The 1396 (2017) Fiscal Performance Improvement

Plan

Striving forEfficient and effective public

services;Strong fiscal discipline; and

Strategic fiscal policyAbstract

This report presents the Government’s Fiscal Performance Improvement Plan updated for the fiscal year 1396 (2017). Much was a achieved in 1395 (2016) but many challenges lie ahead. Progress is good in revenue and customs but there is a long way to go to reach sustainable levels of domestic revenue needed to underpin the overall goals of self-reliance. The budget process needs to reform and become an effective tool for national development. 1396 (2017) and 1397 (2018) are crucial years for reform given external and internal threats to the state and the need for the state to deliver crucial series and public goods to its citizens. There is also a pre-presidential election budget expected due in in 1397 (2018) and/or 1398 (2019).

Corporate reforms and institutional restructuring will continue this year. Some initial investments in IT and HR have been made but there is still much to do. Levels of contracted national technical assistance have increased and a huge effort is required to move people into permanent roles with support and resources to assist them.

Despite some progress, support for the FPIP is behind schedule and many team will not receive any support in 2017. A draft concept note for the FPIP Support Program has been done but the program is unlikely to begin until next financial year. The performance cycle is also delayed with the late release of this rolled over 5-year plan. A formal mid-year tracking assessment will not be completed but plans are still in place for the full formal annual assessment process in late 2017.

Independent Performance Validation TeamJuly 2017

TABLE OFCONTENTSEXECUTIVE SUMMARY..............................................

INTRODUCTION........................................................

THE 1396 (2017) 5-YEAR PLAN..................................ROLLING OVER THE 1395 (2016) 5-YEAR PLAN........................CREATING A PERFORMANCE CULTURE...................................14

Teams within Teams – Participating Agencies.........................................THE 1395 (2016) 5-YEAR PLAN..............................................16

The Plans – Quality and Ownership.........................................................The Flagship Reforms – Some Progress but Big Challenges Remain.......New Aspirational Targets – The Work Planning Guides...........................Reform Risk-Return Profiles – Risk Taking...............................................

STAFFING AND TECHNICAL ASSISTANCE..................33

FPIP FINANCING.....................................................35Existing Resourcing – Sources and levels................................................FPIP Costing – Estimating resourcing needs............................................

FUTURE DIRECTIONS TOWARDS SECTOR BUDGET SUPPORT POLICY FRAMEWORK...............................40

Government Options...............................................................................Donor Options.........................................................................................Performance Reporting...........................................................................

2

TABLESTable 1. Flagship Reforms by Deputy Minister Level/Division.......................................

Table 2. Number of Activities on the FPIP.....................................................................

Table 3. Current FPIP Expansion Agencies (under consultation).................................

Table 4. Current Participating Agencies.......................................................................

Table 5. MoF Teams That Did Not Submit a Plan........................................................

Table 6. Summaries of Flagships Measures for 2017 – DG Level Teams.....................

Table 7. Frequency of Risk Impact Dimensions...........................................................

Table 8. 2016 Tashkeel Complements.........................................................................

Table 9. 2016 Technical Assistance Complements......................................................

Table 10. ARTF Disbursement Performance Indicators..............................................

Table 11. Indicative FPIP Expansion Plans Used in Costings.......................................

Table 12. Inflation, Scale up and Absorptive Capacity Costing Assumptions.............

Table 13. Medium Term Resourcing Allocations – Economic (US$)...........................

Table 14. Medium Term Resourcing Allocations – Administrative (US$)...................

Table 15. ABC Multi-Year Costings by CoFOG Function (US$)....................................

FIGURESFigure 1. The Continuous Performance Improvement Cycle..........................................

Figure 2. The 1396 (2017) Performance Management Cycle........................................

Figure 3. Aspirational Targets: 2016 PEFA....................................................................

Figure 4. Performance Comparison: Budget V’s Treasury (legacy PEFA)......................

Figure 5. Aspirational Targets: Legacy PEFA: EU Monitoring........................................

Figure 6. Aspirational Targets: TADAT..........................................................................

Figure 7. Tax Comparisons: as % of GDP and GDP per Capita.......................................

Figure 8. Tax as % of GDP: low and lower middle-income countries............................

Figure 9. Aspirational Targets for Open Budget Index..................................................

Figure 10. Aspirational Targets for Statistical Capacities.............................................

Figure 11. Doing Business: Proposed Aspirational Ranks (100 Best)...........................

Figure 12. Risk-Return (performance and TA) Space...................................................

Figure 13. Time Required and Coordination Requirements of Activities....................

Figure 14. TA, Impact and Risk Parameter Results at Directorate General Level........

3

BOXESBox 1. Teams not Themes..............................................................................................

Box 2. The Seven Goals for Performance Management:................................................

4

ACRONYMSABC Activity Based CostingACD Afghanistan Custom DepartmentAD Administration DepartmentAEITI Afghanistan Extractives Industries

TransparencyAFMIS Afghanistan Financial ManagementAFS /AFN Afghan AfghaniAMD Aid Management DirectorateANCA Afghan National Customs AcademyANDF Afghanistan National and Development

FrameworkANPDF Afghanistan National Peace and

Development FrameworkARD Afghanistan Revenue DepartmentARTF Afghanistan Reconstruction FundBD Budget DepartmentBRT Business Retail TaxCASA Central Asia-South AsiaCBR Capacity Building for ResultsCD Customs DepartmentCIT Corporate Income TaxCoFOG Classification of the Functions of

GovernmentCSC Civil Service CommissionCSO Central Statistics OfficeDAB Da Afghanistan BankDG Director GeneralDLI Disbursement Linked IndicatorDM Deputy MinisterEA Economic AffairsEITI Extractives Industries Transparency

InitiativeEU European UnionF&A Finance & AdministrationFPIP Fiscal Performance Improvement Plan GDP Gross Domestic ProductGFS Government Finance StatisticsGPS General Public ServicesHCD Housing and Community DevelopmentHEC High Economic Council HR Human Resources HRD Human Resources DepartmentIA Internal Audit IAASB International Auditing and Assurance

Standards BoardICT Information and Communication

TechnologyIDLG Independent Directorate of Local

GovernanceIIA Institute of Internal AuditorsIT Information TechnologyITA International Technical AssistanceJCMB Joint Coordination and Monitoring BoardKPI Key performance IndicatorMAIL Ministry of Agriculture Irrigation and

LivestockMARGD Monitoring, Analysis and Reporting

General DirectorateMARGD Monitoring, Analysis and Reporting

General DirectorateMBAW Making Budgets and Aid WorkMEW Ministry of Energy and Water MFPD Macroeconomic and Fiscal Performance

DepartmentMoCIT Ministry of Communication and

Information TechnologyMOD Ministry of Defense MOE Ministry of Education MoF Minister for Finance MOI Ministry of Interior MoJ Ministry of JusticeMSG Multi-Stakeholder GroupMTFF Medium Term Fiscal FrameworkNPA National Procurement AuthorityNPP National Priority Programs NTA National Technical AssistanceOBI Open Budget Index/InitiativeODM Office of the Deputy MinisterOoCS Office of Chief of StaffOoDMAF Office of the DM for AdministrationOoM Office of the MinisterPC Public CorporationPCBC Procurement Capacity Building ComponentPCs MoF - Public CorporationsPD Property DepartmentPEFA Public Expenditure and Financial

AccountabilityPFM Public Financial ManagementPFMRII Second Public Financial Management

Reform ProjectPI Performance IndicatorPICDG Programs Implementation and

Coordination General DirectoratePIT Personal Income TaxPIU Project Implementation UnitPMT Performance Management TeamPOA Performance Outcome AreaPPP Public Private PartnershipsPSP Policy and Strategic PlanningRD Revenues DepartmentRIMU Project Implementation Management UnitRRD Revenue Reconciliation DatabaseRTAS Revenue Trend Analysis SystemSABII Strengthening Afghanistan's Budget (Phase

II)SAO Supreme Audit Office SBPS State Budget Planning SystemSMAF Self-Reliance through Mutual

Accountability FrameworkSMP Staff Managed ProgramSoC State Owned CorporationSoE State Owned EnterpriseSOEC State Owned Enterprises and CorporationsSOED State-Owned Enterprise DepartmentSP Social ProtectionTA Technical AssistanceTADAT Tax Administration Diagnostic Assessment

ToolTD Treasury DepartmentUNDP United Nations Development ProgrammeUS$ United States DollarUSAID United States Agency for International

DevelopmentVAT Value Added Tax

i

EXECUTIVE SUMMARYIntroduction1. This is the second year of the Fiscal Performance Improvement Plan (FPIP) and this report summarises the rolled over 5-year plans for teams participating in the program.2. In 2016 some 63 teams across the Ministry of Finance and partner agencies completed a full annual performance cycle. Outcomes at the team level were mixed but there were some very significant achievements. The process also highlighted some key risks to the reform process, in particular the need for urgent reform to the budget process. Overall the completion of the process and the publishing of the annual performance assessment report should be seen as a huge step forward. It is a significant step towards creating a performance culture and in improving transparency and accountability. 3. The next step in the FPIP process is to roll over team level plans and to publish those plans. This report sets out the revised plans, including flagship reforms, challenges and risks. The report also discusses staffing levels, progress on support from international partners and aspirational targets for the FPIP. 4. The roll-over of the plans for 2017 is quite late. The target is for the plans to be published in late January or early February. Due to a delay in finalising the 2016 Annual Assessment and some changeover in staff the formulation of 2017 plans took longer than anticipated. There were two significant factors at play. First, in keeping with the strong level of government ownership, plans were adjusted without any dedicated technical assistance. Teams made changes to the plans themselves. Second, it was decided that the quality and ownership of plans by teams was more important than keeping to the timetable. The roll over or in the case of new teams, formulation of their plans is an important learning experience itself and was important not to rush. This has resulted in significantly improved plans for most teams, based on more and better analysis than in 2016. 5. In 2017 there has been some restructuring of the FPIP. All Deputy Ministers and Director General’s Office’s now have plans that focus on leadership and management. There are some new teams joining the program, including Asan Khedmat. The National Procurement Authority have now produced a plan that is split at the team or Directorate level. This has meant a significant increase (45%) in the scope of the FPIP: there are now 96 teams participating in the FPIP this year.6. There has been significant outreach to other agencies that will join the FPIP in the future, but due to constrained resources target agencies such as CSO, SAO and IDLG will not formally join the FPIP until 2018. Further discussion with line ministries including MOD, MOI, MAIL is scheduled for the second half of 2018.

