Country Assistance Program Evaluation Islamic Republic of Afghanistan

Independent Evaluation

Country Assistance Program Evaluation October 2012

Islamic Republic of Afghanistan

Reference Number: CAP:AFG 2012-13 Independent Evaluation: CE-28 NOTES

(i) In this report, "$" refers to US dollars. (ii) For an explanation of rating descriptions used in evaluation reports of the Asian Development Bank, see ADB. 2010. Revised Guidelines for the Preparation of Country Assistance Program Evaluations. Manila.

Director General V. Thomas, Independent Evaluation Department (IED) Director H. Hettige, Independent Evaluation Division 2, IED

Team leader T. Yokota, Senior Evaluation Specialist, IED Team members A. Brubaker, Evaluation Specialist, IED K. Hewitt, Evaluation Specialist, IED R. Vasudevan, Evaluation Specialist, IED J. Dimayuga, Senior Evaluation Officer, IED A. Morales, Evaluation Officer, IED O. Nuestro, Evaluation Officer, IED E. Li-Mancenido, Associate Evaluation Analyst, IED

The guidelines formally adopted by the Independent Evaluation Department on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. To the knowledge of the management of Independent Evaluation Department, there were no conflicts of interest of the persons preparing, reviewing, or approving this report.

In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, the Independent Evaluation Department does not intend to make any judgments as to the legal or other status of any territory or area. Abbreviations

ADB – Asian Development Bank ADF – Asian Development Fund AITF – Afghanistan Infrastructure Trust Fund ANDS – Afghanistan National Development Strategy ANR – agriculture and natural resources ARTF – Afghanistan Reconstruction Trust Fund CAPE – country assistance program evaluation CAREC – Central Asia Regional Economic Cooperation CPS – country partnership strategy CSO – Central Statistics Organization CSP – country strategy and program DABM – Da Afghanistan Breshna Moassassa DABS – Da Afghanistan Breshna Sherkat DFID – Department for International Development of the United Kingdom DMF – design and monitoring framework EIRR – economic internal rate of return FMPARP – Fiscal Management and Public Administration Reform Program GDP – gross domestic product IED – Independent Evaluation Department IMF – International Monetary Fund JFPR – Japan Fund for Poverty Reduction km – kilometer LARP – land acquisition and resettlement plan m – meter MDG – Millennium Development Goal MEW – Ministry of Energy and Water MFF – multitranche financing facility MOF – Ministry of Finance MPW – Ministry of Public Works NGO – nongovernment organization NPP – national priority program O&M – operation and maintenance PBA – performance-based allocation PCR – project completion report PIU – project implementation unit PSFMDP – Private Sector and Financial Market Development Program PSM – public sector management RRP – report and recommendation of the President TA – technical assistance TCR – technical assistance completion report UN – United Nations UNDP – United Nations Development Programme US – United States USAID – United States Agency for International Development

Contents

Preface v Acknowledgments vii Executive Summary ix Management Response xvii Chair’s Summary: Development Effectiveness Committee xxi Maps xxiii

Chapter 1: Introduction 1 A. Objectives 1 B. Scope and Approach 1

Chapter 2: Country Context 4 A. Background 4 B. Economic and Social Development Since 2001 5 C. New Challenges in the Post-Transition Period 11

Chapter 3: Country Strategies and Program 14 A. Government Strategy 14 B. ADB’s Country Strategies and Program 15 C. ADB Portfolio 16 D. Allocation of Funding from the Asian Development Fund 18 E. Afghanistan Infrastructure Trust Fund 20

Chapter 4: Design and Implementation of the Strategies and Program 22 A. ADB’s Role in the Extensive Foreign Support 22 B. A Decade of Operating in a Conflict-Affected Situation 32 C. Effects of Security Concerns and Inadequate Implementation Support 37

Chapter 5: Support for Capacity Development 42 A. Public Sector Managemet 42 B. Private Sector Development and Financial Sector 44

Chapter 6: Results and Sustainability 46 A. Three Infrastructure Sectors 46 B. Private Sector Development and Financial Sector 50 C. Capacity Development for Public Sector Management 50 D. Impacts 52 E. Sustainability 54

Chapter 7: Assessment 56 A. Assessment by Evaluation Criteria 56 B. Overall Rating 60

Chapter 8: Challenges, Lessons, and Recommendations 63 A. Security and the Kabul Process 63 B. Making Development Demand-Driven 64 C. Sustainability 65 D. Capacity Development and Governance 66 E. ADB Administration 66

Appendixes 1. Evaluation Framework 69 2. Afghanistan’s Opium Economy 71 3. Country Economic and Social Improvements and Millennium Development Goals 73 4. Summary of ADB's Country Partnership Strategies for Afghanistan 82 5. ADB Program Implementation and Portfolio 89 6. Summary of Transport Sector Assessment 100 7. Summary of Energy Sector Assessment 114 8. Summary of Agriculture and Natural Resources Sector Assessment 125 9. Summary of Public Sector Management Assessment 135 10. Summary of Private Sector Development and Financial Sector Assessment 154 11. Summary of Resettlement Assessment 171 12. ADB and Government Performance 189

Preface

In 2002, the transitional government of Afghanistan, supported by the international community, established priorities and implemented some important early measures laying the foundations for economic stability, resumption of growth, and provision of social services. The Asian Development Bank (ADB) assumed a key role in the international community’s efforts to plan for and help in the reconstruction. With the significant support of the international community, starting from the very basics, Afghanistan achieved some progress. But the gaps are crucial and the challenges daunting. This first country assistance program evaluation report for Afghanistan provides an independent assessment of ADB’s strategy and program in Afghanistan covering the period from ADB’s reengagement with the country in 2002 through 2011. During this period, support approved by ADB totaled $2,732 million, 65% of which came from grants. ADB’s operations in Afghanistan have continued under highly uncertain, extremely difficult, and risky conditions with the continued dedication and hard work of staff. Initial years called for an emergency approach for infrastructure provision, and ADB responded to this urgency. Situations of emergency call for quick actions. Equally important, they stress the need for protocols and quality standards in order to ensure effectiveness and sustainability of outcomes. The 750-kilometer network of improved roads, rehabilitated with support from ADB, allows travel in less time. Four airports are functional, providing access to remote parts of the country. ADB-supported transmission lines have improved power supplies to Kabul, where electricity is available almost around the clock in 2012 compared with about 4 hours a day in 2002. ADB has also contributed to financial reforms and the emergence of the private sector. At the same time, several important program outcomes have yet to be realized, particularly in the vital areas of agriculture and natural resources, attributable to implementation weaknesses, inter alia, because of the security situation. Capacity development efforts call for substantial improvement, human resources need strengthening, and institutional reforms require careful support. While there were achievements in supporting gender equality, a much stronger and sustained approach is needed. Monitoring of outcomes has been weak; ADB must set concrete, achievable targets and ensure systematic and regular monitoring. The evaluation finds the crucial need for continued support from the international community, including ADB. This, however, must be accompanied by far stronger action on capacity development and reforms to improve development effectiveness. The evaluation recommends that ADB acknowledge the conflict more clearly and set the next country partnership strategy period for 3 years or less. In responding to country demands, it calls for an effort to link development efforts across sectors and partners. It asks for a greater stress on the sustainability of interventions supporting reforms and fiscal implementation, and on capacity development and governance improvements tailored to the country’s unique circumstances. It also suggests a strengthening of the operational capacity of the resident mission and of the management procedures of the Afghanistan Infrastructure Trust Fund.

Vinod Thomas Director General Independent Evaluation

Acknowledgments

This country assistance program evaluation (CAPE) report for Afghanistan was prepared in 2012 by a team led by Toshiyuki Yokota, Senior Evaluation Specialist, Division 2, Independent Evaluation Department (IED), under the overall guidance of IED Director General, Vinod Thomas and IED Division 2 Director, Hemamala Hettige. The CAPE report integrates the findings of sector assessments on agriculture and natural resources, capacity development for public sector management, energy, private sector development and financial sector, and transport. These sector assessments were conducted in 2011–2012 by IED staff: Andrew Brubaker, Kelly Hewitt, Rajesh Vasudevan, and the team leader, with support from Ma. Juana Dimayuga, Alvin Morales, Ma. Olivia Nuestro, and Elizabeth Li-Mancenido. The contribution of Walter Kolkma, Director, Independent Evaluation Division 1, IED in supervising the evaluation approach paper and some of the above sector assessments is gratefully acknowledged. External and internal peer reviewers included Nils Fostvedt, Njoman Bestari, Henrike Feig, and Cheolghee Kim, and their comments contributed to strengthening this report. A team of international consultants joined missions to Afghanistan and assisted in preparing sector background papers and preliminary sector assessments; these have helped to enrich this report. These include: Peter Darjes, Gita Gopal, Simon Peter Gregorio, Tetsu Ito, Eugene McCarthy, Ravi Nangia, David Parish, and Srinivasan Rajagopal. Romella Denopol supported the portfolio review in Manila, and Mohammad Ishaque Sarwari and Mohamad Fahim Zaheer conducted the beneficiary and ocular survey in the field. We gratefully acknowledge the support by the Central and West Asia Department for this evaluation, and the comments received on a draft of this report, provided by relevant departments and offices of the Asian Development Bank, as well as by the Ministry of Finance and other line agencies (including the Afghanistan Chamber of Commerce and Industries; Central Statistics Organization; Afghanistan National Disaster Management Authority; Da Afghanistan Bank; Da Afghanistan Breshna Sherkat; Independent Administrative Reforms and Civil Service Commission; Ministry of Agriculture, Irrigation and Livestock; Ministry of Commerce and Industry; Ministry of Energy and Water; Ministry of Foreign Affairs; Ministry of Mines; Ministry of Public Works; Ministry of Rural Rehabilitation and Development; Ministry of Transport and Civil Aviation; Ministry of Women’s Affairs; and National Environmental Protection Agency); and private companies (Afghanistan International Bank, BRAC Bank [Incorporated in Afghanistan], and Roshan Telecom Development Company Afghanistan, Ltd.). We would also like to acknowledge the contribution of innumerable government, nongovernment, and civil society stakeholders within and outside Kabul who met with us to discuss and comment on ADB support for their country. Their feedback was very important in preparing the CAPE report. Many development partner representatives took the time to meet with us, and we are grateful to them, in particular, to International Finance Corporation, German Development Cooperation, Embassy of Japan, Embassy of the United States of America, International Monetary Fund, International Security Assistance Force, Japan International Cooperation Agency, Kreditanstalt für Wiederaufbau, Norwegian Church Aid–ACT Alliance, Department for International Development of the United Kingdom, United Nations Office for Project Services, United States Agency for International Development, and the World Bank for their gracious cooperation. IED retains full responsibility for this report.

Executive Summary

More than one-third of Afghanistan’s people live below an international threshold for extreme poverty of $1 per day. Decades of war and civil strife have caused widespread human suffering, changed the country’s social and political fabric, and left formidable challenges to recovery. When the Asian Development Bank (ADB) resumed its program in Afghanistan in 2002 alongside several other development partners, the immediate needs were to restore economic stability, rebuild institutions, and provide basic services at a time when hopes had been raised that armed conflict might be ending. As it turned out, the poor security situation resumed after a brief respite, and the hostilities have severely impeded the operations of Afghanistan’s development partners and overall progress on socioeconomic development.

With the significant support of the international community, Afghanistan achieved some progress over the decade from 2002 to 2011. It now has an elected government. A great deal of essential social and economic infrastructure has been built or reconstructed, and a large share of rural households enjoys access to schools, health services, water, and irrigation facilities. Nonetheless, based on indicators—per capita gross domestic product, poverty, child nutrition, primary school enrollment rate, and literacy rates—Afghanistan remains one of the world’s least developed countries. Despite attention to the problem, gender inequity remains an enormous challenge in all walks of life. The fragile nature of the country’s natural environment, if not preserved carefully, poses considerable risks to its future well-being.

This country assistance program evaluation (CAPE) report provides an independent assessment of ADB’s strategy and program in Afghanistan during 2002– 2011. It identifies key issues and challenges and draws lessons and recommendations to guide future operations. The CAPE was prepared during a time of ongoing armed conflict in the country and a strong sense of uncertainty about Afghanistan’s prospects for 2014, when international combat troops will withdraw and the government will become responsible for the country’s security. This report highlights the achievements made under difficult circumstances, at times guided by available tools and capacity, which were understandably limited in the first decade of operations. However, a view of development outcomes needs to be taken linking different initiatives to generate results on the ground, and using effective planning for capacity development and sustainability. The evaluation sees the crucial need for continued support to the country from the international community, including ADB. This, however, must be accompanied by far stronger action to improve and sustain the effectiveness of development support.

Country Strategies and Program

ADB is the fourth largest of Afghanistan’s development partners in terms of total support after the United States, Japan, and the European Union. During the evaluation period, ADB approved lending and nonlending projects amounting to $2,732 million, comprising 32 sovereign projects (loans and grants), 7 nonsovereign projects, and 49 technical assistance activities. ADB’s sovereign operations have accounted for 93% of its lending and nonlending program in the country, with the x Afghanistan Country Assistance Program Evaluation

remainder going to its nonsovereign program. Most of the support (83%) was drawn from the Asian Development Fund (ADF), with the balance provided by the Japan Fund for Poverty Reduction (JFPR), ADB’s Technical Assistance Special Fund, bilateral support, and the Afghanistan Infrastructure Trust Fund (AITF). During 2002–2011, Afghanistan became the fourth largest recipient of ADF resources (loans and grants) behind Bangladesh, Viet Nam, and Pakistan. During the same period, in terms of grant funds, it became the single largest recipient of ADF grants among ADB’s developing member countries, with a share of 37% of ADF as a result of being classified in 2001 as a highly indebted poor country.

Two country strategies have guided ADB operations during the evaluation period. An initial country strategy was prepared in May 2002 and updated three times before ADB launched the second country partnership strategy (CPS) for 2009–2013 in November 2008.

The objective of the initial strategy was to achieve economic growth while ensuring a seamless transition from humanitarian to reconstruction and development support. The initial strategy did not focus on outcome objectives (pillars) but rather on required inputs. This weakness in defining expected outcomes was symptomatic of most country strategies before results frameworks became the norm. Although the initial country strategy had a broad scope, this was narrowed in 2003 to three sectors—energy, transport, and agriculture and natural resources—in response to a government request. The strategy update for 2006–2008 retained this sector composition but emphasized three thematic areas: (i) capacity development, (ii) policy and institutional reforms, and (iii) governance and the financial sector. Consistent with its Strategy 2020, launched in 2008, ADB also sought to support private sector operations, notably in banking and telecommunications.

The objective of the second CPS was to contribute to the high economic growth rates targeted by the government to achieve its objective of poverty reduction. The CPS retained the previous overall strategy, including its focus on three sectors, but added new crosscutting themes such as public sector management, counter-narcotics, gender and development, governance, private sector development, and regional cooperation. Support for these thematic areas has been minimal, however, with the exception of regional cooperation. The second CPS also instituted a distinct shift in financing approach. The bulk of ADB support was to be provided through multitranche financing facilities (MFFs) on account of their flexible nature. During the CAPE period 38% funds were allocated through the MFF modality.

Key Achievements

Operations in Afghanistan started and have continued under highly uncertain, extremely difficult and risky conditions. The dedication and hard work of ADB’s staff and others have been very valuable. The government considers ADB a key development partner that has been responsive to its requests, and informed the Independent Evaluation Department (IED) that it had given its outstanding partnership award to ADB.

Through ADB’s support, the country can now make use of a 750-kilometer (km) network of rehabilitated and improved roads that allow more travel in less time. Of the seven intended airports, four have been built with good outcomes. A new 75-km rail line was completed ahead of schedule. ADB helped improve power supplies to Kabul where, subject to continuing rehabilitation and expansion of the distribution system, Executive Summary xi electricity is now available almost around the clock compared with about 4 hours a day in 2002. The Afghanistan International Bank, supported by ADB private sector operations, has a reputation for good corporate governance. ADB has also contributed to related financial reforms. Roshan Telecom, another private sector beneficiary, outperformed its expansion plans and reached its subscriber target faster than originally anticipated. Unlike some other development partners, ADB has implemented its programs through the government budget, which allows transparency and capacity development. Several of ADB’s envisaged program outcomes were not achieved, however, and ADB’s support for Afghanistan, which in 2002 was restarting development almost from scratch, must continue to address the daunting challenges.

Critical Gaps and Challenges

High-level international efforts to support Afghanistan have influenced the operations of all development partners. The complementarity of security and development support was underlined during the CAPE period at a series of international conferences on Afghanistan. These high-level conferences achieved a general international consensus on strategic directions and financial commitments to Afghanistan after international forces and their Afghan allies ousted the Taliban regime in 2001. ADB was active in the lead-up to the conferences and made pledges of support alongside its development partners. Despite agreements on levels of support, the approaches to be taken, and delineation of tasks throughout the evaluation period, little emphasis was given to linking or complementing the efforts of development partners or even, in some cases, their activities with those of the government. For example, synergies between transport and energy projects were not tapped in developing the mining industry.

Most partners have felt obliged to release the funds they committed despite the government’s limited absorptive capacity and constraints to effective resource use. A comparison of development partner support with the size of Afghanistan’s economy puts the issue of absorptive capacity in sharp relief. Aid disbursements during 2002– 2010 amounted to $57 billion and accounted for 74% of Afghanistan’s accumulated gross domestic product for the same period. The knowledge, human resources, and procedures of Afghanistan’s institutions were not up to receiving and making effective use of such large amounts of external support. This lack of absorptive capacity has revealed itself in slow implementation of projects, frequent recourse to foreign consultants, low sustainability, and market distortions. About 95% of ADB’s public sector management and capacity development support was approved in the first CPS period for 2002–2008. Given that this capacity constraint was well recognized, a better strategy might have been to spread the aid flow over time and use this longer period to more gradually and sustainably help increase capacity. This might have been a difficult option to adopt, given the intense political and security considerations at the time, but ADB should have discussed and evaluated it as a matter of due diligence and planning.

Quick processing and implementation may have been imperative in the initial emergency operations after 2001, even if this meant that projects could not be planned and appraised thoroughly. Both the initial CSP and the first CSP update in 2003 advocated emergency support and simplified procedures to respond rapidly to a precarious situation. The use of this emergency approach never really ended, however, and was used almost continuously throughout the evaluation period. It has often provided the reason for deviating from proper planning, project design, and implementation practices. Clearly, the exigencies in Afghanistan demanded a special xii Afghanistan Country Assistance Program Evaluation

response, but technical standards and some due diligence in designing projects ought not to be compromised.

The difference between following an emergency approach and continuing security concerns needs to be carefully analyzed. While the security situation has continued to plague development work, particularly since 2006, it seems to have provided a justification for continuing the same emergency approach. Continuing conflict does not warrant a continuing emergency approach—where planning, design, and implementation practices may be compromised due to the urgency of the need. In a conflict-affected situation, security is the largest concern, and sustainability and risk management should be the priorities rather than the speed of implementation, which is a priority for an emergency. In the post-emergency phase, security concerns should have been reflected in project designs, and project designs should have been sensitive with respect to their impact on security.

ADB’s efforts to support and make up for deficient institutional capacity in the public sector were weakened by ADB’s decentralization practices. Government ministries and agencies report that ADB has taken longer to resolve project administration issues than other major development partners. One contributing factor may have been the centralized procurement and disbursement practices in ADB. Another factor could have been the limited size and the skill mix of the staff of the Afghanistan Resident Mission, which has fallen short of the demands of ADB’s portfolio in the country. The number of international staff in the resident mission is far smaller than those of other major development partners, even in relation to their different levels of assistance, and has decreased since 2006, while ADB activities have grown. This shortcoming could have been addressed by large, regular missions from ADB headquarters, but this did not occur. Security hazards not only made it difficult to recruit staff for the resident mission but also restricted staff travel to Afghanistan and the length of time staff members spent there. Estimates from ADB's Central Operations Services Office for 2011 show that, while the average mission duration per project ADB- wide was about 24 days, it was 12 days for Afghanistan. It was not easy for the ADB missions to visit projects outside Kabul due to security risks, the cost of using armored vehicles, and limited accommodation. However, some other development partners have managed to retain a sizeable staff contingent with a combination of monetary and nonmonetary incentives to compensate for the difficulties encountered.

ADB’s use of MFFs has been frequent and sometimes not consistent with MFF’s application principles. The second CPS recommended providing the bulk of ADB support through MFFs, and all projects since, except the Hairatan to Mazar-e-Sharif railway project and the supplementary support to the Regional Power Transition Project, have done so. The flexibility of approving tranches under the MFF allowed ADB to cater to changing circumstances of the country context and was much appreciated by the government. However, this modality requires substantial capacity in the executing agencies or detailed plans to develop such capacity. This condition has not been met in Afghanistan. The MFFs have often been used even where sector roadmaps or investment programs are not sufficiently well defined. These vague investment programs have also enabled the financing of frequent and substantial cost overruns of ongoing projects. While flexibility is an intended design feature of the MFF modality, it was not meant to hedge against every kind of uncertainty. Road maps providing strategic direction, investment programs specifying physical and nonphysical investment, risk management measures, and capacity of the government could have been more fully adhered to in Afghanistan.

Executive Summary xiii

ADB’s assessment that Afghanistan was in a postconflict situation in the second half of 2000 was premature. ADB has treated Afghanistan as a postconflict country since 2002 despite a deteriorating security situation and the steady rise in armed hostilities since 2006. When ADB reviewed its strategy for weakly performing countries in 2007, the country strategy classified Nepal as “conflict ongoing” while incongruously categorizing Afghanistan as “postconflict.” Afghanistan continued to receive substantial ADF funding under this classification as well. A conflict-affected country requires a different approach than a postconflict one does. In a postconflict situation, the key considerations are reconstructing the political, economic, and social system. In an ongoing conflict-affected situation, the security issue remains paramount. ADB has no doubt recognized the seriousness of the security situation, but it relied on the government to mitigate security risks. The World Bank currently classifies Afghanistan as conflict-affected.

Public services have been improved over the evaluation period, but a high level of dependence on external support continues. For example, good progress has been made in education, access to health services, and gender issues. Critical infrastructure has been rehabilitated, improving access of Afghanis to many previously inaccessible parts of the country. And an additional 2 million people have access to electric power. However, all this has been the result of a level of support that may not be sustainable. The external grants made available to Afghanistan account for 82% of total public spending—that is, central government spending plus off-budget development partner spending that bypasses the budget process. This flow of funds is expected to diminish. In addition, Afghanistan’s budgetary challenges will be increased by the spending required to take charge of its own security after the withdrawal of foreign troops in 2014. It is vital that all aid agencies focus on sustainable development during this transitional period. The international community can help the transition by consolidating efforts to link interventions to create sustainable outcomes. Much will also depend on Afghanistan’s own efforts to take stronger actions to improve the effectiveness of projects and programs as well as their sustainability. Some new initiatives are being planned by the government, particularly in the infrastructure sectors, to introduce funding for operation and maintenance; however, it is too early to discuss the feasibility of these measures.

The strategy to support the Kabul Process and Afghanistan’s transition after 2014 needs to be determined. The Kabul Process agreed upon by Afghanistan and the international community requires the government to assume a greater burden in the financing of recurrent and investment costs in the face of a likely reduction over time in foreign funds. ADB grant funds will be subject to a gradual decrease owing to the envisaged phaseout of the postconflict premium, which will be completed by 2018. However, the government will need grants for a long time for development investment and recurrent costs, which will now also include greater amounts for security. The International Monetary Fund and the World Bank have estimated that the country is likely to achieve partial fiscal sustainability, defined as domestic revenues covering operating expenditures, only by 2024–2025. The financial squeeze likely to occur in the intervening period may cause further security and sustainability issues. The Kabul Process needs to be based on a clear and detailed road map for the transition period.

The AITF was established by ADB in 2010 to finance the country’s infrastructure funding requirements. The governments of Japan and the United Kingdom have committed $126 million to the fund as of end May 2012. Another multidonor trust fund is the Afghanistan Reconstruction Trust Fund (ARTF), which was established in 2002 and has been administrated by the World Bank. More than 30 development xiv Afghanistan Country Assistance Program Evaluation

partners pledged $4.8 billion for the ARTF as of end December 2011. The ARTF has a more cooperative structure with other agencies, and a strict accountability mechanism. ADB needs alternative sources to maintain its support to Afghanistan because of the phaseout of the postconflict premium of ADF by 2018. The current sole management framework of the AITF is appropriate to manage a small pool of funds. To increase contributions to the AITF from other agencies, ADB needs to strengthen the management structure and operational framework of the AITF, learning from similar funds.

Assessment

ADB support was strategically focused. It was also consistent with the overarching objective of ensuring a seamless transition and economic growth through reconstruction and rehabilitation. Activities of the program have been mostly aligned with the government’s priorities as well as with sector and country strategies. The focus was consistent with agreements with government and development partners. However, monitoring of results has been difficult, given the lack of results frameworks. Collaboration during the initial phase has been good but has diminished, particularly during implementation reducing the linkages with complimentary activities that augment development outcomes. The quality of project design was weak, with overly ambitious designs, sometimes irrelevant monitoring indicators, absent and unrealistic targets, and weak adherence to required due diligence.

Through ADB support, the country can now make use of a network of rehabilitated and improved roads, four airports, and a new rail system. In the energy sector, the main outcome is significantly improved power supplies to Kabul. However the difficulty of the operating environment meant that costs have often exceeded estimates considerably without commensurate benefits. Estimated implementation periods were consistently ambitious, despite expected limitations in implementation capacity, and the weak security situation, which should have called for longer implementation periods. Outcomes in agriculture and natural resources are limited, because many projects have been delayed and are ongoing. Progress in capacity development has been mixed. Some organizational capacity in terms of systems and processes has been strengthened particularly in the Ministry of Finance, but this has been undermined by weak appreciation and implementation of the new systems, and by lack of clarity in organizational responsibilities in other government agencies. Despite some institutional reforms, anticipated reforms have not progressed in many cases.

ADB support for private sector was successful. ADB managed its equity participation in the Afghanistan International Bank well and the bank was the first multilateral development bank to invest in a private commercial bank incorporated in Afghanistan. In addition, Roshan Telecom supported by ADB also performed well, exceeding its original expansion plans and reaching its subscriber target faster than anticipated. However, a spot in the sun was that the Afghanistan Investment Guarantee Facility has not reached the original target, 10–20 of beneficiary projects.

Most physical projects were completed recently and adequate data to assess impacts were not available, the physical investment for transport and energy will likely achieve envisaged impacts such as economic and social development. As a result, transport and energy sectors performed better than other sectors. The impact of capacity development efforts has been less than satisfactory. There are dual concerns regarding sustainability of the program, which are the availability of domestic financial Executive Summary xv resources and the capacity of public institutions. Unless strong action is taken, these concerns could hurt the envisaged impact in the future.

Recommendations

Acknowledge the conflict, set the next CPS period for 3 years or less, and help coordinate development partner efforts. It needs to have a realistic assessment of the current and likely future security environment, and the CPS term should therefore be shorter than normal due to the high risks and uncertainty that now characterize the country context. It will be important to carefully assess the security situation, financial and fiscal sustainability, and institutional capacity while coordinating with other key development partners to make complementary efforts. As the fourth largest source of funds in Afghanistan, ADB is in a position to provide leadership in coordinating development partner efforts in several areas to increase overall efficiency and effectiveness.

Shift from an externally and centrally driven development approach in Afghanistan to one that responds to overall country demands. It has to pay careful attention to country context and absorptive capacity in project design, and to use appropriate financing modalities. While a future program should continue to focus on infrastructure and capacity development in the government, sector strategies should be based on analyses of industrial and agricultural demand and of the population’s socioeconomic needs. ADB also needs to link its support in each sector to its own development efforts in other sectors and to those of other development partners, and to work with central and local governments to achieve development outcomes in project areas.

Prioritize sustainability in the Kabul Process in coordination with other key development partners and address it in a holistic manner in the medium term with adequate attention to fiscal implementation and financial provisions. This will require detailed financing plans, including cost estimates for operation and maintenance (O&M) based on government strategy and sector master plans; financing projections; and identification of the agencies in the central or local governments, the private entities, and other asset users that should or can be responsible for O&M. To facilitate this effort, ADB needs to help prioritize relevant reforms and support them.

Develop and closely monitor a long-term capacity development and governance improvement plan carefully tailored to Afghanistan’s unique circumstances and the government’s needs. Effective capacity development needs to be shaped by the specific circumstances and challenges in Afghanistan—the short history of the current government, weak cooperation between central and local governments, and public sector staff with limited education levels and low salaries. It requires better coordination by development partners. Operations need to explicitly strengthen governance to maximize the development effectiveness of its support. For example, the procurement law needs to be implemented effectively, beginning with the development of a procurement manual. Financial management and project monitoring need strengthening.

Strengthen the management and operational procedures for ADB operations in Kabul to play a more engaged role in supporting the Afghanistan program. Monetary and nonmonetary aspects of work need to be addressed to enable filling of all vacant resident mission positions in ADB's focus areas. ADB needs to consider working with NGOs for external monitoring if project sites are not safe enough for ADB staff and xvi Afghanistan Country Assistance Program Evaluation

consultants but safer for NGOs. Any decision to shift additional responsibilities to the resident mission must be preceded by a strengthening of its financial and procurement capabilities as well as technical skills, since this is where the majority of issues arise. Related, multidonor trust funds are useful to build synergies across partners and provide complementary links to other sectors. They also provide a means for donors to contribute even without a substantial presence in the country. This evaluation did not evaluate the performance of funds like the AITF given the short time that has elapsed since its initiation, but ways and means for participatory and transparent administration and for generating buy-in from a broad spectrum of aid agencies would seem to merit attention.

Management Response

On 8 November 2012, the Director General, Independent Evaluation Department (IED), received the following response from the Managing Director General on behalf of Management, for the Afghanistan Country Assistance Program Evaluation (IN.267-12):

General Comments

We appreciate the country assistance program evaluation (CAPE) for the Islamic Republic of Afghanistan. The CAPE provides an overview of ADB’s operations and efforts to respond to the country’s development needs.

We agree with the successful ratings for ADB’s operations in the transport and energy sectors, where significant progress and impact have been made since 2002, and for non-sovereign operations. However, we disagree with the marginally less than successful overall assessment of ADB’s sovereign operations and of the overall program, and the so-called missed outcomes of Japan Fund for Poverty Reduction (JFPR) operations. The report also fails to reflect the sensitivity of its overall assessment and overall rating to minor changes in sector-based assessments: a change in only one of the 30 components, for example the rating for efficiency of transport projects to “2” (“satisfactory”) instead of “1” (”less than satisfactory”), would lead to a rating of successful for ADB’s overall operations, rather than the CAPE’s “less than successful” rating.

We are concerned about possible misleading inference and impression emanating from such a sensitive overall assessment, particularly in view of the fact that many physical projects were only recently completed or are still ongoing, and the lack of available data to assess outcomes and impacts, which have led to some unsubstantiated conjectures. In this context, we have serious reservations as to how some of the ADB operations were portrayed, including a number of unsubstantiated views such as on the use of the Design-Build (DB) contract modality, as well as on the issue of emergency approach. Regarding the latter, although ADB did prematurely declare Afghanistan to be in a post-conflict stage, ADB did employ a conflict conscious approach, and project processing and implementation followed ADB guidelines.

While recognizing the importance of security in the context of Afghanistan’s development during 2002−2011, the CAPE fails to fully and properly analyze its implications for project design and implementation, as well as for the suitability and choice of financing modalities and instruments.

Comments on Specific Recommendations

Recommendation (1): (i) Acknowledge Afghanistan as a country still embroiled in conflict, (ii) Set the country partnership strategy (CPS) period for 3 years or less, and (iii) Help coordinate development partner efforts. We agree. We believe Afghanistan should be classified as a country in conflict with due recognition of associated difficulties that countries experience when at conflict. ADB and other development xviii Afghanistan Country Assistance Program Evaluation

partners are not able to work in many parts of the country due to the ongoing conflict and associated security concerns. We will continue giving necessary attention to security considerations in our operations. A shorter CPS period, given the upcoming transition through 2014 and the inherent uncertainty, has in fact already been considered and reiterated in IED’s recommendation. The CPS guidelines and the Fragile and Conflict-Affected Situation (FCAS) approach provide sufficient flexibility in CPS preparation and planning. ADB’s Afghanistan Resident Mission (AFRM) will consult with the government about next steps regarding the future CPS. Aside from liaising with various line ministries and supporting project implementation efforts, AFRM actively participates with donors in weekly meetings such as UNAMA’s Country Team, Ambassadors’ Conclave, and Head of Agencies, and in periodic meetings of relevant working groups of the National Priority Programs (NPPs). In addition, ADB as the Secretariat for CAREC, is closely coordinating with Afghanistan and the CAREC development partners.

Recommendation (2): Shift from an externally and centrally driven development approach in Afghanistan to one that responds to overall country demands. ADB’s assistance is already fully government-driven. ADB’s operations, particularly in the transport, energy, and natural resources sectors, have been responding to overall country demands. Requests for financing from ADB are for projects selected by the government based on the Afghanistan National Development Strategy (ANDS) and supporting national development planning documents. These documents are the result of internal consensus within the country themselves with respect to development priorities, with the process being supported by the donors. ADB consults with line ministries on a regular basis to identify needs and priorities. In addition, all of ADB’s financial assistance is channeled through the government’s core budget, unlike that of most development partners. This principle of 100% of ADB’s assistance being on- budget conforms to the Kabul Conference (July 2010) commitment by the international community to channel at least 50% of donor assistance through the core budget by the end of 2012, and is helping to strengthen the government’s commitments to greater transparency and governance in public financial management.

Recommendation (3): Prioritize sustainability in the Kabul Process in coordination with other key development partners and address it in a holistic manner in the medium term, with adequate attention to fiscal implementation and financial provisions. We agree. In fact, this is the current status of ADB assistance, and we will continue our efforts to increase sustainability through better sector governance and increased emphasis on operations and maintenance (O&M). Efforts focusing on government-led responsibility for O&M are currently underway with ADB support in all our priority sectors. Under the Transport Network Development Investment Program, ADB is assisting in reforming the transport sector through the establishment of a rail authority, road authority, and road fund, the latter being specifically established to ensure adequate funding for road maintenance. The energy sector has an O&M strategy and Da Afghanistan Breshna Sherkat (DABS) is funding its O&M requirements through its internally generated revenues, with no subsidies from the government. Under an ongoing Water Resources Development Investment Program, ADB is providing (i) O&M training and planning for the water and agriculture ministry’s staff, (ii) interim O&M funds with the government assurance that they will allocate adequate recurrent budget, and (iii) water user association training for farmers in O&M and development of a financial sustainability mechanism.

Recommendation (4): Develop and closely monitor a long-term capacity development and governance improvement plan. We concur with the recommended Management Response xix approach, which is ADB's current practice in Afghanistan. ADB has supported the government with both targeted and integrated approaches to capacity development and governance improvement. Visible capacity development is integrated and realized through ADB’s infrastructure programs. For example, in 2010 ADB worked with USAID to formulate a strategy for energy sector capacity development and to date, ADB has allocated nearly $50 million for capacity support in the energy sector. ADB is currently supporting capacity of the nation’s energy sector through: (i) sector master planning, (ii) O&M, (iii) Project Management Office support and training in procurement, project management and implementation, (iv) distribution planning, (v) DABS management assistance, and (vi) numerous formal training courses to impart sector knowledge. In the transport sector between 2003 and 2009, ADB provided $12.5 million through 11 technical assistance projects focused on capacity development. Since 2008, as sector planning has moved into programmed implementation with the finalization of ANDS, ADB’s transport interventions have been twinned with a step-by-step capacity development program of the Ministry of Public Works.

Recommendation (5): Strengthen the management and operational procedures of the AITF and the resident mission in Kabul to play a more engaged role in supporting the Afghanistan program. We have serious reservations on the assessment of the structure and operation of the Afghanistan Infrastructure Trust Fund (AITF). The CAPE makes incorrect comparison of AITF – established only in late 2010, with the objective, structure and operation of the Afghanistan Reconstruction Trust Fund (ARTF) which was established in 2002.

The ARTF was established in 2002 and serves as a coordinated financing mechanism for the government’s recurrent budget and priority reconstruction programs and projects. The ARTF is heavily concentrated on agriculture, rural development, education and social services, and public sector capacity building. The ARTF supports only small-scale rural infrastructure projects, whereas, in contrast, the AITF focuses on cofinancing ADB’s and the government’s medium to large scale infrastructure projects. Due to its direct involvement with projects across multiple sectors and the large number of relatively small contracts, the ARTF has a more complex administrative structure than the AITF, whereas the AITF implements cofinanced projects through line ministries. The agencies themselves are directly responsible for the administration and management of the projects. AFRM holds regular consultations with potential stakeholders and contributors to the AITF as well as with relevant government agencies. The report also ignores the fact that the AITF serves as a platform to discuss sector policy issues with current and potential donors, which facilitates a coordinated policy dialogue with the government. On accountability, all projects cofinanced by the AITF strictly follow the ADB’s on-budget approach, due diligence, procurement, and disbursement procedures. We also would like to note that AITF accounts are being regularly audited by an international audit firm as external auditor.

While we agree that AFRM should be strengthened, we believe its current staffing is appropriate given the constraint in available resources. AFRM uses the Joint Venture approach which facilitates close and seamless cooperation at the operational and administrative levels between the RM and Headquarters, and maximizes the efficient use of staff resources.

Chair’s Summary: Development Effectiveness Committee

The Development Effectiveness Committee (DEC) considered the Independent Evaluation Department report, Afghanistan Country Assistance Program Evaluation (IN.267-12), on 12 November 2012. The following is the Chair’s summary of the Committee discussion:

DEC noted the CAPE’s recognition that ADB’s support is strategically focused in ensuring a seamless transition and economic growth through reconstruction and rehabilitation, but also noted that monitoring results has been difficult because of the lack of a results framework. DEC also noted the CAPE’s recognition of ADB’s contribution in improving roads, airports, rail system and power supply, despite cost overruns, project delays and longer implementation periods, although most projects were completed recently and adequate data to assess the impacts is not always available. DEC took note of Management’s disagreement with several ratings including the overall less than successful rating and recognized the difficult situation in Afghanistan, which must be factored in when preparing strategy and projects. DEC also considered that the focus should not be only on the ratings but also on lessons learnt.

Concerns on classification of Afghanistan and sustainability of projects. DEC noted the urgent need to reassess the Afghanistan’s post-conflict status in ADB operations in the next CPS, which should cover a shorter CPS period while fully taking into account the implication of security to the operations. Given Afghanistan’s security context and high dependence on aid, DEC supported the need to include sustainability considerations in project design and was reassured to hear from staff that sustainability is high on the government and donors’ agenda.

Use of the multi-tranche financing facility for supplementary financing. DEC sought clarification about the use of the multi-tranche financing facility (MFF) in financing cost overruns, noting that such changes merited the Board’s consideration, and noted staff’s response that no ADB procedures or compliances were compromised in the use of MFF and that the use of tranches enabled progress in the field. DEC will further review when IED’s evaluation of the MFF is presented to DEC.

Improving donor interest on the Afghanistan Infrastructure Trust Fund. DEC discussed the differences in purpose and duration between the Afghanistan Infrastructure Trust Fund (AITF) and the Afghanistan Reconstruction Trust Fund (ARTF), and noted the diverging views of Management and IED on governance related aspects. DEC welcomed the IED’s indication at the outset that it would revise the section to clarity that the section is not an evaluation of the AITF which was established only in 2010 but rather suggesting lessons from other trust funds operating in the country which may lead to improve the participation of donors in AITF. xxii Afghanistan Country Assistance Program Evaluation

Resident mission staffing. DEC recognized the work done by the Afghanistan Resident Mission and inquired whether staffing should be increased to further improve development effectiveness. DEC suggested that Management consider various incentives to attract staff and reinforce in-country presence for more efficient and effective donor coordination.

Evaluation approach for conflict afflicted countries. DEC members discussed evaluation guidelines and their flexibility, in terms of achievement of outputs and outcomes, for fragile and conflict afflicted contexts. Members also agreed that the CAPE could be instructive in engaging countries with similar contexts such as Myanmar and Nepal.

Prospects of private sector development. DEC noted the success of ADB’s private sector operations in Afghanistan and future prospects on mining and gas exploration. DEC stressed the importance of private sector development, further noting that job creation is one of the most critical factors for inclusive growth. DEC members underscored the urgency of mainstreaming gender in project design noting that ADB has not done enough in addressing gender issues in Afghanistan. 64o 00'E 72o 00'E

AFGHANISTAN ADB TRANSPORT PROJECTS TAJIKISTAN

UZBEKISTAN PEOPLE'S REPUBLIC OF Faizabad CHINA TURKMENISTAN Keleft Hairatan JOWZJAN Balkh KUNDUZ TAKHAR Andkhoy Kholm BADAKHSHAN Mazar-e-Sharif Kunduz Eshkashem Sheberghan BALKH Taloqan o o 36 00'N Sar-e-Pul Baghlan 36 00'N Samangan Pul-e-Khumri Pul-i-Baraq Qaisar SAMANGAN BAGHLAN Maimana Dar-i-Suf PANJSHIR NURISTAN Bala Murghab FARYAB SAR-E-PUL Doshi Bazarak Mahmood-e-Raqi Kamdish Turghundy BADGHIS Charikar KAPISA BAMYAN KONAR Islam Qala Bamyan Nijrab LAGHMAN Leman Qala-i-Naw PARWAN Yakawlang KABUL Mehtar Lam Asadabad Chaghcharan KABUL Jalalabad Herat Maidanshahr NANGARHAR WARDAK Pul-e-Alam Torkham HERAT Khadir GHOR LOGAR PAKTIA DAIKONDI Gardez Ghazni KHOST I R A N Shindand GHAZNI Khost Sharan National Capital ORUZGAN Tarin Kot Provincial Capital Mukur Farah FARAH City/Town o ZABOL o 32 00'N Delaram PAKTIKA ADB Completed Project Airport 32 00'N Qalat ADB Completed Project Road Gareshk Angoor-Ada Lashkar Gah ADB Ongoing Project Road Kandahar ADB Completed Project Railway National Road (paved) Zaranj National Road (unpaved) HELMAND Spin Boldak PAKISTAN NIMRUZ Other Road Landay KANDAHAR River Provincial Boundary Kudbar N International Boundary Boundaries are not necessarily authoritative.

0 50 100 150 200 This map was produced by the cartography unit of the Asian Development Bank. The boundaries, colors, denominations, and any other information shown on this 12-2931a AV map do not imply, on the part of the Asian Development Bank, any judgment on the Kilometers legal status of any territory, or any endorsement or acceptance of such boundaries, Map 1 colors, denominations, or information.

64o 00'E 72o 00'E

o 64o 00'E 72o 00'E o 72 00'E 65 00'E TAJIKISTAN UZBEKISTAN BADAKHSHAN TAKHAR TURKMENISTAN JOWZJAN KUNDUZ AFGHANISTAN BALKH 36o 00'N 36o 00'N ADB ENERGY SECTOR BAGHLAN FARYAB SAMANGAN PANJSHIR POWER AND GAS PROJECTS SAR-E-PUL NURISTAN BADGHIS BAMYAN KAPISA KONAR I R A N PARWAN LAGHMAN AFGHANISTAN KABUL KABUL WARDAK HERAT NANGARHAR GHOR LOGAR DAIKONDI PAKTIA GHAZNI KHOST National Capital Completed Transmission Line Project N ORUZGAN o FARAH PAKTIKA o Provincial Capital Ongoing Transmission Line Project 32 00'N ZABOL PAKISTAN 32 00'N City/Town National Highway NIMRUZ KANDAHAR Substation - Ongoing National Road (unpaved) 0 50 100 HELMAND Distribution Network - Ongoing Other Road Kilometers Switching Station - Completed River o 64o 00'E 72 00'E Switching Station - Ongoing Provincial Boundary Mini-Hydropower Project - Ongoing International Boundary This map was produced by the cartography unit of the Gas Well Boundaries are not necessarily authoritative. Asian Development Bank. The boundaries, colors, TAJIKISTAN denominations, and any other information shown on this map do not imply, on the part of the Asian Development Bank, any judgment on the legal status of any territory, or UZBEKISTAN any endorsement or acceptance of such boundaries, TURKMENISTAN BADAKHSHAN colors, denominations, or information.

o o 7 Faizabad 37 00'N Keleft Hairatan 3 37 00'N 9 JOWZJAN 1 8 Balkh KUNDUZ 9 1 76 km of 220 kV Transmission Line (Hairatan--N aibabad--Mazar-e-Sharif) (Loan 1997) Andkhoy 1 Kholm Kunduz Taloqan 2 165 km of 220 kV Transmission Line (Naibabad-- P ul-e K humri) (L oan 1 997) 11 15 Mazar-e-Sharif 13 Eshkashem Sheberghan 6 10 3 20 km of 110 kV Transmission Line (Sherkhan Bandar--Imam Sahib) (Loan 2165) 2 4 8 9 BALKH 12 4 157 km of 220 kV Transmission Line (Pul-e Khumri--S herkhan B andar) (Loan 2304) 9 10 Sar-e-Pul 8 5 Samangan Baghlan TAKHAR 90 Km of 110 kV Transmission Line (Naghlu--J alalabad--Mehtar L am) ( Loan2 165) Pul-e-Khumri Maimana 6 Switching Station at Naibabad (Loan 1997) SAMANGAN 11 BAGHLAN 7 Switching Station at Sherkhan Bandar (Loan 2304) Qaisar FARYAB Dar-i-Suf 8 Substation in Imam Sahib, Sar-e-Pul, Taloqan, Jalalabad, and Mehtar Lam (Loan 2165) Doshi PANJSHIR NURISTAN SAR-E-PUL 9 Distribution Networks in Khanabad, Imam Sahib, Sar-e-Pul, Taloqan Bazarak Kamdish Jalalabad, Mehtar Lam, Sorubi, and Qarghai (Loan 2165) Mahmood-e-Raqi Charikar 10 Distribution Networks in Kunduz and Baghlan (Grant 0134, under procurement) 12 KAPISA KONAR BADGHIS BAMYAN 11 LAGHMAN Asadabad Switchyards in Kunduz and Baghlan (Loan 2304) PARWAN Bamyan Mehtar Lam 9 8 12 Four Mini-Hydropower Projects (Bamyan and Badakhshan) Yakawlang KABUL 14 9 (MFF tranche 1, Grant 0134, under procurement) Chaghcharan Jalalabad 13 67 km of 220 kV Transmission Line (Kunduz-Taloqan) (Grant 0134, under procurement) KABUL 9 5 Maidanshahr 9 8 14 Kabul Distribution Network (30 Km of 220 kV transmission line, one substation, WARDAK NANGARHAR Torkham and power transmission network for 40,000 households) (MFF tranche 2, Pul-e-Alam Grant 0184, under procurement) o Khadir o 34 00'N GHOR 34 00'N LOGAR PAKTIKA 15 Rehabilitation of 15 Gas Wells in Sheberghan Gas Field in 2 Phases Gardez (MFF tranche 1, Grant 0134, under procurement) HELMAND/GERESHK DAIKONDI GHAZNI = 4.5 MW Hydropower Plant and KHOST 16 4.8 M.W. Gereshk Hydropower Plant and Distribution Network for 8,000 Connections 12-2328 HR Distribution Network for Ghazni (MFF tranche 3, Grant 0280, for commemcement of civil works) 8,000 Connections Map 2 16 Khost

FARAH HELMAND o MFF = Multitranche Financing Facility 65 o 00'E ORUZGAN Sharan 72 00'E

64o 00'E 72o 00'E

AFGHANISTAN ADB AGRICULTURAL AND NATURAL RESOURCES PROJECTS TAJIKISTAN UZBEKISTAN PEOPLE'S REPUBLIC OF Faizabad CHINA TURKMENISTAN Keleft Hairatan JOWZJAN Balkh KUNDUZ TAKHAR Andkhoy Kholm BADAKHSHAN Mazar-e-Sharif Kunduz Eshkashem Sheberghan BALKH Taloqan o o 36 00'N Sar-e-Pul Baghlan 36 00'N Samangan Pul-e-Khumri Pul-i-Baraq Qaisar SAMANGAN BAGHLAN Maimana Dar-i-Suf PANJSHIR NURISTAN Bala Murghab FARYAB SAR-E-PUL Doshi Bazarak Mahmood-e-Raqi Kamdish Turghundy BADGHIS Charikar N KAPISA BAMYAN KONAR Islam Qala Bamyan Nijrab LAGHMAN Leman Qala-i-Naw PARWAN Yakawlang Mehtar Lam Asadabad Chaghcharan KABUL Jalalabad Herat Maidanshahr KABUL 0 50 100 150 200 NANGARHAR WARDAK Pul-e-Alam Torkham HERAT Khadir Kilometers GHOR LOGAR PAKTIA DAIKONDI Gardez Ghazni KHOST I R A N Shindand GHAZNI Khost Sharan ORUZGAN Tarin Kot Northern River Basins Mukur Farah FARAH Northern Basins Development (WRDIP tranche 1) o ZABOL o 32 00'N Delaram PAKTIKA Amu Darya Flood Management (WRDIP tranche 1) 32 00'N Qalat Nangarhar Valley Development Authority Gareshk Angoor-Ada Lashkar Gah WRDIP-tranche 1 (Kabul River Basins) Kandahar Western River Basins EIRRP–Traditional Irrigation Zaranj HELMAND Spin Boldak PAKISTAN Balkh River Integrated Water Resources Management Project NIMRUZ Community-Based Irrigation Rehabilitation Landay KANDAHAR Western River Basins Helmand River Basin Study (WRDIP tranche 1) Kudbar National Capital Rural Business Support Project Provincial Capital Agriculture Market Infrastracture City/Town Integrated Community Development in Northern Afghanistan River This map was produced by the cartography unit of the Asian Development Bank. Provincial Boundary WRDIP = Water Resources Development Investment Program

12-2698 AV The boundaries, colors, denominations, and any other information shown on this EIRRP = Emergency Infrastructure Rehabilitation and Reconstruction Program Map 3 map do not imply, on the part of the Asian Development Bank, any judgment on the International Boundary legal status of any territory, or any endorsement or acceptance of such boundaries, Boundaries are not necessarily authoritative. colors, denominations, or information. 64o 00'E 72o 00'E

CHAPTER 1

Introduction

A. Objectives

1. The objective of this country assistance program evaluation (CAPE) report is to improve the effectiveness of the development assistance provided by the Asian Development Bank (ADB) to the Afghanistan. The CAPE considered the economic, political, and development context in which the program was formulated and implemented. The CAPE report aims to (i) provide an independent assessment of ADB’s support to the country, (ii) analyze factors affecting this performance, and (iii) make recommendations to prepare the next country partnership strategy (CPS) and to improve ADB’s performance in the future.

B. Scope and Approach

2. This was the first CAPE for Afghanistan and covered the period from ADB’s reengagement with the country in 2002 through 2011.1 It has been undertaken at a time when the International Security Assistance Force is preparing a scheduled withdrawal from the country by the end of 2014 and the government of Afghanistan is taking over the principal responsibility for its security and development. This is a cause of considerable uncertainty, and the CAPE has given due consideration to this situation in its analysis and assessments. The report draws on multiple sources, including the findings of four country missions and field visits since December 2011 by a large team of Independent Evaluation Department (IED) staff and consultants. To the extent possible, local consultants were engaged to verify outputs and outcomes. The evaluation involved discussions with government agencies, ADB staff, and development partners, as well as review of ADB strategy documents, project files, and other relevant literature. The evaluation benefited from an ADB perception survey of stakeholders to gain insights into ADB’s performance. The draft report was discussed in Kabul with the government, and this final report takes into account comments from the government as well as from ADB management and staff.

3. Support approved by ADB for lending and nonlending projects in Afghanistan 65% of total ADB during the 2002–2011 evaluation period totaled $2,732 million, of which 65% was support since provided on a grant basis. This comprised 32 sovereign projects, 7 nonsovereign 2002 (and 100% projects, and 49 technical assistance (TA) operations. The sovereign program made up since 2007) was 93% of the total, and nonsovereign support the remaining 7%. Figure 1 shows the history of allocation of the Asian Development Fund (ADF) in Afghanistan during the grants evaluation period.

4. ADB launched two full country strategies during the CAPE period. An initial country strategy and program (CSP) was prepared in May 2002, followed by three

1 ADB started lending operations in Afghanistan in 1970 but put its operations on hold in 1979. Total lending and nonlending operations in the country for this period amounted to $97.7 million with 9 loans and 16 technical assistance (TA) programs. 2 Afghanistan Country Assistance Program Evaluation

updates during 2003–2008.2 A completion report for the first strategies was prepared in November 2006.3 In November 2008, ADB formulated a new CPS for 2009–2013.4 The CAPE has considered the evolution of these strategies and programs over the 10- year evaluation period in light of changing government development plans, and the evolving strategies of development partners, and important developments on the ground. Operations in Afghanistan started and have continued under highly uncertain, extremely difficult, and risky conditions. The dedication and hard work of ADB’s staff and others have been very valuable. The government considers ADB a key development partner that has been responsive to its requests, and informed IED that it had given its outstanding partnership award to ADB.

            M  800 600 400

$ million million $ 200 0 2002 2003-2004 2005-2006 2007-2008 2009-2010 2011-2012 ADF Allocation Approvals ADF = Asian Development Fund. Source: Asian Development Bank.

The CAPE covers 5. The CAPE was guided by IED’s Revised Guidelines for the Preparation of 5 a 10-year period Country Assistance Program Evaluations. It assessed the formulation of the country strategies, the compatibility of the assistance programs with the strategies, and the and draws on performance of the ADB lending and nonlending products and services provided under assessments of these programs. The CAPE takes the position that preparations for operating in a five key sectors conflict-affected country should have gone into these strategies and project documents when they were prepared and that expectations for implementation and delivery of results should have been adjusted accordingly. The evaluation was therefore based on the documents’ stated objectives and targets, using the standard evaluation criteria. The CAPE drew on assessments in five key sectors: transport, energy, finance and private sector, agriculture and natural resources, and public sector management (PSM). These assessments were based on reviews of projects that have been completed or were at a mature stage of implementation. More details on the CAPE methodology are in Appendix 1.

6. The CAPE study relied on intensive desk reviews and stakeholder interviews, and faced several constraints. Although national consultants made field visits to four projects in the agriculture6 and four projects in the transport sectors,7 IED staff were

2 ADB. 2006. Initial Country Strategy and Program: Afghanistan, 2002–2004. Manila. 3 ADB. 2006. Country Strategy and Program Completion Report: Afghanistan, 2002–2006. Manila. 4 ADB. 2008. Country Partnership Strategy: Afghanistan, 2009–2013. Manila. 5 ADB. 2010. Revised Guidelines for the Preparation of Country Assistance Program Evaluations. Manila. 6 ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Transitional Islamic State of Afghanistan for the Emergency Infrastructure Rehabilitation and Reconstruction Project. Manila (Loan 1997); ADB. 2006. Proposed Grant Assistance to Afghanistan for the Rural Business Support Project. Manila (Grant 9100); ADB. 2009. Report and Recommendations of the President to the Board of Directors: Proposed Multitranche Financing Facility and Administration of Grant and Cofinancing to the Islamic Republic of Afghanistan for the Water Resources Development Investment Program. Manila (Grants 0167 and 0170); ADB. 2005. Report and Recommendations of the President to the Board of Directors: Proposed Loan and Asian Development Fund Grant to the Islamic Republic of Introduction 3 not encouraged to make field visits or conduct interviews outside of Kabul due to the security risks. The absence of independent evaluation studies on Afghanistan prior to CAPE preparation—performance evaluation and sector assistance program evaluation reports, for example—posed a challenge. In addition, monitoring and evaluation data available from ADB and the government were sparse.

Afghanistan for the Western Basins Water Resources Management Project. Manila (Loan 2227, and Grants 0033 and 0052). 7 ADB. 2009. Proposed Grant Assistance to the Islamic Republic of Afghanistan for the Hairatan to Mazar-e- Sharif Railway Project. Manila (Grant 0161); ADB. 2004. Report and Recommendations of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the Andkhoy-Qaisar Road Project. Manila (Loan 2140); ADB. 2003. Report and Recommendations of the President to the Board of Directors: Proposed Loan to the Transitional Islamic State of Afghanistan for the Emergency Infrastructure Rehabilitation and Reconstruction. Manila (Loan 1997); ADB. 2006. Proposed Grant Assistance to the Islamic Republic of Afghanistan for the Rural Business Support Project. Manila (Grant 9100). CHAPTER 2 Country Context

A. Background

7. Country characteristics. Afghanistan is one of the least developed countries in More than one the world, and its approximately 34 million people are among the poorest. Four-fifths third of people of the population live in rural, often rugged, and remote areas, and more than one- subsist below the third of its people subsist below an international threshold for extreme poverty of $1 poverty line in per day. Just 12% of the mostly mountainous land area is arable, and the climate includes periods of extreme aridity and cold. Although Afghanistan has substantial Afghanistan mineral resources, they remain, with a few exceptions, largely unexploited. The country has been racked by long periods of armed conflict since the late 1970s and almost continuous political instability, and efforts to modernize governance and society have long faced strong opposition from conservative Islamic and tribal traditions. Agriculture and subregional trade have historically been the mainstays of the economy.

8. Among Afghanistan’s weakest human development indicators are low levels of literacy and life expectancy, high child and maternal mortality, a shortage of trained personnel, and insufficient public expenditure on health and education. Women have traditionally been accorded a lower status than men, and there is gender inequality across the board, including in education, employment, access to health services, and legal rights.

Decades of 9. Decades of political and military conflict have damaged institutions and political and government structures, as well as social and physical infrastructure, including crucial military conflict rural irrigation systems. This strife displaced vast numbers of people and greatly diminished the country’s human and financial capital, pushing millions into lives of have damaged extreme poverty without employment opportunities or access to basic services.8 Much institutions, of the limited progress in education, human rights, and government that had been government, and made before major hostilities began in 1980 was reversed during successive stages of social and civil turmoil. Through the ensuing decades, Afghan society has been burdened by physical widespread corruption and a large informal sector that has included illicit trade and production and export of narcotics. infrastructure 10. Despite a major assistance effort by the international community since 2001, these problems and the country’s overall development challenges remain formidable. Armed conflict continues, and concerns exist that security conditions could worsen with the slated departure of international military forces in 2014. Afghanistan, meanwhile, must struggle to develop despite a narrow economic base, agricultural production that is dependent on precipitation, poor infrastructure, weak institutions and governance, and limited capacity.

8 It is estimated that the gross national income per capita fell to $435 in 2000 from $1,271 in 1985, a level to which it recovered only after 2010. Country Context 5

11. Historical and political context. Landlocked Afghanistan lies at the crossroads between Central, South, and West Asia and has historically had strong trade and cultural ties with its neighboring countries. Its current geographical boundaries were established by the middle of the 19th century, but its history has frequently been marred by violent internal struggles for power and conflicts between its often antagonistic ethnic and tribal groups. This instability has often been exacerbated or encouraged by the interference of rival foreign powers seeking influence within its borders for strategic reasons. Afghanistan has four main ethnic groups, several smaller ones, and a strong tribal culture. Strong ethnic and tribal allegiances continue to play an important role in defining people’s identity.

12. In 1979, the former Soviet Union invaded the country in support of the then communist government, touching off a decade-long war with mujahedin rebels supported materially by an array of other foreign powers. After the former Soviet Union withdrew its troops in 1989 and its client government fell 2 years later, mujahedin factions embarked on a destructive civil war, which culminated in 1996 when Kabul fell to the Taliban. This group consolidated its hold over most of the country and introduced a repressive conservative regime until it was ousted in 2001 by an international military invasion led by the United States (US) in support of the Afghan forces of the anti-Taliban Northern Alliance.

13. The defeat of the Taliban government created a new opening for political, The United economic, and social development. To address the country’s future and establish a Nations process for political reconstruction, the United Nations (UN) sponsored a conference of representatives of the international community and Afghanistan’s anti-Taliban groups sponsored a in Bonn, Germany in 2001. The plans that emerged included the adoption of a new conference in constitution, presidential elections in 2004, and elections for a national assembly in 2001 to establish 2005. In June 2002, a loya jirga, a traditional general council of leaders from around a process for the country, selected an interim transitional administration to govern the country until political elections in 2004. The current President and the bicameral National Assembly were chosen in the second of the two presidential and legislative elections that have been reconstruction held since then, although the official voting results have been hotly contested. 9 Ministers at the national level and provincial governors are appointed by the President. The provinces also have elected provincial councils.

B. Economic and Social Development Since 2001

1. Overview of Recent Developments

14. The transitional government established in 2002, supported by the With international community, established priorities and implemented some important early measures. These included key steps to lay the foundations for economic stability, International resume growth, and provide social services. Among them were measures to improve Monetary Fund macroeconomic management, rebuild institutional and human capacity, rehabilitate support, the infrastructure, improve service delivery, and encourage the return of displaced persons government 10 and refugees to their homes. undertook

15. With support from the International Monetary Fund (IMF), the government financial reforms undertook currency reform in 2002, took steps to establish a national payment system

9 The conduct of the second round of elections for the presidency in 2009 and the National Assembly in 2010 raised questions about the integrity of the election process. 10 It is estimated that more than 4.5 million refugees returned to Afghanistan from neighboring countries from 2002 to 2010, but a further 3 million individuals of Afghan origin still continue to live abroad. 6 Afghanistan Country Assistance Program Evaluation

in 2003, and enacted laws relating to the central bank (Da Afghanistan Bank) and banking in 2004. Action was also taken to try to improve monetary management and banking supervision, to introduce a more efficient tax system, and to improve revenue administration. Government revenues, which were negligible in 2001, rose to 4.7% of gross domestic product (GDP) in 2003. Progress was also made on improving the supply of electricity and on rehabilitating roads. The transitional government also set up an interim regulatory authority in 2003 to encourage private investment in the sector. These measures led to the start of operations of two mobile communications companies by 2003. Similarly, the Law of Banking in Afghanistan helped create pre- conditions for the revitalization of the moribund banking industry and led to the establishment of several new banks.

16. Afghanistan has continued to make progress. GDP grew at a compound annual People now have rate of around 9% after 2001. Some success has also been achieved in rebuilding some greater access to national institutions and capacity, notably in the Ministry of Finance (MOF). Transport basic education has been a priority, and road construction and rehabilitation have been substantial. Investments in the badly degraded power sector and the development of a national and health electricity grid have produced sound results. Kabul now gets electricity for much of the facilities day, compared with only 4 hours daily previously. Afghanistan’s people now have greater access to primary education and basic health facilities, although this varies widely across the country, particularly because internationally funded projects have been limited by the high security risks in some areas. Some advances have also been won in the improvement of women’s rights, especially considering the extreme inequities and daunting challenges that prevailed in the decade prior to 2001. Nonetheless, Afghanistan continues to lag far behind other countries in the region in socioeconomic development.

