The World Bank Financial Sector Rapid Response Project (P119047) REPORT NO.: RES38612 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING AND PARTIAL CANCELLATION OF FUNDS OF FINANCIAL SECTOR RAPID RESPONSE PROJECT APPROVED ON AUGUST 25, 2011 TO GOVERNMENT OF ISLAMIC REPUBLIC OF AFGHANISTAN FINANCE, COMPETITIVENESS AND INNOVATION SOUTH ASIA Regional Vice President: Hartwig Schafer Country Director: Henry G. R. Kerali Regional Director: Zoubida Kherous Allaoua Practice Manager/Manager: Nabila Assaf Task Team Leader: Ahmed Mohamed Tawfick Rostom The World Bank Financial Sector Rapid Response Project (P119047) ABBREVIATIONS AND ACRONYMS ACH Automatic Clearing House AFMIS Afghanistan Financial Management Information System APS Afghanistan Payment System CBS Core Banking System CSD Central Settlement Depository DAB Da Afghanistan Bank DO Development Objective GoIRA Government of the Islamic Republic of Afghanistan MoF Ministry of Finance PDO Project Development Objective RTGS Real Time Gross Settlement TA Technical Assistance The World Bank Financial Sector Rapid Response Project (P119047) Note to Task Teams: The following sections are system generated and can only be edited online in the Portal. BASIC DATA Product Information Project ID Financing Instrument P119047 Investment Project Financing Original EA Category Current EA Category Not Required (C) Not Required (C) Approval Date Current Closing Date 25-Aug-2011 31-Oct-2019 Organizations Borrower Responsible Agency Ministry of Finance,Islamic Republic of Afghanistan DA AFGHANISTAN BANK Project Development Objective (PDO) Original PDO The Project's development objective is to assist DAB to develop actions plans for improved banking supervision and implementamodernnational payment system for efficient and transparent payment transactions. Current PDO To assist DAB to develop action plans for improved banking supervision and to establish key building blocks of financial sector infrastructure: payment system, movable collateral registry, and public credit registry. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IDA-D1400 27-Oct-2016 04-Jan-2017 12-Apr-2017 31-Oct-2019 20.00 0 19.56 IDA-H8930 26-Nov-2013 10-Mar-2014 04-Jun-2014 31-Oct-2019 6.70 4.86 1.28 IDA-H7320 25-Aug-2011 27-Aug-2011 06-Sep-2011 31-Oct-2019 19.00 17.21 .01 The World Bank Financial Sector Rapid Response Project (P119047) Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING 1. Background: The Financial Sector Rapid Response Project was approved by the Bank’s Board in August 2011 with a commitment amount of SDR 11.9 million (US$19 million equivalent). The Project is implemented by the central bank, Da Afghanistan Bank (DAB). Following a request from the Government of the Islamic Republic of Afghanistan (GoIRA), the Board approved a commitment amount of SDR 4.4 million (USD 6.7 million equivalent) Additional Financing (AF) for the project in November 2013. The project was also restructured along with the AF – the PDO was revised to cover additional activities relating to financial infrastructure, and the original closing date was extended from end-June 2014 to end-June 2016. The World Bank’s Board approved a second additional financing in October 2016 for amount of SDR 14.4 million (USD 20 million equivalent) and extended the project closure date until end October 2019. The second additional financing included funding for additional activities under various components of the project. The scope of the second component of the project was increased to finance a modern core banking system (CBS), automation of off-site supervision and internal audit function, and automation of the Financial Intelligence Unit at DAB. New activities were also introduced in other components, such as technical assistance (TA) on adoption of risk-based internal audit and International Financial Reporting Standards; and the implementation of a capacity building program for DAB staff. 2. The project has delivered almost all activities that were planned in the original project (approved in August 2011) as well as activities that were added under the first additional financing (approved in October 2016). The project’s performance in achieving the overall Development Objectives (DO) is assessed as Moderately Satisfactory. The two DO indicators are of a qualitative nature and driven by the delivery of the final product. One of the two indicators require “developing DAB’s Financial Supervision Department’s (FSD) strategic action plan with implementation monitored for the ten banks audited”. A three-year action plan was developed by the FSD in late 2018 to monitor the weak banks within the system. The plan includes corrective actions and timelines and FSD is monitoring the implementation of this plan on quarterly basis. 3. The second DO indicator is expected to be fully achieved by project closing date. The contract for the mobile/card payment switch was signed and the Afghanistan Payment System (APS) is now fully operational. Moreover, the Real Time Gross Settlement (RTGS), Automatic Clearing House (ACH) and Central Settlement Depository (CSD), collectively Automated Transfer System (ATS), was also installed. Testing with banks successfully concluded in May 2019 and the integration with MoF’s AFMIS is currently being finalized. The delays with this component were due to delays in procurement of Afghanistan Financial Management Information System (AFMIS) maintenance and support contract by MoF. The World Bank Financial Sector Rapid Response Project (P119047) 4. With regards to Implementation Progress (IP), the project’s performance is assessed as Moderately Unsatisfactory, reflecting both project management and procurement challenges. This has mainly reflected on a remarkably low disbursement from the second additional financing – amounting to USD 20 million- that was approved in October 2016. These challenges exacerbated during the past six months. Amongst which are several changes that took place to the project leadership, particularly during the last six months, and are of a concern to the World Bank. The project maintained stable project management since the effectiveness of the original project until 2013. In 2013, a new Project Director (PD) was hired and served in this position until end 2016. However, during the past two years several changes to the project management took place that affected implementation progress. 