Flagship Reforms7. The 2017 5 year plans set out a large number of flagship reforms. below summarises the flagship measures at the deputy minster level.

i

Table 1. Flagship Reforms by Deputy Minister Level/DivisionFlagship Reforms

Ministry of FinanceMinister for FinanceDelivering effective management through the leadership groupImplementation of International Internal Audit Standards.AMD working with Donors, MFPD, Budget and Treasury to deliver timely and quality consolidated budgets and accountsDeliver second round of rolling forward estimates and establish first phase of a functional MTBF. Delivering the second annual and mid-year performance management cycle - 1396 (2017) Developing the institutional mechanism of PPP advisory board and working groupsDeputy Minister for Revenue and CustomsWorking at increasing domestic revenue Implementing the Customs and Revenue anti corruption strategy Oversee automation of customs and revenue systemsDeputy Minister for FinanceTrying again for Rolling Forward Estimates for Policy Linked Budgets, Single Currency, Integrated Budget, Piloting new commitment control systems within MoF (allotments). Program budgeting s.t. setting these pre-conditions.Introduction of web-based AFMIS with much more powerful functions - improved reach, purchasing, commitment controls and contract management systems. Zero balance sweeping. More Sub-Accounts trials. Stronger payroll controls and linkages with HR systemsDeputy Minister for PolicyEnsure Development councils are functional Reporting on the progress and implementation of ANPDF with budget alignmentHelp create fiscal space and drive reallocation of the budget to high priorities that are ready o be implemented.Deputy Minister for AdminWork program to deliver better budgeting, accounting, payroll procurement and IT services to MoFExploring PFM competency testing and Working with Treasury to pilot new systems for HR and Payroll controls.Strengthening access control and E-attendance system at MoF HQ, all, all mustofiats and custom officesDrafting Asan Khizmat legal and strategic framework, departmental statutes, regulations and guidelinesSeeking to develop Islamic insurance and micro-insuranceGetting gender-based fiscal information including on the budget, policies, and strategies from a gender perspective.Publish a report on annual procurement activities in the MoF Annual ReportDeliver condition report and report on value of disposalsMonitoring, evaluation, and analysis of all the MoF projects and identifying the needsSolid program to continually double revenue over three years. Ensuring release of 5 Government Properties occupied by powerful people and continue to target backlog of court casesLearning how to report on fiscal risk posed by SoEs and SoCs (initially on quality of business plans & balance sheet health).Drafting PPP guidelines for SOEs and SOCsAdministrative Office of the President1. National Procurement Authority (NPA)Comprehensive reform taking on the big issues. Medium term plan to decentralize. e-Procurement including contract management (working with Treasury)Delivering Procurement Monitoring and Capacity AccreditationImplementation of Open Contracting Data Standards in the public procurement sectorFacilitating around 450 of procurement cases Upgrade current PCBC to National Procurement Institute Other Partner Agencies1. AEITI SecretariatWorking with government agencies to help revealed weakness in revenue and contract management – helping to close loopholes including closing revenue leakages of c$1 b pa.Ensuring all reconciliation reports are published on time and backlogs are clearedStrengthen Multi-Stakeholder Group (MSG) structure, function and processes

8. See also Attachment A of Volume II for flagships and challenges at the Directorate General and Directorate levels (page 8). Staffing and Technical Assistance

ii

9. There is still a relatively high reliance on technical assistance in most teams. There has been a marked shift in recent years from international technical assistance to local or national technical assistance. This has become a tricky issue to navigate. For the purposes of the FPIP we have defined technical assistance as support that is external to the team and is performing a role that is not routine or on-going. For instance, a staff member who is in a line position and who is performing an on-going function, but whose employment is on a contract rather than permanent basis is not technical assistance. TA is when a team requires the help of someone for their expertise in either a capacity building role or a short-term role for a specific purpose.10. The reason for this is that a large number of the staff in teams under the FPIP are referred to as NTA or National Technical Assistance because they are contract or non-ongoing staff. The official policy is to use the NTA system as a way to transition staff from donor programs to tashkeel. The primary source of “top-ups” for staff is through the Capacity Building for Results (CBR) program. In practice, this process is going slowly and many staff prefer the uncertainty but higher salary of a contract position versus the certainty of moving to a permanent tashkeel role. 11. The cost of government financed NTA has also sky rocketed in the last couple of years following the planned closure of some large and long-term donor programs such as MBAW (UNDP), though the Government allocated $1.5million of discretionary funding to keep the national consultant financing project going in 1396 (2017). Due the severity of the level of fragmentation of the budget such changes in funding for professional/consultant services are not properly disclosed in the budget. FPIP Support Program12. Progress towards support for the FPIP has been slower than hoped but is progressing. The government and the World Bank now have a concept note for support to the FPIP. The program will cover all aspects of the FPIP with funding of $100 million over 4 years. The program is a fairly standard World Bank investment program (recipient executed) with some differences. Firstly, there will be no project implementation unit, resources will be allocated under the FPIP Support Program to the corporate areas of the MOF, HR, accounting and finance, budget, and procurement to build capacity and support the implementation of the program. In the first 1 to 2 years this will include MOF contracting a firm to assist with logistics and capacity building to ensure the program can disburse and that teams receive timely assistance. This will still work through government systems with the procurement and on-going contract management done by the MOF administration department.13. The governance of the program will also be the responsibility of the MOF leadership group and heads of partner agencies. This will consist of the Minister, Deputy Ministers and DGs who will oversee the operation of the FPIP and the support program. To assist in this process of managing the program, the support program will include some financial incentives in the form of a number of Development Linked Indicators (DLIs) that will disburse on the basis of the leadership group completing some agreed benchmarks. This is a very positive change to the way the donors are supporting a performance culture within the government.14. The support program is likely to be approved in the second half of 2017 and in practice will not be operation until the start of 2018. This leaves many teams with no support in 2017. There are significant

iii

resources in the current PFMRII program that could be reassigned in the mid-year budget review to assist some teams that are struggling with a lack of resources. The PFMRII PIU, should also be directed to assist with the procurement process for the logistics contractor for the MOF, to ensure support is in place for the start of the next financial year.Future Options for Sector Budget Support15. A key part of the self-reliance strategy is for the government to not only increase revenue to pay for services and investment, but also to develop national systems to ensure resources get where they need to go and the government is accountable for public spending. Using national systems to improve them is going to be crucial in achieving self-reliance. As shown, the cost effectiveness of more traditional development modalities has been very low in Afghanistan, with modest improvements in international benchmarks on public expenditure costing much more than in nearly all other countries.16. There has been some good progress with budget support increasing through programs such as the US National Development Partnership, the EU State Building Contract and the World Bank Incentive Program. These programs are making a significant contribution to improving government systems and processes. However, more can be done to more closely align these budget support measures with specific reform goals. By explicitly incentivising sector level goals, in the case of FPIP - the fiscal reform goals, that are set out by the Government, these programs can assist in a more rapid improvement in outcomes.

iv

INTRODUCTION 17. This report sets out the priorities for the second year of the Fiscal Performance Improvement Plan (FPIP). In 2016 the Ministry of Finance (MOF) and partner agencies the National Procurement Authority and the Afghanistan Extractive Industries Transparency Initiative completed a full annual performance cycle. This included a mid-year tracking assessment and an annual performance assessment setting out progress by teams against their stated goals. This was a huge achievement, for the first time for most of these teams they were subjected to genuine performance assessment where they were held accountable for their commitments to on-going reform. For details on the outcome of the FPIP in 2016 and the implementation strategy paper see http://mfpd.mof.gov.af/#pfm.18. The next step in the FPIP is to roll over the 5-year plans to take into account achievements in 2016 and any changes that need to be made to adjust the plans for government policy or commitments. The time table for this process was to have the 5-year rolling plans published early in the year, around late January or early February. This timeframe was not met due to a range of factors. The annual assessment report was only completed in mid-January and then it took some months for the MOF leadership group to agree on the final outcomes and publish the report. 19. This was also only the second time that teams would formulate team level plans. In keeping with the government owned nature of the FPIP teams were asked to complete their plans without specific additional technical assistance. With quite a lot of turnover in staff from 2016 to 2017 this process took longer than anticipated. It was however, very positive in terms of learning outcomes. Most teams have taken the planning process more seriously than 2016 and plans are generally of higher quality and more representative of what teams are actually doing. Many have a stronger basis in analysis, the use of the Tax Administration Diagnostic Assessment Tool (TADAT) for the revenue department a good case in point. 20. The FPIP focusses on long term reforms through sequenced activities with annual assessment of progress against those goals. This report is set out in four sections:

The first section sets out the 2017 5 year plans including the flagship reforms, aspirational targets and the reform risk return profile.

The second section discusses staffing and technical assistance profiles both international and national.

The third section sets out detailed costings for the FPIP and discusses current levels of support and options for ensuring funds are allocated where they are most needed.

The final section discusses future options for sector budget support and for linking performance to funding, including how performance outcomes are reported by the government.

21. Detailed annexes on team plans and aspirations targets are included in two additional volumes of this report.22.

5

THE 1396 (2017) 5-YEAR PLAN ROLLING OVER THE 1395 (2016) 5-YEAR PLAN 23. This report presents the 2017 Fiscal Performance Improvement Plan (FPIP). It represents the start of the second annual team-based performance management cycle. In 2016 some 63 teams across the Ministry of Finance and partner agencies completed a full annual performance cycle. Outcomes at the team level were mixed but there were some very significant achievements. The process also highlighted some key risks to the reform process, in particular the need for urgent reform to the budget process. Overall the completion of the process and the publishing of the annual performance assessment report should be seen as a huge step forward. It is a significant step towards creating a performance culture and in improving transparency and accountability.24. The next step in the FPIP is to roll over team level plans and to publish those plans. This report sets out the revised plans, including flagship reforms, challenges and risks. The report also discusses staffing levels, progress on support from international partners and aspirational targets for the FPIP.25. In 2017 in keeping with the self-reliance goal of the government, the roll-over of the plans was done by teams with no dedicated or additional technical assistance. This has increased ownership of the plans by teams and in most cases resulted in an improvement in the quality of the plans.26. In 2017 there has also been some restructuring of the FPIP. All Deputy Ministers and Director General’s Office’s now have plans that focus on leadership and management. There are some new teams joining the program, including Asan Khedmat. The National Procurement Authority have now produced a plan that is split at the team or Directorate level. This has meant a significant increase in the scope of the FPIP. This has resulted in a 45% increase in the number of teams under the FPIP from 66 in 2016 to 96 in 2017.27. The total number of activities has increased slightly. This year 1,480 activities are being tracked, compared to 1,308 last year. This is primarily due to the increased in the number of teams. The increase number from the increased teams, was offset by some consolidation of redundant activities in previous plans. Over four years, 5,443 activities have been recorded. (See Table2).

Table 2. Number of Activities on the FPIP1395 (2016)

FPIP 1396 (2017) 1397 (2018) 1398 (2019) 1399 (2020) 4 Years

1,308 1,480 1,406 1,373 1,184 5,443

28. There has been significant outreach to other agencies that will join the FPIP in the future, but due to constrained resources target agencies such as CSO, SAO and IDLG will not formally join the FPIP until 2018. Further discussions with line ministries are scheduled for the second half of 2017.

6

Methodology29. This section summarises the overall performance management methodology as well as the methodology for rolling over the 1395 (2016) 5-Year Plan. It also provides an overview of the timeline for Performance Management Framework annual cycle. 30. Team-based performance management is at heart of the Realizing Self-Reliance agenda.1 Team-based Performance Management in this context is designed to:

Ensure Officials Run Ministries – not Advisors nor Consultants; Improve the Quality of Spending – implementers are clear on their

responsibilities and stakeholders know why, how, what and where reform and spending happens; and

Set the foundations for Donors to link financial assistance to performance - when conditions are right for a donor.

Box 1. Teams not Themes

Team based performance matters to leadership and reflects 5 core values.

We Believe That:

1. Strong Teams Deliver the Best Results

2. Every Team and Every Team Member Matters

3. Measuring, Rating and Ranking Performance Helps Teams Work Better and Deliver Better Results

4. We Must Recognize Efforts of Hard Working Teams and Help Those Teams Who Need It The Most

5. A Resilient and High Performing MoF will Help Realise a Long and Prosperous Future for Afghanistan and All Its People

31. By instituting team-based performance management, the Government is saying we value institutional culture as the primary determinant of performance. Moreover, we believe that managing teams is more effective than managing reform themes. Focussing on teams means direct lines of reporting and increased accountability for results. It also means important institutional enablers and support systems, like IT, internal ministry level budgeting and accounting do not slip through the cracks.32. Improving performance is a strategic goal, anchored in practical activities, outputs and outcomes in the context of reforms to public financial management in Afghanistan. Key goals for performance management and for building systems under this plan are set out in Box 2 below. These are common goals for any fiscal performance improvement plan and for any capacity building plan for a Ministry of Finance and form a foundation for the Government to build on.

Box 2. The Seven Goals for Performance Management:

1 GoIRA, 2014, “Realizing Self-Reliance - Commitments to Reforms and Renewed Partnership” GoIRA, Kabul, Afghanistan.

7

Deliver on the Three Core Budgetary Outcomes

1. Improve efficiency and effectiveness of public services and service delivery (better education, improved health and greater confidence in government)

2. Deliver sustainable public finances by being strategic on how resources are allocated, distributed and spent (economic efficiency)

3. Strengthen fiscal discipline by hitting our targets, and running orderly processes

Deliver on Four Complimentary High Priority Objectives

4. Manage an improving, stable and secure economy creating jobs, increasing opportunities for all, reducing uncertainty and creating conditions for stability

5. Be more accountable to all stakeholders in the pursuit of good governance

6. Be more transparent – to different internal and external stakeholders ; on what the government is doing; in a way that is relevant to stakeholders

7. Deliver continuous improvement through integrated systems of trial and error based around the integrity of the budget cycle.

