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Document of The World Bank Report No: ICR 01325 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA H1440) ON A GRANT IN THE AMOUNT OF SDR 18.4 MILLION ( US$27.0 MILLION EQUIVALENT ) TO THE ISLAMIC REPUBLIC OF AFGHANISTAN FOR THE PUBLIC ADMINISTRATION CAPACITY BUILDING PROJECT November, 2009 Financial Management Unit South Asia Region Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

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Page 1: World Bank Documentdocuments.worldbank.org/curated/en/... · INTOSAI International Organization of Supreme Audit ... Quality at Entry: ... C.3 Quality at Entry and Implementation

Document of The World Bank

Report No: ICR 01325

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA H1440)

ON A GRANT IN THE AMOUNT OF SDR 18.4 MILLION

( US$27.0 MILLION EQUIVALENT )

TO THE

ISLAMIC REPUBLIC OF AFGHANISTAN

FOR THE

PUBLIC ADMINISTRATION CAPACITY BUILDING PROJECT

November, 2009

Financial Management Unit South Asia Region

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CURRENCY EQUIVALENT

(Exchange rate is Kabul based open market buying rate effective June 30, 2009)

Currency Unit =Afs US$ 1 = 50.07 Afs

GOVERNMENT FISCAL YEAR

March 21 – March 20

ABBREVIATIONS AND ACRONYMS

AFMIS Afghanistan Financial Management Information System ANDS Afghanistan National Development Strategy ARDS Afghanistan Reconstruction and Development Services ARTF Afghanistan Reconstruction Trust Fund APR Annual Performance Review CAO Control and Audit Office CKP Charles Kendall Partners DFID Department for International Development (UK) EPAP Emergency Public Administration Project FM Financial Management GOA Government of Afghanistan IARCSC Independent Administrative Reform and Civil Service Commission I-ANDS Interim – Afghanistan National Development Strategy IDA International Development Association INTOSAI International Organization of Supreme Audit Institutions ISA International Standards of Auditing LMs Line Ministries MIS Management Information System M&EU Monitoring and Evaluation Unit MOE Ministry of Economy MOF Ministry of Finance MOJ Ministry of Justice MTFF Medium Term Fiscal Framework NGO Non Governmental Organization OTJ On the job training PACB Public Administration Capacity Building PAR Public Administration Reform PFEM Public Finance and Expenditure Management (Law) PFM Public Financial Management PFMR Public Financial Management Reform PPU Procurement Policy Unit PRGF Poverty Reduction and Growth Facility

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PRR Priority Reform and Restructuring PSIB Programmatic Support for Institutional Building RIMU Reform Implementation Management Unit SAR South Asia Region SBD Standard Bidding Documents SDU Special Disbursements Unit TA Technical Annex WB World Bank

Vice President : Isabel Guerrero Country Director: : Nicholas Krafft

Acting Sector Manager : Pazhayannur K. Subramanian Project Team Leader : Paul Edwin Sisk

ICR Team Leader : Paul Edwin Sisk

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ISLAMIC REPUBLIC OF AFGHANISTAN

PUBLIC ADMINISTRATION CAPACITY BUILDING PROJECT

CONTENTS

1. Project Context, Development Objectives and Design ................................................... 5

2. Key Factors Affecting Implementation and Outcomes................................................. 11

3. Assessment of Outcomes .............................................................................................. 14

4. Assessment of Risk to Development Outcome............................................................. 22

5. Assessment of Bank and Borrower Performance.......................................................... 23

6. Lessons Learned............................................................................................................ 27

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners............... 28

Annex 1. Project Costs and Financing .............................................................................. 30

Annex 2. Outputs by Component...................................................................................... 31

Annex 3. Bank Lending and Implementation Support/Supervision Processes................. 35

Annex 4. Stakeholder Workshop Report and Results ....................................................... 37

Annex 5. Summary of Borrower’s ICR ............................................................................ 39

Annex 6. List of Supporting Documents........................................................................... 48 

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A. Basic Information

Country: Afghanistan Project Name: Public Admin Cpacity Building Project

Project ID: P084736 L/C/TF Number(s): IDA-H1440

ICR Date: 11/25/2009 ICR Type: Core ICR

Lending Instrument: TAL Borrower: ISLAMIC REPUBLIC OF AFGHANISTAN

Original Total Commitment:

XDR 18.4M Disbursed Amount: XDR 18.4M

Revised Amount: XDR 18.4M

Environmental Category: C

Implementing Agencies: Ministry of Finance Control and Audit Office

Cofinanciers and Other External Partners: B. Key Dates

Process Date Process Original Date Revised / Actual

Date(s)

Concept Review: 08/11/2004 Effectiveness: 05/02/2005 05/02/2005

Appraisal: 10/05/2004 Restructuring(s): 02/27/2007

Approval: 01/27/2005 Mid-term Review: 08/30/2006 10/19/2006

Closing: 06/30/2009 06/30/2009 C. Ratings Summary C.1 Performance Rating by ICR

Outcomes: Satisfactory

Risk to Development Outcome: Substantial

Bank Performance: Satisfactory

Borrower Performance: Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Satisfactory Government: Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies:

Satisfactory

Overall Bank Performance:

Satisfactory Overall Borrower Performance:

Satisfactory

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C.3 Quality at Entry and Implementation Performance IndicatorsImplementation

Performance Indicators

QAG Assessments (if any)

Rating

Potential Problem Project at any time (Yes/No):

No Quality at Entry (QEA):

None

Problem Project at any time (Yes/No):

Yes Quality of Supervision (QSA):

Moderately Satisfactory

DO rating before Closing/Inactive status:

Satisfactory

D. Sector and Theme Codes

Original Actual

Sector Code (as % of total Bank financing)

Central government administration 80 95

Law and justice 15

Sub-national government administration 5 5

Theme Code (as % of total Bank financing)

Administrative and civil service reform 33 10

Public expenditure, financial management and procurement

67 90

E. Bank Staff

Positions At ICR At Approval

Vice President: Isabel M. Guerrero Praful C. Patel

Country Director: Nicholas J. Krafft Alastair J. McKechnie

Sector Manager: Pazhayannur K. Subramanian Robert J. Saum

Project Team Leader: Paul Edwin Sisk Anne Tully

ICR Team Leader: Paul Edwin Sisk

ICR Primary Author: Sati Achath F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document) The overall objective of the project is to assist the authorities to develop the capacity to manage public expenditures in an effective, transparent and accountable manner in order to achieve satisfactory and sustainable development outcomes in Afghanistan. The project will have a particular focus on enhancing the performance of public sector procurement, financial management, and accountability systems.

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Revised Project Development Objectives (as approved by original approving authority) To enhance the performance of public sector procurement, financial management, and accountability systems which will contribute to a more effective, transparent and accountable state. This will be accomplished through operational support for treasury, internal audit and external audit, and procurement functions, the reform in the related regulatory framework and where feasible, capacity building. (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Regulatory Framework. New budget law and financial regulations, procurement law and regulations and audit law and regulations all promulgated and under implementation.

Value quantitative or Qualitative)

Inconsistent or outdated legal framework.

Public Finance and Expenditure Management (PFEM), Procurement and Audit Laws with regulations in place.

Procurement, PFEM laws and regulations in place. Updated Audit draft law will be sent to the Ministry of Justice (MoJ) in 2009.

Date achieved 01/01/2005 06/30/2009 04/30/2009 Comments (incl. % achievement)

Indicator 2 : Systems Dev Financial Management (FM). Key business process identified and agreed for core financial management functions; specific policies, processes, systems and stds established for internal and external audit follow-up.

Value quantitative or Qualitative)

Centralized systems in place but under question; no plan for AFMIS roll-out and no IA systems working and no procedures for follow-up of audit findings.

Accounting centralized but accessed by 1 line ministries and 1 moustoufiat. All procedures agreed and documented in an Accounting Manual.Internal Audit procedures and f/up procedures for Ex Audit done.

AFMIS now in 12 provinces and all line ministries. IA Dept. recruited 120 staff, now training under on the job training (OTJ). Accounting and IA Manual approved and released.

Date achieved 01/01/2005 06/30/2009 04/30/2009 Comments (incl. % achievement)

Indicator 3 : Human Resource (HR)Capacity FM. Sustained implementation of Priority

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Restructuring and Reform (PRR) in institutions responsible for financial management functions.

Value quantitative or Qualitative)

PRR initiated in Treasury but not in Internal Audit; no capacity in PRR staff to run FM systems.

Treasury, including Financial Controllers, Internal Audit and CAO all operating under PRR.

PRR complete in Treasury w/Fin Controllers, all posts in the CAO and IA of MoF PRR'd. Key staff under OTJ program but tend to go to NGOs with new skills.

Date achieved 01/01/2005 06/30/2009 04/30/2009 Comments (incl. % achievement)

Indicator 4 : Budget Execution. Effectiveness of cash flow planning, management, and monitoring

Value quantitative or Qualitative)

No cash planning or forecasts prepared.

Weekly cash position report and forecast for quarter report automated and linked to centralized data base of signed contracts.

Monthly forecast prepared and reviewed by Cash Committee. Provincial transfers go out 5 days earlier than prior years.

Date achieved 01/01/2005 06/30/2009 04/30/2009 Comments (incl. % achievement)

Indicator 5 : External Audit. The scope and nature of external audit; follow up of audit reports by the executive or entity.

Value quantitative or Qualitative)

Financial statement audit of state budget not done to any acceptable standard; little follow-up to audit findings.

Audit of World Bank (WB) projects and state budget statements done to the International Organization of Supreme Audit Institutions (INTOSAI) standards

Projects and Afghanistan Reconstrution Trust Fund (ARTF) Recurrent Trust Fund financial statement done to INTOSAI standards. State budget statement 1386 presented to Parliament but not audited to international standards.

Date achieved 01/01/2005 06/30/2009 04/30/2009 Comments

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(incl. % achievement)

Indicator 6 : System Development Procurement. Establishment of procurement functions and performance benchmarks in line ministries

Value quantitative or Qualitative)

Line ministries had not begun reform of procurement.

Procurement functions and performance benchmarks for 6 ministries established.

The firm Charles Kendal Partners (CKP) has completed proposal for PRR of 7 line ministries.

Date achieved 01/01/2005 06/30/2009 04/30/2009 Comments (incl. % achievement)

Indicator 7 : HR Capacity. Line ministry procurement staff training and accreditation and certification program in place.

Value quantitative or Qualitative)

No accredited staff.

Training program in all 6 line ministries chosen for procurement training is underway.

CKP has trained 6 trainers, done needs assessment and trained 1065 staff. Standard bidding documents completed and reviewed by WB.

Date achieved 01/01/2005 06/30/2009 04/30/2009 Comments (incl. % achievement)

Indicator 8 : Economy, Efficiency, Transparency. Percentages of contracts subject to competitive bidding/

Value quantitative or Qualitative)

60% 80%

Monitoring by Procurement Policy Unit (PPU) to commence after Management Information System (MIS) implementation. MIS development advanced but not complete.

Date achieved 01/01/2005 06/30/2009 04/30/2009 Comments (incl. % achievement)

Indicator 9 : Accounting and Reporting. Timeliness and regularity of data reconciliation, of in year budget execution reports, and audited statements.

Value quantitative or

No reliable reconciliation of Line Ministry (LM)

Bank reconciliation done

Bank Reconciliations

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Qualitative) allotment records and annual statement from Treasury. In-year budget reports reliable and timely with some delay of provincial expenditure.

within one month, Qatia statement completed annually and state budget done to acceptable standards.

now up to date. In-year budget reporting reliable as it is reconciled to Line Ministry monthly. State budget statement (Qatia) for 1386 audited and sent to parliament, reconciled with LMs.

Date achieved 01/01/2005 06/30/2009 04/30/2009 Comments (incl. % achievement)

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Legal framework to be developed

Value (quantitative or Qualitative)

Framework inconsistent or outdated.

FM and Procurement law and regulations in place.

Procurement and FM law enacted and regulations in place. Audit draft law in MoJ. Enforcement better in 1386 than 1385.

Date achieved 01/01/2005 06/30/2009 04/30/2009 Comments (incl. % achievement)

Indicator 2 : System Study completed and ITC plan agreed.

Value (quantitative or Qualitative)

No plan for systems development or deconcentration.

Plan for IT to be developed and initiated by MoF.

System study completed, recommendations under implementation.

Date achieved 01/01/2005 06/30/2009 04/30/2009 Comments (incl. % achievement)

Indicator 3 : Counterparts staff positions filled in Treasury under PRR. Value (quantitative or Qualitative)

Only 3 of 17 middle mgmt positions filled with civil servants in

All positions in Treasury mgmt filled with civil

All middle mgmt in Treasury filled. Still key tasks done by

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Treasury. servants. 30 local advisors. Date achieved 01/01/2005 06/30/2009 04/30/2009 Comments (incl. % achievement)

G. Ratings of Project Performance in ISRs

No. Date ISR Archived

DO IP Actual

Disbursements (USD millions)

1 06/08/2005 Satisfactory Satisfactory 0.00

2 04/12/2006 Moderately SatisfactoryModerately

Unsatisfactory 4.57

3 06/26/2006 Moderately Satisfactory Moderately Satisfactory 4.57 4 01/17/2007 Moderately Satisfactory Moderately Satisfactory 10.19 5 06/17/2007 Satisfactory Satisfactory 14.88 6 11/29/2007 Satisfactory Satisfactory 18.30 7 06/23/2008 Satisfactory Satisfactory 23.36 8 12/18/2008 Satisfactory Satisfactory 26.92 9 06/02/2009 Satisfactory Satisfactory 27.98

H. Restructuring (if any)

Restructuring Date(s)

Board Approved

PDO Change

ISR Ratings at Restructuring

Amount Disbursed at

Restructuring in USD millions

Reason for Restructuring & Key Changes Made

DO IP

02/27/2007 Y S S 11.05 Align PDOs intended goal with project activities

If PDO and/or Key Outcome Targets were formally revised (approved by the original approving body) enter ratings below: Outcome Ratings Against Original PDO/Targets Moderately Satisfactory Against Formally Revised PDO/Targets Satisfactory Overall (weighted) rating Satisfactory

I. Disbursement Profile http://projportal.worldbank.org/shared/SiteReso urces/ICR/DISB_CHART/P084736.png

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1. Project Context, Development Objectives and Design (this section is descriptive, taken from other documents, e.g., PAD/ISR, not evaluative)

1.1 Context at Appraisal (brief summary of country and sector background, rationale for Bank assistance)

Country and Sector Background: Afghanistan is a poor country ravaged by a quarter of century of conflict and political instability. The country had achieved much since December 2001, when the Afghanistan Interim Administration (AIA) was inaugurated in Kabul. Picking up the reins of governance a t that po int, the A IA w as c onfronted with an e conomy reeling from pr otracted conflict a nd d rought, m ore t han five m illion p eople d isplaced as r efugees i n ne ighboring countries, economic activities steered in an informal or illicit direction by insecurity, and a state that ha d be come v irtually non f unctional i n t erms of pol icy m aking a nd s ervice de livery –although t he s tructures a nd m any s taff r emained. T he a chievements t hat ha d be en m ade subsequently were significant, and in Afghanistan’s context, remarkable.