Institutional 17. The progress has depended heavily on strong international support. External capacity funding currently accounts for 82% of total public spending—central government 11 continues to be spending plus off-budget external spending (Box 1). Dependence on external consultants or turnkey contracts is also high, and institutional capacity continues to be extremely limited extremely limited in most areas, as do domestic resources. in most areas, as do domestic 18. These challenges are compounded by others. After improving in the wake of resources the 2001 international military intervention, the overall security situation has worsened since 2006. The Taliban has regrouped, and conflict between its insurgents and government and international forces undermines stability and economic growth in many parts of the country. The development process is constrained by poor governance and widespread corruption, as well as fragmented government institutions and overlapping responsibilities between line ministries and between the national and provincial governments. Capacity is weak, especially at the provincial level. Widespread production of narcotics fuels the insurgency, official corruption, and criminality (Appendix 2). The youth and rapid growth of the population mean that economic expansion and overall development must keep pace if high expectations are to be met and socioeconomic conditions and stability improved.12

11 While IED did not assess the degree to which the ADB funds reach their targets, it looked into reports of the Office of Anticorruption and Integrity and the Office of Auditor General, which found no evidence of corruption in some operations they investigated after receiving allegations of corruption. 12 An estimated 46% of the population is below 14 years of age. Net population growth is about 2.8%. Country Context 7

Box 1: Afghanistan Remains Heavily Dependent on Foreign Funding

Afghanistan has received a great deal of support from foreign governments since 2002, particularly from the United States, as well as major assistance from bilateral agencies and multilateral institutions. Of the $90 billion pledged to Afghanistan so far, about $57 billion had been disbursed by the end of 2010. These disbursements averaged 74% of gross domestic product during 2002–2010, with about 51%, or $28.9 billion, going toward security. This does do not include the costs of the presence and operations of foreign troops in the country, which are paid for under the defense budgets of the governments contributing the forces. Nor does it cover emergency humanitarian aid and reconstruction work. The balance of the 2002–2010 disbursements—49%, or $27.7 billion—was spent on rehabilitation and development efforts, including (in declining order of funding) infrastructure repair and development; agriculture and rural development; improvements in governance, social protection, education, and health; and private sector development, Aid to Afghanistan during this period can be analyzed in two main ways—according to its purpose and according to whether it was routed through the national budget or was spent off- budget. The government estimates that 82% of cumulative foreign support has been spent directly by foreign development partners, bypassing the national budgetary processes. Concerns have been raised that this large off-budget foreign spending has weakened national ownership of projects, prevented the harmonization of aid and mutual accountability, and made less of a contribution than it could have to domestic capacity development. The figure below shows the sources and uses of foreign funds for FY2010.

Sources and Uses of Funds to Afghanistan

Public Spending in FY2010 $8.1 billion 52% of GDP

a b Nonsecurity Security Development $1.1 billion $3.5 billion $3.6 billion 7% of GDP 22% of GDP 23% of GDP

Operating Budget Development Budget External Budgetc  Security Nonsecurity Security Development $1.3 billion $1.1 billion $0.9 billion $2.2 billion $2.6 billion 8% of GDP 7% of GDP 6% of GDP 14% of GDP 17% of GDP

Security Nonsecurity Discretionary Nondiscretionary External $0.8 billion $0.3 billion $0.2 billion $0.4 billion 5% of GDP 2% of GDP 1% of GDP 2% of GDP Budget Grants Grants to Operating Budget Grants to Development Budget

$1.6 billion $6.5 billion 11% of GDP 41% of GDP

Domestic Revenues Grants FY = fiscal year, GDP = gross domestic product. a This category covers spending on education, health, and all other nonsecurity sectors across government. b Development expenditures include significant noncapital security spending, e.g., private protection companies. c Estimated local spending content (cash impact) of external budget, 100% externally financed. Source: International Monetary Fund. 2011. Islamic Republic of Afghanistan: Staff Report for the 2011 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility. Appendix III. Economic Developments. Washington, DC. 8 Afghanistan Country Assistance Program Evaluation

19. The scheduled withdrawal of foreign troops by 2014 and a likely decline in the The scheduled exceptional levels of international development partner funding will make the task of withdrawal of governing the country even more difficult. Compared with the foreign units they will foreign troops in have to replace, Afghanistan’s security forces continue to have limited capabilities despite important efforts to make them ready. The governance issues, the constraints 2014 will make on the government’s ability to mobilize the additional resources, and the country’s governing the limited competitiveness will become even more apparent when international support country more declines after 2014. The risk of further political instability and a reversal of the gains difficult made in the past decade remain very real. These challenges and possible outcomes are discussed in detail in section C (paras. 36–42).

2. Economic Developments

20. Despite the difficult security environment, foreign support has helped Afghanistan show strong GDP growth and achieve important progress since 2002. Real GDP rose at a compound annual rate of just under 9% during 2002–2011, although from a low base in 2001.13 Large year-to-year fluctuations during the period (Figure 2) were mainly due to swings in agricultural output, which in Afghanistan is highly dependent on precipitation, and the follow-on effects on agribusinesses and consumption.

Figure 2: Gross Domestic Product in Figure 3: Gross Domestic Product in Afghanistan, 2002–2011 Afghanistan by Sector Share, 2002–2010 (constant 2002 Afghanis) AF % per 100% 400 50 350 45 40 80% 300 35 250 30 60% 200 21.02 25 13.74 20 40% 150 11.18 8.44 8.44 15 100 5.55 5.74 3.61 10 20% 50 1.06 5 0 0 0%

GDP in constant 2002 Afghani Agriculture Industry Services Growth in GDP in constant 2002 Afghani GDP = gross domestic product. Source: Islamic Republic of Afghanistan, Central Source: International Monetary Fund. 2012. World Statistical Organization. 2012. Afghanistan Statistical Yearbook 2010–2011. Kabul. Economic Outlook 2012. Washington, DC.

21. A large part of GDP growth has come from a buoyant services sector (Figure 3). The services sector accounted for more than 48% of GDP in 2010 (Figure 3).14 Overall, the share of the services increased by about 13% during 2002–2010, largely reflecting the rapid growth in telecommunications and transport.

13 The official estimates of GDP and of such components as exports do not include the contribution of illicit activities. The output of illegal drugs alone was estimated by the United Nations Office on Drugs and Crime and by the Afghanistan Ministry of Counter Narcotics at just under $3.0 billion in 2010. According to the World Bank, GDP increased from $2.4 billion in 2001 to $4.3 billion in 2002. 14 In order of magnitude, the sector includes transportation, public administration, trade, wholesale and retail trade, telecommunications, banking and finance, and other services. Country Context 9

22. On the other hand, growth in agricultural production of cereals, fruits and nuts, and livestock failed to keep up with overall growth. Agriculture’s share of GDP over the An estimated same period fell from the equivalent of 30% to 15%. More worryingly, food crop 85% of the production has failed to keep pace with population growth. Afghanistan has had to population import food in recent years, and some provinces have required food aid due to shortages. 15 The sector’s poor performance is a crucial problem for the country’s depends on economy and people, because an estimated 85% of the population depends directly or agriculture, indirectly on agriculture and agricultural products, which also account for about half of which account all exports. for about half of all exports 23. The industry sector has grown at a rate similar to that of the overall economy, with its share increasing from 20% to around 22% of GDP during 2002–2010. 16 It has been helped in particular by a boom in the construction subsector based on the large inflow of foreign funds. Construction now contributes to industrial output.

24. Inflation averaged around 10% over the period and was high due to increases in international food and fuel prices and an expansion in money supply that occurred despite some efforts by the central bank to contain it. Inflation was estimated at around 8% in 2011, following some easing of food price increases.

25. Afghanistan is highly dependent on foreign aid to meet gaps in its budget and its external account. In 2010, imports of goods amounted to $7.2 billion, equal to 57.4% of GDP, while export of goods totaled $2.2 billion. The export figure included in- country sales of domestic goods and services to foreign troops and other noncitizens. The current account deficit of $6.4 billion (51.3% of GDP) was offset by official transfers of $6.1 billion. Afghanistan also received about $300 million in foreign direct investment. Afghanistan was granted debt relief as a highly indebted poor country under the Multilateral Debt Relief Initiative as well as additional debt write-offs from Paris Club creditors. This reduced its total external debt from about 170% of GDP in 2007 ($12.0 billion) to about 8% in 2010 ($1.3 billion). Support since 2006 from ADB and other development partners has been almost entirely provided through grants.

26. In terms of public finance, the government succeeded in raising domestic On-budget revenue collection to 11% of GDP in 2011 through tax measures, administrative development improvements, and consolidation of earlier reforms. However, the government budget still relies on an equivalent amount in foreign grants to cover its remaining current spending expenditures. In addition, on-budget development spending has been declining due to declined due to low execution rates resulting from capacity constraints, difficulties in public financial low execution management (including uncertainty about the receipt of project-specific funding), and rates resulting 17 a more challenging security environment. from capacity

27. The banking sector has grown rapidly since 2001, but governance issues remain, and security supervision must be strengthened, and the ability of banks to support private sector constraints development is limited. Bank assets and deposits increased by more than 50% annually since 2006. From six largely inactive state-owned banks in 2001, the sector has grown to 12 domestic commercial banks, including 10 privately owned ones, with offices in all

15 This appears to result partly from damage to rural irrigation systems and lack of maintenance. According to the government, the area under irrigation has declined by nearly 60% during the years of recent conflict. 16 The sector includes manufacturing, nearly 95% of which is accounted for by the manufacture of food, beverages, and tobacco products; construction; mining; power generation; and handicrafts. 17 This partly explains a widening gap between aid commitments and disbursements in recent years. 10 Afghanistan Country Assistance Program Evaluation

34 provinces. Five foreign banks also have offices in Afghanistan.18 In 2010, total assets of the banking sector amounted to about $4 billion (equivalent to a third of GDP).

The Kabul Bank 28. Confidence in the banking sector suffered a severe setback in 2010, however, crisis highlighted when Kabul Bank, the largest commercial bank in the country, collapsed. This crisis serious highlighted serious deficiencies in bank governance, in the legal and accounting deficiencies infrastructure, and in banking supervision. The negative impact on faith in the banking sector and financial intermediation in general has persisted even though the in bank government responded quickly to contain systemic risk and took several steps to governance, legal address the problem. It also assumed liabilities of about $825 million against its and accounting guarantee to repay all outstanding deposits. infrastructure, and bank 29. The private sector has developed slowly, and the business environment needs to improve for it to expand more quickly. Traditional private activities such as supervision agribusinesses, retail, and other small-scale services in the informal sector have revived over the evaluation period; and construction, telecommunications, and banking have grown, with large investments. Government promotion of large-scale export-oriented mining activity has had some positive initial responses. The government has also enacted several laws and regulations designed to enable greater private sector activity.

30. These bright spots have not outweighed the major obstacles posed to business growth by poor security, lack of policy enforcement, corruption, and other governance issues. The country ranked 160 out of 183 countries and territories in the World Bank’s Doing Business 2012 report and 180 out of 183 countries in 2011 in Transparency International’s Corruption Perception Index.19 The UN Office on Drugs and Crimes has estimated that Afghans pay about $2.5 billion in bribes every year, or almost 20% of the official GDP. More exploitation of the country’s geological potential and other large projects has been slowed or postponed indefinitely by the general security situation, as well as limited and inefficient transport connectivity. Afghanistan may have long depended on subregional trade as an historical crossroads of Asia, but, as pointed out in the assessment for the transport sector (Appendix 6), Afghanistan ranks 143 out of 155 countries in the global Logistics Performance Index.

3. Human Development and Social Indicators

One-fifth of the 31. Socioeconomic indicators have improved since 2002, but Afghanistan remains country’s in the bottom decile of countries on the UN Human Development Index, where it ranks population 172 out of 187 countries. Per capita GDP (in current dollars) rose for 2001–2011 from an estimated $180 to $585, but 36% of the population still lived on less than $1 day in endure chronic 2008, with an even higher percentage falling under the poverty line in remote, rural, food insecurity, and mountainous areas. Many more people exist on the edge of severe deprivation, and another 18% where even small adverse but not unlikely events, such as a fall in agricultural face seasonal production, a particularly harsh winter, or illness, can push their households into 20 food shortages poverty. One-fifth of the country’s people suffer from chronic food insecurity and another 18% face seasonal food shortages.

18 In addition to banks, the financial sector in Afghanistan also includes a small number of microfinance institutions as well as hawala (informal and formal foreign exchange dealers and money service providers). The traditional hawala sector continues to account for most cash payment, transfer, remittance, and currency exchange transactions. 19 The World Bank and International Finance Corporation. 2012. Doing Business 2012 (Doing business in a more transparent world). Washington, DC. 20 The incidence of poverty was higher in 2008 (36%) than in 2005 (33%) because of in a decline in agricultural production caused by drought. Country Context 11

32. Some progress has also been made toward achieving the Millennium Development Goals (MDGs) in education, access to health services, and gender, though from a very low base.21

33. Education has been a national priority and accounts for the second largest share of the government’s operating budget after security. Primary school attendance has risen rapidly to 54% of full enrollment, and the expected number of years of schooling per student rose from 2.2 years in 2000 to 9.1 years in 2010. The ratio of Share of females females to males enrolled in primary schools improved from 60% in 2005 to 67% in in secondary and 2010, but the proportion of females in secondary and tertiary education has not tertiary returned to the levels that existed in 1990—clearly improvements in primary education, education has as also overall literacy rates, will take several years to work their way through to higher levels. The proportion of women in the National Assembly, at nearly 28%, is somewhat not reached what higher than in the regions due to a constitutional requirement on women’s existed in 1990 representation in the National Assembly, but remains marginal at the provincial level.

34. Access to health services has improved in part due to the efforts of foreign nongovernment organizations (NGOs), but gains in health indicators have been generally modest, according to the latest available data from 2008. Maternal mortality rates fell from 1,800 to 1,400 per 100,000 live births, but infant mortality rates, at around 103 per 1,000 live births, and mortality rates for children under 5 years old, at 149 per 1,000 live births, remain high and little changed.22 Overall life expectancy has increased by just 2.5 years to around 48 years. This is 17–20 years below life expectancy rates in South Asian countries (Appendix 3).23

35. Overall, the UN reports that Afghanistan has made progress toward five of the eight MDGs but is behind on eradicating extreme poverty and hunger, promoting gender equality and empowering women, and ensuring environmental sustainability. A ninth goal (for adequate security) has been added. 24 Given the greater resource constraints that Afghanistan is likely to face after 2014, progress is likely to slow rather than accelerate, and only few goals seem likely to be achieved. A sharp deterioration in the security and political environment could even reverse the progress made so far. Even if it achieved the MDGs, Afghanistan would continue to do more poorly in terms of socioeconomic conditions than other countries in the region.

C. New Challenges in the Post-Transition Period

36. Afghanistan will face additional security and budgetary challenges after foreign Afghanistan will troops withdraw in 2014 and the exceptionally high level of foreign support it has face additional received during the evaluation period is reduced. Under the Kabul Process formalized in security and July 2010 between the government and the international community, foreign troops budgetary cutbacks by 2014 will leave only a much reduced but as-yet undetermined number of soldiers on bases for backup support and training of Afghan forces. The government challenges under the Kabul Process

21 Since Afghanistan was unable to participate in the Millennium Summit held in 2000 because of ongoing conflict, it endorsed the Millennium Declaration only in 2004. Consequently, its MDG targets are set for 2020 with a baseline of 2002–2005. It also added an MDG of ensuring adequate security (from insurgency, law and order problems, and illicit activities). Baseline and current data regarding social indicators are incomplete and often contradictory, however, which makes only a partial review of its progress in achieving MDG targets possible. (Available data regarding MDGs are presented in Appendix 2). 22 Despite improvements in immunization rates. 23 However, recent data, still being collected and verified and expected to be available in the second quarter of 2013, suggest substantial improvement in health indicators since 2008. 24 These were the MDGs on achieving universal primary education; reducing child mortality; improving maternal health; combating HIV/AIDS, malaria, and other diseases; and developing a global partnership. 12 Afghanistan Country Assistance Program Evaluation

will be responsible for both carrying out and funding security operations throughout the country. I. 37. The government will also assume responsibility for development initiatives and processes. This will occur at the same time that foreign aid starts declining, although the extent and pace of this decline remain unclear. The government will find it difficult to manage its fiscal deficit while continuing to support development, provide basic services, and keep its external account sustainable.

Reduced 38. The withdrawal of foreign troops is expected to have implications for security international and also to have economic impacts, due to the need for the government to take on a presence will larger share of security spending, as well as reduced purchases of domestic goods and services by foreign troops. Similarly, a reduced international (nonmilitary) presence in likely result in Afghanistan will likely result in lower employment of local civilians and have negative lower income and employment effects. The IMF has estimated that these developments may employment and reduce average GDP growth from 9%–10% which had risen from a low base in the have negative recent years to 4%–6% in the near future, with corresponding implications for domestic income and government revenue growth. II. employment 39. On top of the additional security expenditure, the government will need to effects finance the operation and maintenance (O&M) of projects that will be handed over by development partners, including ADB. The World Bank tentatively estimates these additional O&M costs at $1 billion–$2 billion a year. This will place a huge burden on the current nonsecurity operating budget of around $1.4 billion budget. The possibility that these projects will not be sustained with proper O&M is very real. III. 40. With multilateral support, the government is moving to manage some of these risks by improving the budgetary process and financial management in particular. It is also planning to introduce a value added tax and is strongly promoting several large mining projects to enlarge its revenue base. This is in addition to more general efforts to accelerate private sector development and increase competitiveness. The transfer of international support through the budget is also expected to improve the predictability of financing available for specific projects and hence the execution of development projects.

41. Still, using baseline assumptions of GDP and revenue growth and projected government expenditures, and with an assumption that expenditures will be better managed, the IMF and the World Bank project that the country is likely to achieve partial fiscal sustainability—defined as domestic revenues covering operating expenditures—only by 2024–2025. Afghanistan, moreover, would remain dependent on foreign support for its development expenditures between now and then and even beyond. 25 Table 1 shows these projections and indicates the foreign support Afghanistan is expected to need during 2012–2025. This may be a best-case scenario, however, because a serious risk exists that the baseline assumptions upon which the projections are predicated cannot be met. The security situation may worsen. Actual revenue growth could be slower than projected. 26 Donors may reduce aid sharply. Expected reforms and improvement in governance may be too slow or not take place at

25 IMF. 2011. Islamic Republic of Afghanistan: Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility. Appendix II: Estimating the Impact of Military Transition and Transformation, Staff Supplement—A Joint World Bank/IMF Debt Sustainability Analysis. Washington, DC. p. 85. 26 The World Bank’s strategy is set out as an interim strategy note rather than a country partnership strategy to allow it flexibility in the event of further worsening of security conditions during the ongoing armed conflict. Country Context 13

all, which would deter significant improvement in private investments. If any or all of these risks eventuate, economic growth will be lower and possibly much lower than projected, and the fiscal outlook worse. Government outlays would have to be cut dramatically, and the sustainability of social and investment programs and infrastructure would be negatively affected.

Table 1: Medium- and Long-Term Baseline Projections for Selected Economic and Financial Indicators 2011– 2012– 2013– 2017– 2019– 2021– 2024– Item 2012 2013 2014 2018 2020 2022 2025 Baseline Assumption Real GDP growth (%) 5.7 7.1 5.8 6.6 5.6 5.4 3.9 GDP per capita ($) 591 612 637 758 802 860 918 Government Financing Domestic revenue (% of GDP) 11.5 11.3 11.6 15.6 15.5 16.4 17.4 Grants (% of GDP) 12.2 12.4 12.4 7.7 6.6 6.1 5.4 Overall expenditures (% of 23.8 25.3 25.7 25.1 24.6 25.1 25.3 GDP) Operating expenditures (% of 17.6 18.6 18.7 17.4 16.5 16.7 17.4 GDP) Overall balance (including 0.0 (1.6) (1.7) (1.7) (2.5) (2.6) (2.6) grants) External Sector Current account, excluding (34.3) (33.2) (31.5) (21.3) (17.3) (14.1) (10.4) official transfers (% of GDP) ( ) = negative, GDP = gross domestic product. Sources: International Monetary Fund. 2011. Islamic Republic of Afghanistan: 2011 Article IV Consultation and Request for a Three-Year Arrangement under the Extended Credit Facility. Staff report; World Bank projections.

42. The international community can help avoid this by not reducing support by too much. A great deal will depend on Afghanistan’s own efforts, however, which makes strong action all the more urgent to ensure that the limited funds available will be used more effectively than in the past. International conferences were held in May 2012 in Chicago to discuss security issues and in July 2012 in Tokyo to discuss future economic aid to Afghanistan for reconstruction during a transformation decade from 2015. The results that emerged, along with ongoing economic and sector work by the IMF and the World Bank, will make the prospects for the country more clear. Nonetheless, how the political and security situation evolves after foreign combat troops leave Afghanistan and whether the current and future governments have the capacity to meet much greater responsibilities as international support declines may largely determine the country’s future. CHAPTER 3 Country Strategies and Program

A. Government Strategy

The strategy had 43. In April 2002, representatives of 60 multilateral and bilateral assistance three pillars: agencies met in Kabul for the Afghan Implementation Meeting, where the interim (i) building administration of Afghanistan presented its national development framework of priorities and plans. The strategy had three pillars: (i) building human and social capital, human and (ii) building physical infrastructure, and (iii) developing the private sector. social capital, (ii) building 44. The government’s priority program to develop human social capital focused on physical supporting the return and reintegration of internally displaced persons and refugees. infrastructure, The framework also aimed to improve education, concentrating initially on the recruitment and training of teachers and on vocational education to absorb former and combatants and a lost generation of young people who had received very little (iii) developing practical education under the Taliban. The program also sought to address the problem the private sector of chronic malnutrition and a lack of preventive health care through investments directed toward the poor and rural areas.

45. Priority programs included the development of transport, water and sanitation, energy, urban management, and natural resource infrastructure. The government also laid out a set of diverse measures for private sector development in finance, investment, and trade and through anticorruption activities.27

46. In April 2008, the Afghanistan National Development Strategy (ANDS) for 2008–2013 was approved by the government cabinet and immediately submitted to the executive boards of the IMF and the World Bank as Afghanistan’s poverty reduction strategy paper. The IMF and World Bank boards endorsed the ANDS in June 2008. The strategy’s overriding objective was to reduce poverty substantially, improve the lives of the Afghan people, and build the foundation of a secure and a stable country.28 The ANDS visions for Afghanistan were “(i) a stable Islamic constitutional democracy at peace with itself and its neighbors, standing with full dignity in the international family; (ii) a tolerant, united, and pluralistic nation that honors its Islamic heritage and the deep seated aspirations toward participation, justice, and equal rights for all; and

27 Such measures include (i) strengthening the enabling environment by (a) a stable macroeconomic environment and supportive financial system, (b) private sector investment: attracting private sector participation and legislative reform, (c)administrative reform, (d) formalizing private sector operations, (e) improve private sector access to finance, (f) maintain a pro-trade environment, (g) firm-level technical assistance, (h) trade facilitation; (i) NGOs and civil society; (ii) expand opportunities for private investment in infrastructure and natural resources development by (a) establishing a multisector regulatory authority; (b) creating opportunities for entering into public private partnerships for investment in infrastructure projects; (c) and encouraging private provision of public services wherever it will be feasible; and (iii) concerted private sector investment promotion. 28 Islamic Republic of Afghanistan. 2008. Afghanistan National Development Strategy. Kabul. p. 5. Country Strategies and Program 15

(iii) a society of hope and prosperity based on a strong, private sector-led market economy, social equity, and environmental sustainability.” The ANDS also identified regional cooperation, counter narcotics and anticorruption efforts, gender equity, capacity development, and the environment as key crosscutting themes.

47. The financing requirement for implementing ANDS during 2008–2013 was estimated at $50.1 billion. Infrastructure was to receive 34% of the budget, and security expenditures 28%. The bulk of the ANDS planned development financing was expected to come from sustained high levels of external funding.

48. Government ministries have prepared 22 national priority programs (NPPs) that The objective of prioritized the ANDS, and 15 had been endorsed by a joint coordination and the national monitoring board of the government and the international community by October priority program 2011, prior to the Bonn conference in December of that year. The objective of the NPP instrument was instrument was to consolidate hundreds of Afghan bilateral and multilateral development projects into a coherent suite that could be systematically absorbed by to consolidate the responsible agencies and into the budget to facilitate their sustainability. The hundreds of government’s economic development strategy is embedded within the NPPs. The Bonn Afghan bilateral Conference confirmed a strategic consensus on deepening and broadening the and multilateral partnership between Afghanistan and the international community. development

projects into a B. ADB’s Country Strategies and Program coherent suite 49. ADB assumed a key role from September 2001 in the international community’s efforts to plan for and assist in reconstruction in Afghanistan. In response to a request from the Afghanistan Reconstruction Steering Group, ADB, along with the United Nations Development Programme (UNDP) and the World Bank, prepared the preliminary needs assessments in 2001 and 2002. These assessments identified mainly immediate and short-term government priorities and required actions but could not implement assessment for people’s needs. The assessments became the basis for the international community’s pledges of $4.5 billion in aid to Afghanistan at the Conference on the Reconstruction of Afghanistan in Tokyo in January 2002. ADB staff later worked with UNDP and the World Bank to complete a comprehensive needs assessment in close cooperation with the interim administration of Afghanistan. ADB took the lead in the agriculture, education, infrastructure, and environment sectors. The interim administration had formulated a national development framework, which was reviewed at the first meeting of the Afghanistan Implementation Group in Kabul in April 2002, and this was taken into account in ADB’s own strategy.

50. ADB’s initial CSP for Afghanistan was finalized in May 2002. The objective was It was agreed to help the government rebuild and rehabilitate the country and ensure a seamless that ADB would transition from humanitarian aid to reconstruction and development assistance. The initial strategy focused not on outcome objectives (pillars) but on required inputs. support the Because a fragile situation prevailed, the initial CSP covered only 2002–2004, the period transport, for which ADB had committed to a $500 million program at the Tokyo conference in energy, and January 2002. An update of the CSP in April 2003 added several changes. 29 The natural resource government had asked that ADB and all of Afghanistan’s other development partners management focus their assistance on a maximum of three sectors each. This was intended to minimize overlap and duplication of effort and improve efficiency and effectiveness. It sectors, as well was agreed that ADB would support the transport (roads and civil aviation), energy as governance (power, petroleum, and gas), and natural resource management (agriculture, irrigation, and finance

29 ADB. 2002. Country Strategy and Program Update: Afghanistan, 2003–2005. Manila. 16 Afghanistan Country Assistance Program Evaluation

and environment) sectors, as well as governance and finance.30 Program requirements for 2003–2005 were estimated at $610 million, in line with ADB’s pledge in Tokyo in 2002 and with the needs of the national budget.

In March 2004, 51. Another CSP update in August 200431 followed a conference in Berlin on 31 32 ADB also March on the future partnership between Afghanistan and the international community. In Berlin, ADB pledged to consider support of about $800 million in ADF formally opened loans and grants during 2005–2008, subject to the outcome of the ongoing ADF its resident replenishment negotiations and the future availability of ADF resources. The social and mission in Kabul financial sectors were no longer ADB's priority since this would have been inconsistent with the three-sector rule. In March 2004, ADB formally opened its resident mission in Kabul with three international, five national, and four administrative staff members.

52. ADB’s CPS was updated for the third time in August 2005, covering 2006– 2008.33 The changes were minor. The update noted that the government was slowly moving from postconflict crisis management to more long-term sustainable development planning (Appendix 4).

53. In November 2008, ADB launched the second full-fledged CPS for Afghanistan. 34 The objective was to help achieve the high economic growth rates required to support the government’s key development objectives. The second CPS was consistent with the ANDS.35 ADB’s ongoing and future investments would continue to support Afghanistan’s economic growth, thus contributing to the country’s economic and social development and to poverty reduction. At the government’s request and in line with ADB’s Strategy 2020, ADB’s support to Afghanistan would remain focused on a limited number of priority sectors and subsectors. The strategy was also aligned with activities supported through the Central Asia Regional Economic Cooperation (CAREC) program.

C. ADB Portfolio

54. ADB approved $2,732.16 million in loans, grants, and TA to Afghanistan during the CAPE period 2002–2011 (Table 2). Most of the support was drawn from the ADF (83.0%), with the balance provided by the Japan Fund for Poverty Reduction (JFPR), ADB’s Technical Assistance Special Fund, bilateral support, and the Afghanistan Infrastructure Trust Fund (para. 62). Funding from the ADF has been provided to support postconflict recovery in Afghanistan. Grants comprised 64.5% of ADB support in recognition of the government’s limited financial capacity. The loans were provided

30 This sector selection derived from (i) the need to accelerate the transition from humanitarian assistance to reconstruction and development, while recognizing the continued need for substantial relief assistance; (ii) the government’s budgetary objectives and its priority national development programs and subprograms; (iii) ADB’s comparative advantage and ability to provide critically needed support in these areas; (iv) considerable development partner interest in certain sectors, including education and health, coupled with inadequate support for such other strategically important areas as transport, energy, and natural resource management; and (v) the recent operational experience of ADB and of other development partners in Afghanistan. 31 ADB. 2004. Country Strategy and Program Update: Afghanistan, 2004–2006. Manila. 32 The Berlin conference, entitled Afghanistan and the International Community—A Partnership for the Future, was co-chaired by the UN and the governments of Afghanistan, Germany, and Japan. 33 ADB. 2005. Country Strategy and Program Update: Afghanistan, 2006–2008. Manila. 34 ADB. 2008. Country Partnership Strategy: Afghanistan, 2009–2013. Manila. 35 The country strategy and program was changed to the country partnership strategy in 2006. Country Strategies and Program 17 on highly concessional terms.36 ADB has provided $200 million as 50% grants for 2005– 2006 and $1.347 million as 100% grants since 2007. Ten JFPR projects were approved, totaling $110.0 million. Eight of the 10 grants were above the $2.5 million cutoff ($3 million for emergency loans), as per general JFPR guidelines (Appendix 5).

Table 2: ADB Loans, Grants, and Technical Assistance to Afghanistan, 2002–2011 Amount Share Item Number ($ million) (%) A. Loans Sovereign (ADF) 11 702 25.7 Nonsovereigna 7 198 7.3 Equity 8 0.3 OCR 135 5.0 B-loan 30 1.1 Guarantee 25 0.9 Subtotal 18 900 33.0 B. Grants ADF 18 1,547 56.6 Non-ADF (JFPR, JFICT) 10 110 4.0 Others (AITF, bilateral)b 6 105 3.8 Subtotal 34 1,762 64.4 C. Technical Assistance Capacity development 2 3 0.1 Policy and advisoryc 33 51 0.6 Project preparatory 14 16 1.9 Subtotal 49 70 2.6 Total ADB Financing 2,732 100.0 ADB = Asian Development Bank, ADF = Asian Development Fund, AITF = Asian Infrastructure Trust Fund, JFICT = Japan Fund for Information and Communication Technology, JFPR = Japan Fund for Poverty Reduction, OCR = ordinary capital resources. a Includes one cancelled investment (Sungas LLC). b Number is reduced by 1 to account for a grant with approved funding from both JFPR and a bilateral trust fund. c Due to ADB reclassification of technical assistance initiatives, advisory technical assistance has been subsumed under policy and advisory technical assistance. Source: Asian Development Bank loan, technical assistance, grant, and equity approvals database (as of 16 March 2012).

55. The overall loan and grant disbursement rate for Afghanistan for the 2002– 2011 CAPE period was only 44% ($1.1 billion of approved amount), reflecting the lack of capacity in Afghanistan to implement projects, Technical assistance, which is short term in nature, has a higher disbursement rate of 63%.

56. Figure 4 shows the sector breakdown of loans, grants, and advisory TA during Multisector TA the period. The largest portion of the loans and grants, 56%, went to the transport and operations information and communication technology sector. It was followed by energy, at 16%, and multisector and agriculture and natural resources (ANR), which accounted for 11% included capacity each. ANR activities emphasized irrigation. The major components under multisector development TA were transport, energy, and water and irrigation. In terms of number, there were 10 covering many projects in the transport sector, 6 projects in energy, 1 project and 1 program in sectors multisector, 8 projects (including 3 program loans) in agriculture and irrigation, 3 projects (including a program loan) in finance, 1 program loan in PSM, and 1 project

36 ADB program loans to Afghanistan had a repayment period of 40 years, including a grace period of 10 years, and an interest rate of 1.0% per annum. In addition, the interest rate charged during the grace period was to be capitalized and charged to the loan accounts. 18 Afghanistan Country Assistance Program Evaluation

each in the education and health sectors. The nonsovereign operations had four projects under finance and information and communication technology. The bulk of ADB TA was for advisory and policy projects. TA differed in makeup from loans and grants. Transport received a much smaller share, and multisector a larger one. This is because multisector TA included capacity development TA operations in numerous sectors.

Figure 4: Sector Shares of ADB Support for Afghanistan, 2002–2011

Loans and Grants Policy and Advisory Technical Assistance Water and $30m, other Education, 1% Transport municipal health, ANR $7m, and ICT ANR infrastructure and social 0% $5m, protection $281m, 9% $7m, 11% 13% Energy $8m, Energy  $430m, $15m, 15% Transport PSM 16% 27% and ICT Finance $2m, $83m,  $15m, $1,479m, 3% Finance $297m, 3% 56% 29% 11% Multisector $2m, Industry Multisector 4% and trade

$55m, 2% PSM ADB = Asian Development Bank, ADTA = advisory technical assistance, ANR = agriculture and natural resources, ICT = information and communication technology, m = million, PSM = public sector management. Source: Asian Development Bank.

D. Allocation of Funding from the Asian Development Fund

57. Afghanistan is the fourth largest recipient of ADF loans and grants behind Bangladesh, Viet Nam, and Pakistan (Figure 5). It also ranks fourth on a per capita basis after Viet Nam, Bangladesh, and Pakistan. Afghanistan is the largest recipient of ADF grants, and received more than one-third of total ADF grants during 2002–2011 (Figure 6). The ADF funding was been allocated to the country based on performance-based allocation (PBA) and other set-asides.37

37 The set-asides of ADF XI were for Pacific countries, regional cooperation and integration, a disaster response facility, responding to economic crises, and support for postconflict countries. Country Strategies and Program 19

Figure 5: ADF Allocation for 2002–2011: Figure 6: ADF Allocation for 2002–2011: Grants Loans and Grants Rest of MON, DMCs, 4% 11% Rest of BAN, AFG, DMCs, 17% KGZ, 6% 37% 26% CAM, VIE, 6% 15% CAM, 5% LAO, 9% SRI, PAK, TAJ, 5% NEP, AFG, 14% 10% NEP, 7% 11% 17%

ADF = Asian Development Fund, AFG = Afghanistan, ADF = Asian Development Fund, AFG = Afghanistan, CAM = BAN = Bangladesh, CAM = Cambodia, DMC = Cambodia, DMC = developing member country, KGZ = Kyrgyz developing member country, NEP = Nepal, PAK = Republic, LAO = Lao People’s Democratic Republic, MON = Pakistan, SRI = Sri Lanka, VIE = Viet Nam. Mongolia, NEP = Nepal, TAJ = Tajikistan, VIE = Viet Nam. Source: Asian Development Bank. Source: Asian Development Bank.

58. Table 3 shows the actual and indicative ADF allocation to Afghanistan during the ADF XI period. ADF support for Afghanistan has included PBA and a postconflict premium that was exceptionally large. This premium, decided during consecutive ADF meetings, has been a major source of the country’s funding. The postconflict categorization meant that ADB started to phase the premium out over 6 years to end in 2009. The ADF X allocation for the country for 2009–2010 was reduced to 11/14 or 78.57% of the ceiling.38 ADB had intended to terminate the postconflict premium in 2014 but in 2010 suspended the phaseout planned for 2011–2012 due to Afghanistan’s substantial development needs. During the ADF XI replenishment meeting in March 2012, ADF donors decided to resume the phaseout in 2013 but extended the phaseout period by 2 years to end in 2018.

Table 3: Asian Development Fund Allocation to Afghanistan ($ million) ADF VIII ADF IX ADF X ADF XI 2001– 2003– 2005- 2007- 2009- 2011- 2013- 2015- ADF Allocations 2002 2004 2006 2008 2010 2012 2014 2016 Postconflict premium 0 320 400 400 446 409 359 227 Performance-based allocation 0 0 0 0 102 149 152 156 Total 0 320 400 400 548 558 511 383 ADF = Asian Development Fund. Source: Asian Development Bank.

59. ADB calculates the PBA by a formula based on population, income, and a country performance assessment that ADB conducts annually.39 The amount allocated for Afghanistan under the PBA, which started in ADF X, was expected to increase under ADF XI. This is due to an increase in the estimated commitment authority of development partners, implying an increase in the pool of funds, and does not directly relate to Afghanistan's performance. This expectation was not in line with the

38 Postconflict premium = 11/14*($670 million—performance-based allocation). 39 The allocation formula is a multiplicative formula of three variables: the composite country performance rating, population, and gross national income per capita. ADB assesses country performance based on quality of macroeconomic management, coherence of structural policies, the degree to which a country’s policies and institutions promote equity and inclusion, and quality of governance and public sector management. 20 Afghanistan Country Assistance Program Evaluation

postconflict premium, however, which seems to have been justified by an anticipated improving situation in the country.

60. The ADF allocation to Afghanistan under ADF XI has been based on the current CPS. While the CPS period ends in 2013, the ADF allocation is for 2013–2016. The objectives for Afghanistan during ADF XI should be forward-looking, reflecting the current status of Afghanistan’s security and key lessons from the ADB support.

61. Although it seems a foregone conclusion that ADF grants for Afghanistan will decrease, it would be difficult to replace grants with loans. ADB provided 11 loans in the early stage of its support to Afghanistan. The IMF has estimated that the government will achieve partial fiscal sustainability of operating expenditures, excluding development budgets, only by 2024–2025 (para. 41). Repayments of the loans to ADB will start in 2013. The total amount repayable to ADB in 2013 in special drawing rights is equivalent to about $7 million. This will increase gradually each year to the equivalent of $30 million in 2026. Given Afghanistan’s fiscal position, ADB needs to assess where it will be feasible for the government to make these repayments.

E. Afghanistan Infrastructure Trust Fund

62. The Afghanistan Infrastructure Trust Fund (AITF) was established by ADB in ADB should 2010 to finance the country’s infrastructure funding requirements. Through grant strengthen its cofinancing, the fund supplements financing for infrastructure projects provided by management ADB from its own operational budget. The governments of Japan and the United Kingdom have committed $126 million to the fund as of 31 May 2012. 40 Another framework multidonor trust fund is the Afghanistan Reconstruction Trust Fund (ARTF), which was including established in 2002 and has been administered by the World Bank. More than 30 participatory donors pledged $4.8 billion for the ARTF as of December 2011. Although ADB does not mechanism of provide funds through this mechanism, it is a member of the ARTF Management AITF Committee and has attended meetings regularly. Box 2 shows the features and management mechanism of both funds. The ARTF has a more collaborative structure with other donors than the AITF, which has been managed solely by ADB. The World Bank established an exclusive administration unit that maintains staff both in Kabul and at headquarters to manage the ARTF. A financial and disbursement team in the unit assists the correct and timely funds utilization, including conducting centralized procurement. The World Bank has contracted monitoring agents to assist in ensuring proper fiduciary management related to the recurrent cost financing and to undertake field verification of project outputs through site visits. Since the phaseout of the post- conflict premium of ADF will resume in 2013, to be completed by 2018, ADB needs an alternative management arrangement if ADB is to maintain its support for Afghanistan through the Kabul Process. The current sole management framework of the AITF is appropriate to manage a relatively small amount. However, to increase cooperation with other agencies, ADB needs to strengthen its management framework, including accountability procedures.

40 ADB. 2012. Afghanistan Infrastructure Trust Fund Annual Report (1 January 2011–31 May 2012). Manila. Country Strategies and Program 21

Box 2: Pooling External Resources in Afghanistan

The Afghanistan Reconstruction Trust Fund (ARTF), established in 2002, and the Afghanistan Infrastructure Trust Fund (AITF), established in 2010 are two multiagency initiatives established to enhance development effectiveness in Afghanistan. The ARTF, administered by the World Bank, aims to pool external resources to fund recurrent as well as investment costs consistent with the government's development strategy. The AITF, managed by the Asian Development Bank (ADB), aims to pool resources and support infrastructure investments and related technical assistance in Afghanistan. The AITF focuses on core infrastructure projects co- financed and screened by ADB. The AITF does not have a window for recurrent costs. Both the ARTF and AITF charge the development partners a small service charge for managing the funds.

Despite the above similarities, the management frameworks for the two initiatives are different. The World Bank is the administrator of the ARTF, and acts as its secretariat. The ARTF is overseen by a Management Committee, which approves all financing proposals. The Management Committee comprises ADB, the Islamic Development Bank, United Nations Development Programme, World Bank, and more recently the Ministry of Finance (MOF). A Steering Committee, which meets monthly in Kabul, sets the strategy for the ARTF and is responsible for implementation. The Steering Committee consists of ARTF donors that contribute more than $5 million in a given year, the World Bank, and MOF; other Management Committee members participate as observers.

The AITF’s decision-making and approval processes reflect trust-based aid collaboration. The AITF follows ADB procedures, and the ADB President has been delegated authority to approve all AITF financing. ADB remains accountable for the proper use of funds consistent with AITF principles, and is responsible for sending the contributors biannual reports on financing approved, and regular progress reports. The AITF’s Implementation Guidelines recommend that ADB meet with the contributors (Financing Partners) semiannually to review the annual work program, progress in implementing the annual work program, the performance of AITF projects, and the pipeline of projects and administrative matters.

Two AITF features are noteworthy: First, implementation of projects cofinanced by the AITF is through the sector ministries, ensuring greater ownership of the investments. A second distinct merit of the AITF is a clear results framework with a set of predetermined output and outcome indicators. This is a valuable tool provided the results are monitored against the framework. Greater contributor participation in the AITF’s management, note some observers, would help increase contribution beyond the two contributors (Department for International Development of the United Kingdom and the Government of Japan) as of March 2012.

Sources: Independent Evaluation Department discussions with stakeholders; ARTF website http://www.worldbank.org/artf; Scanteam. 2008. Afghanistan Reconstruction Trust Fund: External Evaluation Final Report. Oslo; Scanteam. 2005. Afghanistan Reconstruction Trust Fund: External Evaluation Final Report. Oslo; ADB. 2010. Afghanistan Infrastructure Trust Fund. Manila; ADB. 2012. Afghanistan Infrastructure Trust Fund: Changes in Implementation Structure. Manila.

CHAPTER 4 Design and Implementation of the Strategies and Program

A. ADB’s Role in the Extensive Foreign Support

1. Early Development Partner Initiative

Externally and 63. ADB is the fourth largest of Afghanistan’s 10 major development partners in centrally driven terms of total support. This relatively prominent position allowed ADB to assume a significant role in shaping the post-2001 transition process. How well it played that role development was and how this role enabled ADB to position itself strategically among the other shaped in a series development partners must be assessed within the geopolitical context of the of high level continuing conflict in Afghanistan. Numerous high-level international conferences were international held during the CAPE period to debate and build international consensus on the level conferences of support, the approach to be taken, and the delineation of tasks among the key actors.41 A major purpose of these conferences was to obtain financial commitments from the participants to support Afghanistan’s transition. Externally and centrally driven development was shaped in a series of high level international conferences. ADB participated actively in the preparation of the conferences and made pledges at them to support the overall international development agenda for the country.

64. These pledges have been reflected in ADB’s country strategies. Table 4 shows the scale of involvement of participating countries and international finance institutions in terms of their overall support packages, excluding and including the security component. The figures illustrate the dominant role played by the US in both categories. US support came from three main players, the US embassy, the US military, and the United States Agency for International Development (USAID), with shares of around 19%, 64%, and 17%, respectively.42 The share of the US military in the country’s overall support was about 40%.

The initial ADB 65. The initial ADB program was based on a preliminary needs assessment jointly undertaken by ADB, the World Bank, and the UNDP in 2001 and 2002. The assessment program was also served as an input for the series of international conferences on Afghanistan held based on a in those early years. Strategic work by key development partners and the conference preliminary deliberations ensured aid coordination in the early stages, because the preliminary needs needs assessment clearly identified the immediate and short-term government priorities assessment 41 Such international conferences were held in Bonn (2001), Tokyo (2002), Berlin (2004), London (2006), Rome (2007), Paris (2008), The Hague (2009), London (2010), Kabul (2010), Lisbon (2010), Bonn (2011), Chicago (2012), and Tokyo (2012). 42 US Congress. 2011. Special Inspector General for Afghanistan Reconstruction, 2011. Washington, DC. The share of the US embassy includes other agencies. Design and Implementation of the Strategies and Program 23 and the actions required to address them. ADB also relied on analytical work undertaken by the World Bank and the IMF. These diagnostics provided inputs for ADB’s initial CSP for 2002–2004. Table 5 shows each development partner and its sector priorities.43 ADB focused on three infrastructure sectors, as requested by the government (para. 50). Many partners have provided support for energy, water, agriculture, and rural development. Although the government asked in 2003 that they limit activities to three sectors each, most supported more.

Table 4: Support to Afghanistan, 2002–2010 With Security Without Security Rank Development Partner Share (%) Development Partner Share (%) 1 United States 64.3 United States 41.5 2 Japan 4.6 European Union 6.4 3 European Union 4.2 Asian Development Bank 6.1 4 Asian Development Bank 3.3 Japan 5.9 5 World Bank Group 3.1 World Bank Group 5.7 6 Germany 3.1 Germany 4.9 7 United Kingdom 3.0 United Kingdom 4.6 8 India 2.1 India 3.9 9 Canada 1.8 Canada 3.0 10 Netherlands 1.5 Netherlands 2.2 Total for Top 10 Development Partners 90.9 84.3

Other development partners 9.1 15.7 Total 100.0 100.0 Source: Islamic Republic of Afghanistan, Ministry of Finance. 2010. Development Cooperation Report. Kabul.

Table 5: Priorities in Afghanistan of Top 10 Development Partners (Based on share of overall committed support) EC/ Item ADB WB CAN EU GER IND JAP NED UK US Security 1 5 1 2 3 3 1 Governance and rule of law 3 3 4 4 4 Energy 2 4 8 6 3 3 2 Transport 1 7 5 Urban development 6 1 6 Mining 6 Water, agriculture, and rural 3 1 2 1 2 1 1 1 3 development Education and culture 5 6 7 2 4 5 Health and nutrition 2 4 2 5 5 Social protection 5 4 3 2 Private sector development 4 3 7 7 4 2 and trade ADB = Asian Development Bank, CAN = Canada, EC = European Commission, EU = European Union, GER = Germany, ICT = information and communication technology, IND = India, JAP = Japan, NED = Netherland, UK = United Kingdom, UN = United Nations, US = United States, WB = World Bank. Notes: 1. Top sectors are ranked by percentage share relative to a partner’s total support, with 1 as the highest. 2. 5% is used as the threshold percentage share to determine a sector's inclusion among development partners' sector priorities. Sources: Asian Development Bank loan, technical assistance, grant, and equity approvals database (as of 16 March 2012), Independent Evaluation Department; and National Budget and Aid Management Systems Afghanistan. Development Assistance Database Afghanistan (as of 12 April 2012).

43 The Ministry of Finance maintains a development assistance database in which all development partners, including bilateral ones, are registered. While registration of all assistance is a requirement for all development partners, it is not always done in practice. However, the database is still useful as an indicator of the direction and magnitude of external assistance. 24 Afghanistan Country Assistance Program Evaluation

2. ADB’s Strategy Aligned with Country Priorities

66. The ADB program was well aligned with the country’s and the government’s ADB has priorities and strategies throughout the evaluation period. Since resuming operations in emphasized the Afghanistan, ADB has emphasized the need to overcome critical infrastructure need to constraints, develop public sector capacity to maintain security and deliver basic overcome critical services in the short term, and develop capacity for a mid- and long-term public sector infrastructure takeover of delivery of the full range of government services. This strategy aimed to develop accountable and transparent governance. ADB has kept its strategy in line with constraints the government’s development priorities. Support for large infrastructure projects was also expected to lead to large-scale employment, help restore livelihoods, and reduce poverty. However, the strategy did not specify outcome objectives (or pillars).

3. Response to Government Request for Strategic Focus

Initially, a more 67. ADB’s initial CSP covered a wide range of sectors, including health and selective education. While the country had a multitude of diverse reconstruction and approach and a development needs, a more selective approach and a focus on fewer priorities would have been more strategic. When the government asked in 2003 that all development focus on fewer partners concentrate on no more than three sectors to improve aid coordination, ADB priorities would chose transport, energy, and natural resources management. Private sector and PSM have been more were later added at the government’s request. The sector breakdown of overall strategic international development assistance, excluding security, is illustrated in Figures 7 and 8. Infrastructure and natural resources, the largest single category, with 33.9% of the total, is where ADB focused its support. Further details about the strategic positioning of the transport, energy, ANR, private sector financing, PSM, and capacity development are discussed in Appendixes 6–10.

Figure 7: International Development Assistance to Afghanistan by Sector, 2002–2011

11.6 33.9 9.8 9.1 20.5 7.5 5.5 2.2 % Share % Share

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 Governance and rule of law Infrastructure and natural resources Education and culture Health and nutrition Agriculture and rural development Social protection Economic governance Unclassified Note: The order of the shades in the chart is the same as the order of the sectors in the legend. Source: Development Assistance Database Afghanistan. National Budget and Aid Management Systems Afghanistan. http://dadafghanistan.gov.af/dad/# (as of April 2012).

Design and Implementation of the Strategies and Program 25

Figure 8: External Assistance to Afghanistan by Sector, 2002–2011

0.03 0.4 Transport 32.4 4.3 0.9 30.7 2.6 26.0 0.1 2.6

1.2 5.0 Energy 8.4 4.9 0.5 57.9 4.2 13.2 3.6 1.0

Agriculture, 2.0 0.5 Rural Dev't 1.2 3.1 3.5 19.9 10.8 45.4 and Water 6.5 7.1

0.00 20.00 40.00 60.00 80.00 100.00 ADB Canada EC/EU Germany India Japan UK US World Bank Others

ADB = Asian Development Bank, EC = European Commission, EU = European Union, UK = United Kingdom, US = United States. Note: The order of the shades in the chart is the same as the order of the donors in the legend. Source: Development Assistance Database Afghanistan. National Budget and Aid Management Systems Afghanistan. http://dadafghanistan.gov.af/dad/# (as of April 2012).

4. ADB Aid Coordination Role Confined to Infrastructure Sector

68. After development partners coordinated successfully in the initial diagnostic assessments, collaboration declined. ADB then generally ceased to play a major role in aid coordination, except in the infrastructure sector. Leadership in any collaboration that did take place rested with the World Bank and other players. In fact, little emphasis was put on links and complementarities between the efforts of individual development partners or of the government during the CAPE period.

69. Coordination issues evolved with the increasing size of aid programs and Coordination number of partners, making duplication of effort often unavoidable. Development actors sometimes approved similar support at the same time. The government was issues evolved unable to coordinate assistance properly. This was especially the case with off-budget with the assistance. Meanwhile, development partners did not always communicate with one increasing size of another. For example, an investment plan by USAID for energy transmission overlapped aid programs with the second tranche of ADB’s Energy Sector Development Investment Program. and number of Discovery of this conflict delayed the ADB project at least 6 months. The ADB Private Sector and Financial Market Development Program had substantial overlaps with partners, making another of the same agency’s programs. The interim CSP and its updates had not duplication of planned for any private sector lending. Nonetheless, ADB processed four private sector effort often loans. In contrast, although the private sector is a thematic topic of the second CPS, no unavoidable private sector projects have been processed during this CPS period. Evidence also exists that duplication of capacity development efforts and variations in development approaches by development partners have burdened the government’s institutional capacity and reduced the effectiveness of ADB support. ADB’s limited staffing capacity at its Afghanistan Resident Mission also contributed to a lack of local coordination with development partners, notably in the agriculture subsector.

70. Policy level collaboration led by ADB showed positive results in the energy sector but less so in others. In the energy sector, regular coordination meetings between development partners have taken place since establishment of an interministerial committee for energy. This enabled a rational allocation of resources for emergency investment in energy. In the transport sector, the Transport Network 26 Afghanistan Country Assistance Program Evaluation

Development Investment Program approved by ADB in 2011 included capacity development for the railway subsector. Most of the planned activities such as establishing the rail authority, a legal framework, and regulations were undertaken by the US.

5. Strategic Focus Broadened to Include Thematic Areas

71. The thematic focuses of the second CPS included gender equity, counter- narcotics and anticorruption activities, and support to strengthen regional cooperation. ADB provided no explicit support for counter-narcotics operations, gave minimal direct assistance to anticorruption efforts, and thus had not much impact in either thematic area. ADB did take advantage of several entry points for addressing gender issues but concrete results, if any, remain undocumented. Considering the government’s request for fewer areas of focus, ADB could have applied the thematic focuses to the three infrastructure sectors alone, and then ensured through coordination efforts that the remaining areas were covered adequately by other development partners.

72. ADB recognized that the relationships of landlocked Afghanistan with its neighboring countries were extremely important and therefore made regional ADB ensured that cooperation a major focus of attention. ADB ensured that Afghanistan was quickly Afghanistan was brought into the CAREC program, for which ADB provides the secretariat. This gave quickly brought Afghanistan a seat at the regional table. ADB found ways to promote regional into the CAREC cooperation while retaining its concentration on infrastructure needs. ADB’s transport program and energy sector projects in Afghanistan supported CAREC through improved transport links with Central Asia and electricity links with Afghanistan’s three northern neighbors, Tajikistan, Turkmenistan, and Uzbekistan.

6. Size of Program Exceeded Capacity

Poor government 73. Poor government absorptive capacity has been a pervasive, overriding problem absorptive since the resumption of ADB operations in Afghanistan, but ADB’s efforts to address it have lacked continuity. Table 6 shows a number of indicators that reflect the situation. capacity has The capacity constraints include low skill levels, a narrow knowledge base, and an been a pervasive, inadequate policy environment. Box 1 provides an example of capacity problems. The overriding challenge to absorptive capacity is demonstrated by the fact that the roughly $57 problem, but billion in aid disbursed in Afghanistan during 2002–2010 was equivalent to 74% of the ADB’s efforts to accumulated GDP for the same period.

address it have 74. Such high levels of external support have distorted labor markets. Anecdotal lacked continuity evidence is considerable that salaries for certain categories of personnel often employed by the international community—engineers, consultants, drivers, and translators, for example—have risen rapidly to a point where they are now several times higher than in other comparable developing countries. According to MOF, development partners that snapped staff away from government institutions did so by paying salaries three to eight times those normally received by civil servants. All ADB’s country strategies have attempted to address capacity constraints, but a positive impact on project delivery has not been discernible.

Design and Implementation of the Strategies and Program 27

Table 6: Afghanistan’s Ranking in Global Indexes Index Ranking Corruption Perceptions Index 2011 180 out of 183 Ease of Doing Business 2011 160 out of 183 Human Development Index (HDI) 2011 172 out of 182 Logistics Performance Index (LPI) 2010 143 out of 155 Failed States Index 2011 7 out of 60 Sources: Transparency International, International Finance Corporation, and the World Bank, United Nations Development Programme; Foreign Policy and the Fund for Peace.

75. ADB has implemented its programs within the government budget, which has in its self made a contribution to capacity development. Many of Afghanistan’s other development partners have used their own structures and procedures and executed programs outside the government budget. Consultants have played a dominant role in both approaches, which—while contributing to more expeditious project planning and implementation—has at times detracted from the goal of capacity development. Nonetheless, heavy international support was provided over the CAPE period to increase the country's human resources. Both ADB and the government are aware that absorptive and governance capacity remains low and that progress to improve development planning and project design and management has been slow. A long- term view and patience may be required to gradually overcome constraints (paras. 76– 77).

76. Under the prolonged perceived emergency conditions during the evaluation Projects had to period, projects had to be prepared in a hurry, sometimes at the expense of due be prepared in a diligence (paras. 84–89). Box 3 provides an example in the energy sector. Conducting hurry, sometimes feasibility studies to generate the required baseline data would have required more time than was allowed by the tight time frames set for implementation. Consequently, at the expense of the normal planning steps were often not followed. due diligence

77. Good development planning requires sound strategies, satisfactory technical standards, and competent institutions. Planning in 2002 in all sectors was rushed and rudimentary, and progress since then has been slow. As a result, there are inconsistent technical standards in the power sector that have resulted in delayed implementation, and a railway line has been built without undergoing the required planning steps (Box 4).

28 Afghanistan Country Assistance Program Evaluation

Box 3: Readiness for Project Implementation–Experience of Power and Gas Components in the Emergency Infrastructure Rehabilitation and Reconstruction Project

Power component ($33 million) for rehabilitation of damaged transmission and distribution lines in Northern provinces and in Kabul. The Emergency Infrastructure Rehabilitation and Reconstruction Project was processed quickly in less than 6 months, in line with its status as an emergency operation.a However, the first disbursement took 15 months, main contract award 27 months, and total disbursements 60 months (compared with the planned 36 months). Lesson 1 from this project was that time saved in rushed preparation may cause delays during implementation if the minimum institutional capacity is not in place and/or design studies are not conducted. Lesson 2: Infrastructure projects should be prepared based on sufficiently detailed surveys and designs even for emergency projects.

Gas component ($22 million) for workover of 12 gas wells, gas sweetening plant to remove

toxic H2S, and repair of gas transmission and distribution lines. Limited documentation was available on the condition of wells or the productive capacity of gas fields, which would require further drilling. Uncertainty existed over a potential toxic gas threat. As a result, several bid invitations failed to attract qualified bidders due to poor information and the perception of high risks. The component was cancelled and no progress was on it until early in 2012. A stepwise approach should have been taken to first establish the production potential and toxic gas content. This is the approach the government adopted in 2012, and it is attracting qualified bidders, despite continuing security concerns.

______a ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Transitional Islamic State of Afghanistan for the Emergency Infrastructure Rehabilitation and Reconstruction Project. Manila (Loan 1997).

Source: Independent Evaluation Department Afghanistan country assistance program evaluation team.

Box 4: Weak Analysis and Due Diligence of the Railway Project

The development of the 75-kilometer railway line from the Uzbekistan border with Afghanistan to the City of Mazar-e-Sharif provides an example of weak planning in Asian Development Bank (ADB) projects in Afghanistan. The project was approved in 2009, and the line between Hairatan and Mazar-e-Sharif was complete in 2011. The project would have not materialized so quickly if the necessary planning steps had been completed. A full- fledged master plan for railway development providing a thorough market analysis for the railway, technical standards including the gauge of the track, and the proposed institutional setup was never prepared. Given the institutional and financial complexities typical of the rail industry the world over, such a master plan would have been essential. In Afghanistan, more specifically, agreement on such basic design issues as the rail gauge would have been highly desirable, not to mention a business plan clarifying the new railway’s operational model. The construction cost of the project per kilometer was twice as high as the railway component of the Transport Sector Investment Program. It was not clear how the contract value of the project was examined, because a single-source procurement modality was chosen using a design–build contract.

Source: Independent Evaluation Department country assistance program evaluation team.

7. Issues Related to Project Preparation and Implementation

78. ADB shifted sizeable funds intended for new investments under multitranche financing facilities (MFFs) to finance the major cost overruns of earlier projects. Table 7 shows these reallocations in the transport sector. Without the additional ADB funding provided by these transfers, the recipient projects would have never been completed as planned. ADB used these sources rather than the supplementary loans normally employed to cover cost overruns of ongoing projects. The Road Network Development Design and Implementation of the Strategies and Program 29

Project 1 supported the cost overrun on the Andkhoy–Qaisar Road Project with $22 million. When the same project encountered a further cost overrun of $224 million, the The route chosen second tranche of the MFF for the Road Network Development Investment Program was used to fund it. At appraisal, this MFF was intended to cover only $60 million of by ADB to the cost overruns of the Andkhoy–Qaisar Road Project and the North-South Corridor finance massive Project through tranche 1. In fact, ADB reallocated all of the resources of the second cost overruns tranche of this MFF from new investment to the cost overruns incurred by the Qaisar– through MFFs Bala Murghab Road Project and the Road Network Development Investment Program– was not Project 1, which are both ongoing, without changing the original scope of the MFF or providing any justification.44 subjected to the standard internal 79. Overall, ADB used $429 million from the MFF for Road Network Development oversight and Investment and Road Development Project 1 to finance cost overruns of previous approval projects. Despite their massive scale, these overruns reportedly were not triggered by mechanism changes in project scope. The route chosen by ADB to finance cost overruns through the MFF was not subjected to the standard internal oversight and approval mechanism that ADB normally applies to such massive supplementary financing. This approach, which earmarked an entire MFF tranche for the financing of ongoing projects, eroded accountability and ran counter to other ADB operational principles as well, including emphasizing project viability. There is no indication that the viability of projects has been revisited in the wake of the massive cost increases.

Table 7: Reallocation of Funds in the Transport Sector ($ million) Recipients Total Allocation Fund Source QBMRP RND1 AQRP NSCP for Cost Overrun RND1 22 22 RNDIP (tranche1) 19 41 60 RNDIP (tranche2) 123 224 347 Total Received 123 224 41 41 429 ANC = North–South Corridor Project, AQRP = Andkhoy–Qaisar Road Project, QBMRP = Qaisar–Bala Murghab Road Project, RND1 = Road Network Development Project 1, RNDIP = Road Network Development Investment Program. Note: Fund figures include contingency. Source: Independent Evaluation Department.

80. Appropriateness of financing modalities. The second CPS recommended providing the bulk of ADB support through MFFs. The MFF is meant to enable ADB to invest programmatically—that is, to follow a planned sequence and combination of projects and TA operations designed to achieve specified strategic goals. In this way, MFFs can sustain a long-term partnership with a client in support of a long-term development objective. A recognized advantage of the MFF is its flexibility. However, while the government appreciated MFF flexibility, this modality was not intended to cover the kind of uncertainty encountered in Afghanistan, such as planning, security, engineering design, aid coordination, and government capacity. The MFFs have often been used for quite vague sector road maps and investment programs seemingly tailored to the need of the MFF rather than the other way round. Vague road maps and investment programs have also facilitated the financing of frequent and substantial cost overruns of ongoing projects. Road maps that provide strategic direction and

44 ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility to the Islamic Republic of Afghanistan for the Road Network Development Program. Manila (Grant 0135); ADB. 2004. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the Andkhoy–Qaisar Road Project. Manila (Loan 2140). 30 Afghanistan Country Assistance Program Evaluation

investment programs specifying physical and nonphysical investments are the key prerequisites of the MFF.

Use of the MFF in 81. Use of the MFF concept presumes that a government is capable of designing the projects that will succeed the first one financed by the MFF.45 This condition has the agriculture rarely been met in Afghanistan. The use of the MFF in the ANR sector should be and natural revisited in light of the limited institutional capacity in this sector. An MFF can be resources sector successful only when the executing agency is able to meet the criteria for tranche should be releases. An example is the Water Resources Development Investment Program, ADB’s 46 revisited current MFF, which was approved in 2009. New activities for the second tranche have already started, although only discrete investments left over from earlier projects have so far been identified for implementation under the first tranche, and the selected TA consultant for the first tranche does not appear to have the required skills. More technical external support is needed if the investment is to fulfill the sector results framework. The MFF is not the appropriate lending instrument if this condition cannot be met.