33. While it is a central part of the plan, team-based performance management is not an end in and of itself. It is part of a broad foundation theory for positive change. The full theory is set out in the Government’s implementation strategy paper cited in the introduction.2 34. In summary, the key components are:

Conform to aid effectiveness principles for fragile states including ownership, alignment, harmonisation, managing for results, mutual accountability and the New Deal’s TRUST and FOCUS priorities for working in conflict affected and fragile states:3

Follow the Basics First Approach to help prioritize and sequence PFM reform activities over time;

Target the weakest links in the budget cycle to ensure the system is self-improving;

Utilise analytical techniques regularly to assess technical and political feasibility of reform options; and

Introduce a Team-based Performance Management culture starting with integrating team-based performance management into reform program design and monitoring and evaluation systems.

35. It is important to base performance management around rolling plans that reflect the challenges the Government faces. The context of conflict means that reforms are not simple and will take time. Results will be uneven. By establishing 5-year plans, we can ensure high impact but achievable reforms are taken on, and that we are carefully tracking progress along the way. Every team will contribute to results, because we know that every team counts. We cannot break the cycle of dependency on external assistance if we do not fix Human Resource (HR) systems, Information Technology (IT) infrastructure and internal budget and accounting processes in government agencies.

2 Implementation of the PFMRII: Achieving a Performance Culture in a Conflict Affected Afghanistan (GoIRA, November 2015).3 As developed and driven by the g7+ to which Afghanistan is a member.

8

Why a 5-Year Rolling Plan?

Figure 1. The Continuous Performance Improvement Cycle

Prepare5 Year

Rolling Plan

Implement Annual Plan

Mid-Year Performance

Tracking

Self-Assessment Performance

Report

ScrutinizePerformance

2

Debate

Allocate

AdjustConsolidate

Transmit

Mid-Year Tracking Ensures All Team Leaders Know What is Expected

Basics FirstPrepare:

A Five Year Rolling Plan with costings, structured around teams guided by

medium term aspirational

targets

Implement the Plan:

Procurement and activity plans implemented.

Adjustments along the way

Basics FirstScrutinize

Performance: by managers, secretaries,

ministers, cabinet and parliament.

Team leaders defend their performance

Report on Performance:

Self-assessments of performance independently

validated

A Cycle of Trial and Error

36. A “rolling plan” is a finance term for “plan which is designed to continue over a period of time and is subject to regular review and updating”4. The underlying logic for 5 Year Rolling Plans within the context of fiscal performance improvement is threefold:

Improving fiscal performance takes time – reform activities are prioritized and sequenced and plans show how we tackle activities over a number of years. 5 Years is the period that covers most grant agreements and is the standard planning time horizon used in budget systems with a fully functioning system of rolling forward estimates.

Progress against plans is not uniform – completion of some planned activities is quick and to a good standard, while others take longer than expected to complete and/or achieve a sufficient level of quality. Some reform activities are contingent on the completion of other activities first. Consequently, there needs to be a routine system to adjust the plan based on progress.

The budget cycle is (or should be) a continuous improvement cycle for the public sector - hence performance frameworks need to be set within the context of the budget process / cycle. This means that: i) at the start of the fiscal year implementing agencies are clear about what is expected of them (i.e. the reform activities in the plan that can be funded); and ii) at the end of the fiscal year, performance is reviewed so that changes can be made to financial and non-financial plans as necessary.

Methodology for Rolling-Over the 5-Year Plans

4 Collins Dictionary http://www.collinsdictionary.com/dictionary/english/rolling-plan

9

37. A methodology was established for the rolling-over of the 1395 (2016) 5-year plan. Templates and a user guide were provided to each team. The templates were the same plans as were in place for 1395 (2016), except that 2015 year had been deleted and a new fifth year (1399-2020) was created. The methodology recommended to roll-over the plans was included in the user guide. 38. These are seven key steps for rolling over an existing 5 year plan. Changes were to be made for the following:

1) Adjust plan for any administrative restructures, unit splits and/or new units. Any changes to team names were to be identified.

2) Review major new policy or new functions that have been set by Government that need to be included in the updated 5-year plan

3) Check if 1395 (2016) actions need to be rolled over to 2016 - this could happen for various reasons as the action is still relevant, was delayed, or there was insufficient progress last year.

4) Check if existing 1397 (2017) actions need to change (i.e. stay, reworded, be pushed out, or be removed

5) Extend any existing activities to 1399 (2020) if required6) Review the 5-year profile to determine if progress is too slow or too

quick? 7) Then determine if:

i. New actions are required to help achieve any new or existing aspirational targets, such as those used for the 2016 PEFA (e.g. Performance Reporting and Public Investment management), and other diagnostics (e.g. TADAT). These aspirational targets are there to help teams prioritize and sequence reform actions over the 5 year period.

ii. Key outputs that need to be delivered in 1396-2017 that the team would like to specify – such as number of reports produced, or deadlines for holding of meetings.

iii. Any existing action or output-based agreements are properly reflected, including with the Office of the President (e.g. 100 days plan or Annual Action Plans), Office of the Minster, IMF, World Bank, EU, US Treasury, and other stakeholders. Any agreed anti-corruption plan activities should also be included.

39. Plans could be redone completely if there was compelling reason. The Revenue Department had a strong case to radically update their plan based on the results of Tax Administration Diagnostic Assessment Tool (TADAT) and their aspirational targets. Similarly, NPA had a massive change to their overall plan as they moved to team level plans at the Director level.

Performance grading40. The implementation of the 5-year rolling Fiscal Performance Improvement Plan is a tool to achieve reforms. Late last year Government established a small Performance Management Team (PMT) within the Macro-Fiscal Performance Department (MFPD) at the Ministry of Finance to facilitate the

10

process. The PMT is under the direct supervision of the Minister for Finance and is responsible for:

Facilitating intensive team-based discussions that turned the PFMR-II strategy into a 5-year rolling plan based around a range of key performance indicators.

Designing and maintaining a system for monitoring progress and rating performance. The design of the system is for monitoring team performance, and training all staff in how their performance is measured.

Facilitating semi-annual team based performance discussions and annual performance reporting to the Minister and Deputy Ministers on progress with implementation of the PFM Roadmap. Teams self-assess their own performance and the PMT will help moderate and ensure independent validation of scores and facilitate discussions based on evidence.

41. The performance scoring approach adopted is one that scores each activity. Grading uses a standard alphanumeric system from D– meaning worst and unsatisfactory performance to A+ meaning best and outstanding performance. 42. Grades are applied against three core performance dimensions:

timeliness – was the reform activity done on time or was it late; quality – was the activity done to a high or low quality; and effectiveness – how effectively did teams deal with problems?

Other Performance Related Ratings – TA, Impact and Risk43. While the first two dimension are the most common and self-explanatory, the third dimension is the most important. Focusing on how teams manage problems while pursuing reform helps teams to understand and explain achievements. A fourth performance dimension quantifies the amount of international and national technical assistance provided in support of the reform activity. 44. International and national technical assistance is tracked in order to:

Ensure that teams being run by Afghans with low or no international TA are not disadvantaged in performance ratings;

Ensure teams that are being run with low levels of national consultants are not disadvantaged; and

That the self-reliance agenda is a prominent component of the performance management system.

45. An assessment of the impact (or importance) and the risk of failure (or difficulty) of each reform activity was undertaken. Scoring rules established for both these dimensions are in the implementation strategy paper noted above and were included in the User Guide for rolling over the plans. For example, assessment of the impact of an activity includes its contribution to achieving: i) improvements in international benchmarks (e.g. PEFA and OBI) and/or perception indexes; ii) more efficient and effective public services; and iii) stability and legitimacy of Government.

11

46. Rating the risk of failure of an activity is in six dimensions. This is to help deliver a more objective risk assessment rather than one based simply on opinion. These dimensions are drawn from the Diamond approach5 and are:

Number of organisations required – more organisations means a higher risk of failure.

The time required – the longer it takes means a higher risk of failure Complexity and scope – the more complex an activity or the wider the

scope means a higher risk of failure Behaviour change required – the more behaviour change required the

higher risk of failure. If a lot of change is required of a few people or a small amount of change of a lot people both imply a higher risk of failure.

Visibility – the more visible an activity is, or how easy it is to link it to real results, means that the risk of failure is reduced (e.g. political support makes it easier to overcome problems); and

Existing fiscal management competencies – the greater the capacity for performing fiscal management the lower the risk of failure. This dimension is a proxy for the need for technical assistance.

47. Ratings used are high, substantial, moderate, and low, which are all assigned numerical equivalents to facilitate quantification. Both raw scores and standardized scores are produced, which are equivalent to the notions of relative impact and relative risk. 48. These two components of risk and impact are particularly important for reform programming and team-based performance management. Firstly, they allow for an objective assessment of the risk of failure of a reform option. Secondly, it allows for review of high risk and high impact activities in a way that reduces the risk of failure (e.g. by splitting the activity into phases). Thirdly, it facilitates team-based performance management by recognising that some teams are focused on more difficult and important work compared to other teams. It also provides a solid foundation to produce fair and defendable league tables of reform performance during implementation.

Routine Performance Reviews – following the budget cycle49. Two performance reports should be produced every year. The system works within existing management systems with the PMT facilitating performance reporting on team-based plans. This enables implementers to implement and not overburden teams with reporting while at the same time improving the amount of performance information generated across the Government. Teams are accountable for performance through various mechanisms including facilitated self-assessment, publishing of league tables ranking each team against one another and by requiring teams to explain their performance to their leadership in six monthly validation meetings. 50. Performance assessments should be conducted twice per year:

In the first half of the year. To help ensure efforts are on track to deliver annual reform actions by the end of the year, but also to ensure

5 Diamond, 2013, “Good Practice Note on Sequencing PFM Reforms”, PEFA Secretariat, Washing DC, USA. A successful team-based performance management has been employed in the MOF in Timor-Leste between 2012 and 2015 with good results. See www.mof.go.tl

12

relevance of reform activities being undertaken and validate any donor performance payments for the following year; and

At the end of the year. To assess end-of-year progress (with time to spare to correct any major problems), but also to trigger and finalize any linked performance payments to be made in the following year, while also ensuring that the best estimates of any programmatic budget support are included in the annual budget papers.

51. At the end of every year, a new 5-year plan should be produced. This involves rolling over the next year’s plan to the new current year’s plan, subject to progress made during the current year. Rolling forward some activities from the current year into next year will occur if there is insufficient progress. Review of future year activities will be in light of progress. Expectations are that some activities drop off and new activities taken on due to changing priorities.

Performance Management Framework Timeline52. The roll-over of the plans for 2017 is quite late. The target is for the plans to be published in late January or early February. Due to a delay in finalizing the 2016 Annual Assessment and some changeover in staff the formulation of 2017 plans took longer than anticipated. There were two significant factors at play. First, in keeping with the strong level of government ownership, plans were adjusted without any dedicated technical assistance. Teams made changes to the plans themselves. Second, it was decided that the quality and ownership of plans by teams was more important than keeping to the timetable. The roll over or in the case of new teams, formulation of their plans is an important learning experience itself and was important not to rush. This has resulted in significantly improved plans for most teams, based on more and better analysis than in 2016.