Afghanistan’s economy had performed strongly in 2003 and 2004 with non-drug GDP reaching US$4.6 billion in 2003/04 (corresponding to a GDP per capita of about US$ 200 per year), an increase of almost 50%, albeit from a very low base. This solid performance was supported by the g overnment’s sound m acroeconomic polices - a hi ghly s uccessful c urrency r eform i n late 2002, a p rudent no ov erdraft po licy pr ohibiting dom estic f inancing of the budg et de ficit, conservative monetary pol icy a nd g ood management of t he exchange r ate. P rogress ha d be en made in mobilizing domestic resources as well as donor assistance in support of the government’s medium term development program, with expenditures financed by external assistance increasing to above U S$ 2 bi llion in 2003/ 04. The g overnment ha d a lso m ade c onsiderable progress in formulating the budget and developing a medium-term expenditure framework.

The above a chievements not w ithstanding, t he c hallenges remained e normous i n i mproving security t hroughout t he c ountry, r eestablishing na tional u nity, de veloping i nstitutions w ith a capacity to formulate and implement policies, reaching out to provinces to collect revenues and deliver s ervices, a nd i mplementing t he government’s l ong term vision f or the f uture o f Afghanistan.

Rationale for Bank assistance: Both t he first a nd s econd Transitional S upport S trategies f or Afghanistan ha d emphasized the n eed for A fghans to be i n the d river’s s eat w ith r egard t o managing t he r econstruction a nd de velopment pr ocess. U nder the g overnment’s s teadfast direction, donors had increasingly s upported government p rograms and a ccepted the budget as the instrument for managing donor resources. In parallel, the government had to demonstrate its ability to manage resources in an effective and transparent manner, with an increasing emphasis on rules-based economic governance and effective capacity building.

In s upport o f these o bjectives, a nd w ithin t he g overnance a nd pu blic administration reform agenda, the Bank’s strategy had been to identify pragmatic opportunities for action in the short term, i nitiating a s et o f i mmediate r eforms w hich w ould be supportive of l onger t erm improvements in public administration. It had entailed: (i) ensuring that emergency capacity is in place – especially i n k ey f iduciary a reas – w hile launching m edium t erm c apacity bui lding efforts; (ii) undertaking extensive diagnostic work along with ongoing technical and policy advice to identify and address key constraints; (iii) identifying short-term goals that are fully owned by government and agreed with all major donors; and (iv) providing gap financing when needed.

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The f irst a nd s econd E mergency P ublic A dministration P rojects (EPAP I a nd I I) pr imarily supported the first and second prongs of the above strategy. Other Bank instruments, including analytical w ork a nd p olicy d ialogue in a dministrative re form, a s w ell a s th e P rogrammatic Support for Institution Building (PSIB) adjustment operation, have supported the third and fourth components.

This strategy initially focused on achieving progress in the governance and public administration reform area through quick-wins, and in ways that did not undermine medium-term goals. As the Bank had engaged in an increasingly substantive policy dialogue with the government in the area of a dministrative r eform, a pr ogressive s hift had b een m ade t owards supporting medium-term solutions to b uild capacity w ithin g overnment, i ncluding: (i) s upport for t he br oader pub lic expenditure legislative r eform a genda covering budg et, pr ocurement, a nd a udit laws; (ii) strengthening s ub-national governance t hrough t he A fghanistan Stabilization P rogram; ( iii) ministry rationalization; (iv) reforming pay and payroll systems; and (v) strengthening financial control, reporting, audit and procurement systems.

1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved)

The overall objective of t he Public Administration Capacity Building Project (PACBP) was to assist t he a uthorities to develop t he c apacity t o m anage public expenditures in a n e ffective, transparent and accountable manner in order to achieve satisfactory and sustainable development outcomes in Afghanistan. The project will have a particular focus on enhancing the performance of public sector procurement, financial management, and accountability systems. Key Indicators were:

• New budget law and financial regulations promulgated and under implementation • Key business processes identified and agreed for financial management functions • Specific policies and standards established for internal and external audit functions • Plan agreed f or a pha sed implementation of a f ully functional A fghanistan Financial

Management Information System (AFMIS) throughout government • Sustained i mplementation of Priority Reform and Restructuring ( PRR) i n Treasury,

Internal Audit and External Audit • Effectiveness of cash flow planning, management and monitoring • Timeliness and regularity of data reconciliation; and reporting • Timeliness of payroll and payment processing • Effectiveness of internal controls • An effective internal audit function is in operation • Timeliness and quality of audited financial statements submitted to donor and legislative

authorities • Follow up on audit reports by executive or audited entity. • New public procurement law and regulations promulgated and under implementation. • Establishment of a p rocurement po licy uni t at an a ppropriate hierarchy w ithin

government • Establishment of key policies and standards of procurement performance against which

the performance of procurement units within ministries can be measured • Implementation of PRR for procurement function within selected ministries • Line ministry procurement staff trained and accredited according to agreed certification

plan.

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• Procurement units within line ministries meeting agreed benchmarks for performance and achieving delegated authority for procurement over time

• Contracts subject to competitive bidding; absence of major delays in the processing and payment of contracts; comparability of prices paid by the public sector to pricing of items available in the market place; regular publication of opportunities and outcomes of public contracts.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification

Following t he m id-term r eview t he p roject was r estructured i n February 2007 f or t wo reasons. First, the project development objective was clarified to reflect the full original intent of t he G overnment of A fghanistan a nd donors, t o bot h a ssure a hi gh l evel o f integrity in the management of public sector resources as these were growing rapidly to finance pos t conflict reconstruction, and to build capacity but recognizing that this will take much more time than originally envisaged. The change emphasized the priority that is already being given to meeting this goal through all of the means provided for in the project. It r educed t he f ocus on m eeting t his g oal t hrough i nternal c apacity bui lding which requires a longer term horizon. Restatement of the development objective removed ambiguities t hat w ere r educing t he v alue o f t he agreed o utcome i ndicators s elected t o monitor the project’s results.

Second, the expected outcome of training activities under the project that were intended to contribute to building internal capacity of the Ministry of Finance and line ministries was r educed. Implementation w as b eing ha mpered b y l agging r ecruitment of t rainable managerial s taff f ollowing m erit-based p rinciples, s lower-than a nticipated r estructuring of lin e min istries, a nd d ifficulties in mo bilizing q ualified s pecialized tr ainers o wing to security risks in the country.

The project development objective was thus modified to read:

‘To enhance the performance of public sector procurement, financial management, and accountability systems which will contribute to a more effective, transparent and accountable state’.

As not ed, t he j ustification f or t he r estructuring w as t he ne ed t o a lign t he pr oject development obj ectives with t he projects activities which a imed more at producing the necessary public financial management outcomes than at human capacity building. Since the original monitoring indicators were already well aligned with the planned activities, the only modification required was to omit from the description of the Human Resource Capacity i ndicator t he c ommitment of s taff t o t ake ove r t he ope ration of f inancial management systems. Similarly, the follow-on project, the Public Financial Management Reform P roject ( PFMR), is e qually r ealistic o n th e time frame f or h uman r esource capacity building in the civil service and targets the reduction of international consultants and the implementation of t he new pa y and grading s ystem in t he Ministry o f F inance while a pplying a n opt imal c ombination of contracted fiduciary services w ith i n-house executive capacity to maintain credible and sound public financial management.

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1.4 Main Beneficiaries

The beneficiaries of the project included: • Public institutions. The pr oject s upported t he g overnment’s e ffort t o bui ld s olid

foundations for a m odern, e ffective a nd a ccountable pub lic a dministration, with a particular f ocus on bui lding t he capacity of publ ic institutions t o manage resources for better budgetary outcomes and development results on the ground.

• Afghan public and the international community. Successful i mplementation of t he

project would help provide a ssurance t o the Afghan public as w ell as the international community as to the effective and accountable utilization of external assistance and thus securing the country’s continued access to development assistance.

1.5 Original Components (as approved)

The project consisted of five components as follows:

Component 1: Strengthening Procurement Capacity within the Government ($9,000,000)

This c omponent would p rovide t echnical a dvisory s upport, e quipment and t raining t o t he government in undertaking its procurement reform effort. A ssistance would be provided in two packages. a. Services of a central procurement facilitation consultant - to support line ministries with the

direct procurement process for three years, particularly in relation to donor programs. b. Capacity Building and Legal and Institutional Reform – t echnical consultancy services, plus

equipment and training to build procurement capacity within line ministries so that they could progressively be accredited with increased delegated authority for procurement management within a coherent procurement structure and an agreed institutional and legal framework.

Component 2: Strengthening Financial Management Capacity ($8,000,000) The Financial Management component would build on t he assistance provided t o t he Treasury under E PAP I a nd I I w ith t he ob jective o f assisting M OF and line ministries to a ttain h igher levels of efficiency in budget execution and financial reporting. Activities under this component would include: a. Financial Management Consultant support to the MOF and to l ine ministries, to strengthen

core Treasury f unctions. Activities w ould include: ope rational support and on t he job training in accounting and reporting cash management payroll processing, grant management and payment processing. A human resource and training needs assessment in l ine with the Treasury Department’s long t erm strategic de velopment pl an would be c onducted. I n addition, technical assistance to strengthen the financial management regulatory framework – including drafting needed regulations and policies based on the new Public Expenditure and Financial Management Law will be provided.

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b. Technical and Professional Training in Basic Financial Management for Treasury and other MOF staff. This would be based upon the needs assessment conducted under subcomponent A but contracted separately.

c. Conduct, and Initial Implementation, of a Comprehensive Financial Management Information Systems (FMIS) Architecture Study to d etermine a framework f or the p hased implementation of an integrated f inancial management information s ystem for government over the medium to long term.

Component 3: Strengthening Internal Audit Capacity ($4,000,000) This component would provide technical advisory services, equipment and training to support the Internal A udit f unction w ithin government. The establishment o f a n effective i nternal a udit service would help to improve the public internal control environment and the establishment of sound financial management within the public sector, including more effective execution of the government budget.

This component w ould a ssist i n e stablishing t he ne cessary f ramework w ithin t he M inistry of Finance and other key ministries for an effective internal audit service which follows generally recognized international standards of internal auditing and control standards enabled by modern technology and software applications. The specific objectives were to:

• Help set up an Audit C ommittee to provide oversight ov er the w ork of the Internal Auditing Service;

• Create an organizational structure which will remove the current influence of individual ministries over the work of Internal Audit;

• Change the working practices of Internal Audit to carry out more operational reviews and evaluations of internal control systems; and,

• Provide training and support to facilitate this transition.

Component 4: Strengthening External Audit Capacity within Government ($4,500,000) The E xternal A udit component w ould p rovide c onsultant services, equipment a nd t raining t o support to t he C ontrol a nd Audit O ffice (CAO) in s trengthening t heir c apacity to p rovide comprehensive auditing services in accordance with International Organization of Supreme Audit Institutions (INTOSAI) Auditing Standards. S everal additional activities were included to help strengthen the broader audit and oversight environment within Afghanistan.

a. Audit Consultant Services t o pr ovide s upport t he CAO of fice i n a udit op erations, including on-the-job training. T he consultants would also assist in the development of the audit regulatory environment including t he completion of a ny necessary l egislation and regulations. A comprehensive human resources and training needs assessment would be conducted to determine the technical and professional training requirements of CAO staff.

b. A Program of Technical and Professional Audit Training for CAO and Internal Audit Staff. This would be based on the needs assessment conducted under sub component A but contracted s eparately. Training a ctivities would be c onducted jointly with training under the Internal Audit component.

c. Technical Assistance t o s trengthen professional accounting a nd a udit standards a nd capacity throughout the country.

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d. Technical A ssistance t o d evelop t he s ystem f or s crutiny a nd response t o a udit r eports including responses by involved ministries and scrutiny by a legislative Public Accounts Committee.

Component 5: Other Institutional Strengthening and Capacity Building ($1,500,000) EPAP II provided support f or the g overnment’s emerging a dministrative r eform pr ogram implemented t hrough t he Independent A dministrative Reform and C ivil S ervice Commission (IARCSC). A lthough, a ssistance packages i n this a rea ha ve just be en l aunched, t he n eed for additional funding i s a lready a nticipated. This may i nclude a ssistance to the G overnment i n rationalizing m inistries and i mplementing a g overnment-wide pa y a nd g rading r eview. Funds have be en i ncluded unde r this c omponent to cover this additional a ssistance as w ell as a ny unforeseen requests for Technical A ssistance or a nalytical work in a reas r elated t o t he overall objective, including:

• Further s upport f or t he I ARCSC i n t he m anagement of the P ublic Administration R eform program;

• Technical a ssistance t o s upport t he G overnment to m anage the design a nd delivery of technical assistance to government; and

• Broad based t raining for the Ministry of F inance and line ministries as a result of ongoing reforms to the financial management framework within government.

1.6 Revised Components

With the change in the development objectives in February, 2007 no major component redesign was effected although t he I nstitutional S trengthening C omponent w as e xpanded to include support for t he preparation of a f ramework for a follow-on project. On the other hand, right after project effectiveness in 2005, the Strengthening Internal Audit Capacity component was r edesigned t o c hange t he approach t o training under the I nternal Audit c omponent. This change a rose f rom f indings a nd r ecommendations on t raining of a uditors in Afghanistan from reports of experts financed under the EPAP I which were not available during project preparation. Comprehensive c overage in a c ertification ba sed training pr ogram w as r ecommended a nd adopted by the project over the initial component approach which provided the framework but not the outputs in terms of staff training in the audit discipline. The shift aligned the inputs better with t he outputs e xpressed i n t he pe rformance indicators o n hum an r esource c apacity development. The c hange i n approach a llowed t he c ontracting of local providers for ba sic accounting and auditing training which resulted in savings of US$ 2.0 million.

1.7 Other significant changes

Actual costs for three Components varied widely from plan as follows:

The consultant under the Strengthening of F inancial M anagement C omponent ha d t o f ace demands not foreseen in the original contract. The first need was the cost to continue to employ 30 local advisors whose posts were financed by the EPAP I Project but which were to be covered by civil servants. When the Treasury Dept. could not recruit the requisite qualified staff, i t was agreed that this cost be added to the contract. The second need was for the consultant to assist with the implementation of t he recommendations of t he s tudy on internal controls i n t he Payments Area and the purchase o f a dditional services to s upport the integrated f inancial management system.

The c ost o f t his increase in a ctivity on s upport t o Treasury w as f unded by s avings unde r t he Strengthening Internal Audit Capacity component, which was redesigned right after effectiveness,

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and s ome savings i n the contracting of the audit o perations advisor u nder t he S trengthening External Audit Component.

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry During pr eparation, t he p roject d esign t ook i nto a ccount lessons l earned f rom pr evious B ank-assisted projects in the public administration sector in Afghanistan and other countries. Likewise, the d esign c onsidered the risk factors and a ppropriate m easures w ere a dopted to m itigate all major risks identified at appraisal.