82. ADB’s readiness. ADB’s operations began and have continued under highly uncertain and extremely difficult conditions, and the continued hard work of its staff has been valuable. However, feedback from government ministries and agencies confirmed the impression that ADB took longer to resolve project administration issues than other development partners such as the World Bank, USAID, and the Department for International Development of the United Kingdom. The feedback suggested that this was related to limited sector expertise in ADB’s Afghanistan Resident Mission and The resident that the mission needed to be more effective in supporting ADB’s Afghanistan mission’s operations. 47 The resident mission’s capacity and skill mix does not match the capacity and skill exigencies of the task in Afghanistan or even the sectors in which ADB has chosen to mix does not concentrate. Frequent changes of country directors and in the mission’s international staff, which was also too small, have only exacerbated the situation. ADB’s resident match the mission has fewer international staff members than those of other major development exigencies of the partners, including the World Bank, USAID, and Department for International task in Development of the United Kingdom, even considering the relative size of its support Afghanistan (Table 8). Although simple comparisons are difficult, since each business mode and project portfolio is unique, the government and other stakeholders expressed the view that there were often long intervals between missions from Manila and that the level of support by ADB headquarters and resident mission staff to Afghanistan was inadequate.

45 The policy paper makes several points about required capacity. One of the lessons from the piloting stage (December 2005 to mid-2008) is that inadequate due diligence on capacity led to poor executing agency selection and insufficient mitigation measures. Nonphysical investments (such as capacity development) are important factors in the success or failure of sector investment programs (which should include MFFs, although this was not explicitly stated). A major area of concern from the MFF pilot stage was capacity development and governance, including fiduciary oversight. To address some of these difficulties, the first tranche loans provide financing for capacity development. The MFFs can correct initial due diligence gaps if implementation teams review capacity development issues regularly (paras. 39, 45 iii). In recognition of the substantial capacity constraints in executing and implementing agencies, a recommendation for mainstreaming of the MFF modality is that “operational teams should incorporate financing for capacity development into individual MFF tranches” (para. 68). The MFF processing guideline also clearly states that each tranche can involve, as applicable, capacity development support (para. 85). 46 ADB. 2009. Report and Recommendations of the President to the Board of Directors: Proposed Multitranche Financing Facility and Administration of Grant and Cofinancing to the Islamic Republic of Afghanistan for the Water Resources Development Investment Program. Manila (Grants 167 and 0170). 47 The experience of other development partners in conflict-affected countries such as Timor-Leste and Sri Lanka indicates that implementation can be facilitated by a strong field presence in resident missions. Two important prerequisites for an effective resident mission are (i) internationally recruited sector expertise leveraged by local staff; and (ii) having a capacity development specialist able to work across the sectors and ensuring that approaches proposed by ADB headquarters fit the needs and capacity on the ground. Design and Implementation of the Strategies and Program 31

83. The government and other development partners pointed out that decision making in ADB is centralized at Manila headquarters, and relatively limited authority is delegated to field offices. This observation holds true for procurement and disbursement The number of approvals. Table 9 shows the number of the actual staff and budgeted positions of the resident mission. 48 Even though ADF allocation and project portfolio increased international continuously from 2002, the number of international staff at the resident mission staff at the declined from 2006, and most of the projects were handled by headquarters.49 In a resident mission country with strong institutions and established implementation capacity, this might not declined from have been a problem. However, in Afghanistan, with its weak institutional capacity, the 2006 shortage of experienced staff in the field office and the centralization of decision making inevitably caused inefficiency. This has been reflected in the extensive delays, extensions of closing dates, and undisbursed funds in the project and TA portfolio and the fact that outputs and outcomes were rarely achieved. Portfolio management has, however, improved recently. The resident mission began a system of regular portfolio review meetings with line agency staff. This has helped to achieve joint decisions and timely action on issues and to make government staff more accountable.

Table 8: Number of International Staff in the Field and Budgetary Commitment Multilateral Bilateral Item ADB World Bank USAID DFID Number of international staff 4a 24 390b 40b Committed amount of support ($ million) 2,732 4,046 15,165 1,372c Number of approved projects 101d 90 e 221e 94e ADB = Asian Development Bank, DFID = Department for International Development of the United Kingdom, USAID = United States Agency for International Development. a Actual number of international staff for the five budgeted positions as of 10 May 2012. b Includes international staff consultants. c Includes support from 2002 to 2011. d The ADB count includes individual loans, grants, and technical assistance (counting each financing source, i.e., loans financed under the ADF, ADF grants, and Japan Fund for Poverty Reduction are counted as 3). e The World Bank, USAID, and the DFID database sources included loans, grants, and technical assistance. The databases did not have a classification, but all operations are denominated only as "projects." Sources: ADB projects and operations database for Afghanistan; DFID (http://projects.DFID.gov.uk); USAID (http://afghanistan.usaid.gov/en/projects); World Bank (http://www.worldbank.org/projects/Afghanistan).

48 In general, the approval is granted by either the sector director or country director concerned under the $10 million threshold (depending on who is responsible for project administration). However, when the procurement package is over $10 million in value, a procurement committee reviews and, if in order, approves the bid evaluation reports. 49 Recruitment for the resident mission positions was often a relatively long process. It was sometimes difficult to find a suitable candidate. This was particularly true of international staff positions, although ADB offered a special benefits package of hardship allocations and entitlements to exceptional travel. Due to long-term vacancies that were hard to fill, two international staff positions were redeployed to department-level portfolio management and coordination in the Office of the Director General, Central and West Asia Department at ADB headquarters in 2010 and 2011 to strengthen them as well as the related expertise in CWRD's sector division. 32 Afghanistan Country Assistance Program Evaluation

Table 9: Assigned Positions in Afghanistan Resident Mission Year International Staff National Staff Administrative Staff 2004 3 (3) 4 (5) 4 (4) 2005 4 (4) 5 (6) 5 (5) 2006 6 (6) 6 (6) 4 (5) 2007 3 (5) 7 (7) 5 (5) 2008 5 (6) 4 (7) 6 (5) 2009 5 (7) 5 (7) 6 (7) 2010 5 (6) 6 (8) 9 (8) 2011 4 (5) 9 (9) 9 (10) 2012 (April) 4 (5) 8 (9) 9 (10) Note: The numbers in parentheses beside the actual numbers of staff members represent the number of budgeted positions as of December each year, except for 2012. Source: Asian Development Bank.

B. A Decade of Operating in a Conflict-Affected Situation

1. Weak Analysis

84. Emergency phase. The notion that it was addressing an emergency was justified when ADB resumed operations in Afghanistan in 2002. At the end of the hostilities—or what was then perceived to be the end—the country needed immediate humanitarian support as well as restoration of government systems and critical infrastructure. Accordingly, both the initial CSP and the first CSP update of 2003 advocated emergency assistance and simplified procedures to respond rapidly to the precarious situation. ADB provided emergency projects and program loans in the first few years to achieve quick results, which accorded with the agreed-upon international approach. 50 ADB’s 2003 CSP update emphasized, however, that preparation and implementation of projects and programs would be carried out in accordance with pertinent ADB guidelines and procedures.

85. During the initial postconflict and emergency phase of their operations, development partners generally focused on simple projects with short gestation periods. ADB’s 2003 Emergency Infrastructure Rehabilitation and Reconstruction and Emergency Road Rehabilitation project is representative of the kind of undertakings during this Though justified period. ADB’s policy-based Postconflict Multisector Program emphasized flexibility to initially the ensure quick disbursements. During this phrase, it appears that both ADB and the emergency government accepted the frequent negative trade-off between the short approach was implementation periods of emergency projects and the reduced quality of outputs. used throughout 86. It was not until 2004 that the new joint strategy of the government and the the decade international community changed the short-term emergency orientation of infrastructure projects.51 It had become clear by then that, while expeditious, the patch-

50 Cluster TA was provided for capacity development in public sector management. The concept provided the flexibility needed to respond to urgent country needs. Budget support provided in the early period through program loans was essential for the government to function but also supported the establishment of an indicative policy framework as the basis for accountable government. ADB also provided timely assistance at the beginning through ADB. 2002. Proposed Grant Assistance to the Islamic Republic of Afghanistan for Supporting the Road Employment Project for Settlement and Integration of Returning Refugees and Displaced Persons. Manila (Grant 9024); ADB. 2002. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the Postconflict Multisector Program. Manila (Loan 1954); ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the Emergency Infrastructure Rehabilitation and Reconstruction Project. Manila (Loan 1997 and Grant 9037). 51 Government of Afghanistan. 2004. Securing Afghanistan’s Future: Accomplishments and the Strategic Path Forward. A Government/International Agency Report. Kabul. Design and Implementation of the Strategies and Program 33 and-mend approach associated with emergency projects did not in many cases achieve development results. The new joint strategy concluded that feasibility studies could not be neglected before infrastructure investments, even if the focus was urgent rehabilitation. Projects were therefore to incorporate all of the inputs necessary for the resulting infrastructure assets. ADB underwent a similar learning process and changed the implementation scope of the Emergency Infrastructure Rehabilitation and Reconstruction Project from the simple crack-sealing originally planned to complete reconstruction.

87. The notion of a prevailing emergency. Though justified by the following the An approach that 2001 invasion by international forces and the overthrow of the Taliban regime, the required more approach has been used almost consistently throughout the entire 10-year evaluation due diligence period. A less emergency-driven approach that required more due diligence might have delayed project approval in some cases, but it would also have avoided the might have shortcomings that the prolonged emergency mind-set encouraged. This mind-set delayed project sacrificed quality in project designs and, more than often than not, failed to produce approval ,but it the intended time savings. The perceived emergency situation has frequently provided would also have the reason for deviating from proper planning, project design, and implementation avoided the practices. 52 The CAPE found that the conditions and circumstances in Afghanistan continued to be extraordinary during the evaluation period and required a special shortcomings response but did not justify the relaxation by ADB of project design and processing work and the compromising of technical standards. The CAPE identified the following specific examples:

(i) ADB has loosened the links among strategies, programs, and projects in Afghanistan by using blanket provisions to finance vaguely defined project components that could have included any piece of infrastructure and could have been accommodated by any strategy. This defeated the main purpose of a strategy, which is to define the future content and direction of operations and to provide an accountability framework.53 (ii) The design–build approach was selected for some activities with a view to shortening preconstruction activities and advance overall project completion, but in some cases it has caused delays and construction cost overruns. Moreover, the efficiency gain sought from these contracts comes to some extent at the expense of capacity development that takes place under traditional contracts (paras. 88–89). (iii) Examples for casual ADB project preparation include deficient results frameworks, design and monitoring frameworks (DMFs),54 financial and

52 An emergency occurs after a disaster when unforeseen circumstances require immediate action and local capacity is insufficient to address and manage traumatic events. These events are typically diverse and occur simultaneously, straining domestic capacity, and disrupting economic and social activity. This description fits the limited period after 2002 when ADB resumed operations in Afghanistan. An emergency is defined as an incident and the consequences of the incident, rather than a persisting situation. Using the 1997–1998 Asian financial crisis as an example, ADB’s 2004 Disaster and Emergency Assistance Policy suggested that the crisis should not be considered an emergency “given its long gestation and recovery periods.” Emergency may therefore be a misnomer for the situation in Afghanistan from 2004 to the present. ADB. 2004. Disaster and Emergency Assistance Policy. Manila. 53 The linkage of projects to the strategic frameworks has at times been tenuous. This applies to ancillary and emergency works components, which were to enable “rapid reconstruction and rehabilitation of critical infrastructure” and were considered “a cost-effective mechanism of providing financing for uncertain and unprogrammed works.” 54 Some major indicators in the sector results frameworks in the 2009–2013 CPS were unsuitable, irrelevant, and/or unrealistic in terms of target and time horizons. This was the case, for example, in the following framework indicator: “Significant increases in the road maintenance budgets.” The government has incurred chronic budget deficits across all sectors and it was unrealistic to expect significant increases in 34 Afghanistan Country Assistance Program Evaluation

economic analyses, as well as overly optimistic traffic forecasts and inadequate contractual arrangements.55 (iv) The short railway line financed by ADB is expected to expand into a nationwide network. Given the scope and complexity of any endeavor in the railway sector, the project should have been based on a genuine master plan study. In addition to addressing key planning issues such as the envisaged market for the railway and the gauge of the track, this study would have discussed institutional arrangements and the role the private sector (Box 4). At the time of the CAPE mission, it was still unclear under whose auspices the railway would be operated in the future—the Ministry of Mines or the Ministry of Transport and Civil Aviation or the Ministry of Public Works (MPW).

The drawback of 88. Design–build contracts. ADB used design–build contracts in almost all its design–build energy and transport projects in Afghanistan. They leave the design and engineering tasks to a single contractor rather than assigning these two functions to separate firms contracts is the and giving the government a greater role in supervising the design process. Design– lack of checks build contracts were used in Afghanistan to speed up the preconstruction period by and balances eliminating the need to tender for design consulting firms, since the contractor would between design be responsible for both the design and the construction. The drawback of these engineer and contracts is the lack of checks and balances between the design engineer and the contractor. Because the design engineer and the contractor act as separate contractor independent entities under a traditional contract, they are each more likely to protect the interests of the client than to collude with or protect the interests of each other. Under design–build, the engineer and the contractor are one entity with a single common set of interests. Due to this inherent potential for conflict of interest, the engineering department of the winning firm is not likely to point out of deficiencies in construction, nor is the contractor section of the firm likely to expose deficiencies in design. This raises particular risks for clients with limited experience in contracts, design, and/or construction oversight—such as governments in Afghanistan. They are left vulnerable to exploitation or failure to identify performance shortcomings. Lack of By employing the experience with this process may lead to project delays, misdirection of funds,56 or design–build increased expenses in some situations. concept, ADB also missed an 89. By employing the design–build concept, ADB also missed an opportunity to develop the capacity of the government to plan, design, and contract management for opportunity to civil works. These contracts also increased uncertainty about land acquisition and develop the resettlement at the appraisal stage. Design–build contracts most likely contributed to capacity of the cost increases, because they have few price control mechanisms, and the design risk government that the contractor had to shoulder was factored into the contract price. Bilateral

resource allocations to one sector at the expense of others, especially the social and education sectors. Some assumptions and risks used by DMFs were internal to the project design and thus involved risks that a proper project design could have mitigated. Instead, the assumed risks were to be mitigated by government assurances related to the security situation, operations and maintenance, and fund allocations. The assurances on operation and maintenance and fund allocations were treated as credible despite the poor general resource situation of the government. 55 The often positive appraisal results reflected in satisfactory financial internal rates of return and economic internal rates of return for ADB projects offer little cause for comfort, because the technical quality of these analyses has often been deficient. An example is the evaluation of the Hairatan–Mazar-e-Sharif railway project, which would be neither financially nor economically viable if sound methodological and analytical standards were used. The traffic projections, which were based on expected GDP growth parameters, were overly optimistic. Moreover, the GDP growth rates used to forecast the development of traffic for the various projects were inconsistent. 56 H. Labelle. 2012. Billions Down the Afghan Hole. The New York Times. 7 July. http://mobile.nytimes.com/ 2012/ 07/07/opinion/billions-down-the-afghan-hole.xml Design and Implementation of the Strategies and Program 35

development partners such as the Japan International Cooperation Agency and KfW of Germany have successfully used the two-stage approach of separating design from construction in Afghanistan. Senior officials in MOF, MPW, and the Ministry of Energy and Water (MEW) do not support the use of design–build contracts in the long term, because it makes it difficult for them to supervise contractors and eliminates opportunities for capacity development.

90. Cost inflation. Although increases vary among ADB projects, the costs of contracts rose two to three times in the past 4–5 years. For example, Table 10 shows cost increases in the transport sector. The estimated unit cost of road rehabilitation was $0.2 million per kilometer (km) in 2003 but had soared to $1.0 million per km by 2011. The unit cost of the Qaisar–Bala Murghab Road Project became $2.7 million per km after the supplemental financing, three times the original estimated unit cost. One factor was the rising cost of construction materials such as bitumen and asphalt, but this alone cannot explain the massive increases. Neither does the security situation. A more likely explanation is that demand for contractors’ services had been driven up by the large inflow of foreign assistance and military spending, and, in a distorted market, few contractors were willing to bid on even a design–build contract, and those that were demanded a high price. There is also anecdotal evidence that salaries for certain categories of personnel who are extensively employed by the international community, for example drivers and translators, have risen to several times those paid for similar work in other developing countries.

Table 10: Cost Increases in Transport Sector Projects Original Cost Estimate Revised Original Updated Increase Project Approval Completion in RRPa Costa Unit Cost Unit Cost per Unit Name Date Date ($ million) ($ million) Scope ($ million) ($ million) (%) Delay Airports RARP 2004 2011 29 32 7 airportsb 4.1/ airport 8.1/airport 98 3y 5m Railways HMSRP 2009 2011 166 - 75 km 2.2/km - - - TNDIP 2011 Ongoing 240 - 225 km 1.1/km - - - Roads EIRRP 2003 2008c 95 97 447 km 0.2/km 0.2/km 2 2y 11m AQRP 2004 2010 68 81 d 210 km 0.3/km 0.4/km 20 2y 9m QBMRP 2005 Ongoing 48 146 e 90 km 0.5/km 1.6/km 209 8yh NSCP 2006 Ongoing 130 158f 239 km 0.5/km 0.7/km 31 1yh RNDP1 2007 Ongoing 135 382g 143 km 0.9/km 2.7/km 183 - TNDIP 2011 Ongoing 550 - 578 km 1.0/km - - - AQRP = Andkhoy–Qaisar Road Project, EIRRP = Emergency infrastructure Rehabilitation and Reconstruction Project, HMSRP = Hairatan to Mazar-e-Sharif Railway Project, km = kilometer, m = month, NSCP = North–South Corridor Project, QBMRP = Qaisar–Bala Murghab Road Project, RARP = Regional Airport Rehabilitation Project Phase I, RNDP1 = Road Network Development Project 1, RRP = report and recommendation of the President, TNDIP = Transport Network Development Investment Program (overall program), y = year. a Costs do not include nonphysical components. b The number of the airports was reduced to four. c The road components. d Additional funds came from the Road Network Development Project 1 in 2007, and tranche 1 of the Road Network Development Investment Program in 2008. e Additional funds came from the road tolling facility ($1 million), and tranche 2 of the Road Network Development Investment Program in 2010. f Additional funds came from tranche 1 of the Road Network Development Investment Program in 2008. g Additional funds came from the maintenance component ($20 million) and business process development component ($3 million), and tranche 2 of the Road Network Development Investment Program in 2010. h Extension of loan closing date. Source: Asian Development Bank. 36 Afghanistan Country Assistance Program Evaluation

2. Assessment of a Postconflict Situation Premature

91. Conflict situation. Since 2002, ADB has designated Afghanistan as a postconflict country. This definition was adopted by the initial country CSP, its three updates, and the most recent CPS. The classification may have been temporarily accurate at the time ADB made the assessment for its initial strategy in 2002, shortly after the initial defeat of the Taliban government army by the alliance of Afghan troops and international forces. But it has been incorrect and inappropriate to Afghanistan’s needs in light of escalating hostilities and a deteriorating security situation since 2006. The classification should have been reassessed. Postconflict has been the official credo from 2002 onwards, giving rise to the assumption that the government duly supported by international forces could ensure necessary security for ADB support.

92. Security has been and will continue to be a major issue in Afghanistan. It is unlikely to improve quickly or greatly and could significantly worsen after most of the A conflict- foreign troops in the country complete their scheduled withdrawal in 2014. ADB needs afflicted country to have a sound understanding of this situation so that it can properly incorporate requires a security issues into its programs and projects. This makes ADB’s persistent failure to different revise the postconflict designation for the country worrisome. When ADB reviewed its strategy for weakly performing countries in 2007, the country strategy classified Nepal approach than a as “conflict ongoing” while incongruously categorizing Afghanistan as “postconflict.”57 postconflict one A conflict-affected country requires a different approach than a postconflict one does, and yet Afghanistan has not been accorded the benefits of that approach by ADB. In a postconflict situation, the key considerations are reconstructing the political, economic, and social system. Security issues should no longer be a dominant concern. In a conflict-affected situation, the security issue remains paramount, and sustainability and risk management should be the priorities. The World Bank currently rates Afghanistan as conflict-affected.58

By continuing to 93. Insufficient risk management. By continuing to classify Afghanistan as a classify postconflict nation, ADB may not have realistically planned for or adequately mitigated Afghanistan as a security risks. ADB, in effect, relied on assurances from the government that it would and could effectively address the poor security situation. This was built into loan postconflict covenants.59 Yet security issues were a major cause of implementation delays and cost nation, ADB may overruns during the CAPE period. ADB projects in Afghanistan should explicitly include not have the costs of mitigating security risks, rather than assuming that security will be realistically provided by the government or other entities. planned for or 94. Although security problems and the government’s inability to solve them were adequately often blamed for slow implementation and rising costs, ADB’s did not always deal with mitigated the security issues in an adequate or innovative way. Instead, it relied on ad hoc and security risks supply-driven approaches that were more applicable to countries that are less fragile and more secure. The second tranche of the Road Network Development Investment Program, approved in 2010, addresses security issues more realistically by trying to enhance community ownership and commitment to project security through

57 ADB. 2007. Achieving Development Effectiveness in Weakly Performing Countries (The Asian Development Bank’s Approach to Engaging with Weakly Performing Countries). Manila. 58 World Bank. 2012. Afghanistan Interim Strategy Note, for the Period Fiscal Year 2012–2014. Washington, DC. 59 The notable exception was tranche 2 of the Road Network Development Investment Program, although the details of the security costs were not clearly explained in the RRP. The MOF Development Cooperation Report said that ADB’s commitment of $4.9 million in 2010 would fund the security cost of the Qaisar– Balamurghab Road in the northwest of the country through Afghan Public Protection Forces. Design and Implementation of the Strategies and Program 37 development works for local residents. The third tranche of the Energy Sector Development Investment Program, approved in 2011, specified costs for security.60

C. Effects of Security Concerns and Inadequate Implementation Support

95. Portfolio management. The limitations of ADB’s resident mission in Afghanistan could have been addressed by large, regular missions from ADB headquarters, but this did not occur, and oversight appears to have been insufficient. The security hazards compounded this problem by restricting staff travel to Afghanistan and the length of time staff members spent there. Consultants tried to keep visits as short as possible and avoided travel to project sites for security reasons. ADB headquarters staff also kept mission times to a minimum. Estimates from ADB’s Central Operations Services Office for 2011 show that, while the average mission duration per project ADB-wide was While the about 24 days, it was 12 days for Afghanistan. It was not easy for the ADB missions to average mission visit projects outside Kabul due to security risks, the cost of using armored vehicles, and duration per limited accommodation. Security concerns also resulted in ADB not being able to project ADB-wide deploy staff with the appropriate skills during project preparation and implementation was about 24 review missions. For instance, the review missions for an irrigation project included no water resources specialist after 2005, and no one with this specialization took part in days, it was 12 the project completion mission for the irrigation component of the Emergency days for Infrastructure Rehabilitation and Reconstruction Project. Finally, despite the importance Afghanistan given to capacity development, relevant skills were not available within the resident mission. An option might have been to collaborate with NGOs to monitor project implementation in the field, a route adopted by some development partners such as USAID and the World Bank. The latter has published monitoring reports prepared by NGOs on its website, enhancing transparency.

96. Tables 11 and 12 summarize the status and performance of public sector An option might programs, projects, and TA operations in Afghanistan during the CAPE period. Of the have been to 14 projects and programs completed to date, project completion reports (PCRs) have been prepared for only 10. The remaining four projects are waiting for implementation collaborate with completion memorandums. The PCRs rate 6 of the 10 projects and programs successful, NGOs to monitor while IED’s assessments have rated 4 of the 14 completed projects successful. Of 42 TA project operations completed, 29 have been the subject of technical assistance completion implementation reports (TCRs), leaving a large backlog. The TCRs rated 13 of 29 TA activities highly in the field successful or successful. The disbursement rates of the TA operations were rated highly successful (83%), successful (90%), less than successful (66%), and unsuccessful (39%). The disbursement rates of TA activities rated partly successful or unsuccessful were low, but their TCRs do not explain the reasons for low disbursements.

97. Self-assessments of ongoing ADB projects and TA operations have with high consistency been too optimistic. The latest self-assessments, namely project performance reports, rate 11 of 13 ongoing programs and projects successful (Table 11). This is despite the increasingly difficult operating environment in the country. Successful self-ratings were given in technical asssitance performance reports to 5 of 6 ongoing TA operations in 2010. The completion report of the country strategy and program 2002–200661 stated that 100% of the ongoing programs, projects, and TA

60 It included $3.0 million in security costs in contingency, out of an overall budget of $76.5 million. ADB. 2012. Periodic Financing Request Report for the Multitranche Financing Facility to the Islamic Republic of Afghanistan for the Energy Sector Development Investment Program–Proposed Tranche 3. Manila (Grant 0280). 61 ADB. 2006. Country Strategy and Program Completion Report: Afghanistan, 2002–2006. Manila. 38 Afghanistan Country Assistance Program Evaluation

operations in Afghanistan had satisfactory ratings at the end of 2004 and in 2005. The disconnects between these earlier assessments and the completion ratings may imply that implementation issues were not reported properly or in time to the relevant ADB staff.

Table 11: Status and Performance of Public Sector Programs and Projects, 2002–2011 PCRs and Complete Ratings of PCRs PPR Ratings of Projects and Completed Ongoing Loans Ratings of Assessed by Projects Assessed Projects as of and Approved PCRs IED by IEDa 2010 b Sector Grants Projects PCRs S LS c (No.) S LS c S PS ANR 11 8 1 1 5 5 d 2 Education 1 1 Energy 10 6 5 1 Finance 3 3 3 1 2 3 1 2 HSP 1 1 Multisector 2 2 2 2 2 2 PSM 2 1 1 1 1 1 Transport 15 10 3 2 1 3 1 2 e 4 1 Total 45 32 10 6 4 14 4 10 11 2 Sharef 60% 40% 29% 71% 85% 15% ANR = agriculture and natural resources, HSP = health and social protection, IED = Independent Evaluation Department, LS = less than successful, PCR = project completion report, PPR = project performance report, PSM = public sector management, S= successful. a Program or project performance evaluation reports, validation ratings, and country assistance program evaluation assessments for projects that are substantially completed but not financially completed. b Indicator for impact and outcome. c Projects that were previously rated partly successful have been termed less than successful since March 2012. d IED validated the agriculture sector assessment as less than successful and rated four projects financed by the Japan Fund for Poverty Reduction for which implementation completion memorandums were not yet developed less than successful. e The largest component of the Road Employment Project for Settlement and Integration of Returning Refugees and Displaced Persons was rated partly successful by the implementation completion memorandum. IED assessed the Andkhoy–Qaisar Road Project as successful and the Regional Airports Rehabilitation Project Phase I as less than successful. f The share was calculated by the number of projects. Financial size was not considered. Sources: Asian Development Bank loan, technical assistance, grant, and equity approvals database (as of 16 March 2012), and Independent Evaluation Department.

Table 12: Status and Performance of Technical Assistance Operations by Sector, 2002–2011 TCR Ratings of TPR Ratings of Ongoing Completed TA TA as of 2010b Projects Sector Completed TCRs HS S LSa U S PS ANR 9 6 3 3 Energy 12 7 3 4 1 1 Finance 1 0 Industry and trade 3 3 1 2 PSM 6 6 4 1 1 3 Transport 10 6 1 5 1 Multisector 1 1 1 Total 42 29 1 12 13 3 5 1 Share 3% 41% 45% 11% 83% 17% ANR = agriculture and natural resources, HS = highly successful, LS = less than successful, PSM = public sector management, S = successful, TA = technical assistance, TCR = technical assistance completion report, TPR = technical asssitance performance report, U = unsuccessful. a The partly successful rating of TA operations was changed to less than successful in March 2012. b Impact and outcome + implementation progress. Source: Asian Development Bank loan, TA, grant, and equity approvals database (as of 16 March 2012). Design and Implementation of the Strategies and Program 39

98. Fiduciary issues. The CAPE team reviewed two audit reports prepared by what Audits identified was then the Integrity Division62 and Audit Division of ADB’s Office of the Auditor non-compliance 63 General. These audits identified noncompliance with ADB requirements and weak with ADB project management controls. While there were indications that fraud and corruption may have taken place, these could not be verified.64 The project procurement-related requirements and audit report on the Emergency Infrastructure Rehabilitation and Reconstruction Project, weak project prepared in 2009, concluded that it appeared that “ADB itself did not monitor the management progress of the project consistently or effectively” and that “the pressure on controls international donors and partners to release urgently required funds to Afghanistan is also very likely a contributing factor.” The team reviewed three other audit reports relating to operational aspects in Afghanistan, prepared by Audit Division of Office of the Auditor General from 2008 to 2010.65 The reports concluded that risk management and control processes over operations needed improvement, particularly in the following areas: (i) compliance with ADB policies and procedures, and with relevant contractual agreements; (ii) accuracy, reliability, and timeliness of financial, managerial, and operating information; (iii) timely achievement of business objectives; and (iv) safeguarding of assets.66

99. The CAPE team also identified similar financial and procurement capacity issues. Financial and Afghanistan has established a legal and regulatory framework for procurement with portfolio support from development partners. ADB provided assistance to develop guidelines, bidding documents, and procedures for implementing the procurement laws, but management capacity was built mainly in autonomous project implementation units (PIUs). 67 have to be Continuing weak procurement capacity in line agencies, poor understanding of strengthened, procurement laws and revisions, the lack of a common procurement manual, and a and projects and weak contracting industry exacerbated fiduciary risks. The lack of effective TA should be harmonization of procurement guidelines between development partners and weak alignment with country procurement procedures (considered to be still weak) further closely increased the burden and complexity faced by sector agencies.68 Poor public finance monitored management at the subnational levels increased overall risks. It is clear that financial and portfolio management have to be strengthened, and projects and TA should be closely monitored. The procurement law needs to be implemented effectively (and a procurement manual produced to help achieve this). Any decision to move additional responsibilities to the resident mission would necessitate strengthening of the mission’s

62 Office of the Auditor General. 2009. Project Procurement-Related Audit Report—Loan 1997-AFG: Emergency Infrastructure Rehabilitation and Reconstruction Project. ADB: Manila (February). 63 ADB. 2008. Independent Performance and Financial Audit of Four Technical Assistance Projects in Afghanistan. Manila (Audit Report No. 2). 64 Examples of key weaknesses included the absence of a project coordination unit, instances of substandard materials and substandard work, failure to reconcile financial records, lack of adequate procurement and other documentation, and failure to comply with ADB procurement guidelines. 65 The common findings of the three audit reports were (i) noncompliance with procurement and contract management aspects, which indicated governance and control risks; (ii) questionable accuracy, reliability, and realism of project ratings; (iii) lack of due diligence and weak attention to financial controls, e.g., lack of enforcement of guidelines on contract variations, unliquidated advances, delay in financial closing of projects, among others; and (iv) weak compliance with audit requirements, with audit reports providing poor assurance on projects finances and having misstatements in financial statements (e.g., stating advances as actual expenditures). 66 Aside for the three audit reports, another audit report assessed three TA projects administrated by ADB headquarters and found risk management and control process to be satisfactory. 67 ADB’s second CPS stated that PIUs can become “mini-ministries” that are costly to maintain, take high- performing civil servants from ministries, and can generate resentment from others. 68 See findings of Indicator 2b on reliability of procurement systems, p. 1–4, and Table 1.6 on Indicator 9, p. 1–13. http://www.oecd.org/dataoecd/26/15/42094533.pdf See also: World Bank. 2010. Afghanistan Public Expenditure Review 2010 (Second Generation of Public Expenditure Reforms). Washington, DC. 40 Afghanistan Country Assistance Program Evaluation

financial and procurement capabilities as well as its technical skills, since this is where the majority of problems arise.

100. Economic efficiency. At the appraisal stage, all transport sector projects funded by ADB in Afghanistan during the CAPE period were appraised as viable, showing economic internal rates of return (EIRRs) mostly above 18%. Although most projects are still incomplete, their actual EIRRs after completion are unlikely to be similarly high. This will be due to high cost overruns, construction delays, and the effects on the economic results of lower than expected growth in traffic. While this expectation can be confirmed using information that will become available only after completion, the risk and sensitivity indicators associated with the original economic evaluations coupled with already known circumstances on the ground make it almost certain that most of these projects will not be viable. This is hardly a surprise, given the substantial cost increases vis-a-vis the fairly predictable traffic increases. The Regional Airports Rehabilitation Project had an appraised EIRR of 23%. Due mainly to cost increases, the postcompletion EIRR was only 11% (although the PCR EIRR was hypothetical, because the government could not provide firm information on the status of airport operations).69 The estimated EIRR of the completed Andkhoy–Qaisar Road Project is around 12%. The technical quality of some economic and financial analyses has been deficient. The Hairatan to Mazar-e-Sharif railway operation has started about a half year earlier. ADB’s appraisal in 2009 of the railway project used very optimistic traffic and GDP projections. With more realistic figures and sound methodology, it is unlikely that the project would have been analyzed as viable.

Loan processing 101. Implementation delays. Loan processing has generally been quick but implementation slow. Delays in start-up of every investment were substantial and has generally systemic. The Emergency Infrastructure Rehabilitation and Reconstruction Project was been quick but processed in only 6 months, compared with the ADB average of 2 years.70 By contrast, implementation loan utilization took almost 6 years, twice as long as planned. The Agriculture Sector slow Program Loan assumed that the second tranche conditions could be met within 18 months, although two consecutive national elections had been scheduled for the same period. Instead, MOF appointed a coordinator for the program more than 2 years after the release of the first tranche, and the establishment of the program steering committee was deferred for another 2 years.

102. Despite the known realities of severe capacity limits, implementation schedules were consistently overoptimistic. The average delay in project completion, based on targets in the reports and recommendations of the President (RRPs), was almost 3.5 years for closed ANR projects and 3.0 years for those in the transport portfolio. None of the five projects in the energy sector have been completed. The ongoing Power Land acquisition Transmission and Distribution and Regional Power Transmission Interconnection issues and projects have already exceeded the original completion dates by 3 years or more. settlement of 103. The project delays have had two main causes. Concerns raised by security risks payments to often made it impossible to finalize contracts with consultants and/or contractors on affected people time. Response to bids for civil works was often poor, and reputable international firms were important were reluctant to work in Afghanistan. Land acquisition issues and settlement of sources of delay payments to affected people were another important source of delay (paras.136–137). Table 13 summarizes the current status of land acquisition and resettlement plans

69 The operational plan used for the economic assessment was hypothetical. However, subsequent to IED missions, the government provided sample logs for two of the four completed airports which showed increased number of flights. 70 ADB. 2009. Better and Faster Loan Delivery. Manila. Design and Implementation of the Strategies and Program 41

(LARPs) for ongoing projects. It shows any LARPs for ongoing projects not yet completed yet, including projects approved more than 5 years ago. Other issues affecting project performance included security incidents during construction, delays in approval of bidding documents, slow government processes, limited capacity of the ministries, and changes in government officials due to elections. More consideration of security issues, attention to properly preparing procurement packages, and limited in- country capacity should have been factored into project designs.

Table 13: Current Status of Land Acquisition and Resettlement Plans for Ongoing Projects Disburse Approval -mentb Project Date Status of LARPa Status of Civil Worka (%) Transport RRAP Nov 2004 Under implementation; Ongoing 84.1 QBMRP Jul 2005 Under preparation/implementation Ongoing 44.3 NSCP Sep 2006 Under implementation Ongoing 79.6 TNIDP1 Oct 2011 Under preparation Not started. Contracts 15.9 awarded Energy PTDP Apr 2005 Under implementation Ongoing 82.6 RPTIP Dec 2006 Under implementation Ongoing 37.9 ESDIP1 Dec 2008 Under preparation Not started. Contracts 5.1 awarded for some components ESDIP2 Dec 2009 Under preparation Not started. Contracts 0.6 awarded ESDIP3 Dec 2011 To be prepared, if necessary Not started. 5.1 Agriculture and Natural Resources WBWRMP Dec 2005 To be prepared, if necessary Not started. Contracts 36.0 awarded for some components WRDIP1 Oct 2009 To be prepared, if necessary Not started 4.7 ESDIP1 = Energy Sector Development Investment Program–MFF Tranche 1, ESDIP2 = Energy Sector Development Investment Program–MFF Tranche 2, ESDIP3 = Energy Sector Development Investment Program–MFF Tranche 3, LARP = land acquisition and resettlement plan, NSCP = North-South Corridor Project, PTDP = Power Transmission and Distribution Project, QBMRP = Qaisar–Bala Murghab Road Project, RPTIP = Regional Power Transmission Interconnection Project, RRAP = Rehabilitation of the Regional Airports Project, TNIDP1 = Transport Network Investment Development Project–MFF Tranche 1, WBWRMP = Western Basins Water Resource Management, WRDIP1 = Water Resources Development Investment Program–Project 1. a As of 1 April 2012. b As of 8 August 2012. Source: Asian Development Bank database.

CHAPTER 5 Support for Capacity Development

Preliminary needs 104. As early as in 2002, Afghanistan’s development partners had recognized that assessments in weak capacity across all sectors would constrain development effectiveness. Fragmented government institutions, overlaps in responsibilities and mandates 2001 and 2002 between line ministries, very weak and poorly managed human resources, and indicated the inadequate facilities and technology afflicted all of the public sector. Transparency and need for massive accountability—never strong—had been reduced significantly during the long years of support in public conflict. Service delivery under these conditions had almost ceased. Not surprisingly, sector the preliminary needs assessments in 2001 and 2002 indicated the need for massive support in PSM and capacity development, and this became a high priority in the management assistance programs.

105. At the same time, the government and its development partners had to deliver urgently needed basic services. Understandably, trade-offs were necessary between the two objectives of meeting urgent service delivery needs and building sustainable institutional, organizational, and human capacity. 71 As discussed in Chapter 2, the efforts during the CAPE period yielded some results, but much of this was achieved through a high dependence on external funding and external consultants. This chapter assesses how ADB achieved its stated objectives and coped with the challenge to capacity development.

A. Public Sector Management

106. ADB’s objectives during the evaluation period in this area are summarized as follows: (i) strengthening capacity of government staff to undertake public sector functions; (ii) strengthening public financial management, procurement, and oversight processes and systems; and (iii) strengthening accountability of government and demand-side institutions such as civil society agencies and NGOs to deliver services. Since 2008, ADB’s support to capacity development in the public sector has been limited to broad issues. A results framework for capacity development was included in the second CPS. The outcome indicators were improved financial management, procurement, and contract management, with reduced support from external consultants in the sectors. Total external support for governance in 2002–2010 was $6.45 billion, $4.67 billion of which was disbursed.72 ADB’s share was $275.32 million, or 10% of ADB’s overall lending.

71 Based on the support provided by ADB, this report analyzes capacity development in the public sector as consisting of three dimensions. Institutional capacity relates to policies, strategies, laws, regulations, other strategic documents, and rules of the game. Organizational capacity encompasses systems, processes, and interlinkages (namely those for public financial management). Human capacity involves individual knowledge, skills, and attitudes. 72 Islamic Republic of Afghanistan, Ministry of Finance. 2010. Development Cooperation Report. 2010. Kabul. Support for Capacity Development 43

107. During the early emergency period, the PSM and capacity development portfolio included a range of instruments that provided the flexibility necessary to During the early respond to the diverse needs of 12 ministries.. Two program loans, the Postconflict Multisector Program for $158.20 million (2002) and the Fiscal Management and Public period, the Administration Reform Program (FMPARP) cluster for $50.57 million (2005) provided public sector budget support and helped enhance policy dialogue on key policy, institutional, and management legal reforms, and improved financial laws, public resource management, and portfolio 73 governance structure. The Postconflict Multisector Program was complemented by 39 included a range advisory TA operations (including a TA cluster program in 2002). The TA aimed to strengthen the capacity of key government agencies and civil society institutions to of instruments to fulfill the conditions for budget support. A capacity development grant of $7.3 million respond to the and four additional advisory TA activities totaling $4.11 million to support the MOF diverse needs of supplemented the FMPARP. The JFPR also funded several capacity development 12 ministries activities for poverty reduction in areas outside Kabul, which resulted in the scaling-up of some ADB investments.

108. The objectives were highly pertinent. ADB aimed to strengthen the capacity of Afghan national government staff to undertake public sector functions, public financial management, procurement, and oversight processes in selected ministries. It also sought to create an enabling environment through improved accountability and enhanced demand-side institutions. These objectives were consistent with ADB’s corporate and country strategies and with thematic approaches that recognized these areas as important drivers of change. They were aligned with government strategies, which gave priority to capacity development and civil service reform. Although ADB support was wide-ranging for most of the evaluation period, the second CPS narrowed the PSM focus to the key ADB sectors of agriculture, transport, and energy.74 However, given the weakness of the results frameworks and their associated monitoring indicators over the evaluation period, little information is available on the results of capacity development efforts. In addition, despite their major problem with absorptive capacity, executing agencies have generally given priority to physical investment rather than capacity development, even though the two were given equal priority in the country strategies. A case in point was the second tranche of the Road Network Development Investment Program. MOF and MPW negotiated with ADB to reduce funds for the capacity development component from $20 million to $10 million.

109. The designs of ADB’s program loans, the TA cluster program, and advisory TA The targeted activities were consistently ambitious. Although the activities were broadly consistent policy and with the long list of needs identified in the initial diagnostics, neither was a country-led institutional vision for capacity development available nor was a strategic plan outlined by ADB. If a sound monitoring system had been established, the designs could have been be reforms were adjusted during implementation. Despite the context—low absorptive capacity and complex and weak country institutions—the Postconflict Multisector Program loan had 55 conditions required much (compared with the ADB-wide average of 38). The targeted policy and institutional longer time reforms were complex and required much longer time frames than planned to come to frames than fruition. The criteria for tranche releases were intended to match the perceived low absorptive capacity of the government. This would have been an effective approach if planned to come the expected reforms had been phased and prioritized over a much longer period. The to fruition

73 ADB. 2002. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the Postconflict Multisector Program. Manila (Loan 1954); ADB. 2005. Report and Recommendation of the President to the Board of Directors: Proposed Cluster of Loans to the Islamic Republic of Afghanistan for Fiscal Management and Public Administration Reform Program. Manila (Loan 2215). 74 About 95% of the PSM and capacity development efforts undertaken during the evaluation period were approved in the first CSP period for 2002–2008. 44 Afghanistan Country Assistance Program Evaluation

policy conditions in the policy matrix were ineffective in ensuring that the proposed reforms took root. Being too general and not binding, they were not translated into appropriate legislation. Lack of sound monitoring systems also resulted in a weak and anecdotal understanding of progress or results. The sector-wide outcome is therefore largely uncertain.

The TA projects’ 110. The TA projects’ designs for developing sustainable human resource capacity designs for were weak and inappropriate. The focus was on direct training, international consultants, and use of PIUs, with little attention paid to strengthening local training developing institutions or transfer of capacity to local staff. Training efforts were constrained by sustainable language and by the persistent reorganization and reassignment of staff. The terms of human resource references for international advisors did not distinguish among the different functions capacity were of capacity development (advisory, operational, and training), and many consultants weak and were expected to perform all three, although each required a different skill set and incentives. The accountability of international advisors was vague, and some were inappropriate required to report directly to ADB, which diminished government ownership. Twinning arrangements were unrealistic, given the lack of strong counterparts in the country. PIUs also had little interaction with local staff, and capacity development of line ministry staff was weak. Finally, until recently, the planning for ADB’s TA operations did not provide for systematic monitoring of how international advisors and PIUs were contributing to capacity development. For example, client stakeholders point out that ADB rarely sought their feedback on consultant or PIU performance.

111. Collaboration with ADB’s development partners in public financial management was greater during the first half of the evaluation period than in the second. Prior to a split of responsibilities along sector lines between ADB and the World Bank, MOF was the central, common counterpart for public financial management activities and this led to collaboration among the key development partners. This was not the case in other sectors, since responsibilities were fragmented and spread across a variety of line and public agencies. Until 2006, ADB was a member of the consultative process for public administration and economic management.75 Although it is part of the Joint Coordination and Monitoring Board, the main instrument for aid coordination, there is no information on the extent of consultations on PSM and capacity development. Duplication of effort and multiple approaches by development partners in terms of financial management requirements appear to have burdened the government’s limited capacity and reduced the effectiveness of ADB support.

B. Private Sector Development and Financial Sector The second CPS dropped the 112. ADB has supported government efforts in finance and private sector development through both public sector and nonsovereign operations. ADB’s initial finance sector CPS for Afghanistan identified the finance sector as a core area of operations and but continues to private sector development as a thematic focus. The second CPS dropped the finance prioritize private sector but continues to prioritize private sector development as a thematic focus. The sector five ADB interventions supporting private sector development and finance since 2002 76 development were (i) an equity investment in the Afghanistan International Bank, (ii) three loans and other guarantees for Roshan Telecom, 77 (iii) an equity investment in the

75 ADB started a special liaison office in Kabul. It was formally upgraded to a resident mission in March 2004. This enabled ADB to increase its presence in operational coordination on the ground. 76 Afghanistan International Bank is a private sector commercial bank established in 2003. Under agreements signed in June 2004, ADB became one of four equal shareholders in the bank. 77 These were extended to Roshan Telecom Development Company in three phases to support the nationwide expansion and network development of this mobile telephone company. Support for Capacity Development 45

Afghanistan Renewal Fund, (iv) an ADF loan for the Afghanistan Investment Guarantee The Afghanistan 78 Fund set up to increase foreign direct investment in Afghanistan, and (v) a program Investment and capacity development grant for the Private Sector and Financial Market Development Program (PSFMDP). The PSFMDP sought to help create a dynamic private Guarantee Fund sector and improve financial intermediation through interventions in legal, market, intended accounting, and audit areas.79 innovative institutional 113. The public sector operations—the Afghanistan Investment Guarantee Fund and arrangements by the PSFMDP—were consistent with the government’s private financial sector priorities but suffered from design flaws. The Afghanistan Investment Guarantee Fund intended facilitating risk innovative institutional arrangements by facilitating risk allocation and market allocation and collaboration among several development partners and private sector players. The market project design did not fully address challenges in marketing the fund’s instruments to collaboration potential international and local investors or a capacity constraint of the counterpart agency in understanding and promoting political risk guarantees. Although the PSFMDP comprised appropriate program measures, its design deficiencies included (i) considerable duplication with USAID support programs; (ii) lack of at-entry assessment of its implicit objective of budget support, inadequate beneficiary identification; and (iii) only marginal consideration of a skills transfer element in designing the associated capacity development TA.

114. The nonsovereign operations for Afghanistan International Bank and Roshan Telecom were timely responses to emerging opportunities in banking and telecommunications and supported the government strategy of private sector-led development. Their activities properly addressed social and economic inclusiveness (through Roshan Telecom) and good governance (through Afghanistan International Bank) and are consistent with ADB’s Strategy 2020. ADB support for Roshan Telecom ADB’s was designed not only to significantly expand the mobile phone network but also to support introduction in the country of M-paisa (a mobile money transfer and payment participation in system)80 to serve persons with no bank accounts. It was also intended to catalyze Afghanistan private sector lending by Afghan banks. ADB’s equity participation and active board International representation in Afghanistan International Bank helped advance corporate governance Bank helped standards and the development of policies and procedures that are in line with advance international best practices. The establishment of the Afghanistan Renewal Fund in July 2005 was designed to finance small- and medium-sized enterprises and provide them corporate with business and technical expertise. The fund made no investments during its 18 governance months of commercial operations due to the worsening of security conditions in 2006– standards 2007.

78 ADB issued $60 million in political risk guarantees to investors. 79 ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant to the Islamic Republic of Afghanistan for Private Sector and Financial Market Development Program. Manila (Grant 0068). 80 M-paisa supports mobile money, which is highly suited to Afghanistan due to limited transport services, limited access to banks in rural areas, diaspora remittances, and the popularity of mobile phones. CHAPTER 6 Results and Sustainability

115. ADB’s performance during the CAPE period has been mixed. There were several positive results. For example, critical infrastructure has been rehabilitated through ADB activities, and Afghans can now travel more easily to many previously inaccessible parts of the country. Due to ADB projects in the power sector, two million more people are now connected to electricity.81 On the other hand, capacity development efforts have fallen short of their intended targets. This is reflected in the TCR ratings of capacity development TA operations. As Table 12 shows, TCRs rated 45% of the projects partly successful and 11% unsuccessful. This chapter summarizes the main results. Details are in Appendixes 6–10, which evaluate the achievements in each sector, as well as sustainability.

A. Three Infrastructure Sectors

The country can 116. Physical investments in three infrastructure sectors. Projects in the transport now make use of and energy sectors have yielded positive outcomes. The majority of the expected a network of physical outputs in the transport sector appear achievable, the only caveat being that most projects are still being implemented. The country can now make use of a network about 750 km of of about 750 km of rehabilitated and improved roads that will reduce the time and rehabilitated and difficulty of travel and transport. ADB’s regional airport project has been complete and improved roads operational with about 50% of the expected outputs achieved due to a cost overrun. Together with a new 75 km rail line, these transport outputs will enable continued traffic growth, lower vehicle operating costs, and reduced travel times. Residents in the influence area of project roads told the IED team that they appreciated the improved quality of the roads and attributed increased economic activities to the projects. However, the beneficiary survey shows that other basic human needs remain unmet, which indicates a need for a more comprehensive approach supported by better development partner coordination to provide complementary services (Box 5).

One main 117. In the energy sector, electricity transmission lines from Uzbekistan and Tajikistan and substations will likely achieve envisaged outcomes. Physical outputs are outcome is providing increased, affordable, and more reliable electricity supplies via power imports, significantly although the benefits had been held up by project delays. The main outcome is a improved power significantly improved power supply to Kabul where, subject to continuing supply to Kabul rehabilitation and expansion of the distribution system, electricity is now available almost all day, compared with only about 4 hours a day in 2002. About 760,000 domestic households in Kabul now have electrical service and 225,000 of these consumer units are new.82 There are also 15,000 new nondomestic customers, which suggests some impact on industrial and commercial users and hence on employment. The gas component of the Emergency Infrastructure Rehabilitation and Reconstruction

81 Physical project outputs include 241 kilometers (km) of North East Power System (50% of the total) and three new substations, in addition to 157 km of 220 kV transmission line constructed from Sherkhan Bandar to Pul-e-Khumri. 82 Given household size data, it is estimated that improved electricity supply has benefitted 2 million people. Results and Sustainability 47

Project did not achieve its objective, because there were no bidders. No progress has been made in developing the country’s gas potential, despite the preparation of a master plan and a regulatory framework.

Box 5: Beneficiary Survey of the Ring Road Rehabilitation

The Independent Evaluation Department mission carried out a beneficiary survey in February 2012 to assess the impact of the Emergency Infrastructure Rehabilitation and Reconstruction Project (Loan 1997) and the Andkhoy– Qaisar Road Project (Loan 2140). Under the two projects, the northern part of the ring road was rehabilitated between Pul-e-Khumri and Qaisar. Local residents appreciated the improved quality of the road. According to the residents, the number of traders, shops, and roadside vendors had increased. Availability of agricultural produce and livestock products, as well as other consumer goods had also improved, though prices had also increased in step with general levels of inflation. The quality and quantity of transport services had risen. Travel time had declined by about half compared with 5 years earlier. The mission also inquired about other public service needs. The Figure below shows the scores obtained from the survey. They indicate that some basic human needs remain unmet.

Priority Public Service Services Needs of Ring Road Residents

Feeder Road 1.2 Farm Roads 1.8 Electricity 2.8 Access to Schools 3.3 Drinking water/sanitation 4.0 Employment Opportunities 4.3 Improved Security 5.2 Access to Health Care 5.4

0.0 1.0 2.0 3.0 4.0 5.0 6.0 Note: Respondents indicated their priority in the given eight servises from 1 (low) to 8 (high).

______a ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Transitional Islamic State of Afghanistan for the Emergency Infrastructure Rehabilitation and Reconstruction Project. Manila; ADB. 2004. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the Andkhoy–Qaisar Road Project. Manila. Source: Independent Evaluation Department country assistance program evaluation team.

118. ADB’s undertakings in the ANR sector have achieved only some of their The agriculture outcomes. Most have been delayed, remain ongoing, and have not delivered all of their and natural expected outputs (Box 6). There are only two completed projects—the irrigation resources sector component of the Emergency Infrastructure Rehabilitation and Reconstruction Project and the Agricultural Support Program. The civil works of the irrigation component were undertakings largely completed as designed and led to the improvement of 16,000 hectares of land have achieved through irrigation, but some planned structures were not provided due to design and only some of budget limitations. The PCR rated the irrigation component less than effective. Four their outcomes other ANR projects have been completed with JFPR funding but are awaiting formal closure, and implementation completion memorandums have yet to be completed. The 48 Afghanistan Country Assistance Program Evaluation

Balkh River Basin JFPR project, which was to rehabilitate irrigation infrastructure, would have produced better outcomes if it had done more to develop the capacity of farmers and local institutions. Potato cold storage facilities developed under the project delivered results, and a component to improve edible oil extraction facilities partly met its objectives. Financed under JFPR rural business support, both helped upgrade agricultural production and markets. Other project outputs—including a component for carpet weaving, which would have provided important benefits to women—have not been delivered. The component had implementation challenges, partly due to being assigned under the wrong ministry.

Box 6: Missed Outcomes in Carpet and Irrigation Components

Two components of projects funded by the Japan Fund for Poverty Reduction and undertaken by the Asian Development Bank in the agriculture and natural resources sector illustrate some of the sector’s operational shortcomings during 2002–2011: Carpet weaving. The carpet weaving component of Rural Business Support Project intended to support the development of the carpet value chain. However, the envisioned development has been constrained by (i) contraction of the international markets for handmade carpets, (ii) type of sheep being raised in Afghanistan, (iii) lack of wool cleaning/scouring facilities, (iv) fragmented carpet industry, and (v) low level of market coordination. This was confirmed by the ADB’s Independent Evaluation Department mission of March 2012, which met 23 members of the Mazar Aliyabad Women’s Cooperative, who were expected to benefit from the component activities. They said there had been no increase in their incomes from the project, because prices remained constant due to the absence of a local carpet market. Cooperatives benefited from tools and equipment provided under the component, but their use was not maximized. Canal. The Balkh River Basin Project primarily rehabilitated infrastructure. While the overall quality of construction of the Dawlatabad Canal Nabhara Khana structure pictured below was satisfactory, outcomes in terms of agricultural productivity, water resource management, and poverty reduction were not fully achieved. This was due to a lack of capacity development for farmers and local institutions. Even the contribution of the infrastructure has been reduced because of limited oversight and poor canal management, which allowed some farmers to make cuts in the canal walls upstream to divert the flow of water.

Source: Independent Evaluation Department country assistance program evaluation team.

Most of the sector targets of 119. Technical assistance in three infrastructure sectors. Most of the sector targets TA operations in of ADB’s TA operations in the three infrastructure sectors have not been achieved. Capacity development TA operations in the transport sector have mostly had little infrastructure impact. ADB and other development partners generally misjudged the organizational have not been capabilities of the government and its agencies during the CAPE period. The TA for achieved Results and Sustainability 49

Capacity Development for Road Sector Institutions developed a road database but it was not used or properly updated.83 The TA for the Cross-Border Trade and Transport Attempts to put Facility lacked an in-depth review of the legal issues involved and neglected the need to a solid regime to promote dialogue between Afghanistan and its neighbors.84 The key expected sector outcome—a sustainable transport sector—is unlikely to be achieved, because ADB’s manage attempts to put a solid regime to manage maintenance in place have not been maintenance in successful. The other envisaged targets—outsourcing work to the private sector and place have not establishment of an Afghanistan highway authority—have not been met either. been successful

120. An institutional framework for development partner coordination was established in the energy sector, and it continues to function. Progress on institutional restructuring was made with the corporatization of Da Afghanistan Breshna Sherkat (DABS) in May 2008. It is now the country’s sole power generation, transmission, and distribution company and replaces its predecessor Da Afghanistan Breshna Moassassa (DABM) under the Corporations and Limited Liabilities Law. Together with the World Bank and USAID, ADB recognized the importance of corporatizing DABM, which was a department of the Ministry of Water and Power (later MEW), in the early 2000s. Although the process was not completed until 2009, ADB and the other development partners supported the government vision of DABM evolving into an autonomous, financially viable enterprise providing reliable low-cost electricity to all Afghan citizens. DABS is regarded by the country’s development partners as a positive step in institution building, but its capacity is weak and it suffers from major gaps, as does capacity within MEW. A new master plan for the energy sector, to be developed by the approved TA for Power Sector Master Plan, could be an important step forward in defining future direction. The key expected outcomes in the energy sector, such as establishment of an enabling environment for private sector investment and better access to rural energy services, were not achieved.

121. ADB’s energy program contributed significantly to regional cooperation, which ADB’s energy was a country development goal. The transmission networks supported by ADB under program both reconstruction and new construction projects have enabled reliable electricity contributed supply imports from Uzbekistan, Tajikistan, and Turkmenistan to meet more than 75% of national electricity needs. The restoration of electricity supply was a key driver of significantly to political stability, economic growth, and social cohesion. The best way to achieve it was regional by rehabilitating the transmission line from Uzbekistan to Kabul. This geographical cooperation focus was an integral part of ADB’s strategy and fully justified. ADB’s comparative advantage in being able to work effectively through CAREC was a positive factor. The high level of imports—almost 80% of electricity supplies in 2011—reflects rapidly growing domestic demand. This will need to be contained by tariff increases if load shedding is to be avoided. In addition, the development of local generating capacity now needs to be given more priority in sector planning.85

122. ADB’s program in the ANR sector included a comprehensive menu of policy reforms but achieved only partial outcomes due to lack of support for the complementary activities needed to ensure that the reforms were enforced. A notable program achievement was the promulgation of the Afghan Water Law and the setting up of the National Environmental Protection Authority. A more modest package of

83 ADB. 2005. Technical Assistance to the Islamic Republic of Afghanistan for Capacity Development for Road Sector Institutions. Manila (TA 4675). 84 ADB. 2004. Technical Assistance to the Islamic Republic of Afghanistan for Cross-Border Trade and Transport Facility. Manila (TA 4536). 85 USAID and the World Bank financed rehabilitation of local hydro and thermal generating capacity, while ADB funds supported investment in transmission and distribution networks. 50 Afghanistan Country Assistance Program Evaluation

reforms would have led to more tangible results. The program did not fully achieve its goals of (i) improving the legal and governance structure, (ii) introducing a sustainable In agriculture, water resource management, and (iii) reducing forestry resource degradation. The the institutional institutional strengthening component was too ambitious and did not achieve the strengthening expected results.

component was B. Private Sector Development and Financial Sector too ambitious and did not 123. ADB’s nonsovereign operations in private sector development have generated achieve the good results, but the outcomes of the public sector operations for the private sector expected results development have been mixed The latter included its activities in the Afghanistan Investment Guarantee Fund and the PSFMDP.

124. ADB managed its equity participation in the Afghanistan International Bank well. It was the first multilateral development bank to invest in a private commercial bank incorporated in Afghanistan. The Afghanistan International Bank now enjoys a reputation for good corporate governance, supported by significant deposits. ADB’s equity participation lent credibility to the bank. ADB also contributed to financial reforms by providing inputs to the formulation of new banking rules and regulations. Supported by ADB, Roshan Telecom also performed well, exceeding its original expansion plans and reaching its subscriber target faster than anticipated. The company had 5 million subscribers by May 2011.

Roshan Telecom 125. The Afghanistan Investment Guarantee Facility stimulated four political risk exceeded guarantees of a total $159.0 million. The number of beneficiary projects under the facility has not reached the original target of 10–20. The goal of helping foreign direct expectations investment flourish in a variety of sectors and in small and medium enterprises was not realized. The facility’s leverage was significantly skewed by $156.8 million in political risk guarantees for investments into mobile phone operator, MTN Afghanistan. Two other facility-supported foreign direct investments are underperforming. The PSFMDP processed the legal framework for private sector development, facilitated removal of key market distortions, and achieved liquidation of 26 state-owned enterprises. However, the adoption of accounting and auditing standards has been delayed. Overall, the program outcomes have been only partly achieved. Private sector investment has not increased as targeted. Financial intermediation had increased until recently but is now declining. Bank deposits have remained largely at an unchanged level, but bank lending has declined.

C. Capacity Development for Public Sector Management

126. Public sector management. The results of ADB support for PSM have been mixed. ADB’s efforts focused on capacity development at the human resource level through training sessions and study tours abroad, but failure to strengthen local training institutions left public sector capacity weak. This has been a particular problem, given the comparatively low pay in the civil service compared with the inflated wages of competitive agencies financed internationally. New systems and processes were introduced at the organization level, but weak human capacity to implement these new systems and fragmented responsibilities of government agencies did not contribute to strengthened organizational capacity. Improving public administration did not proceed as planned, and there were delays in establishing human resource management units in pilot ministries that were to have job evaluation and grading, merit-based appointments, and personnel management responsibilities. ADB support was relatively more effective at the institutional level. Legal and regulatory frameworks in ADB’s Results and Sustainability 51 sectors were supported through program loan tranches and TA activities, particularly those to lay down the budgetary and financial architecture for increased private sector participation.

127. The Postconflict Multisector Program tried to contribute to government reform, especially in public financial management. The program supported MOF to prepare a policy statement on public debt management, establish a debt information system, simplify customs procedures, and rationalize the tariff structures. MOF also computerized its hitherto manual double entry system. The program contributed to the roll-out of the Afghanistan Financial Management Information System. This has been successfully scaled-up to date by the IMF, the World Bank, and USAID to all MOF offices responsible for treasury functions in all 34 provinces.

128. The FMPARP cluster was the second of two program loans under PSM. The PCR prepared in December 2011 noted that little information was available on the formulation stage and that it was also not possible to assess the adequacy of the initial consultation process. Subprogram 1 the FMPARP had a resource envelope of $50.57 million and included a capacity development grant of $7.3 million. Although the second tranche for the program loan was made in December 2009, the capacity development grant was closed in December 2008 with only 33% of the $7.3 million utilized. The planned second program did not materialize. The FMPARP nevertheless contributed to the country’s fiscal management reforms. In 2009, it supported the initial roll-out of a human resource management information system of independent administrative reforms and the civil service commission that covered nine ministries. It has recently been scaled up to all line ministries by USAID. The information system is used by the appointments and appeals board to track headcount in ministries and resolve personnel cases in reduced time.

129. ADB’s approach to developing capacity in PSM during the CAPE period lacked ADB’s approach the continued and strategic engagement needed to achieve planned outcomes (Box 7). to developing ADB support for capacity development was not translated into a set of cohesive and mutually supportive activities, instead they were disparate and self-standing. ADB did a capacity in PSM number of right things during the period and did them in the right way, but this during the CAPE absence of a cohesive strategy and prioritization meant synergies between individual period lacked sector-level support activities could not be tapped to produce overall results. For these continued and reasons, the outcomes envisaged in the early CSPs and in the second CPS results strategic framework (basic business human resource and financial management systems in place and operational by 2010 and reduced reliance on long-term international consultants engagement for program implementation by 2012) are not likely to be achieved.

