPW i s currently being provided with technical assistance for sector planning, project management, and capacity building, including: One Road policy advisor at MPW (one year) for capacity building o f MPW, provision o f policy advice, and support o f the Consultative Group for the Transportation Sector (CG-TS) and Workmg Group activities, financed by Japan International CooperationAgency (JICA). TA for mid-level engineers at MPW with reconstruction and provision o fbasic equipment at Kabul Machinery Center(planned), financed by JICA. Various training courses in Japan and Malaysia for road construction management, civil engineering, roadpolicy management etc, financed by JICA. Two advisors financed by ADB (mainly for financial and contract management related to investment projects). Advisors financed by ADB for developing the capacity for road database management and quality control o f road works, and operation o f a materials testing laboratory (also involves Kabul Polytechnic University and engineers working for local construction firms). Additional advisors for specific projects, provided by the donor financing the project concerned. A teampreparinga roadmasterplan (mainly financed byADB). 5.27 In view of the lack o f capacity in MPW as well as elsewhere in Government, donors have exhibited a tendency to establish ad-hoc structures to oversee and assist with the projects they financed, usually referred to as Project Implementation Units (PIUs), to help ensure timely and effective implementation. In addition, there are numerous foreign experts workmg in MPW under various arrangements. "Enclave" PIUs, which are not an organic part o f a Ministry and don't have sustainable institutional capacity building as a core objective, raise serious concerns. PIUs established by donors primarily to ensure proper implementation o f "their" projects do not support genuine institutional capacity building and may well undermine accountability o f and within ministries for the progress o f projects. Staff inPIUs may see themselves as workmg more for the donor paying for their salaries and not so much responsible or accountable to the Ministry. More generally, uncoordinated and fragmented technical assistance (TA) in ministries like MPW can work at cross-purposes, undermine national ownership, and inhibitlearningbydoing. 97 5.28 These shortcomings suggest that not having a PIU may be the best way to help build capacity and ensure Government program leadership: although this requires a critical mass o f capacity and support within the Ministry structure. Any PIU, if created, should be an integral part o f the Ministry, report to Ministry leadership, and focus on capacity building. Inaddition there should be only one such unit per ministry, responsible for supporting implementation o f the entire program o f the ministry rather than focused on the projects of a single donor. Hence such units are better termed Program Management Units (PMUs) and need to be integrated within the Ministry concerned. 5.29 With a large and variegated group o f donors, most o f them directly executing projects, coordination among the donors and with the Government is extremely important in the highway sector. This i s the responsibility o f CG-TS, which i s chaired by MPW with ADB and JICA as the focal points for sector issues. The aim o f the CG-TS i s to increase the effectiveness o f aid coordination in support o f national development objectives. Monthly CG-TS meetings are conducted, and a secretariat has been provided by U S A I D and the U S Army Corps o f Engineers. Six "Working Groups" have been formed to address particular subjects andor issues. However, coordination i s not without challenges. The CG-TS has been active but i s not necessarily well-linked to MPW's work, and MPW does not take active leadership. More generally, donors still do not have a common agenda and well-developed process for collaboration, with frequent donor staffing changes hindering mutual learning and knowledge building. All this is hamperingthe reformprocess and capacity buildinginMPW. 5.30 To address the need for capacity building in MPW, recently MPW and donors agreed on TA support for administrative reform and capacity building in MPW. This TA will be financed by a grant from the World Bank under its ongoing highways project and will be co-financed by Sida. The TA will assist MPW to develop, manage, and implement a multi-donor supported and funded program for (i) administrative reform and capacity buildinginMPW, and (ii) capacity building o f the private contracting sector for, in particular, road maintenance and minor construction works. The TA will also provide, as and when required, support on an ongoing basis to M P W for the implementation o f capital investment projects.4 The TA will provide lead assistance to MPW for developing, managing, and implementing a program for administrative reform and capacity building in line with the public administration reform strategy o f the Government. The program will also include the strategy and framework for capacity buildingof the private contractingsector inAfghanistan. It is expected that this program will lead to and serve as a framework for other technical assistance projects for reforming and building the capacity o f MPW and developingthe private contracting sector. The primary objective o f this program i s to create a modem ministry responsible for developing and managing Afghanistan's transport infrastructure, including roads, railways, and waterways'. This will include policy malung, planning, establishment and enforcement o f standards, construction, and operation and maintenance, as well as building adequate institutional and human capacity for performing these functions. A secondary objective i s to contribute to the development o f a capable contracting industry for transport infrastructure works. The modernized M P W will, to the maximum extent practicable, perform its functions by way o f service contracts with the private sector. Under this TA a management firm will be initially contracted for three years. For example, the EmergencyTransport RehabilitationProject,financedby the World Bank, was implementedwithout aPIU. It successfullydisbursednearlyall projectfunds and completed all works after two and ahalf years, within the plannedcompletion target for the project. However, lack of capacity inMPW didhinderprojectimplementationinvariousrespects. It is assumed that some of the support referred to in Section 5 may come to an end. The Consultantwill then provide similar requiredservices, as set out inthe Scope o fWork. MPW is also responsible for the planning and construction of airports and airfields. The Transport Sector Review, a (provisional) policy document for the transport sector, recommended that these functions be transferred to the Ministry of Transport, which today is responsiblefor the operations andmanagementof airports/airfields. 98 B. The Highway RehabilitationInvestment Program SIZE AND SHAPE 5.31 The current transport sector development program is contained in the National Transport Programme, Public Investment Programme (PIP), National Development Budget SY1384-1387 (2005/06- 2007/08). Inthe road infrastructure sub-program, there are currently 24 road construction projects with and committed funding from various donors totaling some US$l.l billion (not counting technical assistanceprojects). This programtargets rehabilitation of approximately 4,700 kmof regional, national, and provincial highways. 5.32 The heart o f the programis reconstruction of the 3,242 kmo f "Regional Highways" -mainly the RingRoad as well as some connections from the RingRoad to other cities and border points - executed through 18 projects with an estimated cost of over $1.1 billion. The spatial dimensions o f this program as it emerged are showninFigure 5.2, amap whichillustrates the importance ofthis investmentprogramfor bothroad communications within Afghanistan and the crucial links with neighboring countries. It should benotedthat the northwest quadrant ofthe "Ring Road" network, which was never constructed inthe first place inthe pre-war period, i s includedinthe highway reconstructionprogram. Figure5.2: HighwayReconstructionProjectsinAfghanistan /2, Source: Consultative Groupfor the Highway Sector. 5.33 A list of the segments andprojectsthat comprise the highway network (broadly corresponding to those shown in Figure 5.2), along with brief comments about their current status (as o f October- November 2005), i s presented in Table 5.2. The projects are at varying stages o f progress, with some having already been completed, others currently underway, and some still at the planning or initiation stage. 99 irrent Develop1 :nt Program for RegionalHighways Committed Road Section Length Fundsicontract Description Price,$ million Kabul-Kandahar Originally with asphalt concrete pavement. Rehabilitation/ 483 $237 US $29 Japan reconstruction work has been completed with assistance from United States (389 km) and Japan (53 km). Kandahar-Gereshk- Cement concrete pavement severely damaged. Dilaram-Herat $84 Japan Rehabilitation work started for Kandahar-Gereshk section (114km) 564 $45 Saudi with Japan assistancebutstopped due to security reasons. Gereshk- $140 U S Delaram section (115 km) with Saudi Arabia-US assistance not yet started. Dilaram-Herat section (326 km) started with U S assistance Herat-Bala Murghab GraveVearthen road. Includes the Sabzak Pass (2,500 m elevation). 