Lessons Learned from previous Bank-assisted projects.

The mid-term review conducted on EPAP I and EPAP II in early 2004 concluded that the projects had m ade s ignificant pr ogress in a chieving t heir ob jectives, pa rticularly i n t he c ontext of Afghanistan’s extremely limited capacity and engagement with the international community over the last twenty years.

The review also concluded that continued operational assistance would be necessary to maintain standards of f iduciary c ontrol. A t t he s ame t ime, t he G overnment c onsidered i t c rucial t o progressively t ransition from “ buying-in” capacity t o developing it within g overnment. I n response to this, the Bank and the government had extensive dialogue on a coherent medium term public expenditure management reform and capacity building strategy that addresses legislative, regulatory and institutional reforms and development of management control systems and human resources. The government has requested the Bank assistance in the implementation of such a strategy. The project was prepared in this context.

Risk Assessment. The TA had identified the following potential risks and mitigation measures as deemed a ppropriate a t t he t ime t hey w ere s pelt out. A t p roject c ompletion, m any of t hese identified risks had materialized.

• The fragile political and security environment was a major risk factor which posed some uncertainties as to the government’s ability to stay on course during the post election period and over the medium term with regard to the broad legislative, policy and institutional reforms that were n ecessary f or s ustainability o f the p roject’s o utcomes. To p artially ad dress t his r isk, t he Bank had intensified dialogue with the government’s cabinet, and with senior management in line ministries, to c ontinue building up a nd broadening the ow nership of the r eforms a nd c apacity building programs supported by the project.

• The inability of implementing agencies to adequately recruit counterpart staff w ould continue to constitute a risk to the capacity building strategy. P rovision of substantive technical assistance m ay w eaken t he u rgency f or some agencies t o ag gressively r ecruit and fill k ey positions. The project would carefully monitor this and sequence packages of training and other capacity building initiatives with continuing progress in recruiting competent staff.

• Lack of clarity over functional responsibilities between different parties might i nhibit progress in a number of areas and create overlap and confusion. This was potentially a problem between I nternal A udit and E xternal Audit a nd between t he A ccounting a nd T reasury departments within the MOF. T he Bank planned to organize a series workshops to disseminate

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international e xperiences, and d evelop consensus o n w hat w ould b e the m ost effective and sensible options for Afghanistan.

2.2 Implementation

Restructuring. As no ted, a pr oject restructuring w as c ompleted in F ebruary 2007 t o adjust t he project development objective to reflect the full original intent of the Government of Afghanistan (GOA) and donors, to both assure a high level of integrity in the management of public sector resources, and to build capacity.

Midterm Review. The Bank conducted a Midterm Review (MTR) in October 2006. The objective of t he M TR w as t o review t he ov erall project i mplementation s tatus a nd the advance t oward development ob jectives. Specifically t he MTR r eported on c ompliance w ith legal covenants, monitored the p rogress o f implementation t o da te, and assessed the pr ospects for successful completion.

Factors outside the control of government or implementation agency

The p roject f aced pr oblems due t o t he s ecurity s ituation i n the c ountry, w hich i nhibited consultants (firms and individuals) from taking an active part in supervision and had also stalled for some time the implementation of the procurement capacity building and reform component.

Factors subject to the control of government or implementation agency

Positive: The i nterest and c ommitment on t he pa rt of t he g overnment for a modern l egal framework was a favorable factor in the project implementation.

Negative: (i) The administrative departments of the ministries had not followed through with the reform and merit based recruitment foreseen under the PRR. Similarly, key civil service positions in t he Treasury Department were unfilled for a long t ime and so it was obliged t o continue to depend on local consultants as counterparts for the Treasury Advisor.

(ii) A major challenge was the extremely low capacity of the Afghanistan Civil Service existing at t he time, w ith s taff t hat lacked a dequate skills and w ere poorly paid. This also necessitated running the project through three PIUs comprising local staff on c ontract terms, better paid, but unfamiliar with both the Bank procedures and the reform agenda.

(iii) I nadequate overall pr oject c oordination within g overnment due t o f ragmented implementation a rrangements spread over three i mplementing a gencies and the a bsence of a single agency with the skills and mandate for coordination.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization

M&E design. Monitoring and evaluation w as based on a s et o f specific a nd m onitorable legislative, policy, institutional and human resource development actions (monitoring indicators) that were critical for achieving the project objectives and were clearly linked to results. Specific benchmarks were agreed between the government and technical assistance providers early on in implementation so a s t o m easure s pecific pr ogress i n meeting c apacity bui lding obj ectives. Baseline da ta, as t o be e xpected in a p ost-conflict country, w ere how ever non-existent. A t t he time of pr oject restructuring i n F ebruary 2007, t he onl y modification required i n t he output indicators for human development was to omit from the description the commitment of staff

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to t ake over t he ope ration of f inancial m anagement systems s ince t he or iginal t argets on H R related t o conversion of staff to PRR s tatus which was not a ffected by change in PDOs or t he scaling back in training.

Intensive supervision by the Bank during the first half of the project period was planned to ensure that a ny implementation i ssues were de alt w ith promptly. A t a minimum, a full s upervision mission was planned twice a year, comprising appropriate specialists from each of the component areas. The M OF h ad t he pr imary r esponsibility t o prepare and furnish to the B ank qua rterly progress report highlighting pr ogress i n unde rtaking t he a ctions r equired to a chieve pr oject development objectives.

M&E implementation. The Reform Implementation Management Units (RIMU’s) Monitoring and E valuation U nit ( MEU) ha d l ed the m onitoring a nd e valuation p rocess a nd e stablished a network of M&E focal point pe rsons i n e ach m ajor ope rating l ine uni t of t he m inistry. Implementation data w ere collected o n a regular b asis, and Annual P erformance R eports w ere prepared using a results-based M&E performance framework.

M&E utilization. Appropriate data collected from Annual Performance Reports was evaluated and used to inform decision-making on certain activities. For example, these data contributed to the design of the follow-on project, PFMRP.

2.4 Safeguard and Fiduciary Compliance

(focusing on issues and their resolution, as applicable) Safeguard Compliance. N/A Fiduciary Compliance. There were no significant deviations or waivers from the Bank’s fiduciary policies and procedures during the implementation of the project.

2.5 Post-completion Operation/Next Phase

(a) Transition arrangements. PFMR Project which became effective in July 2007, has ensured a smooth transition for continuing the project's future operation, which mainly consists of technical assistance from consultants.

(b) Monitoring and evaluation. The R IMU w ould incorporate the c urrent M &E U nit into its structure for the life of the PFMR Project to assure coherent results-focused project management. The M&EU now reports to the Deputy Minister of Administration and this arrangement would be re-instated a t t he e nd of the project. W ith t he M &EU staff, t he RIMU has i ntroduced a new monitoring methodology, including monitoring the achievement of annual benchmark results, in addition t o the m ore conventional m onitoring of the e xecution o f a ctivities t hat a re a greed in annual work programs.

(c) List of performance indicators. Indicators developed under PFMR Project will be monitored during its implementation. Some of the Indicators are the following:

• Coherence of budget, treasury and revenue estimates with Afghanistan National Development Strategy (ANDS) priorities and Mid Term Fiscal Framework (MTFF)

• Timeliness of budget, treasury and revenue preparation and execution • Level and perception of good governance in PFM operations • Number of ministries/agencies performing assigned treasury functions

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• Number of line ministries conducting stand alone procurement • Reliance on international technical assistance diminishing

(d) F uture I mpact Evaluation. I t w ill be important t o c onduct an impact e valuation after three years of project c losing in order to assess the sustainability of the project’s achievements. This evaluation could be done at the end of PFMRP.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation (to current country and global priorities, and Bank assistance strategy)

The o bjective i s c lear, r elevant, a nd i mportant to A fghanistan’s e conomic de velopment. I t is timely and a ppropriate t o t he c urrent ne eds of t he country's public a dministration s ector. T he project is also consistent with the Bank's assistance strategy for Afghanistan.

In order to strengthen the capability and sustainability of the PFM system, MOF and the CAO have recognized that it will have to address several organizational and capacity constraints such as:

• Incomplete re-organization of MOF. While a ll m ain d epartments w ithin MOF h ave undergone restructuring under the Priority Reform and Restructuring (PRR) program, the MOF would still require r estructuring of its r emaining f unctions to a ssure that all of i ts departments work as a n integrated w hole. I t i s a lso important t hat s taffing pl ans i n t erms of numbers, job descriptions, grade levels, and qualifications be finalized.

• Concentration of Responsibility. There are limits to the expansion of the internal capacity of the MOF to further expand the transaction-based system and remain responsive, accountable and efficient. Line ministries and agencies need to be involved in PFM to increase predictability and t imeliness of their op erations, a lbeit, in parallel w ith t heir c apacity t o meet a ccountability standards.

• Inadequate Human Resources Numbers, Capacity and Management. G overnment external auditing in Afghanistan, for example, is still dependent on external international advisors to pe rform f inancial statements audits and t o conduct any other audits to acceptable s tandards. There is no accounting profession in the country and training in certification related programs is just be coming a vailable and is g iven onl y i n E nglish w hich as s uch is not accessible for most CAO s taff. S everal r emedies, i ncluding of f-site training, a dequate g rading a nd pa y, e ffective recruiting and m anagement of c areers o f civil s ervants fo r t he lo nger t erm (in cluding p ension management), an d est ablishing sch emes of ser vice for k ey p rofessional c lasses a re i nterlinked factors an d r equire specialized m anagement c apacity t hat the MOF an d most other m inistries lack.

• Anti-corruption and Maintaining Accountability and Transparency while Reforming. The control e nvironment on which A fghanistan’s P FM f ormal c ontrols r est is undermined b y corruption in its various forms and manifestations. This is increasingly seen as one of the most important threats t o A fghanistan’s e ntire s tate-building a nd t o de livering public s ervices. T he GOA recognizes the critical importance of addressing corruption and the MOF is seeking advice on how to fight it.

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3.2 Achievement of Project Development Objectives Satisfactory. The pr oject was successful in a chieving i ts ob jective. The public financial management f unctions supported unde r t he pr oject performed s atisfactorily i n bot h a ttaining acceptable standards i n t he conduct o f pub lic f inancial m anagement and i n developing t he necessary r egulatory frameworks. For example, new budg et l aw a nd financial r egulations, procurement law and regulations, and audit law and regulations all have been promulgated and are under implementation. Outcomes, in terms of : (i) contracts being processed in line with the new pr ocurement l aws, a nd ( ii) m aintaining a dequate c ontrol a nd reliable reporting of budg et operations, have k ept up w ith t he s tandards s et und er t he two pr eceding e mergency f inancial management support operations (EPAP I and EPAP II).

Satisfactory progress had been made in strengthening internal and external audit work practices and capacity in the Internal Audit Department (IAD) of the MOF and the CAO respectively. In particular, there is progress in completing internal audits in the MOF, Ministry of Defense and Independent D irectorate o f L ocal G overnment (IDLG), a nd continued e nhancement t o t he timeliness and quality of the audited Qatia, together with the beginnings of demonstrated CAO capacity to conduct performance audits. S imilarly, both the IAD of the MOF and the CAO are placing diminishing r eliance on international t echnical assistance for ba sic o r routine audit matters. The details of the project’s achievements are as follows: (i) Strengthening Procurement Capacity within the Government

Procurement activities in Afghanistan Reconstruction a nd D evelopment Services (ARDS) have got w ell i nstitutionalized. The c ounterpart national P rocurement L iaison Officers (PLOs) associated with the international procurement specialists working in ARDS have been sufficiently trained in procurement by means of classroom training sessions as w ell as o n the job training. Functioning in ARDS now is comparable to any international standards. In its endeavor to ensure that t he a chievements g ained a re n ot only c ontinued i n future bu t a lso g ets further improved, ARDS has established a Quality Management System and obtained ISO 9001/2000 certification since November 2006, the first ever ISO certification in Afghanistan.

The constant interaction of ARDS with the line ministries in every step of procurement is helping the l ine ministries a lso i n getting their p rocurement a ctivities institutionalized though a t a relatively lower pace than that of ARDS.

Due t o enactment of P ublic Procurement L aw 2008 i n July 2008 and subsequent d iscussions leading t o i ts a mendments i n January, 2009, the Rules o f Procedure w ere a ligned w ith the amended l aw and similarly a ll Standard B idding D ocuments ( SBDs) w hether i ssued or under finalization were also being aligned with the amended law.

(a) Institutional Development. Seven m inistries a re c urrently c ompleting a pplications f or P RR status. A Joint Advisory Committee has been constituted to finalize the requirements of the line ministries for obtaining PRR s tatus. Draft procurement organization structure and draft ToR of various pos itions ha ve been pr epared. I nitial da ta g athering a nd r eporting t ask ha ve be en completed for Provincial Institutional Development for four provinces (Herat, Kunduz, Kandahar and Nangarhar).

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(b) Capacity Building. A bout 800 of ficials from 25 m inistries, four p rocuring e ntities (Civil Service Commission, Municipality, Cartography, President’s Office) and three provinces (Herat, Kunduz and Balkh) have completed training courses of d ifferent levels i .e. Basic, Intermediate and Advanced, and obtained certificates of attendance. 631 Trainees completed Basic course, 91˜trainees c ompleted I ntermediate c ourse a nd 78 a ttended ot her c ourse. The t rainings ha ve a lso covered private sector.

(c) Management Information System. MIS tools necessary to establish website were contracted; software and hardware items were received, assembled and installed. Configuration and setting activities w ere c ompleted. The w ebsite de sign a nd r equirements for c ontents have be en completed. E-reporting and E-monitoring formats are under finalization and development.

(d) Procurement Functions of Line Ministries /Procuring Entities. PPU recruited 24 Procurement Controllers f or l ine m inistries a nd one C oordinator ( Procurement C ontrollers) f or M inistry of Finance for one year under the PACB Project. The Procurement Controllers were allocated to the line m inistries an d t heir reporting an d evaluation formats were d esigned. T he objective i s t o facilitate procurement function for the line ministries in view of increase in threshold limits in the Public Procurement Law 2008 and need for strengthening procurement control function through feedback a nd r eporting m echanism t o M OF. R elevant instructions a bout pl acement of Procurement Controllers were also issued to line ministries. Monthly reports from Procurement Controllers are received and compiled reports are circulated.

(ii) Strengthening Financial Management Capacity

(a) Treasury Capacity Building. Majority of Treasury units a re now fully s taffed by PRR civil servants. Local consultants however are still managing some key units and more sophisticated operations – foreign c urrency account r econciliations, dono r liaison, I nformation Systems development, I nformation Technology S upport a nd o perations a nd pr eparation of monthly and annual financial statements - are still largely dependant on local consultants (technical assistance) with support of international consultants.

Treasury has now filled all but one of the 17 middle management positions which have allowed the FM Advisor (Bearing Point) to implement a new twinning arrangement to ensure skills are passed on to PRR staff. S imilarly, Treasury has initiated a program for i nterns i n FM for HQ, Moustoufiats and line ministries with the aim of providing qualified candidates to apply for civil services positions under the PRR. 49 interns have been hired to date.