Figure 2. The 1396 (2017) Performance Management Cycle

CREATING A PERFORMANCE CULTURE53. Creating a performance culture within an organisation is difficult. It cannot be achieved by focusing on a few cherry-picked outputs, and this is especially so in a low capacity environment. While donors should take some

13

Publish updated 5-year

PlanJan / FebDELAYED

Mid-Year assessment June / July

OFF TRACK / CANCELLED

Annual Performance Assessment and Report Oct / Nov

Publish 2018 Revised 5-year

PlanJan

comfort that they are pursuing output indicators as part of the mutual accountability agenda, such as through the SMAF, the EU State Building Contract and the World Bank Incentive Program, it should be recognised that outputs are not the whole story, and in fact can be a dangerous distraction. In low capacity environments it is often not clear what actions are required by implementers to deliver the outputs – e.g. what is actually required to deliver a policy based budget? Stakeholders need to know and agree on what needs to be done to achieve the outputs over time. In institutions that have a pervasive culture of corruption, accountability for delivering on promised actions at the team level becomes much more crucial, as capacity can easily be blamed for poor progress, when in fact it is an unwillingness to reform corrupt systems and a strong desire to keep the status quo. 54. The 2017 plan adopts a new structure that more accurately reflects the latest organisational structure of the Government and the relevant ministries who are part of the FPIP. This allows better targeting of accountability around the formal organisational units. The biggest change is the adoption of Deputy Ministers as the top level of the organisational structure. The plan in 2016 left the Deputy Ministers and their offices out of the plan as the structure was based on the ministry’s organisational chart. The 2017 FPIP also includes plans for each Director General’s Office. This reflects an increased emphasis on leadership as an important determinant of success. There were a couple of clear examples in 2016 where having a dedicated plan for the office of the DG helped to drive reform and establish a culture of performance. The large improvement in performance by the Revenue Department from the mid-year to the annual assessment was in large part driven by the DG and his office. 55. The next step in this process will be to break down the institutional “silos” that exist within and between departments and establish an effective leadership group. This principle of a “team of teams” that drives the culture change needs to be explicitly reflected in the planning process and is a key goal for 2017.

Table 3. Current FPIP Expansion Agencies (under consultation)Independent Directorate of Local GovernanceCentral Statistics OfficeSupreme Audit OfficeAttorney General’s OfficeMinistry of Mines and PetroleumMinistry of Agriculture Irrigation and LivestockMinistry of DefenceMinistry of Interior

56. In terms of SMAF indicators, the planned expansion to help achieve a performance culture outside the central agencies has been delayed. It is, however, still on track to meet the spirit of the target. Discussion has progressed well with all agencies. Given time, resource and performance management team constraints, it was not possible to start 1396 (2017) with 5-year rolling plans for these agencies. 1396 (2017) will continue to set the pre-conditions for participation in 1397 (2018). These may include conducting a security sector review and more follow up with key stakeholders. above lists those agencies where dialogue has progressed. Plans for further expansion to

14

more service delivery agencies past 2018 can be found in the costing section at Table 11 below.

Teams within Teams – Participating Agencies

Table 4. Current Participating AgenciesTeam Ministry of FinanceMinister for Finance1. Office of the Minster for Finance

Chief of the StaffAdvisory BoardMinister's SecretariatReception DepartmentLegal BoardPublic Relations and Awareness DirectorateAid Management Directorate

2. Internal Audit 3. Macro-Fiscal Performance Dept.4. Public Private PartnershipsDeputy Minister for Revenue and Customs1. Office of the DM for Revenue and Customs2. Customs3. RevenuesDeputy Minister for Finance2. Budget3. TreasuryDeputy Minister for Policy1. Office of the DM for Policy2. Monitoring, Analysis and Reporting General Directorate3. Programs Implementation and Coordination General DirectorateDeputy Minister for Admin1. Office of the DM for Administration2. Finance & Administration

Office of the DG for Admin and FinanceProcurement, Supplies & Services DirectorateFinance & Accounting DirectorateICT DirectorateProjects Planning, Care and CoordinationAuctions and Disposals Unit

3. Properties4. State Owned Enterprises and CorporationsAdministrative Office of the President1. National Procurement Authority (NPA)Other Partner Agencies1. AEITI Secretariat

57. The 2017 FPIP as described above continues to focus on core agencies involved in fiscal reforms, led by the MOF. The National Procurement Authority has submitted a more detailed plan that splits its own reform plan up into its various directorate level teams. A number of structural changes are reflected with some DGs abolished, some teams renamed and some new teams within existing DGs established. above provides and overview of all

15

the teams currently participating in the FPIP. Teams that were asked to participate but did not submit a plan are at below.

Table 5. MoF Teams That Did Not Submit a Plan1. Office of the DM for Finance5. MoF - Public Corporations

PCs: Sukuk Printing Press and MintPCs: Da Afghan Brishna Shirkat (Afghan Electricity)

SOEC: Office of the DG for SOECsOoDMAF: Translation Board

THE 1395 (2016) 5-YEAR PLAN

The Plans – Quality and Ownership

58. Ownership of the plans is crucial. The plans were finalised five months later than was anticipated but in keeping with the self-reliance approach of the FPIP the teams developed their plans with no additional assistance. The independent validation team provided the planning templates and some guidance, but teams worked on their individual 5 year rolling plans without assistance. As a result, in general the level of engagement and ownership over the plans is higher than in 2016. With the exception of a couple of teams the Director Generals and Directors have taken a strong leadership role in rolling over the plans. 59. While the delay in publishing the plans is unfortunate, the process of working on the plans has in and of itself been an important learning exercise. The Performance Management Team within the MOF have also learnt some valuable lessons in facilitating the process.60. What is clear is the reforms that are parachuted in by external forces simply do not work. The last decade is littered with well-meaning but poorly thought through initiatives that have shown little progress even when backed with significant resources. There are often criticisms that low capacity is constraining progress, but the FPIP process has shown clearly that when teams have high ownership over reforms then reforms are more likely to get done and stick.61. There remain, however, significant obstacles and barriers to change that are not related to capacity issues. Upsetting the status quo and disrupting systems and networks that are essentially there to facilitate corruption is very hard to do, and risky both for the government and for the individuals taking on reforms. Where the incentives are all pushing staff to do the wrong thing, and the reward and recognition of teams taking on hard reforms are not there, it is hard to expect individual staff to drive change. There needs to be a strong culture of leadership in reform coming from the top level. This is an area that requires significant improvement in 2017 leading into 2018.62. A business as usual approach, even with an improvement to existing systems is not going to work. There may be the form of change but there is unlikely to be real and meaningful reform. The FPIP is a systematic and cost-effective approach to change that focuses on incremental but real change. Moreover, it is the only approach in the world that aims to transform

16

cultures of corruption in to cultures for performance, while delivering sound reform. 63. The cost of no change is very high6. Analysis clearly shows that the cost of achieving reforms in Afghanistan have been rising exponentially over the last 10 years and the economic costs of low tax revenue and poor targeting of public investment are adding to the political and security instability.64. There are a number of issues with the quality of plans that are related to capacity. Training on PEFA, TADAT, OBI, and other international benchmarks is crucial for better planning and linking plans to measurable indicators of system performance. After 15 years and billions of dollars in investment in governance and still most staff have little idea about these targets. 65. PEFA is a prime example. With three assessments done over the last 12 years, analysis shows that the outcomes are not accurate and may even be being manipulated. The 2013 outcomes in particular were overly generous attributing progress on key systems that under the FPIP independent validation process have been shown to have not been achieved (see 2016 annual performance report). This reflects that only a small group of vested interests understand the process and it has served the needs of various parties to show progress that has in fact not taken place. This needs to be rectified in the PEFA being done this year, establishing an accurate baseline.

Planning Progress and Gaps

66. The 2017 plans are an improvement on the 2016 plan but there is still much work to do. As part of the discussion between the Government and the World Bank there was supposed to be support for teams to help develop their plans. In the majority of cases no support was provided. There was some help for the HR team and some high-level needs assessment done for the finance and accounting team, but most other teams did not receive any assistance or formal feedback on their plans.67. Links between plans and international benchmarks are still too weak. Due to the capacity issues described above and the lack of donor support for the development of the plans, links to international benchmarks, including PEFA, TADAT and OBI are not strong enough. The independent validation team have provided some updated aspirational targets (see below and Volume II to this report) but more work at the team level to understand these targets is needed.

The Flagship Reforms – Some Progress but Big Challenges Remain

68. The plans are still good enough for performance management purposes. A crucial element of performance management is that teams and team leaders are held accountable for results – or rather the promises they made in their plans. This is at the heart of fiscal discipline – teams do what they say, hit their targets, and have a reputation for delivering high quality and timely outputs, in the service of their ministers and the public. 69. Every team plan has taken on a few flagship reforms. A summary of these flagship reforms at the Directorate General Level is provided at below. For

6 See “A Preliminary Fiduciary and Development Risk and Cost-Effectiveness Assessment” 2015 available at http://mfpd.mof.gov.af/pfm-analytical-documents/

17

a summary of flagship measures and identified challenges at the lower directorate team level, see Attachment A of Volume II.

Table 6. Summaries of Flagships Measures for 2017 – DG Level TeamsFiscal Performance Improvement Plan - Flagships and ChallengesMinistry of FinanceMinister for Finance1. Office of the Minster for FinanceDelivering effective management through the leadership groupOperationalisation of the Legal BoardImplementing a new client service system2. Internal Audit Implementation of IIA Standards. Risk based auditing and introduction of follow-up procedures.Develop and implement supervision mechanism to assess performance of internal auditorsOutsourcing special case audits to reputable Audit Firms3. Macro-Fiscal Performance Dept.Collaborate with DGB to improve estimates on high value projects/policies and continue to improve the effectiveness of the MTFF.Deliver second round of rolling forward estimates and establish first phase of a functional MTBF. Delivering the second annual and mid-year performance management cycle - 1396 (2017) 4. Public Private PartnershipsDeveloping the institutional mechanism of PPP advisory board and working groupsEstablishing monitoring & evaluation mechanism for PPP programDeveloping of PPP guidelines, operating manuals and PPP models guidelinesDeputy Minister for Revenue and CustomsWorking at increasing domestic revenue Implementing the Customs and Revenue anti corruption strategy Oversee automation of customs and revenue systems1. Office of the DM for Revenue and CustomsWorking at increasing domestic revenue Implementing the Customs anti corruption strategy Oversee automation of customs clearance and tax payment process 2. CustomsComprehensive program of legislative, system and administrative reforms.Targeting key corruption areas including valuations, clearance times, reconciliation of assessments, payments and transfers, and customs debt collection performanceSupporting new leadership and management structure3. RevenuesComprehensive program of legislative, system and administrative reforms including expanding the reach of the tax system to the provinces.Targeting key corruption areas including reconciliation of tax assessments, payments and transfers, and debt collection performance.Aligning reforms to set and deliver on aspirational TADAT targetsOther key work programs: i) IT/Sigtas development; ii) integration of an anti-corruption strategy including developing systems to mitigate risk of inappropriate relationships between tax assessor and tax payer; iii) developing a fair appeals system; iv) tax legislation strengthening program; v) developing options for broadening of the tax base and implementation and enforcement of VAT legislationDeputy Minister for Finance

18

Fiscal Performance Improvement Plan - Flagships and Challenges1. Office of the DM for FinanceNot participating2. BudgetTrying again for Rolling Forward Estimates for Policy Linked Budgets, Single Currency, Integrated Budget, Piloting new systems commitment control systems within MoF (allotments). Program budgeting s.t. setting these pre-conditions.3. TreasuryIntroduction of web-based AFMIS with much more powerful functions - improved reach, purchasing, commitment controls and contract management systems. Zero balance sweeping. More Sub-Accounts trials. Stronger payroll controls and linkages with HR systemsDeputy Minister for Policy1. Office of the DM for PolicyRedeveloping and monitoring the 5 year rolling plan in line with the restructure of the Policy Department and lead the self-assessment processEnsuring all managers establish systems to manage the performance of staff through team based workplans and regular formal feedback and work at establishing systems of reward and recognition for staff in the policy department, linked to the 5 year rolling plans.Attending leadership group meetings, contributing to strategic planning through the FPIP planning process (the roll over of the plans), assisting the Minister with the mid-year and annual self assessment and validation process including the allocation of the budgets to teams. 2. Monitoring, Analysis and Reporting General DirectorateMonitoring and reporting on national programs.Ensure Development councils are functional Reporting on the progress and implementation of ANPDF with budget alignmentHow to deal with duplication of functions between MARDG and PICDG3. Programs Implementation and Coordination General DirectorateSecretariat to the Development Councils - develop rules and proceduresNational budget allocated based on the priorities of the ANPDFHelp create fiscal space and drive reallocation of the budget to high priorities that are ready to be implemented.Deputy Minister for Admin1. Office of the DM for AdministrationExploring PFM competency testing and Working with Treasury to pilot new systems for HR and Payroll controls.Improving IT systems for Asan Khizmat: Network infrastructure, Data center, Hardware infrastructure designed; 3 software solutions for AzAK modified and adapted, and Online Passport Directorate Systems rolled outDeveloping Islamic insurance and micro-insuranceGetting gender-based fiscal information including on the budget, policies, and strategies from a gender perspective.2. Finance & AdministrationWork program to deliver better budgeting, accounting, payroll procurement and IT services to MoFMonitoring and evaluation of all the MoF projects Deliver condition report and report on value of disposals3. PropertiesSolid program to continually double revenue over three years. Dealing with the problems of former Banks (Agricultural, Industrial, Mortgage and Construction Banks) (Agricultural, Industrial, Mortgage and Construction Banks) (Agricultural, Industrial, Mortgage and Construction Banks)