203 $30 Iran Requires substantial improvement including realignment and NA Saudi provision o f bridges/culverts to allow smooth passage o f cargo vehicles. Iran has completed first section (60 km) to Armalik. The remaining sectionwill be fundedby Saudi Arabia Bala Murghab-Qaysar 100 $55 GraveVearthen road requiring substantial improvement. Bid documents are under preparation. Funded by ADB. Qaysar-Andkhoy 250 $80 GraveYearthen road with embankment and bridges/culverts provided. Funded by ADB. Andkhoy-Mazar e Except the first 22 km from Andkhoy, retains asphalt concrete Sharif pavement. Rehabilitation is under way with ADB/Japan assistance. Mazar e Sharif-Puli 447 90 Retains asphalt concrete pavement and is relatively ingood condition. KhUmri Rehabilitation is under way with ADB-Japan assistance. PuliKhumri-Kabul Puli Khumri-Doshi section (47 km)is inrelatively good condition and to be further improved with IDB assistance. Work on Doshi-Kabul 219 80 section (172 km) has been completed with World Bank assistance. Rehabilitation o f the Salang Tunnel (2.7 km at 3,363 m above sea level) has been completed with World Bank assistance. Kabul-Torkham Reconstruction o f Kabul-Jalalabad section (150 km) underway with (border o f Pakistan) Eur 35/28 EU assistance from the European Commission. 224 Eur 35/30 EU Reconstruction o f Jalalabad-Torkham section (74 km) underway with Pakistan da/ assistance from Pakistan. A new bypass is under consideration to augment the capacity o f h s section Kandahar-Spin Boldak Rehabilitation work completed with assistance from Japan/ADB and (border o f Pakistan) 104 225 Kuwait. Project rehabilitatedreconstructedabout 50% ofthis road. Dilaram-Zaranj 223 $84 Reconstruction started with assistance o f India. Zaranj-Milak (border A 320 m bridge across the border completed with assistance o f Iran. o f Iran) 11 $5 Approach roads to the border are being improvedby Iran. Herat-Islam Qala Upgrading to a 7.3 m camageway asphalt surface road has been (border o f Iran) 124 $50 completed with assistance from Iran Dirtroad. Plannedto beimproved with external assistance. ~Herat-Torghandi (border o f Turkmenis.) 119 None Anderkoy-Aqina Retains asphalt concrete pavement and is inrelatively good condition (border o f Turkmenis.) 37 None Rehabilitation is underway with ADB-Japan assistance. Naibabad-Hayratan Includedin Constructiodrehabilitation underway with World Bank assistance. Tc (border o f Uzbekistan) 57 Mazar to Puli be completed by December 2005 KhUmri Puli Khumri-Sher The project is ongoing with the assistance from the World Bank, anc Khan Bandar & 232 $30 is expectedto be completed by the end o f 2005. Kunduz-Taluqan Nizhni Pyanzh NA Contract for construction o f a new 670 m long two-traffic lane bridgc (Tajikistan)-Sher Khan over the Pyanzh river bordering Afghanistan and Tajikistan has beer Bandar awarded, with US assistance. Total Approximately 3399 $1,100 excluding data n/a Source: MPW (2005, pp. 9-10). 5.34 Also forming part of the current investment program are some additional national and major provincial highways not shown in the above table (see Table 5.3). There are numerous secondary, 100 tertiary, and farm-to-market roads as well, for which repairs, rehabilitation, and new construction are being carried out under a wide variety o f programs, including cash-for-work programs notably the National Emergency Employment Program for Rural Access (NEEPRA), which i s now being replaced by its successor, the National Rural Access Program (NRAP). These smaller roads are not analyzed in this paper, althoughtheir economic importance mustbe recognized. Table 5.3: Curl Committed Road Section Length km FundsKontract Price, Description $ millions 140 Eur 36 Full rehabilitation with assistance from Italy will cover initial 54 km. For the remaining section, only special maintenance is financed. Italian grant covers feasibility study and detaileddesignof entireroad. Jalalabad-Asmar 124 $25.44 Kabul-Gardez $28.94 Pul e Alam Ring Road $6.14 Ghazni-Sharan $14.64 Kandahar-TirinKot $22.14 ReconstructiodimprovementunderUSAID Gereshk-Lashkergarh $13.14 FarahRod-Farah $21.14 45 $15.54 72 $22.54 173 $25 WE3 ,$46mUSAID Rehabilitationand reconstructionwith assistancefrom WE3 (Taluqan-Keshim) and USAID (Keshim- Faizabad). 140 $5m Repair and constructionof structures (retaining walls, culverts, wash, etc), widening o f road, subgrade preparation, placement of 15 cm of gravel base wearing course, installation of new side drains and cleaning of existingones with World Bank assistance. 1,164 2000 $39.2 Fundedby World Bank andother donors and implementedby UNOPS I Source: MPW (2005, p. 5.35 Estimates o f the length o f roads o f different types included in current investment projects and those at an advanced stage o f planning are shown in Table 5.4. A s can be seen from the table, the coverage o f the regional highway system i s almost complete except a section o f 161km., while that o f the second-tier national highways and provincial roads under the responsibility o f MPW i s very partial. Information about coverage o f other provincial and rural roads i s not very precise, but it is clear from the various programs that are involved inthis area that substantial activities are occurring. RoadClassification Under InterimRoad Total Length Length in and Highway Standards Km Current Projects Km RegionalHighways(MPW) 3,242 3217 NationalHighways(MPW) 4,884 1,164 ProvincialRoads (still underMPW) 9,656 500-1000 Total RuralRoads (under MRRD) 17,000 2,000 34 782 NA 101 USA IO2 5.39 The dominance o f donor-executed projects financed through the External Budget gives rise to a risk o f fragmentation in implementation arrangements and difficulties for the Government in exerting leadership. Some major donors have long-established policies o f providing assistance in this way, using contractors procured through donor procedures, sometimes with restricted competition (effectively providing projects "in lund"). Moreover, at the outset the capacity o f MPW to oversee and monitor these investment projects was limited, even in the case of those whose funding was channeled through the Government budget. Moreover, despite the fragmentation o f funding, as seen earlier the gaps in the investment program have been progressively covered over time, and there has been reasonably good coordination among donors interms o f division o fresponsibilities for different projects. PRIORITIES FOR THE FUTURE 5.40 Inadditionto the currentprogram, MPWhasprepareda list ofprioritized newprojectswhich it hopes will be implemented during the coming five years and for which it i s seeking funding. The list, presented inTable 5.5, includes a mix o f rehabilitation and wideningprojects as well as major new roads through difficult terrain. Although most o f these project proposals have not been costed, the new East- West highway segment from Herat to Chaghcharan and the two proposed North-South highways (in addition to the Salang route) most probably would involve major investments totaling in the range o f at least $800 million if not more, if constructed to Rmg Road standards. It i s doubtfbl that the expected traffic on these routes would justify the high costs, particularly since in some cases there are alternative routes for long-distance transport (even though they involve greater distances). Moreover, it i s not at all clear, given the large investments already made in reconstruction o f the main highways, whether such new projects are o f top priority as compared with investments in other sectors. In any case, least-cost options for providing critical accessibility to new areas, involving lower standards than those currently in place for nationalhighways, could be assessedas the first step. Road Section Length km Description National Highways Dilaram-Farah 253 Connectionof Farahto the ringroad Herat-Chagcharan(East-WestHighway) 351 Feasibilitystudybeing fundedby Swedish SIDA North-SouthHighway Sheberghan-Delaram 775 Permitdirect north-southmovement and connect inaccessiblecentralpartsto the ringroad North-SouthHighway Mazar-Lai Sarjangal -Tirin Kot 528 Feasibilitystudybeing fundedby USAID Khulm-KunduzKishim-Ishkashim 393 Comuletionof imrovements to direct route from Khulm to Isikashimleadingto better linkswith China infuture Jabalsaraj-Nooristan 172 Kabul-Chaharikar 51 Roadwidening Kabul-Kandahar 100 Roadwidening (onpart of the road) Source: MPW 5.41 Several o f the proposed projects involve widening existing highways to make them into four-lane expressways. The economic viability o f such investments needs to be assessed, in particular against current and projected traffic. Similarly, proposals for rehabilitationheconstruction o f several short segments connecting the RingRoad to small or medium-sized cities would need to be assessed interms o f whether the additional traffic generatedwouldjustify the cost. 103 5.42 More generally, a powerful tool for prioritization o froad projects and other expenditures on roads i s cost-benefit analysis.' While it cannot incorporate all o f the broader social and national integration benefits o f roads, such analysis can capture the fundamental economic benefits o f roads - in terms o f decreased travel times, increasedtraffic, reduced wear and tear o f vehicles and lower fuel costs, etc. - and compare these with the costs. Given their substantial costs, competing priorities, and future O&M requirements, any major new highway project proposals must be carefully evaluated and those with very high economic returns (based on cost-benefit analysis) considered for approval first. Benefits depend greatly on traffic forecasts (both freight and passengers), and on available alternative routes. Costs per lulometer may be fairly standard (depending on the type o f road construction involved and the condition of the existing road), although there has been a great deal o f cost variation inAfghanistan - depending in part on mountainous terrain, the number o f bridges, tunnels, etc. High altitude and steep grades also affect the costs o f users and benefits to them. 5.43 It is extremely important that further development of Afghanistan's road strategy take fully into account financing constraints, including the need for adequate funding o f highway maintenance. Putting forward, let alone initiating, major new highway projects for which funding will not be available would be counterproductive to the sustainability o f the road network. Relatively few but adequately financed road investment projects would be more efficient than a larger number o fprojectswith grossly inadequate funding, resultinginmajor delays and some