130. Gender and development. ADB’s 2002 CSP proposed an approach to gender that was responsive and relevant to the country context and to ADB’s overall support for Afghanistan in the initial period. Implementation of this strategy during the early years of the evaluation period generated some positive results in key areas. For example, support for the Central Statistics Organization (CSO) through a regional TA helped create a joint vision for gender statistics and gender equality within CSO. This increased the availability of gender-disaggregated data. However, the responsiveness and relevance of ADB’s gender strategy declined. The second CPS lacked a clear gender results framework and stated the outcomes in terms of rights to development. It identified attainment of the 13 gender-specific benchmarks of the Afghanistan Compact and ANDS as the key indicators, although they had only an indirect connection to ADB’s support. ADB's shift from social development sectors to large infrastructure left gender mainstreaming as the lone tool—and, in isolation, a weak 52 Afghanistan Country Assistance Program Evaluation

instrument—to achieve ambitious gender objectives. ADB needs to develop a gender results framework for Afghanistan that is geared to ADB support, particularly in the country strategy. It will also need to be periodically monitored (additional details are in Appendix 9, Box A9).

Box 7: Key Evaluation Findings from Afghanistan, Cambodia, and Timor-Leste

Evaluations by the Asian Development Bank (ADB) of its support for Afghanistan, Cambodia, and Timor-Leste have found some common reasons for the reduced effectiveness of capacity development interventions. ADB underestimated the complexity of the transition from emergency assistance and, in particular, of developing capacity in agencies and individuals in Afghanistan and Timor-Leste. The evaluations identified a need to formulate a development plan or strategy, even in a conflict context, that would prioritize and strike an appropriate balance among institutional, organizational, and individual capacity development. The importance of monitoring the achievement of capacity development objectives through establishment of measurable output, outcome, and impact targets was also stressed. Clarifying the role of consultants and advisors (e.g., training, mentoring, and gap filling) and matching potential candidates to specific roles was found to be necessary, as was the need to have an exit strategy when providing long- term gap filling. Linking the work plans of advisers and consultants to mutually agreed- upon capacity indicators and to ensure periodical monitoring was also found to be necessary to strengthen accountability for capacity development.

Sources: Independent Evaluation Department. 2011. Country Strategy Final Review Validation Report: Timor-Leste, 2006–2010. Manila: Asian Development Bank; IED. 2004. Country Assistance Program Evaluation: Cambodia–Growth and Sector Reform. Manila: Asian Development Bank.

D. Impacts

131. Physical investment impacts. The 750 km of national roads completed under While the ADB projects along with the project-supported electricity transmission lines and physical outputs substations have contributed to the envisaged transport and energy sector impacts— and outcomes which were economic and social development (paras. 116–117 and Box 5). However, were achieved, the PCR of the Andkhoy–Qaisar Road Project reported in 2010 that progress toward the the reform intended impact was made, but no evidence of achievement was available and qualitative targets were not assessed because it was too early to do so. The Regional initiatives were Airport Rehabilitation Project Phase I completed four airports out of the expected seven. not followed up The original impact targets, for example 50% decrease in narcotics cultivation in the project area within 3 years, may not have been realistic in the first place and will unlikely be achievable, and the PCR did not assess impact, as it was not yet due. Sample operational data was from two airports provided to IED subsequent to its missions showing increases in flights. Since project-level outcomes have not been achieved, no sector outcomes or impacts could be expected in the ANR sector.

Capacity 132. Public sector management and capacity development. While the physical substitution has outputs and outcomes were achieved, the reform initiatives were not followed up. been the only Despite the achievements, the overall impact of ADB’s activities in PSM and capacity development can be described less than successful. A major gap continues to exist way to meet between planned and actual budget expenditures due to unrealistic budget urgent needs formulation and limited implementation capacity. A large portion of funding for government projects continues to bypass the budget process and flow directly from external development partners to line agencies. Key public financial management functions remain excessively dependent on external advisors and consultants, because capacity substitution has been the only way to meet urgent needs. Results and Sustainability 53

133. Country and sector impact. ADB’s continued treatment of Afghanistan as a postconflict country during the CAPE period despite the resurgence and steady increase of armed hostilities in the nation since at least 2006 has had a practical distorting effect on planning, design, and results targets. ADB’s CPS, sector, and project results frameworks have been based on the incorrect assumption that ADB activities would be carried out (and were being carried out) in a situation when armed conflict was generally over and where the country was moving towards normal, peaceful conditions rather than suffering from escalating violence in some regions, with no end in sight. This made it inevitable that expected impacts would for the most part not be achieved. ADB’s acknowledgment of the conflict-affected situation would have fostered better project design to accommodate the security situation and the absence of absorptive capacity.

134. In addition, the second CPS and sector results frameworks were not well Sector results designed. The indicators for ANR, for example, were largely nonmeasurable and frameworks and descriptive in several cases, and the ANR program was not clearly or realistically linked the second CPS to the outcomes that ADB wanted to influence. The other issue was lack of data. Even results when the frameworks set quantitative indicators, no baseline data were available for most of them, and targets were never monitored. This has made it impossible to assess framework were achievements. These weaknesses were symptomatic of most country strategies of the not well time. designed

135. ADB’s objective in the second CPS was to contribute to the high economic growth rates needed to support the government’s key development objectives, including poverty reduction. GDP growth in Afghanistan since 2002 has been relatively strong, averaging 9% annually during 2002–2011, albeit from a low base. GDP per capita rose from $180 in 2001 to $585 in 2011. Afghanistan remains, however, one of the world’s poorest countries, and its standard of living is among the lowest anywhere. The CAPE could not assess ADB’s contribution to the country’s overall GDP growth quantitatively. The second CPS stated that the planned outcome of accelerated economic growth and poverty reduction would contribute directly to improved security, but this hypothesis has been proven incorrect so far by continuing high levels of insurgency. The second CPS was also optimistic when it assumed a direct connection between economic growth and poverty reduction. Overall growth has actually benefited only a small fraction of the population.

136. Social and environmental.86 The concept of implementing safeguard policies Uncertainty over and requirements through LARPs in infrastructure projects was new to Afghanistan land ownership when ADB introduced it in 2002. Inevitably, given very low government capacity, has posed key teething problems in accommodating ADB’s safeguards requirements have been numerous, and progress across government agencies has been uneven. The problems difficulties that have arisen in connection with resettlement have related largely to procedure and process rather than principle. Uncertainty over land ownership has posed the main difficulties. Plots, whether private or public, sometimes have more than one claimant. With no central land registry, such disputes can be difficult to resolve. Some claims appear to have been made simply to benefit from resettlement funds. Absentee landlords are another problem, since the small amount of compensation due them may not be worth the time they would take to go through the process of claiming the funds.

86 The fragility of the environment and the need for sustainable development were not directly linked to the country strategies and therefore not examined by the CAPE. However, the CAPE noted the government’s significant achievements in passing the Environment Act (2007) and creating the Afghanistan Environment Agency. Any issues on environment safeguards were found through interviews and document reviews. 54 Afghanistan Country Assistance Program Evaluation

A delay of 2–3 137. LARPs can take a considerable time to prepare. One was revised 17 times. All LARPs require approval from the Council of Ministers, which is time consuming due to years between a the difficulty of getting such items onto a meeting agenda. Overall, a delay of 2–3 years property between a property valuation and the corresponding payment appears to be the norm. valuation and the This is unsatisfactory both for the recipients, who receive compensation in a corresponding depreciated currency, and for project implementation, which is delayed until the payment appears compensation process is complete. There is little room for ADB to resolve these problems, however. Avoidance of involuntary resettlement issues altogether, which is to be the norm stipulated by ADB’s policy to be the first principle of action, is not an option in many projects. The best way forward is to sustain capacity development over the long term. ADB also needs to ensure that RRPs discuss the scope and solutions of resettlement issues thoroughly. MPW has now developed a good resettlement approach of its own. It also has a good relationship with an NGO that is able to prepare LARPs, but further progress is needed (Appendix 11).

E. Sustainability

138. During the CAPE period, investments were made both to rehabilitate existing assets and to create new ones. The political imperative of the international community was to show progress through reconstruction and development. On one level, these efforts have been successful. It is easy to point to improved roads, power and lines in Afghanistan as examples of what has been achieved in terms of outputs.

Government has 139. Operation and maintenance budget stress. Focus on O&M has been weak. neither the Without continued support from development partners, the government has neither the institutional nor the financial capacity to carry out O&M of its new and institutional nor rehabilitated assets, not to mention older ones (Box 1). Yet it will be under huge the financial pressure to do so as international troops continue to withdraw and foreign assistance capacity to carry diminishes, forcing it to take on much greater budgetary responsibility for security, the out the delivery of services, and keeping assets in serviceable condition. Tax revenues may grow, operation and but the IMF has estimated that the government will achieve fiscal sustainability for operating expenditure only by 2024–2025. Weak public sector capacity compounds the maintenance of problem. ADB’s railway project is a case in point. Afghanistan has neither the financial its assets nor institutional capacity to maintain the rail line, which ADB has financed (Box 4). The Uzbek state railway company is currently operating and maintaining the new railway on Afghanistan’s behalf. ADB envisages financing any revenue shortfall of the railway through the second MFF, Transport Network Development Investment Program, which is an explicit indication of ADB’s somewhat low expectation with regard to sustainability. While the railway commenced operations on 5 December 2011, no operational or financial records were available for IED to review.

140. Road maintenance shortfall. In the road subsector, government resource allocations to MPW have more than doubled over the past 3 years. There is, however, still a shortfall relative to needs. The roads sector has no secure funding mechanism to meet these costs, no budget funds have been allocated for road maintenance. The government is preparing to impose a tax on fuel imports and the funds are expected to be earmarked for either maintenance or new construction. The levy will be applied to all imports of fuel, and the proceeds will be transferred to the general budget. The allocation of these funds to road maintenance is unpredictable, as funds are eligible for new construction as well as maintenance, according to the fuel tax proposal. Sound maintenance management would require an objective assessment of maintenance needs and an asset management system. Results and Sustainability 55

I. 141. Capacity challenge in energy sector. The country’s power company, DABS, a corporatized state-owned utility, has been in existence for only 2 years, remains Energy sector institutionally weak, and requires extensive external support in every aspect of the sustainability power business (para. 120). Capacity strengthening of DABS will be critical to the long- faces four main term sustainability of the electricity sector. Sector sustainability faces four main risks: risks (i) the limited progress made in building technical and financial capacity with DABS; (ii) political resistance to the necessary tariff increases; (iii) a rapid rise in domestic demand for electricity, which is compounded by the resistance to higher tariffs; and (iv) Afghanistan’s high dependence on imported electricity from Central Asia, which leaves the country vulnerable to major supply disruptions.

142. Weak ownership of agriculture assets. Most of the completed ANR activities targeted small rural communities and producer cooperatives. The assets, such as potato storage facilities, were to be operated and maintained by individual farmers or groups of farmers, making O&M not a primary issue. However, the O&M of rehabilitated irrigation infrastructure is now uncertain, because capacity development was limited, project components appear to have been implemented without enough stakeholder consultations, and the farmers’ ownership of project assets is weak. The organizational capabilities to implement and sustain reforms in the ANR sector are generally weak.

143. Government capacity gain tenuous. Efforts to strengthen institutional capacity have been sustainable when there was country ownership, but results of organizational capacity development have often been met by strong resistance, particularly when new or revised organizational mandates are not sufficiently clarified or owned. The lack of a shared vision by the sector ministries on the government’s organizational framework resulted in fragmented capacity development. Sustaining gains in public sector human resources is unlikely due to the exit of trained staff to the private sector. The rate of attrition will increase as long as effective civil service reforms with appropriate incentives are not developed.

144. Constraints to the government’s absorptive capacity need to be addressed by adopting a long-term perspective. These constraints—an overriding concern since the resumption of ADB operations—include a low skill level, a narrow knowledge base, an inadequate policy environment, and the deleterious results of these factors in various combinations. In principle, given the depth of the problem, ADB might have considered spreading available assistance in its CPSs over a longer period of time while intensifying its TA efforts to increase the country’s capacity to make more effective use of resources. While this gradual approach would likely have been politically unacceptable, given the urgency with which the international community approached Afghanistan’s reconstruction after 2001, it would have had strategic merit based both on the circumstances that existed then (see Box 7 for what had been learned in other postconflict situations) and the experience available now. Capacity development should have been more systematic, focused on fewer areas and institutions, and based on corporate plans supported and monitored by ADB over a longer period. CHAPTER 7 Assessment

145. The CAPE assessed the achievements of the country strategy and program on six evaluation criteria (paras. 146–160). It took the extraordinarily difficult circumstances under which the strategy and program were designed and implemented into consideration. It believes that these circumstances should have influenced the project design elements and implementation arrangements, and therefore the CAPE assessed performance against the objectives and targets that were specified in the operations documents. The overall assessment is provided as an aggregation of the individual criteria.

A. Assessment by Evaluation Criteria

ADB’s support 146. Strategic positioning. ADB program’s strategic positioning is assessed 87 was well focused satisfactory. ADB’s support was well focused and consistent with the objective of the country’s strategic documents, which has been to ensure a seamless transition and and consistent economic growth by supporting reconstruction and rehabilitation. It was aligned with with the government strategies and priorities. The program was based on preliminary needs objective of the assessments in 2001 and 2002 and was well coordinated with the government’s own country’s plans throughout the CAPE period. Since 2003, the program has focused primarily on strategic infrastructure sectors. This responded to the need to overcome critical infrastructure constraints and fit ADB’s comparative strengths. The program also concentrated on documents greatly needed capacity development. Support for PSM and capacity development was well founded on the needs assessments. In the early stages, the program was also well coordinated with the efforts of other development partners, although the level of coordination during implementation of the program declined in the past few years. Eventually, weak or nonexistent linkages between the efforts of development partners, ADB, and the government resulted in lower impacts than envisaged.

The sector results 147. The strategic positioning shortcomings have related to the sector results frameworks of frameworks of the second CPS and collaboration with development partners, which the second CPS diminished even though initially successful in the diagnostic assessments. Except in the infrastructure sector, ADB has largely ceased to play a major role in aid coordination. and collaboration Regular energy sector coordination meetings have taken place following establishment with of the Interministerial Committee for Energy. ADB’s continued classification of development Afghanistan as a postconflict country was unrealistic in light of the major escalation of partners were armed hostilities since 2006. ADB did not sufficiently take into account the seriousness inadequate of the security situation and build security issues into its programs and projects.

148. Relevance. ADB’s program is assessed relevant to the objectives of strategies of ADB and the government.88 The program focused on activities that are relevant to the government priorities. They have also been relevant to the sector and country strategies.

87 Issues relevant to this rating are discussed in paras. 63–74, 84, 91, 92, 93, 106–108, 111, 112 and 130. 88 Issues relevant to this rating are discussed in paras. 75–81, 84–90, 93, 94, 106–110, 112–114, 130, and Boxes 3 and 4. Assessment 57

In its early emergency operations, ADB had little choice but to move ahead with investments. Quick processing and implementation were the initial priorities in ADB’s program response to the emergency situation in the country. ADB rightly provided emergency has been projects and program loans in the first few years. The PSM portfolio also included the relevant, but flexibility necessary to respond to the capacity development needs of 12 ministries some project and during the early emergency period and focused on appropriate areas related to the use TA designs have of public resources, such as financial management and procurement. been 149. On the other hand, project design was weak in some aspects. Several project overambitious and TA designs, particularly for capacity development, have been overambitious. ADB’s capacity development support did not adopt a strategic approach to the country’s overall problem in this area, did not have a strong results framework or associated indicators, and was fragmented across sectors. The constraints of poor government absorptive capacity, the security environment, and risks to sustainability were not carefully addressed in project design. ADB used the MFF as a resource envelope during the CAPE period and designs under this modality were often kept vague to allow flexibility and to hedge against unforeseen risks during program implementation. ADB’s transport MFF has been reprogrammed from its original purpose—to finance additional investment—and used instead to finance cost overruns of earlier projects. Despite these issues, the CAPE found the program relevant because the core program overall had a relevant focus and was satisfactorily designed. The quality of the DMFs for ADB’s undertakings during the CAPE period varied. The main problem areas were (i) overly ambitious time frames, and (ii) unrealistic and sometimes irrelevant monitoring indicators.

150. Efficiency. ADB programs and projects are rated less than efficient. 89 Most projects are still incomplete. Project costs have been high, exceeding original estimates and reflecting the difficulty of the operating environment. High cost overruns, construction delays, and uncertainty of traffic development are affecting the majority of projects. Costs of contracts increased two to three times in the past 4–5 years. The entire $407 million of the transport MFF was used to cover cost overruns of older road projects. The cost overruns will significantly reduce the economic internal rates of return at project completion.

151. The few EIRRs that have been recalculated at the completion of public sector projects have been below expectations. The Regional Airports Rehabilitation Project, for example, had an appraisal EIRR of 22% and a postcompletion EIRR of only 11%. The EIRR on the energy component of the Emergency Infrastructure Rehabilitation and Reconstruction was reduced from 27% at appraisal to 16% in the PCR. In some cases, the assumptions made in the economic analysis in the RRPs and PCRs were unrealistically optimistic and hypothetical. High cost

152. The extensive use of the design–build contracts left the design and engineering overruns and tasks to building contractors rather than to the government. By allowing this contract construction modality, ADB missed an opportunity to develop capacity within the government. The delays are same existing low capacity also made it difficult for the government to supervise affecting the contractors. Estimated implementation periods continued to be overly optimistic, majority of despite limitations in implementation capacity, which would have called for longer implementation periods. Infrastructure projects were completed more than 3 years late projects on average.

89 Issues relevant to this rating are discussed in paras. 71, 76–79, 86–90, 95–99, 100, 102, 103, 109, 114 and Boxes 3 and 4. 58 Afghanistan Country Assistance Program Evaluation

153. Effectiveness. The program is assessed effective.90 In the transport and energy In the transport sectors, the majority of expected physical program outputs currently appear achievable. and energy The exceptions are the regional airport project and the gas component of the sectors, the Emergency Infrastructure Rehabilitation and Reconstruction Project. Completed projects majority of in the transport and energy sectors have yielded positive outcomes. Afghanistan has benefitted from ADB’s program. The country can now make use of a network of about expected physical 750 km of rehabilitated roads. Residents in the influence area of project roads program outputs appreciated the improved quality of the roads. Power supplies to Kabul have been currently appear significantly improved. Electricity is now available almost all day compared with about achievable 4 hours a day in 2002. About 760,000 domestic households in Kabul now have electrical service. However, ADB interventions have made very little or no progress in rural areas. Water, agriculture, and natural resources have so far produced only limited outcomes, because many have been delayed and have not delivered a number of outputs.

154. Progress in capacity development has been mixed despite some positive results. Government capacity in Afghanistan is well below levels elsewhere in Asia, and many more years of effort will be required to improve it. Capacity development at the human resource level provided training, but failure to strengthen local training institutions left public sector capacity weak, particularly given the absence of a competitively paid civil service. New systems and processes were introduced at the organization level, but weak capacity and strong resistance (when new or revised organizational mandates are not sufficiently clarified or owned) were bottlenecks to implement these new systems. Improving public administration did not proceed as planned and there were delays in establishing human resource reforms implementation management units in pilot ministries that were to have job evaluation and grading, merit-based appointments, and personnel management responsibilities. Fragmented responsibilities of government agencies also did not contribute to strengthen organizational capacity. The Ministry of Progress in Mines took the initiative to establish a rail authority and develop a related legal capacity framework and regulations, rather than the Transport and Civil Aviation or MPW. This is development has an example of how responsibilities in the transport sector have remained fragmented. ADB support was relatively more effective at the institutional level, particularly the been mixed budgetary and financial architecture. MOF established a debt information system, despite some simplified customs procedures, and rationalized the tariff structures. However, ADB’s positive results approach to developing capacity in PSM during the CAPE period lacked a continued and strategic engagement needed to achieve planned outcomes.

155. Sustainability. The program is assessed less than sustainable mainly because of concerns regarding the proper O&M of assets after their construction and turnover from ADB and other development partners to the government.91

156. There are two main reasons for this. First, the domestic financial resources available to the government for O&M of the projects that ADB and other development partners have created are very limited. O&M costs are therefore being partly met by development partners, and this support is projected to shrink through the Kabul Process. The roads sector has no secure funding mechanism to meet these costs, no budget funds have been allocated for road maintenance. The government is preparing to impose a tax on fuel imports and the funds are expected to be earmarked for either maintenance or new construction. The sustainability of the rail line is uncertain, which is why ADB stands ready to subsidize its operation from a MFF. The power sector is also incurring financial losses. The country’s main power company has been in existence for

90 Issues relevant to this rating are discussed in paras. 116–130, and Boxes 5 and 6. 91 Issues relevant to this rating are discussed in paras. 138–144. Assessment 59 only 2 years. It still requires extensive external support in all aspects of the power business. In agriculture, the O&M of rehabilitated irrigation infrastructure is uncertain, given the farmers’ reluctance to accept these interventions.

157. Second, the capacity of public institutions remains very limited and is The capacity of improving very slowly. External support continues to be vital to all the sectors in which public ADB is operating, even though some improvements were made over the CAPE decade. Capacity improvements supported by ADB at the institutional level (policy and institutions for regulation) are likely to be sustainable, but sustaining individual capacity to effectively O&M remains implement the reform is less than likely, because trained staff leave for better pay and very limited and better jobs in the private sector and elsewhere. It appears that not enough attention is improving very has been given to the future sustainability of ADB projects and TA. In private sector slowly development and finance, ADB’s Afghanistan Investment Guarantee Fund support has not led to any plans to set up a new guarantee facility using the funds.

158. Impact. The development impact of the program is assessed satisfactory.92 This is largely a result of the delivery of the physical outputs of the transport and energy sectors. Although most physical projects were completed recently and no data to assess impact were available, (even in project completion reports), the IED expects from the achieved outcomes that the completed national roads and electricity transmission system are likely to contribute to the envisaged sector impacts (paras. 116 and 117). On the other hand, the impact of the program’s capacity development was less than successful. A major gap continues between planned and actual budget expenditures due to a lack of realism in budget formulation and limited capacity for implementation. Excessive dependence on external advisors and consultants for key public financial management functions continues. The completed 159. The second CPS and sector results frameworks were not well designed and the national roads objectives are being only partly met. ADB’s continued designation of Afghanistan as a and electricity postconflict country despite a resurgence of armed hostilities since 2006 has meant that the results frameworks were designed for a country moving towards normal, transmission peaceful conditions after the end of a military contest. Since security conditions were system are likely actually deteriorating significantly, it was inevitable that expected impacts would to contribute to largely not be achieved. Acknowledgment that Afghanistan was in a conflict-affected the envisaged situation would have allowed better project design to accommodate the security sector impacts situation and the absence of absorptive capacity.

160. The objective of the second CPS was to contribute to the high economic growth rates required to support the government’s key development objectives, including poverty reduction. Overall economic growth after 2002 has been relatively strong, although much of the expansion has been the result of the presence and spending of foreign troops and major flows of development partner funding. Afghanistan’s living standards remain among the lowest in the world. The second CPS stated that the planned outcome of accelerated economic growth and poverty reduction would contribute directly to improved security, but so far this hypothesis has been shown to be incorrect by actual conditions on the ground. In addition, an assumption in the CPS of a direct connection between economic growth and poverty reduction has not been borne out. Growth has benefited only a small fraction of the population.

92 Issues relevant to this rating are discussed in paras. 131–137. 60 Afghanistan Country Assistance Program Evaluation

B. Overall Rating

161. Sovereign loans, grants, and technical assistance operations. The CAPE rated There are the sovereign program less than successful. It recognized the extraordinary circumstances that prevailed in the country during the period and the challenges faced, systemic issues in particular, by the ADB staff involved. The CAPE brings together five separate sector across all sectors assessments, covering transport, energy, ANR, private sector development and finance, on efficiency and and capacity development of government, as well as a strategic assessment of the CPS sustainability (see Appendixes 6–10 for details). Table 14 shows the ratings for the five sectors. The individual sector assessments using the standard evaluation criteria were brought together and weighted according to the relative size of the sector programs.93 The transport and energy sectors are rated borderline successful and finance, PSM, ANR sectors are rated less than successful. There is some uniformity of the ratings across sectors. This points to systemic issues across all sectors with respect to efficiency and sustainability. All public sectors were rated less than efficient because of high cost overruns, implementation delays due to security incidents, procurement issues or poor response to bids for civil works, slow government processes, land acquisition issues, and limited capacity of the ministries. The outlook for sustainability of public sector outputs is poor because of the limited domestic financial resources available for O&M. Table 15 summarizes the overall performance of the Afghanistan program based on ADB’s six standard criteria.

Table 14: Sector-Based Assessment of ADB Program (Sovereign) Sharea Strategic Effective- Sustaina- Key Sectors (%) Positioning Relevance Efficiency ness bility Impact Transport 55% 2 2 1 2 1 2 Energy 19% 2 2 1 2 1 2 ANR 13% 2 2 1 1 1 1 Finance 3% 2 1 1 1 1 1 PSM 10% 2 2 1 1 1 1 Weighted average rating 2.00 1.97 1.00 1.74 1.00 1.74 ADB = Asian Development Bank, ANR = agriculture and natural resources, PSM = public sector management. Note: A rating score is 3, 2, 1, or 0, corresponding to a rating of highly satisfactory, satisfactory, less than satisfactory, or unsatisfactory, respectively. a Projects that cover several sectors and have been categorized as multisector were included in three infrastructure sectors by distributing their various components to the appropriate sectors. The financing and guarantee to the Roshan Telecom in the information and communication technology category was assessed as nonsovereign support. Source: Independent Evaluation Department.

93 The strategic positioning considered the overall strategic positioning of cross-sector support. Assessment 61

Table 15: Assessment of Overall Strategy and Program (Sovereign) Evaluation Criteria Weighted Average Rating Criteria Weight Overall Rating Strategic positioning 2.00 0.1 0.200 Relevance 1.97 0.1 0.197 Efficiency 1.00 0.2 0.200 Effectiveness 1.74 0.2 0.348 Sustainability 1.00 0.2 0.200 Development impact 1.74 0.2 0.348 Overalla 1.0 1.493 Less than successful a The evaluation scoring system rates the overall sector performance based on the following criteria: (i) if the overall weighted average score for criteria combined is greater than or equal to 2.7, then the overall performance is highly successful; (ii) if it is less than 2.7 but greater than or equal to 1.6, then the overall performance is successful; (iii) if it is less than 1.6 but greater than or equal to 0.8, then the overall performance is less than successful; and (iv) if it is less than 0.8, then the overall performance is unsuccessful. Source: Independent Evaluation Department.

162. A CAPE evaluates performance against the stated program objectives. Country strategies and the scope and design of projects and programs should have been prepared with full consideration of the fact that Afghanistan was and has continued to be a conflict-affected state with very low capacity and in a fragile and weakened situation. This would have provided a platform for the CAPE to evaluate the performance of the ADB program in the light of assumed risks recognized in the design and reflected in the design targets and indicators. Instead, the efficiency of ADB’s program was affected to a large extent by a poor security situation and ongoing conflict that strategy and program design in effect did not take into account. Para. 49 of ADB’s Achieving Development Effectiveness in Weakly Performing Countries suggests that ADB should recognize that the financial and economic risks of investments are higher and that lower returns are likely in weakly performing countries (footnote 55).

163. Nonsovereign loans and guarantees. The CAPE rated the nonsovereign program successful. Table 16 shows the ratings for the nonsovereign program (see Appendix 10 for details). The individual sector assessments using the standard evaluation criteria were brought together using the relative size of the sector program as weights.

Table 16: Performance Rating for Nonsovereign Operations Rating Criteria Ratings Development impact 2.0 ADB Investment profitability 2.0 ADB work quality 2.0 ADB additionality 2.0 Overall assessmenta 2.0 Successful ADB = Asian Development Bank. a The evaluation scoring system rates the overall sector performance based on the following criteria: (i) if the overall weighted average score for criteria combined is greater than or equal to 2.7, then the overall performance is highly successful; (ii) if it is less than 2.7 but greater than or equal to 1.6, then the overall performance is successful; (iii) if it is less than 1.6 but greater than or equal to 0.8, then the overall performance is less than successful; and (iv) if it is less than 0.8, then the overall performance is unsuccessful. Source: Independent Evaluation Department.

164. ADB and government performance. ADB performance was assessed based on the criteria of the CAPE guidelines, such as (i) its role in aid coordination and building partnerships with other partners, (ii) its role in building government ownership and 62 Afghanistan Country Assistance Program Evaluation

leadership, and (iii) the extent of delegation of activities to the resident mission. ADB performance is rated less than satisfactory. 94 Government performance was also assessed based on such criteria as (i) the extent of government ownership and commitment in the country’s development agenda, (ii) the extent of leadership in aid coordination, and (iii) the extent of compliance with ADB’s loan covenants and conditionalities and of involvement during implementation. 95 The CAPE rated the government performance less than satisfactory. Appendix 12 provides a summary of the ADB and government performance.

165. Overall rating. Overall, the CAPE rated the ADB program less than successful. Table 17 shows the overall ratings. The sovereign and nonsovereign programs were brought together using the relative size of the programs as weights.

Table 17: Overall Assessment of ADB Program Operation Sharea Rating Weighted Score Sovereign 93% 1.493 1.388 Nonsovereign 7% 2.000 0.140 Overall ratingb 1.528b Less than successful ADB = Asian Development Bank. a The financing and guarantee to the Roshan Telecom in the information and communication technology category was assessed as nonsovereign support. b The evaluation scoring system rates the overall sector performance based on the following criteria: (i) if the overall weighted average score for criteria combined is greater than or equal to 2.7, then the overall performance is highly successful; (ii) if it is less than 2.7 but greater than or equal to 1.6, then the overall performance is successful; (iii) if it is less than 1.6 but greater than or equal to 0.8, then the overall performance is less than successful; and (iv) if it is less than 0.8, then the overall performance is unsuccessful. Source: Independent Evaluation Department.

94 Issues relevant to this rating are discussed in paras. 65, 67–70, 82–83, 89–90, 95, 101, and 111. 95 Issues relevant to this rating are discussed in paras. 80, 89, 101, and 102. CHAPTER 8 Challenges, Lessons, and Recommendations

166. The achievements of ADB support were discussed in Chapter 6. This chapter discusses the critical gaps and challenges as well as recommendations stemming from them.

A. Security and the Kabul Process

167. Afghanistan continued to be a weakly performing, conflict-affected country throughout the evaluation period, but ADB’s programs and projects did not explicitly take into account the continuing conflict or the country’s weak performance. The Development Assistance Committee of the Organization for Economic Co-operation and Development’s 12 principles for good international engagement in fragile states say that the political, security, economic and social spheres are interdependent; failure in one risks failure in all others (footnote 57). This country weakness and the protracted military hostilities remain Afghanistan’s most serious concern, and sustainability and risk management should be the priority.

168. The CAPE findings highlight shortcomings in ADB’s program in several areas. These include weaknesses in analysis in project formulation and design, in project efficiency due to delays and consequential cost increases, through insufficient supervision during project implementation, and in limited coordination with development partners. Many of these deficiencies were the result of concerns about the security environment, which in turn led to less-than-optimal staffing in the resident office, fewer and shorter missions by headquarters staff, as well as few visits to project sites. Security issues made it difficult to attract staff to come to Afghanistan. Consultants also minimized the length of their visits to the country and avoided visiting project sites. The evaluation also found that, while the average mission duration per project ADB-wide was about 24 days, the corresponding average mission to Afghanistan lasted about 12 days. This compounded problems caused by the lack of capacity in government.

169. Afghanistan is highly dependent on external support, which currently accounts for 82% of total public spending, incorporating both central government spending and the large amount of off-budget spending that development partners funnel directly to government line agencies. This means that Afghanistan will face additional security and budgetary challenges with the planned withdrawal of foreign troops in 2014 and the gradual reduction in foreign support that its development partners have forecast. Through the Kabul Process, Afghanistan will take primary responsibility for security and development (para. 36). The US military has provided about 40% of all foreign support, which includes nonsecurity support (para. 64).

64 Afghanistan Country Assistance Program Evaluation

170. Recommendations. The CAPE has provided the following recommendations regarding the security situation and the Kabul Process:

(i)A cknowledge Afghanistan as a country embroiled in war. ADB should formally recognize the facts and treat Afghanistan as a conflict-affected country rather than one in a postconflict situation. This may become even more important as the presence of international troops decreases, because political and military struggle may escalate and take on new forms. (ii) Shorten the country partnership strategy period. ADB needs to have a realistic assessment of the current and likely future security environment, and the CPS term therefore should be 3 years or less due to the high risks and uncertainty that now characterize the security situation. (iii) Help coordinate development partner efforts. ADB should remain consistent with the Kabul Process. As the fourth largest funding agency in Afghanistan, ADB is in a position to provide leadership in coordinating development partner efforts in several areas to increase overall efficiency and effectiveness. It will be important to carefully assess the security situation, financial and fiscal sustainability, and institutional capacity while coordinating with other key development partners to make efforts complementary.

B. Making Development Demand-Driven

171. The evaluation finds an urgent need for ADB to adopt an approach to development in Afghanistan that is centrally and externally driven to one driven by demand. ADB programs rightly focused on infrastructure and capacity development in government, but the bottom-up processes normally required were not fully executed and inadequate attention was paid to security aspects in project design and implementation. Although weak analysis in designing and implementing ADB support was unavoidable in the initial emergency years, it continued throughout the evaluation period. This became unsuitable as the development challenges became far greater and more complex.

172. ADB’s physical investment in the transport and energy sectors was relevant to both the ANDS and its CPS and was justified by the government’s macro priorities. However, these investments have not been clearly linked to other industrial and social demands or coordinated with projects of other development partners in industry, agriculture, and social services. Although the priorities in each of ADB’s investment sectors are clearly stated, they are not supported by qualitative data assessment and have not yet been clearly linked to any substantive demands, especially in industry. If ADB support had been based on more substantial plans, coordination among development partners and sectors would have been more efficient. The World Bank highlights what it calls “resource corridors," which link up mineral resources, infrastructure, communities, and employment-creating sectors in a way that provides growth and jobs beyond the borders of the mines. The mineral corridor concept, for example, requires substantive development plans that focus on tangible demands requiring physical investment.

173. The design of ADB support did not fully capture the pervasive constraints to the government’s absorptive capacity. Since 2007, ADB support to Afghanistan has been entirely in the form of grants. The government has preferred faster implementation to Challenges, Lessons, and Recommendations 65 more careful implementation, even though this may mean inefficient use of the funds. Leaving civil works design and engineering tasks to a single construction contractor through design–build contracts is an example of this, which constrains the government’s ability to supervise civil works and to justify cost overruns. The design– build contracts also increased uncertainty about land acquisition and resettlement at the appraisal stage and limited the development of capacity in line agencies. Although these contracts are appropriate for simple civil works, they were used in large infrastructure projects without considering the two-step procedure that avoids conflict of interest by separating the design and construction functions. The design–build contract should be used only selectively and must be fully justified.

174. Several grants were provided in the form of MFFs, a modality that requires government capacity and a detailed road map and investment program to be effective. This may be a preferred tool for facilitating fast disbursement of funds, but it is likely inappropriate in Afghanistan, where there is insecurity and government absorptive capacity is weak. In addition, ADB has used some MFFs to cover cost overruns of ongoing projects that the government could not fund. Given the extraordinarily difficult environment under which projects had to be implemented and the inherent risk of cost increases, making the MMFs quasi-credit lines was imaginative but not defensible with respect to ADB principles of accountability. Instead, ordinary grant (loan) and supplementary financing for cost overruns should have been sought, with the necessary information provided to ADB’s Board.

175. Recommendation: Shift from an externally and centrally driven development approach in Afghanistan to one that responds to overall country demands. ADB should pay careful attention to country context and absorptive capacity in project design and use appropriate financing modalities. While a future program should continue to focus on infrastructure and capacity development in the government, sector strategies should be based on analyses of industrial and agricultural demand and of the population’s socioeconomic needs. ADB should link its support in each sector to its development efforts and those of development partners in other sectors, and to work with central and local governments to achieve development outcomes in project areas.

C. Sustainability

176. Afghanistan will need an estimated $1 billion–$2 billion a year to meet the O&M costs of civilian assets. ADB support during the CAPE period did not systematically integrate a concept of sustainability in project design and implementation that took both financial and human resource requirements into consideration. Neither did its support distinguish between sectors where self-financing was possible for O&M and those where it was not. ADB’s assumptions about cost recovery and sustainability issues were, therefore, unrealistic. This will mean heavy future expenditures for O&M that the government will be able to make only with continued foreign support.

177. Recommendation: Prioritize sustainability in future development support. Supporting the sustainability of the development assets and gains in Afghanistan should be a priority under the Kabul Process. ADB should also help build a holistic approach and concern for sustainability into future medium-term assistance for Afghanistan by the international community through coordination with other key development partners. This will require detailed financing plans, including cost estimates for O&M based on government strategies and sector master plans; financing projections; and the identification of the agencies in the central or local governments, the private sector, and other asset users who should or can be responsible for O&M. 66 Afghanistan Country Assistance Program Evaluation

ADB should help prioritize relevant reforms and support them. One such area would be ensuring sustainability through financial management reforms. If full cost recovery from users is not possible, ADB may provide support for meeting O&M costs in the short term by deferring funding of other investments.

D. Capacity Development and Governance

178. The design of ADB’s capacity development support during the CAPE period was generally unsatisfactory. The Development Assistance Committee of the Organization for Economic Co-operation and Development believes from experience across postconflict and fragile situations that international support agencies need at least a 10-year engagement in countries such as Afghanistan to develop capacity. The importance of continuity cannot be overemphasized. Because capacity development was a major goal, results needed to be properly measured. But results frameworks were generally weak, as was the design and monitoring of capacity development interventions. Each set of policy reforms involved the need for new organizational and human capacity, and so prioritization and sequencing should have been seen as essential. Instead, they were not considered. A blend of training modalities was crucial to developing individual capacity. This meant that, while short-term internal and external training sessions were necessary, a simultaneous effort was needed to initiate sustained support for the development of trainers and to undertake long-term measures to develop training institutions. Exit strategies for PIUs and international and national consultants were not defined at the beginning but should have been. Providing training abroad was an easy output to achieve but proved to be less effective when not twinned with hands-on application of learning on the job. Now, with capacity still weak, Afghanistan is entering a new period of transition when risks to operations—from the security environment, political uncertainty, potential policy paralysis, and corruption and fraud—are likely to rise.

179. Recommendation: Develop and closely monitor a tailored capacity development plan and governance improvement plan. ADB should develop and closely monitor a long-term capacity development and governance improvement plan carefully tailored to Afghanistan’s unique circumstances and the government’s needs. Effective capacity development needs to be shaped by specific circumstances and challenges. In Afghanistan, it should take into account the short history of government, weak cooperation between central and local governments, and a public sector staff that has limited education levels, language constraints, and low salaries. Better coordination by development partners is also needed, as is a clear vision set by the government. This will require (i) diagnostic needs assessment, (ii) sector capacity assessments, (iii) an overall results framework, (iv) a prioritizing and sequencing of the efforts essential for poverty reduction, and (v) providing greater guidance for ADB staff on designing capacity development activities. This last step should include instruction in the correct formulation of results indicators and monitoring systems. ADB’s operations need to explicitly address the strengthening of the accountability mechanism for governance to maximize the development effectiveness of its support. For example, the procurement law needs to be implemented effectively—providing a procurement manual would be a good start. Financial and portfolio management have to be strengthened, and projects and TA should be monitored closely.

E. ADB Administration

180. The ARTF established in 2002 has a more cooperative structure with other contributors than the more recently established AITF, which has been managed by ADB. Challenges, Lessons, and Recommendations 67

The ARTF is overseen by a Management Committee, which approves all financing proposals, comprising ADB, the Islamic Development Bank, UNDP, the World Bank, and more recently MOF. A Steering Committee sets the strategy for the ARTF and is responsible for implementation; it consists of ARTF donors that contribute more than $5 million in the year. The World Bank established an exclusive administration unit, which maintains staff both in Kabul and at headquarters, to manage the ARTF. A financial and disbursement team in the unit assists the correct and timely funds utilization, including conducting centralized procurement. In addition, the World Bank has contracted monitoring agents to assist in ensuring proper fiduciary management. Since the phaseout of the postconflict premium of ADF will start in 2013, to be completed in 2018, ADB needs alternative sources if ADB is to maintain its support for Afghanistan through the Kabul Process. However, the current management framework of the AITF is appropriate to manage a small amount of funds.

181. ADB’s resident mission did not have the numbers or the skills mix to cope with the task in Afghanistan during the evaluation period. Although the portfolio grew, the number of international staff declined from six in 2006 to four in 2012. Positions have remained vacant for extended lengths of time (Table 9). A stronger mission would have made ADB more effective in capacity development and aid coordination and would have contributed to more expeditious project implementation. The human resources issue has other aspects in addition to staff numbers and skills at the resident mission. These includes the number and skills of international staff working at ADB headquarters on the country, the length of time they have spent in Afghanistan, and how often they visit and for how long. Staff specializations are also crucial to effectiveness. Having adequate procurement staff in the field is important, because long-distance procurement arrangements can be a significant source of delays in low- capacity environments.

182. Recommendation: Strengthen the management and operational procedures for ADB operations in Kabul to play a more engaged role in supporting the Afghanistan program. Monetary and nonmonetary aspects of work need to be addressed to enable filling of all vacant resident mission positions in ADB's focus areas. ADB needs to consider working with NGOs for external monitoring if project sites are not safe enough for ADB staff and consultants but safer for NGOs. Any decision to shift additional responsibilities to the resident mission must be preceded by a strengthening of its financial and procurement capabilities as well as technical skills, since this is where the majority of issues arise. Related, multidonor trust funds are useful to build synergies across partners and provide complementary links to other sectors. They also provide a means for donors to contribute even without a substantial presence in the country. This evaluation did not evaluate the performance of funds like the AITF given the short time that has elapsed since its initiation, but ways and means for participatory and transparent administration and for generating buy-in from a broad spectrum of aid agencies would seem to merit attention.

Appendixes

APPENDIX 1: EVALUATION FRAMEWORK

1. The evaluation by the Independent Evaluation Department (IED) of the country assistance strategy and program of the Asian Development Bank (ADB) in Afghanistan covered the period from 2002, when ADB resumed operations in the country, to 2011. The ADB program was on hold during 1979–2002 due to armed conflict in the country. The country assistance program evaluation (CAPE) covered 32 ADB-assisted projects (loans and grants), 33 ADB policy and advisory technical assistance (TA) grants, and ADB strategies and programs launched during the 2002–2011 period.

2. There are five sector assessments in the CAPE report, covering transport, energy, agriculture and irrigation, private and finance sector, and capacity development. The CAPE and the sector assessments followed ADB’s Revised Guidelines for the Preparation of Country Assistance Program Evaluations and used the same criteria and evaluation questions retrofitted to sector and project levels.1 Projects that cover several sectors and have been categorized under multisector were included in three infrastructure sectors by distributing multisector project components to the appropriate sectors. The sector assessments aimed at identifying lessons from projects and TA grants arising from the set of issues that typically occur at the various stages of the project cycle.

3. Cross-cutting issues related to capacity development, governance, gender, and safeguards were also assessed. Some parts of ADB’s assistance to Afghanistan were provided in the context of the Central Asia Regional Economic Cooperation programs.

4. Evaluation structure, approach, and method. Following the guidelines for the preparation of CAPEs, the CAPE used the following six evaluation criteria to assess the performance of ADB’s country assistance strategy and program in Afghanistan: (i) strategic positioning; (ii) program relevance; (iii) efficiency; (iv) effectiveness; (v) sustainability; and (vi) development impact, focusing mainly on projects and TA grants approved and completed from the start of the partnership between ADB and Afghanistan. The study drew on various sources of data and information, including (i) literature from ADB and independent sources; (ii) in-depth interviews with key informants from government and nongovernment organizations, private sector entities, development partners, ADB staff, in-country experts and observers, beneficiary organizations, and other stakeholders; and (iii) field observations of selected projects. In addition, the CAPE carried out perception surveys of government and development partner stakeholders and interviewed beneficiaries in the field. The CAPE also conducted one field survey.

5. Limitations of evaluation methodology. Assessment of efficiency, effectiveness, and sustainability of the program were limited to (i) projects that had been completed and for which project completion reports are available; (ii) projects that were at an advanced implementation stage and had made significant interventions in a given sector; and (iii) projects where quality-at-entry issues permitted conjecture on their likely performance. The five main sectors that were assessed cover 87% of ADB’s loans and grants for the period and 67% of its policy and advisory TA. No assessments were undertaken for the education, industry and trade, and health and social protection sectors, to which ADB has also provided some support. The study relied on intensive desk reviews and stakeholder interviews. National consultants carried out field visits to projects in the agriculture and transport sectors for four projects.2 However, the study was limited by several factors. IED staff were prevented

1 ADB. 2010. Revised Guidelines for the Preparation of Country Assistance Program Evaluations. Manila. 2 ADB. 2009. Proposed Asian Development Fund Grant to the Islamic Republic of Afghanistan for the Hairatan to Mazar-e-Sharif Railway Project. Manila (Grant 0161); ADB. 2004. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the Andkhoy–Qaisar Road Project. Manila (Loan 2140); ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Transitional Islamic State of Afghanistan for the Emergency Infrastructure Rehabilitation and Reconstruction Project. Manila (Loan 1997); ADB. 2006. Proposed Grant Assistance to the Islamic Republic of Afghanistan for the Rural Business Support Project. Manila (Grant 9100). 70 Appendix 1

by the poor security situation from visiting project sites or conducting field interviews outside of Kabul. This is the first IED study. No performance evaluation reports, sector assistance program evaluations, or any other IED evaluation studies for Afghanistan had been conducted to which the CAPE could have referred.

6. Evaluation criteria and rating system. The overall CAPE rating comprises ratings for ADB's country and sector strategic positioning (accounting for 10% of the overall rating), program relevance (10%), and efficiency, effectiveness, sustainability, and development impacts (20% each).

APPENDIX 2: AFGHANISTAN’S OPIUM ECONOMY

1. Afghanistan’s illicit economy is huge by any standard and is estimated by the International Monetary Fund to account for between one-third and one-half of the country’s gross domestic product (GDP).1 The production and trade of opiates forms the largest component of this economy and is directly equivalent to one-quarter of the official GDP.2 It also has immense global and domestic impacts. In recent years, Afghanistan has become by far the largest opium producer in the world. It is now responsible for more than 90% of global production (up from 42% in 1990). This is because it has the highest yields in the world, a nonsecure environment with institutional weaknesses that permit the cultivation of illegal crops, and other factors that provide some segments of society with strong incentives to cultivate opium.

2. Afghanistan has traditionally produced large amounts of opium, and the production of and trade in opiates was declared illegal only during the past decade. Production has risen exponentially from the traditional base since the early 1990s, however, and the area under opium poppies in 2011 was estimated by the United Nations Office on Drugs and Crime at 131,000 hectares (ha),3 or about 3.6% of the country’s cultivated area. This area was producing about 5,800 tons of dry opium with a farm gate value of about $1.4 billion and an export value of around $3.0 billion. Poppies are widely cultivated across 16 of the country’s 34 provinces, but just two of them, Helmand and Kandahar, account for 69% of production. These two, with three other southern and southwestern provinces, account for 93% of the national output. In general, opium production is more prevalent in provinces with poor security, even though some provinces with very poor security, such as Ghazni, are poppy free.4 But the opium economy remains highly adaptable to changes in the economic and security environment and, when eradication efforts are stepped up in some areas, production moves elsewhere.5 An increasing proportion of opium is now converted into heroin within Afghanistan itself.

3. Poppy cultivation plays a complex role in rural livelihood strategies. The reasons for poppy cultivation by farmers include significantly greater profitability per hectare than other crops,6 lower water requirements and relatively better drought resistance, the absence of alternatives that would make small holdings viable, a ready and guaranteed market, and the availability of credit. Opium is also easy to store and transport, which are important considerations, given the country’s poor storage and transport infrastructure. On the other hand, prohibitions by local and Islamic leaders, eradication efforts, and the risk of crop loss can discourage poppy cultivation. Efforts to provide inputs and promote the cultivation of alternative crops have had some results, but these are mixed. Even so, the impact of opium on the overall agriculture sector in terms of crop substitution (except in the Helmand– Kandahar region) is not large, despite the huge financial flows it generates. The total area under poppy (131,000 hectares) amounts to about 3.6% of the cultivated area, compared with 2.4 million hectares

1 International Monetary Fund. Islamic Republic of Afghanistan: 2011 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility. Unpublished staff report. Washington, DC. 2 While opium production and exports have remained largely unchanged, the sector’s share in the Afghan economy has declined over the past years due to the sustained growth of the illicit economy. 3 This was lower than the peak of 193,000 ha in 2007, but considerably higher than the cultivated area of 41,300 ha in 1990. In 2001, following a ban imposed by the Taliban, the area temporarily shrunk to just 7,606 ha but rapidly increased again in the succeeding years. 4 United Nations Office on Drugs and Crime (UNODC). 2012. Afghanistan Opium Survey 2012. The opium industry’s relationship with security can be described as symbiotic—opium production flourishes in areas with poor security and at the same time helps fund insurgency. 5 UNODC and World Bank. 2006. Afghanistan’s Drug Industry, Structure, Functioning, Dynamics and Implications for Counter- narcotics Policy. Washington, DC. 6 While farm-gate prices have been volatile, it is estimated that poppy cultivation currently provides a net income of $2,005 per hectare, compared with $960 per hectare for wheat, even after taking account of substantially higher labor costs in opium production. Nut and fruit orchards provide a higher per hectare return, but they require long gestation periods and reliable irrigation. Given the insecure environment, farmers prefer to opt for quick yielding crops. 72 Appendix 2

under wheat (30% of the cultivated area),7 which has the same cropping cycle. Despite higher profits offered by poppy cultivation, farmers continue to grow wheat on a large part of their holdings as a subsistence crop, while opium poppies are usually cultivated on smaller plots as a cash crop to boost family incomes.

4. The impact of the opium economy on the overall economy, security, polity, and society is profound. It has some short-term benefits for the rural poor and at the macroeconomic level the opium economy significantly increases aggregate demand, employment—since opium cultivation provides incomes for about 5% of the Afghan population—and export earnings. It affects the country’s balance of payments, which has in turn contributed to a relatively strong exchange rate for the local currency and reduced export competitiveness for Afghan goods. The opium economy has also contributed to higher government revenues, albeit to a limited extent, through taxes and duties on drug-financed imports. However, these impacts are vastly outweighed by its negative impacts on security—where it is a substantial source of funding for insurgency—and on governance and nation building—where it is a major source of corruption. The illegal narcotics industry is also largely responsible for the country’s growing criminality. Moreover, while farmers spend their opium cultivation earnings mostly on consumption of domestically produced goods and services, much of the estimated two-thirds to three- quarters of net income that accrues to other actors in the industry is either retained abroad, sent out of the country, or used to import goods or to buy real estate.

5. The negative impacts have intensified in recent years with the growth of the opium economy and a gradual shift in how the illegal gains are captured. There is a growing concentration at the top levels of the drug industry of large drug traffickers, insurgent networks, and political elites. At a lower level, large sections of the national and local police, customs officials, border guards, local officials, traders, and military commanders are complicit in providing paid protection for and extracting rents from the drug industry. The Taliban, which while in power briefly discouraged the cultivation of poppies, is also reported to be increasingly entrenched in the drug industry. To provide protection, they charge transit taxes, own processing labs, and control shipments, especially through the southern route through Pakistan. Drug money provides the bulk of the operational funding essential to carry out its insurgent activities.

6. Opium, moreover, is not the only narcotic produced in Afghanistan. An estimated 10,000– 24,000 ha is currently under cannabis (marijuana) cultivation. Due to substantially lower labor costs, the net income from cannabis cultivation is about two-thirds higher than from poppy cultivation. In addition, cannabis cultivation is not subject to the eradication efforts that poppy cultivation faces. As a result, though the cannabis economy is currently far smaller than the opium economy, cannabis cultivation could grow rapidly in the future.8

7. Despite efforts at poppy eradication, awareness campaigns, and incentives for cultivation of alternative crops, the prospects for a significant and sustainable reduction in the size of the opium economy remain limited due to the sheer scale of opium production, the complicity of officials in its production and trade at all levels, the challenge of restricting the export of narcotics across porous borders, widespread rural poverty, and the lack of alternative livelihoods.

7 Islamic Republic of Afghanistan, Central Statistics Organization. 2012. Afghanistan Statistical Yearbook 2010–2011. Kabul. 8 UNODC. 2009. Afghanistan Cannabis Survey 2009. Kabul. APPENDIX 3: COUNTRY ECONOMIC AND SOCIAL IMPROVEMENTS AND MILLENNIUM DEVELOPMENT GOALS

Table A3.1: Country Economic and Social Indicators Economic and 2002– 2003– 2004– 2005– 2006– 2007– 2008– 2009– 2010– 2011– Social Indicators 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 A. Income and Growth 1. GDP a. GDP in current prices, (AF 185.5 224.7 252.6 311.4 352.3 435.7 533.5 615.1 729.9 865.7 billion)a b. GDP in constant 2002 185.5 201.1 203.3 226.0 238.5 271.3 281.1 340.2 368.9 390.0 prices( AF billion)b c. GDP in current prices 4.2 4.6 5.3 6.3 7.1 8.7 10.5 12.5 15.9 18.2 ($ billion )c d. GDP in constant prices … 8.44 1.06 11.18 5.55 13.74 3.61 21.02 8.44 5.74 (AF, % change)d e. GDP per capita in current 8,134.7 9,441.0 10,214.9 12,121.6 13,197.7 15,896.9 18,809.9 21,013.0 24,185.9 27,850.8 prices (AF)e f. GDP per capita in constant 8,134.7 8,450.9 8,219.6 8,795.1 8,935.1 9,898.5 9,910.1 11,621.4 12,222.7 12,547.5 prices (AF)f g. GDP per capita in current 182.33 192.70 213.56 244.07 264.41 319.16 369.73 426.46 527.77 584.90 prices, ($)g 2. Sector value addedh (% of GDP) a. Agriculturei 45.16 46.01 41.59 39.48 32.59 34.49 28.13 31.18 29.92 … b. Industryj 19.72 18.65 23.36 25.28 28.20 25.82 25.98 21.21 22.17 … c. Servicesk 35.12 35.34 35.05 35.24 39.21 39.69 45.89 47.61 47.92 … 3. Sector value added (% growth) a. Agriculture … 17.07 (4.90) 6.72 0.57 20.45 (10.79) 27.53 5.18 … b. Industry … 6.14 32.10 23.85 20.13 8.38 6.85 1.82 18.07 … c. Services … 13.72 16.23 14.64 16.89 5.82 15.00 24.20 6.55 … B. Money and Inflation a. M2 growth (%) … … … … … 42.4 31.4 33.0 26.9 … b. M2 (% of GDP) … … … … … 20.3 22.3 24.8 28.6 … c. Inflation, end of period … 10.3 14.9 9.4 4.8 20.7 3.2 (5.1) 16.6 7.8 consumer prices (% change) C. Government Finance 1. General government revenue 15.3 24.8 36.0 56.6 64.6 86.9 93.6 126.4 160.4 205.3 (AF billion) 2. Domestic revenue and grants 8.2 11.0 14.3 18.2 18.3 19.9 17.5 20.5 22.0 23.7 (% of GDP) 74 Appendix 3

– … … … … …

6.2 0.0 0.5 7.9 23.7 22.6 22.6 46.6

11.5 12.2 17.6 (0.1) (0.1) (2.2) 2012 204.8 – 2011

–

5.9 0.9 0.3 1.7 8.0 0.1 2.8 21.1 26.3 27.9 46.5 34.4

11.0 11.0 15.1 (1.9) 2011 153.8 46.45 149.2 103.0 (10.3) – 2010

– –

7.6 9.2 0.1 2.8 22.1 31.7 28.9 26.7 23.1 50.2 33.4

10.3 10.2 14.5 (1.6) (0.3) (2.8) 2010 136.1 46.78 149.4 103.2 2009

–

7.8 9.8 8.6 0.1 0.9 5.5 0.1 2.8 21.7 36.4 37.2 28.1 19.7 50.3 32.5

13.1 (4.1) 2009 115.7 47.07 149.6 103.3 – 2008

–

7.7 0.1 1.3 1.3 0.0 2.8

95.7 22.0 40.6 41.9 13.9 23.0 50.0 31.6

12.3 11.6 10.3 (2.0) 2008 47.31 150.2 103.7 – 2007

–

8.2 9.2 5.4 0.1 2.8

75.7 21.5 43.7 38.1 13.8 49.9 30.8

10.2 12.3 (3.1) (0.4) (5.6) 2007 169.6 47.53 150.5 103.8 – 2006

– … … …

8.1 1.0 2.9 53.4 17.2 46.1 43.4 10.5 20.9 49.5 29.1

10.1 (0.2) (2.7) 2006 47.71 150.5 103.8 – 2005

– … … … … … 2.9 39.6 15.7 47.2 42.5 16.6 47.8 24.7 (1.4) (0.2) (4.7) (9.9) 2005 47.86 150.1 103.6 – 2004

– … … … … … …

2.9 31.6 14.1 38.8 22.3 39.3 68.3 48.8 28.3 (3.0) (0.8) 2004 47.98 150.6 103.9 (16.5) – 2003

– – … … … … … … … … … … … 2.9 34.0 30.4 47.3 27.5 (0.2) (3.6) 2003 48.07 149.6 103.3 2002

l l

l ors t t

l GDP) GDP) GDP) GDP)(% of a. (% of expenditure Operating b. expenditure Development expenditure (AF billion) billion) (AF expenditure GDP) (% of expenditure GDP) (% of GDP) billion) ($ GDP) (% change) services (% change) services total) (per 1,000) births) live a. (% of revenues Domestic b. (% of grants On-budget opulation Indicators opulation P P

Economic Economic Social Indica and 3. government total General 4. government total General 5. grants including balance Overall andD. Savings Investments E. External Sector F. G. Social Indicators 1. GDP) (% of Total investment 2. (% of savings national Gross 1. balance account Current 2. of (% balance account Current 3. and goods of export Volume of 4. and goods of imports Volume of 5. GDP) (% of debt Total external 6. GNI) (% of service Total debt 7. (AF–$) rate exchange Official 1. (million) Population 2. %) growth (annual Population 3. (% of 0–14 ages Population 1. under-5 rate, Child mortality 2. 1,000 (per rate mortality Infant Country Economic and Social Improvements and Millennium Development Goals 75

– … … … … … … … … … … … … … … … … … … … 2012 – 2011

– … … 6.3 0.4 7.6 9.8 9.1 48.4 48.1 48.3 37.7 50.0 30.7 15.5 80.4 49.2 15.2 2011 376.8 409.5 – 2010

– – … 6.4 0.4 7.6 1.6 9.2 8.7 48.1 47.8 47.9 33.7 48.5 29.6 15.1 80.5 49.0 14.8 2010 379.9 412.2 2009

– 6.6 0.4 7.0 1.6 9.5 8.4 47.7 47.4 47.5 31.8 50.6 30.8 14.7 80.5 48.9 14.5 2009 383.0 415.0 – 2008 1,400.0 1,400.0

– … 6.7 0.4 7.3 1.8 9.0 8.1 47.3 47.1 47.2 28.8 49.4 30.0 14.4 80.5 48.7 14.2 2008 386.2 417.8 – 2007

– … … 6.8 6.8 2.1 9.0 7.8 47.0 46.8 46.9 23.8 50.4 30.5 14.1 80.6 48.6 14.0 2007 389.3 420.6 – 2006

– … 7.0 8.8 2.1 8.8 7.6 46.7 46.5 46.6 32.5 49.7 30.0 13.9 80.6 48.6 13.7 2006 392.4 423.4 – 2005 1,500.0 1,500.0

– … … 7.1 8.7 2.0 8.9 7.4 46.4 46.3 46.4 29.6 50.9 30.7 13.7 80.7 48.5 13.6 2005 395.6 426.2 – 2004

– … 7.3 0.4 8.4 1.6 8.6 7.1 46.2 46.0 46.1 25.5 50.0 30.2 13.6 80.7 48.4 13.5 2004 398.7 429.0 – 2003

– – … 7.4 7.5 1.5 8.6 6.9 45.9 45.8 45.8 21.8 50.5 30.4 13.5 80.7 48.4 13.4 2003 401.9 431.8 2002 1,600.00 1,600.00

ors t t (modeled estimate, per 100,000 per 100,000 estimate, (modeled births) live adults) 1,000 female adults) 1,000 male (years) (years) (years) woman) $) (current GDP) GDP) (%) female 15–24, ages (%) male 15–24, ages (%) total 15–24, ages ages population female (% of 15+) 15+) ages population male of 15+) ages population total of labor force) Economic Economic Social Indica and 3. ratio mortality Maternal 4. (per female adult, rate, Mortality 5. (per male adult, rate, Mortality 6. female birth, at expectancy Life 7. male birth, at expectancy Life 8. total birth, at expectancy Life 9. per (births total rate, Fertility 10. people) (per 1,000 beds Hospital 11. capita per expenditure Health 12. (% of total Health expenditure, 13. of (% public expenditure, Health 14. ratio, population to Employment 15. ratio, population to Employment 16. ratio, population to Employment 17. female rate, Labor participation 18. (% male rate, Labor participation 19.(% total rate, Labor participation 20. total (% of female Labor force, 21. (million) total Labor force, 76 Appendix 3

– … … … 2012 – 2011

– plus savings and and plus savings … … … 2011 lso reported as a a as reported lso – 2010 s, and import duties,

– – DI database, World World DI database, Bank, … … … 2010 April 2012. 2009

– Standard Industrial Classification (ISIC), (ISIC), Industrial Classification Standard ing, manufacturing (a manufacturing ing, staurants); transport; and government, government, and transport; staurants); … al O database, O database, 36.0 29.0 2009 (WDI) Database. April Database. 201; Islamic (WDI) Republic hout making deductions for depreciation of – 2008 ted bank service charge bankted service s on 21 March. base year solar The is the year livestock production. W production. livestock dded in min

– 42.0 27.0 27.8 2008 – 2007 reporting year start reporting year rnational; M2 = money on demand Monetary Fund

database of the database ofIMF, April 2012. – mprises value a value mprises … … … inputs. It is calculated wit is calculated inputs. It 2007 – 2006 , April 2012.

(WEO) Indicators Development World

dded is determined by dded is the determined Internation well as cultivation of crops and – … 33.0 21.1 2006 April and March. April and The – 2005 WEO database onal income; IMF = Inte

– SIC divisions 15–37). It co It 15–37). divisions SIC … … … 2005 World Economic Outlook Economic World – 2004 sing market exchange rates (yearly average). Data from Data from average). WE (yearly rates sing market exchange . April 2012; World Bank. April 2012. puts and subtracting intermediate subtracting puts and

– … … … 2004 – 2003 s forestry, hunting, and fishing, as cies arising from rescaling. rescaling. from cies arising discrepan as well s, as , World Bank, , World Bank,

– – … … … 2003 on of natural resources. The a origin of value 2002 and end months of the reporting year are of the end months are and year reporting 45 and includes manufacturing includes (I and 45 April 2012. April 2012. gross domestic product; GNI = gross nati bruary 2012 from WEO database, April 2012.