19

Fiscal Performance Improvement Plan - Flagships and ChallengesEnsuring release 5 Government Properties occupied by powerful people and continue to target backlog of cases currently before the courts4. State Owned Enterprises and CorporationsLearning how to report on fiscal risk posed by SoEs and SoCs (reporting initially on quality of business plans and balance sheet health).Reporting formats for SOEs and SOCs according to IFRS will be developedPrepare 2016 annual report on divesture (change status) and new SoEsDelivering useful SoE/C property reports on: i) preparation and implementation of SOEs contracts and conditions letters; ii) evaluation of SOEs contracts; and iii) usage and size of the SOEs properties.Drafting PPP guidelines for SOEs and SOCsAdministrative Office of the President1. National Procurement Authority (NPA)Comprehensive reform taking on the big issues. Medium term plan to decentralize. E-Procurement including contract management (working with Treasury)Delivering Procurement Monitoring and Capacity AccreditationImplementation of Open Contracting Data Standards in the public procurement sectorFacilitating around 450 of procurement cases (Works 180, Goods 211, Consulting Services 40 and Non-consulting services 19 projects) Upgrade current PCBC to National Procurement Institute Other Partner Agencies1. AEITI SecretariatWorking with government agencies to help revealed weakness in revenue and contract management – helping to close loopholes including closing revenue leakages of c$1 b pa.Ensuring all reconciliation reports are published on time and backlogs are clearedStrengthen Multi-Stakeholder Group (MSG) structure, function and processes

Challenges - some of the big issues

70. There are some huge challenges that face the government in driving an effective fiscal reform program. Much has been achieved in the last 2 years, but many of the biggest and most crucial issues remain intractable.71. First and most crucial of these issues is the budget process. As set out in the 1385 (2016) Annual Assessment there was little progress made on reforms to the budget process. There is strong resistance to change. The budget process has been in place for more than 10 years, so it is well understood by all stakeholders. It has also played a central role in facilitating the distribution of public resources to vested interests. This is worth billions of dollars per annum and so will be a very tough change to make. The 1396 (2017) plan for the Budget Department is a mixture of the status quo and key reforms, reflecting the lack of consensus within the MOF on the way forward. 1396 (2017) and 1397 (2018) are crucial years for reform given external and internal threats to the state and the need for the state to deliver crucial series and public goods to its citizens. 1396 (2017) is also crucial year to make changes as the 1397 (2018) budget is the last full budget cycle before the 1398 (2019) Presidential election. So it is the last chance for meaningful reform under the current government.72. Second, the challenge to increase the amount of revenue being collected in a sustainable way. Even after 15 years and billions of dollars of financial and technical assistance, Afghanistan still has one of the lowest tax takes in the world (see Figure 7 and Figure 8 on page 27). Moreover, donor commitments from Warsaw (security) and Brussels (development) expire in 1398

20

(2019) and assume that all donors meet their commitments with actual funding. The medium term fiscal outlook is very uncertain meaning improved performance on revenue is crucial for fiscal sustainability. How revenue is raised is as important as just raising it. Big increases in non-tax revenue in 1394 (2015) and 1395 (2016) without independent analysis of the impacts of policy changes highlights the risks. The Revenue Department need to use the TADAT outcomes and target them much more explicitly in their plans. There is still a lot of work needed on the tax system for it be rated close to high under TADAT (see TADAT analysis at Figure 6 on page 26 and at Table 5 of Attachment E of Volume III). 73. Similarly, Customs also need to be clear in targeting TADAT and PEFA like indicators. Adoption of WCO benchmarks is important but given the high proportion of revenue in Afghanistan derived from Customs levies, setting up sustainable systems with good economic analysis is also important.74. As already discussed, leadership is a major determinant of success in achieving real institutional reform. Regular Leadership Group meetings to drive the FPIP is crucial to driving change, in both culture and in providing the right incentives for staff. This needs significant improvement on 1395 (2016), where leadership group meetings only occurred twice. 75. The development of a strong Internal Audit function remains problematic in Afghanistan. There needs to be more focus on demonstrating how compliance with all international internal auditing standards will be achieved over time – which standards are in compliance, broadly compliant and not compliant. The leadership group also need to demonstrate how they value internal audit by taking outputs from IAD seriously and implementing recommendations.76. A whole of government e-Governance solution needs to be debated. There is significant evidence that the line agencies, NPA, Treasury and Budget are all going in different directions. There has been some progress on establishing interfaces between key systems, but the alignment of systems and processes is not happening.77. The policy area needs a large investment and significant help. The policy departments have been restructured from 3 DGs to 2, but there is a lot of work to do in both establishing a sensible institutional structure and building the capacity of the teams. The core function of policy analysis that assists the government through the development councils is still non-existent. This means the budget is not being driven by a policy agenda, creating the space for vested interests to subvert the budget process against the public interest. This needs urgent attention.78. There are also a number of other key issues for the MOF that need investment in 2017. There is still no effective internal budget process, meaning resources are not allocated by needs. In other words, despite basic activity based costing of 5 year plans, resources are not allocated systematically. With the current “cherry-picking” approach by donors, some teams have more support than they need and some have none at all. Teams like the property team not only need financial resources, they also need political support and at times physical security as they take on powerful vested interests.79. Lastly, the issue of off budget fiscal risks is not being given anywhere near enough attention. The SOEC Department was bottom of the league table in 2016 and need a significant investment to build capacity. The focus needs to be firmly on building capacity to quantify and report on the fiscal risks posed by State-Owned Enterprises (SOEs) and State-Owned Companies

21

(SoCs). These risks and any contingent liabilities that the government is accruing should be published in the annual budget and monitored by audit agencies.80. Flagships Reforms and Challenges for 2017 are summarised for each of the 96 directorate level teams at Attachment A in Volume II of this report.

New Aspirational Targets – The Work Planning Guides

81. Last year’s Aspirational Targets have been updated. New targets have been set for the new 2016 Public Expenditure and Financial Accountability (PEFA) framework and the 2015 Tax Administration Diagnostic Assessment Tool (TADAT). Target indicators have been proposed for the EU and the State Building Contract performance reporting component. These indicators are drawn from the original legacy (2005) PEFA. The targets for Open Budget Index, Doing Business, and Statistics Capacity Indicator all remain the same as last year. Customs still needs more work to link multi-year workplans to international standards, though good progress has been made in linking to some key PEFA indicators. Details of the new targets including 2016 PEFA and TADAT can be found at Attachment E in Volume III.82. The new aspirational targets for 2016 PEFA are at below. As was reported in the 1395 (2016) Annual Performance Report, the new 2016 PEFA closes a lot of loopholes in the original PEFA, which allowed assessments to be overly generous. An early assessment against the 2016 PEFA was conducted as part of the performance review. 83. Figure 3 reveals how little progress has been made over the years. Much work remains to be done to transform Afghanistan’s public financial management system from a low quality to high quality. The first assessment under the new 2016 PEFA will be conducted this year. It is hoped that middle management throughout MoF and line agencies take a lead in the assessment, with the ideal being that the assessment be a validated self-assessment, as opposed to a donor driven consultant exercise.

22

International Benchmarks

Figure 3. Aspirational Targets: 2016 PEFA

0 .0

0 .5

1 .0

1 .5

2 .0

2 .5

3 .0

Budget reliability

Transparency

Management of assets &liabilities

Policy-based fiscal strategy &budgetingPredictability and control

Accounting and reporting

External scrutiny

Afghanistan 2017 RIR Avg Grade = D+ Afghanistan Aspirational Aspirational Avg Grade = B+

A

B+

B

C+

C

D+

D

0 .0

0 .5

1 .0

1 .5

2 .0

2 .5

3 .0

Budgetreliability

Transparency Managementof assets &liabilities

Policy-basedfiscal strategy& budgeting

Predictabilityand control

Accountingand reporting

Externalscrutiny

Pillar Average

Afghanistan 2017 RIR Avg Grade = D+ Afghanistan Aspirational Aspirational Avg Grade = B+

A

B+

B

C+

C

D+

D

23

Figure 4. Performance Comparison: Budget V’s Treasury (legacy PEFA)

1

1.5

2

2.5

3

3.5

4

Treasury: Continuing to Deliver and Improve (some overly genorous scoring in the past)

2005r 2008r 2013o 2016RR Aspirational Target

A

B+

B

C+

C

D+

D

1

1.5

2

2.5

3

3.5

4

Budget, Macro-Fiscal Performance and Aid Managmenet Departments: Struggling to Deliver and Improve (overly genorous scoring in the past)

2005r 2008r 2013o 2016RR Aspirational Target

A

B+

B

C+

C

D+

D

24

Figure 5. Aspirational Targets: Legacy PEFA: EU Monitoring

1

1 .5

2

2 .5

3

3 .5

4

PI-06i Budgetpapers

completeness

PI-07Unreported

expenditures

PI-23 In-yearreporting

PI-18 Payrollcontrols

PI-19Procurement

PI-20 Non-salary

controls

Revenueassessment,

collection andtransfer

PI-3 Acuraterevenueforecasts

PI-13 TaxationTransparency

PI-14Taxpayer

registration &assessment

PI-15 Taxcollection

SBC PEFA Moniting Indicators (Legacy PEFA)

2005r 2008r 2013o 2016RR Aspirational Target

A

B+

B

C+

C

D+

D

84. Legacy PEFA targets are provided at Figure 4 and above. These figures show historical results with the aspirational targets. This is helpful as it reveals strengths and weaknesses. For example, the treasury system is doing relatively well against PEFA compared to Budget (see Figure 4). While the Government moves to the new 2016 PEFA framework, the legacy framework will remain a key guide. The EU requested information to be provided annually on certain key PEFA indicators. These have been included at Figure 5. 85. As part of the rolling over of the 5-year plan process, ARD started to base its updated plan on TADAT results and benchmarks. The TADAT assessment was not yet available to reviewers, however, a preliminary assessment was undertaken as part of the aspirational target setting process. The results are provided at below. The assessment indicates that progress has been slow in delivering a sound tax administration. That said, with a clear focus on reaching high standards set by TADAT, Afghanistan has a much better chance of increasing trust in its tax administration as well as increasing its tax take to more appropriate levels.86. Aspirational Targets OBI, Statistical Capacity and Doing Business (Tax and Trade) remain the same as last year. These are summarised at Figure 9 to below. Further training is also required for middle management on these indicators.