projectsbeingleft uncompletedfor longperiods o ftime. C.ImplementationExperienceandIssues 5.44 As indicated earlier (see also Table 5.2), considerable progress has been made in implementing the national highways reconstruction program. The pattern o f implementation i s presented visually in Figure 5.4. There are some important issues, however, as well as lessons from implementation patterns and results which may provide guidance for the future. This section looks at road design standards, contract design and procurement, security arrangements, and overall costs and "value for money" o f Afghanistan's highway reconstruction program. ROAD DESIGN, CONSTRUCTION, AND MATERIALS STANDARDS 5.45 In general, all of the ongoing highway reconstruction and rehabilitation projects have similar technical road specifications: two-lane single carriage ways (seven meters width with shoulders maximum two meters). Thus for the most part the concern that different projects funded by different donors would have different standards i s unfounded based on project information. Interim Road Standards have been developed by CG-TS/GoA/MPW and are to be usedby projects under the current Road Master Plan. The four road classification based on functions, as mentioned earlier, includes the following: (i) Regional Highways, (ii) National Highways, (iii) Provincial Roads, and (iv) Rural Roads. And the five technical classifications o froad are: i)Expressways-Type I, Expressways-Type II,( (ii) iii)MajorRoads,(iv)Minor Roads, and (v) Non-Standard Roads. Finally, a L o w Standard road class i s also recommended by the Master Plan. 5.46 The cross-section dimensions recommended in the Interim Road Standards are very high compared to geometric standards in neighboring countries, and are unrelated to traffic volume. For example, both the provincial and rural road standards allow for two-lane 7.0m wide pavement, which experience has shown to be uneconomic for roads with low traffic volumes. In contrast, Tajilustan and Kyrgyzstan have a single-lane pavement standard width o f 3.75m and 3.5m respectively for low-volume rural roads, and a two-lane standard of 5.5 and 6.0m respectively for secondary roads with l o w traffic * This is particularly true inthe case of road upgradingand capacity enhancement projects, although also applicable, with a larger margin of uncertainty, to new roads. 104 volumes. The regional highway standard calls for four lanes, which most likely will be uneconomic for most such highways for the foreseeable future, except possibly for short sections such as Kabul - Charikar. Figure5.4: OngoingHighway ReconstructionProjectsinAfghanistan Source: Consultative Group for the Highway Sector. 5.47 The design standards to be used for different road classes are an important issue because they will affect the overall investment and O&M requirements and the economic feasibility o f individual road links. It is strongly recommended that geometric standards such as road widths, curvature, and design speeds be related to traffic levels and terrain, as is customary in other countries. For example, a single- lane standard i s adequate for low-volume provincial roads; and a two-lane standard lower than 7.0m (say 6.0m) i s recommended for national roads inmountainous areas. CONTRACT DESIGN 5.48 Comparing the effectiveness o f the various contract types used for the highway projects currently under implementation is difficult. Where significant works are involved in a contract (whether it i s for rehabilitation o f a seriously damaged road or construction o f a new road, or construction o f specific infrastructure assets like bridges and tunnels), the basic choice i s whether (1) to contract for the design work separately from the actual construction work (i.e. sequentially), or (2) to design one contract for 105 both works.g A hybrid option is (3) to contract for preliminary design separately from the actual construction works, and then based on the preliminary design the detailed design i s prepared by the works contractor while simultaneously works are proceeding. The detailed design must be approved by a supervision consultant, who could be the same consultant that did the preliminary design or a different consultant selected by competition. 5.49 Option (1) is generally considered to be the appropriate approach when substantial design work is required, because it maximizes the information available to potential bidders for the works contract (and thereby should result in a better outcome o f that bidding process) and moreover minimizes the risk o f conflict o f interest that would arise if a contractor does the design work for subsequent construction that the contractor knows it will cany out itself. However, this option i s generally considered to be more time-consuming (an assumption not entirely borne out by experience). On the other hand, option (2) is generally considered to be faster but carries the risk o f higher costs and possible conflict o f interest inthe design work. Option 3 allows a faster biddingprocess for the construction contract, and it i s also flexible ifchanges indesign areneededduringconstruction. Therisk ofconflict ofinterest isless than inOption (2) butthe time requirement may be somewhat longer, although less than inthe case o f Option (1). 5.50 An example o f option (1) is the Kabul-Jalalabad Road contract, funded by the European Commission. The detailed design was completed by the consultant and then the construction work was separately contracted. Supervision i s beingcarried out by the design consultant. 5.51 An example of option (2) i s the Kabul-Kandahar Road contract, funded by USAID. A single contract for all work - including the design, construction, and supervision - was awarded to one contractor. The main contractor then sub-contracted the works to various subcontractors, and the main contractor supervised the work carried out by the subcontractors. 5.52 An example o f option (3) i s the World Bank-funded Emergency Transport Rehabilitation Project, which mainly covered the Kabul-Salang-Doshi national highway. Preliminary design work including the bidding documents was completed by consultants contracted for this purpose; their work included preliminary design o f all drainage structures, retaining walls, tunnels, snow galleries, and all pavement quantifiers needed for strengthening o f the roads, and the thicknesses o f asphalt was based on field tests o f pavements and their residual strengths. The works were then carried out under separate contracts, awarded through a different biddingprocess. The works contractors had to submit the detailed design to the supervision consultant for review and approval before the actual works started. PROCUREMENT ARRANGEMENTS AND COMPETITION 5.53 In the contracting of highway rehabilitation projects, as in the case of any other major procurement transactions, the procurement arrangements and their quality are a very important determinant o f the results achieved and the value for money from such projects. As discussed inVolume 11,Part 2, ensuring transparency, fairness, and adequate competition is the key. However, as most o f the highway rehabilitation projects have been donor-executed through the External Budget, procurement arrangements vary considerably. Where the work involved i s of a simple nature and does not require significant design efforts, then a contract for works only may be appropriate. This is not the case for the bulk of rehabilitationofhighwaysinAfghanistan, which as noted earlier for the most part were in a heavily deteriorated state. For example, the USAID-funded Kabul-Kandaharroad started out with the "Build" method as it was intended to build on the existing road without significant design work (either as part of the works contract or separately). However, the condition of the roadin some sectionswas so deterioratedthat it requiredadetaileddesign to be worked out prior to the initiation of new overlayingwork. This requiredadditionalfunds andresultedinsome delays inthe project. Another example is the ADB-funded Kandahar to Spin Boldak road, the first highway rehabilitation contract to be awardedinAfghanistan, which suffered from inadequatefunding due to incompletedesignprior to awardingthe works contract. 106 5.54 Contracting arrangements have ranged from full international competitive bidding to limited competition o f one sort or another to sole-sourcing/direct contracting o f contracts with entities from the donor country concerned (and also fi-om force account to direct hiring o f local contractors). It i s reported by the concerned donors that most of the ongoing projects are contracted out according to competitive biddingprocedures. However, in the case of bilateral donors there may be national restrictions on the eligible bidders for a contract. Moreover, reportedly as much as 21% o f the total contract value o f highway rehabilitation projects was through limited or non-competitive processes. The justification for non-competitive arrangements has often been that they will result in much greater speed due to the procedures and extra time required for competitive procedures. Experience often does not fully support thisjustification. 5.55 Government-executed highway rehabilitation projects in the Core Budget, consisting almost exclusively o f World Bank-funded and Asian Development Bank-funded projects, have been contracted through international competitive bidding. In some cases the method used was Limited International Bidding(Repair o f the Salang Tunnel) or National Competitive Bidding(especially for small contracts). The Procurement Unit (PU) of the Government supports procurement for most World Bank financed projects and for projects financed by other donors that have decided to use the PU's services. The PU i s not made up o f government employees but i s staffed by consultants; it assists Ministries with tenders, evaluations, and contracting; and it provides advice on a range o f procurement issues. The PU i s supervised by the Minister o f Economy through the Afghanistan Reconstruction and Development Services (ARDS). All procurement by the P U i s carried out according to the procedures o f the World Bank or other donors who make use o f their support. While such extraordinary arrangements for centralized procurementwere necessitated by the lack of capacity inline ministries for major contracting, they are seen by the Government and by other stakeholders as a temporary device which should be used only untilprocurement capacity i s strengthened inline ministries. Moreover, under Afghanistan's newly- promulgated Procurement Law (see Volume 11, Part 2), procurement i s to be handled by line ministries rather than in a centralized manner. 