World Economic Outlook Database electricity, water, World Bank, and gas. W DI database, April 2012. onal services such as education, health care, and real estate services. Also included are impu are included Also services. real estate and health care, such as education, onal services Indicators database WEO database, WEO database, WEO database, utional money market funds.

nds to ISIC divisions 1–5 and include

spond to ISIC divisions 50–99 and they include value a dded in wholesale and retail trade (including hotels and re ors t t national poverty line line poverty national (% of population) urban (% of line urban poverty population) separate subgroup),separate construction, April 2012. revision 3. World Development revision any statistical discrepancies noted by national compiler discrepancies statistical any fabricated assets or depletion and degradati and depletion or assets fabricated pers and professional, financial, 2002/2003. Data were last updated in February 2012 and are from the Afghanistan follows a solar year that runs from 21 March 2010 to 20 March 2011. start The is at market prices. valuation GDP Base year: 2002. Data last updated: Fe u to US dollars cy converted in national curren on GDP based are Values Base year: 2002. Data last updated: April 2012 from WEO Database, April 2012. Estimates start 2007. after Base year: 2002. Estimates start 2007. Data2012 after last updated: from February Estimates start 2007. after Value added is the a sector net after output of adding out up all Agriculture correspo 10– to ISIC divisions Industry corresponds corre Services Estimates start after 2009 (IMF).

Economic Economic Social Indica and H. IndicatorsPoverty time deposits, and non-instit and time deposits, 1. at ratio headcount Poverty 2. at ratio headcount Poverty 3. Gini index … = not available,= negative, ( ) GDP =

of Afghanistan: 2011 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility. a b c d e f g h i j k l Monetary International Fund. Sources: Country Economic and Social Improvements and Millennium Development Goals 77

Table A3.2: Millennium Development Goals: Targets Baseline Goals and Targets/Indicators 1990 1995 2000 2002–2005 2010 2011 Goal 1: Eradicate Extreme Poverty and Hunger Target 1.A: The proportion of people whose income is less than $1 per day decreases by 3% per annum until the year 2020 1.1 Proportion of population below $1 (purchasing power party [PPP]) per daya - Population below national poverty line, total (%) ...... 33.0 36.0 b ... - Population below national poverty line, urban (%) ...... 21.1 29.0 b ... - Population below national poverty line, rural (%) ...... 36.2 37.5 b ... - Purchasing power parities, national currency per 1993 international dollar (World Bank) ...... 16.7 19.6 c ... Target 1.B: The proportion of people who suffer from hunger decreases by 5% per annum until the year 2020 - Prevalence of underweight children under-5 years of age ... 44.9 d ... 32.9 ...... - Proportion of population below minimum level of dietary energy consumption ...... Goal 2: Achieve universal primary education Target 2: Ensure that, by 2020, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling 2.1 Net enrollment ratio in primary education (%)e ...... 54.0 ...... 2.2 Proportion of pupils starting grade 1 who reach last grade of primary (%) - Total ...... 38.8 ...... - Girls ...... 21.4 ...... - Boys ...... 55.1 ...... 2.3 Literacy rate of ages 15–24 years old (%) - Total ...... 34.0 ...... - Female ...... 18.0 ...... - Male ...... 50.0 ...... Goal 3: Promote gender equality and empower women Target 3: Eliminate gender disparity in all levels of education no later than 2020 3.1 Ratios of females to males in primary, secondary, and tertiary educatione - Gender parity Index in primary level enrollment (%) 0.6 f ...... 0.6 0.7 c ... - Gender parity Index in secondary level enrollment (%) 0.5 f ...... 0.3 0.5c ... - Gender parity Index in tertiary level enrollment (%) ...... 0.3 0.2c ... 3.2 Reduce gender disparity in economic areas by 2020 - Share of women in wage employment in the non-agriculture sector (% of total)g ...... 25.9 18.4b ... 3.3 Increase female participation in elected and appointed bodies at all levels of governance to 30% by 2020 78 Appendix 3

Baseline Goals and Targets/Indicators 1990 1995 2000 2002–2005 2010 2011 - Seats held by women in national parliament (%) 3.7 … ... … 27.3 27.7 3.4 Reduce gender disparity in access to justice by 50% by 2015 and completely (100%) by 2020 - Ratio of literate women to men, 15–24 years of age … ... … ... … … Goal 4: Reduce child mortality Target 4.A: Reduce by 50%, between 2003 and 2015, the under-5 mortality rate, and further reduce it to 1/3 of the 2003 level by 2020 4.1 Under-five mortality rate (per 1,000 live births) 209.0 159.0 151.0 151.0 149.0 … 4.2 Infant mortality rate (per 1,000 live births) 140.0 109.0 104.0 104.0 103.0 … 4.3 Proportion of 1 year-old children immunized against measles (% of children ages 12–23 months) 20.0 41.0 35.0 64.0 76.0c … Goal 5: Improve maternal health Target 5.A: Reduce by 50% between 2002 and 2015 the maternal mortality ratio, and further reduce to 25% of the 2002 level by 2020 5.1 Maternal mortality ratio (modeled estimate per 100,000 live births) 1,700.0 1,800.0 1,800.0 1,500.0 1,400.0c … 5.2 Proportion of births attended by skilled health personnel … ... 12.4 14.3 24.0c … Target 5.B: Achieve by 2020, universal access to reproductive health … ...... 5.3 Contraceptive prevalence rate among married women 15–49 years of age, any method (%) ... … 4.9 13.6 22.8b ... 5.4 Adolescent fertility rate (births per 1,000 women ages 15–19) ... … 151.0 … ...... 5.5 Antenatal care coverage (at least one visit and at least four visits) … … 36.9 … 36.0b ... Goal 6: Combat HIV/AIDS, malaria, and other diseases Target 6.A: Have halted by 2020 and begun to reverse the spread of HIV/AIDS 6.1 HIV prevalence among population - Total, ages 15–49 (% of population) 0.3 0.8 1.0 1.0 0.8 ... - Female, ages 15–24 (%) … … … … 0.7 ... - Male, ages 15–24 (%) … … … … 0.4 ... 6.2 Condom use at the last high-risk sex - Condom use to overall contraceptive use among currently married women ages 15–49 (%) … … 8.1 11.8h ... Target 6.B: Have halted by 2020 and begun to reverse the incidence of malaria and other major diseases 6.3 Incidence and death rates associated with malaria - Notified cases of malaria per 100,000 population … … ... … 2,428.0b ... 6.4 Proportion of children under 5 sleeping under insecticide-treated bed nets … … … ... … ... 6.5 Proportion of children under 5 with fever who are treated with appropriate anti-malarial drugs … … … … ...... Country Economic and Social Improvements and Millennium Development Goals 79

Baseline Goals and Targets/Indicators 1990 1995 2000 2002–2005 2010 2011 6.6 Incidence, prevalence, and death rates associated with tuberculosis - Tuberculosis incidence rate per 100,000 population (midpoint) 189.0 189.0 189.0 189.0 189.0c ... - Tuberculosis prevalence rate per 100,000 population (midpoint) 452.0 452.0 427.0 348.0 337.0c ... - Tuberculosis death rate per 100,000 population (midpoint) 66.0 66.0 59.0 41.0 38.0c ... 6.10 Proportion of tuberculosis cases detected and cured under directly observed treatment short course (DOTS) - Tuberculosis detection rate under DOTS (midpoint) 18.0 ... 18.0 47.0 48.0c ... - Tuberculosis treatment success rate under DOTS ... … 85.0 90.0 … … Goal 7: Ensure environmental sustainability Target 7.A: Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources 7.1 Proportion of land area covered by forest 2.1 ... 2.1 2.1 2.1 …

7.2 Carbon dioxide (CO2) emissions, total, per capita and per $1 (PPP) gross domestic product (GDP)

- CO2 emissions, kilogram per PPP $ of GDP— Carbon Dioxide Information Analysis Center (CDIAC) ...... 0.0 0.0b … b - CO2, thousand metric tons (CDIAC) 2,677.0 1,269.0 781.0 700.0 814.0 ... b - CO2, metric tons per capita (CDIAC) 0.2 0.1 0.0 0.0 0.0 … 7.3 Consumption of ozone-depleting substances (ODS), in ozone depletion potential metric tons - Consumption of all ODS ... 381.9 ... 145.4 49.2c ... 7.4 Proportion of fish stocks within safe biological limits ...... 7.5 Proportion of total water resources used (%) ...... 35.6 ...... 7.6 Proportion of terrestrial and marine areas protected to total territorial area (%) 0.4 0.4 0.4 0.4 0.4 ... 7.7 Proportion of species threatened with extinction ...... Target 7.B: Halve, by 2015, the proportion of people without sustainable access to safe drinking water and basic sanitation 7.8 Proportion of population using an improved drinking water source (%) ... 3.0 21.0 41.0 48.0b ... 7.9 Proportion of population using an improved sanitation facility (%) ... 29.0 32.0 35.0 37.0b ... Target 7.C: By 2020, have achieved a significant improvement in the lives of at least 100 million slum dwellers 7.10 Proportion of urban population living in slums (%) 98.5 ...... Goal 8: Develop a global partnership for development Target 8.A: Develop further an open, rule-based, predictable, nondiscriminatory trading and financial system 80 Appendix 3

Baseline Goals and Targets/Indicators 1990 1995 2000 2002–2005 2010 2011 Includes a commitment to good governance, development, and poverty reduction—both nationally and internationally Target 8.B: Address the special needs of the least developed countries Includes tariff and quota free access for the least developed countries' exports, enhanced program of debt relief for heavily indebted poor countries (HIPC) and cancellation of official bilateral debt, and more generous official development assistance for countries committed to poverty reduction Target 8.C: Address the special needs of landlocked developing countries and small island developing states (through the Program of Action for the Sustainable Development of Small Island Developing States and the outcome of the twenty-second special session of the General Assembly) Target 8.D: Deal comprehensively with the debt problems of developing countries through national and international measures in order to make debt sustainable in the long term (Some of the indicators listed below are monitored separately for the least developed countries, Africa, landlocked developing countries, and small island developing states) Official development assistance (ODA) 8.1 Net ODA, total and to the least developed countries, as percentage of Development Assistance Committee of the Organisation for Economic Co-operation and Development (OECD/DAC) donors’ gross national income ...... 8.2 Proportion of total bilateral, sector-allocable ODA of OECD/DAC donors to basic social services (basic education, primary health care, nutrition, safe water, and sanitation) ...... 8.3 Proportion of bilateral official development assistance of OECD/DAC donors that is untied ...... 8.4 ODA received in landlocked developing countries as a proportion of their gross national incomes (GNI), based on OECD/DAC Database (2009) ...... 16.4 i 41.3 45.7 ... 8.5 ODA received in small island developing states as a proportion of their gross national incomes ...... Market access 8.6 Proportion of total developed country imports (by value and excluding arms) from developing countries and least developed countries, admitted free of duty 8.7 Average tariffs imposed by developed countries on agricultural products and textiles and clothing from developing countries 8.8 Agricultural support estimate for OECD countries as a percentage of their gross domestic product Country Economic and Social Improvements and Millennium Development Goals 81

Baseline Goals and Targets/Indicators 1990 1995 2000 2002–2005 2010 2011 8.9 Proportion of ODA provided to help build trade capacity ...... Debt sustainability 8.10 Total number of countries that have reached their HIPC decision points and number that have reached their HIPC completion points (cumulative) 8.11 Debt relief committed under HIPC initiative Multilateral Debt Relief Initiative (MDRI) - HIPC initiative, cumulative million $, end- 2009 ...... 654.0 - MDRI initiative, cumulative million $, end- 2009 ...... 20.0 8.12 Debt service as a percentage of exports of goods and services and net income ...... 3.8 1.1c ... Target 8.E: In cooperation with pharmaceutical companies, provide access to affordable essential drugs in developing countries 8.13 Proportion of population with access to affordable essential drugs on a sustainable basis Target 8.F: In cooperation with the private sector, make available the benefits of new technologies, especially information and communications 8.14 Fixed telephone lines per 100 inhabitants 0.3 0.2 0.1 0.4 0.5 ... 8.15 Mobile cellular subscriptions per 100 inhabitants ...... 4.4 41.4 ... 8.16 Internet users per 100 inhabitants ...... 1.2 4.0 ... … = not available. a For monitoring country poverty trends, indicators based on national poverty lines should be used, where available. Poverty figures are not comparable due to seasonality and changes in the questionnaires used. b Value reflected is from 2008. c Value reflected is from 2009. d Value reflected is from 1997. e School attendance rate is used as proxy indicator. f Value reflected is from 1991. g Covers employment in public sector. h Value reflected is from 2006. i Value reflected is from 2001. Sources: Millennium Development Goals Indicators (United Nations), except for the following indicators: net enrolment ratio in primary education and literacy rate of 15–24 year olds—United Nations Development Programme, Afghanistan; HIV prevalence among population—World Development Indicators database, World Bank, April 2012.

APPENDIX 4: SUMMARY OF ADB’S COUNTRY PARTNERSHIP STRATEGIES FOR AFGHANISTAN

CSP 2002-2004 CSPU 2003–2005 CSPU 2004–2006 CSPU 2006–2008 CPS 2009–2013 Overall Outcome/Goal National reconstruction of Afghanistan is No major change from No major change No change from initial ADB-supported activities will the overall theme of the initial CSP. initial CSP. However, from initial CSP and CSP and updates. contribute to the high economic government requested update. Technical growth rates required to support Assist the government in the and ADB agreed to assistance to cover the government’s other reconstruction and rehabilitation of the focus assistance on governance and the development objectives, including country to ensure a seamless transition transport, energy, and financial sector and poverty reduction. from humanitarian to reconstruction and natural resource private sector development assistance. management. interventions to focus on banking and telecommunications. Agriculture and Natural Resources Key approaches in the sector will be ADB’s intervention No major change No major change from Support government’s efforts in (i) community-based demand-driven was to be in the from preceding preceding CSPU. the development of sector policies, approach, (ii) streamlining and agriculture sector CSPU. strategies, and planning processes, consolidating public sector roles, (iii) rehabilitation and Proposed areas of as well as in sector institutional strengthening local implementation and development intervention include reform governance capacity, and (iv) upgrading program. nonlending Support capacity development, human resource skills. assistance for project A wide range of institutional strengthening, and preparation for In the short term, (i) restore agricultural nonlending activities governance in the agriculture commercial production and food security; (ii) restore will be undertaken to sector agriculture, water and rehabilitate irrigation systems, rural support biodiversity resources Irrigation rehabilitation and water water supplies, village grain storage, and management, management, and resources management access roads; (iii) implement pilot livelihood promotion, integrated watershed management, forestry, and pilot labor-intensive agriculture Support for agriculture market agroforestry programs; (iv) support rural irrigation, community- development project. infrastructure livelihood in the areas of livestock and based service delivery, nonfarm enterprise development; and and local market Nonlending support ADB will focus on developing (v) adopt policy, institutional, and development. for capacity water resources and irrigation as capacity-development measures. development also well as on agriculture market envisioned infrastructure to support Over the medium term, (i) promote commercial agribusiness improved technologies; (ii) rehabilitate Proposed project development while promoting small and medium irrigation schemes; interventions include sustainable natural resource (iii) expand watershed management, water resources management. forestry, and agroforestry programs; and management and (iv) pursue further policy, institutional, integrated Summary of ADB’s Country Partnership Strategies for Afghanistan 83

2013 – – sector agencies agencies sector CPS CPS 2009 The key strategies for assistance in in assistance for strategies The key power include sector the and transmission, generation, of development distribution; such resources energy indigenous and medium micro, small, as in trade and regional hydropower; energy. government the help will ADB power sector develop regulations, regulatory an independent create the rationalize further and agency, Sherkat Breshna Afghanistan Da electricity Afghanistan (DABS), unbundling its to prior authority, privatization. and possible the support continue to will ADB power Afghanistan’s of expansion or rehabilitating by supply generation, constructing distribution and transmission, not areas rural in including assets, Power East North by the served System. support continue to will ADB and capacity institutional of development and institutional ongoing through TA. human capacity primarily focus will support ADB’s or construction on the

2008 epublics epublics – – CSPU 2006 development development projects. The key strategies are strategies The key in the as same the CSP and initial addition, In updates. the support will ADB a of establishment power national grid and transmission and power trading with interconnection Asian r Central and Iran. areas of Additional include intervention of construction the a of 206 kilometers 110 kilovolt network. transmission proposed Additional intervention of areas are (i) skills for development gas advanced technologies, and (ii) update seismic of analysis gas natural for data exploration, for study (iii) feasibility energy alternative (iv) a and sources, gas natural project. development initial from No change updates. and CSP

2006 – – CSPU 2004 No change from from No change CSP initial and update. Proposed areas of include intervention Study (i) Feasibility National for Grid Transmission million), ($0.75 (ii) Power and Transmission Project, Distribution (iii) Institutional Strengthening of the Water of Ministry and and Power, Power (iv) National Grid Transmission Project. from No change CSP and initial -

2005 – – job management job management CSPU 2003 No major change from from No major change CSP. initial The Emergency Infrastructure and Rehabilitation Project Reconstruction in 2003 approved about committed in the $41.0 million power to sector finance and (i) rehabilitation of reconstruction damaged transmission substations and lines northern in the provinces; needed (ii) urgently and rehabilitation the of reconstruction Kabul distribution system; and services (iii) consulting projectfor on and management the- training. support initial from No change CSP.

ions t t

tor ministries and enterprises; enterprises; and ministries tor 2004 - -

CSP CSP 2002 measures. development and capacity Energy in assistance the for strategies The key (i) undertaking are sector energy the the of training and development capacity sec energy of repair urgent and (ii) rehabilitation of formulation (iii) infrastructure; energy framework regulatory and legal, policy, and creating (iv) development; sector for for infrastructure energy upgrading increasing and economic development the for energy commercial to access areas; rural the in poor, particularly to environment policy of (v) development enableprivate investments in oil,and gas (vi) regional and sector; mining and electricity in and trade cooperation natural gas. Transport Communica and the for framework The strategic and reconstruction, rehabilitation, 84 Appendix 4 network. network.

2013 – – CPS CPS 2009 rehabilitation of national roads and roads national of rehabilitation emergency or ancillary related help also will support ADB works. the of maintenance finance road and national regional provide continue to will ADB capacity and human institutional emphasis an with TA, development on and cost-effective timely projects road of implementation management. sector and improved Not a priority

2008 – – CSPU 2006 Not a priority Not a priority

s. 2006 – – CSPU 2004 Planned support support Planned a includes master to plan study road the prioritize update. update. Not a priority

ial 2005 – – CSPU 2003 Proposed ADB Proposed ADB interventions include of rehabilitation and roads national links to international Uzbekistan, road of financing maintenance, reconstruction, and/or rehabilitation important the of regional airports. no loan- Although are activities financed soc the for planned during 2003– sectors projects 2005, pilot in the and TA and education health already sectors by ADB’s approved proceed. Board will sustainable sector

combatants, and women in and combatants, 2004 - - CSP CSP 2002 consists sector road the of development and policy (i) elements: following the of capacity (ii) development; institutional sector private (iii) development; employment (iv) development; participation; community (v) generation; network of (vi) decentralization (vii) management; recovery; cost and financing the of preservation and (viii) protection mitigating or avoiding (ix) environment; returnee (x) absorbing resettlement; ex- refugees, and maintenance; and road construction NGO community the of (xi) involvement and maintenance. construction in road Social Sectors sector will social in the priority first ADB’s education the of rehabilitation be the system, which is in a statevirtual of collapse.ADB’s immediate focus willbe education, basic of rebuilding on the The education. nonformal including get to is ADB of strategy short-term them retain and school to back children ADB term, medium the Over in schools. women’s and on girls’ will focus strategy education, preschool education, and teacher education, nonformal as well as upgrading training—quality and equipment, facilities, buildings, materials. a of preparation the support will ADB health the for framework preliminary preventive, basic assures that sector to services health promotive and curative, in capacity strengthened citizens; all the address to management sector health of requirements health immediate access increased groups; and vulnerable Summary of ADB’s Country Partnership Strategies for Afghanistan 85

2013 – – CPS CPS 2009 Governance and private-sector private-sector Governance and focused gender support will ADB its throughout mainstreaming and will make activities program the expand to efforts greater The key women. of participation increased the will be outcomes capacity of staff in the resident

2008 – – CSPU 2006 A component of of A component cluster ADB’s for Building Capacity and Reconstruction has TA Development Future ADB financial financial ADB Future development sector to expected is support financial a include private and market development sector rural in 2006, program in finance program and trade a 2007, and transit facilitation scheduled program 2008. for initial from No change or CSPUs. CSP

2006 – – CSPU 2004 The government requested its expand to ADB to focus current loan provide for assistance the governance and sector. financial from No change CSPU. and CSP initial

2005 – – 150 million 150 million CSPU 2003 As for governance and governance and for As loan further finance, not is assistance these in necessary recently the as sectors, $ approved Postconflict Program Multisector a loan provides for concrete basis over dialogue policy on medium term the policy key the covering conditions laws, financial public of efficiency resource management, and governance structure. initial from No change CSP. and and

2004 - -

CSP CSP 2002 services, health public and preventive to other and women by especially maternal include groups, to vulnerable and health, reproductive health, control. disease communicable and water the for Key strategies of repairs include will sector sanitation urban systems, improved access in and rehabilitation areas, rural priority and the systems, urban of expansion in rural access improved of expansion areas. Financial Sector and the IMF with coordinate will ADB viable a reestablish to World Bank central functioning with system financial currency banks, and commercial policy, monetary a regime, rate exchange a regulatory and system, a payments of importance the Given framework. consider will ADB services, financial institutional developing for support enterprise and microfinance for capacity small- and agribusiness, (agriculture, finance. enterprises) medium-sized Gender the with closely work will ADB help to society civil and government that, so environment enabling an create family, religious, of context the within of values traditional and cultural, play to able are women Afghanistan, reconstruction national role in due their 86 Appendix 4

2013 – – CPS CPS 2009 mission and in key ministries to to ministries key and in mission into equality gender mainstream be will work. Women sector valuable as included routinely in development partners and interventions, ADB throughout its focuses ADB where ministries greater demonstrate will efforts structure, in equality gender is It plans. and opportunities, mainstreaming that anticipated of status the enhance will efforts ADB sector women within are benefits Specific interventions. to relation women in for envisaged (and energy and agriculture will that transport) possibly creation, employment to contribute overall and reduction, poverty economic growth. capacity its focus will ADB on priority efforts development medium-term Substantive sectors. on a focus with TA, advisory (including development capacity long-term for mobilizing support all in included be will training), projects. ADB-financed

2008 – – CSPU 2006 provided capacity capacity provided development assistance to the Women’s of Ministry Affairs. No change from initial initial from No change CSP.

2006 – – CSPU 2004 No change from from No change CSP. initial

2005 – – CSPU 2003 No change from initial initial from No change CSP.

upported through through upported

2004 - - CSP CSP 2002 involve to desirable is It effectively. stage. every women at effort a special make will assistance ADB schools. to bring girls back to women’s increasing support will ADB local and public all in representation women’s strengthening and bodies, organizations. Capacity Development will support capacity-development ADB’s the of efforts with be synchronized respective the delineate to government private state, (the actors key the of roles NGOs, national enterprises, public sector, of management in the etc.) unions, trade development. capacity for programs TA ADB’s in designed be will development and roles respective the with accordance central actors—the all of needs governments, government, provincial communities, local local governments, of Most sector. private and the NGOs, s be to have will these as processed be to needs which TA, normal the that so possible as quickly government can the of functioning for strengthened be continue and Summary of ADB’s Country Partnership Strategies for Afghanistan 87 narcotics narcotics

2013 – – CPS CPS 2009 While many of ADB’s development development ADB’s of While many the lay to helping are initiatives provide to needed foundations narcotics to economic alternatives directly has ADB not production, counter-narcotics any supported integrated not has and initiatives, counter- or mainstreamed in program overall its into links clear Despite Afghanistan. work, of sectors key ADB’s with and transport particularly resources natural and agriculture issue drugs the management, or addressed been not has generally project into factored otherwise little been has there and design, that role complex the to reference in opium plays rural poppy strategies. livelihood support continue to will ADB cooperation regional selected on activities focus with efforts, Asia Central the through supported Economic Cooperation Regional regional for scope The initiative. be will interventions cooperation to support in planning assessed engagement. of sectors selected better GACAP with II, Consistent planning, expenditure public andmanagement, accountability sector ADB’s of elements key be will will and activities development portfolio improved to contribute

2008 – – CSPU 2006 previous CSPU. CSPU. previous No change from initial initial from No change CSP. initial from No change CSP. the from No change

2006 – – CSPU 2004 Proposed includes assistance service public the No change from from No change CSP. initial from No change CSP. initial No major change CSP. initial from

2005 – – CSPU 2003 No change from initial initial from No change CSP. initial from No change CSP. initial from No change CSP.

2004 - - Narcotics - - CSP CSP 2002 rehabilitation, of management effective efforts. development and reconstruction, Counter drug the that CSP recognizes The initial of resurgence the and situation abuse provinces in several cultivation poppy ADB’s However, addressed. be to need area. this not include will operations Regional Cooperation road that recognizes CSP The initial could be networks and energy transport with basis a subregional on developed and gains, and efficiencies great with bonds economic catalyzing closer of Republic People’s as such countries Central the and Pakistan Iran, China, Tajikistan, particularly republics, Asian and Uzbekistan. Turkmenistan, Governance and policy a term, medium In the in put be will framework institutional in investment support to place sound requires also which reconstruction, accountability, Transparency, governance. be must law rule of and the participation, 88 Appendix 4

2013 – – CPS CPS 2009 nagement plans in key sectors of of sectors key in plans nagement tnership strategy, GACAP II= Second II= Second GACAP strategy, tnership management and project project and management be will Attention implementation. paid to systems to reduce corruption for opportunities corruption risk through ma engagement. support continue to will ADB through development sector private an enabling supporting private vigorous a for environment Sector Private ADB’s sector. will Department Operations strategic make continue to additional catalyze that investments investment. sector private

2008 – – arket and private private and arket CSPU 2006 Future ADB financial financial ADB Future development sector expected is support financial a include to m development sector in 2006. program No change from initial initial from No change CSP.

2006 – – = technical assistance. assistance. technical = tes, country operational business plans. business country operational tes, CSPU 2004 delivery reform reform delivery program. The government the requested has of inclusion support program market financial for sector and private ($80 development 2006. million) in No change from from No change CSP. initial

m, CSPU = country strategy and program update, CPS = country par = country update, CPS program and = country strategy m, CSPU 2005 – – overnment organization, TA CSPU 2003 No change from initial initial from No change CSP. y, country strategy and program and upda and program and y, country strategy

2004 - -

Governance and Anticorruption Action Plan, NGO = nong Anticorruption Action Plan, and Governance strateg ADB country partnership Sources: CSP CSP 2002 to center the from levels all at established local levels. and community the Private Sector Development appropriate an requires sector The private a stable legal and regulatory framework, good environment, policy and predictable in order law rule of the governance, and in the linchpin the roleas its play to These process. development economy’s capacity by addressed be are to building, institution development, and reform the and support, governance system. financial the of development progra and = country strategy CSP Bank; Development ADB = Asian APPENDIX 5: ADB PROGRAM IMPLEMENTATION AND PORTFOLIO

A. Portfolio of Assistance

1. During 2002–2011, the Asian Development Bank (ADB) provided a total of $2,732 million in loans, grants, and technical assistance (TA) to Afghanistan (Table A5.1).

Table A5.1: Approved ADB Loans, Grants, and Technical Assistance to Afghanistan, 2002–2011 Amount Share Item Number ($ million) (%) A. Loans Sovereign (ADF) 11 702 25.7 Nonsovereigna 7 198 7.3 Equity 8 0.3 OCR 135 5.0 B-loan 30 1.1 Guarantee 25 0.9 Subtotal 18 900 33.0 B. Grants ADF 18 1,547 56.6 Non-ADF (JFPR, JFICT) 10 110 4.0 Others (AITF, bilateral) b 6 105 3.8 Subtotal 34 1,762 64.4 C. Technical Assistance Capacity development 2 3 0.1 Policy and advisoryc 33 51 0.6 Project preparatory 14 16 1.9 Subtotal 49 70 2.6 Total ADB Financing 2,732 100.0 ADF = Asian Development Fund, AITF = Asian Infrastructure Trust Fund, JFICT = Japan Fund for Information and Communication Technology, JFPR = Japan Fund for Poverty Reduction, OCR = ordinary capital resources. a Includes one cancelled investment (Sungas LLC). b Number is reduced by one to account for one grant with approved funding from both JFPR and a bilateral trust fund. c Due to ADB’s reclassification of technical assistance (TA) initiatives, advisory TA has been subsumed under policy and advisory TA. Source: Asian Development Bank. Loan, TA, grant, and equity approvals database (as of 16 March 2012).

2. The performance of ADB’s active portfolio is an indicator for how well ADB projects are implemented. This performance has also been considered in the context of the various sector evaluations. Based on various performance indicators, the country assistance program evaluation (CAPE) attempted to determine plausible links between ADB’s interventions and the overall performance of the country.

3. Of the 32 sovereign projects approved during the 2002–2011 CAPE period, 14 were rated based on project completion reports (PCRs) and the assessment of the CAPE team.1 Of these, five were rated successful and nine were rated less than successful. Of the 49 approved technical assistance operations, 29 were assessed: 1 was rated highly successful, 12 were rated successful, 13 were rated less than successful, and 3 were rated unsuccessful. Project disbursements during the CAPE period totaled $1.1 billion, or less than half of the amount committed. The disbursement rate for TA was higher, at 63%, and equivalent to $43.9 million. The annual loan disbursement ratio for Afghanistan in 2011 was 25%, slightly higher than the ADB-wide average rate of 23% (Figure A5.1). The disbursement

1 These consisted of 11 sovereign loans and 34 grants from the Asian Development Fund and sources 90 Appendix 5

ratio for 2002 was as high as 67% due to the fast-disbursing Postconflict Multisector Program (PMP) loan, the first tranche of which was released in 2002. In terms of contract awards in 2011, the ADB average ratio (27.8%) significantly exceeded that of Afghanistan (17.3%) (Figure A5.1).

   N!"  #$ 

Contract Award Ratio: Afghanistan and % Disbursement Ratio: Afghanistan and ADB 80 % ADB 70 45 60 40 35 50 30 40 25 30 20 20 15 10 10 5 - 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 Afghanistan ADB-wide Afghanistan ADB-wide ADB = Asian Development Bank. Source: ADB.

4. A review by ADB’s Independent Evaluation Department of CAPE period projects revealed the following implementation issues: slow mobilization of consultants; delays in meeting tranche release conditions, which then affected fund disbursements; and a frequent change in counterpart government staff due to elections. Other issues impeding implementation included the limited implementation capacity of the ministries, low response from contractors to civil works tenders, and delays in approval of bidding documents. Land acquisition issues, problems involved in compensating affected persons, and security incidents also contributed to implementation delays.

5. The Asian Development Fund (ADF) accounted for 83% of the total funds provided by ADB to Afghanistan. The balance was from the Japan Fund for Poverty Reduction (JFPR), ADB’s Technical Assistance Special Fund (TASF), bilateral support, and the Afghanistan Infrastructure Trust Fund (AITF).2 Grants represented 64.5% of total assistance—in response to the government’s request to minimize encumbrances on succeeding Afghan generations. The loan component also had a large grant element due to its highly concessional terms.3

6. A summary by sector of loans (sovereign and nonsovereign), grants (ADF, JFPR, and others) and TA operations (including both project preparatory TA and policy and advisory TA) is in Table A5.2. The list of ADB loans and grants from 2002 to 2011 is in Table A5.3.

2 The Afghanistan Infrastructure Trust Fund was established by ADB in 2010 to finance the considerable infrastructure requirements of the country, which were expected to total up to $4 billion during 2011–2013. Through grant cofinancing, the fund will supplement financing for infrastructure projects provided by ADB from its own operational budget. The governments of Japan and the United Kingdom have made contributions to the fund. 3 ADB program loans to Afghanistan had a repayment period of 40 years, including a grace period of 10 years, and carried an interest rate of 1.0% per annum. In addition, the interest rate charged during the grace period would be capitalized and charged to the loan account. ADB Program Implementation and Portfolio 91

Table A5.2: Approved ADB Loans, Grants, and Technical Assistance to Afghanistan by Sector, 2002–2011 Loans Grants Technical Assistance Total Amount Share Amount Share Amount Share Amount Share Sector No. ($ million) (%) No. ($ million) (%) No. ($ million) (%) No. ($ million) (%) ANR 2 102 11.4 9 179 10.1 10 11 16.4 21 293 10.7 Education 0 0 0.0 1 4 0.2 0 0 0.0 1 4 0.1 Energy 3 62 6.8 8 368 20.9 13 12 16.6 24 441 16.2 Finance 4 23 2.6 2 60 3.4 2 3 3.6 8 86 3.1 Health and SP 0 0 0.0 1 3 0.2 0 0 0.0 1 3 0.1 Industry and 0 0 0.0 0 0 0 3 2 3.4 3 2 0.1 trade Multisector 2 297 33.0 0 0 0 1 15 22.1 3 313 11.4 Public sector 1 48 5.3 1 7 0.4 10 15 21.2 12 70 2.6 management Transport and 6 368 40.9 11 1,111 63.0 10 12 16.8 27 1,491 54.6 ICT Water and 0 0 0.0 1 30 1.7 0 0 0 1 30 1.1 other municipal Total 18 900 100.0 34 1,762 100.0 49 70 100.0 101 2,732 100.0 ANR = agriculture and natural resources, ICT = information and communication technology, No. = number, SP = social protection. Source: Asian Development Bank loan, technical assistance, grant, and equity approvals database (as of 16 March 2012).

7. ADB endeavored to ensure continuity in terms of investments, focus areas, and choice of effective delivery modalities. The main concern was that the unstable security situation could undermine the effectiveness and sustainability of projects and programs. The PMP loan and TA cluster for capacity development were followed closely by a series of program loans intended to further advance the reform agenda by fostering market-based policy reforms, public infrastructure investment, and institutional capacity development.4 A series of sector grants and TA activities were designed for additional policy, human resource, and institutional reforms.

8. Almost 55% of ADB assistance was allocated to the transport and information and communication technology (ICT) sector, including a financing package of $180 million to Roshan Telecom. The package—consisting of a loan, complementary financing, and a political risk guarantee— was the first corporate financing in Afghanistan in around 30 years. The ADB package played an important role in helping Roshan’s subscriber base grow from 158,000 in 2004 to 5 million by 2011 and supported the promotion of innovative services such as mobile money transfer and mobile agriculture trade data.

9. ADB’s two other priority sectors, energy and agriculture, were allocated more than 16% and 10% of its aggregate assistance, respectively. Along with the PMP loan, the Emergency Infrastructure and Reconstruction Project (EIRRP) formed part of the multisector component—accounting for more than 11% of the EIRRP—to address the reform agenda in the road, power, and irrigation subsectors. Although accounting for just over 3% on aggregate, ADB assistance to the finance sector had a significant developmental impact. Its equity infusion of $2.6 million (representing a 25% stake in equity) and partnership with three private investors led to the establishment of the Afghanistan International Bank (AIB), a purely private sector commercial bank. ADB’s presence in the finance sector

4 ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Transitional Islamic State of Afghanistan for Emergency Infrastructure Rehabilitation and Reconstruction Project. Manila (Loan 1997); ADB. 2004. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical Assistance Grant to the Islamic Republic of Afghanistan for the Agriculture Sector Program. Manila (Loan 2083); ADB. 2005. Report and Recommendation of the President to the Board of Directors: Proposed Cluster of Loans to the Islamic Republic of Afghanistan for Fiscal Management and Public Administration Reform Program. Manila (Loan 2215). 92 Appendix 5

catalyzed the entry of other international financial institutions, including the establishment of AIB’s correspondent banking with Citibank and, potentially, other notable international financial institutions.

B. Project Status and Ratings

1. Loans

10. Sovereign projects accounted for 78% of ADB’s Afghanistan loan portfolio, and nonsovereign projects for 22%. The sovereign loans had a large grant element. After the PMP loan and EIRRP, program loans were extended in the agriculture and natural resources (ANR), energy, finance, public administration reform and governance, and transport sectors. The use of program loans jump-started the country agenda, because their disbursements could be quick and serve as bridge financing for reform-related costs.

11. Seven of 11 sovereign loan projects have been completed—6 of which were rated successful by the PCRs (covering ANR, finance, transport and ICT, and multisector) and 1 partially successful (covering public sector management). The PCRs accorded successful ratings to two multisector loans, the PMP loan, and the EIRRP. The PCR results were validated by ADB’s Independent Evaluation Department (IED). The PMP loan was rated successful. In contrast, IED did not confirm the PCR’s successful rating of the Agriculture Sector Program Loan, instead rating it only partly successful.5

12. ADB’s extended annual review reports for Roshan Telecom, spanning three projects, and for AIB found the projects highly successful and said they had delivered significantly on the intended development impacts for the transport and ICT and finance sectors.

2. Grants

13. Almost two-thirds of ADB assistance to Afghanistan took the form of grants, and Afghanistan relied 100% on ADF grants starting in 2007. Nearly 88% of grant projects were funded from the ADF, with the balance covered by JFPR, bilateral trust funds, and the AITF.

14. The transport and ICT sector accounted for 63% of grant assistance, while energy and ANR were allocated 21% and 10%, respectively (Figure A5.2). More than 73% of grant projects are still active. Nine have been completed, and six rated.

3. Technical Assistance

15. The policy and advisory component made up more than two-thirds of assistance under ADB’s 49 TA operations. The component supported the policy and institutional reforms that were deemed critical to the country agenda. More than 20% of the allocation was accounted for by the TA component, which was intended as a key complement to the PMP loan. Its utilization was carried over to the EIRRP, supporting the ANR and infrastructure components.

5 ADB had pinpointed capacity as a constraint in Afghanistan (Box A5). Yet the conditions and covenants underlying these projects were difficult for any developing member country to comply with and were much more so for a country emerging from the rubble of decades of armed conflict. The validation report on the PMP loan pointed this out, stating that “the program design was somewhat unrealistic in targeting such a large number of conditions in multiple sectors while being fully aware that there was almost no internal capability in the government to develop, implement or track these measures.” The report also observed a disconnect between the policy matrix and the program framework and noted a “lack of evidence to assess achievement of program outcomes.” The report concluded that “the contribution to impact is unclear.” It also raised questions about the sustainability of the policy measures. ADB Program Implementation and Portfolio 93

16. Close to 80% (39 of 49) of TA activities have been completed, and 29 have been rated. The TA track record is mixed: Half were rated successful, half were rated less than successful, and three were rated unsuccessful.

Figure A5.2: ADB Grants to Afghanistan, 2002–2011

$30.00m ANR 2% Education $178.75m, $4.00m 10% Energy

Finance $368.40m Health and SP 21% $1,110.8m Public Sector 63% Management $60.0m Transport and ICT 4% $3.0m Water and Other $7.0m Municipal Infrastructure

ADB = Asian Development Bank, ANR = agriculture and natural resources, ICT = information and communication technology, m = million, SP = social protection, TA = technical assistance. Source: ADB loan, TA, grant, and equity approvals database.

Box A5: Parallel Project Implementation Units

The Asian Development Bank (ADB) guidelines on weakly performing countries recognize that competent counterpart staff may not be available for some undertakings or that it may not be possible to retain qualified individuals for this purpose, given outmigration and other factors. In such cases, the guidelines say it is appropriate for ADB to consider asking the government to outsource the counterpart requirement to civil society, including local businesses, local nongovernment organizations, and faith-based groups. The Development Assistance Committee of the Organisation for Economic Co-operation and Development recommends avoiding activities that can undermine national institution building, such as “developing parallel systems without thought to transition mechanisms and long term capacity development.” With capacity already a binding constraint to begin with in Afghanistan, such parallel systems also place an undue burden on the heads of executing agencies, because they take them away from their principal functions. While ADB has made project implementation units (PIUs) mandatory in loan covenants in Afghanistan, the projects undertaken by the World Bank that were similar to ADB’s Emergency Infrastructure and Reconstruction Project provide a useful basis for comparison. The loan agreement of the ADB project required establishing a project coordination unit but the World Bank took the position that—avoiding the creation of such parallel institutions as PIUs is considered good practice in the emergency situation with ineffective state institutions. At the time of project preparation, the Government of Afghanistan and the World Bank decided against creating PIUs for individual components, opting instead to develop capacity directly in the implementing ministries and agencies. In place of PIUs, the World Bank tailored implementation arrangements for the individual components—pairing the agency concerned with United Nations agency for human settlement, UN-HABITAT (for the municipal public works component), engaging a consulting firm to assist the Ministry of Urban Development and Housing (for the water and sanitation component), and tapping an expatriate supervisory engineer to ensure the quality of the installation of material procured under the project. Such innovative implementation arrangements should have been tried in providing ADB support. Moreover, not all project types would qualify for such approaches and instead would have to rely on traditional engineering and other technical inputs from qualified consultants. ADB could have adopted this approach for agriculture and natural resources components, which do not require advanced knowledge or skills. It should also be noted that the creation of a PIU and capacity development of an institution are not mutually exclusive. The Ministry of Public Works, where the ADB PIU consisted of national staff and (sometimes) international advisors, is fully integrated in the organization and is a case in point. Source: Independent Evaluation Department country assistance program evaluation team.

94 Appendix 5

Table A5.3: ADB Loans and Grants to Afghanistan (2002–2011) Loan/Equity Sub- Investment Fund Amount Date Date Sector sector No. Project Name Type ($ million) Approved Closed AGRICULTURE AND IRRIGATION Agricultural Production and Markets 2083 Agriculture Sector Program ADF 55.0 04-May-04 Active 9100 Rural Business Support JFPR 18.0 12-Dec-06 Active 0126 Agriculture Market Grant 30.0 21-Nov-08 Active Infrastructure Agriculture and Rural Sector Development 9038 Integrated Community JFPR 3.0 26-Dec-03 Active Development in Northern Afghanistan Irrigation, Drainage, and Flood Protection 9039 Rural Recovery through JFPR 5.0 26-Dec-03 12-Apr-12 Community-Based Irrigation Rehabilitation 2227 Western Basins Water Resources ADF 47.3 20-Dec-05 Active Management 0033 Western Basins Water Resources Grant 14.5 20-Dec-05 Active Management 0052 Western Basins Water Resources Grant 8.4 25-Aug-06 Active Management 0167 Water Resources Development Grant 86.6 06-Oct-09 Active Investment Program–Tranche 1 0170 Water Resources Development Grant 3.3 06-Oct-09 Active Investment Program–Tranche 1 Water-Based Natural Resources Management 9060 Balkh River Basin Water JFPR 10.0 15-Dec-04 Active Resources Management EDUCATION Pre-Primary and Basic Education 9019 Community-Based Gender- JFPR 4.0 10-Sep-02 30-Sep-06 Sensitive Basic Education for the Poor ENERGY Conventional Energy 7307 Sungas LLC Equity 8.0 a 25-Mar-10 Facility Electricity Transmission and Distribution 0004 Power Transmission and Grant 23.5 14-Apr-05 Active Distribution 2165 Power Transmission and ADF 26.5 14-Apr-05 Active Distribution 2304 Regional Power Transmission ADF 35.0 19-Dec-06 Active Interconnection (Regional) 0134 Energy Sector Development Grant 164.0 02-Dec-08 Active Investment Program–Tranche 1 0184 Energy Sector Development Grant 81.5 03-Dec-09 Active Investment Program–Tranche 2 0230 Regional Power Transmission Grant 12.0 18-Nov-10 Active Interconnection 0280 Energy Sector Development ADF 43.0 22-Dec-11 Active Investment Program–Tranche 3 0281 Energy Sector Development UK 20.0 22-Dec-11 Active Investment Program–Tranche 3 0282 Energy Sector Development Denmark 12.4 22-Dec-11 Active ADB Program Implementation and Portfolio 95

Loan/Equity Sub- Investment Fund Amount Date Date Sector sector No. Project Name Type ($ million) Approved Closed Investment Program–Tranche 3 Renewable Energy 9128 Development of Mini JFPR 12.0 28-Nov-08 Active Hydropower Plants in Badakshan and Bamyan Provinces FINANCE Finance Sector Development 0067 Private Sector and Financial Grant 56.0 14-Dec-06 13-Apr-09 Market Development Program 0068 Private Sector and Financial Grant 4.0 14-Dec-06 28-Jan-11 Market Reforms-Capacity Building Investment Funds 2091 Afghanistan Investment ADF 5.0 24-Sep-04 28-Sep-10 Guarantee Facility PRIVATE SECTOR Banking Systems b 7199 Afghanistan International Bank Equity 2.60 13-May-04 Facility Investment Funds 7201 Afghanistan Investment Guarantees 10.0 24-Sep-04 c Guarantee Facility 7215 Afghanistan Renewal Fund Equity 5.5 28-Jul-05 d Limited Facility Information and Communication Technology 7202/2098 Telecom Development Company OCR 35.0 04-Nov-04 16-Sep-06 Afghanistan B. V. 7238/2241 Roshan Phase II Expansion– OCR / B- 85.0 29-Jun-06 16-Jan-08 Telecom Development Loan / Company Afghanistan Limited Guarantees (Combined) 7281/2431 Telecom Development Company OCR 60.0 29-Jul-08 18-Feb-10e of Afghanistan (Roshan) HEALTH AND SOCIAL PROTECTION Health Systems 9030 Primary Health Care Partnership JFPR 3.0 19-Dec-02 Active for the Poor MULTISECTOR Multisector 1954f Postconflict Multisector Program ADF 167.2 04-Dec-02 Active 1997g Emergency Infrastructure ADF 130.0 03-Jun-03 Active Rehabilitation and Reconstruction PUBLIC SECTOR MANAGEMENT Public Administration 0030 Fiscal Management and Public Grant 7.0 14-Dec-05 31-Dec-10 Administration Reform Program Public Expenditure and Fiscal Management 2215 Fiscal Management and Public ADF 48.0 14-Dec-05 Active Administration Reform Program

96 Appendix 5

Loan/Equity Sub- Investment Fund Amount Date Date Sector sector No. Project Name Type ($ million) Approved Closed TRANSPORT AND INFORMATION AND COMMUNICATION TECHNOLOGY Air Transport 2105 Regional Airports Rehabilitation ADF 30.0 23-Nov-04 Active Project Phase I Rail Transport 0161 Hairatan to Mazar-e-Sharif Grant 165.0 30-Sep-09 Active Railway Road Transport 9037 Emergency Infrastructure JFPR 20 19-Dec-03 12-Jan-10 Rehabilitation and Reconstruction 2140 Andkhoy–Qaisar Road ADF 80.0 15-Dec-04 Active 0012 Qaisar–Bala Murghab Road Grant 55.0 12-Jul-05 Active 2257 North–South Corridor Project ADF 78.2 26-Sep-06 Active 0054 North–South Corridor Project Grant 40.0 26-Sep-06 Active 9097 North–South Corridor Project JFPR 20.0 26-Sep-06 25-Jun-10 0081 Road Network Development 1 Grant 176.0 28-Sep-07 Active 0135 Road Network Development Grant 60.0 02-Dec-08 Active Investment Program (Tranche 1) 0244 Road Network Development Grant 340.0 21-Dec-10 Active Investment Program (Tranche 2) 9024 Supporting the Road JFPR 15.0 03-Oct-02 16-Nov-09 Employment Project for Settlement and Integration of Returning Refugees and Displaced Persons 9024 Supporting the Road Grant 15.0 26-May-03 16-Nov-09 Employment Project for Settlement and Integration of Returning Refugees and Displaced Persons (Supplementary) 0076 Road Employment Project for Grant 12.8 28-Mar-07 Active Settlement and Integration of Returning Refugees and Displaced Persons (Supplementary) 0261 Transport Network Development Grant 189 17-Oct-11 Active Investment Program–Tranche 1 0262 Transport Network Development Grant 33 12-Oct-11 Active Investment Program–Tranche 1 ADF = Asian Development Fund, JFPR = Japan Fund for Poverty Reduction, OCR = ordinary capital resources. a The equity investment of $8 million was cancelled on 7 March 2011. b The Extended Annual Review Report (XARR) was prepared on 22 December 2010. The equity investment has not been sold. c The equity investment was cancelled. d The equity facility was closed in May 2008 after disbursing $462,000. e Final repayment is scheduled on 21 September 2014. f The project covered the finance and governance, transport, and energy sectors. g The project covered the transport, energy, and irrigation sectors. Source: Asian Development Bank loan, technical assistance, grant, and equity approvals database.

ADB Program Implementation and Portfolio 97

Table A5.4: ADB Advisory Technical Assistance to Afghanistan (2002-2011) % of Sub- Amount Total Date Date TCR Sector sector TA No. TA Name ($) PATA Approved Completed Rating AGRICULTURE AND NATURAL RESOURCES Agriculture and Rural Sector Development 4334 Capacity Building for 1,000,000 1.9 04-May-04 30-Apr-08 PS Agriculture Policy Reform 4483 Capacity Building for 850,000 1.6 15-Dec-04 31-Jan-09 S Land Policy and Administration Reform 4549 Capacity Building for 450,000 0.8 23-Dec-04 12-Sep-08 PS Impact Monitoring and Evaluation Land-Based Natural Resources Management 4311 Capacity Building in 400,000 0.7 22-Dec-03 29-Aug-08 S Agriculture and Natural Resource Management for Programming, and Aid Management and Coordination 4541 Natural Resources 1,785,000 3.3 23-Dec-04 31-Dec-08 PS Management and Poverty Reduction Water-Based Natural Resources Management 4716 Capacity Development 755,000 1.4 07-Dec-05 18-Jun-09 S for Irrigation and Water Resources 7994 Supporting Natural 1,500,000 2.8 14-Dec-11 Active Resources Operations ENERGY Conventional Energy 4354 Establishing a Gas 750,000 1.4 08-Jul-04 20-Dec-07 GS Regulatory Framework 7637 Power Sector Master Plan 1,500,000 2.8 06-Nov- Active 10 Electricity Transmission and Distribution 4579 Capacity Building of the 750,000 1.4 14-Apr-05 31-Jul-07 PS Ministry of Energy and Water 4909 Improving the Capacity 1,200,000 2.2 19-Dec-06 25-May-10 PS of Da Afghanistan Breshna Moassessa Energy Sector Development 4918 Support to the 2,000,000 3.7 31-Jan-07 31-Dec-09 PS Interministerial Commission for Energy Pipelines 4088 Energy Sector Review and 950,000 1.8 18-Mar- 20-Jan-05 GS Gas Development 03 Master Plan Renewable Energy 4461 Poverty Reduction and 750,000 1.4 03-Dec-04 31-Dec-08 PS Rural Renewable Energy Development 7168 Development of Wind 160,000 0.3 06-Nov- 31-May-10 No 98 Appendix 5

% of Sub- Amount Total Date Date TCR Sector sector TA No. TA Name ($) PATA Approved Completed Rating Energy 08 TCR FINANCE Banking Systems/Microfinance 7983 Rural Finance Expansion 1,500,000 2.8 14-Dec-11 Active INDUSTRY AND TRADE Large and Medium Industries 4235 Institutional 750,000 1.4 03-Dec-03 31-Jul-08 U Strengthening of the Gas Sector Trade and Services 4699 Building the Capacity of 400,000 0.7 24-Nov- 31-Jan-09 S the Ministry of 05 Commerce for Trade and Transit Facilitation 4906 Capacity Building for 1,200,000 2.2 18-Dec-06 13-May-09 U Customs and Trade Facilitation PUBLIC SECTOR MANAGEMENT Economic and Public Affairs Management 3875 Disaster Preparedness 500,000 0.9 30-May-02 20-Feb-07 S and Management Capacity Building 4313 Poverty Assessment and 1,750,000 3.3 26-Dec-03 Active Socioeconomic and Macroeconomic Statistical Capacity Building 4637 Capacity Building for 390,000 0.7 26-Aug- 23-Dec-08 S Economic Management 05 4758 Capacity Building for 400,000 0.7 22-Dec-05 26-Nov-08 PS Regional Cooperation 4897 Support to the 2,700,000 5.0 14-Dec-06 Active Afghanistan National Development Strategy 4964 Support for Economic 2,500,000 4.6 04-Sep-07 Active Policy Management 7090 Security Plan for Project 995,000 1.8 24-Jun-08 Active Implementation 7090 Security Plan for Project 225,000 0.4 16-Sep-10 Implementation (Supplementary) Public Administration 4244 Support for Public 3,400,000 6.3 11-Dec-03 31-Dec-08 U Administration Reform Program 4345 Security of ADB-Financed 990,000 1.8 01-Jun-04 31-May-10 S Projects in Afghanistan Public Expenditure and Fiscal Management 4502 Capacity Building of the 960,000 1.8 17-Dec-04 16-Oct-07 S Ministry of Finance TRANSPORT AND ICT Air Transport 4594 Capacity Strengthening 1,000,000 1.9 10-Jun-05 31-Mar-08 PS ADB Program Implementation and Portfolio 99

% of Sub- Amount Total Date Date TCR Sector sector TA No. TA Name ($) PATA Approved Completed Rating of the Civil Aviation Sector Rail Transport

7259 Railway Development 1,200,000 2.2 27-Mar- 12-Aug-11 HS Study 09 7259 Railway Development 700,000 1.3 16-Jun-10 Study (Supplementary) Road Transport 4675 Capacity Building for 1,000,000 1.9 31-Oct-05 30-Apr-10 PS Road Sector Institutions Transport Management and Policies 4536 Cross-Border Trade and 550,000 1.0 23-Dec-04 31-Aug-07 PS Transport Facilitation MULTISECTOR Multisector 3874 Capacity Building for 14,636,000 27.2 30-May-02 14-Nov-08 S Reconstruction and Development 3874 Capacity Building for 450,000 0.8 31-Mar- 14-Nov-08 S Reconstruction and 03 Development (Supplementary) 3874 Capacity Building for 90,000 0.2 28-Jan-04 14-Nov-08 S Reconstruction and Development (Supplementary) 3874 Capacity Building for 271,000 0.5 01-Jun-04 14-Nov-08 S Reconstruction and Development (2nd Supplementary) 4415 Kabul Air Quality 450,000 0.8 15-Oct-04 31-Jul-09 PS Management GS = generally successful, HS = highly successful, ICT = information and communication technology, PATA = advisory technical assistance, PS = partly successful, S = successful, TA = technical assistance, TCR = technical assistance completion report, U = unsuccessful. Source: Asian Development Bank loan, TA, grant, and equity approvals database.

APPENDIX 6: SUMMARY OF TRANSPORT SECTOR ASSESSMENT

A. Introduction

1. The country assistance program evaluation (CAPE) for Afghanistan for 2002–2011 included an assessment of Asian Development Bank (ADB) assistance to the country’s transport during the period. The objective of the assessment was to identify areas for improving the effectiveness of ADB’s interventions. The sector assessment used facts and lessons from all loan projects and policy and advisory technical assistance as a basis for its analysis. Taking into account the sector context, the sector assessment evaluated the contribution of ADB to specific development results.

B. Sector Context

2. Afghanistan’s transportation system consists of inland waterways, civil aviation, railways, and road transport. The country has about 60 airports and airfields, including two international and 22 domestic airports that meet class 4 categorization standards of the International Civil Aviation Organization. The international airports of Kabul and Herat are compliant with the international organization’s standards, while those of Mazar-e-Sharif, Jalalabad, and Kandahar will be upgraded shortly.

3. Roads are the principal means of transport. Afghanistan’s road network comprises 3,242 kilometers (km) of regional highways, about 4,900 km of national highways, and 700 km of provincial roads, in addition to 4,000 km of urban roads and 100,000 km of rural roads. The regional highway network comprises the 2,300 km Ring Road that connects Afghanistan’s major regional centers (Herat, Kandahar, Maimana, Mazar-e-Sharif, and Sheberghan) with Kabul, and about 700 km of cross-border roads linking the ring road to neighboring countries.1 National highways extend regional highways to provincial capitals, contributing to economic growth and national integration. Until April 2011, the country’s rail system comprised entirely of 24.6 km of short cross-border extensions of railways from Turkmenistan to transshipment yards on the Afghan side of the frontier. The completion of the 75 km ADB-supported Hairatan–Mazar-e-Sharif rail link provided Afghanistan with its first new railway in over 100 years.

4. Afghanistan’s trade competitiveness is weak due to the high cost of transport. For instance, it is not only landlocked but also farther from the nearest seaport—2,000 km over harsh terrain—than almost any country in the world. Four provincial capitals remain unconnected to the regional road network and thus have little access to domestic and regional markets. The transport services that exist are poor and expensive. These constraints combined help rank Afghanistan 143 out of 150 countries on the Global Logistics Performance Index. As Figure A6 illustrates, high transport costs put it in a similar situation—well behind many of its neighbors. The figure shows the components and the totals of the costs of exporting a twenty-foot equivalent unit container from Afghanistan and from nearby countries. At more than $3,500 per container, Afghanistan tops the list, mostly by substantial amounts.

1 The Ring Road is a system of national roads, which -by forming a circle- provide connectivity to all parts of the country. Summary of Transport Sector Assessment 101

Figure A6: Cost for Exporting Goods (% per TEU)

Afghanistan Azerbaijan Kazakhstan Kyrgyz Republic Mongolia PRC Tajikistan Uzbekistan

$- $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 Documents preparation Customs clearance and technical control Ports and terminal handling Inland transportation and handling PRC = People’s Republic of China, TEU = twenty-foot equivalent unit. Source: World Bank. 2011. Doing Business. Washington, DC.

C. ADB’s Sector Strategies and Portfolio

5. Since ADB resumed operations in Afghanistan in 2002, its overall objective has been to help the government in the reconstruction and rehabilitation of the country to ensure a seamless transition from humanitarian to reconstruction and development assistance. Details of the ADB strategies and the place of the transport sector in them are summarized below:

(i)A DB's initial country partnership strategy, 2002–2004. The initial country partnership strategy (CPS) accorded high priority to rehabilitating the core highway network. ADB assistance for rehabilitating roads was also to focus on capacity building. ADB's approach to road planning and design was to take into account the subregional links, which demanded a higher standard than other domestic roads. Other aims of the CPS were to promote sustainable sector financing and cost recovery and absorb returnee refugees, ex-combatants, and women in road construction and maintenance. (ii)C ountry strategy and program update, 2004–2006. The first CPS upgrade took a three- pronged approach to supporting Afghanistan’s reconstruction through (i) building capacity; (ii) establishing an appropriate policy and institutional framework; and (iii) rehabilitating essential infrastructure, including infrastructure for civil aviation. (iii)C ountry strategy and program update, 2006–2008. The second update stayed the course and focused on road sections that were identified in the ADB-financed master plan study. The CPS update contained some very general provisions that could have covered any road section in the country. This defeated the purpose of a strategy, which is to provide scope, direction, and priority. (iv) Country partnership strategy, 2009–2013. The new CPS continued to focus on a limited number of priority projects, including improvements to roads and the construction of a railway line.

6. In addition to the objectives of its country-specific strategies, ADB pursued goals set under the Central Asia Regional Economic Cooperation (CAREC) Transport Sector Strategy (2008–2018), which had three overarching goals: (i) establishing competitive transport corridors across the CAREC region; (ii) facilitating efficient movement of people and goods across borders; and (iii) developing safe, people-friendly transport systems that are environmentally friendly. The strategy also identified six strategic corridors for full completion by 2018. A priority railway network under the CAREC system is in Afghanistan. 102 Appendix 6

7. Five ADB-supported investment projects2 and five technical assistance (TA) operations approved during the 2002–2011 evaluation period were completed and five other investment projects3 remained ongoing at the time of the evaluation missions in early 2012. ADB financing for the projects totaled $1,426 million.4 Four regional airports, about 660 km of the Ring Road, and 75 km of railway were completed. Work continues on about 760 km of project roads.

D. Evaluation of ADB Assistance

8. Strategic positioning. ADB’s strategic positioning in the transport sector is rated satisfactory. ADB’s strategic positioning has been strong throughout the evaluation period. The government’s sector development plan under the National Development Framework (NDF) has been formulated with ADB support since the resumption of ADB’s operations in Afghanistan. This has enabled a strong alignment of ADB’s sector strategies with the government’s development plans and priorities.

9. The goal of the Afghanistan National Development Strategy (ANDS) was to have a safe, integrated transportation network that ensured connectivity and enabled reliable, low-cost movement of people and goods domestically as well as to and from foreign destinations. Accordingly, the ANDS put a high priority on the rehabilitation of the transport system. This included fully upgrading and maintaining the Ring Road and the connector roads to neighboring countries and improving transportation services, regional cooperation, and trade logistics. ADB operations have focused on all these areas, notably improving strategic regional corridors, fostering trade facilitation, and regional cooperation. ADB plans for private sector participation envisaged performance-based maintenance contracts in the road subsector and private toll booths. Both components were abandoned.

10. ADB’s transport strategy supported the restoration of infrastructure and institutions as a means to reduce poverty, which was consistent with ADB’s overarching corporate goal. Transport sector strategies were largely in line with the broad principles of ADB’s Strategy 2020. Examples were the privatization efforts under the CSPs and updates and the CPS and the attempt to rely on the public– private partnership concept in the most recent strategies and programs.

11. The transport strategies have made full use of ADB’s comparative advantage. ADB has been the premier donor in the transport sector in Afghanistan. This resulted from ADB’s ability to finance and implement large infrastructure projects, which, in turn, provided leverage for supporting and steering policy and institutional reforms. ADB strategies were tightly focused on strategic corridors, an approach based on a division of responsibilities in the sector between development partners. As a result of this coordination, ADB has concentrated its operations on the northern part of the strategic ring road. The

2 ADB. 2002. Proposed Grant Assistance to Afghanistan for Supporting the Road Employment Project for Settlement and Integration of Returning Refugees and Displaced Persons. Manila; ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Transitional Islamic State of Afghanistan for the Emergency Infrastructure Rehabilitation and Reconstruction Project. Manila; ADB. 2004. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the Regional Airports Rehabilitation Project Phase I. Manila; ADB. 2004. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the Andkhoy-Qaisar Road Project. Manila; ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the Hairatan to Mazar-e-Sharif Railway Project. Manila. 3 ADB. 2005. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the Qaisar-Bala Murghab Road Project. Manila; ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the North-South Corridor Project. Manila; ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the Road Network Development Project 1. Manila; ADB. 2011. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the Transport Network Development Investment Program (Tranche 1) Project. Manila. The Road Network Development Investment Program has not been included, because all funds of this program have been used to cover cost overrun of ongoing projects. ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the Road Network Development Investment Program. Manila. 4 The total includes the road component for the Emergency Infrastructure Rehabilitation and Reconstruction Project. Summary of Transport Sector Assessment 103 exception was ADB’s first project, which attempted to combine employment generation for returning refugees with the reconstruction of a strategic road in the southeastern part of the country. Because the strategies were closely aligned with the CAREC program and strategy, ADB’s transport sector program took on a regional character while meeting the country’s internal connectivity needs.

12. For example, ADB provided support to develop the six transport corridors across the CAREC region.5 The Bala Murghab–Qaisar, Bala Murghab–Leman, and Leman–Armalick roads in Afghanistan, all part of CAREC Corridor 3, will connect the country to the Kyrgyz Republic, the Russia Federation, and South Asian countries. The Hairatan–Mazar-e-Sharif railway line is part of CAREC Corridor 2, which connects Afghanistan with Uzbekistan, Kazakhstan, and the People’s Republic of China. The Pul-e- Khumri–Doshi road sections are part of Corridor 5 linking Afghanistan to East and South Asian countries.