25

Figure 6. Aspirational Targets: TADAT

1 .0

1 .5

2 .0

2 .5

3 .0

3 .5

4 .0

POA 1: Integrity of theRegistered Taxpayer Base

POA 2: Effective RiskManagement

POA 3 PerformanceMeasurement Framework

POA 4: Timely Filing of TaxDeclarations

POA 5: Timely Payment ofTaxes

POA 6: Accurate Reporting inDeclarations

POA 7: Tax Dispute Resolution

POA 8: Efficient RevenueManagement

POA 9: Accountability andTransparency

Afghanistan: Tax Administration Diagnostic Assessment Tool (TADAT)2017 (1396) Rapid Preliminary Assessment Aspirational Targets

A

B+

B

C+

C

D+

D

1 .0

1 .5

2 .0

2 .5

3 .0

3 .5

4 .0

POA 1: Integrityof the

RegisteredTaxpayer Base

POA 2: EffectiveRisk

Management

POA 3Performance

MeasurementFramework

POA 4: TimelyFiling of TaxDeclarations

POA 5: TimelyPayment of

Taxes

POA 6: AccurateReporting inDeclarations

POA 7: TaxDispute

Resolution

POA 8: EfficientRevenue

Management

POA 9:Accountability

andTransparency

Afghanistan: Tax Administration Diagnostic Assessment Tool (TADAT)2017 (1396) Rapid Preliminary Assessment Aspirational Targets

A

B+

B

C+

C

D+

D

26

Figure 7. Tax Comparisons: as % of GDP and GDP per Capita

Source: IMF, 2016, Domestic resource mobilization and taxation

Figure 8. Tax as % of GDP: low and lower middle-income countries

02468

101214161820

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Tax revenue (% of GDP)

Afghanistan Indonesia Iran, Islamic Rep. Kazakhstan China

Low income Pakistan India Liberia

Source: WDI and IMF, 2017, IMF Afghanistan Report No. 17/144

27

Figure 9. Aspirational Targets for Open Budget Index

Figure 10. Aspirational Targets for Statistical Capacities

Figure 11. Doing Business: Proposed Aspirational Ranks (100 Best)

28

Future Targets

87. Looking forward, it will be important for FPIP teams to get better at linking aspirational targets to work plans. While the system requires teams to make linkages, the linkages are often not made or not well thought through. Much training at middle management is required on the international benchmarks and workplan drafting. 88. Similarly, output and policy targets need to get better in a way that the targets are clearly linked to action-based indicators. It is now clear in development that focusing solely on outputs as one would do in a high-income country performance management system, delivers a high risk of reform failure. Ownership of the plans count, as does making sure the plans are good enough to deliver the outputs and reform objectives. This can be a catch-22 situation; where the plans owned and produced by government officials are not up standard, but parachuted reforms for international experts do not get implemented because they are not owned and/or understood. The team-based performance management system, however, is the mechanism that helps break the catch-22. 89. Some key policy and reform targets need to be set for the FPIP. A key revenue target could be increase tax revenue to 10% of GDP within 2 years, then 12% within 5 years (see graph). Some examples for key system reform output targets that could be used by donors who would like to incentive reform include the following:

a. All agencies are issued a six-month year allotment by Treasury within one week after the passage of the budget issued;

b. Carryovers of unspent appropriations to follow the law and be limited to no more than 5% of the original annual budget allocations;

c. Consolidated budgets and end-of-year financial statements be produced in accordance with Government Finance Statistics (GFS) reporting and classification standards;

d. A national public sector accounting standard developed and published by 2018 and be in conformity with international standards, clearly explaining differences to international standards and which non-mandatory standards are adopted or not adopted.

e. A national public sector auditing standard developed and published by 2018 and be in accordance with IAASB requirements for conforming with International Public Sector Auditing Standards.

f. All ministries move to a single government wide accounting system.

Reform Risk-Return Profiles – Risk Taking

90. Risk-Return Profiles of team’s reform plans reveal that the proposed reforms target impactful and important work – but at a high risk of failure. Considerable effort occurred during the planning process last year to reduce the risk of failure by phasing in reforms, or redesigning proposed solutions to include pilots. Some improvements were made this year. Aggregate risk return profiles are presented for all teams at Figure 12. The figures reveal that for raw risk and raw returns (in accordance with teams’ self-assessment)

29

most activities are considered to be high risk and high impact. There were only a few high risk - low impact activities. In relative terms, however, where risk and impact is relative to the group, there are of course a lot more high risk low impact activities being undertaken. Those activities that fall into that high risk - low impact quadrant should be reviewed. Source data on the risk and impact parameters at the team level are provided at Attachment C of Volume III.

Figure 12. Risk-Return (performance and TA) Space Raw Risk and Raw Impact Relative Risk and Relative Impact

0.00.10.20.30.40.50.60.70.80.91.0

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Impa

ct

Risk

Fisal Performance Improvement Plan

A+AB+BC+CD+D -1.0

-0.8-0.6-0.4-0.20.00.20.40.60.81.0

-1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0

Rela

tive

Impa

ct

Relative Risk

Fisal Performance Improvement Plan

A+AB+BC+CD+D

Table 7. Frequency of Risk Impact Dimensions

ImpactScope &

complexity of reform

Degree of behaviour

change

No. of organisations

Time required

Visibility of reform impact

PFM Competency

Low 38 62 66 67 80 50 76Moderate 131 230 182 274 188 236 320Substantial 315 257 256 215 118 339 388High 452 387 432 357 558 311 152Total 936 936 936 913 944 936 936

SharesLow 4% 7% 7% 7% 8% 5% 8%Moderate 14% 25% 19% 30% 20% 25% 34%Substantial 34% 27% 27% 24% 13% 36% 41%High 48% 41% 46% 39% 59% 33% 16%Total 100% 100% 100% 100% 100% 100% 100%

Figure 13. Time Required and Coordination Requirements of Activities

-

100

200

300

400

500

600

- 1 2 3 4 5 6 7 8 9 10 11 12

Frequency of No. of Months

-

20

40

60

80

100

120

140

160

180

200

- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Frequency of No. of Organisations

91. There is some evidence of teams gaming the system. There is an increase in the number of high risk and high impact activities compared to last year. The same level of quality assurance and debate did not occur with validators this year due to resource and time constraints. This resulted in less

30

Low Risk – High Impact

Low Risk – Low Impact

High Risk – High Impact

High Risk – Low Impact

Low Risk – High Impact

High Risk – High Impact

Low Risk – Low Impact

High Risk – Low Impact

than optimal oversight of gaming tendencies. It appears that teams now understand that high risk and high impact activities will be given high scores under certain league tables. These perverse incentives can be addressed at the next performance review. (See Table 7 and Figure 13)

Figure 14. TA, Impact and Risk Parameter Results at Directorate General Level

- 0.2 0.4 0.6 0.8 1.0

3. T

reas

ury

1. A

EITI

…3.

Mac

ro-…

4. P

ublic

…1.

Nati

onal

…2.

Inte

rnal

Aud

it1.

Offi

ce o

f the

…2.

Fin

ance

&…

3. P

rogr

ams…

1. O

ffice

of t

he…

2. M

onito

ring,

…2.

Bud

get

3. P

rope

rties

1. O

ffice

of t

he…

2. C

usto

ms

3. R

even

ues

1. O

ffice

of t

he…

4. S

tate

…1.

Offi

ce o

f the

…

TA FPIP Mean 0.22

- 20 40 60 80

100

3. P

rogr

ams…

1. N

ation

al…

1. O

ffice

of t

he…

1. A

EITI

…4.

Sta

te…

4. P

ublic

…2.

Cus

tom

s2.

Inte

rnal

Aud

it3.

Mac

ro-…

3. T

reas

ury

1. O

ffice

of t

he…

3. R

even

ues

1. O

ffice

of t

he…

2. M

onito

ring,

…3.

Pro

perti

es2.

Fin

ance

&…

1. O

ffice

of t

he…

2. B

udge

t1.

Offi

ce o

f the

…

Impact FPIP Mean 79

- 20 40 60 80

100

3. P

rope

rties

1. O

ffice

of…

3. P

rogr

ams…

1. N

ation

al…

1. A

EITI

…4.

Sta

te…

2. C

usto

ms

1. O

ffice

of…

3. M

acro

-…2.

Bud

get

1. O

ffice

of…

2. In

tern

al…

3. T

reas

ury

3. R

even

ues 2.…

4. P

ublic

…1.

Offi

ce o

f…2.

Fin

ance

&…

1. O

ffice

of…

Scope & complexity of reform FPIP Mean 71

- 20 40 60 80

1001.

Offi

ce o

f…1.

Offi

ce o

f…3.

Pro

perti

es1.

AEI

TI…

1. N

ation

al…

3. P

rogr

ams…

3. R

even

ues

4. S

tate

…2.

Bud

get

2. C

usto

ms

2. In

tern

al…

4. P

ublic

…1.

Offi

ce o

f…3.

Tre

asur

y3.

Mac

ro-… 2.…

1. O

ffice

of…

2. F

inan

ce &

…1.

Offi

ce o

f…

Degree of behaviour change FPIP Mean 74

- 20 40 60 80

100

1. A

EITI

…1.

Offi

ce o

f the

…2.

Bud

get

4. P

ublic

…4.

Sta

te…

3. T

reas

ury

2. M

onito

ring,

…1.

Offi

ce o

f the

…3.

Mac

ro-…

3. R

even

ues

3. P

rogr

ams…

1. N

ation

al…

3. P

rope

rties

1. O

ffice

of t

he…

2. In

tern

al A

udit

2. C

usto

ms

2. F

inan

ce &

…1.

Offi

ce o

f the

…1.

Offi

ce o

f the

…

No. of organisations FPIP Mean 73

- 20 40 60 80

100

3. R

even

ues

1. O

ffice

of t

he…

2. C

usto

ms

2. M

onito

ring,

…4.

Pub

lic…

3. P

rogr

ams…

1. A

EITI

…2.

Bud

get

4. S

tate

…1.

Offi

ce o

f the

…2.

Fin

ance

&…

1. N

ation

al…

3. M

acro

-…2.

Inte

rnal

Aud

it3.

Pro

perti

es3.

Tre

asur

y1.

Offi

ce o

f the

…1.

Offi

ce o

f the

…1.

Offi

ce o

f the

…

Time required FPIP Mean 81

- 20 40 60 80

100

1. O

ffice

of…

4. S

tate

…3.

Pro

gram

s…2.

Cus

tom

s1.

Nati

onal

…1.

AEI

TI…

3. P

rope

rties

3. T

reas

ury

1. O

ffice

of… 2.…

1. O

ffice

of…

2. In

tern

al…

1. O

ffice

of…

4. P

ublic

…3.

Rev

enue

s2.

Bud

get

3. M

acro

-…2.

Fin

ance

&…

1. O

ffice

of…

Visibility of reform impact FPIP Mean 71

- 20 40 60 80

100

4. P

ublic

…1.

Nati

onal

…1.

Offi

ce o

f the

…4.

Sta

te…

2. In

tern

al A

udit

3. P

rope

rties

3. P

rogr

ams…

2. M

onito

ring,

…1.

AEI

TI…

3. T

reas

ury

1. O

ffice

of t

he…

2. C

usto

ms

3. M

acro

-…1.

Offi

ce o

f the

…1.

Offi

ce o

f the

…3.

Rev

enue

s2.

Bud

get

2. F

inan

ce &

…1.

Offi

ce o

f the

…

PFM Competency FPIP Mean 63

Note: TA vertical axis represents share of workload. Impact and Risk of Failure parameters. scores represent ratings: Low=0, Moderate=25, Substantial= 50 and High =75

92. Ranks of the TA, Impact and Risk Parameter results are presented at Figure 14. These figures show which teams are self-assessing reform activities are high risk and high impacts and which are self-assessing as low. Experience

31

has shown that those agencies that self-assess low are generally more accurate and being fairer, while those who assess consistently self assess high, are either trying to game the system or are not spending enough time thinking about the team’s risk of failure to deliver on their promises – and how to deal with such risks.