5.56 For projects that do not come under the PU, procurement i s carried out directly by the relevant Ministry or donor or project management consultant, recruited for the purpose by the Ministry (for example UNOffice for Project Services [UNOPS] inthe case o f NEEP/NEEPRAprojects). Procurement carried out directly by a donor i s normally inaccordance with the donor's procurement arrangements. An example o f this would be that EC-funded projects are procuredthrough ICB, but rules o f origin do apply. WithineachMinistry,project plans are developed by the relevant department and subsequently approved by the respective Minister. The procurement activities are then carried out by the Procurement Department. Procurement carried out by the Government o f Afghanistan i s now expected to be in accordance with the new Procurement Law, which i s based on international procurement standards. Procurement carried out by project management consultants i s also in accordance with the donor's procurement arrangements, although in some cases exceptions are made to use the procurement arrangements o f UNAgencies. 5.57 Lack o f participation by the Afghan private sector in bidding may also have somewhat reduced competition and increased costs. Constraints include lack o f experience inmanaging large-scale projects and in following donors' financial management and procurement processes; lack o f up-fi-ont capital (or financing) to mobilize equipment; and difficulties inmobilizing constructionlabor. SECURITYARRANGEMENTS AND COSTS 5.58 Implementing major road projects inan insecure environment not surprisingly is challenging and can impose significant costs. It i s estimated that 3-15% o f total expenditures on projects in the highway 107 reconstruction programhave been devoted to security, although there appears to be considerable variation across projects. 5.59 As can be seen from Figure 5.5, a variety o f different types o f security arrangements are being used, but with most (nearly three-quarters) involving a foreign security firm (solely or sometimes in conjunction with the contractor's own arrangements or Government support). Mine clearance on and around the roads where rehabilitation and construction works are occurring constitutes another security- related cost that is an essential component o f project costs. In this regard, donors and contractors have cooperated closely with the UNMine Action Centre for Afghanistan (MACA). Figure5.5: SecurityArrangements for OngoingRoadProjects (% ofnumber ofprojects) Contractor & ForeignSecurity Contractor& Contractor 7% Foreign Security Firm & GOA 4% Firm 57% Source: Table 5.6. 5.60 At least as important as the direct financial costs incurred for security are the delays resulting from security problems or threats, which can affect how quickly project benefits are reaped. It was difficult however to estimate the impact o f security interms o f delays and other project costs (aside from direct spending on security). Project site security clearly i s an important issue and has been the factor behind most security-related delays. Sometimes expatriate personnel have been evacuated for a period o f time (e.g. around the Presidential elections in 2004), whereas in other cases security incidents at or near project sites have caused sometimes substantial delays affecting particular projects (e.g. a major security incident against the Pul-e-Khumrito Shirkhan Bandar Road contractor which caused a three-month delay for that project). Initially there were some delays in coordinating de-mining arrangements, but subsequently these appear to have been more regularized and smooth. ' PROJECT COSTSAND VALUE FOR MONEY 5.61 The size o f the highway reconstruction investment program, and its implementation through numerous differently designed and implemented donor-financed programs, along with the fairly standard type o f finished result required, provides an opportunity to investigate cost performance. While cost comparisons and assessments are not straightforward and need to keep in mind the different parameters faced by individual projects - topographical, terrain-wise, existing road condition, security, etc. - nevertheless the exercise can shed light on implementation issues and constraints and provide some lessons for the future. 108 5.62 Tryingto evaluate the costs o fdifferent roadprojects on a comparable basis and get an indication o f the "value for money" i s challenging, despite greater comparability among highway projects than is the case in many other sectors. One approach to get a sense o f the factors behind differences in "Value for Money" i s to compare some or all o fthe following across a set o f projects: 0 Plannedand actual project costs. 0 Plannedand actual levels o f unit costs 0 Time required for projects (time projected and delays) 0 Differences inunit costs o fvarious materials usedinroadreconstruction. 5.63 Available basic project information including on costs and unit costs (per kilometer o f road reconstructed) i s shown in Table 5.6." This indicates a wide variation in per-km costs, ranging at the extreme from $118,OOOh to $589,00Oh, with a scattered distribution o f unit costs among projects and no tendency to cluster around an average or mean. In fact there i s some clustering inthe direction o f the two extremes, with six out o f the 17 projects having unit costs below $200,00Oh and four projects having unit costs above $540,OOOh. 5.64 Clearly this wide cost variation reflects a number o f contributing factors, including many that are beyond the control o f the project entity, donor, or Government. The security situation and threats (as well as actual incidents which unfortunately have affected some roadprojects) are different across the country, necessitating different levels of security preparedness and expenditures, and possibly resulting in cost- increasing delays o f different durations. For example, security conditions are generally worse in the southern and eastern regions of the country, although there have been serious security incidents in the north and west as well. The difficulty o f the physical terrain also varies widely, affecting for example the number o f bridges and culverts that need to be constructed, and in places the heavy earthwork. The Salang Highway between Charikar and Doshi, passing through rugged terrain reaching a maximum altitude o f over 3,300m above sea level, i s a notable example. The underlying condition o f the existing road also varies greatly; for example the condition o f the Pul-i-Khumri Shirkhan-Bandar road, which has among the lowest unit costs for the listed projects, was considered relatively good and could be built upon, whereas the existingroad had deteriorated far more inthe case o f some other projects. 5.65 However, there are also other factors which appear to have contributed to differences in unit costs, which are at least partly under the control o f the project entity, donor, andor Government. One i s speed; for example, contributing to the high cost o f the Kabul-Kandahar Road, the highest-cost project, was the strong pressure from all sides to complete the project very quickly. Although the project was completed expeditiously, costs were much higher (and exceeded the planned level - actual unit costs are estimated at $668,OOOh as opposed to the design cost o f $589,00Oh). Thus not surprisingly, high speed can carry a high cost. Other reasons for the relatively high costs and delays for this project may include the use o f a General Construction Manager, untraditional pavement design with short durability, and allowing traffic to runon pavement layers before the asphalt wearing course was laid." 5.66 Another contributing factor to differences in unit costs may have been the choice made as to whether to go for a uniform amount and standard o f work (and costs) throughout the length o f a road, or to minimize costs by talung advantage o f places where the existing road was inbetter shape, andor where less work would be were required to achieve a given standard for the reconstructed road. Some o f the projects with the lowest unit costs appear to have followed this latter approach. lo It should be noted that the cost information inthe table relates to plannedldesign costs, not actual costs, which in some cases appear to have considerably exceeded these figures. However, since actual or revised cost data were not available for all projects, it was consideredbest to calculate unit costs uniformly on the basis o f design costs for all projects. This last issue i s o f course closely related to the pressure for speed, as there was great demand to allow traffic on the rehabilitated highwayas quickly as possible, even before work was fully completed. 109 1 1 5.67 It would be expected that the extent o f competition in the bidding for different contracts might affect unit costs, Le. costs would be higher when there is limited or no competition in bidding for contracts. The data available did not permit this issue to be explored to any great extent or to reach meaningful conclusions. Although the great majority o f projects were reported to be contracted through competitive bidding, there are likely to be differences inthe set o fpotentially eligible bidders for different donors, as well as in other dimensions o f tendering which may affect the extent and effectiveness o f competition. Another factor which may have limited the benefits from competitive biddingcould be the relatively small number o f technically-qualified international concerns willing to bid on contracts and work inAfghanistan. 