Financial Management at the Provincial Level in Kandahar

UNCLAS SECTION 01 OF 03 KABUL 001911

DEPARTMENT FOR SRAP, SCA/FO, SCA/A, EUR/RPM
STATE PASS TO AID FOR ASIA/SCAA
USFOR-A FOR POLAD

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: KDEM PGOV AF
SUBJECT: Financial Management at the Provincial Level in Kandahar


1. Summary. The Afghan government's financial management at the
provincial level in Kandahar has improved greatly over the past year
with respect to financial and revenue accounting. However, the lack
of a consultative budget planning process between ministries in
Kabul and their departments in Kandahar remains an obstacle to
efficient functioning of provincial-level government. Moreover,
deficiencies in governmental functions such as private business
registration and land titling limit the efficiency of revenue
collection. Like many provincial departments throughout
Afghanistan, chronic understaffing and low salaries directly impacts
effectiveness and operations. End Summary.


2. While international advisors have worked with the Ministry of
Finance (MoF) in Kabul for several years to increase transparency of
national-level finance, revenue, and budgeting processes, little is
known about financial management at the provincial level. In light
of frequently reported problems with provincial line departments
receiving and executing their budget allocations, and the need to
increase revenue collection in the provinces, experts from the U.S.
Department of the Treasury (UST),Office of Technical Assistance,
visited Kandahar in order to ascertain the present state of
financial management and to assess the ways in which USG technical
assistance might be useful at the provincial level.


3. UST and Kandahar Provincial Reconstruction Team (KPRT) personnel
visited Kandahar's Director of Finance ("Mastufi") at the
headquarters of the provincial line Department of
Finance("Mastufiat") in Kandahar City July 1, The Mastufi, Ghulam
Haider, had with him the heads of the Mastufiat's two sections: Zia
Uddin, Head of Finance, and Samat, Head of Revenue. The Mastufiat
is located in the relatively secure "Government Circle" area of
Kandahar City, in an old but well-constructed and clean building
with electricity and plumbing.

Kandahar Mastufiat Functions and Work Load
--------------


4. The functions of the Mastufiat are 1) to receive, disburse, and
cost account monies from the MoF allocated to line departments and
the Afghan National Security Forces (ANSF),and 2) to implement the
revenue code by collecting taxes and customs fees on behalf of the
MoF. The Mastufiat is only responsible for "operating" budgets, not
development budgets associated with specific donor-funded programs.
The operating budgets consist of monies for 1) payrolls, and 2)
goods and services. In Kandahar Province, the Mastufiat is
responsible for approximately 20,000 ANSF salaries and 8754 civilian
salaries. (Note: The number of ANSF salaries is high because
Kandahar's Mastufiat handles payroll accounts for all military and
civilian employees of the ANA 205 Corps, headquartered in Kandahar
but deployed across the south in Zabul, Kandahar, Uruzgan, and
Helmand.) The Mastufiat began paying ANSF salaries by direct
deposit about one year ago. However, the system for paying civil
servants by direct deposit has not yet come on line due, according
to Haider, to the various ministries' failure to make necessary
arrangements with banks and issue employee ID cards.


5. Concerning the Mastufiat's revenue function, Haider stated that
revenues for the first quarter of 1388 were up 30 pct compared to
the first quarter of 1387. He attributed this increase to his
deployment of more tax collectors and more aggressive collection.
The sources of revenue continue to be customs fees and taxes, the
former being the larger. (Note: The Mastufiat has customs
inspectors stationed at the Spin Boldak border crossing point.) The
Mastufiat does not prepare tax bills for businesses and individuals;
according to Haider, because businesses are generally not
registered, the only way to collect taxes is for his staff to visit
each place of business, evaluate the size and income of the
business, and write up tax bills and receipts on the spot.

Kandahar Mastufiat Financial
Management Procedures and Systems
--------------


6. At the center of the Mastufiat's financial management procedures
is the Afghan Financial Management Information System (AFMIS),a
computerized system that came online in Kandahar about a year ago.
AFMIS connects the Mastufiat with the MoF in Kabul in near real
time, showing all finance and revenue transactions and automatically
updated balances for all accounts. AFMIS also allows the Mastufiat
to provide each Kandahar line department with a monthly transaction
record and accounting sheet. Transactions that are not completed
electronically (including all civil service salaries and all goods
and services expenditures) are recorded on paper requisition,
receipt, and voucher forms; clerical staff perform manual data entry
of these the records into AFMIS. Apparently because the Mastufi and
his staff do not fully trust AFMIS, they keep a paper master ledger
as a back-up to record all transactions. Staff accountants use
paper records to perform the traditional bookkeeping function of

KABUL 00001911 002 OF 003


bank reconciliation; that is, reconciling the banks' records of
credits, debits, and balances with the data in AFMIS.


7. The AFMIS system includes a function for printing data on
security-paper check forms. According to Haider, the forms and the
access code for the check-printing function were only accessible to
four staff members. As a management control, any department that
submits a requisition for over AF 1,000,000 has to have the governor
or his designee sign off on it. Asked about whether Provincial
Council (PC) members attempted to exercise any fiscal oversight,
Haider stated that PC members occasionally stopped by the Mastufiat,
and that they were welcome to inspect the financial and revenue
reports.


8. Finance Section Chief Zia Uddin, a young man, received one month
of training at the MoF in Kabul on the use of AFMIS, and he, in
turn, trained his assistants, who trained the data entry clerks.
The older Revenue Section Chief, Samat, was less proficient with
AFMIS, but evidently had younger assistants who worked with the
system. In fact, all of the Mastufiat staff observed using
computers were young men (though Haider claimed he had "a few" women
on his staff); the older men worked exclusively with paper records.

