Identifier
Created
Classification
Origin
09KABUL2076
2009-07-26 16:31:00
UNCLASSIFIED
Embassy Kabul
Cable title:  

AFGHANISTAN RECONSTRUCTION TRUST FUND:

Tags:  EINV EFIN ENRG ETRD ECON AF FAS 
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P 261631Z JUL 09
FM AMEMBASSY KABUL
TO SECSTATE WASHDC PRIORITY 0390
INFO DEPT OF TREASURY WASHINGTON DC 0859
AFGHANISTAN COLLECTIVE
NATO EU COLLECTIVE
DEA HQS WASHINGTON DC
USDA FAS WASHDC
DEPT OF COMMERCE WASHINGTON DC
UNCLAS KABUL 002076 


DEPT FOR SRAP, SCA/FO, SCA/RA, AND SCA/A
DEPT PASS FOR AID/ASIA SCAA
DEPT PASS USTR FOR DELANEY AND DEANGELIS
DEPT PASS OPIC
DEPT PASS USDA FOR FAS MICHNER
DEPT PASS TDA FOR STEIN AND GREENIP
NSC FOR JJONES AND GSMITH
DASD FOR DSEDNEY
TREASURY FOR MHIRSON, ABAUKOL, AWELLER, AND MNUGENT
COMMERCE FOR HAMROCK-MANN, DEES, AND FONOVICH

E.O. 12958: N/A
TAGS: EINV EFIN ENRG ETRD ECON AF FAS
SUBJECT: AFGHANISTAN RECONSTRUCTION TRUST FUND:
ACHIEVING ECONOMIC AND POLICY REFORMS

This is an action message. See paragraphs 4 and 14.

SUMMARY

UNCLAS KABUL 002076


DEPT FOR SRAP, SCA/FO, SCA/RA, AND SCA/A
DEPT PASS FOR AID/ASIA SCAA
DEPT PASS USTR FOR DELANEY AND DEANGELIS
DEPT PASS OPIC
DEPT PASS USDA FOR FAS MICHNER
DEPT PASS TDA FOR STEIN AND GREENIP
NSC FOR JJONES AND GSMITH
DASD FOR DSEDNEY
TREASURY FOR MHIRSON, ABAUKOL, AWELLER, AND MNUGENT
COMMERCE FOR HAMROCK-MANN, DEES, AND FONOVICH

E.O. 12958: N/A
TAGS: EINV EFIN ENRG ETRD ECON AF FAS
SUBJECT: AFGHANISTAN RECONSTRUCTION TRUST FUND:
ACHIEVING ECONOMIC AND POLICY REFORMS

This is an action message. See paragraphs 4 and 14.

SUMMARY


1. On July 20, 2009, the Government of the Islamic
Republic of Afghanistan and the donors reached
agreement on the Afghanistan Reconstruction Trust
FundQs (ARTF) Incentive Program for FY 1388 (March
20, 2009 - March 19, 2010),which is intended to
support needed economic policy reforms and funding
for the ARTF recurrent cost window. A Memorandum of
Understanding is planned to be signed between the
World Bank and the Ministry of Finance and presented
at the upcoming July 29, 2009 ARTF Quarterly Donor
meeting.


2. Minister of Finance Zakhilwal and Deputy Minister
Mastoor led a whole-of-Afghan-government approach in
putting forth an ambitious reform agenda in
negotiating the ARTF FY 1388 benchmarks with donors.
The FY 1388 Incentive Program scheme is $60M (25% of
which is tied to a revenue target matching the IMF
program and 75% allocated to other structural
benchmarks). The new Incentive Program essentially
offers additional discretionary funding if the GIRoA
meets certain pre-agreed benchmarks on an annual
basis. The benchmarks are allocated by three themes:

A) Sustaining domestic revenues; B) Improving public
sector governance; and C) Enabling private sector
development with three benchmarks per theme; thus, a
total of nine benchmarks. The GIRoA and ARTF donors
agreed on equal weights for all three themes, i.e.
$15 million per theme and the expectation that if one
benchmark within each theme is not fulfilled the
government would forgo the entire resource allocation
for that theme. The Incentive Program is funded by
the ARTF donors in the same way that the Recurrent
Cost Window is funded.

If the GIRoA meets all of the benchmarks, the $60M
will be included as part of the FY 1389 budget.

Where incentive funds are not allocated due to
underperformance on revenue or against benchmarks,
funds are allocated by the ARTF Management Committee
through ARTFQs Investment Window to well-performing
national priority programs.


3. Embassy staff was closely involved in the
formulation of the benchmarks and aligning a USG
whole-of-government approach to align technical
assistance and programs to support the Afghan-led
reform agenda. Embassy staff also worked closely
both formally and informally with donors to present
common messages. For example, the U.S. and the U.K.
prepared a joint statement at the July 20 meeting.
The World Bank played a key role in facilitating the
working group meetings leading up to the agreement.


4. Action request: We ask Washington support to
encourage other donors (the U.S. and the UK now
provide half of the total ARTF funding) to contribute
to the ARTF to support national programs, GIROA-led
economic policy reforms, and contribute to aid
effectiveness goals as outlined in the Paris
Declaration. END SUMMARY


AFGHANISTAN RECONSTRUCTION TRUST FUND (ARTF)
BACKGROUND


5. The Afghanistan Reconstruction Trust Fund (ARTF)
is a partnership between the international community
and the Afghan government for the improved
effectiveness of the reconstruction effort. Since
early 2002, 30 donors have contributed over $3
billion (as of April 20, 2009),making the ARTF the
largest contributor to the Afghan budget Q for both
operating costs and development programs. ARTFQs
support for national priority programs, for operating
costs of government operations and for the policy
reform agenda is contributing to the achievement of
the Afghanistan National Development Strategy goals.