13. Relevance. ADB’s transport program is rated relevant. The loan programs were consistent with the ADB’s country strategies and the government’s strategic frameworks. Technical assistance projects were mostly relevant. Most design and monitoring frameworks (DMFs) or corresponding frameworks were well prepared.

14. Project frameworks or DMFs have in most cases adequately defined the projects and enabled monitoring of results. However, the component for ancillary and emergency works under the Road Network Development Investment Program was too unspecific to be captured by a DMF. It is actually a contingency provision or a budget support component, rather than a project component. Some assumptions and risks used by DMFs were internal to the project design and thus the project design should have mitigated these risks. For example, risks were assumed in relation to the security situation, operations and maintenance, and fund allocations. The mitigating measures in the DMF to address those risks consisted merely of government assurances. The assumption of government funding for operations and maintenance in the DMF ignored the government’s budget situation and, by insisting that the government would provide adequate funding for the project facilities, seemed to accept that in the face of finite resources the rest of the road network would have to suffer.

15. The persistence of an emergency approach to ADB’s Afghanistan program throughout the evaluation decade has been a key factor affecting the quality of the preparation and implementation of most ADB projects in the country. The hazardous security situation and armed hostilities that reemerged before the midpoint of the period and worsened thereafter have also played a central role. The assessment of an emergency situation in Afghanistan was justified when ADB resumed operations in 2002. Hostilities were perceived to have ended for the foreseeable future and the country needed urgent post-conflict humanitarian support immediately, as well as swift assistance to restore government systems and critical infrastructure. Both ADB’s initial CSP and the first CSP update in 2003 advocated emergency assistance and simplified procedures to respond rapidly to the precarious situation. However, the assumption underlying the emergency approach –which was that projects would be completed within a shortened period—was often unrealistic and even counterproductive, given the scope and nature of the civil works involved.

16. It was not until 2004 that a new joint strategy between Afghanistan and the international community opposed the continuation of an emergency, short-term orientation toward infrastructure projects.6 It had become clear by then that the patch-and-mend approach associated with emergency projects—while being expeditious—did not achieve development results in many cases. The new

5 ADB. 2008. Transport and Trade Facilitation Strategy of CAREC. Manila. The strategy is an investment program intended to be coordinated between the CAREC member countries during 2008–2017. It includes 65 priority projects under an action plan launched in 2008 to construct or improve 7,974 km of road sections, 5,569 km of railway lines, seven airports, three ports, and seven logistics centers. 6 Government of Afghanistan. 2004. Securing Afghanistan’s Future: Accomplishments and the Strategic Path Forward. A Government/International Agency Report. Kabul. 104 Appendix 6

strategy concluded that feasibility studies for infrastructure investments could not be neglected even if the initial focus was on urgent rehabilitation work. Projects were now to incorporate all of the inputs required for the resulting infrastructure assets to be effectively utilized.7 ADB underwent a similar learning process and changed the scope of the Emergency Infrastructure Rehabilitation and Reconstruction and Emergency Road Rehabilitation Projects from the original simple crack-sealing to complete reconstruction.

17. The situation was complicated by a turn in the security conditions that was not anticipated during the first two or three years of the evaluation period. Rather than coming to an end after a decisive victory over the Taliban regime by Northern Alliance forces and a powerful allied air and ground invasion by the international community, armed hostilities resumed and an growing insurgency met by escalating foreign military intervention became a permanent backdrop to development and development partner operations. The worsening security seems to have given rise to the notion in ADB that projects should still be prepared and implemented under the looser standards accepted under the initial emergency conditions. This perception seems to have motivated staff to relax accepted project planning, design, and implementation principles as well as standards of good technical proficiency. In this regard, the CAPE observed the following specific points:

(i) The link between strategies, programs, and projects was frequently slackened through the use of blanket provisions that could have covered any piece of infrastructure and could have been accommodated by any strategy. This defeated the main purpose of a strategy, which is to define future content and direction of operations and to provide an accountability framework.8 (ii) The design–build contract approach was applied indiscriminately across almost all transport projects regardless of their complexity. The objective was to shorten preconstruction activities and hasten overall project completion but design–build contracts should have been limited to simple projects where the client had sufficient understanding of the key design features and the quantities involved. Emergency projects during the first 2 years of operations met this requirement but the project that followed were more complex, which reduced the level of transparency and widened the scope for inefficiencies. The use of design–build has in some cases caused delays and cost overruns rather than shortening construction periods or achieving savings. 9 Moreover, the potential efficiency gain of using design–build contracts came at the expense of capacity development that would have taken place under the traditional form of contract. Table A6.2 contains a matrix illustrating merits and disadvantages of the design–build concept. (iii) Other examples of inadequate ADB performance in project preparation and implementation included deficient results frameworks, DMFs,10 and poor financial and

7 Government of Afghanistan. 2004. Securing Afghanistan’s Future: Accomplishments and the Strategic Path Forward. A Government / International Agency Report. Kabul. 8 The linkage of projects to the strategic frameworks was at times tenuous. This applies to ancillary and emergency works components, which were to enable “rapid reconstruction and rehabilitation of critical infrastructure” and which were considered “a cost-effective mechanism of providing financing for uncertain and unprogrammed works.” 9 Staff of MPW told the CAPE mission that one contractor relied merely on preliminary designs when carrying out engineering for a road project. In another case, a contractor complained about not benefitting from a price escalation clause and incorporated the clause in the contract post facto. 10 Major indicators of the transport Sector Results Framework (SRF) were unsuitable with respect to relevance, realism, and time horizons. This applies in particular to the following indicator: significant increases in the road maintenance budgets. The government had incurred chronic budget deficits across all sectors and it was unrealistic to expect significant increases in resource allocations to one sector at the expense of others, notably the social and education sectors. Some assumptions and risks used by DMFs were internal to the project design thus involving risks that a proper project design could have mitigated. Instead, the assumed risks were to be mitigated by government assurances related to the security situation, operations and maintenance and fund allocations. The assurance seemed oblivious of the general resource situation of the government, and, insisting on adequate funding for the Project facilities, seemed to accept that in the face of finite resources the rest of the road network would have to suffer. Summary of Transport Sector Assessment 105

economic analyses; 11 overly optimistic traffic forecasts; and inadequate contractual arrangements.

18. An example of poor development work is the railway line financed by ADB. The line is expected to be the nucleus for a nation-wide network. As such, the project should have been based on a genuine master plan study. A master plan study should have addressed key planning issues such as most appropriate gauge of the track.12 It should also have examined the most efficient sequencing of priority investments, institutional arrangements for rail transport, and the role the private sector, including the possibility of a build–operate–transfer (BOT) approach and railway development integration with the development of natural resource extraction industry. At the time of the CAPE, it was still unclear whether the railway would operate under the Ministry of Mining and Natural Resources or the Ministry of Public Works (MPW). It was however clear at the early planning stage that Uzbek Railways or a subsidiary thereof would become the operator. This being so, the prerequisites for BOT arrangements were met early on so that such arrangements should have been explored before construction began.

19. A component for railway operations and maintenance is provided under the government’s Transport Network Development Investment Program (TNDIP). The component is related to a 3-year contract that the government concluded with SE Sogdiana Trans, the subsidiary of Uzbekistan Railways. The remuneration to which SE Sogdiana Trans is entitled under the contract has two amounts: (i) a management fee of $8 million per year, and (ii) an overhead compensation of $24 million per year. The basis for these two amounts is unclear and the CAPE mission is of the view that a competitive procedure for a BOT contract would have provided clarity in this regard. The contract is to be financed from freight revenues. However, in case of a shortage of revenues to cover the contractual obligations, based on the Financing Framework Agreement for the TNDIP, ADB will cover such deficits from the loan. This would amount to ADB directly subsidizing the operation of the railway, which raises several issues.

(i) ADB’s cost-sharing guidelines permit the financing of recurrent costs provided they are a component of a project to which the general financing ceiling would apply. Additional requirements are technical, commercial, and financial due diligence reviews, including reviews of revenue streams, if any, and revenue assumptions, as well as of the financial model and pro forma financial statements (as appropriate), and the cost recovery profile and sustainability capacity of the project. These additional requirements were not met. (ii) Recurrent costs are eligible for additional funding only for ongoing investment projects to which such costs are incremental. Recurrent costs of completed projects do not meet these criteria. An additional concern is that MFFs are to finance components of a sector investment program. Recurrent costs do not constitute investments. (iii) The operator potentially entitled to the subsidy belongs to the same group of companies as the contractor that constructed the railway line, namely Uzbekistan Temir Yullari (UTY). Given that an operation and maintenance contract was awarded to the contractor, the arrangements overall resemble a BOT contract. The significant difference is that a BOT agreement is typically negotiated and concluded as a single package, which may have better balanced the construction and operational risks of the contracting parties. (iv) Under a genuine BOT contract, revenue generation and maintenance would be performance indicators of SE Sogdiana Trans. The prospect of a substantial operating

11 The often positive appraisal results reflected in satisfactory financial internal rates of return (FIRRs) and economic internal rates of return (EIRRs) should not be taken at face value because the technical quality of the economic and financial analyses was often deficient. 12 Neighboring countries use four different gauges, including 1,520 mm in most of Central Asia; 1,676 mm and 1,000 mm in both Pakistan and India, and 1,435 mm and 1,676 mm in Iran. The need to provide the most cost-efficient option and connectivity would have meant that the choice of one or more of the options should have been thoroughly examined. 106 Appendix 6

subsidy in addition to the guaranteed fixed management fee and other remuneration may weaken the incentive for the operator to perform well.

20. The traffic analysis of ADB’s project preparatory technical assistance (TA) for the railway project was based on inadequate analysis of truck traffic at the time. The baseline traffic was then projected forward by applying standard gross domestic project growth rates and elasticity factors. The assumed growth rate was 13.9% per year throughout the assumed 25-year life of the project, equivalent to a 26- fold increase over the base line traffic.13

21. Another problematic assumption that supported strong traffic growth projection was that many movements across the Afghanistan–Uzbekistan border were going unrecorded because the frontier was porous. This assumption was used to justify figures larger than those of actual recorded truck traffic. While borders may be more or less porous the world over, the border between Afghanistan and Uzbekistan is one of the best guarded in the region. The traffic analysis concluded that 97% of the current truck traffic would divert to rail. This assessment was based on unit cost of trucks vis-a-vis rail transport. Modal competition between truck and rail traffic is governed by four main factors, none of which seem to have been considered in the TA.14

22. The traffic analysis casts doubt on the credibility of the financial analysis. The latest traffic figures seem to indicate that the first-year traffic may reach 4 million tons, which would be just 50% of the traffic forecast by the TA. In addition, the TA financial analysis used low recurrent costs for the operation of the line ($1.6 million per year). It is surprising that the feasibility study did not consider more realistic railway operating costs, which could have been easily obtained from UTY, the operator of the existing railway line. On the other hand, if ADB was confident that the figures used in the TA financial analysis were reliable, it would have used them in negotiating the operating contract with UTY.15 It did not. Thus the feasibility study was not informed by real actual operating cost levels and UTY’s operating contract was not informed by the feasibility study. The result is a major discrepancy between the two documents.

23. Efficiency. Overall, ADB’s transport program is rated less than efficient. Cost overruns and implementation delays were systemic and reduced the efficiency of loan projects. The efficiency of the overall program is measured by its economic internal rate of return (EIRR). At appraisal, all projects were assessed as viable, mostly showing EIRRs of above 18%. Most of these projects are still incomplete.

13 The traffic analysis was less than realistic because if failed to assess a major source of the baseline traffic, the logistics needs of the North Atlantic Treaty Organization (NATO) military forces operating in the country at the time. It became clear during 2008/2009 that the situation on the main supply corridors into Afghanistan for NATO forces had been fluid. Traffic figures on the northern route should not have been regarded as stable and should not have been applied to conventional traffic forecasting using GDP growth as the main variable. In fact, the reopening of the transport corridor through Pakistan in 2012 may reduce traffic hitherto carried by the railway line. The conditions on the southern distribution network (SDN), which had been the key logistics corridor, started to deteriorate in 2008 and the SDN closed in 2011. Following its closure, NATO shifted movement of its supplies to the northern distribution network. By February 2012, 85% of NATO fuel supplies were being shipped through this corridor and to a large extent were using the new railway line. However, the high extra cost of the northern route—about $1.0 billion per year over the cost of the SDN—spurred renegotiations with Pakistan and led to the reopening of the SDN in July 2012. 14 The first factor is that unit costs develop in favor of rail transport with increasing distance (economies of scale), the threshold distance being at about 500 km. This would mean that most rail freight traffic in transit through Uzbekistan would have been eligible for inclusion in the traffic analysis. Rather than using an overall traffic figure, the TA should have identified this traffic. Secondly, the traffic analysis should have been based on a commodity-by-commodity assessment. Economies of scale are reinforced if railways carry bulk goods over such distances. The third factor is the fact that, regardless of a comparative cost advantage, shippers tend to prefer trucks because they can deliver better—i.e., door-to-door—service. Fourthly, on short routes such as that from the Uzbekistan border to Mazar, trucks have a clear cost advantage. Due to these four factors, the assumed massive 97% shift from trucks to the railway appears highly unlikely. 15 UTY was granted a total income of $32 million per year. This was assumed to cover overhead expenses involved in the operation—calculated at $24 million per year—to which was added an $8 million management fee. The operating costs will have to be met by the operating income of the railway. The operating figures for the first 6 month of operations indicate that this income could reach about $40 million in 2012. Summary of Transport Sector Assessment 107

Their reassessed EIRRs after completion are unlikely to show similarly positive results because high cost overruns, construction delays, and the uncertainty of traffic developments are affecting most of them. This assessment is supported by the sensitivity indicators and switch values associated with appraisal economic evaluations. A case in point is the Regional Airports Rehabilitation Project, which had an appraisal EIRR of 22% and a post-completion EIRR of only 12%.

24. The single-source procurement modality was chosen under the railway project. As was the case with most of the road project contracts, the single bid for the railway project was high compared with international standards. ADB does not appear to have undertaken a due diligence bid price assessment.

25. Almost all the projects had delays and cost overruns. Implementation of loan and grant projects consistently took longer than expected at appraisal. The cost overruns under the program were systemic and substantial in most cases. The underlying causes were (i) price increases, (ii) a worsening security situation, and (iii) quality-at-entry issues. Procurement procedures were generally efficient but allegations of abuse and malpractice led to project audits, which resulted in improved practices. In response to the substantial cost overruns in several road projects and the government’s inability to make up for funding shortfalls, ADB used the MFF as a quasi-credit line to provide the required supplementary financing.

26. Effectiveness. ADB’s transport program is rated effective. The program has contributed to the outcome of a more efficient transport sector overall, especially through the improvement of the ring road, which, in turn, has enabled increased exchange of goods and services.

27. Although many have been delayed, the majority of intended project outputs currently appear achievable, with the exception of those of the regional airport project. The following project outcomes remain likely to the achieved:

(i)T raffic growth. Based on a rapid traffic count conducted by the CAPE mission, traffic is slightly lower than anticipated at appraisal but growth rates may be achieved on the northeastern sections of the northern ring road. 16 (ii) Reduced vehicle operating costs. The outcome indicators were realistic, based on road evaluation models. The expected cost reductions appear to fall into a realistic range. (iii)R eduction in average travel time. The appraisal outcome indicators were realistic and are likely to be met. (iv)R eduction in freight charges and passenger fares by 10%–15%. This remains uncertain due to the security situation, which tends to drive up, rather than reduce fares and charges.

28. The effectiveness rating is based on project outputs, but the CAPE found that only a small portion of the sector level outcomes were or are likely to be achieved. Several outcome indicators were unrealistic. A case in point is the expectation of a sustainable resource base for road maintenance. Performance of other indicators is assessed as follows:

(i)A reformed transport sector administration. This was largely achieved through institutional reforms supported by advisory TA projects. (ii)I ncreased maintenance cost financed out of tolls. This was not achieved. (iii) A greater private sector involvement in maintenance. This was only partly achieved.

16 Rapid traffic counting on sections of the northern ring road involved a national consultant in a moving vehicle counting the number of oncoming vehicles passed in a specified length of road. If the average speed of the moving vehicle, length of road and trip time is known, then the traffic flow rate and thus the average daily traffic can be calculated.

108 Appendix 6

(iv)P eriodic maintenance. If it involves capital works, maintenance will be contracted out to private firms. There is, however, a need to assess the capacity of the contracting industry to justify the use of this indicator. (v) A sustainable transport network of local airports and roads. This was the principal intended outcome and is unlikely to be achieved because the necessary conditions (asset management systems) are not yet in place.

29. ADB used TA strategically for the most part. TA projects such as the cluster TA for the preparation of the Postconflict Multisector Program and the Master Plan for Road Network Improvement Project helped formulate the government’s transport policy framework and a road master plan. Both were linked to the overall country strategy and the strategy for the transport sector. Such TA operations have provided the platform for institutional and policy reforms and subsequent ADB interventions. On the other hand, the TA program should have had a longer time horizon and focused more sharply on capacity building in the institutions that ADB’s operational program relied on most. By taking up subjects like trade facilitation and air quality, ADB spread its TA projects too thinly over too many areas and deviated from capacity building in the areas on which ADB operations were focused, namely roads. The efforts made under the TA for trade facilitation were largely in vain because the executing agency was the MPW, an institution that has hardly anything to do with trade facilitation.

30. Sustainability. Overall, sustainability of ADB’s transport sector program is rated less than likely. The key outcomes and preconditions for sustainability—assured financing and an effective maintenance regime—were not achieved. While they have improved, organizational capabilities are still limited.. This rating also results from the fact that (i) asset maintenance still relies on discretionary allocations from the general budget and from donors; (ii) the allocations, while having increased over time, are not needs-based because there is no objective asset maintenance regime; (iii) the policy environment has not been conducive to sustaining outcomes; and (iv) the Kabul Process accords priory to security rather than to government spending for operation and maintenance.

31. A portion of the proceeds of the proposed fuel levy is to be allocated to road construction and maintenance. The tax will be applied to all imports of fuel and the proceeds will be transferred to the general budget. It is unclear, however, on what basis the allocation to road maintenance will be made and whether the allocation will be adequate to cover all maintenance activities. Sound maintenance management would require an objective assessment of maintenance needs and an asset management system. The introduction of a road asset management system has been a subject of ADB’s more recent policy dialogue with the government.

32. Impact. The overall impact achieved by the transport sector program is rated satisfactory. This is largely a result of the delivery of the physical outputs. ADB’s support, the country can now make use of a 750-kilometer (km) network of rehabilitated and improved roads that allow more travel in less time. Four airports have been built out of the seven intended. A new 75 km rail line was completed. Most physical projects were completed recently and no data to assess impact was available, (even in project completion reports). However, the IED team presumed that the completed national roads are likely to contribute to the envisaged sector impacts from the achieved outcomes. On the other hand, the overall impact of the program’s capacity development was less than successful. Other expected project-level impacts include reduced traffic accidents, socioeconomic impacts, and environmental impacts. The road designs included road safety features such as better signage, road markings, guard rails, and other features. Details of the expected various impacts are given below:

Summary of Transport Sector Assessment 109

(i)I mproved road safety. Statistics are not available. (ii)G ender impacts. These were achieved in connection with the project for returning refugees and due to the fact that most projects provided better access to social facilities, from which women benefited.17 (iii)L and acquisition and resettlement. Due to very limited government capacity, there have been numerous teething problems in accommodating ADB’s requirements and progress across government has been uneven. The main source of problems has been uncertainty over land ownership. Plots in both the public and private sectors sometimes have more than one claimant. No central land registry exists and disputes can be difficult to resolve (iv) Environmental impacts. Because most projects consisted of rehabilitation of existing roads, no environmental impact was expected. Mitigation measures for restoration of borrow pits, extraction of water for construction, and control of hazardous and toxic materials were appropriately implemented and were monitored through regular site inspections. Safeguards concerning involuntary resettlements were properly introduced so that the impact may be considered substantial.

33. The degree to which the transport sector program has resulted in sector impacts is mixed:

(i) Sector impacts, including institutional development and governance, were achieved to some extent. (ii) The impact on governance has been marginal because none of the related outcomes stated in the sector results—better sector management and policies, an improved asset management system, and increased private sector involvement—was achieved. (iii) The impact on institutions is rated less than satisfactory. ADB’s sector program has also supported very limited institution building and development of policy making and regulatory oversight capacities. Progress in these areas was less substantial. (iv) The role of private contractors in carrying out maintenance works has so far been limited. (v) The impact of measures to transfer know-how was limited. The project implementation arrangements helped improve governance and contract management practices. The use of international competitive bidding for civil works exposed staff of the executing agency and local consultants to sound practices, although the use of design–build contracts has not advanced know-how in good project planning and management.

34. Overall assessment. Overall, the transport sector program is rated successful based on the criteria discussed in paras. 8–33 and summarized in Table A6.1.

Table A6.1: Transport Sector Overall Performance Rating Rating Criteria Criteria Weight Assessment Score Weighted Average Score Strategic positioning 0.1 Satisfactory 2 0.2 Program relevance 0.1 Relevant 2 0.2 Efficiency 0.2 Less than efficient 1 0.2 Effectiveness 0.2 Effective 2 0.4 Sustainability 0.2 Less than likely 1 0.2 Development impact 0.2 Satisfactory 2 0.4 Overall assessment 1.0 Successful 1.6 Source: Independent Evaluation Department.

17 ADB. 2002. Proposed Grant Assistance to Afghanistan for Supporting the Road Employment Project for Settlement and Integration of Returning Refugees and Displaced Persons. Manila. 110 Appendix 6

E. Conclusion: Key Findings, Lessons and Suggestions

1. Project Design and Implementation Issues and Recommendations

35. Design–build approach. The design–build approach was selected to shorten preconstruction activities but in some cases caused construction delays and cost overruns. Moreover, the potential efficiency gain from these contracts came at the expense of capacity development that would have taken place under the traditional form of contract. The design–build modality should be applied more discriminately and only to simple design projects rather than to projects across the board.

36. Due diligence. Sector and project due diligence and good technical proficiency should not be compromised by the special security environment.

37. Risk of operation. The government judged the management contract with Uzbekistan railways as one-sided. Because the second tranche of ADB’s second MFF, the Transport Sector Investment Program, will be used to finance a potential shortfall of railway operating revenues to pay for the services of the Uzbek railway contractor, ADB assumed responsibility to ensure that the contract was fair to all parties. In this regard, ADB should have ensured that the financial risks of the contract were more evenly shared between the government and the railway contractor from Uzbekistan. This could have been achieved by a public–private partnership arrangement. An annuity contract may have been a suitable solution in this regard.18

38. Financing modality. The relationship under ADB’s two MFFs between the sector investment programs on the one hand and government strategies on the other was unclear. This compounded the lack of orientation that emanated from vague government strategies.

39. Financing of cost overruns. As a result of substantial cost overruns in several road projects, and the government’s inability to make up for funding shortfalls, ADB used the MFF as a quasi-credit line to provide the required supplementary financing. Given the difficult environment under which projects had to be implemented and the inherent risk of cost increases, this approach was imaginative and has contributed to economy and efficiency in project implementation. The issue, however, is whether the approach was defensible with respect to principles of accountability and other ADB operational principles, such as emphasizing project viability. There is no evidence that the economic results were recalculated after the cost increases had been incurred.

40. Suggestions. As a summary of the conclusions resulting from the above assessment, IED has the following suggestions:

(i) Whatever terms are applied to describe the prevailing conditions in the country, the extraordinary situation in Afghanistan should not justify abandoning ADB’s orderly planning and design process. (ii) The continuing conflict-affected situation should not provide a reason to abandon recognized due diligence and sound technical proficiency standards. (iii) Under conflict-affected and fragile situations and their concomitant market distortions, ADB should act as a fair intermediary to protect the interest of the clients.

18 An annuity contract is a public–private partnership in which a private investor may participate in the financing and may be the contractor for the construction and subsequent maintenance of the road infrastructure. The contribution to the financing may vary and would be converted to constant annuities spread over an agreed period. The annuities, which are the basis for the remuneration of the investor, would have to reflect the capital outlay, the cost of the capital, a profit margin, and the remuneration for the maintenance services performed during the contract period. The government would pay the annuities. The government would collect the revenues, but having the responsibility for making the annuity payments, would have to make up for any potential shortfall.

Summary of Transport Sector Assessment 111

(iv) The investment program of an MFF should be specific in terms of strategic direction and goals, as well as measures to achieve the goals. If an MFF covers more than two sectors, due diligence in both sectors should be discussed during appraisal. (v) ADB should be more transparent and explicitly state the risk factors involved in the use of the MFF under conflict-affected and fragile situations. (vi) In view of the fragile economic and financial viability of the road components under TNDIP, contract management should ensure that construction costs are kept within estimates and implementation stays on target. The railway component needs to be monitored carefully, particularly with respect to the development of costs and revenues and traffic. Given the arrangements for potential deficit financing, a risk exists that revenues may be underreported and costs overstated to make it possible to tap ADB resources.

2. Capacity Development Issues and Recommendations

41. Constraints to the government’s absorptive capacity have been a pervasive and an overriding concern since the resumption of ADB operations. Given the recognized constraints, a strategic option could theoretically have been to reduce the aid flow per unit of time by spreading the available resources over a longer period, while continuing efforts to increase capacity. This option was not discussed in any of the ADB strategies, presumably because it was politically unacceptable.

42. The focus of the TA projects has been on advanced technical subjects rather than on longer- term formal and hands-on training provided by long-term international experts to long-term committed local staff. The TA program should have had a longer time horizon and focused more on the top priorities in sustainable capacity building of institutions.

43. With regard to strengthening capacity building in ADB projects, ADB should

(i) align country programs with the assessed absorptive capacity, (ii) focus the capacity development program on areas where ADB has leverage, and (iii) draft a long-term business plan for the MPW and develop and execute a training program based on it. 112 Appendix 6

Table A6.2: Design-and-Build Contracts for Civil Works—Advantages and Disadvantages Attribute/Process Advantages Disadvantages General The modality combines the The traditional system with its divided engineering and construction task in responsibilities provides checks and one contract so a single procurement balances, whereby the designer and the process covers both activities and contractor act as a restraint on the powers time is saved. If the value of time of the other. This generally precludes the saved is greater than the likely conflict of interest that would arise if the increase in overall costs, the design– designer favored the interests and build (D–B) concept is advantageous. capabilities of the constructor to the That cost increases compared to the detriment of the interests of the client. It traditional form of procurement are is for this reason that the engineering and likely is due to the premium a the construction tasks are separated. The contractor will demand for incurring potential conflict of interest increases with the design and construction risk. rising complexity of a project. The risk may translate into higher costs of civil works over and above the cost increase inherent in any D–B contract. The client is expected to produce a conceptual design but any further involvement in the engineering and contract management is limited to construction supervision, which is typically delegated to a consultant. Supervision is to ensure that construction meets the conceptual design standards. Client faces two parties (designer and contractor) and may be at their mercy depending on the client’s experience with contract management. The overall reduced involvement of the client in the whole process reduces opportunities for capacity building. Suitability Suitable for simple design projects Use in complex projects reduces the level where the client has sufficient of transparency and advances the understanding of the key design potential for abuse. features and the quantities involved. A client who is familiar with contract management principles. Concept design consultant is Client can agree on the deliverables Many consultants are unskilled at employed, either as a in terms of their conceptual developing concept specifications for a D– member of the project requirements, not in terms of the B contract, and instead fall back on management unit (PMU) or tender specifications. Client will preparing a detailed specifications based as a separate entity define their requirements—typically on the design concept which limits the through the PMU and get concept benefits of D–B. design consultant to set them out so that they are agreed with the concept design consultant, who is then responsible for articulating them for the tender. Tenderers are prequalified, Difficulty of evaluating the engineering including assessment of their skills in relation to the construction design capability capacity. Need for a weighting system that can be subjective Summary of Transport Sector Assessment 113

Attribute/Process Advantages Disadvantages Tenderers prepare bid with If designers are experienced in D–B, If inadequate time is given to tender, or their designer using they can include constructability and competition is not high, tenderer will conceptual design for value engineering at this stage, include large contingencies to allow for costing potentially reducing costs and unknowns in the design. This risk speeding the construction time. increases with project complexity. Concept design consultant This provides a check that codes have If the consultant has prepared a or PMU assesses or approves been complied with and that the “conforming design” or is not sufficiently design design meets the concept experienced in the materials or other specification. If the concept features of the engineering proposal, the specification is simple and clear, the consultant may be unwilling to approve detailed design can be approved the design. Liability for the design quickly. becomes unclear if the client’s concept design consultant approves the design. Start of construction Contractor starts construction prior The design and approval process is on the to design completion. This is one of critical path for completion. The PMU may the major advantages seen for D–B be unwilling to allow construction to start contracts. without completed design. This could be the case if the client is concerned about contiguous design elements and/or unwilling to create an irreversible deed or fact by allowing the contractor to proceed without getting the completed design beforehand. Supervision None. Less understanding of detailed design makes it difficult for clients to supervise contractors. The supervision is related to the adherence of the contractor to the conceptual design rather than the detailed engineering. Contractor identifies No advantage to Client unless a Client requires further input from potential cost savings or sharing of the savings has been Consultant, and there can be increased cost avoidance and included in the contract. disagreement over whether the changes wishes to modify design provide an equal quality. Less understanding of detail design makes it difficult for clients to manage contract variation. Construction process Greater familiarity with the design Contractor may exploit familiarity with the may avoid lengthy discussions and design and make changes to suit its design changes. interests. Capacity building None. Less chance for client to learn design skills. Supervision with less understanding of detail design is less efficient and effective. Source: Independent Evaluation Department. APPENDIX 7: SUMMARY OF ENERGY SECTOR ASSESSMENT

A. Introduction

1. This assessment discusses the sector context, taking it into account to evaluate the strategies and the support provided by the Asian Development Bank (ADB) to Afghanistan’s energy sector since 2002.1 The positioning and performance of ADB’s sector strategies and assistance are analyzed, and the assessment discusses the contribution of ADB to development results in Afghanistan and identifies development issues and lessons in the energy sector pertinent to the preparation of the next country partnership strategy (CPS). Situations discussed herein cover 2002 through December 2011.

B. Sector Context and Background

2. Efforts to ensure a secure supply of energy have been greatly constrained in Afghanistan by war and conflict. Persistent security issues have plagued the country, limiting vital physical advancement of energy infrastructure and human capacity development in key institutions within the energy sector.2 Despite the continuing conflict, energy infrastructure, particularly power generation plants and crucial transmission links, have been successfully rehabilitated as part of a global collaborative effort to support Afghanistan in its efforts to restore normalcy to the life of its citizens.

3. During 2002–2011, ADB’s approved support to Afghanistan totaled $671.73 million in loans and Asian Development Fund grants covering nine energy sector-related projects4 and $8.06 million covering eight energy technical assistance (TA) operations projects.5 The context of ADB support from

1 ADB. 2010. Revised Guidelines for the Preparation of Country Assistance Program Evaluations. Manila. 2 Major energy sector stakeholders in Afghanistan include Da Afghanistan Breshna Sherkat (DABS), Ministry of Energy and Water (MEW), the Ministry of Mines (MOM), and the Ministry of Rural Rehabilitation and Development (MRRD). DABS was established in May 2008 under the Corporations and Limited Liabilities Law of Afghanistan and is the country’s sole power generation, transmission, and distribution company; it replaced its predecessor Da Afghanistan Breshna Moassassa (DABM), a noncorporatized government-owned utility. MEW, among other things, is responsible for power sector-related policies and regulations. MOM’s domain in energy covers oil, gas, and coal. MRRD has responsibility for small renewable energy projects in rural areas. 3 This amount includes total costs associated with two multisector projects, both of which included respective energy sector components. 4 ADB. 2002. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the Postconflict Multisector Program. Manila (Loan 1954); ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Transitional Islamic State of Afghanistan for Emergency Infrastructure Rehabilitation and Reconstruction Project. Manila (Loan 1997); ADB. 2005. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Asian Development Fund Grant and Technical Assistance to the Islamic Republic of Afghanistan for Power Transmission and Distribution Project. Manila (Loan 2165 and Grant 0004); ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Loans, Technical Assistance Grants, and Administration of Loans to the Islamic Republic of Afghanistan and Republic of Tajikistan for Regional Power Transmission Interconnection Project. Manila (Loan 2304 and Grant 0230); ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility and Administration of Grant to the Islamic Republic of Afghanistan for Energy Sector Development Investment Program (Tranche 1). Manila (Grant 0134); ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility and Administration of Grant to the Islamic Republic of Afghanistan for Energy Sector Development Investment Program (Tranche 2). Manila (Grant 0184); ADB. 2011. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility and Administration of Grant to the Islamic Republic of Afghanistan for Energy Sector Development Investment Program (Tranche 3). Manila (Grant 0280). 5 ADB. 2004. Technical Assistance to the Islamic Republic of Afghanistan for Establishing a Gas Regulatory Framework. Manila (TA 4354); ADB. 2010. Technical Assistance to the Islamic Republic of Afghanistan for Power Sector Master Plan. Manila (TA 7637); Technical Assistance to the Islamic Republic of Afghanistan for Capacity Building of the Ministry of Energy and Water (TA 4579) attached to ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Asian Development Fund Grant and Technical Assistance to the Islamic Republic of Afghanistan for Power Transmission and Distribution Project. Manila; Technical Assistance to the Islamic Republic of Afghanistan for Improving the Capacity of Da Afghanistan Breshna Moassassa (TA 4909) attached to ADB. 2006. Report and Recommendations of the President to the Board of Directors: Proposed Loans, Technical Assistance Grants, and Administration of Loans to Islamic Republic of Afghanistan and Summary of Energy Sector Assessment 115

2002 through 2011 addressed postconflict challenges of nation rebuilding and reconstruction despite the ongoing conflict. In fact, the continuing hostilities caused loss of human life and physical property, resulting in significant implementation delays and gaps in human capacity, particularly in the energy sector. Afghanistan’s two main energy sector challenges are a dearth of best-practice knowledge capacity in key energy enterprises and ministries; and the substantial backlog of infrastructure rehabilitation and expansion still to be undertaken.

4. The lack of adequate human capacity in the sector has had an adverse effect on the installation of equipment vital for the operations of power plants and transmission systems. Likewise, an asset management system necessary for proper collection of sector-related operational and planning data could not be introduced. Hence, essential data to assess baselines and sector progress is not collected or compiled systematically and is generally unavailable. Basic metering equipment along with proper asset management system formulation and implementation will be needed to fill current data gaps.

5. Despite such adversities, some progress in the sector is evident and can be attributed to ADB support, which has focused mainly on securing dependable transmission links for importing power from Uzbekistan and, more recently, Tajikistan. In 2002, as shown in Table A7.1, when ADB commenced operations in Afghanistan, much of the country’s power generation, transmission, and distribution infrastructure had been destroyed; and the country had access to only 242 megawatts (MW) of power. Moreover, more than 90% of the population did not have access to electricity. 6 By the end of 2011, the country had an installed power generation capacity of 507 MW, although only 195 MW was actually available and operating in country—i.e., less than 40%, as shown in Table A7.2.7 But Afghanistan now had access to 467 MW of imported power capacity, most of the five-fold increase in electricity imports coming from Uzbekistan as a result of the ADB-supported transmission link. The availability of this transmission link has enabled a sharp increase in power access—from 590,000 consumers in 2007 to nearly 850,000 consumers in 2012, most of the increase being residential customers.

Table A7.1: Installed Power Supply Capacity in Afghanistan (megawatts) Power Supply Capacity 2002 2007 2011 Installed Capacity 156 270 507 Hydro 140 183 254 Thermal 16 87 253 Imported Capacity 86 96 467 Sources: Asian Development Bank independent evaluation mission; Da Afghanistan Breshna Sherkat-provided indicators, March 2012; and presentation on Afghanistan Energy Sector in Kabul on 7 February 2012; Government of Afghanistan, Inter-Ministerial Commission for Energy Secretariat. 2011. Energy Sector Status Report. Kabul (December); and United States Agency for International Development. http://www.sari- energy.org

Republic of Tajikistan for the Regional Power Transmission Interconnection Project. Manila; ADB. 2007. Technical Assistance to Afghanistan for Support for Interministerial Commission for Energy. Manila (TA 4918); ADB. 2003. Technical Assistance to Afghanistan for the Energy Sector Review and Gas Development Master Plan. Manila (TA 4088); ADB. 2004. Technical Assistance to Afghanistan for Poverty Reduction and Rural Renewable Energy Development. Manila (TA 4461); ADB. 2008. Technical Assistance to Afghanistan for Development of Wind Energy (Small-scale). Manila (TA 7168) 6 United States Agency for International Development (USAID). South Asia Regional Initiative for Energy. http://www.sari- energy.org 7 A. Razique Samadi. 2012. Da Afghanistan Breshna Sherkat (DABS) presentation on Afghanistan Energy Sector. Kabul. 7 February. 116 Appendix 7

Table A7.2: Available Power Indicators for Afghanistan Indicator 2007 2008 2009 2010 2011 Operational Capacity (MW) … 68 109 99 195 Hydro (MW) … 68 100 88 136 Thermal (MW) … 9 11 59 System Losses … … … … … Domestic Consumers 539,228 574,379 677,859 715,742 764,284 Total Consumers 599,014 633,029 746,822 786,449 841,376 Average Power Price (AF per kWh) … … 4.39 4.53 4.74 Sales Revenues (AF million) … … 6,645 8,093 7,346 … = data not available, kWh = kilowatt-hour, MW = megawatt. Sources: Asian Development Bank independent evaluation mission; Da Afghanistan Breshna Sherkat indicators in March 2012 and presentation on Afghanistan energy sector in Kabul on 7 February 2012; Government of Afghanistan, Inter- Ministerial Commission for Energy Secretariat. 2011. Energy Sector Status Report. Kabul (December); and United States Agency for International Development. http://www.sari-energy.org/

6. It will be difficult to transfer best practices and knowledge while security threats continue to plague the country. Even the best international consultants may not be successful if the current security situation persists. Under this predicament, vital electricity infrastructure, on which the country’s long- term economic recovery depends so much, will remain elusive.

C. ADB’s Sector Strategies in the Country

7. ADB’s strategic positioning in the energy sector of Afghanistan is rated satisfactory. This rating is based on the close alignment of ADB support with the government’s own development strategy in energy and the focus of ADB support on its areas of comparative advantages. These strategic strengths are offset partly by weaknesses in the sector results framework and a lack of realism in sector output targets.

8. Notwithstanding prolonged security threats, ADB’s energy sector program was strategically well positioned and was largely formulated by the understanding that the establishment of an efficient power sector was necessary to bring about the country’s economic development. ADB gave priority to restoration of electricity to Kabul via imports from Central Asian countries on Afghanistan’s northern border. Imports of electricity from Uzbekistan represented the best option to reestablish significant electricity supplies to Kabul and thereby provide economic and social benefits to a large segment of the country’s population and industry. Capacity development of sector ministries, another key government priority, also received strong and sustained support from ADB. Attention was also given to rehabilitation and development of indigenous energy resources, notably natural gas, which was among the government’s priorities. Finally, the provision of energy to remote rural areas, mainly by developing renewable energy opportunities, had a high priority for the government. However, faced with weak institutional capacity and the greater security risks in rural areas, ADB accorded it a relatively lower priority. Even so, pilot projects for micro hydro and solar energy were carried out, though the positive results from these pilots have not been integrated into an expanded, government plan to bring more renewable energy schemes in other remote rural areas due to weak capacity, limited resources, and deteriorating security outside of Kabul.

9. There was also a high degree of consistency between ADB-financed operations, including the TA grants, and the CPSs, which emphasized programmatic areas that included (i) capacity development (TA focus), (ii) rehabilitation of physical infrastructure (project focus), and (iii) private sector development (TA focus). Core specializations such as infrastructure and regional cooperation were two areas of comparative advantage for ADB and had high priority in the energy sector for Afghanistan, especially in electricity.

Summary of Energy Sector Assessment 117

10. ADB’s program in energy was closely linked to the outcomes that ADB was trying to influence— expanded access to reliable electricity supply. However, the program outcome indicators appear to have been adopted from the Afghanistan government’s own energy sector strategy goals8 and lacked realism as well as underestimated existing sector capacity. Access targets in both urban and rural areas were particularly optimistic. The target for rural areas, 25% of households, bears little relation to current reality and was even optimistic at the time.9

11. The main deficiencies in the sector results framework in the CPS documents are the lack of sector-specific targets in key areas of ADB intervention; for example, targets for ”energy links with neighboring countries” could have been easily specified, though such targets were later included in the design and monitoring frameworks (DMFs) of regional power transmission operations. Having targets for capacity might have enabled a more realistic assessment of existing capacity in the energy ministry as well as for levels of new private investment in the energy sector. Also, more detail regarding the gap between current tariff charges and actual costs could have been provided to enable a better understanding of what would have been required to narrow the difference.

D. Assessment of ADB Country Level Support

12. Relevance. Overall, ADB’s country program is rated relevant. This rating is based primarily on the close alignment of all grants, lending, and TA operations with sector and country strategies. The design of these operations was also generally sound, the main shortcoming being to adequately provide for weak implementation capacity. The rating would have been higher if implementation arrangements and design and monitoring frameworks had been of a better quality. Clearly, weak DMFs made measuring of achievements with respect to capacity development and physical outputs difficult.

13. DMFs for the different projects and TA operations were uneven in quality. Improvements were evident in ADB operations after 2006. The ”energy” DMF for the Emergency Infrastructure Rehabilitation and Reconstruction Project (EIRRP) (loan 1997)10 was limited to physical output indicators, which were necessary, given the emergency nature of this operation. The DMFs of subsequent loans— the Power Transmission and Distribution Project (loan 2165 and grant 0004)11 and Regional Power Transmission Interconnection Project (loan 2304 and grant 0230)12—lacked needed monitoring details. The inclusion of common sector indicators such as the number of hours of load shedding each month could have been used to further substantiate improvements in electricity supply. In contrast, the DMFs of ADB’s multitranche financing facility (MFF) tranche releases (Energy Sector Development Investment Program [Tranche 1]; Tranche 2, and Tranche 3) 13 were sufficiently detailed. DMFs for capacity development TA operations were rather basic, being limited to training course attendance. No attempt

8 Government of Islamic Republic of Afghanistan, Afghanistan National Development Strategy (ANDS). 2008. Energy Sector Strategy, 1387–1391 (2007/08–2012/13. Kabul (February). p. 2. 9 ADB. 2008. Country Partnership Strategy: Afghanistan, 2009–2013. Manila. 10 ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Transitional Islamic State of Afghanistan for Emergency Infrastructure Rehabilitation and Reconstruction Project. Manila (Loan 1997). 11 ADB. 2005. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Asian Development Fund Grant and Technical Assistance to Islamic Republic of Afghanistan for Power Transmission and Distribution Project. Manila (Loan 2165 and Grant 0004); 12 ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Loans, Technical Assistance Grants, and Administration of Loans to Islamic Republic of Afghanistan and Republic of Tajikistan for Regional Power Transmission Interconnection Project. Manila (Loan 2304 and Grant 0230). 13 ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility and Administration of Grant to Islamic Republic of Afghanistan for Energy Sector Development Investment Program (Tranche 1). Manila (Grant 0134); ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility and Administration of Grant to Islamic Republic of Afghanistan for Energy Sector Development Investment Program (Tranche 2). Manila (Grant 0184); ADB. 2011. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility and Administration of Grant to Islamic Republic of Afghanistan for Energy Sector Development Investment Program (Tranche 3). Manila (Grant 0280). 118 Appendix 7

was made to measure progress in procurement efficiency or improved implementation resulting from such training.

14. Efficiency. The overall rating is less than efficient. Portfolio performance has been characterized by slow implementation and disbursement, much higher financial and economic costs than estimated at appraisal, and an extension of closing dates for most operations. Of the eight14 sovereign loan and grant energy sector projects, only one was completed, the Emergency Infrastructure Rehabilitation and Reconstruction Project (loan 1997) with the remaining project operations, i.e., loans 2165 (with grant 0004) and 2304 (with grant 0230) as well as grants 0134, 0184, and 0280)15 still under implementation. At multisector loan 1997’s completion, the recalculated economic internal rate of return (EIRR) for the project’s power component was 16% as compared with nearly 27% estimated at appraisal;16 the gas infrastructure component under the energy component was not implemented and had to be cancelled. In the project completion report (PCR) for multisector loan 1997, the power component was rated less efficient; and the gas component was rated inefficient.

15. Portfolio performance of the remaining projects has been slow, with much higher costs than estimated at appraisal, and an extension of closing dates for most of these operations. While some recent turnaround in implementation performance in projects is evident (e.g., Loan 2165 [footnote 11]), all projects were found to be significantly behind the original implementation schedule. For example, ADB Loan 2165 (footnote 11) was expected to be completed in 3 years, i.e., July 2008, and is still under implementation, almost 4 years behind the original schedule.17

16. The high security risks involved in working in Afghanistan were primarily responsible for higher than anticipated costs.18 Weak capacity of the implementation agencies, compounded by difficulties in contracting experienced project management for the project implementation units (PIUs) were also responsible for delays and slow disbursement.19 In the case of TA operations, there was a significant underutilization of funds, further reflecting very slow implementation as well as difficulties in recruiting qualified consultants to a conflict-ridden Afghanistan.

17. Effectiveness. The overall rating for effectiveness in the sector is effective. The main project- level outcome achieved in the power sector has been the restoration of reliable electricity supply to the main centers of consumption in the Northern region, in particular Kabul, by 2011. This compares with a 4 hour per day electricity supply in 2002. Generally, physical outputs have been achieved, albeit with delays in the power sector. In contrast to progress made in restoring electricity supply, no progress has been made in developing the country’s gas potential. A master plan was prepared as well as a gas regulatory framework under two TA grants, but there has been no follow-up to either of these TA activities, even though developing the country’s gas potential remains a priority for government.

14 ADB. 2002. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Afghanistan for the Postconflict Multisector Program. Manila (Loan 1954), is not included because of its unique positioning as a comprehensive postconflict relief project that reflects more the state of Afghanistan’s public management system at the time. 15 Footnotes 10, 11, 12, and 13. 16 ADB. 2009. Completion Report: Emergency Infrastructure Rehabilitation and Reconstruction Project in Afghanistan. Manila (Loan 1997). p. 13. 17 While the multitranche financing facility (MFF) is in early implementation phase with a 2-year extension beyond the completion date anticipated at time of appraisal, recent data gathered by IED from January through September 2012 show that ADB’s MFF for Afghanistan’s energy sector appears on target in meeting ADB’s implementation contractor established bid, contracting, and commissioning milestones. 18 For example, Loan 2165’s implementing contractor lost three personnel from a rocket attack in October 2010; in July 2011, the implementing contractor lost another two personnel from kidnapping; and in December 2011, two transmission towers (physical assets) were hit by rockets. 19 During the independent evaluation mission for this assessment it was found that project managers hired by ADB were often gaining project management experience for the first time under ADB-related projects. Further, it was also found that, once the project manager had gained 1–2 years of project management experience in Afghanistan, ADB PIU project management positions would be abandoned for higher paying PIU project management positions with other development partners operating in Kabul. Summary of Energy Sector Assessment 119

18. A key objective of the CPS for 2009–2013, was capacity development. In the energy sector, the main focus of capacity development initially was strengthening planning and procurement capacity in the Ministry of Energy and Water (MEW), and more recently the project management capacity in the recently corporatized power company, Da Afghanistan Breshna Sherkat (DABS). One achievement in capacity development has been setting up the Inter-ministerial Committee for Energy (ICE) with ADB support. 20 ICE meets regularly to resolve issues affecting sector development and to facilitate aid coordination. However, in critical areas important for the sector’s future development and operational efficiency, only limited capacity development objectives have been achieved. Despite six TA operations, the capacity of the key energy institutions MEW, Ministry of Mines (MOM), and DABS remains weak. The one tangible step in capacity development has been establishing ICE. Continuing difficulties in recruiting qualified consultants for capacity development to work in Afghanistan are an important reason for the lack of progress. Different approaches may now need to be considered such as on-the- job-training in established regional utility offices. In the development of the country’s gas potential, no progress has been made in 10 years, though the recently revamped MOM is now taking steps to assess more precisely Afghanistan’s gas potential. The development of a renewable energy strategy has not progressed either, due to (i) inadequate institutional capacity in MEW’s Department of Renewable Energy Development and in MEW in general, and (ii) worsening security conditions in remote rural regions.21

19. In terms of other intended outcomes, the energy program contributed significantly to regional cooperation, a stated country development goal. The transmission networks supported by ADB loans have been instrumental in supplying Kabul with reliable electricity supply. As of 2011, the country is now importing more than 75% of its electricity needs from Uzbekistan, Tajikistan, and Turkmenistan. ADB’s comparative advantage in being able to work effectively through Central Asia Regional Economic Cooperation (CAREC) has been an enabling factor.

20. Development partners in the energy sector have participated in the frequently held ICE meetings and focused on implementation progress of key strategic investments, mostly in electricity transmission and distribution. This has enabled a more rational allocation of resources for emergency investment. However, there have been no major progress reviews by either the government or any of the main partners.22 In addition, little attention has been given to sector planning, even from a 2–3 year perspective. The preparation of a longer term power sector master plan to lay the basis for the further development of the sector is being financed by ADB and is just starting.23 It will include energy sector information and investments mainly in gas and coal under the responsibility of MOM.

21. Sustainability. Overall sustainability is rated less than likely. The primary constraint thwarting sustainability is the persistent conflict in the country. Other factors, notably weak institutional capacity of key energy agencies; the precarious finances of the main power utility; and a high dependence on imported electricity, leaving the country vulnerable to supply disruptions, are compounding the adverse impact of the security situation. A key determining factor in improving prospects for longer term sustainability of the sector is strengthening the institutional capacity of DABS.

20 ADB. 2007. Technical Assistance to Islamic Republic of Afghanistan for Support for Interministerial Commission for Energy. Manila (TA 4918). 21 While MEW’s Department of Renewable Energy Development shared an updated Renewable Energy Policy with the independent evaluation mission (IEM), there has been little in regard to implementation of the policy. Further, the IEM found evidence of conflict between MEW and the Ministry of Rural Rehabilitation and Development (MRRD) over which entity has responsibility for the country’s off-grid rural electrification development. The Head of Energy Rural Development for Afghanistan (a department of MRRD) expressed the belief that there should be only one ministry responsible for off-grid rural electrification, and that ministry is MRRD. The drafted 2009 Renewable Energy Policy was updated in March 2012 in an attempt to, among other things, address the MEW-MRRD conflict by proposing the creation of a Renewable Energy Development Authority. 22 ICE provides a brief snapshot of “recent” progress. However, very little has been done to measure longer term progress in the sector. 23 ADB. 2010. Technical Assistance to Islamic Republic of Afghanistan for Power Sector Master Plan. Manila (TA 7637). 120 Appendix 7

22. To be a successful operating utility, DABS needs additional capacity in land acquisition and compensation, procurement management, contract award, system standardization, planning, and operation and maintenance. Despite steady improvement in collections, growth in electricity demand requires that DABS develop a functioning asset management system, including appropriate metering. This is necessary for accurate data collection, system planning, and optimal pricing. As there is resistance to enabling DABS to become a financially self-sustained and viable corporation, an autonomous tariff-setting body appears crucial to set cost-based tariffs. Technical and nontechnical losses, though reduced, appear to continue undermining DABS’ finances.24 Unless losses are properly calculated, tracked, and reduced over the next 2–3 years, DABS’ financial position will become precarious and it will be unable to contribute internal cash for future investment needs. Afghanistan’s high dependence on imported electricity from Central Asia leaves the country vulnerable to major supply disruptions. So far it has managed this risk well; however, it needs to mitigate this risk by developing the country’s indigenous energy resources. It is clear that this will take time, especially hydro development, and that the process will be further hampered by weak institutional capacity.

23. Impact. The overall rating for development impact is satisfactory. This is largely a result of the delivery of the physical outputs and outcomes. The rating of the physical components is based on assessments of (i) the power investment components in terms of their economic and social impact; 25 (ii) regional cooperation which is now responsible for the provision of more than 75% of Afghanistan’s electricity supply;26 and (iii) the development of a renewable energy strategy and the country’s gas potential, on which no progress has been made.27 Although no data to assess impact were available, the IED team presumed that the completed electricity transmission system from Uzbekistan and Tajikistan is likely to contribute to the envisaged project impact. However, only limited progress has been made in strengthening key power sector institutions, despite several TA operations, and in attracting private sector investment to the energy sector.28

24. In terms of the impact of project investments in the power sector, the significantly improved electricity supply in Kabul and in other urban centers should have a major economic and social impact, notwithstanding uncertainties in regard to the longer term sustainability of this supply. Electricity availability has acted as a stimulus to rehabilitate traditional industries and start new enterprises. The social impact has also been considerable, with an increase of 225,000 new domestic customers since 2007, or more than 40%. In contrast to the power sector, there has been no impact in the gas or rural energy sectors, since these investment components could either not be implemented (gas) or there has been no follow up to the pilot phase (rural renewable projects).29

24 During the IEM, DABS was unable to provide a detailed annual breakdown of technical and nontechnical losses for its downstream lines of business. Without a working fixed asset management tool to track assets, operation and maintenance, as well as finances and costs, it is not possible to assess the true financial wellness of an institution such as DABS. 25 Recent data show correlation between economic growth and electricity access, and that the lack of access to modern energy services is a serious hindrance to economic and social development. International Energy Administration. 2011. World Energy Outlook. Paris. 26 Including recent summer 2012 electricity imports (monthly averaging approximately 100 MW) from Tajikistan over the October 2011 completed transmission link under ADB Loan 2304 and Grant 0004 (footnote 11). 27 The 2009 through 2013 Energy Sector Results Framework envisages outcomes of reliable affordable energy based on, among other things, investments in Afghanistan’s own sources of energy; along with a strategy for renewable energy—formulated, approved, and under implementation. 28 ADB’s energy sector strategy from 2002 through 2009 included, inter alia, the development of a policy environment to enable private investments in the oil, gas, and mining sector; and formulation of a policy, legal, and regulatory framework for sector development. Actual outcomes and impacts under both of the aforesaid areas did not materialize. 29 Upon two rounds of discussions with MEW’s Department of Renewable Energy Development, the IEM found that none of the pilot renewable projects that were at one time operational under TA 4461 (ADB. 2004. Technical Assistance to Afghanistan for Poverty Reduction and Rural Renewable Energy Development. Manila) were currently operational because of lack of operation and maintenance capacity. Despite this shortcoming, evidence of continued effort under natural gas and renewable power development was found under Tranche 1 (Grant 0134) of the current MFF where current design includes Sherbaghan gas well rehabilitation and various remote mini hydropower renewable projects. Summary of Energy Sector Assessment 121

25. Capacity development has been an important goal in almost all CPSs. However, little has been achieved towards this end. Key energy sector institutions still have to operate without the necessary human resources and capacity. This will continue to be a major obstacle to the energy sector’s further development. As discussed in para. 18, the establishment of ICE as a forum for effective aid coordination is a positive contribution to capacity development.

26. The impact on private sector investment has also been marginal. TA grants30 designed to put in place a regulatory environment for private sector investment have not had any follow up, and it is doubtful whether these were priority areas for TA support at the time. While there has been some recent private investment for petroleum exploration, this investment is unrelated to the TA support provided by ADB.

27. The impact on regional cooperation of ADB lending in the power sector has been significant, with the steady increase in the import of electricity from Central Asian countries to Afghanistan since 2008 once the key transmission link to the Uzbekistan border had been completed. As mentioned in para. 19, this is an area of comparative advantage for ADB, where it plays an effective role as an intermediary in strengthening regional ties, to the benefit of Afghanistan’s economic and social development.

28. In terms of safeguard concerns, land acquisition and resettlement issues have been addressed as an integral part of the preparatory phase of all projects in the sector. The lack of familiarity of DABS with ADB’s safeguard policy and procedures has affected implementation progress only to a minor extent.

29. Overall assessment. Overall, the energy sector program is rated successful based on the criteria discussed in paras. 12–28 and summarized in Table A7.3.31

Table A7.3: Energy Sector Overall Performance Rating Weighted Criteria Average Rating Criteria Weight Assessment Score Score Strategic positioning 0.1 Satisfactory 2 0.2 Program relevance 0.1 Relevant 2 0.2 Efficiency 0.2 Less than efficient 1 0.2 Effectiveness 0.2 Effective 2 0.4 Sustainability 0.2 Less than likely 1 0.2 Development impact 0.2 Satisfactory 2 0.4 Overall assessment 1.0 Successful 1.6 Source: Independent Evaluation Department.

E. ADB’s Performance in the Sector

30. ADB’s contribution to aid coordination in the sector, with the establishment of ICE, has been strong. However, in addition to coordination, ADB’s Afghanistan Resident Mission in Kabul should play a key role in supporting project implementation. The experience of ADB and other development partners in conflict countries such as Timor-Leste and Sri Lanka indicates that implementation can be facilitated by a strong field presence. Two prerequisites are important for an effective resident mission: (i) internationally recruited sector expertise leveraged by local staff; and (ii) delegation of authority to

30 ADB. 2004. Technical Assistance to Islamic Republic of Afghanistan for Establishing a Gas Regulatory Framework. Manila (TA 4354). 31 As discussed in para. 18, of the eight sovereign loan and grant energy sector projects, only one was completed, the Emergency Infrastructure Rehabilitation and Reconstruction Project (Loan 1997), with the remaining project operations (i.e., loans 2165 (with grant 0004) and 2304 (with grant 0230) as well as grants 0134, 0184, and 0280) still under implementation. With most energy sector projects still under implementation, the actual overall rating of success for the sector is qualified as “likely.” 122 Appendix 7

the resident mission, especially in procurement. At present, the resident mission has only a small international and local staff when compared with those of other partners, and it has been given limited decision-making authority.

F. Conclusion

31. Despite achievements by ADB in Afghanistan’s energy sector, capacity development has been limited, key sector institutions remain fragile, planning capacity is weak, and the private sector impact has been marginal. These constraints must be addressed, or they will hinder the energy sector’s future development.

32. Identified lessons. Security will remain a primary impediment to development of the sector. The main lesson of the past 10 years is that conventional approaches to sector development have not worked either effectively or quickly enough for the needs of the country. In the short term, the security situation is unlikely to improve significantly while capacity constraints will continue to impede rapid progress. Competitive bidding approaches are also not working, take too much time, and require more flexibility. Consequently, sector development efforts need to focus more selectively on areas critical for the country’s economic and social cohesion. This will require continued investment in power distribution in urban centers within an agreed-upon planning framework. In parallel, it will also require an intensive but also innovative capacity development effort. Since funding is already available from sources such as the United States Agency for International Development and ADB, the challenge is rather to make more effective use of these funds when conventional approaches to capacity development have failed. Priorities need to be first agreed upon, concentrating efforts on only a few key institutions: i.e., building up the planning and regulatory capacity of two energy ministries and strengthening the main power utility in areas critical for its future business. Innovative approaches to capacity development also need to be considered. As discussed in para. 22, capacity strengthening of DABS is a critical issue that will determine the long-term sustainability of the power sector. To this end, support in metering, asset management, system planning, the land acquisition and resettlement plan, and other safeguards, and utility skills training and certification are needed. And lastly, capacity strengthening of the Ministry of Energy and Water regarding the formulation of an independent regulatory body for cost-based tariff setting and overall sector planning is also of paramount necessity, not just for the successful sustainability of DABS, but also to further the long-term sustainability of Afghanistan’s energy sector development.

33. Suggestions. Among options that should be considered to meet the security challenge and help the country’s energy sector after 2013 are institutional ”twinning” contracts with an experienced utility in Central or South Asia. 32 Notwithstanding Afghanistan’s security, it is recommended that a comprehensive 5-year program for capacity development accompany ADB’s physical asset support to the sector, addressing each of the lessons identified in para. 32. Capacity development should start with the preparation of business plans for the institutions concerned.

34. Metering. Proper metering33 can help energy providers such as DABS collect data, conserve energy, reduce costs, increase reliability and transparency, make processes more efficient, and facilitate more accurate billing. Metering also enhances system security, signaling vulnerable areas associated with both technical and nontechnical losses. 34 Metering equipment and metering are necessary at

32 ADB’s Managing for Development Results’ Community of Practice (MfDR CoP), which is comprised of public sector managers from ADB’s developing member countries, could serve as a resource or starting point for effectuating this vital partnership arrangement. The same holds for CAREC as a resource option. In short, twinning arrangements, with priority areas explicitly stated up front, under ADB’s MfDR CoP and CAREC could be more effective as compared with a competitive bidding approach. 33 Meters are used to gather load, voltage, current, and power values necessary for proper equipment planning to facilitate efficient power delivery. 34 In 2003, ADB support to the energy sector included the installation of 30,000 meters as targeted outputs under Loan 1997 (ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Transitional Islamic Summary of Energy Sector Assessment 123 points of generation input (from domestic as well as regional generation plants) onto the Afghanistan transmission system as well as at points of transfer of electricity from the transmission system to distribution facilities. Metering will support DABS in knowing what is really being demanded, what losses are occurring, and how best to plan for increased demand and expansion while minimizing technical and nontechnical losses. Metering needs to have continuing priority (footnote 32).

35. Asset management system. Supporting DABS in formulating an asset management system will aid DABS in understanding what assets it has, the age and depreciated value of such assets, and timing for operation and maintenance as well as replacement of all operating assets; it is recognized that some of these assets are still in the process of being transferred from DABM. The aim is to commercialize DABS’s operations, which is not possible without an asset management system. Such a system would also facilitate coordination among development partners with regard to support toward the financing and purchase of necessary system plant and equipment.

36. System planning. Total power system planning is necessary for power system operators such as DABS. External planning is not as effective as planning by the actual owners (custodians in the case of a public sector limited liability company such as DABS) and operators of the system. Generally, system owner-operators are responsible for facilitating and coordinating the planning, procurement, and utilization of energy service-related resources. Proper planning includes generation, transmission, and distribution expansion plans; integrated resource planning (demand side and supply side, including renewable, alternative, and energy efficiency plans); standard operating procedures covering technical as well as nontechnical business practices; and operational contingency as well as emergency processes. Such system planning is now being undertaken under the ongoing ADB-supported power master plan.

37. Outreach. Appropriate system planning requires reaching out to stakeholders by a utility company such as DABS. Outreach keeps both consumers and nonconsumers informed, helping communities to better understand construction activities, related service issues, as well as possible benefits. Outreach is also a major part in dealing with involuntary resettlement (IR) issues, as it tends to minimize IR issues before they become serious. General outreach and IR training are necessary for DABS success, making effective use of its provincial offices where particular construction works are being undertaken.

38. Utility skills training and certification. Options for improving human capacity at DABS require both theoretical and hands-on training in all aspects of utility operations and planning. Basic management principles support positioning human capital as central to strategies for improving organizational performance. Training and knowledge transfer need to be accelerated and made more vigorous, with emphasis on such areas as solar panel maintenance, meter reading, small power generation operation and maintenance, low voltage distribution line repair, and outreach. These skills not only build DABS’ current employee knowledge base, but also provide opportunity for self-sufficient utility operations in rural areas, including both grid and off grid areas—opening further opportunity for easing security tensions by facilitating buy-in and ownership from local communities. To enable Afghanistan to compete in a knowledge-based world economy to bring energy to its people, human capital is as important as physical capital in producing value in the sector.