5.68 Yet another factor i s the cost o f materials. For example, USAID i s not permitted to procure asphalt from Iran, which might have been able to supply it at a lower cost than other sources, especially if transportation costs from farther distances were involved. In the case o f the World Bank-funded Emergency Transport Rehabilitation Project, all bitumen came from Turkey by truck, with substantial transportation costs involved. On the other hand, works carried out by Iranian contractors (as part o f Iran's assistance program for Afghanistan) benefitedfrom lower costs o f these materials. ADB has gotten a special exemption to source asphalt from Iran (which i s not a member o f ADB). 5.69 To try to probe more deeply into some o f the factors behind differences in unit costs, further information collected on seven major projects in the highway rehabilitation investment program (funded by four donors, namely USAID, ADB, EC, and the World Bank) is summarized inTable 5.7. While the qualitative factors given as contributing to delays and/or higher costs are hard to evaluate and do not necessarily differ very much across projects, it i s clear that security costs for the Kabul-Kandahar Highway USAID-funded project have been very significant. Security was also consistently listed as a factor contributing to higher costs in the case o f other projects as well. For example, the EC had to increase the total costs o f their two major projects, from Kabul to Jalalabad, with further funds to strengthen the security arrangements after an unfortunate incident occurred to the contractor's workers. The Asian Development Bank and World Bank have also committed additional funds for security purposes. 5.70 Other factors behind differences in the "value for money" o f different highway projects can be related to weather delays, poor quality of construction materials, and the Government's capacity and efficiency in timely addressing the demands o f development agencies and contractors (e.g. for permits to importproject-related goods). 5.71 While it i s not possible to ascertain with any degree o f precision how most o f the factors contributing to higher costs and delays affected projects differentially, more detailed information on unit costs o f road building materials can be used to shed light on this aspect and compare with similar information for neighboring countries. Table 5.8 presents available information on the applied unit costs for the main materials used in road building (pavement compound). This can be compared to similar information for projects inCentral Asia (Kyrgyz Republic and Tajilustan) and Pakistan, shown inTables 5.9 and 5.10, respectively. 111 I 4 z I J + 5.72 A number o f observations can be made based on the information in these tables. First, the variation across the Afghan projects in terms o f the unit costs o f applied materials (taken as a whole) i s much less than the variation in the total unit costs o f these projects. Except for one outlier project with considerably higher unit costs o f materials (the Jalalabad-Sarobi Road), the unit costs of all other projects cluster in the area around $250,OOO/km, with the difference between the highest and lowest unit cost figures (excluding the one outlier) only 16%. By comparison, even excluding the two highest and two lowest observations from the 17-project sample in Table 5.5, the difference between highest and lowest total unit-costs o f the projects i s 270%. Looking only at the same seven projects that are included in Table 5.7, the difference i s 175%.' 5.73 Second, the relatively narrow range o f differences in total unit costs of road building materials does mask significant cost differences for individual items. For example, the unit cost o f earth works for the Kabul-Kandahar Road was substantially higher than in all other projects. As another example, the main factor behind the highunit-costs incurred for the Jalalabad-Sarobi Road i s the very highcosts for the asphalt-concrete course and asphalt-concrete wearing course, 67% and 44% respectively higher than for the Kabul-Sarobi Road.* 5.74 Third, comparing Table 5.7 with Tables 5.8 and 5.9, it appears that unit costs for road building materials for the Afghan projects are significantly higher than inneighboring countries. Infact, even the lowest unit cost reported for one of the Afghan projects exceeded the figures for Central Asia and Palustan by 23% and 35%, respectively. The simple average level for the Afghan projects (excluding the outlier at the high end), $253,0OO/lun, i s 32% higher than the unit cost in Central Asia and 45% higher than in Pakistan. Most, but not all, of these differences can be attributed to the asphalt concrete base course and asphalt concrete wearing course, as well as to a lesser extent granular pavement-related costs. The reasons behind the substantially higher unit costs in Afghanistan should be further clarified, and to the extent possible remedial measures taken inrelation to future projects (for example ifthere are specific market or administrative obstacles affecting prices o f certain materials, or if some contractors are including prices grossly above prevailing market levels intheir bids).3 5.75 Fourth, the available data suggest that the main source o f differences in overall unit costs o f the different projects in Afghanistan (shown in Table 5.6) does not lie in the cost o f road buildingmaterials per unit o f road built but rather stems from other possible factors. These include: (i) differences in security costs incurred by a project; (ii) differences in the degree o f difficulty o f other work associated with the project (e.g. bridges, tunnels, etc.); (iii) differences inthe proportion o f road length on which full road rebuilding was required and conversely the proportion on which lighter work would be sufficient (most probably an important factor in the lower-cost ADB and World Bank-funded projects; and (iv) differences in contractor overhead and profit. While some o f these factors are beyond the control o f the Government or the contractor and donor concerned, others may be improved for example through cost- saving design, more effective biddingprocesses, etc. ' Itshould be noted that applied unit costs for road materials for the two ADB-funded projects shown in Table 5.7 exceed the total unit costs shown in Table 5.5. This confirms that the level o f road rebuilding associated with the unit costs o f materials reported was not conducted on the full length o f these roads. If parts o f the existing roads were in relatively good condition to start with, such an approach would be cost-effective. As noted earlier, the very low cost figure for the Pul-i-Khumri - Shirkhan Bandar road reflects the relatively better initial condition o fmuch o f this highway. This may be inpart due to changes inthe internationalprices o f these items. One option that Afghanistan may want to consider is to discuss with the Government o f Iran whether large quantities o f bitument could be made available at lower than international market prices for road projects in Afghanistan. This would eliminate the risks and transport costs now embedded inthe cost o f asphalt ininternational contractors' bids. 114 D.Maintainingand SustainingtheHighway System 5.76 The successful implementation o f the highway rehabilitation investment program, as well as proposed future road investments that may be undertaken, means that there will need to be adequate funding and capacity for highway maintenance. Otherwise, as happens in many countries that do not prioritize road maintenance, the condition o f the highways will deteriorate over time and, within a decade or so reach the point where major rehabilitation investments once again will be required. Without proper maintenance, the overall economic benefits from road investments will be sharply reduced, and much higher expenditures will be requiredlater to restorethe highway network once again. MAINTENANCE OPTIONS AND ARRANGEMENTS 5.77 Prior to the conflict, maintenance was directly handled by MPW, through force account. The maintenance equipment o f the Ministrywas depleted duringthe conflict, as a result o f lack o f expenditure on equipment maintenance and new equipment, and there was a great loss o f skilled mechanics and engineers required to operate and maintainthe equipment. 5.78 Parts o f the Regional and National Highways are nearing completion and will be handed over to the Government o f Afghanistan / MPW soon. The roads will fail unless there i s adequate O&M capacity. To undertake efficient and effective road maintenance, MPW plans are to establish eight maintenance zones to cover national andprovincial roads throughout the country. The Ministryhas finalized a plan for the upgrading, maintenance, and development of the national road network and has submittedthis to the Government. The plan, divided into four categories, i s currently in Phase Io f implementation. The planning and budgeting o f routine ongoing maintenance will require focus and fbnding. Inthis regard a draft policy paper has been developed for options to hndmaintenance o f the national road network. The present institutional capacity as well as a shortage o f funding to undertake even regular routine maintenance o fthe road network needs to be addressed. 5.79 Inprinciple, there are several options for organizing the maintenance of highways, including in particular (i)buildingcapacity for maintenance within MPW through force account, or (ii) sector private handling maintenance through competitive contracting o f maintenance by MPW. The two options have rather different implications for capacity requirements - both require buildingcapacity inMPW, but the capacity needed i s different. International experience suggests that for the most part, contracting out maintenance to the private sector i s the best approach. Moreover, under the current conditions in Afghanistan, labor-intensive maintenance work should be encouraged wherever feasible and efficient (e.g. routine shoulder maintenance, maintenance o f gravel roads, etc.). For smaller local roads, community-based maintenance i s often the best option. 