(b) AFMIS Roll Out to Line Ministries and Mustofiats. AFMIS ha s be en rolled out t o 12 line ministries. Because system security continues to be a primary concern for all AFMIS users, each organization will only be able to access and enter data pertaining to their organization via proper coding in AFMIS.

To date eighteen provincial Mustofiats have been covered by AFMIS. The provincial Mustofiats exploit all the current functionality available in AFMIS, include check printing.

In pr eparation o f the r oll out of A FMIS, ba sic training in financial management ha s been delivered to l ine ministries budget un its’ s taff, M ustofiat’s staff and Treasury i nterns. The training pr ogram i ncluded t he i ntroduction t o Treasury ope rations, f inancial pl anning a nd commitment c ontrol, pa yment/disbursement pr ocedures, introduction t o A FMIS a nd t he new chart of accounts (CoA). Over 500 staff members were trained and additional training was given to staff members as the procedures for transaction processing and reporting are now streamlined.

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(c) Internship Program. In 2008, T reasury introduced an intern program recruiting high school graduates for performing basic data entry and calculations tasks and university graduates for more challenging a ccounting a nd reconciliation tasks. The i nterns s plit their day be tween w ork assignments w ithin T reasury a nd a ttending f ormal training c ourses. This ne w program should help address t he insufficient num bers of PRR s taff t hat are a vailable for t raining t o t ake ov er AFMIS from the contractor. The intern program is a pipeline for recruiting staff into Treasury; at present in HQ 40 have been recruited; 32 are planned for the line ministries but none in place, and 45 have been recruited against a plan of 101.

(d) Comprehensiveness and Transparency. Significant progress has been made in transparency and c omprehensiveness although s ome w eaknesses remain. The g overnment has de veloped a robust c lassification system w hich t o s ome e xtent facilitates t he t racking of e xpenditures o n organizational, e conomic and functional a nd p rogram ba sis ( e.g. I-ANDS), but t he Chart of Accounts ne eds to b e f urther d eveloped and amended s o as t o s upport a nd f acilitate pr ogram budgeting. The government is committed to share budgetary information transparently and the annual budget documentation has been improved in terms of quality and comprehensiveness. The extent of unreported government operations in terms of extra-budgetary funds appears very low and all donor funding to the core budget is included in fiscal reports.

(e) Policy Based Budgeting. Progress ha s been m ade i n p lanning and organizing t he annual budget process through more realism in the time planning as well as political guidance is needed to e nsure s trategic pr ioritization i n t he resource allocation process. The Cabinet completed t he inter-sectoral prioritization of the Afghanistan National Development Strategy (ANDS) which is planned to be fully integrated in the budget process beginning in 2009/10 (SY1388). The budget approval process of the National Assembly has been greatly improved. The 2008/09 budget was approved by the parliament before the start of the fiscal year.

The multi-year perspective of the budget process has been improved since 2005 with the linking of budget and na tional s trategy and the regular update of the Medium-Term F iscal Framework (MTFF) which is s lowly emerging as a budgeting f ramework through the estimation of budget ceilings. Debt sustainability analyses have been undertaken annually by the IMF and the Bank for the past three years, and the MOF needs to develop its capacity in this area.

(f) Predictability and Control in Budget Execution. Budget pr edictability has be en greatly improved bot h for r evenues a nd e xpenditures, w hile budg et control ha s room f or f urther improvement. On the revenue side, the income tax law (November 2005) provides clarity on tax liabilities a nd pr ocedures. O n the expenditure side, pr edictability of funds availability has improved t hrough better cash flow forecasts where t here ha s b een improved i nformation availability on actual cash balances and commitments which are reflected in the allotments.

(g) Accountability, Recording and Reporting. Reconciliation of ba nk a nd a dvance a ccounts i s regularly conducted a t least on a quarterly basis within four weeks after the end of t he month. The t reasury de partment has e stablished and implemented a procedure by w hich a dvances and suspense accounts are cleared at least annually. AFMIS enables the MOF to produce the monthly reports (which a re p ut on t he M inistry of F inance w ebsite) w ithin a m onth. A c onsolidated government statement is prepared annually with complete set of information. The statements are sent to the President’s office within six months of the fiscal year end.

(h) External Scrutiny and Audit. The Public Finance and Expenditure Management (PFEM) law was enacted in July 2005 and provides for comprehensive financial regulations including annual independent a udit and pub lic reporting. C urrently, over 50 pe rcent of expenditures a re a udited

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annually a nd r eports a re i ssued w ithin 12 m onths of y ear-end w ith s ignificant i ssues be ing identified.

(iii) Strengthening Internal Audit Capacity

Formation of Audit Committee: The PFEM Law provides for the Ministry of Finance to establish an internal audit administration and appoint auditors to audit the financial and accounting affairs of all State administrations. A high level Audit Committee has been established in the MOF as an apex body to f ormulate the policy, procedures and to r egulate the i nternal a udit activities performed by the IA Department. The committee has been effectively working for internal audit strategy formulation, approving t he annual activities plan, and providing necessary instructions and guidance t o implementing agencies over the recommendations i n t he audit r eport provided for the improvement in the financial management system.

Organization Structure of the IAD. A functional organization structure in the IA Department has been de veloped to cover the audit o f e ntire f inancial a nd the op erational activities o f MOF. Separate audit di rectorates f or R evenue a nd A sset A udit, Treasury and Budget Audit and Compliance, I nvestigation and S ystem A udit a re in place t o c arry out the i nternal audit i n an extensive and systematized way. Arrangements are still being finalized for appointing auditors to audit the financial and accounting affairs of other State administrations.

Basic Accounting & Auditing Training: Under t his pr ogram, B asic A ccounting & A uditing Training was conducted for a total of 365 a uditors from the MOF, IA Department, Control and Audit O ffice, M inistry of Defense, Ministry of Interior, I ndependent D irectorate o f L ocal Governance (IDLG), local commercial banks and other line ministries. Among the total auditors, 95 a uditors w ere involved f rom t he I A D epartment of the M OF itself. A uditors w ere a ble to obtain extensive knowledge in both accounting and auditing through classroom training.

On-the-Job Training (OJT) in Internal Auditing: In order to give practical audit exposure to the auditors who have received classroom training of Basic Accounting and Auditing, the OJT was organized f or 90 auditors of t he IA D epartment of the M OF. The O JT was c onducted for t he internal auditors under the close guidance of international experts in this field. The training has been considered as very much appropriate and practical to follow theoretical knowledge acquired in classroom t raining and t o a dopt the s tandard approach o f a uditing a s pe r the i nternational standards and the best practices in p lace. B y obt aining t raining, participants ha ve be come acquainted w ith the audit procedures generally followed i n o ther c ountries and acceptable t o donor communities.

Development of Internal Audit Manual and Handbook: To develop appropriate internal audit work practices, the IA Department with the technical assistance of internal audit experts and on the job trainers, has produced an Internal Audit Manual and Code of Ethics that conform with the guidelines issued by the Institute of Internal Auditors, Internal Audit Departmental Procedures, and Audit Standards and Regulations. A working handbook has been provided to the internal auditors to guide uniform audit procedures. Orientations on these manuals and procedures were provided to all IAD staff. Achievements in applying these work practices include the audit of 48 budgetary units of the GOA in accordance with the manual as part of the on the job training provided by international audit experts. Establishment of Fraud Investigation Unit: A Fraud Investigation Unit (FIU) is established and the basic training in the Fraud Investigation has been provided to 12 Internal Auditors of the IA

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Department by an UNDP advisor through the ACT project. Fraud Investigation Manual was also prepared and approved by the Audit Committee. Information Technology (IT) Audit. An IT audit unit has been established under the project financing in the IA Department of the MOF. An IT audit specialist has been hired for preparing an IT audit manual and providing training on IT audit to the IA staffs. So far, the IT audit manual has been prepared and the training has been conducted for the Afghanistan Financial Management Information System (AFMIS) audit. The training for the ASYCUDA1 audit is under process.

Implementing a Program of Audits. 15 pilot internal a udits ha ve be en c ompleted us ing procedures i n a ccordance with international standards f or IA, and further a udits are i n the execution ph ase s till under the g uidance o f the on-the-job trainers recruited under the pr oject. These a udits a re us ing modern r isk-based a pproaches i ncluded in t he I A manual. The reports covered important departments including the State Owned Enterprise Department, the Revenue Department, the Kabul M ustofiat, t he C ustoms D epartment, the Afghan N ational I nsurance Company, and various divisions of the MOF.

The audits us ed w ell-designed a udit t esting pr ograms w hich pr oduced s ignificant recommendations on improving internal controls. The audits identified deficiencies in following laid d own p rocedures a s well as si gnificant g aps in r esources and t he financial management processes, and demonstrated the substantial value of the program of internal audits in providing opportunities for improving the management of public expenditures. A n Audit Committee is in place t o e nsure p roper r esponses t o t he a udit recommendations and t he IA D epartment should report back to the Audit Committee in due course on the extent to which the reported deficiencies are corrected in the MOF to secure the continuing strong support of the very senior members of the Audit Committee for the program.

(iv) Strengthening External Audit Capacity within Government

PACBP ha s pr ovided real i mpetus to the institutional s trengthening of CAO. It has supported CAO to enhance its capacity and develop the organization as a Supreme Audit Institution (SAI) in carrying out its function as per the INTOSAI Auditing Standards.

Achievement of a s trongly pe rforming C AO w as e nabled institutionally by t he P ACBP A udit Advisor and audit agent helping technically with CAO staff work. Advice on legislative reform provided a pathway to an external audit capacity that would enable fully effective audit coverage of the GOA financial system after the legislation has been enacted and implemented.

The C AO ha d m ade pr ogress i n s hifting f rom a lmost exclusive us e of transactions-oriented compliance a udits, to m ore financial s tatement a ttest a udits a nd to p erformance a udits. I n addition; capacity building activities including comprehensive classroom and on-the-job training had been imparted to raise the quality of audits conducted by the CAO. Progress with respect to strengthening of the external audit capacity of the CAO is viewed as sa tisfactory, and activities planned for the duration of the project are such that the capacity building objectives with respect to this sub-component of the project will be achieved.

Project Audits T he f irm D eloittes of I ndia, pub lic a ccountants, p rovided d irect a ssistance a nd technical support in the audit of IDA and ARTF operations for the fiscal years 2005/06, 2006/07,

1 ASYCUDA is a computer software for customs management developed by UNCTAD

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2007/08. The audits were done to a high s tandard and were all accepted by the World Bank as fulfillment of the corresponding legal covenant. CAO staff grew in their participation of the work and the timeliness and assurance to the W orld B ank i mproved ov er the pr oject. S avings a rose since the services of Deloittes of India were procured for US$ 2.0 million against a budget of US$ 3.0 million. Also, the lack of activity on strengthening the accounting profession and support for the public accounts committee contributed another US$ 1.0 million of under-run.

Institutional and Capacity Development. Efforts of the advisors to assist with implementation of new audit procedures and to provide training in the new CAO audit functions have been highly satisfactory. O ver 4200 person da ys of t raining ha ve be en de livered in auditing, computer literacy and English language; a 3-week training on performance audit was delivered to Deputy AGs, directors, auditors and some internal auditors. In addition, in January 2009 a workshop on Procurement Audit was conducted to introduce audit directors, auditors and internal auditors to the Procurement Law that had recently been passed by the National Assembly. Commencing in June 2008 a new training approach was designed to provide a batch of 30 auditors with 3 months training full time in PCs, English and audit.

The strengthening of Public Accounts Committee (PAC) is still to be done and in fact there is no PAC. There is Budget & Finance Committee in the national Assembly that discusses the audit of state financial statements but other reports are not being discussed in the national assembly. The staff in CAO have been appointed through PRR and this process is over now.

Legal Framework: The new A udit Law has not be en l egislated till now a nd efforts a re be ing made f or i ts legislation in s hort time. T he dr aft l aw doe s not c ontain adequate pr ovisions t o establish an independent SAI. T his i s a serious implementation issue that requires high policy level attention on the part of the GOA on a priority basis.

(v) Other Institutional Strengthening and Capacity Building

Under the General Training for Mustofiats (Provincial Officers of the Treasury Dept.) Managers, 145 Mustofiat management staff completed one month residential course which comprised topics in financial management, human resource management, communications, budgeting, leadership, and pl anning. The s econd phase o f training started i n N ov 2008 f or 200 Mustofiats mid level managers. To the end of December 2008, two courses were completed and 42 staff were trained under the PACB Project.

Additionally, under the project a core group of 43 mid-management level MOF staff traveled to Malaysia and completed one year training on accounting, management, basic computer skills and English. ˜The staff are now back in assigned positions in MOF.

3.3 Efficiency

(Net Present Value/Economic Rate of Return, cost effectiveness, e.g., unit rate norms, least cost, and comparisons; and Financial Rate of Return)

N/A

3.4 Justification of Overall Outcome Rating (Combining relevance, achievement of PDOs, and efficiency)

Rating: Satisfactory

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Based on the discussion given in Sections 3.1 and 3.2, the overall outcome is rated as satisfactory.

3.5 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development N/A (b) Institutional Change/Strengthening

The pr oject resulted in a substantial institutional development i mpact in the a reas o f l egal framework, a long w ith the e nactment o f public pr ocurement law and public f inancial management law. For details see Section 3.2.

(c) Other Unintended Outcomes and Impacts (positive or negative)

Positive

• In the process of making an effective and transparent procurement system in ARDS, a very useful website has been developed with lots of features. All business opportunities are placed on w ebsite. This includes projects handled not only by t he ARDS but by the line m inistries d irectly also, i f t hey d esire so. B idders can download co mplete b id documents, amendments, pre-bid meeting minutes, bid opening minutes etc. directly from website. Registration of firms with ARDS is also done on line through this website.

• The local bidders are gradually getting knowledge/experience of requirements of bidding documents, pr eparation o f bids etc. a s a r esult, f requent use of v arious f eatures of t he ARDS website and also with the interactions with ARDS procurement professionals on various occasions such as bid opening sessions, pre-bid meetings etc.

• Treasury interns employed in line ministries support the success of Treasury as through their training they have a good understanding of Treasury requirements and procedures.

Negative

• It was intended that with the assistance of the project: (i) the IA Department of the MOF would be developed as sole authority to carry out the internal audits of the entire government agencies; and (ii) internal audit capacity would be strengthened to the expected level of performing the audit as per the international standards and the best practices. However, after the presidential order revoking the Article 61 of the Public Finance and Expenditure Management Law, the IA Department has now been confined to the auditing of financial activities under the MOF only. Consequently, the progress achieved in the internal audit work practices from the assistance of the project funding has not been able to apply in the audit of entire government agencies except the MOF.