39. Capacity strengthening of Ministry of Energy and Water. Since the corporatization of DABS, the Ministry of Energy and Water has attempted to focus on its new role as policy maker and regulator, ensuring that policies are enforced, and relevant sector objectives met. For the successful development of the sector, it is important that boundaries be drawn between DABS as systems operator and MEW as a policy maker and regulator. Regulation is a new role with which MEW has not yet been acquainted. Hence, capacity development of MEW is needed from development partners active in the energy sector

State of Afghanistan for the Emergency Infrastructure Rehabilitation and Reconstruction Project. Manila (Loan 1997); however, IEM found no claim or record of targeted installation being met under Loan 1997. 124 Appendix 7

to ensure that it becomes a best-practice energy sector regulatory body. Its mission should be to formulate tariff policies, set fair tariffs, and ensure fairness between energy providers and consumers.

40. Future challenges and opportunities. Security will remain a persistent challenge as conflict lingers on in Afghanistan. While human capacity within key institutions in the energy sector with appropriate expertise will remain deficient, the recruitment of qualified local and international consultants for further development of the energy sector will continue to be difficult. Established ADB rules for procurement are simply not suitable for conflict-affected countries such as Afghanistan; bidding procedures take a considerable amount of time and often result in one or even no bidders, with valuable time lost in the process. There is a fundamental need for greater flexibility, with procedures adapted to the special conflict environment of Afghanistan. Some steps have been taken in this direction, but much more needs to be done. Senior Afghan authorities are increasingly frustrated by the slow progress made in adapting bidding procedures to the needs of Afghanistan’s conflict. APPENDIX 8: SUMMARY OF AGRICULTURE AND NATURAL RESOURCES SECTOR ASSESSMENT

A. Introduction

1. The objectives of this agriculture and natural resources (ANR) rapid sector assistance program evaluation (RSAPE) are to (i) provide a credible assessment of the performance of Asian Development Bank (ADB) assistance the ANR sector in Afghanistan during 2002–2011; (ii) identify factors affecting the sector’s performance; and (iii) draw lessons and recommendations for improving future performance of ADB assistance in Afghanistan. 1 The RSAPE followed the Independent Evaluation Department’s Revised Guidelines for the Preparation of Country Assistance Program Evaluations.2 This RSAPE covers eight ADB-assisted loan and grant projects, a program loan, and six technical assistance (TA) projects.3 During 2002–2011, the ADB committed $287 million to the ANR sector through loans, grants, and TA activities.

B. Sector Context

2. Agriculture and water resources management are important to the Afghan economy. The Afghan economy has been gradually recovering and progressing toward macroeconomic stability. Real gross domestic product (GDP) growth averaged around 9% a year during 2003–2011. Despite this double-digit growth, the economy suffered great volatility because of its heavy reliance on agriculture, which is susceptible to seasonality and capricious climatic impacts. Real GDP dropped significantly in 2008 owing to severe drought but bounced back to a record growth of 21% in 2009, led by strength in the service sector and reflecting recovery from the poor harvest of the previous year. GDP decreased again in 2010. Agriculture’s contribution to GDP fluctuated from 28% in 2008 up to 31% in 2009 and down to 30% in 2010.

3. Agriculture has the potential to become a driver of economic growth. Although only about 12% of Afghanistan’s land is arable, only about 23% of this area has been irrigated so far. Agriculture accounts for only one-third of GDP (excluding the illicit drug sector) but the sector employs about 80% of the population. Cereal and annual crop production, of which wheat makes up the largest share, is the major agricultural output and contributes about 80% of total agricultural value added. Livestock production represents about 14%. Although fruits and nuts account for a mere 6% of agricultural value added, their production and export have the potential of becoming an engine of growth in the future. Raisins are the dominant agricultural export, accounting for up to 21% of the total value ($53.0 million) of all agricultural exports in 2009/10. Carpets and rugs are other major export items and account for almost 36% of total exports.4

4. Low productivity and small farm sizes are the major sector constraints. Afghan farms are very small. According to the Afghan Central Statistics Office’s National Risk and Vulnerability Assessment Survey (2007–2008), about 40% of households have access to irrigated land, with an average farm size

1 ADB includes irrigation and drainage as a subsector of the ANR sector. In the context of this evaluation, water refers to irrigation projects and components supported by ADB. A rapid assessment was undertaken due to the security related travel restrictions, which limited the coverage of the field visits compared to sector assessments in other countries without restrictions. 2 ADB 2010. Revised Guidelines for the Preparation of Country Assistance Program Evaluations. Manila. 3 ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Transitional Islamic State of Afghanistan for the Emergency Infrastructure Rehabilitation and Reconstruction Project. Manila (Loan 1997). The project is classified as a multisector project but was included in the analysis because it had a major agricultural component (irrigation). The loan amount was excluded from the computation of ADB’s total assistance to the sector. 4 United States Department of Agriculture. Gain Report: 2011 Afghan Agricultural Economy Update. July 2011. 126 Appendix 8

of 1.3 hectares. About 17% of households have access to rain-fed land, with the average farm size 2.8 hectares. Small land plots combined with low productivity mean that Afghan farmers work for their own subsistence and only limited amounts of their agricultural production enter commercial marketing channels.

5. Irrigation is the key input enhancing productivity in agriculture. In the 1970s, the total irrigated area was 3.3 million hectares. It dropped to 1.8 million hectares in 2011 due to armed conflicts, drought, floods, and destruction of irrigation systems. The World Bank estimated that the remaining irrigated areas operate at a very low efficiency of about 25%.5 In response, development partners are prioritizing irrigation and watershed rehabilitation in the hope of expanding total irrigation coverage.

6. Agriculture was an important pillar of the government’s recovery strategy. In 2002, the transitional government of Afghanistan articulated a national strategy for economic development in its National Development Framework (NDF). The NDF recognized the economic importance of both agriculture and irrigation in transforming the rural economy, improving food security, reducing vulnerability, and expanding livelihood opportunities for the rural population. The Afghanistan National Development Strategy (ANDS) for 2008–2013 articulates the current government’s development strategies for security, governance, economic growth, and poverty reduction. The ANDS features three mutually supporting pillars: (i) security; (ii) governance, rule of law, and human rights; and (iii) economic and social development. The ANDS also serves as the country’s Afghanistan’s Poverty Reduction Strategy Paper and was approved by the executive boards of the International Monetary Fund (IMF) and the World Bank in April 2008.

7. ADB’s initial country strategy and program (CSP) in 2002 envisioned a leadership role for ADB in the ANR sector in the short term. This required a more comprehensive approach to agriculture overall, 6 although in the medium term, ADB was expected to place greater emphasis on water resources and particularly irrigation, given its importance to agriculture and the economy.7 ANR was identified as a key sector in ADB’s medium-term strategies I and II and Strategy 2020, with irrigation remaining a priority and agriculture given less emphasis. The initial strategy included discussion of the serious and pervasive capacity gaps at all levels of government and the private sector in Afghanistan and envisaged quick-disbursing TA to provide institutional capacity building. The interim CSP updates in 2004, 2005, and 2006 identified a number of provinces that would be prioritized due to damage to their agricultural sectors inflicted by droughts, locust infestation, and the use of landmines. These updates also give more emphasis on commercial agriculture and developing agriculture skills, integrated water and natural resources development and management, and market infrastructures

8. The country partnership strategy (CPS) for 2009–2013 shifted the focus from the initial emergency restoration orientation to a development focus. It placed greater emphasis on commercial agriculture and developing agriculture and market infrastructure. Improving the enabling environment for private sector investment and value chain efficiency were emphasized, for example. This included the introduction of a focus on high value commodities. The CPS for 2009–2013 limits the areas of ADB intervention to (i) water resources and irrigation, (ii) commercial agriculture market infrastructure and institutions, (iii) regulatory environment, and (iv) capacity building for the Ministry of Agriculture, Irrigation and Livestock (MAIL) and the Ministry of Energy and Water (MEW).8

5 World Bank. 2007. Emergency Irrigation Rehabilitation Project for Afghanistan. Washington, DC. 6 Short-term responses include (i) quickly restoring production through the supply of inputs like veterinary services, propagative materials, pest control, and rural finance; (ii) rehabilitating irrigation systems, rural water supplies, village grain storage, and access roads; (iii) implementing pilot watershed management, forestry, and agroforestry programs; (iv) supporting rural livelihood in the areas of livestock and nonfarm enterprise development; and (v) adopting policy, institutional, and capacity development measures. ADB. 2002. Initial Country Strategy and Program: Afghanistan, 2002–2004. Manila (para. 64). 7 This was to be done through assistance that tackled (i) comprehensive water policy; (ii) rehabilitation of small and medium irrigation schemes; (iii) expansion of watershed management, forestry, and agroforestry programs; and (iv) pursuit of further policy, institutional, and capacity development measures. 8 ADB. 2008. Country Partnership Strategy: Afghanistan, 2009–2013. Manila. Appendix 6, para. 25. Summary of Agriculture and Natural Resources Sector Assessment 127

C. Evaluation of ADB’s Assistance

1. Strategic Positioning

9. ADB’s strategic positioning in the agriculture and natural resources sector is rated satisfactory. ADB’s strategic positioning as reflected in the CSPs and CPS during the review period are in line with such government’s strategies such as the NDF and ANDS, both of which emphasize restoring irrigation and improving agriculture. ADB’s strategy reflected the weakly performing status of Afghanistan and focused on building up the capacity of the institutions dealing with agriculture and water resources. The designs of program and projects contained reform measures necessary to implement the government’s priorities, such as institutional reform and support for the creation of a water law. ADB’s water resources projects contributed to addressing the critical need to rehabilitate and reconstruct dilapidated infrastructure.

10. The initial CSP for 2002–2004 was too broad and ambitious for the resources allocated. ADB underestimated the capacity limitations and challenges of working in a post-conflict country with serious security concerns. In this context, ADB assistance ought to have been more judicious and chosen very carefully to position ADB as a stable financing partner of choice that would be around in the long run. The later strategies narrowed ADB’s focus and also recognized Afghanistan was a weakly performing country requiring additional attention. As part of the Kabul Process agreed between Afghanistan and the international community assisting it through aid and military support, the CSPs and the CPS have been prepared with the government in consultation with development partners. During implementation, however, ADB engaged less frequently with these partners in the ANR sector— and in agriculture in particular—due to its resource constraints, including the limited human resources in the Afghanistan Resident Mission.

11. ADB does not have a comparative advantage in the agriculture sector overall but has a distinct advantage in the irrigation and water resources subsector. This is recognized in the strategy updates. In the water resources area, ADB has articulated an overall water policy that is in line with best international practice and has successfully carried out several water resources developments in other developing member countries. ADB also has staff with technical skills in integrated water resources management but needs more expertise in other agriculture areas outside irrigation and water resources.

2. Relevance

12. Overall, ADB’s assistance to the sector is rated relevant. The program is generally consistent with ADB’s sector and country strategies. Almost all of the projects were consistent with the NDF, particularly the second pillar on reconstruction and natural resources, and with its successor ANDS, given the broad scope of these strategies. On the ground, however, implementation proved more challenging as the context changed rapidly. The introduction of a sector results framework in the 2009– 2013 CPS was a welcome addition, although it could have been improved by more measurable indicators.

13. The focus on water management and irrigation is relevant. It would be considered highly relevant if water resources development could have been done in a more holistic manner and included strategies for integrated river basin development. Similarly, the design of water management and irrigation projects could have been improved through a greater emphasis on supporting complementary activities that are necessary for achieving better development outcomes through capacity building and strengthening the linkages to agriculture and agribusiness.

14. Project designs were limited by the failure to adequately take into account the challenging security environment and limited capacity. Designs would have been much more relevant if they had 128 Appendix 8

followed and incorporated ADB lessons from weakly performing countries (WPCs). The general weakness of the projects stems from the emergency approach to early project designs. Preparatory work was limited and baseline data in project frameworks incomplete for projects planned before 2006. Complete baseline data could have been used to better illustrate the outcomes and impact of ADB interventions in the sector. Project designs generally did not give sufficient attention to gender and women’s issues through clear targets and explicit activities.

3. Effectiveness

15. Overall, the agriculture and natural resources sector has delivered limited results to date and is rated less than effective. The project completion reports (PCRs) of two completed projects in ANR—the Agriculture Sector Program (ASP) and the irrigation component of the Emergency Infrastructure and Reconstruction Project (EIRRP)—gave them less effective ratings for effectiveness. The ANR sector outcomes have not been achieved because the remaining active projects have not yet delivered their project outcomes. But this may change once they are completed; however, delays and capacity constraints to date make it unlikely that outcomes will be fully achieved at the planned project completion. Some of the completed infrastructure, such as irrigation rehabilitation and cold storage for potatoes, has mostly met the intended objectives and achieved outcomes.

16. Achievement of design and monitoring framework (DMF) outcomes in the ANR sector has been limited. Reporting through PCRs on the DMFs is available only for the two completed projects—the irrigation component of EIRRP and the ASP.9 The RSAPE confirms the PCR rating of less than effective for the irrigation component of the EIRRP. The evaluation concurs with the ASP PCR rating of less than effective in terms of poor goal achievement. The other projects for which DMFs are available are the Western Basin Water Management Project, the Multi-Tranche Water Resources Development Investment Program, and the Agriculture Market Infrastructure Program. However, these interventions have been delayed due to poor performance by both ADB and the borrower and the monitoring indicators and associated targets have so far not been met.

17. It is difficult to assess the Japan Fund for Poverty Reduction projects because the implementation completion memoranda (ICMs) have not been completed. However, documentation review and site visits by the independent evaluation mission team provided some indications of results. The Balkh River Basin Management Project primarily rehabilitated infrastructure and was less than effective. The project could have done more to build capacity of farmers and local institutions, which would have led to better outcomes. The potato cold storage and the edible oil extraction facilities built under this project are a success and can be considered effective, although the number of beneficiaries is limited.

18. There is no clear evidence that capacity development and the institutional strengthening efforts supported by ADB resulted in better outcomes. For example, although the ASP PCR has indicated success in terms of reforming the ministries involved in the sector, this cannot be supported by the Independent Evaluation Department’s assessment. The lack of capacity and overdependence on consultants are indications that the institutional strengthening and capacity building objectives have not been fully achieved. Likewise, only limited capacity has been built at the farm level related to agronomic practices and the introduction of storage facilities in the Rural Business Support Project. No significant progress was made in building skills associated with cooperative development, bulking of products by farmers, group marking, and accessing credit.

9 ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Transitional Islamic State of Afghanistan for the Emergency Infrastructure Rehabilitation and Reconstruction Project. Manila (Loan 1997); ADB. 2004. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical Assistance Grant to the Islamic Republic of Afghanistan for the Agriculture Sector Program. Manila (Loan 2083). Summary of Agriculture and Natural Resources Sector Assessment 129

4. Efficiency

19. The agriculture and natural resources program is rated less than efficient. No overall economic internal rates of return (EIRRs) have been calculated so the assessment is based on process efficiency, which has been less than satisfactory. The substantial start-up and implementation delays in projects indicate systemic deficiencies. Contracting delays and the uncertain security situation also resulted in less frequent and inadequate monitoring and evaluation. These delays were compounded by the shortage of international staff in the field responsible for these projects. Improved business processes and strengthening of staff skills remains an urgent need. The slow disbursement pace is of serious concern.

20. There are no completed projects with EIRRs computed. The Balkh River Basin Management Project was under a JFPR grant and to date no ICM has been prepared. A PCR was prepared for the EIRRP but did not compute an EIRR for the irrigation component. This is primarily due to the emergency nature of the project, which did not require such calculations.

21. In terms of process efficiency, the portfolio was administered less than efficiently and characterized by delays. These include delays in start-up and in contracting and procurement, which contributed to delays in implementation, disbursement, and project closure. The average delay in project completion of the closed projects was almost 3.5 years beyond the original target date. The start-up delays were largely due to inability to finalize consultant contracts on time, a deficiency that was due to the deteriorating security situation and the reluctance of reputable international firms to work in Afghanistan. Disbursements in a number of ongoing projects are lagging.

22. The challenges related to contracting led to procurement delays and a low quality of implementation, monitoring, and evaluation. Project directors interviewed by the mission complained about ADB’s inordinate delays in issuing non-objection letters, which further delayed project implementation. They said that other development partners had performed better and attributed this to their delegation of decision making to their Kabul offices. In addition, it appears the Afghan Reconstruction and Development Services, which was set up with donor assistance to assist the government in managing the procurement process in accordance with donor agency guidelines, was itself not clear about some of ADB’s procurement guidelines. Although procurement and disbursement approval are generally centralized at ADB headquarters, the lack of clarity in implementing an otherwise prudent joint venture approach adopted by ADB’s Central and West Asia Department contributed somewhat to significant delays since roles and responsibilities of headquarters and the resident mission staff were not clearly defined. For example, TA was provided by poorly qualified specialists from consulting firms with little ADB oversight and implementation support. In some instances, nongovernment organizations were hired directly by CWRD, which created a conflict situation with the government implementing agency. This includes Roots for Peace RBSP; and Agro Action for the Ministry of Rural Rehabilitation and Development project. As a consequence, monitoring and evaluation of programs and projects also suffered.

5. Sustainability

23. Sustainability is rated less than likely. The majority of the expected project outputs and the targeted outcomes have not yet materialized, which makes sustainability difficult to predict. In the areas where outcomes have been achieved, the potential for sustainability varies. Support was provided through the ASP for developing the Afghan Water Law and setting up the National Environmental Protection Authority (NEPA). These outputs are likely to be sustained since the government has set up river basin councils under the law and operationalized the NEPA as these are key elements for river basin management. The storage facilities established under the RBSP also appear to be sustainable as farmers are already using them and receiving improved prices for their potatoes. The operation and maintenance of irrigation structures constructed under the projects is less likely because recurrent 130 Appendix 8

technical and financial support is required. In general, sustainability of ADB’s assistance is also affected by the security situation and inability of staff to monitor the projects properly.

24. Organizational capabilities to implement and sustain reforms are generally weak and the government’s commitment to reform varies between ministries. The program is being implemented primarily by the MAIL, the MEW, and the Ministry of Rural Rehabilitation and Development. All these ministries started with extremely weak capacities. Some improvement has been made but the ring- fencing of ADB project operations, which are being implemented by contract staff in a project management unit arrangement, has limited the potential improvement in the capacity of line ministry staff through project experience. Substantial TA is still required to increase the technical, managerial, and administrative capacity of the implementing agencies. This leaves the continuation of support by these ministries to sustain the achievements made in the ADB projects uncertain without further development partner support.

25. Financial security of project entities. Irrigation-related investments in the EIRP and the ongoing Western Basin Water Management Project are focused on rehabilitation of traditional or community- owned schemes usually managed by the farmers. So far the only infrastructure created in the agriculture sector has been under the RBSP. These are small-scale cooperatives where financial security is not an issue and no financial rates of return have been computed for these projects as yet. Funding for operation and maintenance is also not clear but this will also be affected by security concerns and by slow adoption of user fee charges as a means of cost recovery and as part of a water management system regime.

6. Development Impact

26. The program’s overall development impact is rated less than satisfactory. This is largely due to the facts that many projects have not been completed and remain remaining ongoing and that it is too early to assess development impacts in a country emerging from decades of conflict and strife. Interventions at the community level for rural recovery through community-based irrigation and integrated community development projects were small ($8 million from two JFPR projects spread over 4 years). These projects delivered the outputs expected with substantial delays at start-up and during implementation. The irrigation component of the EIRRP was completed successfully with modest impacts at the project level in improving water delivery in selected irrigation schemes. The RBSP achieved substantial positive impacts in developing potato cold storage facilities in Bamyan Province and developing a value chain for the processing of edible oils in Balkh and Nangarhar provinces.

27. The completed investment in the ASP has had some impact at the sector-level in policy reforms and strategies. ADB support helped develop a far-reaching water law with strategies for integrated water resources development in a river basin context. The policy loan also helped move the environmental safeguards agenda ahead by setting up the NEPA and assisting it in preparing the necessary regulations. The World Bank and other development partners are supporting the implementation of the water law.

7. ADB Performance

28. ADB’s performance is rated less than satisfactory. The initial CSP, the updates, and the CPS for 2009–2013 appropriately acknowledged the challenges related to engaging in a country coming out of conflict. However, since 2007 the country has actually been in continued conflict with increased in insurgency activities. This reality was not actively acknowledged. The CPS strategies were not consistently translated into viable development activities. TA operations should have formed the backbone of ADB’s operations but some of these projects were too small to produce any meaningful impact. More attention should have been paid in TA projects to developing the capacity of the Summary of Agriculture and Natural Resources Sector Assessment 131 implementing agencies. 10 All TA operations had undisbursed balances when they closed, which indicated that the government and ADB had not taken them seriously. Project designs were at times overoptimistic about capacity and implementation relied heavily on international consultants but did not allow for the fact that reputable and well-qualified firms were not bidding for these assignments.

29. Implementation oversight provided by ADB from headquarters as well as from the Afghanistan Resident Mission has been less than satisfactory, with some exceptions. In the early stages of the review period, missions were fielded from headquarters relatively frequently. They then declined. The support provided by the resident mission has been weak in terms of quantities (limited staffing and technical skills) when compared with the technical and managerial expertise provided by other development partners. This may have been among the factors causing substantial delays in starting projects and in implementation. Only limited staff resources were allocated to donor coordination. This was particularly felt in the management of ANR projects and sector issues. In addition, the ICMs for the four completed JFPR-funded projects have not been completed even several years they closed.

8. Government Performance

30. The government performance is rated less than satisfactory. However, some ministries are gaining capacity faster than others and making efforts to take ownership of the projects. All projects suffered substantial start-up delays. The government could have ensured that adequately qualified project management units were in place at the start and paid more attention to procurement of goods and services. Ministries should have assigned selected staff for training under the capacity building TA. Ownership of investments made under the projects was weak except in those related to physical infrastructure improvements. Although ministries complained strongly about the delays in the processing of non objection letters at ADB they were slow to set up appropriately staffed project management units.

9. Overall Assessment

31. Overall, the ANR program is rated less than successful based on the criteria discussed in paras. 9–27 and summarized in Table A8.

Table A8: Performance Assessment and Rating Weighted Criteria Average Rating Criteria Weight Assessment Score Score Strategic positioning 0.1 Satisfactory 2 0.2 Program relevance 0.1 Relevant 2 0.2 Efficiency 0.2 Less than efficient 1 0.2 Effectiveness 0.2 Less than effective 1 0.2 Sustainability 0.2 Less than likely 1 0.2 Development impact 0.2 Less than satisfactory 1 0.2 Overall assessment 1.0 Less than successful 1.2 Source: Independent Evaluation Department.

10 For instance, the independent evaluation mission noted that the capacity building efforts under TA 4549 Capacity Building for Impact Monitoring and Evaluation)had been limited and no clear evidence existed that a viable system was already been in place. (. 132 Appendix 8

D. Conclusions, Lessons, and Suggestions

1. Conclusions

32. The portfolio, while focusing appropriately on water, has not performed well due to poor implementation. ADB and the borrower are equally responsible for this less than satisfactory situation. Start-up delays of up to 5 years have been experienced so far and yet neither ADB nor the borrower appears to have taken the measures required to improve implementation performance. The Western Basin Project and the Water Resources Development Program MFF are typical examples. Given the weak government capacity and the projects’ inability to attract and retain well-qualified staff and contractors, different measures should have been put in place for timely project execution and, more importantly, to build capacity in the ministries concerned. The issue here is lack of capacity within the country as well as with the consultants recruited for the project. Lack of implementation oversight by ADB has been an issue throughout. This has been pointed out in some of the completion reports. The resident mission staff needs technical, managerial, and administrative guidance to improve its performance.

33. The outputs and outcomes expected from TA operations were ambitious, given the limited absorption capacity of the government agencies. The operations were also too short and too small to achieve their purpose and goals. Careful sequencing of TA projects to build capacity is vital to achieving outputs and outcomes. As capacity development in government agencies continues, their ability to use TA more effectively may improve over time.

34. A key measure of portfolio success should be whether ADB’s contribution to building appropriate water and agriculture related government institutions and improving implementation capacity in a fragile post-conflict country. ADB operations were ring-fenced and managed by project implementation units whose contract staff received substantially higher salaries than public sector employees. And, in the end, this did not appear to improve implementation performance.

35. The Central and West Asia Department provided inadequate oversight to the Afghanistan Resident Mission. This was further complicated by the lack of clarity in roles with the joint venture operating model and the insufficient resourcing of the resident mission. The resident mission remains understaffed in the ANR sector and also lacks adequate skills specific to agriculture and water resources management. The staff also needs support in procurement issues.

2. Lessons

36. In a post-conflict and fragile environment, it is important to follow the lessons learned from previous operations in WPCs in terms of project design, implementation support, and partnership. Institution building is important and TA should home in on this aspect. More intensive technical and managerial backstopping for project implementation is needed. The absorptive capacity of executing and implementing agencies should be taken into account when designing projects.

37. Implementing projects in a post conflict situation requires increased oversight. More resources and delegation of authority to the field level (e.g., AFRM) is needed to provide implementation support, assistance in hiring and managing consultants, and addressing other delays such as the non- disbursement of funds.

38. It is necessary to align strategic objectives with available investment resources. Investment decisions should reflect the policy priorities of ADB and these priorities need to be resourced appropriately. The strategic focus has moved from the broad ANR sector to a more selective approach on water (e.g., irrigation) alone. However, for better outcomes and impacts, broader livelihood and environmental factors need to be considered that would require a shift back to a broader focus on water, agriculture, and natural resources. A more concerted effort is also required to ensure that Summary of Agriculture and Natural Resources Sector Assessment 133 gender issues are taken up in project implementation. This more integrated approach will require additional resources.

3. Suggestions

39. Based on the assessment, the following recommendations are made to improve the portfolio performance and development effectiveness of the assistance provided by ADB:

40. Need to acknowledge challenge and respond. ADB should recognize the challenging context and respond accordingly with respect to management, project design and implementation. The steps outlined in the CPS 2009–2013 and the strategies outlined in ADB’s approach to WPCs should be followed meticulously. Portfolio management in Afghanistan suffers from lack of adherence to the WPC principles on such matters as enhanced implementation support, which are outlined in these documents.

41. Urgent need for more oversight. The oversight of operations in Afghanistan provided by CWRD at ADB headquarters should be enhanced. Start-up delays of 3–5 years in some cases have not been addressed and remedied. Similarly, the failure to prepare ICMs even 3 years after financial and physical closure of the JFPR grants has not been dealt with. Some of the completion reports for TA operations have been prepared 2–3 years after TA completion. Adequate management oversight at the most senior level, such as director, should be provided starting immediately. Otherwise, portfolio performance will continue to be less than satisfactory.

42. More staff skills needed. ADB should provide sufficient technical resources for the ANR sector. The ANR sector staff handling Afghanistan in the ADB headquarters and in the resident mission need to be strengthened both in terms of numbers and skill sets. At present, there is almost no technical expertise on ANR available in the ADB staff pool operating on Afghanistan. Given the poor capacity of the ministries involved, technical inputs need to be provided to the government on a continuous basis to improve portfolio performance and quality.

43. More hands-on portfolio administration. The portfolio has experienced enormous delays. These can be attributed in part to poor definition of the precise roles of ADB headquarters and the resident mission. These roles and the responsibilities of each should be clarified to promote greater accountability and eliminate delays in approvals. The portfolio administration would benefit from appointing a full-time internationally recruited procurement specialist for posting at the resident mission.

44. More regular project implementation support and follow-up. ADB’s business process guidelines for WPCs are not being adhered to. It is recommended that implementation support missions with full representation of technical disciplines be carried out at least once every 6 months and that appropriate documentation be prepared for management oversight.

45. More realistic project designs. Project designs should reflect the weakly administered situation in Afghanistan and be made simpler and more realistic. They should reflect the fact that Afghanistan is still in a conflict situation.

46. Technical assistance is key. TA with adequate and appropriate international and regional experts should continue for the foreseeable future since it would be irrational to assume that technical and managerial capacity can be built in Afghanistan in a matter of a few years given the decades of conflict and the decimation of technical and managerial expertise in the country.

47. ADB’s comparative advantage. ADB should focus on its comparative advantage in the ANR sector, which is in water, and balance its TA with investments. Given the poverty reduction focus and 134 Appendix 8

the limited results of the agriculture portfolio in general, ADB should focus on more robust investments in irrigation and engage in connecting the dots from there—for example, by supporting the agricultural upstream and downstream linkages from increased production, such as agribusiness development. Providing irrigation without also building capacity will not increase production and the productivity that contributes to agricultural growth. Value chain development is a priority of government. ADB should focus on developing a few well-articulated value chains as a pilot with sufficient implementation support.

48. Transition from irrigation rehabilitation to river basin management. Investments now aimed at basin management are in fact only projects in irrigation rehabilitation. This is all that is possible now, since basin development plans are not available, but ADB should begin looking in the medium term at real integrated water resources management using basin approaches. This can be done in coordination with other development partners and the government agencies operating in this subsector.

49. Partnerships to develop agriculture. ADB should engage in country level partnerships in support of agriculture. Given the status of staffing related to agriculture and ADB’s focus on agricultural infrastructure development, it would be prudent to complement and further strengthen ADB’s agricultural activities by combining efforts with other development partners, such as USAID, the European Union, and the World Bank. They are all heavily involved in agriculture development in Afghanistan and their activities would be complemented by ADB’s investments in agricultural market infrastructure. Building slaughterhouses and business centers without upstream and downstream linkages makes achieving project outcomes unlikely. These linkages could be established through ADB support or explicitly through working with other donors with expertise in these areas.

50. Document translation. ADB should consider providing required literature in a local language. ADB procurement guidelines and bidding documents should be translated into Dari and made widely available. This would also minimize delays in procurement and lead to a better understanding of procedures and processes. APPENDIX 9: SUMMARY OF PUBLIC SECTOR MANAGEMENT ASSESSMENT

A. Introduction

1. The total development support provided by Asian Development Bank (ADB) to Afghanistan for public sector management (PSM) and capacity development during the 2002–2011 country assistance program evaluation (CAPE) period was $275.50 million. The total development support that the country received for PSM and governance reforms from the international community during the same period was $6.45 billion, out of which $4.67 billion was disbursed.1 So ADB support for PSM was about 6% of the overall resource envelope available to the country, out of which about 95% of the ADB allocation, or $268.66 million was utilized.

2. After the fall of the Taliban regime in 2001, the international community pledged a total of $90.0 billion in overall support for 2002–2013. About $69.00 billion was formally committed between 2002 and 2010 and $57.0 billion disbursed as of 2010. Slightly less than one-half of this amount, or about $28.10 billion was earmarked for reconstruction and development, but only $10.50 billion of these disbursements passed through the country’s public financial management (PFM) and treasury systems as on-budget support. The remaining funds were routed directly by development partners to their respective programs bypassing the government budget process. While the overall trend of on- budget support was up during the CAPE period increasing from $1.23 billion in 2003 to $1.80 billion in 2010, drops occurred in 2004 and 2009. About 95% of total ADB disbursements of about $1.00 billion have been on-budget support.

3. The national budget consists of the core budget (on-budget, which covers operating and development budget) and the external budget (off-budget).2 The operating budget includes line items such as salaries for the national army, police, and pay and grading for civil servants. Although domestic revenues increased during the evaluation period, they have not covered operating expenditures, which have risen faster. The development budget includes infrastructure investments by different ministries. The execution rates have dropped over the period and large amounts of unspent funds have been carried forward to subsequent years due to the government’s low absorptive capacity.

4. In addition, poor capacity, weak governance, and low accountability in the country’s PFM systems are among the reasons that development partners have often bypassed government systems and delivered their resources directly to programs and projects. Efforts increased in 2010 to reduce the bypass rate, primarily through attempts to strengthen capacity of ministries and help them recruit and retain competent staff.

B. Government Policies and Programs for Public Sector Management and Capacity Development

5. Decades of political and military conflict since the late 1970s have damaged institutions and government structures in Afghanistan, as well as social and physical infrastructure. In 1979, the former Soviet Union invaded Afghanistan in support of the then communist government, which was followed by a decade-long war with mujahedin rebels supported materially by an array of other foreign powers. After the former Soviet Union withdrew its troops in 1989 and its client government fell 2 years later, mujahedin factions embarked on a destructive civil war, which culminated in 1996 when Kabul fell to

1 Islamic Republic of Afghanistan. Ministry of Finance. 2010. Development Cooperation Report. 2010. Kabul. 2 The total core budget expenditures in 2010–2011 were $3.3 billion with the operating budget expenditures at $2.35 billion and development expenditures at $945.0 million. It has been estimated that 48% of the core budget was covered through domestic revenues. The external budget for 2010–2011 was $13.8 billion.

136 Appendix 9

the Taliban. This fundamentalist Islamic group consolidated its hold over most of the country and introduced a repressive conservative regime until it was ousted in 2001 by an international military invasion led by the United States in support of the Afghan forces of the anti-Taliban Northern Alliance.

6. An international conference in Bonn in December 2001 facilitated the creation of an interim government for 6 months and a 21-member special independent commission to convene the traditional Afghan assembly (loya jirga) that was to appoint a transitional administration for the next 24 months. Central administration was started with 172,000 civilian staff in December 2001.

7. Governance reforms were a cross-cutting theme in the National Development Framework (NDF) first drafted in April 2002.3 The reform was to be achieved through management training; capacity development for financial management, audit, and procurement; improved land registration; and better information systems for tracking development support. A new joint strategy of the government and the international community titled Securing Afghanistan’s Future was adopted in 2004 in response to the need for a systematic approach to the country’s public investment program. 4 It was to cover a period of twelve years and enable sustained funding of security, social sectors, physical infrastructure investments, and a poverty reduction program.

8. The Afghanistan National Development Strategy (ANDS) was prepared in February 2006 and approved in 2008. The government also made a compact with the international community to achieve a set of targets by 2010. The compact goals related to public administration reforms (PAR) included creation of a fiscally sustainable public administration by 2010, formulation and use of a transparent national appointments mechanism, and annual performance reviews for all senior level appointments.

9. Further, financial management was to be made transparent at the central and provincial levels, while total domestic budgetary revenue was to be increased to 8% of the gross domestic product by 2010–2011. A medium-term fiscal framework was to guide allocation of all budgetary resources from 2008 to 2009 and government was to prepare a medium-term expenditure framework for the 2009– 2010 budget. The government formulated six national priority programs for PSM and a cluster of governance priorities in 2010 for the next three years until 2013.5 Its objectives were to increase the implementation momentum of the ANDS with prioritized public investments despite weak government capacity.6

10. Three key government approaches and programs for PAR and capacity development during the evaluation period consist of the asymmetric priority reforms and restructuring (PRR), under which only key ministries were identified for financial, human resource, and service delivery restructuring; Pay and Grade reforms that adopted a whole-of-government approach; and the ongoing capacity building for results (CBR) program to improve capacity of key spending ministries and their service delivery abilities at central and provincial levels. The government also introduced an Afghan expatriates program; a lateral entry program; and a management capacity program. The objectives of these programs were primarily to reform the civil service and level the playing field between expatriate Afghans, international and national advisors funded by development partners (who are known as the country’s second civil service), and the other government staff in ministries.

3 Afghan Interim Authority. 2002. National Development Framework Version 2. Kabul. 4 Government of Afghanistan. Securing Afghanistan’s Future: Accomplishments and the Strategic Path Forward. Government and International Agency Report. Kabul. Prepared for an international conference on 31 March–1 April 2004 in Kabul. The government undertook the securing Afghanistan’s future exercise in partnership with ADB, the International Monetary Fund, the United Nations Development Programme, the United Nations Assistance Mission in Afghanistan, and the World Bank. 5 The Kabul Conference in July 2010 resulted in the preparation of 23 national priority programs as part of ANDS around five clusters. The five clusters covered agriculture and rural development, human resource development, economic and infrastructure development, governance, and security. 6 Islamic Republic of Afghanistan. 2010. Afghanistan National Development Strategy Prioritization and Implementation Plan. Mid 2010–2013. Volume 1. Kabul. Summary of Public Sector Management Assessment 137

11. During the PRR phase in 2003–2005, key ministries were selected for financial, human resource, and service delivery restructuring. The government and development partners view results as less than satisfactory. Restructuring plans varied across ministries, service delivery improvements were minimal, and reforms were expensive. The Pay and Grade efforts were undertaken during 2006–2010. Several attempts were made to establish benchmarks to monitor and account for progress toward the 2010 ANDS compact goals but were unsuccessful.

12. The focus of the ongoing CBR program is to improve capacity of key spending ministries at central and provincial levels. The World Bank coordinated efforts for this with the Department for International Development of the United Kingdom (DFID), the European Union, the United States Agency for International Development (USAID), the Australian Agency for International Development, the Japan International Cooperation Agency, and the Afghanistan Reconstruction Trust Fund (ARTF) group. Its operations manuals include indicators to assess improvements such as development budget execution rates by ministries, business process improvements in a participating ministry’s development plan, service delivery improvements in the ministry’s performance plan, and strategic staffing.

C. ADB Strategy and Program on Public Sector Management and Capacity Development

13. ADB’s PSM and capacity development portfolio during the CAPE period included two program loans, one technical assistance (TA) Cluster, one capacity building grant, 13 project preparatory TA projects, 30 advisory TA (ADTA) activities, and two policy and advisory TA activities. The portfolio totaled $275.5 million. Of the 49 activities, 29 have been self-assessed. Two project completion reports (PCRs) for the two program loans rated one successful and one partly successful. Technical assistance completion reports (TCRs) have been produced for 27 of the 30 ADTA activities. One was rated highly successful, 10 successful, 13 partly successful, and 3 unsuccessful.

14. Areas covered by the two program loans for $215.9 million under PSM and multisector included policy reforms in governance and in transport, energy, and finance sectors; financial management; and PAR. The other 47 activities, totaling $59.6 million, included 14 in energy, 11 in PSM, 9 in transport, 9 in agriculture, 2 in industry and trade, 1 under multisector, and 1 in finance. The TA- supported activities aimed to strengthen capacity of government staff to undertake public sector functions (individual level); PFM, procurement, and oversight processes in selected ministries (organizational level); and the enabling environment for the public sector through improved accountability and enhanced demand-side institutions (institutional level).

15. Related country planning documents include the initial country strategy and program (CSP) of May 2002,7 country strategy and program updates (CSPUs) for 2003–2005, 2004–2006, and 2006– 2008,8 and the CPS for 2009–2013.9 Table A9.1 shows the portfolio spread of ADB-supported PSM and capacity development activities. See Table A9.3 for more information on the 49 activities covered by the sector assessment.

7 ADB. 2002. Initial Country Strategy and Program: Afghanistan, 2002–2004. Manila. 8 ADB. 2003. Country Strategy and Program Update: Afghanistan, 2003–2005. Manila; ADB. 2004. Country Strategy and Program Update: Afghanistan, 2004–2006. Manila; ADB. 2005. Country Strategy and Program Update: Afghanistan, 2006– 2008. Manila. 9 ADB. 2008. Country Partnership Strategy: Afghanistan, 2009–2013. Manila. 138 Appendix 9

Table A9.1: ADB Approved Public Sector Management and Capacity Development Activities by Sector, 2002–2011 ($ million) Sector 2002–2005 2006–2008 2009–2011 Total Multisector 172.7 0 0 172.7 Public sector management 65.8 3.7 0 69.5 Energy 7.2 3.4 1.7 12.3 Transport and ICT 6.5 2.9 1.9 11.3 Agriculture and natural resources 5.1 1.8 0 6.9 Industry and trade 0.6 1.2 0 1.8 Finance 1.0 0 0 1.0 Total 258.9 13.0 3.6 275.5 ADB = Asian Development Bank, ICT = information and communication technology. Sources: ADB databases and Independent Evaluation Department sector assessment team.

16. Because many of the activities were approved before 2009, institutional memory had faded and obtaining information for the evaluation was difficult. In addition, a reorganization at ADB in 2002 and creation of ADB’s Central and West Asia Regional Department, under which Afghanistan operations fall, affected the availability of documentation. The Independent Evaluation Department (IED) team used a variety of methods to overcome these obstacles—desk reviews, interviews with stakeholders, field visits to institutions supported by ADB, interviews with ADB staff, and a survey of Afghan stakeholders. Four audit reports also contributed to validating the results in terms of capacity development. A 2007 assessment of the impact of ADB TA and of funding by the Japan Fund for Poverty Reduction (JFPR) and a 2005 progress report on the TA Cluster program were also sources of information.

D. Public Sector Management and Capacity Development Assessment

17. Strategic positioning. Overall, the strategic positioning of ADB support to PSM is rated satisfactory. The large size of its PSM and capacity development portfolio during 2002–2008 provided a good start to ADB’s efforts to help shape government strategies and approaches. Almost all of the PSM and capacity development efforts undertaken during the evaluation period were approved during these years. From 2008 on, a change in the orientation of Central and West Asia Department moved ADB toward a greater focus on roads, railways, and energy. The 2002–2008 phase corresponded with NDF (2002) (footnote 3), the Securing Afghanistan’s Future exercise (2004) to derive a systematic approach to public investments (footnote 4), and the ANDS (2008).10

18. Until 2008, ADB provided explicit support for across-the-board PSM activities through both major program loans and its TA activities. This support aimed to create and strengthen the institutional framework and organizational processes needed for reconstruction. Since 2008, ADB has focused more closely on its own priority sectors and has concentrated its institutional and capacity development support for PFM, procurement, and anticorruption on the key institutions in these sectors of engagement.

19. This approach has been consistent with ADB’s Second Governance and Anticorruption Action Plan. Risk assessments and risk management plans were prepared in 2008 for the customs, energy, and road sectors. The assessment findings were to inform sector investments. This narrowing of ADB’s focus does not appear to have created problems, since other development partners stepped into the support areas that ADB left, including strengthening grassroots institutions to work together in delivering basic services.

10 Islamic Republic of Afghanistan. 2008. Afghanistan National Development Strategy. An Interim Strategy for Security, Governance, Economic growth and Poverty Reduction. Kabul. Summary of Public Sector Management Assessment 139

20. In terms of geographic locations of ADB supported activities, findings from a 2007 assessment of the security situation for ADB-supported projects were incorporated in the subsequent 2009–2013 CPS.11 The assessment suggested that most ADB activities were located in the northern provinces that were regarded as relatively secure. The assessment recommended that ADB explore an area-based programming approach to reduce security costs and increase participation by local populations. There were two TA activities on the security plan for project implementation. The first TA was approved for $960,000 in June 2004 and the second for $995,000 in June 2008.

21. ADB collaborated more with other development partners on PSM and capacity development activities during 2002–2008 than during 2009–2011. It participated in the consultative process for public administration and economic management until 2006.12 Although ADB is a member of the Joint Coordination and Monitoring Board that is co-chaired by the government and is the main instrument for coordination across development partners, there is little evidence of PSM consultations on a regular basis for sector level activities. There is evidence of duplication of capacity development efforts and different financial reporting requirements among development partners unnecessarily stretching the limited capacity of the government. ADB has also been only marginally involved, as a member of the ARTF board, in the formulation of the CBR facility.13

22. The CSPU for 2006–2008 was the first to mention a results framework. It did not include a framework itself but said that the next full country strategy would have one to guide the future program. The sector results framework in the 2009–2013 CPS provided PSM-related outcome indicators for improved financial management, procurement, and contract management. Although components for resource management were incorporated through risk assessments at entry, evidence that financial management, procurement, and contract management have improved is limited.

23. ADB initiated reengagement in Afghanistan in May 2002 with approval of a TA Cluster program that had a total resource envelope of $17.32 million. This modality offered flexible capacity development to 12 ministries at both the organizational and individual levels. The Postconflict Multisector Program (PMP) for $158.20 million approved in December 2002, marked the first investment support for the country by an international financial institution in about 23 years. The PMP initiated policy and institutional reforms in governance and in the transport, energy, and finance sectors. It was followed by ADB activities funded by the JFPR activities that supported capacity development for poverty reduction in areas outside of Kabul and resulted in the scaling-up of ADB investments.

24. ADB made changes in its CSPU for 2004–2006 that responded to government requests for increased loan support for governance and finance sectors and for one new program loan each year. Four program loans for emergency reconstruction, agriculture, fiscal management, and the private sector were approved. Their objectives overlapped that make it difficult to isolate their contributions.

25. ADB utilized a wide range of modalities to support PSM and capacity development efforts. The sector approaches on PSM and capacity development were consistent with government’s national development plans, although this alignment was greater during the period 2002–2008 and diminished during 2009–2011. ADB was responsive to the government’s needs and used a combination of

11 ADB. 2007. An Assessment of the Security of Asian Development Bank Projects in Afghanistan. Consultant’s Report. Manila (TA 4345). 12 ADB opened a special liaison office in Kabul in 2002. It was formally upgraded to a resident mission in March 2004. This enabled ADB to increase its on-the-ground presence in operational coordination. 13 World Bank. 2011. Emergency Project Paper on a Proposed Afghanistan Reconstruction Trust Fund Grant for $350 million to Islamic Republic of Afghanistan for a Capacity Building for Results Facility. Washington, DC. The World Bank coordinated efforts with the United Kingdom's Department for International Development, the European Union, the United States Agency for International Development, the Australian Agency for International Development, the Japan International Cooperation Agency, and the ARTF donor group through the preparation of this grant facility. 140 Appendix 9

implementation TA and intermittent stand-alone support through project preparatory TA activities to support investments.

26. Support for capacity development has been more one–off in some instances than in others. One example was TA for the Afghanistan National Disaster Management Authority.14 Some support has been sequenced effectively. This includes three TA projects for $4.11 million approved to support the Ministry of Finance (MOF) with the first TA approved in December 2004.15 Another such example are the three TA activities for statistics capacity development.16

27. Relevance. ADB’s PSM and capacity development activities are rated relevant, but the evaluation identified key issues that need to be addressed in the next CPS. The objectives of the PSM and capacity development portfolio were consistent with ADB corporate, country strategies, and thematic approaches, all of which recognized them as an important driver of change. Despite the high priority accorded these goals, however, evidence is weak that progress was properly monitored with a limited set of pre-identified indicators to assess outcomes for PSM and capacity development efforts. Individual activities were planned separately and, at best, were sequentially planned within each sector.

28. Two changes were made to the initially planned sector approach, which altered the actual programming of PSM and capacity development activities.

29. The first change was that the CSPU for 2004–2006 included a $80 million program loan for public service delivery reforms but its scope changed to strengthening fiscal management and improving public administration by the time it was approved in December 2005.17 Although no specific rationale for this change has been documented, one plausible reason is that the government and its development partners had found the results of the PRR that began in 2003 less than satisfactory because restructuring plans varied across ministries and reforms proved expensive with minimal improvements in service delivery.

30. The second change involved the Fiscal Management and Public Administration Reform (FMPAR) program loan approved in December 2005. It was planned as a cluster and subprogram 2, envisaged for completion by 2011. The Subprogram 2 was to focus on resource management issues, in accordance with the results framework for governance in the CPS for 2009–2013. This subprogram 2 did not materialize due to delays in the implementation of subprogram 1 and truncation of activities under the capacity building grant arising from policy uncertainty around changes of the civil service law. There also was a change in the orientation of ADB’s Central and West Asia Department in 2008 toward a greater focus on roads, railways, and the energy sector.

31. The design of program loans, TA Cluster program, and TA activities were consistently overambitious. The initial CSP was informed by findings of the preliminary and comprehensive needs

14 ADB. 2002. Technical Assistance to the Islamic Republic of Afghanistan for Disaster Preparedness and Management Capacity Building. Manila (approved in May 2002 for $550,000 and completed in January 2005). 15 ADB. 2004. Technical Assistance to the Islamic Republic of Afghanistan for Capacity Building of the Ministry of Finance. Manila (approved in December 2004 for $960,000 and completed in December 2006); ADB. 2005. Technical Assistance to the Islamic Republic of Afghanistan for Capacity Building for Economic Management. Manila (approved in August 2005 for $390,000 and completed in December 2007); and ADB. 2007. Technical Assistance to the Islamic Republic of Afghanistan for Support for Economic Policy Management. Manila (approved in September 2007 for $900,000, cofinanced by the Government of Australia and the Government of Denmark). 16 The three activities are ADB. 2003. Technical Assistance to the Islamic Republic of Afghanistan for Poverty Assessment and Socioeconomic and Macroeconomic Statistical Capacity Building. Manila (TA 4313, for $1.75 million, approved in December 2003); ADB. 2006. Technical Assistance to the Islamic Republic of Afghanistan for Support to the Afghanistan National Development Strategy. Manila (TA 4897, for $2.7 million that was approved in December 2006); ADB. 2006. Technical Assistance for Statistical Capacity Building in the Asia and Pacific Region. Manila (TA 6333–REG, for $600,000, approved in July 2006). 17 ADB. 2005. Report and Recommendation of the President of the Board of Directors: Proposed Loan and Grant to Afghanistan for the Fiscal Management and Public Administration Reform Program. Manila (approved in December 2005 for $48 million and $7 million). Summary of Public Sector Management Assessment 141 assessments that ADB jointly undertook with other development partners in 2002-2003. ADB took the lead in agriculture, education, infrastructure, and environment.

32. The PMP loan had 55 conditions—although 38 was the ADB average—despite the context in Afghanistan, which was dominated by low absorptive capacity and weak institutions. The targeted policy and institutional reforms were complex and would have required much longer than the program loan allowed to come to fruition—18 months, including a lead time to the second tranche (which had 30 conditions) of only 12 months. The real time allowed was even shorter. The inception mission took place on April 2003 and by October 2003, progress reports had to be prepared for the release of the second tranche.

33. The TA Cluster program did serve as an umbrella modality and provided a holistic way to assist the PRR process that a one-time TA intervention would have been unable to achieve. However, its design made monitoring crucial, given the 12 ministries, 4 clusters, and 19 components it covered, and monitoring turned out to be weak. The cluster design was appropriate because it allowed more flexibility over its different components than a single large TA project with a multiyear implementation period would have.

34. The quality of the design and monitoring frameworks (DMF), and its preceding version, the program framework for PSM activities have varied. The PMP loan did not have a detailed program framework and it referred to the policy matrix for details on activities and outputs. The PCR for the PMP said it should have had specified detailed outputs that isolated the intended ADB contributions to institution building and capacity development from those to be delivered through the involvement of the International Monetary Fund (IMF) and the World Bank. Although the DMF of the subsequent FMPAR program loan included outputs and detailed intended activities, the performance targets and indicators were not precise or specific and relied on descriptive sentences that could have been better.

35. While development partners had collaborated on the diagnosis of the country’s circumstances and needs, duplication of efforts and problems in delineating responsibilities later arose. For example, ADB and USAID worked in parallel for some time to support the development of a land registry before ADB shifted away to focus on a community-based rural land tenure system, the relevance of which can be questioned, given the country context. Overlaps in the civil aviation18 and education19 sectors led to inefficiencies. The adoption of different approaches by development partners overburdened government’s weak capacity.

36. Efficiency. ADB support for PSM and capacity development is rated less than efficient. Given their nature, these activities are not amenable to benefit–cost analysis. To assess efficiency, the sector assessment has undertaken a general assessment of efficiency of the process in PSM and the value for money—i.e., a comparison of outputs and outcomes in relation to the costs.

37. The average delay in the completion of PSM and capacity development activities has been 22.35 months, with the delay in the TA activity on statistics capacity development the longest, at 62

18 Three studies addressed civil aviation in Afghanistan. The World Bank conducted a transport sector review in 2003 to develop an institutional and policy framework for the sector. It had an emphasis on privatization, specifying that airports would be managed by a number of airport companies. The operations of companies would be self-financing. Around the same time, ADB has also prepared a civil aviation master plan to provide the framework and a time-bound action plan for sustainable and effective development of the civil aviation sector. ADB. 2003. Technical Assistance to the Islamic State of Afghanistan for Preparing the Regional Airports Rehabilitation Project. Manila (TA 4210). 19 In the education sector, both ADB and the World Bank worked on supporting a community college. After significant effort in this area, at the request of the Ministry of Higher Education (MOHE) Minister, the ADB consultant focused on supporting the World Bank activity. 142 Appendix 9

months.20 Overall sector delays for TA activities averaged 26.5 months in agriculture, 25.3 months in PSM, and 23.7 months in transport.

38. A report of ADB’s Office of Auditor General in June 2010 noted that all activities supported by the TA for statistics capacity development had been put on hold by early 2006 due to capacity constraints and the priority of the country’s Central Statistical Organization (CSO) to help prepare the ANDS.21 The report added that the midterm review for the TA in July 2006 resulted in a major change of scope and that it had been refocused on institutional strengthening, skills development, and database management.

39. An independent performance and financial audit in 2008 that covered the environment component of the TA Cluster revealed instances of misprocurement and mismanagement. 22 It also revealed close to a 400% deviation from the initial outlay target ($87,000) in the actual funds used for consultants ($428,000) that pointed to poor supervision. Findings from this audit resulted in an immediate rationalization of ADB’s TA program and a move toward risk assessments and risk management plans in sectors of engagement in the country identified under the CPS for 2009–2013.

40. An ADB special liaison office that opened in Kabul when Afghanistan operations resumed became a full-fledged resident mission in March 2004. The resident mission was expected to contribute to project implementation but its capacity in both staff numbers and skill sets remained weak through the better part of the evaluation period. Efforts were made to strengthen it in 2008 with the appointment of a transport implementation specialist and an energy implementation specialist.

41. Anecdotal information suggests that ADB headquarters-staff conducted fewer missions than other development partners. Estimates from ADB Central Operations Services Office for 2011 show that while the average ADB-wide project mission was 23.6 days, while the corresponding average for the country was about 12.8.

42. A special evaluation study on ADB’s Support to Fragile and Conflict-Affected Situations in 2010 stated that the country strategies that were prepared for Afghanistan are among the few that have discussed security arrangements that included a designated security unit and had project-specific security plans. 23 Despite the recognition given to security issues at the country planning and programming stages, the study highlighted instances where project staff and consultants were faced with adverse security issues that affected implementation and reduced efficiency in terms of time and costs.

43. Delays were also caused by country specific regulations. For example, any government contract larger than $100,000 needed to be cleared by the MOF, with contracts over $3.5 million requiring clearance from the Office of the President. The Afghanistan Reconstruction and Development Services oversee all procurement activities more than $200,000. In addition, the procurement guidelines were not always conducive to obtaining the right support for PSM and capacity development.

44. While both program loans for PSM and capacity development were implemented in compliance with the tranche conditions, the quality in the implementation of the TA activities has been mixed. ADB shifted its focus on governance to resource management issues under the 2009–2013 CPS but the

20 ADB. 2003. Technical Assistance to the Islamic Republic of Afghanistan for Poverty Assessment and Socio-Economic and Macroeconomic Statistical Capacity Building. Manila ($2.06 million). 21 ADB. 2010. Report on the Audit of the Headquarters-administered portfolio of Afghanistan (Operational Aspects–Technical Assistance). Manila. 22 A. F. Ferguson & Co. Chartered Accountants Pakistan. 2008. Independent Performance and Financial Audit of Four Technical Assistance Projects in Afghanistan Audit Report No. 2 by the Integrity Division of the Office of the Auditor General of the Asian Development Bank. Kabul. 23 Independent Evaluation Department. 2010. Special Evaluation on Asian Development Bank’s Support to Fragile and Conflict- Affected Situations. Manila: Asian Development Bank. Summary of Public Sector Management Assessment 143 funding planned through subprogram 2 of the FMPAR program to address resource management issues and to support nonlending products like TA for the MOF and other key ministries in ADB’s sectors either did not materialize or was not systematically tracked.

45. Effectiveness. ADB support for PSM and capacity development is rated less than effective. The results have been mixed. Although there was a focus on capacity development at the individual level, the lack of attention to strengthening training entities left capacity weak, particularly given the absence of a competitively paid civil service.

46. At the organization level, capacity development was less than effective primarily due to weak implementation of systems and processes. The responsibilities of several institutions continue to be fragmented, weakening organizational capacities. At the institutional level, ADB support was relatively more effective, although mostly in terms of achieving outputs. Legal and regulatory frameworks in key ADB sectors were supported through program loan tranches and TA activities, particularly those that laid down the budgetary and financial architecture for increased private sector participation.

47. The PMP loan approved in December 2002 was developed on the basis of numerous assessments and diagnostic studies. It contributed to the government’s reform efforts in the introduction of a new currency; establishment of the budget as a central instrument of policy making; centralization of revenue collection; and improved financial management, procurement, and audit procedures of development finances. The loan did not include a program framework and it referred to the policy matrix for details on outputs.

48. The MOF prepared a policy statement on public debt management and established a debt information system. Simplification of customs procedures and rationalization of the tariff structures translated into initial results in terms of improved revenue administration and reduced document processing. The MOF initiated computerization of its double entry system, while the Treasury department generated weekly and monthly revenue and expenditure reports through its financial management information system, although connectivity with provinces was an issue.

49. The program contributed to the roll-out of the Afghanistan Financial Management Information System that was piloted in four ministries and two provinces in 2002.24 This has been successfully scaled-up by the IMF, the World Bank, and USAID to all MOF offices responsible for treasury functions in all 34 provinces.

50. In transport, a road sector policy statement was developed as part of the transport sector review. Road development priorities over the medium term (5–10 years) were established with an ambitious action plan for restructuring the transport sector institutions. Policy papers on road financing, with assessments of investment and maintenance requirements on the basis of economic and financial criteria, were prepared separately by ADB and the World Bank, leading to duplication of efforts.

51. In energy, a national energy policy was developed in 2004 that recommended that all energy- related functions be grouped under a single ministry. The government restructured ministries to bring power under the Ministry of Energy and Water (MEW), while mining and gas were to be under the Ministry of Mines (MOM). Steps were undertaken to unbundle public energy sector enterprises from ministries.

52. The FMPAR program was the second of the two program loans under PSM and capacity development. It was approved in December 2005. The PCR in December 2011 noted that little

24 World Bank. 2005. Managing Public Finances for Development. Washington, DC. The AFMIS is the core financial management system. It integrates budget control (appropriations and allotments), accounting, and treasury systems using Free Balance software. The system operates under the control of the Treasury, records all budget uses, and is the platform for reporting the financial position of the government on a cash basis. 144 Appendix 9

information was available on the formulation stage and that it was not possible to assess the adequacy of the consultation process at entry.

53. Subprogram 1 of the FMPAR had a resource envelope of $50.57 million and a capacity building grant of $7.3 million. Although the second tranche of the program loan went ahead in December 2009 instead of March 2008, the capacity building grant was closed in December 2008 with only 33% of the envelope used. The planned subprogram 2 did not materialize.

54. The FMPAR program nevertheless contributed to the country’s fiscal management reforms, PAR efforts, and PFM reforms. In the area of fiscal management, a medium-term fiscal framework with a 5- year revenue and expenditure horizon was prepared in 2007. The financial, human resource, and service delivery restructuring was completed for seven MOF offices responsible for treasury functions in the provinces.

55. ADB supported the initial roll-out of a human resource management information system under the Independent Administrative Reforms and the Civil Service Commission (IARCSC) that covered nine ministries in 2009. It has been scaled up to all line ministries by USAID. The information system is used by the IARCSC’s appointments and appeals board to track the headcount in ministries and reduce the time needed to resolve personnel cases.

56. Improving public administration did not proceed as planned and there were delays in establishing human resource management units in pilot ministries that were to have job evaluation and grading, merit based appointments, and personnel management responsibilities. The delays were due to the fact that government repealed the human resource management-related provisions of the Civil Service Law of 2005 through its new Civil Servants Law of 2008. The new law contained legal foundations for pay and regarding, appointments, performance appraisal, promotions, and retirements.

57. Given the above legislative changes, IARCSC asked ADB to use the capacity building grant to create a reform implementation management unit in the Ministry of Agriculture, Irrigation and Livestock rather than human resource management units, which went beyond the initial cope of the policy matrix.

58. Thus, policy uncertainty resulting from changes to the civil service law and inadequate policy dialogue by ADB with related Government agencies were two reasons for the truncation of activities supported by the capacity building grant. The PCR stresses that although program outputs were produced to varying degrees, existing capacity constraints and excessive dependence on in-house international advisors led to marginal results in fiscal planning, budgeting, PAR efforts, and financial management.

59. The government’s capacity for strategic planning was nevertheless enhanced through ADB’s successful support for the generation of poverty-related and gender-awareness statistics (footnote 19). ADB contributed towards a statistical master plan prepared in 2004 in partnership with the World Bank, the IMF, and the DFID. Resources from three TA activities were used to support the widening of the consumer price index, a household income and expenditure survey, the national risk and vulnerability survey of 2005, and an integrated business enterprise survey that was completed in 2009. Information on gender issues has become more available. Support for the CSO through a regional TA has helped create an understanding of the need for gender statistics and support for gender equality within the office, according to CSO’s senior management (Box A9).

Summary of Public Sector Management Assessment 145

Box A9: Gender and Development

Gender and development is an enormously challenging issue in Afghanistan. In 2002, the initial country strategy and program (CSP) of the Asian Development Bank (ADB) proposed an approach to gender that was relevant and responsive to the country context and ADB’s own policy. It focused on creating an enabling environment for women to participate fully in development. It targeted relevant outcomes—enhanced human development of women, increased women’s access to economic resources and assets, and an improved voice for women in public and local bodies. While gender mainstreaming was to be the main approach, the need for targeted activities for women was noted. ADB implemented its strategy during the early years of the evaluation period. Through the social development components of the TA Cluster and through Japan Fund for Poverty Reduction (JFPR) activities, ADB supported increased service delivery to girls and women. A pilot in girls’ education, which was later scaled-up by other development partners, helped to change mind-sets of the targeted population on education for girls. The development of a gender-aware basic health package in collaboration with other development partners and support for its implementation by NGOs brought much-needed services to nine districts in two remote provinces. A third JFPR activity successfully strengthened partnerships between civil society organizations and local communities to increase female participation in decision making. An institutional strengthening grant was provided early on to the Ministry of Women’s Affairs, responsible for gender mainstreaming in government programs, but the results of this intervention are undocumented. The relevance and responsiveness of ADB’s gender strategy, however, declined after 2008. The CPS for 2009– 2013 lacked a clear results framework, stating outcomes in terms of rights to development. With a shift to large infrastructure, gender mainstreaming on its own was left as a weak instrument to achieve ambitious objectives. The CPS also identified the “attainment of the 13 gender-specific benchmarks of the Afghanistan Compact and ANDS” as key indicators, although they had only an indirect connection with ADB support. ADB did support gender in a few areas during the evaluation period. Support for the Central Statistics Organization (CSO) through a regional technical assistance has helped create a joint vision for gender statistics and gender equality within the CSO. As a result, the availability of gender-disaggregated data has increased. Client stakeholders within the CSO emphasized that the activity gave them a unified vision for addressing and integrating gender issues into data collection and dissemination. Some infrastructure projects have included special funds for women, particularly where indigenous communities were affected, as well as equal employment clauses. The results of the last two sets of interventions are yet to be assessed. The appointment of a gender specialist in the ADB resident mission and the increased resources available for mainstreaming gender into ADB support are likely to help strengthen support for gender equality in the future. Nevertheless, in moving forward, there is need for greater clarity on how gender will be integrated into ADB support. A results framework stating desired outcomes is essential to guide staff in integrating gender. Associated indicators (geared to ADB support) need to be developed, included in the country strategy, and monitored periodically. To enhance ownership and increase sustainability, measures to achieve gender-related objectives in infrastructure projects must be designed in consultation with local governments and communities. Project monitoring systems and completion reports must also ensure regular collection of gender-disaggregated data and discussion of gender issues when relevant. Source: Independent Evaluation Department sector assessment team.