6. In addition, the specific objectives of the ARTF
are to: 1) position the national budget as the key
vehicle to align the reconstruction program with
national development objectives; 2) promote
transparency and accountability of reconstruction
assistance; 3) reduce the burden on limited
government capacity while promoting capacity-building
over time; and 4) enhance donor coordination for
financing and policy dialogue.


7. The new Incentive Program essentially offers
additional discretionary funding if the GIRoA meets
certain pre-agreed benchmarks on an annual basis. The
objectives of the Incentive Program are: 1)
predictable ARTF Recurrent Cost (RC) funding over the
medium-term Q and hence aid effectiveness; 2) support
for the governmentQs core policy reforms, including
domestic revenue generation; 3) strengthening the
ARTF as a platform for policy dialogue between donors
and government; and 4) clearer strategic objectives
for the ARTF RC Window. The objective is not only to
support the reform process, but also to allow for
increased allocations towards the financing of the
governmentQs core development programs through the
ARTF Investment Window.


8. Under an earlier reform plan agreed by donors and
the GIRoA, guaranteed recurrent cost support to the
GIRoA will decline by $25 million per annum from its
level of $276 million in FY 1387. This decline is
offset by the Incentive Program, which started out at
$40 million in FY 2009-10, to reward GIRoA
performance against a set of policy benchmarks. The
GIRoA met all benchmarks and will receive the full
$40 million.


REVENUE MATCHING GRANT SCHEME


9. The Revenue Matching Grant Scheme is designed to
incentivize improved revenue performance, and
therefore fiscal sustainability. The scheme will
start in SY1389 (March 20, 2010 Q March 20, 2011),
based on revenue performance in SY1388 (March 20,
2009 Q March 20, 2010). It is anchored in the annual
revenue targeting negotiations between the Ministry
of Finance and the International Monetary Fund (IMF).
The Revenue Matching Grant scheme is capped at 25
percent of the total ARTF Incentive funds available
in any year. Thus, in its first year, SY1389, the
Revenue Matching Grant will have a pot of $15
million. It is important to recognize that in the
event of an adjustment to the IMF revenue target
during the fiscal year, the Matching Grant mechanism
will adopt the new target to avoid confusion.


Theme A: Sustaining Domestic Revenue Generation


10. The Poverty Reduction and Growth Facility (PRGF)
program supervised by the IMF is the core framework
for the GovernmentQs revenue generation program, in
addition to broader macro-fiscal stability. In
addition, various donor agencies support the Ministry
of Finance revenue department through technical
assistance. The ARTF Incentive Program can further
support the GovernmentQs revenue measures, through
strategic strengthening of existing benchmarks and
commitments. This policy objective will be
complemented by the Revenue Matching Scheme. The
three benchmarks for FY 1388 in this theme focus on:
1) customs reforms; 2) Tax and Non-tax revenue
transparency; and 3) improving companiesQ compliance
with the Business Receipt Tax (BRT).

Theme B: Improving Public Sector Governance


11. Public administration reform (PAR),public
finance management (PFM) and anti-corruption are all
critical for the improved delivery of services and
the broader state-building program in Afghanistan.
Specifically with respect to the ARTF, PAR will be
important for developing the sustainable core
capacity in Government that will enhance the impact
of external assistance through the Core Budget and
from a longer-term perspective will reduce
AfghanistanQs dependence on expensive and
unsustainable technical assistance. As a result, the
three benchmarks for FY 1388 in this theme focus on:
1) asset declaration; 2) strengthening GIRoAQs
Internal Audit function; and 3) progress in Pay and
Grade implementation (including teachers).


Theme C: Enabling Private Sector Development


12. Private sector development is critical to
transition the Afghan economy from one where the
public sector plays a large role in the formal
economy (and where there is substantial corruption)
to a stable, licit, private-sector led growth path.
This is crucial for job creation and poverty
reduction as well as for increasing the productivity
and competitiveness of the Afghan economy. A broad-
based economy will also support a broader tax base.
The three benchmarks for FY 1388 in this theme focus
on: 1) progress in AfghanistanQs Electricity
Corporation (DABS) corporatization and governance
reforms; 2) roll-out of the Central Business Registry
to the provinces; and 3) improvement of the
regulatory framework and transparency in the mining
sector.


NEXT STEPS


13. The World Bank is responsible for the annual
Technical Review of benchmarks. The date of the
Technical Review has been set for November/December.
In undertaking the Technical Review the World Bank
may draw on the technical competencies of other
agencies as necessary. The World Bank will report
the results of the Technical Review in early December
2009 to the Donor/Government Working Group, which
will make a recommendation to the Quarterly Donor
Meeting on whether the benchmarks have been met.


14. Action request: At the field level, we will
continue to support the ARTF with the GIRoA and
donors, to track progress, align technical assistance
to meet the economic reform benchmarks, and to
develop the ARTF Financing Strategy. A key ARTF goal
is to reduce the burden on limited government
capacity while promoting capacity-building and fiscal
sustainability over time. We ask Washington to press
a broader diplomatic effort among other donors (the
U.S. and the UK now provide half of the total ARTF
funding) to contribute to the ARTF to support
national programs, and to contribute to aid
effectiveness goals as outlined in the Paris
Declaration. With the incentive scheme in place, the
objective is not only to support the reform process,
but also to allow for increased allocations towards
the financing of governmentQs core development
programs through the ARTF Investment Window.



EIKENBERRY