• Reduced rollout to line departments for the reformed internal audit function – there

was strong support for the CAO from the Bank but the CAO exerted a continued control over auditors in line ministries and prevented the MOF internal auditors operating in line departments. This disruption to a highly promising roll-out of

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internal audit was partly caused by the MOF’s failure to fully consult the CAO during development of the internal audit sections of the new Finance Act, resulting in CAO’s fear of loss of function and resistance to the new arrangements. At the same time, there was substantial delay in legislating the new Audit Act and thereby not empowering the CAO properly.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops (Optional for Core ICR, required for ILI, details in annexes)

N/A

4. Assessment of Risk to Development Outcome

Rating: Significant

• Although there has been tremendous capacity bui lding of the na tional s taff working i n ARDS, P rocurement L iaison Officers (PLOs), with their qua lification and background, may not be fully c apable t o ha ndle all procurement i ssues independently a t present. Guidance of the international consultants will be required for some more years.

• Without the support of this project, the government may not pay the same salary to the PLOs w hich they are g etting now . This m ay r esult in many of them l eaving t he organization in search of better opportunities. This is due to lack of permanent cadre in the organization.

• Most of the line ministries also have not developed full capacity to handle procurement independently at present. Although there have been some capacity building in the field of procurement there, they are s till dependent on A RDS for majority of their procurement activities.

• Not having enough information technology (IT) capacity in order for the government to operate the s ystem, and not ha ving e nough t rained s taff in a ccounting a nd t reasury i n order to continue operating the system after the contractor leaves the project are two risk factors that need to be dealt with by the GOA.

• National Assembly does n ot ha ve P ublic A ccounts Committee nor is it proactive on discussing a udit issues. This limits the e ffectiveness of t he a udit function di rectly a nd makes t he CAO d irectionless t o so me extent a s they d o n ot r eceive any f eedback or guidance/instructions from the National Assembly.

• Independence for the CAO is required. I t will make it more effective and will establish its well defined role in the accountability framework. It will a lso eliminate the p resent friction between role of internal audit and external audit. The proposed draft audit law supported by the Bank s eeks to a chieve t he ob jective of i ndependence i n auditing function, whereas the current audit law is inadequate.

• The support in training program, study tour and procurement of goods/services to provide proper infrastructure m ust continue. B ut t he f ocus s hould s hift t o m ore s pecialized training i n m atters of a uditing a nd a ccounting, a nd t raining i n E nglish a nd I T m ust continue. T he staffs in CAO should ha ve t raining in current a ccounting s ystem in Afghanistan based on AFMIS.

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5. Assessment of Bank and Borrower Performance (relating to design, implementation and outcome issues)

5.1 Bank Performance

(a) Bank Performance in Ensuring Quality at Entry (i.e., performance through lending phase) Rating: Satisfactory.

The B ank’s pe rformance in t he identification, p reparation, a nd appraisal of the pr oject w as satisfactory. During preparation and appraisal, the Bank took into account the adequacy of project design an d al l major r elevant aspects, such as technical, financial, economic, an d institutional, including procurement and financial management.

During the appraisal, the Bank quickly assessed the changes in project’s risks and benefits from the data collected during EPAP-I and II preparation. Project preparation was carried out with an adequate number of specialists who provided the technical skill mix necessary to address sector concerns a nd a good project de sign. The B ank provided a dequate r esources i n terms of s taff weeks a nd dollar amount to ensure quality pr eparation and a ppraisal w ork. The p roject was consistent w ith the TSS and g overnment pr iorities in t he s ector at the time. T he B ank ha d a consistently good working relationship with the Borrower during preparation and appraisal.

(b) Quality of Supervision (including of fiduciary and safeguards policies) Rating: Satisfactory.

A Quality of Supervision A ssessment w as carried out i n A ugust 2006, by a QAG pa nel of reviewers for t he p roject. The Panel ra ted the o verall quality o f s upervision for t his p roject a s Moderately Satisfactory. Focus on D evelopment Effectiveness, Adequacy of Supervision Inputs and Processes, and the Candor and Quality of ISR were also all rated by the Panel as Moderately Satisfactory. S upervision of F iduciary/Safeguard A spects was a ssessed b y t he P anel to be Satisfactory.

QAG noted that: “ISRs factually report problems and progress in addressing them, but communications both by the TTL to Washington and to the client could have better identified and addressed the underlying issues (e.g., of sustainability).

Relationship with the borrower was good. Unusually for a post conflict country, bilateral donors do not seem to have cooperated well with the Bank on the PFM reform agenda, but rather p ursued t heir ow n pr ograms i n i solation (e.g., T TL m entioned d ifficulties o f coordinating with the Bank and DFID on budgetary procedures at the MOF).

In commenting on the panel's initial comments the TTL provided additional information on the d irect involvement of H Q managers i n addressing t he d elay i n the p assing t he procurement law, issues related to the Treasury Civil Service and delays with the Internal Audit Component. However, the Panel feels that big i ssues impacting on implementation and sustainability were still left out and not adequately considered, or discussed in the ISR, including: c ivil s ervice pay/grading i ncentives, i mpact of c ulture, and adequacy of t he supervision budget in a difficult environment.

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A larger supervision budget could have helped the TTL obtain more specialist inputs from HQ and the Region. There were delays in developing the M&E framework, due to weak GOA capacity and the non-existence of a pre-existing system. Furthermore, the emergency nature of the project meant that the full set of outcome and key performance indicators was not developed at the outset, and subsequently do not appear to have played a large role in supervision.”

The ICR team concurs with the above findings of QAG.

The Bank's performance during the implementation of the project was satisfactory. The task team prepared aide-memoires regularly and alerted the government and the implementing agencies to problems with project execution and facilitated remedies in a timely manner, in conformity with Bank procedures. The Implementation Status Reports (ISRs) realistically rated the performance of the project both i n t erms of achievement of development o bjectives a nd p roject implementation. The task team also monitored fiduciary compliances.

Bank’s procurement and financial management s taff worked with the staff of the implementing agencies to explain t he rules and procedures to be applied during project implementation, with regard to p rocurement of goods a nd w orks, a nd s election o f c onsultants, a ccounts and a udits, based on the Grant Agreement. The task team carried out a Mid-Term Review in October 2006, and a ssessed progress to date on all project components, t he implementation i ssues a nd the actions to be taken to ensure the successful completion of the project.

Having t he T TL on the g round in K abul w as strongly pos itive, given w eak implementation capacity and thus the need for Bank assistance in drawing up t he TOR for the legal, PFM, and procurement f rameworks, specifying capacity building a ctivities, and nu rsing t he government through the contracting process. There was considerable input f rom technical staff. The project also r eceived support i n addressing project i ssues f rom the Country Management Unit (CMU), the Quality Director, Regional Procurement Manager, and the Sector Manager.

(c) Justification of Rating for Overall Bank Performance Rating: Satisfactory.

Based on the Bank performance during lending phase and supervision as discussed above, overall Bank Performance is rated as Satisfactory.

5.2 Borrower Performance

(a) Government Performance Rating: Satisfactory.

The B orrower ha d s ubstantial i nvolvement i n de fining the pr oject's scope a nd i dentifying t he agencies and ministries where consultants would be located to best advantage. There were also strong champions in senior levels of government. Commitment on the part of the MOF was high. The government officials worked closely with the Bank's project team on a continual basis, and cooperated fully with the task team.

The government consistently demonstrated and maintained full commitment to the project and its objectives throughout t he i mplementation. The government s uccessfully e xecuted t he project. Examples of active implementation interventions are: (i) monitoring the operations of the agents and advisors; ( ii) coordinating knowledge t ransfer to local counterparts whenever possible; and

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(iii) m aking pr oject course c orrections w here warranted. The g overnment pr epared periodic monitoring r eports, communicated i ssues f reely a nd ope nly. G iven t he country c ontext in Afghanistan and the difficulties t o f ind qua lified staff, the government made e very e ffort t o comply with Bank covenants.

(b) Implementing Agency or Agencies Performance Rating: Satisfactory.

Project Management Committee (PMC). The performance of PMC (under MOF), which was established t o m onitor progress under v arious c omponents a nd ensure coordination, w as satisfactory.

Financial Management. Records of the project’s funds receipts and disbursements from inception until closure were maintained at the MOF, Special Disbursement Unit (SDU). Record of project’s disbursements w as a lso m aintained a t t he individual i mplementing e ntity’s o ffices. R ecords under PACBP, like other emergency projects in Afghanistan, were maintained manually a t the SDU f rom inception until March 2005 when the SDU s tarted using the AFMIS for all projects and l ine ministries’ f inancial transactions, w hich w as f inanced unde r t he pr oject. S upporting documents were maintained satisfactorily for all payments.

Funds flow to all implementing agencies was controlled centrally by the MOF (SDU). This had been managed appropriately s ince t he project began. A nnual audited financial s tatements w ere submitted regularly, though later than the mandated submission deadline. The audit opinion of the Control a nd A udit Office of A fghanistan w as unqualified for S Y 1384, qu alified w ith a n exception for SY1385. The SY1386 audit report became due on Sep 22, 2008; but was submitted only on June 30, 2009. The audit opinion was unqualified.

Given t hat t here w ere n o f inancial m anagement sy stems i n p lace w hen the project b ecame effective, one could conclude that FM capacity has been built steadily over the life of the project. A financial management review was done in June 2009, which included transaction review of the project’s expenditures up to the closing date June 30, 2009.

Procurement Arrangements. Procurement of a ll works, goods and technical services under the project followed t he Procurement G uidelines “Procurement under IBRD Loans and the IDA Credits”. Overall, after initial delays, procurement activities proceeded both at a satisfactory pace and at acceptable quality levels.

Reporting Arrangements. Financial reporting was poor initially: monthly and quarterly financial reports – including the mandatory financial monitoring reports to be submitted quarterly to the Bank – were not prepared regularly and also did not contain all required information. However financial r eporting improved c onsiderably ov er t ime. T he F MRs w ere pr epared a nd submitted regularly in the last two years.

Monitoring and evaluation of project progress and results were satisfactory. MOF. Three different departments in the Ministry of Finance implemented three components of the project and their performance was satisfactory. Treasury carried out Strengthening Financial Management which included:

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i) direct operations support for the day to day operation of the accounting and payments for then entire Government budget and the reporting and control of all World Bank and ARTF projects. Treasury showed great dedication, transparency and good judgment as it absorbed ever increasing resources under the budget in the project period (from US$ 965 in 2004/5 t o U S$ 1,978 i n 2007 /8). Treasury obtained good pe rformance from the FM consultant and produced good FM support to the entire government.

ii) the technical and professional training comprised a needs assessment which was carried out although training itself was limited.

iii) the F MIS S ystem S tudy was c arried out on-time a nd within budg et and p rovided k ey guidance to the entire government on systems development for financial management and contributed to the design of the PFMR project.

The Internal Audit Department carried out the Strengthening I nternal A udit C apacity a nd under t his c omponent t he MOF ne gotiated w ith the Bank a r edesign of t he component w hose inputs were major international technical assistance; MOF proposed and carried out a component with l ocal t raining i nputs which trained nearly 400 staff f rom across the g overnment i n ba sic accounting and auditing. The IA unit also restructured its own unit and carried out a merit based recruitment of 100 staff.

The last c omponent , ‘ Other I nstitutional S trengthening a nd C apacity Building’, included t he continued s upport t o m inistries w hich c ompleted the P riority R eform a nd Restructuring a nd another set of activities on capacity building which comprised a program for overseas training of 60 M OF m id-level s taff i n a one y ear bus iness c ourse a nd a one m onth r esidence c ourse f or moustoufiat staff.

ARDS. The performance of ARDS, which was responsible for the Procurement Component, was satisfactory. The level of staffing was adequate after some difficulties in the early stages of the project. The staff skills mix improved throughout the l ife of the project. As staff became more experienced, p rocurement of international c onsultants w as performed i n a s atisfactory manner. Additional t raining and t echnical support w ere provided to s trengthen t he p rocurement team. Time ex tensions w ere requested on a n e xceptional b asis t o e nsure c ontinuity o f essential government a dministrative s ervices while c ompetitive pr ocurements w ere be ing pr ocessed. ARDS surmounted difficulties of mobilizing international consultants under the firm which was awarded the contract in the face of terrorist attacks targeting Indian nationals in 2006. Moreover, performance of public procurement was exceptionally transparent over the project period despite a general rise in the perception of corruption in government and ARDS provide critical support to any non-security a reas of Government dur ing t he t ransition under the ne w public p rocurement law.

CAO. The CAO, was responsible for the External Audit Component, and i ts performance was satisfactory. T he e ntire e xternal ov ersight w ithin the government rested on t he C AO w hich carried out the procurement, mobilization and supervision of the audit advisor firm in a t imely and e ffective m anner. M oreover, C AO pr ovided t he c ritical s upport t o t he f irm, pe rformed t o standard under the firms instructions for t he audit of donor projects and additionally a dvanced with training on their staff albeit on an ad hoc basis.

(c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory.

In light of the performance of the government and implementing agencies as discussed above, the overall performance of the Borrower was satisfactory.

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6. Lessons Learned

Capacity Building

• Knowledge of bidding documents. Lack of proper knowledge of bidding documents among the d omestic b idders r estricted th eir a bility to s ubmit t he b ids in p roper f ormat a nd w ith requisite information/documents. In light of this shortcoming, it is necessary to improve their knowledge of bidding documents.

• Adequate command of English language is important among the staff in the line ministries. Currently, due t o lack of knowledge of English, t he a bility o f t he s taff t o understand the procurement d ocuments i s limited. T his cr eates d ifficulty i n cl earance o f d ocuments at various stages and affects both quality and timely output of line ministries.

• Continuation of OJT to follow the Manuals and Handbook. Lack of practical exposures as needed to use manual and handbooks in auditing have resulted the internal audit staffs still facing the practical problems in the exact conversion of such standards into practice. Considering these realities, further extensive programs in the OJT is desirable to impart the practical knowledge of performing highest standard of auditing in both revenue and expenditures s ide o f the government f inancial system unde r c lose guidance of t he international experts.

• Civil Service capacity development r equires s trong leadership. Motivation to build capacity becomes l imited when c onsultants are performing f unctions i n t he absence of civil servants. Consulting firms offer limited career path to local staff, which exacerbates this problem.

Sustainability

• Sustainability and Consolidation of Achievement. Sustainability a nd c onsolidation of achievement in the project is very important. A strategy for retaining the local talent of trainers, MIS personnel and Procurement Capacity Building Officers developed under the project has to be formulated so that the capacity building and institutional strengthening process c ontinues und er aegis of P PU, w ithout losing t alent on w hich s ubstantial investments have been made by the project.

Likewise, in order to sustain the achievement in the internal audit work practices in the long run, some focal points in the various areas of internal auditing have to be developed within pe riod of s ervices of i nternational audit e xperts. These focal p oints s hould be utilized in providing necessary guidance to other junior and newly recruited auditors for sustaining the achievements.

Staffing

• Permanent cadre of personnel in the line ministries i s es sential, as l ack of co ntinuity o f personnel adversely affects retention of knowledge.

• Staff retention. Measures should be taken for retaining staff, especially those who have been trained. Currently staff retention is a problem as many of those who have received

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training are highly sought after outside the government, and leave when they get better career opportunities.