Kandahar Mastufiat's Accomplishments
--------------


9. Asked about his view of the Mastufiat's accomplishments and
successes, Haider first put his reply into context by pointing out
that the department had "started from zero" and that the MoF had
given him little technical assistance over the years. Haider then
stated that he could sum up the Mastufiat's progress in simple
terms: Within the past year, largely thanks to AFMIS and drawing on
the skills of his staff, he has become able to explain clearly to
the other provincial departments their budgets and current accounts.
He also acknowledged that the MoF had over the past year become
much better about making the departments' operating budget
allocations available in a timely fashion. However, Haider said
that he knew the recent improvement in financial management in
Kandahar was only the beginning, and he noted several challenges his
department faced.

Kandahar Mastufiat Staffing Issues
--------------


10. Haider explained that the MoF's official staffing pattern
("tashqil") for the Mastufiat authorized him a staff of 92
professionals and clerical workers (civil servants),and 37 contract
laborers. He is at present short 29 employees in the
professional/clerical category. (Note: All Kandahar line
departments are staffed under their tashqils; the Mastufiat's ratio
of authorized positions to employees is above average for the
province. This is a widespread situation in both the central
ministries and the provinces, due to the fact that the Tashqil is
determined by the Civil Service Commission and the amount of budget
provided by the Mof for salaries is usually less than the Tashqil.)
According to Haider, he constantly attempts to recruit professional
staff, but the salaries he is authorized to pay are not high enough
to attract qualified persons. The average salary for professional
staff at the Mastufiat is USD 121 per month. (Contract Laborers
receive USD 60 per month, but there is no shortage of laborers.)
Haider stated that he believed an average salary of USD 300 would be
sufficient to attract the staff he needs, and would address as well
the department's problem retaining employees. He was skeptical
about the planned pay raises under the Priority Reform and
Restructuring (PRR) civil service reform program for employees who
pass the civil service exam, noting that a number of his employees
had recently passed the exam but did not receive a pay raise;
according to Haider, "That might be the case for employees in Kabul,
but the central government does not follow its own rules when it
comes to the provinces."

Training Issues
--------------


11. Haider enthusiastically welcomed the idea of UST training and
mentoring support for the Mastufiat. He complained that, although
the MoF had provided training to several of his key staff members in
Kabul, "the Afghan instructors just read out loud from books" and
did not offer the trainees anything useful for their work in
Kandahar. Haider also expressed a characteristic Southern scorn for
the two "Adam Smith Fellows" whom the British Department for
International Development (DFID) funds to work on capacity building
at the Kandahar Mastufiat. He said the two Fellows were "useless"
and "did nothing but sit around." Moreover, they had a negative
effect on staff morale because it was known they were paid USD 1800
per month. (Note: It was evident from what Haider said that the
two Fellows were Dari-speaking Tajiks, which in itself would
practically rule out their ability to work effectively in the highly

KABUL 00001911 003 OF 003


conservative Pashtun culture of Kandahar.) Haider appeared open to
UST's proposal to have American experts visit the Kandahar Mastufiat
periodically to provide mentoring and guidance.

Vertical Communication Issues
--------------


12. Haider cited another problem seems to affect every provincial
line department: Lack of communication between the Ministries in
Kabul and their provincial departments. In particular, Haider
mentioned the lack of a consultative budget planning process. The
MoF sets targets for revenue collection by the Kandahar Mastufiat
that appear to Haider to be arbitrary, and makes salary and goods
and services allocations to departments that do not correspond well
to their actual requirements. In order to improve this situation,
Haider suggested that a USDOT expert mediate a conference between
the Kandahar Mastufiat and the MoF in order to work out a more
effective budget planning process for all provincial departments.

Reality Check: The DRRD's
Relationship with the Mastufiat
--------------


13. Following the visit to the Mastufiat, UST and KPRT personnel
visited the Kandahar provincial Department of Rural Rehabilitation
and Development (DRRD) in order to evaluate the departmental
financial management practices of this key department and their
relationship to the Mastufiat. DRRD Director Abdul Latif Ashna and
his female Financial Management Officer, Nasima, provided
information.


14. According to Ashna and Nasima, the Mastufiat was helpful and
efficient about providing the DRRD with monthly reports as well as
in disbursing funds as required in a timely fashion. The DRRD's
financial management system is not computerized and is rudimentary,
with only two object codes: salaries and goods and services. Like
the Mastufiat, the DRRD only tracks its operating budget, not the
development budget. Ashna and Nasima stated that the MRRD in Kabul
sent their budget allocations to Kandahar in a timely fashion, but
like Haider, Ashna complained that the allocations were largely
arbitrary due to the lack of a consultative budget planning
process.

Comment: Management Keeping Pace
with Capacity Development
--------------


15. Though obviously inefficient in many respects - such as
requiring ANSF and line department personnel to present requisitions
personally at the Mastufiat to draw cash or checks for operating
expenditures - the Mastufiat in Kandahar appears to run in an
orderly, transparent fashion, with several management controls in
place. With respect to its revenue collection function, the
Mastufiat is performing well within the limitations of not having
functioning private business registration or land title mechanisms
in Kandahar for the purpose of preparing tax bills. In short,
financial management problems at the provincial level in Kandahar
are not due to deficiencies in the functioning of the Mastufiat, but
rather to limited government capacity in other areas, and to the
lack of a consultative budget planning process between Ministries
and their provincial departments.


16. The MoF and its department in Kandahar can be a positive driving
force in developing more effective provincial-level budgeting for
all Ministries, and for establishing mechanisms to support improved
revenue collection. The UST clearly has an opportunity to make a
beneficial intervention in Kandahar in a mentoring role and as a
mediator between central and provincial government institutions.

EIKENBERRY