5. The project has also faced procurement challenges which have intensified in the last six months. The project suffered significant procurement delays and failure to take timely and decisive actions on several areas agreed in the recent implementation support missions particularly during the last six months. One example is significant implementation challenges that faced a key TA activity - relating to strengthen FSD’s capacity and amounting to USD 5 million. Implementation of this two years activity started in November 2017 and halted at only 70% by the time project is closing. The weak implementation progress was mainly due to a disagreement that erupted in December 2018 between FSD and the contractor over the TA activities and deliverables. The team has advised FSD and DAB’s management during several implementation support missions during April 2019; July 2019 and most recently September 2019 - to take decisive actions to resolve this disagreement, yet, no tangible outcomes were achieved. This problem was exacerbated by FSD’s weak capacity and laxed contract management. DAB management was made aware that any expenditure relating to this activity after the closing date will be incurred by DAB. 6. The technical nature of many planned activities under the second additional financing (e.g. the acquisition of the new Core Banking System and automation of several critical functions of Da Afghanistan Bank) combined with the above-mentioned project management challenges lead to several delays in project implementation and abysmal disbursement of the second additional financing approved October 2016. It took DAB around two years to develop the technical specification and prepare draft bidding documents for the new CBS. While DAB’s management had the option to hire a firm to prepare these documents, it was decided to rely on internal resources for this undertaking. Instead, DAB’s management and the relevant technical team held several consultation sessions and learning events with central banks of Bangladesh, Vietnam and Sri-Lanka as these institutions have gone through the same exercise recently. DAB took this strategic decision to ensure full relevant departments’ ownership of this project. It is worth noting that the budget for the CBS accounts for around 72% of the - undisbursed - second additional financing. The bidding documents have now been finalized. Given the criticality of the CBS for the central bank’s functions; MoF has requested that the procurement and implementation of these critical activities be carried forward under the successor project that was discussed with the leadership of Ministry of Finance and Da Afghanistan Bank, and which would support financial intermediation for economic growth and development in the country. 7. In preparation for FSRRP project closure, efforts will be focused on completion of outstanding contracts; services and goods delivery and authorizing payment for completed activities before the project closing date of October 31, 2019. Accordingly, to take advantage of the possibility of recommitting these IDA funds, the Ministry of Finance (MoF) has on September 21, 2019, requested the partial cancellation of the remaining undisbursed balance under the FSRRP project and reallocating it for the new project. The World Bank Financial Sector Rapid Response Project (P119047) II. DESCRIPTION OF PROPOSED CHANGES 1. The proposed restructuring is to cancel the unused funds of SDR 14.3 million. Given project closing date of October 31, 2019, the cancellation of the funds will not affect the project’s achievement of PDOs and results targets. Undisbursed balance IDA H7320 SDR 5,924.65 IDA H8930 SDR 938,009.86 IDA D1400 SDR 13,400,000.00 Total SDR 14,343,934.51 III. SUMMARY OF CHANGES Changed Not Changed Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ Results Framework ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Disbursements Arrangements ✔ Disbursement Estimates ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ The World Bank Financial Sector Rapid Response Project (P119047) Procurement ✔ Implementation Schedule ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_CANCELLATIONS_TABLE CANCELLATIONS Value Reason Current Cancellation New Ln/Cr/Tf Status Currency Date of for Amount Amount Amount Cancellation Cancellation BORROWER' S REQUEST IDA-D1400- Effectiv XDR 14,400,000.00 14,400,000.00 21-Sep-2019 0.00 FOR 001 e COUNTRY REASONS BORROWER' S REQUEST IDA-H7320- Disburs XDR 11,900,000.00 5,924.65 21-Sep-2019 11,894,075.35 FOR 001 ing COUNTRY REASONS BORROWER' S REQUEST IDA-H8930- Disburs XDR 4,400,000.00 938,009.86 21-Sep-2019 3,461,990.14 FOR 001 ing COUNTRY REASONS OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IDA-D1400-001 | Currency: XDR The World Bank Financial Sector Rapid Response Project (P119047) iLap Category Sequence No: 1 Current Expenditure Category: GD,NCS,CS,IOC,TRNG, IOCPt A B1,B2 C 13,600,000.00 0.00 0.00 100.00 100.00 iLap Category Sequence No: 2 Current Expenditure Category: GD, NCS, CS, IOC,TRNG IOC Pt B3 800,000.00 0.00 0.00 100.00 100.00 Total 14,400,000.00 0.00 0.00 IDA-H7320-001 | Currency: XDR iLap Category Sequence No: 1 Current Expenditure Category: GD, NON CS, CS, IOC & TRNG NOT APS 8,030,000.00 5,160,828.07 8,024,075.35 100.00 100.00 iLap Category Sequence No: 2 Current Expenditure Category: GD, NON CS, CS, IOC & TRNG FOR APS 3,870,000.00 3,264,040.86 3,870,000.00 100.00 100.00 iLap Category Sequence No: 3 Current Expenditure Category: UNALLOCATED 0.00 0.00 0.00 Total 11,900,000.00 8,424,868.93 11,894,075.35 IDA-H8930-001 | Currency: XDR iLap Category Sequence No: 1 Current Expenditure Category: GD, NON CON SER AND CON SER 4,400,000.00 1,398,777.60 3,461,990.14 100.00 100.00 Total 4,400,000.00 1,398,777.60 3,461,990.14 .