Implementation

• Pace of Implementation. It is necessary to have patience when dealing with a project such as PACBP in the current situation in Afghanistan. The project must move at a pace that the g overnment can a bsorb the m any ne w concepts a nd c hanges i nvolved under the project. In addition, the implementation of such as project needs to have close oversight, and s ufficient r esources. For e xample, s upervision budgets m ust be sufficient f or the TTL to bring in expertise from Washington or field offices, as required.

• Consultation with stakeholders. Any decision on legal framework should be taken after consultation with all major s takeholders as the Procurement Law, 2008 was enacted in July 2008 without consulting major donor and that resulted in to delays and amendments to the Law.

Audit

• Performance of the Fraud Investigation Unit. This Unit cannot be made functional until some powers are given through drafting of regulations for the unit. In order to achieve good governance, not only the development of the manual and its orientation are enough, but also a c lear cut mandate for the investigation by t he unit, a full set of professional staff along with the availability of necessary equipment, proper coordination between the MOF departments and the cooperation from the higher authority are essential.

• Legal Framework. Audit a nd f inancial management powers r ely on strong integrated legislative bases to work well. The PACBP included p lans for better legislation but did not c ontrol the legal d rafting de velopment pr ocesses. L egislation d evelopments were assisted by consultative processes that included all relevant players. R elated legislation such as finance and audit could best be pushed through together if possible. To overcome the institutional r ivalries a nd r esistances, development pa rtner mediation a nd support should be heavily e mphasized a nd institutional rigidities de alt w ith as best as possible within the practicalities of the other factors at play.

• Delays i n implementing ne cessary l aws a nd r elationships h ave i nhibited p rogress. The new a udit l aw t hat w ill e stablish the CAO as an i ndependent e xternal auditor must be enacted to support the efforts for capacity de velopment of e xternal a udit. A n active Public Accounts Committee is needed and the National Assembly should become more involved in di scussing a udit i ssues and m aking t he P AC ope rational. T hese developments are e ssential f or t he e xternal a udit a nd r eview functions of the CAO t o reach those of comparable SAIs. Regional cooperation in capacity development including with t he SAI of India is b ecoming s ustainable a nd will support implementation of t he new laws and review processes once they are enabled.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners

(a) Borrower/implementing agencies

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The Borrower’s r eport b rought up i n t he l essons l earned t he ne ed f or a benchmarking mechanism t o f ollow and e ncourage t he t ransfer of know ledge a nd s kills f rom international a dvisors t o l ocal s taff. T he B ank agrees w ith t his ne ed a nd t he P FMR project committed to reduce international advisors over the life of the project. Related to this, the Borrower also made the point there was s till a need for technical assistance in PFM and the c ivil s ervice could not r ecruit s taff with t he r equisite skills t o absorb the capacity bui lding e fforts. T his s ituation w as s imilarly a ddressed i n t he P FMR w here bonus payments are being introduced for civil service who perform to a high standard and absorb the duties of advisors.

(b) Co-financiers

N/A

(c) Other partners and stakeholders

N/A

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Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent)

Components Appraisal Estimate

(US$ million)

Actual /Latest Estimate

(US$ million)

Percentage of Appraisal

Strengthening Procurement Capacity

9.00 8.45

Strengthening Financial Management Capacity

8.00 13.62

Strengthening Internal Audit Capacity

4.00 1.87

Strengthening External Audit Capacity and the General Audit Environment

4.50 2.48

Other Institutional strengthening and training

1.50 0.98

Total Baseline Cost 27.00 27.40

Physical Contingencies Price Contingencies

Total Project Costs 27.00 27.40

Project Preparation Facility (PPF)

Front-end fee (IBRD only)

Total Financing Required

27.00 27.40

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(a) Co-financing

(The appraisal estimate will be pre-populated from the Financing data in SAP/AUS; Percentage of Appraisal column will be calculated by the system)

Source of Funds Type of

Financing

Appraisal Estimate

(US$ million)

Actual/Latest Estimate

(US$ million)

Percentage of Appraisal

[Government]

[IBRD/THE BANK]

27.00 27.40

[Donor A] [WB-administered TF]

[Donor B] [Parallel financing]

Annex 2. Outputs by Component Component 1. Strengthening Procurement Capacity

• Procurement Law was enacted. • Rules of Procedures were developed, approved within the Ministry on April, 2007. • Transaction of Business Rules for Special Procurement Commission was approved and

adopted in MoF on March, 2007. • SBD f or G oods a nd all its 12 s tandard f orms w ere t ranslated a nd of ficially i ssued;

Glossary f or A fghan P ublic P rocurement w as p repared in t hree di fferent versions (English to Dari, Dari to English and only Dari) and officially issued.

• 21 guidelines/ c irculars issued for preparation of procurement plan, procedure for open tendering etc. The new Procurement Law, 2008 enacted in July 2008 (and its subsequent amendment made in January 2009) needed alignment of all the drafted SBDs which are getting finalized.

• PPU e stablished a nd op erating unde r a dvisors since A ugust, 2007 . I nstitutional Development report for the PPU is under finalization.

• A total of 640 staff from 25 ministries, private s ectors a nd o thers like C ivil Service Commission, M unicipality, C artography, & s taff from 3 pr ovinces including Herat, Kunduz a nd B alkh t ook pa rt in B asic, I ntermediate a nd A dvanced t raining be ing conducted by CKP/PPU and obtained certificates of attendance.

• A Joint A dvisory Committee consisting of P PU, I ARCSC and l ine ministries representatives are finalizing the organizational structure and ToRs of the positions. The Institutional Development report for 7 ministries is at the advanced stage of finalization.

• 100%, all cases by ARDS are handled through competitive bidding procedure as required by Procurement Law.

• Monitoring by PPU to commence after MIS implementation. Website design completed and requisite hardware and software are in place. E-reporting and E-monitoring formats are under final stage of development.

• Publication of opportunity is done 100% on website and also in newspapers by ARDS.

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Outcome of publ ic contracts i s about 95%. Website and MIS being developed for PPU will p rovide f or r egular publ ication o f bi dding oppor tunities a nd de tails of a warded contracts by Procuring entities on the website.

Component II. Strengthening Financial Management Capacity

• The Financial regulations have been completed and promulgated • AFMIS Systems Study was completed in June 2006. Immediate software enhancements

recommended by t he study w ere i mplemented by t he end of A ug 2006. The study implementation of t he r ollout pl an r esulted in e xtending A FMIS t o 12 pr ovincial Mustofiats and 12 line ministries by the end of Dec 2008.

• An Accounting Manual prepared by the FM Consultant was delivered to the Treasury in Dec 2006.

• The draft A FMIS Countrywide Time bound R ollout P lan w as approved i n S eptember 2006.

• AFMIS ha s been rolled ou t t o t welve line ministries at t he level of the P hase 1-Temp Save. Twelve provincial Mustofiats have a lso been covered by AFMIS. The provincial Mustofiats exploit a ll the c urrent functionality a vailable in A FMIS, i nclude cheque printing.

• Filling of PRR vacancies have been concluded in 15 provinces with a plan to initiate the process in 7 M ustofiats in the first half of 1388. All Financial Controller positions have undergone PRR.

• 40 trainees have been recruited and are undergoing On the Job training in the Treasury Department.

• The C ash Management C ommittee, e stablished in FY 2007/ 08, h as m et regularly on monthly ba sis for r esolving c ash m anagement issues a nd f or s haring i nformation. Monthly c ash position a nd forecasts are be ing pr epared a nd t abled a t t he C ommittee. PRR employees of the Cash Management Unit have been assigned responsibility for sub-tasks required for preparing cash projections.

• The Treasury m anages f und requirements f or bu dget execution in provinces by transferring funds on monthly basis using allotments and cash projections as basis.

• Software for generating pa yrolls h as be en e stablished in 42 accounting of fices a t t he centre. Pilot implementation of the pa yroll system w ill be undertaken in 2 p rovincial Mustofiats during first quarter of FY 2009/10.

• Coverage of government employees under the Verified Payroll Plan exceeds 113,000 as at the end of December 2008.

• Monthly reconciliations of budget execution has been established, both for the operating and development budgets.

• Audited Q atia statements for F Y 20 06/07 and 2007 /08 ha ve b een s ubmitted annually within six months from the end of each fiscal year.

• Procedures are in place for monthly reconciliation of TSA accounts and Special Accounts under the Development Budget, within 25-30 days from the end of each month.

• Monthly reports are posted on the dedicated treasury website within 28 days from end of each month.

• All transactions of the period posted within the month of expenditure. • Audited Core Budget Financial Statements were submitted to Parliament on time for FY

2006/07 and 2007/08.

Component III. Strengthening Internal Audit Capacity

• Internal Audit has been re-organized first under PRR and then under Pay and Grading. As per the approved PFEM Law, the new structure has 127 posts and most staffed under the

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the Priority Reform and Restructing. Pay and Grading implementation will also start in FY 2009/10.

• A total of 365 government staff were trained in basic accounting and audit, of whom 92 belonged to MoF IA Dept and 32 to other MoF Departments and the rest 241 related to the C AO, Ministry of D efense, M inistry of I nterior, other line m inistries, Independent Offices of the Government and officials of the local commercial banks . Out of the 365 staff, 158 of them were trained in FY 1385/FY 1386 and 207 of them were trained in FY 2008/09.

• The I nternal A udit D epartment ( IAD) dr afted a new IA M anual ba sed on IIA standards and this was a pproved by t he A udit C ommittee o n 16 March 2008. To e nd of 1387, 39 provincial and 60 central government budgetary units were audited under the guidance of international c onsultants w orking a s on -the-job trainers, and recommendations were s ent t o m ost uni ts. The I AD e xceeded its a nnual target by 48% a s 67 audits were planned a nd 99 c onducted. However, the IAD c ould not conduct other pl anned a udits of non- MoF budg etary uni ts due to a s uspension of t heir power provided by article 61 of the PFEM law.

Component IV. Strengthening External Audit Capacity and the General Audit Environment

• PFEM Law Article 59 includes provision for independent audit certification of the annual accounts. A dr aft A udit L aw c overing t he ope ration of t he C ontrol a nd Audit O ffice provides for the CAO to operate in accordance with international standards i s with the MoJ, bu t a revised text o f t he draft is a lso being e xamined by t he C AO t o a djust references to timing of audits and relation to internal audit.

• Draft law based on international standards that are suitable to the CAO is with the MoJ. CAO i s also w orking t o make some amendments w hich have been suggested by t he World Bank after Midterm Review.

• The audit manual for the CAO has been completed by Deloittes of India and a workshop for staff to launch was held early 2008.

• All audit posts in the CAO have gone through the PRR process. • English and IT teachers have been engaged to take over from the teachers provided under

the Deloitte contract. IT teacher commenced in October 2007 and English teacher in Jan 2008. CAO now has the first of 4 groups of 30 students started in 3 month full time study in English, IT and audit methods (120 over 12 months). SAI of India contracted to send trainers later in 2008 for class room and for on t he job training to satisfy the 1387 HR training plan requirements.

• . Unfortunately, due to some procedural problem it could not materialize. CAO may have such a rrangements i n 1388. T he qu arterly t raining pr ogram is s till g oing on and w ill continue t ill 2nd qua rter of 138 8. A udits of t he ARTF ( RC) a nd 31 d evelopment grant/credit audits in FY 2007/08 were conducted using international standards; these are over due and behind schedule.

• Audit o f the s tate b udget s tatement ( Qatia) w as d one f or F Y 200 5/06 on time a nd presented t o Parliament. The audit review w as n ot done t o international a uditing standards and no concrete assurance by way of an audit opinion certificate was provided. The a udit of t he F Y 2006/07 statement w as on time and for the first time included an audit op inion certificate. This was a po sitive o pinion for b oth t he D evelopment a nd Ordinary Budget Qatias. Audit of FY 2007/08 state budget statement was also carried out in time and there was an improvement in the quality of the report though there is still a gap to meet international auditing standards.

• The FY 2007/08 state budget statement audit has been responded to in full by MoF. MoF

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agreed with all the observations made by CAO. • Audit report on FY 2005/06, 2006/07 and 2007/08 state budget sent to Parliament. PAC

has been formed but is not operative. The Auditor General has met with chair and offered to b rief the C ommittee on 1385 management letter issues when i t i s functional. Nonetheless, B udget a nd Finance C ommittee had d iscussions w ith MoF and CAO on 1386 audit report.

Component V. Other Institutional strengthening and training • A core g roup o f 43 y oung, mid – management l evel MOF staff completed one y ear

training on Accounting, Management, Computer and English through Overseas Training Project in Malaysia. ˜

• Under the G eneral Training f or M ustofiats M anagers ( GTMM), 145 Mustofiats’ managers from all Mustofiats c ompleted one m onth r esidential course in F inancial Management, H RM, C ommunications, B udgeting, Q uality C ontrol, Q uality A ssurance, Leadership, and Planning.

• The second phase of GTMM started in Nov 2008 for 200 Mustofiats mid level managers. Till end Dec 2008, 2 courses were completed and 42 staff were trained under PACB. The course is ongoing and will be completed in 2009 under PFMR.

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Annex 3. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Names Title Unit Responsibility/ Specialty

Lending

Anne Tully Task Manager SASPR Public Administration Reform

Douglas I. Graham Consultant OPCFM Financial Management

Stephane Guimbert Senior Economist EASPR Public Expenditure Management

Shawkat M.Q. Hasan Senior Procurement Specialist AFTPC Public Procurement

Supervision/ICR

Paul Sisk Task Manager SARFM Public Expenditure Management

Manoj Agrawal Consultant SARFM Project Financial Management

Wazhma Azamyar Team Assistant SACAF Logistics Support

Robert W. Crown Consultant EASPR Public Administrative Reform

Deepal Fernando Senior Procurement Specialist SARPS Bank Procurement

Stephane Guimbert Senior Economist EASPR Public Expenditure Management

Shawkat M.Q. Hasan Senior Procurement Specialist AFTPC Public Procurement

Ali Hashim Consultant SASDA Systems Development

Michael John Jacobs Consultant SARFM Public Auditing

Kenneth O. Okpara Sr. Financial Management Specialist SARFM Project Financial Management

Ronald Points Consultant EASPR Public Accounting and Treasury Operations

Donna Thompson Sr. Financial Management Specialist CTRLP Project Financial Management

Peter-Armin Trepte Consultant OPCPR Public Procurement

(b) Staff Time and Cost

Staff Time and Cost (Bank Budget Only) Stage of Project Cycle

No. of staff weeks USD Thousands (including travel and consultant costs)

Lending FY05 15 135.22 FY06 1 7.55 FY07 0.00 FY08 0.00

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Total: 16 142.77 Supervision/ICR

FY05 6 17.91 FY06 17 66.84 FY07 16 69.34 FY08 8 69.61 FY09 6 0.00

Total: 53 223.70

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Annex 4. Stakeholder Workshop Report and Results Written comments on the ICR were requested and received as follows. Comments received from the International Monetary Fund The W B P ACB project has successfully allowed donor s t o i ncrease their c onfidence in channeling resources t hrough t he budget for budg et s upport and development p rojects. The project has helped transform the Treasury from a basic and technologically weak department to being able to manage and consolidate the transaction processing and payments functions of the government using the Afghanistan Financial Management Information System. The system has been s uccessfully expanded t o most pr ovinces a nd a ll line ministries. T he W B has pl ayed a critical role in these developments providing resources and expertise

The WB support has facilitated the build-up of expertise at the Treasury in transaction processing and basic accounting. However, building up specialist positions with higher skill requirements in the area of accounting and f inancial management (cash projections, debt management, IT) will require further efforts. Higher demands on the Treasury to expand the delivery of services and its functionality ha s r equired t he involvement of do nor f inanced consultants, w ithout m uch involvement of civil servants. In this connection, continued support will be needed for some years to ensure continuity in the operations of financial management systems.