5.80 Afghanistan, facing its current situation and capacity limitations, does not have much choice but to (i) capacity in MPW to contract and oversee maintenance (the idea o f setting up a separate road build agency i s much too premature); (ii)keep some limited maintenance capacity in MPW for reserve/emergency purposes, but not beyond that; and (iii) handle the bulk of maintenance by contracting with the private sector. An important consideration is the need to foster the development o f a strong and competitive Afghan contracting industry, discussed inthe following section. For this purpose, the EC, in coordination with MPW and the CG-TS, i s funding and launching a demonstrationproject to carry out the maintenance on the Kabul-Jalalabad road for a three-year period through a contractor. Some training and mentoring will be provided, but the supervision o f the maintenance contract is envisaged to be carried out byMPWalone. 115 5.81 A related issue which affects the rate of deterioration o f highways, maintenance problems, and maintenance costs is the weight carried by the trucks using the highways. If the axle-load weight i s significantly above certain technically-determined limits (which vary with the specifications, quality, and strength o f the road), the rate o f deterioration o f the road surface will accelerate, often dramatically. This can impose large extra costs inthe form o f greater maintenance requirements. Thus it i s very important to ensure that appropriate axle-load limits are imposed and enforced. Afghanistan does have axle-weight regulations on the books, with enforcement vested in the Ministry o f Interior. The axle load limit according to the recent Interim Standards i s 12 tons, which i s identical to the limit applicable inPakistan. Enforcement is no easy matter, however, under current conditions inAfghanistan, where as in some other nearby countries axle-load weight limits are largely observed in the breach. Nevertheless, efforts should be made to address this important issue. THEAFGHANPRIVATE SECTORANDDEVELOPMENT CONSTRUCTIONINDUSTRY OFA 5.82 Encouraging the development of an Afghan road contracting sector. The private sector in Afghanistan potentially can play an important role inimplementingroadprojects. The role o fthe Afghan private sector inongoing road sector development projects is, however, largely limitedto a subcontracting role for the time being, due to the small size o f contractors and their limited financial capacity. Moreover, under current conditions in Afghanistan local contractors often register themselves as NGOs. More generally, despite the fact that a large contingent o f Afghan private construction companies thrives in neighboring Iran and Pakistan, their input and participation in major road construction projects in Afghanistan has been limited and primarily in a sub-contractor role. 5.83 However, many Afghan contractors have some experience engaging in works in rural, remote, and somewhat insecure areas. This experience and local knowledge can be tapped in implementation o f smaller works in rural and remote areas, as i s already occurring. However, capacity building in the Afghan contractingindustryi s urgently needed. 5.84 For smaller and medium-sized contractors, lack o f availability o f up-front capital as well as absence o f credit/banking/insurance, capacity limitations (which, for example, mean that many contractors are unable to produce internationally acceptable bid documents), irregular availability o f construction labor, and logistical and access constraints are common problems. 5.85 It is extremely important to enhance the development o f the Afghan private sector through the highway investment and maintenance programs. This implies that maintenance capacity should be provided by the private sector. Support to the Afghan private sector, and to the private road construction industryand contractinglconsulting industry,has been a gap ininternational assistance to Afghanistan. As a result the serious yet addressable constraints faced by the private sector - in terms o f finance, equipment, technical capacity, ability to prepare bidding,documents, etc. - have not been adequately addressed. The solutionto this i s accelerated support to private sector capacity building. 5.86 At present, while numerous road construction projects are underway, and while large maintenance contracts may be handled through international contractors, local contractors can only be expected to handle part of the country's construction and maintenance work. As a pilot approach to address this issue, the EC has divided work to be tendered in 2005/06 into lots which should be small enough for local contractors to be able to compete directly. All five lots have been awarded to local contractors, and the works have been completed on time and within budget. Such an approach will help buildup a viable Afghan contracting industryinthe road sector. Another vehicle for this is for successful Afghan contractors to move up from their current activities on smaller tertiary and farm-to-market roads to progressively larger contracts and activities over time. 116 5.87 Building capacity in the private sector versus in the public sector. At present, public sector capacity i s extremely limitedalthough there are staff and some (mostly aged) equipment. However, some proposals call for international engineering expertise as well as equipment to be provided to the concerned public sector entities. But this will take time and resources and is not advisable from the perspective o f development o fthe private sector and private sector-led economic activity and growth. 5.88 The question arises as to whether building up the capacity o f Government departments and state- owned enterprises would occur more quickly than capacity buildingin the Afghan private sector. Given that there are already many going private concerns, some o f them successfd, it would be reasonable to expect that capacity building in the private sector, if financial and other resources are made available under appropriate conditions, would be considerably faster than would bepossible inthe public sector. 5.89 Moreover, investing in government departments/SOEs and giving them guaranteed access to works contracts (particularly the smaller works that the Afghan private sector has demonstrated it i s capable o f handling) would send a very negative signal with respect to development o f the Afghan private construction industry. And once public sector capacity i s built up, it would tend to become entrenched, privatization would take additional time, and inthe meantime the development o f the private construction sector would be inhibited. In the case o f smaller construction projects, there i s already some domestic private sector capacity to handle these, which should be nurturedand expanded. 5.90 While using force account for sizable projects would send an adverse signal to the private sector and would risk hindering its healthy development, use o f special arrangements in extremely insecure areas might not be entirely ruled out. Under such conditions construction activities would more closely resemble military operations. Butbuildingup extensive force account/SOE capacity ingeneral would not be warranted. 5.91 Thus MPW should not try to restore the construction and maintenance capacity that it once possessed. The way forward would instead be to engage the private sector in road construction and maintenance work. A stronger local contracting industryhas to be created. The Ministry hence needs to re-organize its maintenance units, which it has started doing under Government's Priority Reform and Restructuring (PRR) program. Part o f the Ministry's present maintenance staff should be g v e n training in labor-based road maintenance in order for them to be able to act as trainers for private sector labor- based maintenance units - which may be small-scale contractors and community groups. The rest o f the maintenance staff could be formed into units to perform emergency repairs and routine maintenance works. A clause on compulsory use and training o f local subcontractors could be included in highway rehabilitation contracts, to encourage development and training o f the local contracting industry. 5.92 The main part o f the road and airport construction staff o f about 1,600 that MPW still employs should, to the extent possible, be transferred to private sector contractors (with provisions to absorb them). This can be achieved partly inconnection with the ongoing donor financed highway rehabilitation projects. 5.93 MPW would thus concentrate on two functions: planning and contracting (i.e. to enter into and administer contracts). H o w to achieve the transition to these two roles i s set out inthe Transport Sector Review's Consultation Paper 2.3. This paper also puts forward a recommended approach for capacity building,which so far has not been initiated. Efforts mustbe redoubledto ensure that the State adopts its role as a regulator o f the private sector, not a competitor. As mentioned earlier, recently MPW and the donors have agreed on technical assistance for administrative reform and capacity buildinginMPW. The TA will be financed by a grant from the World Bank co-financed by Sida.. The mainpurposes of the TA are to assist M P W to develop, manage, and implement a multi-donor supported and funded program for (i)administrative reform and capacity buildinginMPW, and (ii)capacity buildingof the private 117 contracting sector for, in particular, road maintenance and minor construction works. A secondary purpose i s to provide, as and when required, support on an ongoing basis to M P W for the implementation o f capital investment projects. LIKELY FUTURE MAINTENANCE COSTS 5.94 As emphasized earlier, roads once built have to be regularly and properly maintained; otherwise they will deteriorate, not visibly immediately, but increasingly over time untilmajor, costly rehabilitation investments become required. It has been estimated that the financial requirements for properly maintaining the newly reconstructed Regional Highways, i.e. the core national highway system (Ring Road and major links with neighboring countries), will rise to around $41 million per year by 2011when periodic maintenance will be required (MPW, 2005 p. 76). For the other national highways, maintenance costs are expected to reach about $25 million annually, and for the provincial roads managed by MPW another $25 million or so. Thus overall maintenance requirements for the roads managed by MPW will be in the range o f $90 million per year, not including maintenance o f any new highways that may be constructed inthe future, and nor the maintenancerequirements for the numerous smaller roads. 