32

STAFFING AND TECHNICAL ASSISTANCE93. There is still a relatively high reliance on technical assistance in most teams. There has been a marked shift in recent years from international technical assistance to local or national technical assistance. This has become a tricky issue to navigate. For the purposes of the FPIP we have defined technical assistance as support that is external to the team and is performing a role that is not routine or on-going. For instance, a staff member who is in a line position and who is performing an on-going function, but whose employment is on a contract rather than on a permanent basis is not technical assistance. TA is when a team requires the help of someone for their expertise in either a capacity building role or a short-term role for a specific purpose.94. The reason for this is that a large number of the staff in teams under the FPIP are referred to as NTA or national technical assistance because they are contract or non-ongoing staff. The official policy is to use the NTA system as a way to transition staff from donor programs to tashkeel. The primary source of “top-ups” for staff is through the Capacity Building for Results (CBR) program. In practice, this process is going slowly and many staff prefer the uncertainty but higher salary of a contract position versus the certainty of moving to a permanent tashkeel role.

Table 8. 2016 Tashkeel ComplementsStaffing

Data

Tashkeel Staffing Profile

Grades

Outside Beyond Above 1 2 3 4 5 6 7 8 Total Filled

OoM 28 1 4 0 2 2 10 8 1 0 0 0 23OoCS 93 1 2 11 9 36 15 19 92Coms 25 1 3 4 13 0 2 2 19Customs 296 1 4 16 55 145 39 6 30 u/aRevenue 794 1 9 36 123 258 269 11 87 u/aTreasury 594 1 3 12 70 187 269 6 46 591Budget 96 1 2 16 56 8 1 4 8 81Admin 412 1 4 12 42 71 67 146 69 405SoE 82 1 2 8 22 25 15 2 7 82Property 150 1 3 9 25 30 29 14 39 140HRD 113 1 5 16 41 31 4 15 107Insurance 28 1 2 9 12 0 2 2 27IAD 153 1 4 12 49 75 1 2 9 149PICGD 30 1 2 4 13 3 0 3 4 27MARGD 29 1 2 4 11 4 0 4 3 25RIMU 0 0RPD u/a u/aMFPD 41 1 3 15 13 1 0 5 3 20AMD 20 1 2 13 1 0 1 2 18OoP-NPA 266 1 9 101 67 22 22 44 136AETI 14 1 1 3 6 3 4Total 3264 1 5 9 114 113 191 565 890 760 271 345 1946

95. The cost of NTA has also sky rocketed in the last couple of years following the closure of some large and long-term donor programs such as MBAW (UNDP), though the Government allocated $1.5million of discretionary funding to keep the national consultant financing project going in 1396 (2017). The full extent has yet to be quantified. Due the severity of the level of fragmentation of the budget, such changes in funding for professional/consultant services are not properly disclosed in the budget. Further work is required to quantify and then properly disclose and account for all national and international consultants and Tashkeel staff. Current practice for such disclosures including on staff establishment are considered very poor.

33

96. Staffing and technical assistance levels in each team. As at the time of the 1395 (2016) Annual Performance review we found that further work was required to match up existing staffing and technical assistance with technical assistance requirements under the fiscal performance improvement plan. Early analysis reveals that TA to tashkeel levels are highly variable. Further work will be required this year to get a clearer and more reliable picture of team personnel.97. The veracity of claims that NTA are being moved to CBR will need to carefully monitored. For example, the Budget Department claims NTA are shifting to tashkeel - resulting in low TA workload numbers in the plan. However, their actual plan indicates that they are expanding their NTA numbers rather than transferring staff to CBR to help achieve a sustainable public service. The provision of $1.5m to keep the MBAW national consultant hiring program going raises further concerns.

Table 9. 2016 Technical Assistance ComplementsStaffing Data Tashkeel Staffing Profile TA TA to

TashkeelNational International TotalOoM 28 16 0 16 57%OoCS 93 15 0 15 16%Coms 25 6 0 6 24%Customs 296 31 2 33 11%Revenue 794 50 1 51 6%Treasury 594 53 3 56 9%Budget 96 57 0 57 59%Admin 412 18 0 18 4%SoE 82 7 1 8 10%Property 150 2 0 2 1%HRD 113 5 0 5 4%Insurance 28 0 0 0 0%IAD 153 30 0 30 20%PICGD 30 4 1 5 17%MARGD 29 2 0 2 7%RIMU 0 14 0 14 n/aRPD u/a u/a u/a u/a u/aMFPD 41 18 3 21 51%AMD 20 11 1 12 60%OoP-NPA 266 111 0 111 42%AETI 14 5 0 5 36%Grand Total 3264 486 13 499 15%

34

FPIP FINANCING Existing Resourcing – Sources and levels

98. The FPIP is a government led initiative with the majority of resources coming from the national budget. Since 2015 there has been a considerable consolidation of the support by donors for fiscal reforms. The primary source of support comes from the ARTF funded Public Financial Management Roadmap II project. It is a standard World Bank recipient executed trust fund with a project implementation unit. PFMRII was set up prior to the election of the National Unity Government and also prior to the establishment of the FPIP. Despite detailed discussions over an extended period of time between the Government and the World Bank, PFMRII has not be restructured and has underperformed. The project only supports some areas within core public finance agencies and has a poor record in disbursement. 99. For example, in 2016 virtually all of the underspend recorded by the MOF was attributable to PFMRII, which was some $24 million underspent. At the time of the Annual Assessment in December 2016, PFRMII had a procurement plan that projected around $40 million in expenditure up to June 2017. It has subsequently been extended to December 2017 but will need to spend at around 3.3 times its current rate of disbursement to close on time fully disbursed. 100. This lack of flexibility, poor alignment to the government’s program, and cherry picking of certain teams has meant poorer outcomes than might otherwise have been achieved. 101. The British Government disengaged from directly supporting fiscal reform. The United Kingdom has been a significant contributor to governance and PFM over the last 10 years, but following the closure of their SABII program, UK have now pulled out of direct support for fiscal reforms. They remain a large contributor to the ARTF but despite some scoping of a new program have decided against a bilateral or budget support program with the Government.102. The European Union have entered into a State Building Contract worth Euro 200 million over 2 years in general budget support. Within this contract there are a number of incentives for fiscal reforms and through the process there are now significant opportunities emerging. The key issues are to make sure the SBC is fully aligned with the government’s program and that it uses data validated by third parties – as is the case with the FPIP and the IMF ECF.103. The proposed FPIP Support Program funded from the ARTF and administered by the World Bank is well behind schedule. A concept note was produced last year but it remains theme based rather than team based. This means it follows the more traditional theme or issue based approach instead of the institutionally or team based approach of the FPIP. In this way the proposed support is not aligned with the government’s program. The program is also a standard recipient executed trust fund similar to PFMRII discussed above. 104. There are some good modifications from PFRMII that will assist the FPIP. First, there will not be a project implementation unit - program management will be done by the government leadership group and all resources for procurement, HR, accounting, budgeting and IT will go to the relevant MOF

35

departments. Second, there are likely to be some Development Linked Indicators (DLIs) that provide strong incentives for the leadership group to manage the program. These DLIs essentially disburse based on agreed triggers and then become general budget support. This is a good step but will need to be matched by discipline from the leadership group in establishing management systems and putting an internal budget process in place, including for the hypothecation (earmarking) of DLI performance payments for the FPIP. The World Bank and donors will also need to be disciplined and not disburse on DLIs unless the triggers are met.

Table 10. ARTF Disbursement Performance Indicators

Projects

Disbursement Execution Rate Multiple - Required Improvement

in Current Average Annual Disbursement Rate to Close on

Time with Zero BalanceCASA-1000 Community Support Project - TF017012 n/a Zero Disbursement Afghanistan Agricultural Inputs Project - TF015003 6.1Irrigation Restoration and Development Project - TF012029 4.5Second Education Quality Improvement Project - TF093962 4.4Non Formal Approach to Training, Education and Jobs in Afghanistan - TF016354 4.3Capacity Building for Results Facility Project (CBR) - TF011447 3.9Justice Service Delivery Project - TF012533 3.4Second Public Financial Management Reform Project - TF010024 3.3National Horticulture and Livestock Project - TF013820 3.2Power System Development Project - TF093513 3.1Kabul Municipal Development Program (KMDP) - TF017016 2.2On-Farm Water Management Project (OFWM) - TF099074 2.1Afghanistan Naghlu Hydropower Rehabilitation Project 1.7Kabul Urban Transport Efficiency Improvement Project (KUTEI) - TF017061 1.7Afghanistan Rural Access Project (ARAP) - TF013093 1.4Higher Education Development Project - TF0A0730 1.1System Enhancement for Health in Transition Project (SEHAT) - TF015005 0.7Afghanistan DABS Planning and Capacity Support Project 0.7Afghanistan Resource Corridors Project - TF014845 0.6Third Emergency National Solidarity Project - TF098459 0.3

Source: 2016 Annual Performance Report. Drawn from:1395 Update to the ARTF Financing Strategy (6/3/2017). Nb: Required improvement means, the multiple of the existing average annual disbursement rate. In other words, for the Afghanistan Agricultural Inputs Project, disbursement rate has to improve by six (6) times existing disbursement rates in order for the project to close on time with a zero balance. Any multiples of 1.5 or higher, indicate that the project may likely be extended or close with significant levels of unspent money. It may also indicate a project review is warranted.

FPIP Costing – Estimating resourcing needs

105. As with the 2016 plan, the independent validation team provided indicative costings for the 5 year plans in line with government budget standards. Activity based costings for major economic classifications – salaries and wages, goods and services, and capital are provided. Costings against functional classifications are also provided in line with international standards. The costing has not been included in the budget due to the delay in finalising the plans and lack of external support.106. Activity Based Costing (ABC) was methodology used. Standardised unit costs were used for national and international technical assistance, security, IT works and other expenditures. Costings also include expansion of the reach of

36

the program to line ministries over the next few years. These are added in as an unallocated component reflecting that there were no actual activities to cost at this stage – only indicative allocations for admin and finance functions within line agencies. Costs by Fund source type (e.g. ARTF, USAID etc) are also included. 107. Every team provided the technical assistance costing input data. Each team identified the amount of national and technical assistance required to get every reform activity done on time and to a reasonable quality. They also identified how long the work would take in 1396 (2017). This data provides the foundation for an activity based costing of technical assistance needs. Standard unit costs for international and national TA working in Afghanistan were applied to work load data. Self-assessments of TA and workloads were not changed in order to adjust costings outcomes, including at the admistrative unit level. Absorptive capacity assumptions were then made on how hard it would be for the teams to spend the development funds. Attachment C of Volume III provides the raw TA data provided by each team. Plans for expanding the reach of the FPIP to more service delivery agencies were used to estimate the costs in the out-years. These assumptions are at below.

Table 11. Indicative FPIP Expansion Plans Used in Costings2017 2018 2019 2020

Supreme Audit Office Land Authority High office of Oversight and Anti-Corruption

Ministry of Foreign Affairs

Central Statistics Office Central Bank of Afghanistan Ministry of Urban Development Affairs

Ministry of Justice

Independent Directorate of Local Governance

Civil Service Commission Ministry of Parliamentary Affairs

National Environmental Protection Agency

Ministry of Agriculture Irrigation and Livestock

Ministry of Education Ministry of Public Works

Ministry of Mines Ministry of EnergyMinistry of Defence Ministry of HealthMinistry of Interior Ministry of Labour

Ministry of Rural Rehabilitation & Dev

Table 12. Inflation, Scale up and Absorptive Capacity Costing Assumptions1396 (2017) 1397 (2018) 1398 (2019) 1399 (2020) Comments

Scale up (absorptive capacity assumptions)

0.6 0.8 1 1 3 years ab cap

Inflation 0 0.06 0.06 0.06 6%Cumulative 1 1.06 1.1236 1.191016Index rate 0.6 0.848 1.1236 1.191016Forex 0.67 0.67 0.67 0.67

108. The costing reveals that around US$26m is needed and could be spent on technical assistance to deliver on every team’s plan. Of the US$26m, $19million would be for International TA, with the remainder being for National TA and a performance incentive pilot for Tashkeel. Around US$11m (40%) would be spent on security and reimbursable expenses, which is slightly under historical figures. Over four years it was estimated that US$123m would be required and could be spent to help deliver FPIP. Most of the funds over the four years (86%) would be for the financial and fiscal affairs function of Government. (See Table 13 to below.)