Comments received from USAID Kabul Office Based on t he l imited M oF a ssessment c onducted by U SAID i n e arly 2004 (prior t o t he implementation of the Public Administration Capacity Building Project (PACBP), MoF’s systems were found to be adequate for purposes of managing USAID assistance. The most recent MoF assessment performed by USAID in July 2009 disclosed a marked improvement in the financial management capability of MoF in areas of budgeting, accounting and reporting. I nternal audit needs further strengthening a nd MoF’s r ole in t he i nternal audit o f o ther ministries n eed clarification.

No assessments ha ve be en done by U SAID on t he C AO unt il July 2009. O ur assessment disclosed that CAO needs further technical assistance in order to effectively carry out its mandate and fully comply with the audit requirements for USAID funds directly provided to the Afghan government. The lack of technical capability of civil servants and the inadequacy of equipment and facilities that would enable them to perform their jobs more effectively seem to be persistent weaknesses. I n the C AO, f or e xample, t he a uditors lack I T knowledge a nd a c omplete understanding of A FMIS to be able to conduct a thorough a udit of the system. Their English writing skills need to be improved so that they can prepare audit reports on their own. They do not have adequate working space and computers.

We believe that for the most part, the objectives of the PACBP were attained, as evidenced by the successful development of AFMIS and i ts roll-out to various ministries, and the passage of the Procurement Law and the PFEM law. However, as mentioned above, the CAO’s capability needs to be further strengthened.

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Comments received from UK DFID

Overall, the report was honest about both the successes and shortcomings of the project.

Legal framework The project delivered a marked improvement in the legal framework for PFM although t he A udit A ct is y et t o be e nacted a nd there were i nappropriate c hanges t o the Procurement Law in 2008.

AFMIS AFMIS roll-out is universally recognised as a success story.

Cash F low P lanning a nd Monitoring Good progress w as ac hieved s een; a lso t here is r ecent evidence of better collaboration between the budget department and treasury department on cash forecasting and management.

External Audit Some progress has been made here but more needs to be done to strengthen CAO independence a nd the q uality a nd r elevance of the work i t c arries out. M oreover, it r emains dependent on technical assistance to fulfill its remit.

Procurement The project delivered an a ppropriate l egal a nd regulatory f ramework for pu blic procurement and built capacity of staff to carry out procurement in line with the Law. Increased transparency on c ontracts awarded i s a lso a w elcome de velopment. W hether the pr ocurement process enshrined in Law is always followed in practice is less certain though.

Persistent Shortcomings The report could be improved if it better reflected some of the political challenges internal t o M oF sp ecifically so me o f t he se tbacks ca used b y t he A dministration Department’s relationship with the rest of t he MoF could have been brought out in the r eport. The report has a tendency to treat progress in each of the thematic areas in isolation when in fact there are strong linkages between progress (or lack of it) in one part of the system and others.

Recommendations Given t he a chievements that w ere obtained in building up s ustainable capacities in the Treasury Department and the Internal Audit Department, the World Bank should have considered a s pa rt o f the pr oject t o de velop case s tudies, w hich c ould be applied f or information pur poses vis-à-vis o ther projects an d d onors so as to replicate t he ap proaches and lessons learned, w hich appear particularly r elevant g iven t he general lack of su ccess in transferring skills and building up capacities in other MoF departments and in line ministries that are supported by donors.

The i nitiation of formalized a nd r egular coordination m eetings be tween the World Bank a nd DFID as well as b etween t he p roject teams within the Treasury Department a nd t he B udget Department to discuss relevant cross-cutting issues should have been undertaken (it is, however, noted that also DFID did not take any such initiative).

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Annex 5. Summary of Borrower’s ICR

Islamic Republic of Afghanistan

Ministry of F inance, Office o f the Deputy Minister for Administration/Reform Implementation and Management Unit

Public Administration Capacity Building Project

Borrower’s Evaluation Report, November, 3, 2009, Kabul Afghanistan

I. Operation’s Objective, Design, Implementation and Operational experience

As per the r equest of the Islamic Republic of Afghanistan, the Public Administration Capacity Building P roject was l aunched on 2 May 2005 to maintain and e xpand the progress already made under t he First and S econd E mergency P ublic A dministration P rojects (EPAP I a nd I I) which i s not only to c ontinue t o provide t echnical assistance f or operational support i n procurement, financial m anagement a nd a udit bu t a lso broaden the focus o n de veloping t he regulatory and institutional framework in these core fiduciary management areas, further systems development that is based on a full understanding of medium term requirements and the country’s implementation capacity and capacity building and training in the central agencies, line ministries and the provinces so that staff can maintain and operate systems independently and effectively.

Originally, the overall objective of the Project was to assist the authorities to develop the capacity to e ffectively m anage pu blic e xpenditures i n or der t o a chieve satisfactory and sustainable development out comes in A fghanistan. The Project w ill ha ve a particular e mphasis on enhancing the performance o f public sector p rocurement, financial m anagement a nd accountability systems.

However, after the midterm review carried out by the Bank (9-16 Oct 2006), it was proposed that the objective statement to be modified due to slow progress on civil service reform and the delay in c ontracting t he s ervices f or sk ills transfer as w ell as d ue t o t he fact t hat the st ated P roject objective did not include achieving the fiduciary outcomes which were well supported by Project activities and monitored by the indicators. The objective statement was, therefore, modified as below:

To enhance the performance of public sector procurement, financial management, and accountability systems which will contribute to a more effective, transparent and accountable state. This will be accomplished through operational support for treasury, internal audit and external audit, and procurement functions, the reform in the related regulatory framework and where feasible, capacity building.

The objective of the Project was well modified and defined and was addressing the main issue which is low performance particularly in the field of public procurement, financial management and audit in the government. It was mainly building upon the already progress made under EPAP I and II. The Project focused on enhancing public administration performance in fiduciary areas. The Project objective was based on the Ministry of Finance (MoF) needs, which is to move from emergency support under the previous projects to a more sustainable phase. The Project, indeed, helped bui ld c redibility of t he government with the donors and thanks t o i t, the amount of t he donor assistance through the core budget has increased significantly compared to past.

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To achieve t he a forementioned o bjective, the P roject was w ell d esigned and w as b asically focusing in the areas of public procurement, financial management and accountability system i.e. the internal and e xternal audit c apacity bu ilding a nd s ystem de velopment to m aintain the standards of fiduciary control. The Project had five components and was well set up t o directly address the mentioned areas. Through consultant services, the Project’s components provided the technical assistance for operational support in procurement, financial management and audit. As planned, the P roject was implemented by M oF, the A fghanistan R esearch and Development Services (ARDS) and the Control and Audit Office (CAO).

Both the Project’s objectives and design were very supportive of the MoF/government goals for an effective public finance management system. As MoF intends to establish an effective public finance m anagement system bot h a t c entral and provincial levels and sound expenditure management is a k ey p riority for MoF to e nsure fis cal sustainability, th e Project d irectly addressed this issue and enabled MoF to effectively manage public resources and bring reforms in the system.

The Project had five components as below:

Component 1: Strengthening Procurement Capacity within Government This component of the project provided technical advisory support, equipment, and training to the ARDS Procurement Unit and Procurement Policy Unit (PPU) in order to support line ministries with the direct procurement process and to undertake a procurement capacity bui lding program within l ine ministries so t hat t hey c an b e p rogressively a ccredited w ith i ncreased d elegated authority for procurement management within an agreed institutional and legal framework. T he component f ocused on capacity bui lding of the c entral m inistries/budgetary entities and the provinces. It e stablished t he Procurement P olicy U nit a nd s upported p romulgation and implementation of the new procurement law and regulations.

Component 2: Strengthening Financial Management Capacity within Government The financial management component provided technical assistance, equipment, and training to the MoF and through MoF to line ministries in the achievement of core financial management objectives including attaining efficiency in budget execution, fiscal reporting, accounting, and internal controls. Activities under this component included, comprehensive financial management information systems (FMIS) architecture study, further developing/upgrading of Afghanistan Financial Management Information System (AFMIS) to meet needs of the government, technical advisory support to the MoF and to line ministries to strengthen core MoF functions and managerial and professional development training in public sector financial management for MoF and line ministries staff.

Component 3: Strengthening Internal Audit Capacity within Government This component p rovided technical advisory s ervices, t raining, and e quipment t o s upport t he internal a udit f unction within G overnment w hich w ould h elp to improve publ ic s ector accountability a nd g overnance and s upport the establishment of sound f inancial management within the government. A program of professional and technical training for internal audit staff was a lso carried out. The component’s intervention became limited just to MoF internal audit due to suspension of the article # 61 of the PFEM Law.

Component 4: Strengthening External Audit Capacity within Government The e xternal a udit component p rovided t echnical a dvisory services, equipment, and training t o support the C AO i n s trengthening c apacity t o p rovide c omprehensive a uditing s ervices in accordance with the International O rganization o f S upreme A udit I nstitutions ( INTOSAI)

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auditing s tandards. Technical A ssistance w as provided to t he C AO i n o rder t o unde rtake core audit operations to acceptable international standards and to provide on- the-job training for staff in the CAO, develop professional accounting and audit capacity in the public and private sectors, develop the system f or scrutiny and response to audit reports i ncluding r esponses by i nvolved ministries and scrutiny by a Public Accounts Committee of the Parliament.

Component 5: Other Institutional Strengthening and Capacity Building The component provided support for the IARCSC in the management of the PAR program and supported MoF in capacity building t hrough ov erseas training pr ogram a nd with a general management training for Mustofiats. Additionally, the Reform Implementation Management Unit (RIMU) was established and made functional under the PACB project in March 2007.

II. Outcome of the Operation against Agreed Objectives:

The o bjective of t he P roject w as to e nhance t he performance of public s ector procurement, financial m anagement, and accountability systems which w ill c ontribute to a more effective, transparent and accountable state which would be accomplished through operational support for treasury, internal audit and external audit, and procurement functions, the reform in the related regulatory framework and where feasible, capacity building.

The P roject results w ere measured a gainst so me k ey i ndicators i n 7 key ar eas (Regulatory Framework, System Development, HR Capacity, Budget Execution, Accounting and Reporting, External Accountability, Audit and Scrutiny and Economy, Efficiency and Transparency in Public Procurement). Performance u nder e ach indicator w as satisfactory an d resulted in g reat improvement and positive impact on MoF performance enabling it to move towards attainment of its strategic goals and creating an enabling environment for the donor’s assistance to be channeled through government. The P roject t argeted the Procurement, F inancial Management a nd Accountability S ystem w hich are i ndispensible f or a sound and effective publ ic finance management system.

The revised legal framework for MoF operations developed under the Project enabled the MoF to move forward t oward ot her r eforms. F urther upgrading a nd de veloping of A FMIS a nd implementation of Verified Payroll Program (VPP) brought a lot of efficiency, effectiveness and control in the system. VPP has helped in payment of monthly salaries in a timely and transparent manner to legitimate employees of the government. The roll out of AFMIS to 18 pr ovinces and 45 m inistries/ budg etary entities as o f e nd of June 2009 ha s resulted i n capture o f financial information for a lmost 87% of t otal Operating Budget execution, resulting i n improved budget control, fund accountability and transparency of operations.

Concerning i nstitutional d evelopment a nd H R capacity building, PRR pr ocess has a lmost completed i n Treasury, Internal Audit a nd f or t he Audit P ositions i n CAO, which he lped i n institutional de velopment of these departments. C apacity bui lding i n the f ield of i nternal and external audit, procurement, and training for Mustofiat Managers have been of great value and importance. However, the suspension of the article no 61 of the PFEM Law limited the scope of internal audit only to MoF and the built capacity therein couldn’t be utilized and expanded the way it should have been done.

The operation support for the budget execution and accounting and reporting and external audit improved a great deal the expenditure management at MoF. Establishment of Cash Management Committee, preparation of monthly cash forecasts, preparation of monthly f inancial s tatements, conduct of m onthly r econciliation of the bu dget e xecution, a udit of the c ore budget f inancial

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statements and timely submission of it to the Parliament are good examples of progress in budget execution, accounting and reporting and external scrutiny.

Direct operation support for government procurement through ARDS and establishment of PPU to help promulgate and implement new procurement law and build the capacity of line ministries in procurement field for sustainability purpose are great s teps initiated under this Project. The detail of the performance under each indicator is as below.

1. Regulatory Framework

Indicators: New budget law and financial regulations promulgated and under implementation; new audit law and regulations promulgated and under implementation; New public procurement law and regulations promulgated and under implementation; Establishment of procurement policy unit at an appropriate hierarchy within government.

New Public F inance a nd Expenditure M anagement ( PFEM) Law 2005 a nd r egulations ha ve been completed and promulgated. Regarding new audit law, the PFEM Law Article # 59 includes provision for independent audit certification of the annual accounts. A draft Audit Law covering the o peration o f the C AO pr ovides f or t he C AO t o ope rate i n a ccordance w ith international standards is with the MoJ, but a revised text of the draft is also being examined by the CAO to adjust references to timing of audits and relation to internal audit.

About Procurement, Procurement Law was enacted 2005. Rules of Procedures were developed, approved within the Ministry i n A pril 200 7. Transaction of B usiness R ules f or S pecial Procurement Commission w as approved a nd adopted i n MoF on M arch 20 07. S BDs were developed and SBDs for Goods, RFQ Document were issued. The new Procurement Law 2008 enacted in July 2008 (and its subsequent amendment made in January 2009) needed alignment of all the drafted SBDs which are getting finalized.

PPU w as e stablished a nd has be en ope rating unde r advisors since A ugust, 20 07. I nstitutional Development report for the PPU is under finalization.

2. System Development:

Indicators: Key business processes identified and agreed for core financial management functions; Plan agreed for a phased implementation of a fully functional AFMIS throughout government; Specific policies, processes, systems and standards established for internal and external audit functions; Establishment of procurement functions and performance benchmarks in line ministries.