5.95 The time profile o f maintenance requirements i s illustrated in Figure 5.6. The figure shows that in addition to the first "peak" of rehabilitation investment expenditures on the core system, which is occurring now, there will be a second, smaller "peak" as rehabilitation o f the provincial road system moves forward. It should be noted that this figure does not include investments in any new highway projects, even though a number are proposed inMPW's prioritized Master Plan (see Table 5.5). Figure5.6: ProjectedAnnual Sustaining Costs (Rehabilitation and Maintenance) 700.0 Bo0.0 500.0 d 3 400.0 \ _I- 5JbBotrl- !! $ 300.0 Rurd Feeder 200.0 100.0 D.0 Source: MPW (2005) and staff estimates. FISCAL SUSTAINABILITY OFTHE HIGHWAY SYSTEM 5.96 The future maintenance costs o f the highway system (and more generally o f the road system as a whole) are substantial as discussed above, and questions about the fiscal sustainability o f the highway and road systems. The discussion below focuses on the national highway system. 5.97 A first key issue is to ensure that there are adequate financial resources allocated inthe national budget for highway maintenance. This activity has to be prioritized, ifnecessary at the expense o f new 118 road projects. Maintenance o f existing roads with substantial traffic will usually reap higher economic returns than construction o fnew roads. 5.98 A second issue is whether the existingrevenue sources ofthe nationalbudget canbear the burden o f adequately funding highway maintenance. While maintenance o f the Regional Highways alone (estimated at roughly $41 million per year, not including maintenance o f any new highway investments beyond the existing reconstruction program) would appear to be manageable, it must be kept inmindthat there are many other claims on budgetary resources for operations and maintenance (O&M) in the different sectors. Moreover, at present half o f Afghanistan's recurrent Core Budget is financed by international assistance, which i s not expected to continue such financing indefinitely. For these reasons, it would be essential for the Government to mobilize additional financial resources to help ensure that the budget remains manageable and sustainable while absorbing the necessary and high-priority costs o f adequate highway maintenance: 5.99 A third issue is what additional sources o f revenues can be tapped, in particular those that are closely relatedto the use o f highways, so that at least a considerable part o f the burden falls effectively on the main beneficiaries o f the highways. The potential revenue sources which meet this criterion most appropriately include road tolls, fuel tax, and vehicle tadfee. As summarized in Box 5.1, the Transport Sector Review (TSR) recommended that the Government introduce tolls on major highways in the near future, whose receipts would be dedicated for direct financing o f maintenance contracts for road sections on which the tolls are collected. The TSR further stated that over the medium term fuel and vehicle taxes could be introduced when the conditions are appropriate. Box 5.1: Financing the Road Sector, Recommendations of the Transport Sector Review The recommendation o f the Transport Sector Review i s that the Government should introduce tolls to finance specific turn-key maintenance contracts for upgraded roads, and subsequently impose ordinary fuel and vehicles taxes. Such measures are required for financing the maintenance o fthe road network. Options: Five different options based on road user charges are evaluated. It is possible that road user charges in a medium term perspective may be used to recover both routine and periodic maintenance costs. Full cost recovery by way of road user charges is not an option for Afghanistan for manyyears to come. Criteria: Six different criteria are usedto assess the options considered. The outcome o f the assessment is that the preferred option in the short term i s to introduce tolls to finance long-term maintenance contracts for rehabilitated roads. From a longer-term perspective, systems based on conventional road user charges (e.g. a surcharge per liter of fuel) are viewed as superior to systems based on tolls. They are better in terms o f minimizing fraud, and the administrative costs are modest. Therefore, in the mediumterm the best option i s a system comprising surcharges on fuels and vehicles, which may be considered once a regime o f taxation o f fuels on road users has been imposed and a functioning vehicle register systemis inplace. Recommendations: A system for the imposition tolls on vehicles using national roads which have been upgraded and/or rehabilitated should be introduced inthe near future. The toll revenues should be used to finance the contracts for routine maintenance of these roads, following completion o f the upgrading and/or rehabilitation works, and the tolls should be set to provide for full financing of these maintenance contracts. The system should allow for a specific contract to be financed exclusively by the tolls collected on the road concerned, as well as cross- subsidization between different roads as necessary. Actions: A complete design of the recommended new system, including draft legislation, should be prepared. Additionally, a plan for its implementation shouldbe prepared. Source: TransportSector Review (2003), Policy Paper 2.4. 5.100 All toll collections by MPW on roadways in Afghanistan had been discontinued in September 2002 by Presidential Decree. The reason for this, as explainedby MPW staff, i s that some (though by no means all) o f these toll roads used to be paved asphalt roads, but that due to the ongoing rehabilitation An option to alleviate fiscal constraints in the short run would be to seek additional donor funding to support highway maintenance for a stipulated period o f time. However, this would not detract from the need to mobilize additional revenues so that highway maintenance costs can be absorbed inthe budget over the mediumterm. 119 activities some sections o f these roads have granular surface that i s not authorized to be usedas a toll road according to Afghan laws. Once these roads are upgraded to their original asphalt surface, the toll law can be implemented again. However, an underlyingreason for discontinuing these tolls was the perception that the funds collected were being improperly diverted into the wrong hands. 5.101 So currently MPW i s not collecting charges/tolls from road users. The Ministry o f Transport has been collecting tolls on some roads from the truchng industry. The Ministry o f Interior through its numerous security checkpoints i s collecting fines for overloading or for non-payment o f annual vehicle and driver license fees. Finally, local security checkpoints are also sometimes charging non-legitimate "tolls". An additional issue i s the illegal tolls collected by local commanders on many roads. 5.102 Stopping existing official tolls, without good reason or their replacement by a new set o f rationalized tolls, would appear to be a step backward. In particular, the Salang Tunnel i s an obvious place where official tolls should be collected even now. And there i s an urgent need to stop illegal tolls from being collected by local commanders, which will become technically easier to do as the highways concerned are reconstructed. 5.103 The Government / MPW has been developing a set o f new tolling procedures that combine the existing Afghan toll law and new approaches based on international experience. A change to the current Afghan law on this subject would have to be coordinated and approved/promulgated. It i s expected that at least some tolls on selected major highways will again be collected starting in 2005/06. These tolls, unlike the dedicated tolls proposed in the TSR, are collected for revenue purposes and form part o f the national budget, and are not earmarked for road maintenance or construction, as based on a recent Government decision, the Ministryo f Finance i s responsible for toll collection. 