37

Table 13. Medium Term Resourcing Allocations – Economic (US$)

Economic ClassificationP.A Costing -

full absorption

1396 (2017) 1397 (2018) 1398 (2019) 1399 (2020) 1396-1399 (2017-2020)

Salary, Wages & Allowances 1,000,000 600,000 508,800 571,688 680,889 2,361,377ITA - - - - - -NTA 1,000,000 600,000 508,800 571,688 680,889 2,361,377

TA Compensation 24,066,817 14,440,090 12,245,197 13,758,703 16,386,835 56,830,825ITA 14,491,225 8,694,735 7,373,135 8,284,455 9,866,918 34,219,243NTA 9,575,592 5,745,355 4,872,061 5,474,248 6,519,917 22,611,582

G&S (Security and Reimbursables) 18,150,404 10,890,242 9,234,926 10,376,362 12,358,414 42,859,944

ITA 16,809,821 10,085,893 8,552,837 9,609,968 11,445,625 39,694,322NTA 1,340,583 804,350 682,089 766,395 912,788 3,165,621

Capital 771,161 462,697 392,367 440,863 525,075 1,821,001ITA 579,649 347,789 294,925 331,378 394,677 1,368,770NTA 191,512 114,907 97,441 109,485 130,398 452,232

Unallocated (for Expansion) 2,968,000 6,741,600 9,051,722 18,761,322Grand Total 43,988,382 26,393,029 25,349,289 31,889,216 39,002,935 122,634,469

ITA 31,880,695 19,128,417 16,220,898 18,225,801 21,707,220 75,282,335NTA 12,107,687 7,264,612 6,160,391 6,921,815 8,243,993 28,590,812Unallocated - - 2,968,000 6,741,600 9,051,722 18,761,322

Total Excl. Unallocated 43,988,382 26,393,029 22,381,289 25,147,616 29,951,213 103,873,147TA Total 42,988,382 25,793,029 21,872,489 24,575,928 29,270,324 101,511,770

ITA 31,880,695 19,128,417 16,220,898 18,225,801 21,707,220 75,282,335NTA 11,107,687 6,664,612 5,651,591 6,350,128 7,563,104 26,229,435

Table 14. Medium Term Resourcing Allocations – Administrative (US$)

PLANNED ACTION OVER 5 YEARS S,W&ATA

Compensation

G&S Capital TA Total Grand Total

FPIP 1,000,000 24,066,817 18,150,404 771,161 42,988,382 43,988,382 Ministry of Finance 1,000,000 20,071,984 15,310,152 646,539 36,028,675 37,028,675 Minister for Finance 1,000,000 9,775,521 6,112,104 288,521 16,176,146 17,176,146 1. Office of the Minster for Finance - 1,557,500 728,050 41,150 2,326,700 2,326,700

2. Internal Audit - 1,928,333 1,323,967 59,233 3,311,533 3,311,533 3. Macro-Fiscal Performance Dept. 1,000,000 4,269,688 1,941,288 111,738 6,322,713 7,322,713 4. Public Private Partnerships - 2,020,000 2,118,800 76,400 4,215,200 4,215,200 DM for Revenue and Customs - 6,499,155 6,884,167 247,126 13,630,448 13,630,448 1. Office of the DM - 40,000 5,600 800 46,400 46,400 2. Customs - 3,427,500 3,794,850 133,550 7,355,900 7,355,900 3. Revenues - 3,031,655 3,083,717 112,776 6,228,148 6,228,148. Deputy Minister for Finance - 736,050 318,560 18,947 1,073,556 1,073,556 1. Office of the DM2. Budget - 285,000 39,900 5,700 330,600 330,600 3. Treasury - 451,050 278,660 13,247 742,956 742,956 Deputy Minister for Policy - 1,484,583 1,487,092 54,775 3,026,450 3,026,450 1. Office of the DM - 120,000 118,800 4,400 243,200 243,200 2. Monit’g, Analysis & Repot’g GD - 425,000 391,000 15,000 831,000 831,000 3. Programs Impl’n & Coord GD - 939,583 977,292 35,375 1,952,250 1,952,250 Deputy Minister for Admin - 1,576,675 508,229 37,171 2,122,075 2,122,075 1. Office of the DM - 405,929 56,830 8,119 470,877 470,877 2. Finance & Administration - 714,583 119,167 14,667 848,417 848,417 3. Properties - 271,163 229,833 9,185 510,181 510,181 4. SoE/Cs - 185,000 102,400 5,200 292,600 292,600 1. National Procurement Authority - 3,719,833 2,801,752 119,122 6,640,707 6,640,707 1. AEITI Secretariat - 275,000 38,500 5,500 319,000 319,000

38

Table 15. ABC Multi-Year Costings by CoFOG Function (US$)Grand Total 1396 (2017) 1397 (2018) 1398 (2019) 1399 (2020) 1396-1399

(2017-2020)Grand Total 26,393,029 25,349,289 31,889,216 39,002,935 122,634,469General Public Services 26,173,647 23,467,252 27,185,786 32,560,693 109,387,378GPS - Executive & legislative organs, financial & fiscal affairs, external affairs

25,773,618 22,704,028 25,905,753 31,153,921 105,537,319

GPS - General Services 400,029 763,225 1,280,033 1,406,772 3,850,059Defence - 424,000 449,440 476,406 1,349,846D - Civil Defence - 424,000 449,440 476,406 1,349,846Public Order and Safety 7,698 430,528 456,774 961,548 1,856,548POS - Police Services 7,698 430,528 456,774 485,142 1,380,141POS - Public Order and Safety n.e.c. - - - 476,406 476,406Economic Affairs 211,685 1,027,509 1,550,016 2,145,849 4,935,058EA - Agriculture, Forestry, Fishing & Hunting - 424,000 449,440 476,406 1,349,846EA - Fuel and Energy 211,685 179,509 651,136 716,629 1,758,959EA - Mining, Manufacturing & Construction - 424,000 449,440 952,813 1,826,253Environmental Protection - - - - -Housing and Community Development - - 898,880 1,429,219 2,328,099HCD - Housing Development - - - 476,406 476,406HCD - Community Development - - 898,880 952,813 1,851,693Health - - 449,440 476,406 925,846H - Health n.e.c. - - 449,440 476,406 925,846Recreation, Culture, Religion - - - - -Education - - 449,440 476,406 925,846E - Education n.e.c. - - 449,440 476,406 925,846Social Protection - - 449,440 476,406 925,846SP - Unemployment - - 449,440 476,406 925,846

39

FUTURE DIRECTIONS TOWARDS SECTOR BUDGET SUPPORT POLICY FRAMEWORK109. A key part of the self-reliance strategy is for the government to not only increase revenue to pay for services and investment, but also to develop national systems to ensure resources get where they need to go and the government is accountable for public spending. Using national systems to improve them is going to be crucial in achieving self-reliance. As shown, the cost effectiveness of more traditional development modalities has been very low in Afghanistan, with modest improvements in international benchmarks on public finance costing much more than in nearly all other countries.110. There has been some good progress with budget support increasing through programs such as the US National Development Partnership, the EU State Building Contract and the World Bank Incentive Program. These programs are making a significant contribution to improving government systems and processes. However, more can be done to more closely align these budget support measures with specific reform goals. By explicitly incentivising sector level goals, in the case of FPIP - the fiscal reform goals, that are set out by the government these programs can assist in a more rapid improvement in outcomes.

Government Options

111. The government has taken the first steps in aligning budget allocations to FPIP objectives. The President agreed to funding from the national budget of up to $20 million to be allocated to the FPIP in 2017. Unfortunately, the budget process did not accept the costings provided and only $1 million was allocated. This small amount was allocated to the finance and accounting department signalling for the first time a recognition that improving the administration of the MOF is a key issue.112. The prospect of more budget support, and the proposal to manage the FPIP Support Program without a project implementation unit also means the MOF systems will have to be able to deliver at a much higher level than it currently does. This will require significant capacity building and training that will take at least 1 to 2 years. As such, the Minister has agreed to allocate some funds from the FPIP Support program for the MOF to procure the services of a contractor / agent to assist. This firm would be a short-term measure to assist with the transition from relying on donors to self-reliance. Its primary purpose will be to assist teams in delivering their plans and to work with the Administration Department of the MOF on capacity for core functions including budgeting, accounting, HR and procurement. 113. This is consistent with using national systems to improve them as the agent will be procured by the government, report to the government and the contract will be managed by the government. This procurement will take at least 6 months and for the MOF to have a firm in place for the start of the 2018 fiscal year the procurement process needs to begin immediately. The main risk is that the FPIP Support Program begins but the MOF are unable to execute and teams cannot access assistance.114. The government also needs to explicitly target a higher percentage of domestic revenue as a proportion of GDP. Afghanistan is

40

currently very low following the fiscal crisis of late 2014. While the Government has increased from 6.7% of GDP in 2014 to 7.9% last year, it still needs to get above 10% in the next couple of years, and then reach at the 12% mark a few years after that.

Donor Options

115. With the establishment of the FPIP, the government consolidated its approach to fiscal reforms and set out preferences for support. The government has a clear preference for sector budget support, will accept support through the ARTF but is only interested in bilateral support in a small number of specific cases. This simplifies the decision for most donors. Smaller donors with an interest in fiscal reforms should provide support through the ARTF while the government is negotiating with larger donors to link existing budget support operations to the FPIP. 116. Returning to business as usual with a proliferation of facilities operating in silos is now not really an option. These approached have proven to be both ineffective and expensive. The government understands that this approach may lead some donors to withdraw from the sector.117. A culture for accountability is emerging. Now in its second year, the FPIP performance management system is better established. The FPIP teams self-assess their own performance in the middle of the year and then again at the end of the year, and these self-assessments are independently validated by a separate team. The validation team is separate from the Performance Management Team at the MOF whose role is to facilitate the process, not validate the assessments. 118. The capacity of the validation team is a key determinant of the credibility of the assessments. The initial year was done with a skeleton team but the government is interested in international partners participating in and nominating experts to the validation team. The validation process is about accountability but it goes further and is a key part of the engagement. It helps to build a performance culture and to encourage teams to be honest about their own performance. It must remain independent of both the government and the donors as much as possible. Meaning in general, donors with investments in reforms (such as the World Bank) should participate in the planning and self-assessment, but not the validation. The Bank might like to nominate a third party that they contract to be part of the validation, but they should not be from the task team for the FPIP Support Program.119. Another opportunity for donors to participate in the validation process is to act as a peer reviewer of draft assessments. In 2016 the US Treasury peer reviewed the draft mid-year assessment and presented their views to the wider donor group. The government welcomes this type of engagement by donors as a good tool for promoting open and honest dialogue about the FPIP.

Performance Reporting

120. The FPIP Support program and other support to fiscal reforms such as the EU’s SBC should not require additional performance reporting or monitoring and evaluation systems. The Government has established a robust performance management system that is aligned to the national budget cycle. The Government acknowledges that there is room for

41

improvement in the presentation and the content of the performance reports. The Government is open to a discussion with donors on how performance information will be determined, reported and where there needs to be additional information. However, all of this negotiation needs to be done within the established system. It is not feasible for government to be providing multiple reports to multiple donors on the same reforms.121. The EUs State Building Contract is a very welcome initiative that will help the government to drive change, but it needs to support the single system for performance reporting established under the FPIP. The EU performance reporting agreement shows that some progress has been made but more work is needed. Having a separate process run out of the Aid Management Department virtually straight after the completion of the FPIP Annual Assessment with benchmarks and goals that are different would have been better managed by EU asking for more information in the Annual Assessment.122. Similarly, the US National Development Partnership is hugely important for Afghanistan but could include an explicit link to FPIP overall grading, and targeting certain flagship reforms. This would also support the fixed and variable funding structure that the government has proposed in the past. Some funding is fixed based on the overall grading outcome, while additional variable funds are linked to the outcomes on specific flagship reforms that are negotiated annually. 123. The role of the World Bank as administrator of the ARTF is one of quality assurance and verification. There has been no formal assessment by the World Bank on the Annual Assessment report and outcomes. Nor have the Bank been involved in the development of the 5 year plans for both teams. This is an important role in coming years.

42