AFMIS Systems S tudy was completed i n June 2006. I mmediate s oftware e nhancements recommended by t he study w ere i mplemented by the e nd of Aug 2006. T he dr aft AFMIS Countrywide Time boun d R ollout P lan w as a pproved i n S eptember 2 006.The study implementation of the rollout plan resulted in extending AFMIS to 18 provincial mustofiats and 45 line ministries/budgetary entities by the end of June 2009. The provincial mustofiats exploit all the current functionality available in AFMIS, include cheque printing. Total checks issued from AFMIS have increased from approximately 53,000 in 1385 (2006) to 67,000 in 1386 (2007) and 130,000 in 13 87 (2008), primarily a s a result o f t he e xtension of AFMIS to l argest b udget executing provinces. An Accounting Manual prepared by the FM Consultant was delivered to the Treasury in Dec 2006.

Regarding e xternal a nd internal audit s ystem de velopment, dr aft l aw ba sed on i nternational standards t hat a re s uitable t o t he C AO i s w ith t he MoJ. C AO i s a lso w orking t o make s ome

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amendments w hich have been s uggested by t he World Bank a fter M idterm R eview. The audit manual for the CAO has been completed by Deloittes and a workshop for staff to launch was held early 2008. T he I nternal Audit D epartment ( IAD) drafted a ne w I A M anual ba sed on I IA standards w hich w as a pproved by t he A udit C ommittee du ring the meeting he ld on 16 March 2008. R egarding e stablishment of pr ocurement f unctions i n l ine m inistries, a J oint A dvisory Committee c onsisting of PPU, IARCSC and line m inistries representatives are f inalizing the organizational s tructure a nd T oRs of the pos itions. The Institutional D evelopment report for 7 ministries is at the advanced stage of finalization.

3. HR Capacity

Indicators: Sustained implementation of PRR in institutions responsible for core financial management functions; On the job training and professional training programs in place and designated to meet agreed capacity development milestones so that staff can take over the operation of function/system within defined period of time; Line ministry procurement staff trained and accredited according to agreed certification plan.

As of end of June 2009, the Treasury Department PRR process in the Headquarter has completed 95% and all F inancial C ontroller positions ha ve un dergone P RR. The pr ocess ha s also been accelerated in the Provinces. All audit posts in the CAO have gone through the PRR process. In the Internal Audit Department, the process has completed 85%.

Regarding the training, in the Treasury Department the initial training strategy was completed in March 20 06 in c onjunction w ith t he completion o f a Training N eeds A ssessment, a nd w as updated i n S eptember 200 7. A L ocal Training A dviser ha s c ompleted de livery of S tage One Management S kills C ourses. Mat erials f or S tage T wo M anagement S kills co urses h ave b een presented. 40 trainees have been recruited and are undergoing on the Job training in the Treasury Department.

In C OA, E nglish a nd IT teachers h ave be en engaged t o take ov er f rom t he t eachers p rovided under the Deloitte contract. IT teacher commenced in October 2007 and English teacher in Jan 2008. I n a ddition to the s tudents enrolled for C AT, CAO now ha s the f irst o f 4 g roups of 30 students s tarted in 3 month f ull time s tudy i n E nglish, I T a nd a udit m ethods ( 120 ov er 12 months). SAI of India contracted to send trainers later in 2008 for class room and for on the job training.

To build the capacity of the internal audit staff to conduct professional audits, MoF contracted Bakhtar University, earlier called Afghanistan International University of Management Sciences (AIUMS), on an SSS basis to provide class room training in basic accounting and auditing to 400 auditors of MoF, CAO and other line ministries in four cycles of training. The training started and the end of 1385 (Jan 2007) and completed in the month of Sunbula 1387 (Sep 2008). During this period, a total of 365 government staff were trained, of whom 92 belonged to MoF IA Dept and 32 to other MoF Depts and the rest 241 related to the CAO, Ministry of Defense, Ministry of Interior, other line ministries, Independent Offices of the Government and of ficials of the local commercial banks . O ut of t he 365 s taff, 158 of t hem w ere t rained i n 138 5 ( 2006) a nd 138 6 (2007) and 207 of them were trained in 1387(2008).

In t he f ield of p rocurement, a ll l ine m inistries ha ve be en a ssessed a nd i dentified and 6 local trainers were selected and Training of Trainers was completed. Since the inception of the training program in 1387 ( 2008), 1023 of ficials from 29 ministries/procuring e ntities and 5 pr ovinces (Herat, Kunduz, Balkh, Kandahar and Nangarhar) have completed the course of different levels i.e. Basic, Intermediate and Advanced in which 814 trainees completed Basic course, 119 t̃rainees completed Intermediate course and 90 attended other courses.

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Additionally, a core group of 43 young, mid – management l evel staff of MoF completed one year training on Accounting, Management, Computer and English through OTP Malaysia Project. ˜ Out of 43 trained staff, one of them didn’t return and 12 of them have left the MoF. Under G eneral Training f or Mustofiat M anagers (GTMM), 145 M ustofiats’ managers f rom a ll Mustofiats c ompleted on e m onth r esidential course in Financial M anagement, H RM, Communications, B udgeting, Q uality C ontrol, Q uality Assurance, Leadership, a nd P lanning. Totally 8 sessions were held and the training program started on 18 Feb 2007 and ended on 4 Dec 2007. The second phase of GTMM started in Nov 2008 for 200 mustofiats mid level managers. Till end June 2009, 162 staff of Mustofiats were trained.

4. Budget Execution. Effectiveness of cash flow planning, management and monitoring; evidence that budgeted resources reach spending units in a timely and transparent manner; effectiveness of internal controls; effectiveness of internal audit; effectiveness of payroll controls.

The C ash M anagement Committee, e stablished i n 1 386 ( 2007), has m et r egularly on m onthly basis for resolving cash management issues and for sharing information. Monthly cash position and forecasts a re b eing pr epared a nd tabled a t the Committee. P RR e mployees of the Cash Management U nit ha ve be en a ssigned r esponsibility for s ub-tasks r equired f or preparing c ash projections.

Execution rates in provinces are still significantly lower than for Central Ministries. The Treasury manages fund requirements for budget execution in provinces by transferring funds on m onthly basis using allotments and cash projections as basis.

About internal audit, t ill end of 1387 (March 2009), 99 entities including 39 pr ovincial and 60 central w ere audited und er t he g uidance of t he international consultants (on-the-job trainers). Recommendations were sent to most of the above mentioned audited offices. The IAD exceeded its a nnual t arget by 48 % a s 67 entities w ere p lanned and 99 w ere a udited. H owever, t he IAD could not succeed to conduct the audit of other government budgetary units due to the suspension of article # 61 of the PFEM Law.

Regarding e ffectiveness of payroll, software for generating payrolls has been e stablished i n 42 accounting offices at the centre. Pilot implementation of the payroll system will be undertaken in 2 provincial mustofiats du ring f irst quarter o f 1388 (2009). As of end of June 2009, V erified Payroll Program addresses payroll for 164,000 civil servants who receive their payments through direct deposit in their bank accounts.

5. Accounting and Reporting: Indicators: Timeliness and regularity of data reconciliation; timeliness, quality and dissemination of in-year budget execution reports; timeliness and quality of audited financial statements submitted to the legislature and donors.

Monthly r econciliations o f budg et e xecution has been e stablished, both f or the ope rating a nd development budgets. C ore Budget Audited Qatia statements for 1385 (2006) and 1386 (2007) have been submitted annually within six months from the end of each fiscal year to Parliament. Procedures are in place for monthly reconciliation of TSA accounts and Special Accounts under the Development Budget, within 25-30 days from the end of each month. Treasury has developed its w ebsite s ince the M oF s ite w as non operational for e xtended pe riods. M onthly r eports a re posted on the dedicated treasury website within 28 days f rom end of each month. The Special Disbursements U nit pr ocedures ha ve be en suitably modified t o e nable capturing of

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Development Budget transactions be fore t he pa yment instructions a re s ubmitted to t he ba nk. Thus, all pertaining transactions for a month are recorded in that month.

External Accountability, Audit and Scrutiny:

Indicators: The scope and nature of external audit; follow up audit reports by the executive or audited entity; legislative scrutiny of external audit reports.

Audits of t he A RTF R ecurrent C ost T rust Fund and 31 d evelopment g rant/credit audits in 1386 ( 2007) are c onducted us ing international s tandards; w hich w ere ov erdue a nd behind schedule.

Audit of the state budget statement (Qatia) was done for 1384 (2005) on time and presented to Parliament. The a udit r eview was not done to international a uditing standards and no concrete assurance by way of an audit opinion certificate was provided. The audit of the 1385 s tatement was on t ime and f or the first time included an audit op inion c ertificate. This was a pos itive opinion for both the Development and Ordinary Budget Qatias. Audit of 1386 (2007) state budget statement was also carried out in time and there was an improvement in the quality of the report though there is still a gap to meet international auditing standards.

The CAO has appointed an Advisor to the AG to examine the audit approach to the Qatia audit so that t he a udit for 1387 (2008) w ould be un dertaken us ing a more modern a pproach c loser t o international s tandards. The 1386 ( 2007) s tate budget s tatement audit has been responded to in full by MoF. MoF agreed with all the observations made by CAO. The 1386 (2007) audit report noted that audit guidance issues presented in previous years had not been attended to by the MoF. The 1385 (2006) report summarizes the main issues.

Public Account C ommittee ha s be en f ormed but i s not ope rative. A G ha s m et with c hair and offered t o brief the Committee on 1385 (2006) management l etter issues when it is f unctional. Nonetheless, Budget a nd Finance C ommittee h ad d iscussions w ith MoF and C AO on 1386 (2007) audit report.

Economy, Efficiency and Transparency: Indicators: Percentage of contracts subject to competitive bidding; absence of major delays in the processing and payment of contracts; comparability of prices paid by the public sector to pricing of items available in the market place; regular publication of opportunities and outcomes of public contracts.

By ARDS, a ll c ases a re ha ndled through c ompetitive bi dding procedure a s required by Procurement Law. Publication of opportunity is done 100% on w ebsite and also in newspapers. Publication of outcome of public contracts is about 95%. However, by PPU it is still pending and will be done after implementation of MIS and website and monitoring by PPU shall start after MIS implementation.

III. Borrower’s Own Performance, Emphasizing Lessons Learned

The Ministry of F inance through its office of the Deputy Minister for Administration provided full support t o implementation of the P roject. At initial stages a d hoc meetings of t he P roject were he ld, but later o n t he S teering C ommittee c haired by H E Deputy M inister for Administration was f ormed. The Steering C ommittee m eetings of t he P roject were, then, he ld regularly, which created synergy and kept the momentum. The Ministry of Finance did its best to ensure smooth running of the Project as the execution of it was important for many objectives of

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the Ministry Strategic Plan to be attained. The way the Project was managed both by the MoF and the B ank w as a l iving e xample of g ood governance, w hich ne eds t o b e considered in t he implementation of the other Technical Assistance Project in the Ministry.

The Reform Implementation and Management Unit provided secretariat support to the Steering Committee as well as handled the coordination, monitoring, finance and administration activities of the Project, which well contributed to the Project effectiveness.

Finally, as capacity building lies in the forefront of MoF agenda, effective management of such projects by the Borrower enables it to be self-reliant in the long run. This needs to be addressed through a benchmarking mechanism whereby the international consultants gradually transfer the required knowledge and skills to local staff and closely monitored by the respective department head.

IV. Performance of the Bank

The B ank pr ovided full support a nd a ssistance to i mplementation o f t he P roject. The B ank Supervision Mission took place annually and the midterm review of the Project was conducted and the r ecommendations of t he S upervision Missions were implemented which b rought improvements to the Project. Ad hoc supervisory visits by the Bank supported the Project team in carrying out their activities smoothly. T he Ministry of F inance highly appreciates the Bank support i n g eneral a nd t hat of M r. P aul E. S isk, t he T ask T eam Leader, i n pa rticular w hose effective a nd ou tstanding s upervision and support a nd technical i nputs contributed very positively to the Project’s effectiveness and thus on MoF performance enabling i t to achieve its goals.

V. Technical, Institutional, and Financial Sustainability of Activities Initiated under the Project after Project Closure

The Project activities now seems to be somehow sustainable pa rticularly in the Internal Audit Department as much capacity has been developed there and the Department is now able to carry out its activities with little technical assistance and external support. H owever, the activities in the f ield of f inancial m anagement, pr ocurement a nd e xternal a udit a re moving t owards sustainability and after t he Project c losure, s till t here is need for the external support f rom the Bank to follow on the tasks undertaken under this Project. The issue of being self-reliance and sustainable is now early to judge it upon the outcomes of this Project.

This i s mainly due t o s low administrative r eforms process i mplementation i n the government during the lifetime of the Project and capacity couldn’t be transferred the way it should have been done a s it needed a r e-structured and reformed de partment a s a prerequisite for t ransfer of the capacity. A lso, delay i n c ontracting s ervices for the s kills t ransfer f or i nternal audit a nd procurement hampered the pace of the capacity transfer, which even resulted in modification of the Project Objective as stated in the page # 2 of this report and diverted the main focus of the Project f rom capacity building t o enhancing f iduciary out comes through c ontracting s ervices. Secondly, the g overnment very l ow pay s ystem couldn’t help t o r etain the staff w ith higher capacity built under the Project and some of the government staff left the MoF during the Project lifetime.

Thirdly, the success and sustainability of the activities undertaken by this Project depends upon the performance of all budgetary entities in the related fields particularly in the field of financial management and procurement and taking into consideration the scope and time of this Project, it

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wasn’t possible to institutionally develop and build the capacity of all the budgetary/procuring entities.

For sure, there has been sustainable institutional development in the MoF. Restructured Internal Audit and Treasury Departments f illed with PRR s taff a re good examples of this. Nonetheless, given the vast scope of the activities under the Project, it, indeed, needs another project to follow on t he a ssistance pr ovided unde r t his P roject, which ha s a lready been tackled through t he initiative of the Bank under the Public Finance Management Reform Project.

The Project was undeniably a stepping stone and a success pace which enables whole the public finance management system to be self-reliant in the long run in coordination with other relevant TA Projects in the ministry.

Methodology

The Borrower’s Evaluation of the PACB Project included:

I. Review and examination of the below relevant documents:

• Project Document Technical Annex , 27 Dec 2004

• MTR Aide Memoire 7-9 Oct 2006

• Data Sheet for the Project Paper, 6 Dec 2006

• PACB and PFMR Aide Memoire 31st July 2008

• PACB Performance Monitoring Report 30 Dec 2008

II. Interview and Discussion with:

• Mr. Abdul Razique Samadi, Deputy Minister for Administration

• Mr. Mohammad Aqa, Treasury Director General

• Mr. Mohammad Naeem Dindar, Internal Audit Director General

• Mr. Sayed Murtaza, Head of Procurement Policy Unit

• Jamal Nasir, Project Coordinator, Internal Audit Department

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Annex 6. List of Supporting Documents

• Project Implementation Plan • Technical Annex for Afghanistan: Public Administration Capacity Building Project

(PACBP) dated December 27, 2004 (Report No: T764 1 -AF )

• Aide Memoires, Back-to-Office Reports, and Implementation Status Reports.

• Project Progress Reports.

• Borrower’s Evaluation Report dated November 3, 2009

*including electronic files