5.104 Yet another question, sometimes raised, i s whether a separate, partially autonomous "Road Fund" should be established to fund road maintenance based on earmarked resources from one or more o f the highway-related taxes mentioned above. Based on international experience, road funds are difficult to operate appropriately and Afghanistan i s not mature for an instrument o f this nature. Moreover, the road fund concept raises issues about earmarking particular revenue sources for specific uses, which is not generally recommended as it constrains budget management. Inparticular, under current conditions faced by Afghanistan, domestic revenue is very low and earmarkinga significant portion o f it to a specific use would not be advisable. Another issue associated with earmarking i s that o ftransparency and control, and also the comprehensiveness o f the budget (see Volume I, Chapter 2 and Chapter 6) i s adversely affected. Hence the Government's approach o f developinghighway tolls, collecting them as part o f the budget, and ensuring adequate allocations for highway maintenance through the budget i s appropriate. E.ConclusionsandRecommendations SUMMARY FINDINGS CONCLUSIONS AND 5.105 As discussed inthis chapter, the Government and internationalcommunity have come together to mobilize funding for and implement a set o f major highway reconstruction investments. Other than the enormous spending on building up Afghanistan's security forces, the road sector has been the biggest recipient o f foreign assistance. The Government encouraged donors to invest inreconstruction o f the core national highway network, and donors responded well, funding different segments with relatively good coordination for the most part, avoiding duplication or competition among donors for specific routes. Moreover, gaps in the main network were progressively filled over time, and the investment program for the Ring Road and key connections to neighboring countries i s basically fully funded, with most o f it 120 under implementation. While implementation has not been as rapid as either the Government or donors had originally hoped, good progress has been made on many projects, and moreover implementation overall has been considerably faster than inmost other infrastructure sectors. 5.106 Many difficulties were encountered, however, and there are areas where improvements are needed. Inthe spirit o f learning from experience for application in the future, some o f the main findings and lessons are summarized below. These lessons are important for the highway sector but also for other infrastructure sectors as well. 5SO7 The fragmented implementation pattern dominated by donor-executed projects was been reasonably successful but may be outliving its usefulness. The approach taken allowed projects to start up quickly, ensured that donors focused on and were in some sense accountable for specific projects, "allocated" the different projects across donors so that all priority projects were eventually covered, and minimized the burden on initially very weak capacity in MPW. There was basic coordination with respect to standards, and the existing highway system itself for the most part provided a blueprint for reconstruction investments. 5.108 However, the disadvantages o f this approach are increasingly evident - in terms o f high and varying costs, lack o f Government leadership and ownership, reliance on temporary external capacity rather than building sustainable core government capacity, possibly making it more difficult for the Afghan contracting industry to develop, etc. Moreover, this hnd o f approach made more sense in an "emergency" mode o f reconstructing an existing network o f highways than it will for any future program of new investments that will needto be cohesive, very carefully prioritized, limited, and cost-controlledin view o f resource constraints. As "lumpy" investments, major road projects are more conducive to projectized funding than i s the case in many other sectors. However, Government-led prioritization and oversight, along with more harmonizedapproaches across donors, would yield substantial benefits. 5.109 Capacity constraints in M P W have not been very well-addressed by fragmented TA and project-oriented PIU arrangements. As in other ministries, such approaches have not been very helpful inbuildingsustainable core government capacity. The recent agreement betweenMPW and donors on a program o f administrative reform and capacity building in MPW demonstrates that there i s shared recognition o f this problem and a determination to develop sustainable core capacity inMPW. 5.110 There has been large variation in the unit (per-kilometer) costs of different highway reconstructionprojects. Although such differences would appear to be to a considerable extent explained byfactors beyondthe control o fGovernment, donors, or implementing agencies, part o fthe variation may be due to controllable factors and hence needs to be looked into further, with a view to identifying contributingfactors and taking remedial actions as necessary. 5.111 Implementation has clearly been hampered, and costs increased, by security issues, to varying degrees indifferent parts o f the country butwith no regon fully exempted from security problems. 5.112 Unit costs associated with standard road-building materials and works have been relatively high in relation to those in neighboring countries. This i s a matter o f concern because it means that the net benefit for Afghanistan's development providedby each dollar o f assistance i s less. 5.113 Inthis context, it seems clear from some examples thatgoingfor too rapid speed of work has substantial cost consequencesfor projects. While delays can be costly by postponing the time when economic benefits are being reaped by a project and often raising the total costs as well, trying to finish a project unrealistically rapidly also raises costs and may lead to downstream quality and maintenance problems. I 121 MAINRECOMMENDATIONS 5.114 A few recommendations are put forward below for consideration, based on the findings o f this work and in the context of the broader themes o f the Public Finance Management Review o f which this forms a part. 5.115 While the requirements o f the road sector are many and urgent, setting priorities i s essential, particularly in view of the large spending on road reconstruction that has already occurred and the substantial maintenance requirements for highways. Within MPW's "prioritized" Master Plan, it will be necessary to further strictly prioritize different investments, in line with the recommendations o f the Master Plan, currently being finalized. It i s extremely doubtful whether funding will be available to initiate and carry out most or all o f the projects in the Master Plan, and in addition their maintenance requirements may be unaffordable. 5.116 More generally, it is recommendedto take a very cautious approach to large new road project proposals. Given the reconstruction o f the core national highway network that i s already underway with a number o f segments completed or approaching completion, it i s doubtful whether large additional investments in new roads are of the highest priority for funding in the near term. Examples include the two proposed north-southhighways and the proposed Herat-Chaghcharan Highway. Where basic access (with lower standards and unit costs), as opposed to the current hightechnical standards for key national highways, i s the objective, this can also be taken into account. 5.117 A s discussed earlier in this paper, meaningful prioritization of investments is possible on the basis of simple cost-benefit analysis, with traffic forecasts a key consideration. The difficulties and extra costs (including for security) o f implementing major road projects inAfghanistan, evident from the experience with the ongoingrehabilitation investment program, need to be taken fully into account on the cost side o f the equation. While road investments often carry very higheconomic returns, this depends in particular on traffic development, which needs to be reviewed carefully with respect to the major road project proposals, as the existence o f alternative routes (albeit longer in terms of distance) can have a considerable impact on whether a major road project generates increased traffic overall or diverts existing traffic from other routes. The latter will result in some net benefits in terms o f faster travel times and lower costs, but these will be smaller than in the case o f new traffic as the diverted traffic does have an alternative, already inuse. 5.118 Maintenance of reconstructed highways needs to be given top priority for funding. The economic returns to maintaining existing roads carrying substantial traffic invariably are high, as can be ascertained through cost-benefit analysis. Moreover, adequate maintenance is essential for the full economic benefits o f the highway investments already made to be achieved. Thus there should be adequate provisions for highway maintenance inAfghanistan's annual budget. 5.119 Inthis context, revenue sources that roughly correspond to the main beneficiaries of highways should be developed. Examples include tolls, fuel tax, and vehicle levies. These kinds o f instruments constitute an appropriate form o f "cost recovery" from highway users, but should not be segregated from other revenues or put ina "road fund", for which the conditions are not right inAfghanistan. 5.120 The role of the Afghan private sector in both maintenance and construction needs to be nurtured and developed, through ensuring that there are at least some opportunities for Afghan firms to credibly bid on contracts and subcontracts, improving the enabling environment and business climate more generally, and providing capacity buildingsupport as necessary. 122 5.121 By the same token, substantial, permanent involvement by MPW or other public entities directly in road maintenance or constructionshould be discouraged. This would go against the general direction o f Government policy in favor o f private sector-led development, reduce the space for private sector activities, distort MPW's role from a policy, planning, and regulatorybody to one directly involved in providing construction and maintenance services, etc. Maintaining some emergency maintenance capacity would bejustified. 5.122 Although difficult, measures to prevent excessive wear-and-tear on roads from overloaded trucks need to be explored and developed. Otherwise road deterioration will be more rapid, and maintenance costs higher. Some regulations are on the books, with enforcement vested with the Ministry of Interior, but as i s often the case inother nearby countries, these are observed inthe breach. 5.123 Finally, sustainable core capacity building in MPW is essential. This calls for a program o f capacity development as part o f the Government's public administration reform program, around which donors should cohere. 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