60. ADB did not include new PSM and capacity development activities in the CPS for 2009–2013, except for support to develop a power sector master plan and conduct a railway development study. Risk assessments and risk management plans were undertaken for priority sectors and governance outcome indicators defined in the governance roadmap. The CPS outcome indicators included improved financial management, procurement, and contract management, with reduced support from external consultants in agriculture, transport, and energy sectors. Evidence is limited on the extent to which (i) sector documents have paid explicit attention to these resource management issues with related baselines, targets, indicators, outputs, and outcomes, to provide the necessary foundation for monitoring implementation progress; and (ii) provision of resources has taken place in terms of financing and staffing to implement these resource management activities and to achieve the stated outcomes.

146 Appendix 9

61. More changes were effected at the institutional level but progress at organizational and individual levels was weaker. Efforts aimed at capacity development to make organizations more transparent and accountable 25 met with resistance. Many changes at the institutional level have remained on the books without being implemented. The high degree of dependence on the capacity substitution approach of doing business through international and national consultants continues. An outcome was outlined in the 2009 CPS but it was not reflected in individual activities, which ended up as a set of disparate activities with no common direction.

62. Sustainability. The sustainability of ADB supported PSM and capacity development program in the country is rated less than likely. It is at best only partial and will depend on continued support by ADB and other development partners. Capacity in most ministries and state institutions remains critically low. Developing it continues to be, as it has always been, a major challenge due to the existing weak absorptive capacity, the security hurdles, and significant resistance to change.

63. Capacity substitution was judged essential during the initial CSP and its updates in several areas—but the need for it never really ended. The TA Cluster program, for example, provided support to 12 government ministries through 300–350 person-months of international consultant services and 650–700 person-months of the services of domestic consultants. Most of ADB’s infrastructure support has used design–build approaches that resulted in little strengthening in the capacity of ministry staff.

64. ADB supported activities were unable to successfully transition from this capacity substitution mode. This was due to the weak country systems and the absence of a long-term approach to capacity development in priority sectors. The PCR on the FMPAR program rated the sustainability of its subprogram 1 less than likely and “highly conditional on continuation of support from other development partners.” It added that the programs, projects, and TA activities that are supported by development partners needed to be recalibrated, given the low absorptive capabilities and weak capacity of government agencies.

65. The international and national consultants engaged to undertake day-to-day tasks within government at higher pay than regular staff, have become the second civil service. This parallel cadre of nongovernment staff has kept the systems newly introduced under the international reconstruction and development effort operational. The local staff has questioned whether these consultants have any incentive to transfer skills to lower paid Afghans who could then take over their work. The pay and grading reform efforts after the PRR phase helped increase salaries of local staff somewhat but the maximum salary per month allowed under this structure with eight grades is $650. Even with salaries at this low level, according to the MOF, only 62% of the government payroll can be met from domestic revenue. The scope of the pay and grading reforms has been limited, with only one-fourth of the total staff covered so far.

66. Changing attitudes is an extremely important part of developing capacity in a country shifting to a modern market economy but ADB documents showed little evidence that it has analyzed resistance to change or how it can be overcome. An exception involved TA support to the Ministry of Rural Rehabilitation and Development on impact monitoring and evaluation. Documents show that establishment of a monitoring and evaluation system was met with significant initial resistance, which was eventually overcome.

25 For example, the PMP loan proposed an action plan to restructure transport sector ministries that would eventually pave the way for integration of the Ministry of Public Works, the Ministry of Transport, and the Ministry of Civil Aviation and Tourism. This had not been achieved at the time of second tranche release but the Ministry of Civil Aviation and Tourism was later merged with the Ministry of Transport—becoming the Ministry of Transport and Civil Aviation—although the new ministry remained separate from Ministry of Public Works, which continues to be responsible for operation and maintenance. The Ministry of Rural Rehabilitation and Development is in charge of rural roads. Summary of Public Sector Management Assessment 147

67. The results of ADB’s efforts to strengthen institutional capacity are relatively more sustainable, particularly those that were more country-owned, even if not country-led. This has been demonstrated by the fact that, with the help of development partners, the government has broadened and deepened several of the initial reforms kicked off by the PMP, such as the framework for PFM and procurement. The organizational capacity development results are less likely to be sustained, except where mandates have been clarified. Lack of coordination by development partners, poor collaboration on ADB’s side, and no common vision on how the government should be organized have left institutional capacity building efforts fragmented.

68. Sustainability is unlikely in terms of the human capacity built. Trained staff more likely move to the private sector and the problem will only grow as this sector becomes stronger and as long as wider civil service reforms with appropriate incentives are not undertaken. Extending support to existing capacity providers in the country, as noted in ADB’s Capacity Building Strategy of 2007, is one way to address staff attrition.

69. In the road sector, 35 Kabul Polytechnic University professors were sent for short-term training to University of Calgary in Canada. This was under the TA on Preparing the Road Rehabilitation and Capacity Building Cluster approved in August 2005. It led to the development of a strategic academic plan for the Engineering Department of Kabul Polytechnic University in partnership with the Canadian university’s school of engineering. However, the completion report on the project makes no mention of any subsequent training of trainers through ADB support, and stakeholders in Kabul also did not recall any such efforts.

70. The framework for ADB engagement within its sectors of engagement in the country has involved creation of stand-alone and externally staffed project implementation units (PIUs), which generally does not bode well for capacity development.26 Limited efforts were made to strengthen the capacity of wider ministry staff in ADB’s priority sectors.

71. Little attention was paid to creating capacity development systems using local educational institutes, training, twinning of international advisors with national counterparts, ensuring ready availability of the terms of reference of consultants, engagement of ministries to validate usefulness of outputs prepared by consultants, and wider on-the-job interaction between the PIUs and wider ministry staff. Feedback received by the evaluation team from the director of the administrative reforms secretariat in the IARCSC highlighted the need to increase government involvement and ownership in policy development through coaching and mentoring of wider ministry staff.

72. As part of the CBR efforts, operations manuals are being prepared with indicators to assess improvements. These include development budget execution rates by participating ministries, business process improvements in each ministry’s development plan, service delivery improvements in each ministry’s performance plan, and strategic staffing from the ministry’s human resource plan.

73. Through its investments in priority sectors, ADB needs to contribute to the government’s efforts to rationalize the second civil service, which includes national project staff civil servants receiving salary top-ups through ADB TA. This would ensure increased sustainability of ADB support and greater buy-in by the government, as well as more synergies with other development partners.

74. The results of ADB support to statistics capacity development are likely to prove more sustainable than other TA outputs, partly due to longer time it took to achieve them. The government counterpart has shown strong leadership and has a good management team and ADB has been engaged in the effort continually through three TA projects to develop statistical capacity (footnote 19). The CSO has developed a capacity building plan for 2011–2014 with United Nations Development

26 Independent Evaluation Department. 2005. Special Evaluation Study: The Role of Project Implementation Units. Manila: ADB. 148 Appendix 9

Programme support and has requested continued support for it from ADB. The plan aims to build strong linkages between the CSO and all the line ministries.

75. Development impact. The development impact of ADB’s PSM and capacity development program is rated less than satisfactory. ADB contributed to the establishment of relevant institutions but their organizational capabilities remain weak. Support through the TA Cluster program helped create an Independent Department of Disaster Preparedness that has since then been renamed the Afghanistan Disaster Assistance Management Authority. This agency today suffers from inadequate budget allocations, weak human resources, and a lack of early warning systems, relief supplies, and search and rescue machinery.

76. In addition to providing two program loans, ADB supported capacity development efforts in the MOF through three TA activities (footnote 18). This resulted in the creation of a fiscal policy unit within MOF that today undertakes trend analysis for budget preparation and fiscal sustainability of budgetary expenditures and recommends reforms. Nevertheless, it continues to depend on external advisors and consultants.

77. ADB also contributed through budget support conditionalities and consultants to the creation of the IARCSC, which has the mandate to guide PAR efforts. Its capacity and authority to implement PAR efforts across the government is still limited. ADB also helped to establish the Inter-Ministerial Commission for Energy to help coordinate activities in the energy sector but the commission has severe capacity constraints and most funds are being allocated for turnkey projects using design–build contracts.

78. ADB support did produce considerable change through the creation of legal and regulatory frameworks within its sectors of engagement. ADB support contributed to a water law and land management law to improve the land title system that is essential for agricultural financing (to provide collateral), inclusiveness (to provide access to opportunity), and setting environmental standards.

79. ADB also helped lay the foundation for increased private sector participation. A unified currency, payments system, and mechanisms for bank transfers were established with its support and are currently being improved. However, most of the institutional reforms have been achieved on paper but not implemented as planned. One TCR for a TA activity for the MOF concluded that international legal advisors should not be tasked with the responsibility of shepherding the passage of new legislation, making up for the weakness of the Ministry of Justice given the inordinate delays involved in such efforts.

80. Organizational capacity continues to remain weak in ADB’s sectors of engagement, whether energy, transport, agriculture, or finance. The mandates, roles, and responsibilities of line ministries and independent agencies have only been partially clarified. The need to streamline government institutions continues. For example, ministries involved in the transport sector would benefit from a more rational division of labor. The MOM is preparing a railway strategy and taking the lead in establishing a railway authority even though the executing agency for ADB’s railway project was the Ministry of Public Works.

81. Despite six ADB TA projects, the capacity of key energy institutions such as the MEW, the MOM, and the corporatized power company—Da Afghanistan Bereshna Sherkat—remain weak. ADB and Afghanistan made little progress over the evaluation decade in the development of the country’s gas potential.

82. The efforts to build individual capacity in the public sector were not as effective as planned. Because ADB TA did not commonly conduct training of trainers, capacity that was lost when trained staff moved on to higher pay and better jobs with internationally funded agencies and the private Summary of Public Sector Management Assessment 149 sector could not be easily rebuilt. This left capacity substitution the only way to meet urgent needs. The shifting mandates of ministries as they underwent realignments added to the difficulty of sustaining capacity improvements.

83. ADB support to improve procurement by improving abilities in priority ministries was not successful either. Capacity for procurement outside of the consultant-staffed PIUs remains weak. ADB helped agencies in the large infrastructure sectors develop bidding documents for contracts but sustainable capacity remained in the PIUs instead of the wider ministries.

84. The design–build contracts used by ADB compensated for weak capacity in government ministries but these also served to prolong it. ADB paid little attention to developing the contracting industry and its one documented attempt to build partnerships between the contracting industry, training institutes, and the public sector failed.

85. The PMP loan was based on multiple assessments and sector analysis but less documented information is available on the preparation of the FMPAR program. Although ADB is a management member of the ARTF, it did not play an active part in formulating the CBR facility, which has resulted in greater collaboration in the area of PSM and capacity development between development partners.

86. Two assessments of overall PFM in Afghanistan were undertaken during the evaluation period, in 2005 and 2008. 27 The 2008 evaluation indicated significant improvements over 2005 but also highlighted continuing shortcomings, including a gap between the ANDS and the fiscal policies, weak PFM capacity outside of the MOF across line ministries, and weak internal audit mechanisms. It is difficult to measure a direct impact of ADB’s support to PSM and capacity development activities on the improvements.

87. The PCR on the PMP lacked details on institutional development that could have provided insights into the program’s effects on governance and the finance, transport, and energy sectors. Although a great deal of activity was covered by the loan, the PCR does not include evidence to show the PMP’s intended impact was achieved. The PCR for the FMPAR program emphasized that the policy and institutional reforms sought under subprogram 1 typically required a long time to achieve their outcomes and development impact.

88. Although the intended outputs were included in the program design to varying degrees under budget programming, resource mobilization, civil service reforms, and public finance monitoring, the design did not use a limited set of actionable indicators or interim signposts across sectors of ADB engagement. This has made an assessment of development impact difficult.

89. Future ADB-supported PSM and capacity development activities in the country need to improve in several ways. First, if capacity development is an objective, then precise targets need to be set and results need to be measured. Secondly, a clear outcome-based results framework is essential to design and monitor related interventions. Thirdly, because each set of policy reforms involves new organizational and human capacity and the goal for PSM and capacity development is ever moving, prioritization and sequencing are essential. Fourthly, a blend of training modalities is essential to develop individual capacity. While short-term internal and external training sessions are necessary, there must be simultaneous sustained support for the development of trainers and long-term measures to develop training institutions. Finally, exit strategies for PIUs and international and national consultants must be clearly defined at the entry stage.

90. While the aggregate score for public sector management and institutions under the country performance assessment increased marginally during 2007–2011, the country fared poorly in

27 World Bank. 2005. Managing Public Finance for Development (Vol. 2 of 5): Improving Public Financial Management. Washington, DC; World Bank. 2008. Public Financial Management Performance Assessment. May 2008. Washington, DC. 150 Appendix 9

composite indexes such as the corruption perception index, where it ranked between 176 and 180 out of 185 countries during 2008 and 2011.

91. Overall assessment. Overall, the ADB support to public sector management and capacity development is rated less than successful based on the criteria discussed in paras. 17–90 and summarized in Table A9.2.

Table A9.2: Public Sector Management Overall Performance Rating Criteria Weighted Average Rating Criteria Weight Assessment Score Score Strategic positioning 0.1 Satisfactory 2 0.2 Program relevance 0.1 Relevant 2 0.2 Efficiency 0.2 Less than efficient 1 0.2 Effectiveness 0.2 Less than effective 1 0.2 Sustainability 0.2 Less than likely 1 0.2 Development impact 0.2 Less than satisfactory 1 0.2 Overall assessment 1.0 Less than successful 1.2 Source: Independent Evaluation Department.

E. Conclusion

92. ADB support for PSM and capacity development was substantial during 2002 and 2008. With GACAP II, the approach since 2009 has been to reposition governance in terms of resource management issues within ADB’s priority areas of engagement—energy, roads, and railways. The gradual shift away from PSM can be explained by the lack of defined action plans prepared or used across sectors to achieve stated outcomes. Such a plan should have included ways for improving financial management, procurement, and contract management across key sectors and reducing the support from consultants.

93. It is essential that ADB focus more on results in its support for public resource management. Results also need to be tracked systematically and periodically across the sectors of ADB engagement. A survey of 13 key Afghan stakeholders confirmed that ADB’s support was successful to a certain degree in supporting institutional reforms and capacity but was less so in improving organizational and human resource capacity, where results were mixed. In the view of these stakeholders, PIUs and international advisors did not transfer capacity to local staff.

94. Achieving better results in the future will demand better coordination by development partners and the formulation of a clear vision by the government on PSM and capacity development around which this collaboration can be exercised. ADB staff will have to help guide the government’s designing of this long-term approach. The new approach should sequence and prioritize efforts and distinguish between urgent fiscal and financial risks that can be addressed through strengthened institutional systems and oversight processes and those development risks that require organizational and human capacity to be in place before institutional capacity can be strengthened. This is in line with the recommendation by the special evaluation study on ADB support to fragile and conflict affected countries to develop a step-by-step plan for capacity development (footnote 26).

95. While ADB mostly did the right things, the results in PSM and capacity development were not fully adequate or fully achieved. This was partly due to the change in orientation in 2008 by ADB’s Central and West Asia Department toward a greater focus on roads, railways, and energy. ADB financial and staffing resources need to be allocated or earmarked to move the public resource management agenda from the existing mode of sector and project-level risk assessment and management plans toward results in improved procurement, PFM, and contract management that are tracked systematically across all ADB sectors. Summary of Public Sector Management Assessment 151

96. It needs to be noted that institutional capacity development may be easier to achieve in the context of a state highly dependent on donor funding, and plentiful availability of international consultants to substitute capacity. However, institutional capacity is ineffective when government ownership is low, and when such capacity is contingent on resolving structural, technical, fiscal and governance issues on the part of government.

97. The country remains in a fragile situation and needs capacity substitution to ensure service delivery across the country. But it also needs and lacks capacity development roadmaps and action plans by sector to inform future projects and TA activities and to monitor their implementation and outcomes. These roadmaps and action plans will need to coordinate and prioritize capacity development efforts between development partners to avoid the inefficiencies and duplications of the past.

98. It is crucial that suitable capacity development methodologies—training, seminars, studies, advisers, equipment, and hands-on training—be tailored to the needs and wants of clients and thereby attract their interest. Some ministries prefer hands-on job training over training courses that may not fit the ministry’s needs. However, newly established institutions need political, instructional, and technical studies in addition to on-the-job training. Training abroad is an easy way to create and achieve a stated output in the design and monitoring framework, but may be less effective.

99. ADB needs to develop and periodically track a limited set of actionable indicators or interim signposts for PSM and capacity development. These indicators need to be linked to the extent possible within the DMFs of activities at entry and the results framework of activities at completion. At the project level, executing agencies in Afghanistan have shown preference for physical investment even though capacity development was highlighted in country strategies.

100. Capacity development, including such pilot approaches as performance-based contracts for road maintenance, has been crowded out by physical investment due to cost increases. Sector monitoring and enforcement mechanisms need to be developed.

Table A9.3: ADB Approved Technical Assistance for Public Sector Management and Capacity Development Activities, 2002–2011 Closing Date Amount TA Date of Extension Utilized TCR No. Name of Activity Approval (months) Type ($) Rating A. Agriculture and Natural Resources (ADTA = 6, PPTA = 3) 4311 Capacity Building for Aid Coordination 22 Dec 03 43.00 ADTA 303,741 S and Management in Natural Resource Management Sector 4334 Capacity Building for Agriculture Policy 4 May 04 31.00 ADTA 927,862 PS Reform 4420 Western Basins Water Resources 26 Oct 04 26.00 PPTA 1,690,944 Management and Irrigated Agriculture Development Project 4483 Capacity Building for Land Policy and 15 Dec 04 37.00 ADTA 793,097 S Administration Reform 4541 Natural Resources Management and 23 Dec 04 25.00 ADTA 1,013,107 PS Poverty Reduction 4549 Capacity Building for Impact 23 Dec 04 27.00 ADTA 190,810 PS Monitoring and Evaluation 4696 Commercial Agriculture Development 23 Nov 05 18.00 PPTA 822,924 Project 4716 Capacity Development for Irrigation and 7 Dec 05 22.00 ADTA 725,583 S 152 Appendix 9

Closing Date Amount TA Date of Extension Utilized TCR No. Name of Activity Approval (months) Type ($) Rating Water Resources Management 7088 Preparing the Water Resources 10 Jun 08 10.00 PPTA 1,657,065 Development Project 26.55 8,125,133 B. Energy (ADTA = 8, PPTA = 4, S-PPTA = 1, PATA = 1) 4160 Feasibility Study for Power Transmission 13 Aug 03 18.50 PPTA 628,582 and Distribution Project 4088 Energy Sector Review and Gas 18 Mar 03 11.00 ADTA 892,995 S Development Master Plan 4235 Institutional Strengthening of the Gas 03 Dec 03 46.00 ADTA 283,011 U Sector 4318 Preparing the National Power 26 Feb 04 34.00 PPTA 676,700 Transmission Grid Project 4354 Establishing a Gas Regulatory 08 Jul 04 30.00 ADTA 553,653 S Framework 4461 Poverty Reduction and Rural Renewable 03 Dec 04 12.00 ADTA 632,912 PS Energy Development 4579 Capacity Building of the Ministry of 14 Apr 05 20.00 ADTA 164,656 PS Energy and Water 4662 Preparing Small and Medium 03 Oct 05 16.00 PPTA 779,941 S Hydropower Development Project 4666 Preparing the Natural Gas Development 06 Oct 05 17.00 PPTA 658,433 Project 4909 Improving the Capacity of Da 19 Dec 06 17.00 ADTA 658,445 PS Afghanistan Breshna Moassessa 4918 Support to the Inter-Ministerial 31 Jan 07 0.00 ADTA 1,365,711 PS Commission for Energy 7168 Development of Wind Energy 06 Nov 08 10.00 ADTA 145,000 7289 Kabul Distribution Network 27 May 09 5.00 S-PPTA 182,597 Rehabilitation (PFR 2 of MFF 0026) 7637 Power Sector Master Plan 06 Nov 10 2.50 PATA 0 17.07 7,622,636 C. Finance (PPTA = 1) 4751 Preparing the Financial Market and 21 Dec 05 6.00 PPTA 65,287 Private Sector Development Program 6.00 65,287 D. Industry and Trade (ADTA = 2) 4536 Cross-Border Trade and Transit 23 Dec 04 19.00 ADTA 368,531 PS Facilitation 4906 Capacity Building for Customs and 18 Dec 06 2.00 ADTA 172,941 U Trade Facilitation 10.50 541,472 E. Multisector (TA Cluster = 1, Program Loan = 1) 3874 Capacity Building for Reconstruction 30 May 02 53.00 Cluster 14,106,986 S and Development L1954 Postconflict Multisector Program 4 Dec 02 0.00 Program 170,354,000 26.50 184,460,986 F. Public Sector Management (ADTA = 10, Grant = 1, Program Loan = 1) 3875 Disaster Preparedness and Management 30 May 02 18.00 ADTA 479,677 S Capacity Building 4244 Support for Public Administration 11 Dec 03 36.00 ADTA 1,629,487 U Reform Program 4313 Poverty Assessment and Socioeconomic 26 Dec 03 62.00 ADTA 1,333,376 and Macroeconomic Statistical Capacity Building Summary of Public Sector Management Assessment 153

Closing Date Amount TA Date of Extension Utilized TCR No. Name of Activity Approval (months) Type ($) Rating 4345 Security of ADB-Financed Projects in 1 Jun 04 17.00 ADTA 911,772 S Afghanistan 4502 Capacity Building of the Ministry of 17 Dec 04 16.00 ADTA 852,380 S Finance 4637 Capacity Building for Economic 26 Aug 05 12.00 ADTA 263,597 S Management 4758 Capacity Building for Regional 22 Dec 05 21.00 ADTA 221,953 PS Cooperation 4897 Support to the Afghanistan National 14 Dec 06 38.50 ADTA 1,496,475 Development Strategy 4964 Support for Economic Policy 4 Sep 07 19.50 ADTA 23,847 Management 7090 Security Plan for Project 24 Jun 08 20.50 ADTA 705,007 Implementation 0030 Fiscal Management and Public 14 Dec 05 18.00 Grant 3,670,358 PS Administration Reform (Capacity Building for Institutional Reform) 2215 Fiscal Management and Public 14 Dec 05 0.00 Program 47,723,000 PS Administration Reform Program 25.31 59,310,929 G. Transport and ICT (ADTA = 4, PPTA = 4, PATA = 1) 4177 Herat–Andkhoy Road Project 17 Sep 03 12.00 PPTA 940,862 4210 Regional Airports Rehabilitation Project 05 Nov 03 43.00 PPTA 787,778 4371 Preparing the Master Plan for Road 06 Aug 04 31.00 ADTA 1,598,962 Network Improvement Project 4415 Kabul Air Quality Management 15 Oct 04 46.00 ADTA 413,320 PS (Government of Denmark financing) 4594 Capacity Strengthening of the Civil 10 Jun 05 19.00 ADTA 465,518 PS Aviation Sector 4675 Capacity Building for Road Sector 31 Oct 05 38.00 ADTA 859,467 PS Institutions 4828 Preparing the Road Rehabilitation and 21 Aug 06 15.00 PPTA 2,068,084 Capacity Building Cluster (MPW Capacity Building) 4854 Afghanistan: Preparing the Herat–Bala 23 Oct 06 6.00 PPTA 130,000 Murghab Road Project 7259 Railway Development Study 27 Mar 09 4.00 PATA 1,238,898 HS 23.77 8,502,889 ADTA–30, Cluster–1, Grant–1, PPTA–12, 22.35 49 268,669,232 2 PCRs S-PPTA–1, PATA–2, Program Loan–2 Activities 27 TCRs TCR Ratings: HS–1, S–11, PS–14, U–3 ADB = Asian Development Bank, PATA = advisory technical assistance, HS = highly successful, MFF = multitranche financing facility, MPW = Ministry of Public Works, PATA = policy advisory technical assistance, PCR = program/project completion report, PFR = periodic financing request, PPTA = project preparatory technical assistance, PS = partly successful, S-PPTA = small-scale project preparatory technical assistance, S = successful, TA = technical assistance, TCR = technical assistance completion report, U = unsuccessful. Sources: ADB databases and Independent Evaluation Department sector assessment team.

APPENDIX 10: SUMMARY OF PRIVATE SECTOR DEVELOPMENT AND FINANCIAL SECTOR ASSESSMENT

A. Introduction

1. This sector assessment, part of the country assistance program evaluation (CAPE) for Afghanistan, covered the Asian Development Bank (ADB) assistance program for private sector development (PSD) and the finance sector in the country during 2002–2011. The objective was to identify ways to improve the effectiveness of ADB’s interventions. The assessment used facts and lessons from ADB’s public sector and nonsovereign operations (NSOs) in its analysis and, taking into account the sector context, evaluated ADB’s contribution to specific development results in Afghanistan.

B. Sector Context

2. Private sector development. The government has prioritized PSD as the “engine of development” since reconstruction began in 2002. In some areas, private entrepreneurship responded to opportunities that emerged under this pro-private sector strategy during the evaluation period, particularly in telecommunications and banking. 1 Overall, however, business activity has not been vibrant and private investment as a percentage of gross domestic product (GDP) stagnated at 8%–9% during FY2006–FY2010, which limits the economy’s overall growth prospects.

3. Telecommunications. The government approved a telecommunications industry policy in 2003 and recognized that private sector participation would be essential to expand it quickly and demonstrate the potential for private sector-led development across the economy. It also recognized the need for strong institutions to attract private investment and established a regulatory framework for telecommunications.2 Consequently, the telecommunications sector has received far more foreign direct investment (FDI) than most other sectors, which has resulted in the emergence of a competitive mobile phone market.3

4. Banking. When the Taliban regime fell in 2001, Afghanistan’s banking system comprised six state-owned commercial banks operating with virtually no legal framework. Most were inactive. During 2002–2004, the government rebuilt the basic legal and institutional framework and in 2004 adopted the Law of Da Afghanistan Bank (DAB) and the Law of Banking in Afghanistan. It also created the basic payment system. Currently, 17 commercial banks are operating in all the 34 provinces. 4 Total commercial bank assets increased from $261.0 million at the end of March 2004 to over $4.0 billion at end of October 2011. The share of private bank assets (including those of foreign bank branches) in the total rose from 17% at the end of March 2004 to 81% at the end of March 2010.5

1 The Afghanistan government identified PSD as one of the three pillars of development in its National Development Framework (NDF) adopted in 2002. 2 In May 2003, the government created an interim regulatory unit within the Ministry of Communications and created the Telecom Development Fund to promote the expansion of telecommunications in rural areas. In 2005, the president approved a telecommunications law to establish the Afghanistan Telecommunications Regulatory Authority (ATRA), an independent regulator. 3 In 2002, the first private operator of a global system for mobile communications (GSM) was launched, Afghan Wireless Communication Company (AWCC). AWCC is 80% owned by the US-based Telephone Systems International, with the remaining 20% owned by the Afghan Ministry of Communications. The government awarded a second GSM license through a competitive process to Roshan in 2003. To further promote competition, the government initiated international competitive bidding for two more GSM licenses in 2005. As a result, licenses were awarded to South Africa-based MTN Group and United Arab Emirates-based and state-owned Etislat. 4 Besides 17 commercial banks, the finance sector in Afghanistan includes seven microfinance institutions (MFIs), a small number of companies offering insurance services and leasing services (mainly agricultural products), and foreign exchange dealers and money service providers. 5 DAB. 2011. Summary Analysis and Performance of the Banking System. Kabul. Summary of Private Sector Development and Financial Sector Assessment 155

5. Kabul Bank crisis. In September 2010, concerns over the soundness of Kabul Bank, by far the largest bank in Afghanistan at the time, caused a bank run. This reportedly resulted from abuse of their positions by shareholders and top management and manipulation of the bank’s loan accounts to commit fraud and launder money. Kabul Bank quickly lost about half of its $1.3 billion deposits. This was equivalent to one-third of the banking system’s total assets of $4.0 billion and threatened its stability. The government immediately removed the management of Kabul Bank, put the bank into conservatorship, and shouldered $825.0 million of the cost of a lender-of-last-resort facility, which provided a full deposit guarantee. In April 2011, DAB instituted receivership against Kabul Bank and revoked all shareholder rights. The government later split Kabul Bank into two parts. The bank’s deposits and good assets were transferred to a bridge bank, New Kabul Bank, while the bad assets have been retained by the receiver.6 The Ministry of Finance and DAB have been closely working with the International Monetary Fund (IMF) on a program of action in response to the Kabul Bank crisis (IMF 2011).7

6. The crisis affected financial intermediation in Afghanistan. Total bank loans, which had increased from $18.0 million at end-March 2004 to $1,765.0 million at end-March 2011, suddenly dropped in October 2011 to $789.0 million, or where they had be in March 2008. This reflected the transfer of Kabul Bank’s bad loan assets out of the banking system to the receiver but was also the result of a series of measures by DAB to restrain credit because of growing concern about the quality of the loan portfolios of some other banks. The crisis impact on overall bank deposits was not as significant as the impact on bank loans, which resulted in high liquidity in the banking system. 8 Nonperforming loans (NPLs) represented 6.6% of total gross loans at the end of September 2011, according to DAB.9

7. Informal economy. Afghanistan’s economy is overwhelmingly informal, with a wide range of legal and illegal activities.10 The informal economy has been estimated to be equivalent to 80%–90% of the country’s recorded GDP. 11 IMF estimates that illegal activities such as the outlawed narcotics industry and corruption are equivalent in value to one-third to one-half of the country’s GDP. The United Nations Office of Drugs and Crime estimates that opium cultivation provided income for 5% of the Afghan population in 2011 and Afghans paid about $2.5 billion in bribes in 2010 (20% of GDP). A large number of the country’s people depend on the illicit opium industry since many rural people rely on several, generally informal jobs outside agriculture for their livelihoods, subsistence, and to cope with adversity. The World Bank points out that “the predominance of the informal economy in Afghanistan represents a ‘self-enforcing equilibrium,’ involving failed government; other, competing power bases; insecurity; lack of rule of law; and a very poor investment climate for formal sector activities.”

6 For the time being, New Kabul Bank cannot extend loans. It was to be privatized by mid-2012. 7 IMF. 2011. Islamic Republic of Afghanistan: Sixth Review Under the Arrangement Under the Poverty Reduction and Growth Facility, Request for Waiver of Nonobservance of a Performance Criterion, Modification and Performance Criteria, and Rephrasing and Extension of the Arrangement. Washington, DC. 8 Total banks’ deposits increased from $60.0 million at end-March 2004 to $3,444.0 million at end-March 2011, and slightly decreased to $3,318.0 million at the end of October 2011. 9 The NPL ratio surged to 48.4% at the end of FY2011, reflecting the surfacing of Kabul Bank’s NPLs. The subsequent drop reflected the removal of Kabul Bank’s NPLs from the banking system. 10 The World Bank considers an activity that is registered and taxable to be formal and defines several classifications of informal economic activities in Afghanistan: (i) in-kind activities (legal output and production and/or distribution with no market transaction, e.g., subsistence agriculture); (ii) extra-legal activities (legal output and production and/or distribution with market transactions, e.g., construction and hawalas); (iii) irregular (legal output with market transactions but illegal production and/or distribution, e.g., smuggling and gemstones); and (iv) illegal (illegal output, production and/or distribution with market transactions—poppy trafficking). 11 World Bank. 2005. Afghanistan—State Building, Sustaining Growth, and Reducing Poverty. Washington, DC; Sultan Barakat. 2008. Synthesis Report: Understanding Afghanistan. (A study commissioned by DFID); J. Cusack and E. Malmstrom. 2011. Bactrian Gold: Challenges and Hope for Private-Sector Development in Afghanistan. Kansas City, Mo: Ewing Marion Kauffman Foundation. 156 Appendix 10

8. Business environment. The government tried to build market institutions during the evaluation period by issuing several laws and regulations. Nonetheless, Afghanistan ranks 160 out of 183 countries in the World Bank’s Doing Business 2012 index of the ease of doing business and dropped 6 places from the previous report in 2011.12 Findings of other business surveys also suggest that the country continues to face numerous challenges to create an enabling environment for PSD. 13

C. ADB Strategy and Assistance

9. ADB’s initial country strategy and program (CSP) for 2002–2004, as well as the three country strategy and program updates (CSPUs) that covered 2003–2008, identified the finance sector as one of the core areas of operations and PSD as a thematic focus. During the 2002–2008 period that these documents covered, ADB approved (i) an equity facility for Afghanistan International Bank (AIB) from the nonsovereign window; (ii) an Asian Development Fund (ADF) loan for the Afghanistan Investment Guarantee Facility (AIGF) from the public sector window and a political risk guarantee (PRG) facility from the nonsovereign window for the supplementary fund of the AIGF; 14 (iii) Phases I–III of the support for the Roshan Telecom Development Company (Roshan) from the nonsovereign window (comprising an OCR loan for Phase I; an OCR loan, a complementary finance scheme (CFS), and a PRG for Phase II; and an OCR loan and a PRG for Phase III);15 (iv) an equity facility for Afghanistan Renewal Fund Limited (ARFL) from the nonsovereign window;16 and (v) the Private Sector and Financial Market Development Program (PSFMDP), comprising a program grant and a capacity building grant from the public sector window. This evaluation classifies all these loans, grants, and other instruments as the ADB’s PSD and finance sector activities. 17 Apart from these activities, the Postconflict Multilateral Program Loan, approved on 4 December 2002 contained a finance and governance component.18 The finance and governance component was complemented by a component for development of a national payment system under the technical assistance (TA) cluster for capacity building for reconstruction and development.19

10. The country partnership strategy (CPS) for Afghanistan for 2009–2013 continues to prioritize PSD as a thematic focus but the finance sector is not considered to be a core area of operations. ADB approved a capacity building TA for Rural Finance Expansion in December 2011 under the CPS in the PSD and finance sector.20 This evaluation identifies the AIGF and the PSFMDP from the public sector window and the support for the AIB and the ARFL and the three phases of the support for Roshan from the nonsovereign window as the key PSD and finance sector activities in Afghanistan.

12 World Bank. 2012. Improving Ease of Doing Business in Afghanistan. Reform Memorandum. Washington, DC. 13 World Bank. 2008. The Afghanistan Investment Climate in 2008: Growth Despite Poor Governance, Weak Factor Markets, and Lack of Innovation. Washington, DC; CIPE. 2010. Afghan Business Attitude on the Economy, Government, and Business Organization: 2009–2010 Afghan Business Survey. Washington, DC. 14 The PRG facility from the nonsovereign window was subsequently cancelled (para. 29). ADB. 2004. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Guarantee for the Afghanistan Investment Guarantee Facility Project. Manila. 15The PRG component for the third phase was subsequently cancelled. ADB. 2004. Report and Recommendation of the President to the Board of Directors: Proposed Loan for the Roshan Cellular Telecommunications Project in the Islamic Republic of Afghanistan. Manila; ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Political Risk Guarantee for the Roshan Phase II Expansion Project in the Islamic Republic of Afghanistan. Manila; ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Political Risk Guarantee for the Roshan Expansion Project (Phase III) in the Islamic Republic of Afghanistan. Manila. 16 ARFL (an equity facility of $5.5 million, approved on 28 July 2005) was closed in May 2008 after disbursing $462,000 for administrative expenses but without supporting any project due to a lack of demand. 17 ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant to the Islamic Republic of Afghanistan for Private Sector and Financial Market Development Program. Manila (Grant 0068). 18 The finance and governance component aimed to (i) create an enabling framework for market-based policy and institutional reforms in the financial sector, and (ii) improve working of the finance system. 19 The CAPE team notes that the final consultant report on the national payment system was submitted in September 2003, while the DAB fully operationalized the SWIFT payment system during May–June 2003. The CAPE team could not verify to what extent this TA actually contributed to the operationalization of the national payment system. 20 ADB. 2011. Technical Assistance to Afghanistan for Rural Finance Expansion. Manila. Summary of Private Sector Development and Financial Sector Assessment 157

11. Afghanistan International Bank. AIB was established in October 2003 as a private sector commercial bank and its commercial bank license was issued in March 2004. AIB was initially owned by three Afghanistan groups. AIPC, Horizon Associates, and Wilton Holdings each held a 33.3% stake. On 13 May 2004, ADB’s Board of Directors approved a $2.602 million equity investment in AIB. On 29 June 2004, ADB and the three groups signed a shareholders’ agreement and a share purchase agreement whereby each group sold 1,309,995 shares to ADB, resulting in ADB acquiring a 25% stake. These four parties, including ADB, continue to be the AIB’s shareholders today.

12. Afghanistan Investment Guarantee Facility. ADB approved AIGF project in September 2004, with an aim to increase FDI in Afghanistan by issuing $60 million in PRGs to investors. The project was sponsored by the government and implemented by the Multilateral Investment Guarantee Agency (MIGA). The project comprised (i) $10.0 million in first-loss PRG cover (for debt and equity) issued by MIGA, which was to be backed by a loan equivalent to $5.0 million each from ADB and the International Development Association (IDA) to the government and bilateral grants that were committed to or paid in to the AIGF; and (ii) $50.0 million of second-loss PRG cover issued by MIGA, private insurers, and ADB (from the nonsovereign window for up to $10.0 million equivalent PRGs), which would supplement on a second loss basis the first loss cover issued by MIGA on behalf of AIGF (the supplementary component). Following MIGA's regular procedures, eligibility criteria, and methodologies, PRGs provided by the AIGF were to cover the risks of (i) currency transfer restrictions and inconvertibility, (ii) expropriation, (iii) war and civil disturbance, and (iv) breach of contract. The Afghan Investment Support Agency (AISA) was to work with MIGA to promote the AIGF to potential foreign investors.21

13. Roshan Telecom, Phases I–III. An ADB loan of $35.00 million approved in October 2004 financed the nationwide expansion and upgrading of Roshan’s global system for mobile communications (GMS) network, consisting of a nationwide cellular telephone system, public call office services, an international gateway, and internet service provider reselling operations. Loan 2241/CFS 41, approved in June 2007, supported the construction of a synchronous digital hierarchy system, and a fiber-optic microwave ring.22 This was to accelerate the extension of service to the populations of semi- urban and major rural areas, addition of network redundancy, and upgrading of network equipment. In conjunction with this second loan of $35.00 million, ADB also extended (i) a CFS of $22.39 million and (ii) PRG of $7.21 million (for CFS participants). Phase III supported further expansion of base transceiver stations and construction of the synchronous digital hierarchy fiber-optic backbone initiated in the previous phase. The third phase also introduced a mobile money transfer and payment system. ADB approved a third loan of $60.00 million and a PRG of $10.00 million in July 2008 but the PRG was later cancelled when the expected participation by a bilateral agency did not materialize.

14. Afghanistan Renewal Fund Limited. ARFL was established in July 2005 as an equity investment of up to $5.5 million. The fund was designed for investment in small and medium-sized enterprises (SMEs) across a range of industries in Afghanistan that were expected to take advantage of the opportunities offered in a post-conflict economy. The fund also aimed to provide SMEs with business and technical expertise. ARFL failed to make any investments during its 18 months of commercial operations.

15. Private Sector and Financial Market Development Program. ADB approved the PSFMDP in December 2006. The PSFMDP’s intended outcomes were (i) a dynamic private sector, and (ii) improved

21 AISA was set up with support from the United States Agency for International Development, MIGA, the United Nations Development Program, the Afghanistan Business Council, and the World Bank to facilitate the registration, licensing, and promotion of investments in Afghanistan. 22 A fiber-optic transmission system developed for high speed digital traffic. ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Political Risk Guarantee for the Roshan Phase II Expansion Project in the Islamic Republic of Afghanistan. Manila. 158 Appendix 10

financial intermediation. The PSFMDP comprised (i) a program grant of $56 million from the ADF to support the program adjustment costs and general government development expenditures, and (ii) an ADF grant of $4 million for capacity building. The program aimed to (i) establish a legal framework for PSD, (ii) address key market distortions, (iii) liquidate state-owned enterprises (SOEs), (iv) improve financial supervision, and (v) strengthen accounting and auditing standards and the profession’s capacity. The capacity building grant was to help the government achieve these outputs.

D. Evaluation of ADB Assistance23

1. Public Sector Operations

16. Strategic positioning. The positioning of ADB’s strategy in public sector operations is rated satisfactory because ADB’s PSD and finance sector strategy—as laid out in the CSP, three updates, and the CPS—has generally responded to the sector priorities. The rating is accorded despite two shortcomings: (i) while ADB’s PSD and finance sector strategy was largely consistent with ADB’s medium-term strategies, it is at variance to some extent with Strategy 2020; and (ii) the design quality of the theme result framework for PSD in the CPS has weaknesses.

17. The government’s national development framework (NDF), issued in April 2002, identified PSD as one of its three pillars of development, with priority given to the finance sector, investment, trade, and the elimination of corruption. In line with the NDF, ADB’s initial CSP adopted in May 2002 identified the finance sector as one of the core areas of operations and PSD as a thematic focus. The CSP saw microfinance24 and financial system development25 as particularly key areas for ADB’s finance sector operations, in response to the NDF’s priority initiatives. In April 2008, the government finalized the Afghanistan National Development Strategy (ANDS) for 2008–2013. The PSD section of the ANDS made the creation of an enabling environment one of three priority components.26 In response to ANDS, ADB’s CPS, adopted in November 2008, directs ADB’s PSD and finance sector operations toward (i) supporting an enabling environment through its public sector operations; and (ii) catalyzing private sector investment through the NSOs, possibly in the banking, telecommunications, energy, and mining sectors.

18. ADB’s medium-term strategy for 2001–2005 (MTS) emphasized the need for sector selectivity in the CSP and the initial CSP, with its sector focus on the finance sector, met this requirement. Strategy 2020, approved in 2008, identifies PSD and private sector operations as one of the drivers of change. The CPS for 2009–2013 was consistent with this in its thematic focus on PSD but no longer consider the finance sector a focus sector (with no reason given). This is despite the fact that Strategy 2020 (i) identifies the finance sector development as one of the core areas of operations, and (ii) specifically envisages deeper and longer engagement in institutional development for fragile countries and situations.

19. Strategy 2020 also envisages a better alignment with other funding agencies at strategic and project levels. To achieve this, the CPS provides a development coordination matrix. However, the matrix does not refer to the support for DAB being provided by the United States Agency for International Development (USAID), which was closely related with the PSFMDP. This perhaps reflects fading interest in the finance sector by ADB. Neither does the CPS incorporate a concrete plan for

23 In this section, ADB’s public sector operations and NSOs are evaluated separately based on their respective evaluation guidelines. 24 This initiative did not materialize until the TA for Rural Finance Expansion was approved in December 2011. 25 The CSP said that “ADB will coordinate with IMF and the World Bank to reestablish a viable financial system with functioning central and commercial banks, currency exchange rate regime, a monetary policy, a payment system, and a regulatory framework. Given the importance of financial services, ADB will consider support for developing institutional capacity for microfinance and enterprises (agriculture, agribusiness and small and medium-enterprises) financing.” 26 Two other components include (i) expand opportunities for the private investment in infrastructure and natural resources development, and (ii) concerted private sector for investment promotion. Summary of Private Sector Development and Financial Sector Assessment 159 harmonization at the strategy level in support of PSD with relevant active development partners, such as the World Bank, USAID, and the Department for International Development of the United Kingdom (DFID).

20. The CPS included a theme results framework for PSD that presented (i) intended PSD outcomes with measurable indicators in subregional trade, and GDP growth, and the rural poor; (ii) PSD outputs that were also accompanied by measurable indicators in private sector investment, cross-border trade, and investment climate improvement; (iii) intended ADB assistance, including nonlending and investment projects; and (iv) acknowledged risks, including those posed by the poor security situation and continued armed conflict. Most of the PSD outcome and output indicators have matching baselines and targets. However, difficulties in obtaining reliable trade related data in Afghanistan constrain the monitoring of these output and outcome achievements and it is unclear how the ADB PSD assistance and stated outputs are connected with the intended outcomes on the rural poor. Moreover, all the measurable PSD outcome and output indicators and targets are set for 2010 or earlier even the CPS covers operations through 2013.

21. Relevance. The PSD and finance sector program of ADB public sector operations is rated less than relevant. This is based on the fact that the AIGF and the PSFMDP were consistent with the government’s PSD and finance sector priorities and/or ADB’s country strategy but their designs suffered from flaws and their design and monitoring frameworks (DMFs) contained weaknesses.

22. The AIGF’s intended outcome of stimulating FDI was relevant to the government’s PSD strategy under the NDF, which prioritized investment promotion. The PSFMDP’s intended outcomes of a dynamic private sector and improved financial intermediation were also relevant to the NDF. It prioritized the privatization and development of commercial banks, among several other institutional development and reform measures. The PSFMDP outcome goals were also consistent with ADB’s PSD and finance sector strategy.

23. ADB’s PSD and finance sector operations were not entirely well designed. The AIGF’s design was based on (i) the rich experiences of MIGA in guarantee operations in conflict-affected countries, and (ii) innovative institutional arrangements envisaging risk allocation and market collaboration among several development partners and private sector players.27 However, the project design did not fully address (i) the inability of the AISA to translate initial investor interest into FDI or to promote PRGs to support such investment, partly because of its incapacity to keep trained staff; (ii) MIGA’s limited marketing of PRGs to potential investors outside of Washington, DC.; and (iii) the lack of local investor interest in PRGs, notwithstanding MIGA’s efforts to offer them through a local finder. Moreover, justification of a maturity mismatch between PRGs of normally up to 7 years and an ADF loan of 40 years—in the case of no renewal of the fund, which was foreseeable—is somewhat questionable. The PSFMDP had major design deficiencies related to the (i) considerable duplication with USAID assistance programs, (ii) lack of assessment of its implicit objective of budget support, and (iii) inadequate consideration of a skills transfer aspect in designing the capacity building TA.28

24. The DMFs for the two public sector activities were weak.29 The PSFMDP’s DMF provided impact and outcome indicators but (i) outcome indicators were not fully supported by baselines and targets, (ii) the sources of indicators were not specified and some are not available and/or reliable, and (iii) the

27 The AIGF reflected MIGA's previous experience with guarantee facilities, most notably in Africa (Regional Trade Facilitation Project) and Bosnia and Herzegovina (European Union Investment Guarantee Trust Fund). 28 The PSFMDP duplicated USAID’s (i) Land Titling and Economic Restructuring Activity (2004–2009) in the areas of land title management and the Immovable Property Formalization Law, and SOE liquidation; and (ii) Economic Governance and Private Sector Strengthening (2003–2009) in various areas of bank supervision. This meant that a major part of the PSFMDP’s planned activities had been covered under USAID programs that preceded it. 29 The AIGF had a project framework, which was the standard ADB results framework before adoption of the DMF. 160 Appendix 10

output indicators did not fully correspond to a wide range of program measures.30 The AIGF’s project framework identified impact and outcome indicators with no baselines or targets.

25. Efficiency ADB’s PSD and finance sector operations under its public sector window are rated less than efficient in view of the less-than-satisfactory performance of portfolio and program management and poor monitoring and evaluation (M&E).

26. ADB fully disbursed the PSFMDP grant of $56 million and closed the program 8 months earlier than the expected and 14 months ahead of the original grant closing date. It did so while approving the waiver of full compliance with three of the twelve second tranche release conditions. The three partly met conditions were concerned with (i) liquidation or asset sale announcements for 20 SOEs, (ii) issuance of bidding invitations for the assets of 20 SOEs, and (iii) submission of an accounting law and an audit law to Parliament.31 ADB waived these conditions considering that (i) the time and effort involved in completing the two conditions on SOE liquidation were underestimated at program inception, and (ii) the government delayed the submission of the laws on accounting and auditing at the request of ADB and development partners despite the fact that the government had completed substantial technical work on the two laws.32 The CAPE team believes these considerations justified the waiver of the partly met conditions but views ADB’s follow-up reviews and policy dialogues on the matter with the government as inadequate. Other implementation issues were associated with the accompanying capacity building grant that ended up with (i) a major change in scope right after its inception that allowed the use of this grant to hire advisors to support Ministry of Finance activities outside PSFMDP implementation, thus diluting the intended support for the program grant;33 and (ii) significant underutilization of this capacity building grant in the end despite the evident weakness in the program implementation capacity of the government agencies concerned and mixed achievements in program outputs. 34 The capacity development grant had a component to support program coordination that was not used for this purpose.

27. ADB’s M&E under the PSFMDP was poor. ADB fielded only two review missions, in June and September 2008, during a program implementation period that lasted from December 2006 to April 2009. Before the second tranche release in March 2009, ADB failed to initiate meaningful policy dialogue with the government on continuing weakness in bank supervision. This was despite the fact that addressing this weakness was one of the program’s intended outputs and ADB was aware that the IMF and the World Bank had warned that systemic risks were building in the banking sector (para. 33). This was a major flaw in ADB’s PSFMDP’s management, especially in light of the fact that weak banking supervision and enforcement later resulted in the Kabul Bank crisis (para. 5). ADB’s decision to close the

30 The DMF did not include any output indicators that corresponded to the two program measures: (i) implementation of the regulation on depository MFIs, and (ii) implementation of the regulation for kawaladars (money and foreign exchange services providers) in Kabul and in major provincial capitals. 31 The PCR on the PSFMDP stated that the two policy conditions related to SOE liquidation had been complied with. The PCR also reported substantial compliance on the policy condition related to the legal framework on accounting and audit systems but gave no explanation of its basis for this assessment, while noting little progress on the second tranche release and the end-of- program monitorable actions related to accounting and auditing. In its project framework, the PCR noted “target not achieved” regarding the intended program output on the accounting and auditing standards. 32 According to the PCR on the PSFMDP, ADB and several development partners recommended a delay in submission of these laws to Parliament due to what they saw as several enforcement and oversight issues. They believed that the private sector was not yet able to comply with and the public sector was unable to enforce the laws. The development partners had supported the laws but did not agree on whether the oversight board should be placed within the Ministry of Finance or be a self- regulating private sector body. A World Bank study on the issue was under preparation and a steering committee was to discuss it when it was complete. 33 The specific objective of this TA was to help achieve the PSFMDP outputs. However, the government indicated shortly after the TA’s inception in October 2007 that this assistance was not fully necessary in view of the ongoing TA from USAID, especially in the areas of the legal framework and SOE liquidation. In response, ADB approved a major change in grant scope that facilitated the provision of seven advisors to the MOF (which was originally to be funded through TA for Support for Economic Policy Management). No records of consultant outputs and performance have been kept by the executing, the implementing agencies, or ADB. This significantly constrained the CAPE team’s assessment of the TA outputs. 34 Footnote 17. This grant disbursed only 58% (or $2.3 million) of the estimated total TA cost in the 37 months of implementation, which compared with an original time frame of 36 months. Summary of Private Sector Development and Financial Sector Assessment 161

PSFMDP 8 months ahead of schedule without formally reviewing the progress of the end-of-program measures that were to be met by December 2009 was also questionable. These episodes indicate weak attention by ADB to results.35 The PSFMDP could have complemented the relevant USAID program more effectively, especially in the area of DAB’s bank supervision, if M&E had been properly carried out.

28. Implementation of the AIGF suffered from the deterioration of the security conditions in Afghanistan, combined with the effects of the 2008 global financial crisis. Both led to a severe decline in FDI. 36 The World Bank's implementation completion and result report observed that AIGF implementation was also hampered by (i) the lack of a clear and agreed marketing strategy and MIGA headquarters' poor supervision of the Kabul-based consultant responsible for marketing and operations of the AIGF and training of AISA staff at an initial stage of implementation; (iii) the lack of a full-time local representative of AIGF after October 2007 (following the termination of the initial consultant), due in part to a funding constraint; and (iv) AISA's failure to develop a good understanding of the AIGF. MIGA closely communicated with AIGF sponsors, especially Deutsche Gesellschaft für Internationale Zusammernarbeit (GIZ) and DFID, to explore and debate sources of funding for its local representative after October 2007.37 ADB does not appear to have played an active role in addressing this issue.

29. ADB made disbursements of the total $2.5 million under the first loss component under AIGF, only 50% of the total estimated amount, in May–July 2009.38 Until this last phase, there had been no disbursement, reflecting the weak coordination with MIGA.39 ADB’s participation in a supplementary component through a $10.0 million PRG facility was cancelled because (i) investments that needed debt cover, met the other criteria for NSOs in Afghanistan, and were viable were lacking; and (ii) ADB's ordinary capital resources for NSOs were needed elsewhere.

30. Effectiveness. The PSD and finance sector operations from the ADB public sector window are rated less than effective in view of the limited progress made by completed activities toward achieving their output and outcome targets.

31. Despite Afghanistan's deteriorating investment climate, the AIGF met its key outcome targets of stimulating FDI and creating jobs. The AIGF outcomes as of the end of September 2011 included three FDI flows to MTN (Arreeba) Afghanistan,40 BRAK Afghan Bank,41 and Geo Building Technologies.42 These

35 The PSFMDP’s policy matrix included 12 measures to be completed before the end of the program in addition to the program measures to be completed by the second tranche release. Of these 12 measures, only 4 were fully completed, 1 was partially completed, and the remaining 7 progressed only slowly, according to PCR. 36 FDI in Afghanistan in 2010 was $76 million, less than half of FDI in 2004 ($186 million) when the AIGF was formed and one– fourth the peak in 2008 ($300 million), according to the UNCTAD Stat. 37 A German grant of $0.6 million through Deutsche Gesellschaft Für Technische Zusammenarbeit of the Government of the Federal Republic of Germany (GTZ) covered the MIGA's cost of hiring a consultant based in Kabul in the early phase of the AIGF implementation. DFID contributed to the AIGF with a grant equivalent to $1.9 million. 38 In 2009, MIGA, IDA, and DFID agreed to extend their participation in component 1 for 2 years to 30 September 2011. ADB did not agree, however, because (i) funds in the AIGF account were sufficient to back PRGs already issued and any expected to be issued, (ii) viable new investments in the pipeline that would need PRG cover under the project were lacking, and (iii) ADB’s special funds resources were needed elsewhere. On 18 May 2010, the undisbursed ADB loan amount of SDR1.8 million was cancelled because of this and Afghanistan's commitment to AIGF was reduced from $10 million to $7.5 million. At that point, the actual project cost of component 1 was $7.7 million: $2.5 million from the ADB loan, $2.5 million from the IDA credit, $1.9 million from the DFID grant, and $0.8 million from net investment and premium income. 39 The PCR stated, “Coordination between ADB and MIGA was intermittent because of staff changes at both. MIGA implemented the project with initial contributions from IDA and DFID. It was towards the later stage of the project that ADB’s active involvement was sought, including the payment of ADB’s disbursement of $2.5 million into the AIGF account. ” (The Project Completion Report on AIGF, p. 6). 40 A PRG of $76.5 million was originally issued to MTN (Areeba) Afghanistan in June 2007 for its investment in a mobile phone network. In July 2011, a new guarantee of $156.75 million was issued to MTN to cover the expansion of its mobile network, replacing the earlier guarantee of $76.5 million. 41 A PRG of $1.8 million was issued to BRAC Afghan Bank—a financial institution focusing on loans to small- and medium-sized enterprises—for its investment in 2006, supplemented by an additional PRG of $0.2 million issued in 2008. BRAC Afghan Bank has struggled with bad loans and increasing minimum capital requirements and was in the process of being sold when the AIGF closed. 42 A PRG of $1.7 million was issued to Geo Building Technologies, a company invested by International Home Finance and 162 Appendix 10

amounted to $201.5 million, well above the target of $80 million specified in the IDA and MIGA result monitoring framework for this project.43 The FDI was stimulated by four PRGs totaling $159 million, including $6.5 million of AIGF exposure and $152.5 million of MIGA exposure.44 The outcomes also included the creation of 725 jobs, slightly over the target of 700. Nonetheless, the number of beneficiary projects fell short of the intended 10–20 and the hope that FDI could flourish in a variety of sectors and in SMEs was not realized. The results were also skewed by one large $193.0 million investment (in MTN Afghanistan) under which MIGA retained a $150.8 million second-loss position, which represented 95% of the total PRGs issued.

32. The five PSFMDP outputs have been partly achieved. Establishment of the targeted legal framework for PSD has been moved forward but further work is required to put out-of-court business resolution systems and a land titling and management system effectively in place. Removal of key market distortions has progressed but price controls at the municipality level have not been fully removed. Twenty-six SOEs have been liquidated. DAB’s bank supervision had been strengthened through the PSFMDP measures but the Kabul Bank crisis in 2010 showed that fundamental problems in bank supervision remain. Adoption of accounting and auditing standards has been significantly delayed. Reflecting the mixed performance on outputs, the program’s outcomes have also been only partly achieved. Private sector investment has not increased as targeted and although financial intermediation had grown until recently it is now in a downturn.

33. The Kabul Bank crisis underscored the vulnerability of the country’s banking system. It revealed that banking supervision lacked the political support necessary to enforce compliance with rules and regulations. Some studies had warned of banking system fragility before the crisis but these signals did not result in effective preventive measures by government authorities. In 2008, the IMF reported (i) considerable violation of prudential guidelines on related-party lending, loan concentration in a small number of borrowers and sectors, and open foreign exchange positions; (ii) weak enforcement by bank supervision; and (iii) a need to develop a comprehensive financial sector strategy aimed at deepening financial intermediation and reducing banks’ exposure to risks.45 In 2009, the World Bank’s report on the Financial Sector Strengthening Project pointed out that “in a situation where the growth of banking system reflects mainly the growth of the two largest banks (i.e., Kabul Bank and Aziz Bank), the bad performance or failure of one of these banks would create a huge impact.”46

34. Field studies have examined why bank lending and private investment have not grown in Afghanistan despite achievement of some of the PSFMDP outputs. In 2009, the World Bank pointed out that about 67% of total US dollar deposits were going to the short-term international money market and thus did not contribute to domestic lending and private investment. The World Bank also observed in 2008 that (i) only 5% of respondent Afghan firms had a loan with a financial institution and around half of the respondents felt the need to access formal credit but did not do so;47 (ii) working capital was overwhelmingly obtained from non-formal sources of finance; and (iii) retained earnings were the primary source of financing, accounting for 85% of all fixed asset purchases. In 2011, Cuasck and

Development to manufacture “green” bricks and lease brick-making machines in 2008. Subsequently, Geo Building Technologies failed to secure planned debt financing and reduced the amount of PRG cover to $0.2 million to reflect the declining value of investment. 43 MIGA and IDA developed and modified the project outcome indicators in the course of AIGF implementation. 44 AIGF also supported two other investment flows totaling $16.1 million that were stimulated by two PRGs amounting to $1.7 million (including $0.3 million of AIGF exposure and $1.4 million of MIGA exposure). However, these projects ran into difficulty and the PRGs were later cancelled. In April 2011, the AIGF paid compensation on a claim of $572.95 under the war and civil disturbance cover to the BRAC Afghanistan Bank for physical damage following an explosion at the Safi Hotel and shopping center in January 2010. This is the only claim filed under this project so far. 45 IMF. 2008. Islamic Republic of Afghanistan: Selected Issues. Washington, DC. 46 World Bank. 2009. Emergency Project Paper on a Proposed Grant in the amount of SDR 5.5 million to the Islamic Republic of Afghanistan for a Financial Sector Strengthening Project. Washington, DC. 47 Another report in 2010 based on a survey conducted by CIPE stated that “one-quarter of respondents in firms that did not attempt to borrow money mentioned the prohibition of interest in Islam as the reason they did not attempt to borrow (26%).” This was the top reason for not borrowing after not needing a loan, cited by 75%. Summary of Private Sector Development and Financial Sector Assessment 163

Malmstrom reported feedback from a study of Afghan corporate executives. It indicated that (i) microcredit under $2,000 or large-scale funding for infrastructure projects was available from banks but little lending could be obtained at the levels in between; (ii) a well-connected businessperson who had a personal relationship with a bank’s management could typically access loans up to $100 million; (iii) the fact that businesses did not have audited financial statements and could not put a business plan on paper were major obstacles in the way of greater lending by banks; (iv) less than half of all land in Afghanistan was legally registered and land was thus not trusted as collateral; (v) attempts to establish credit or collateral registries were in their infancy and did not provide reliable assurances that a would-be borrower had not already taken out multiple loans; and (vi) businessmen considered the judiciary to be “corrupt to the core.” Feedback that ADB’s CPS preparation team received from private sector interviewees largely supported these observations.

35. Sustainability. The sustainability of the outcomes of the PSD and finance sector operations under the ADB public sector window is rated less than likely. This is in view of the poor current business climate in Afghanistan, the capacity gaps in government agencies responsible for PSD and finance sector development, and the expected reduction in external assistance alongside the effects of the Kabul Process.

36. No major reversal has occurred in the policy measures supported under the PSFMDP but sustainability of the program outcome is doubtful. The reasons include (i) uncertain political support for the enforcement of rules and regulations needed to generate compliance with bank supervision; (ii) inadequate capacity in DAB and inadequate development partner support for DAB (paras. 59–60); (iii) the recent downturn in financial intermediation, and (iv) little improvement in the business climate. Of the three remaining projects covered by the four PRGs under the AIGF, the one large investment seems viable but the two smaller ones are underperforming. No plans exist to set up a new guarantee facility using the funds rolled over from the AIGF because FDI flow is weak due to the deteriorating business environment.

37. Impact. The impact of the PSD and finance sector operations under ADB’s public sector window is rated less than satisfactory.

38. Country achievements. Citing the ANDS strategic objective for PSD, the results framework in the CPS for 2009–2013 sets this specific impact target: “enable the private sector to lead Afghanistan’s development, with the government serving as policy maker and regulator of the economy, not its competitor.” Stagnant private investment and little improvement in the business climate during the evaluation period show little progress toward this target.

39. An exception at the sector level has been the telecommunications industry’s success in attracting private sector investment and reaching out to Afghan citizens and businesses. The business survey report (CIPE 2010) showed that 88% of respondents said they used their mobile phones as the most frequent way to communicate.

40. Although banking sector assets grew rapidly during the evaluation period, led by the private sector, business lending by banks remains low party due to limited bankable projects. A large portion of bank deposits are invested in international money markets and deposit growth did not lead to more private investment. In addition, the Kabul Bank crisis exposed the risks of rapid banking growth in a country where the rule of law is weak, the agency tasked to supervise and manage banking is new and inexperienced, and corporate governance in the banks themselves is poor. For Afghanistan’s banks to contribute more to PSD, they must improve their corporate governance and management, allocate credit more efficiently, develop their services, provide innovative products, and further mobilize savings. This will also require better execution and the backing and political will of government in the enforcement of banking rules and regulations.

164 Appendix 10

41. Project and program achievements. The AIGF contributed to the achievement of its impact by mobilizing $201.5 million in FDI and created 725 jobs while supporting the private sector-led development of the telecommunications sector. The investment in telecommunications also helped generate tax for the Afghan government and promoted technology transfer. The AIGF was not effective in providing the envisaged support for foreign direct investors in other sectors, however, or for SMEs. This made its overall impact limited. Growth occurred in financial intermediation, as intended under the PSFMDP, but this growth neither increased private investment nor was sustained. Therefore, the PSFMDP did not achieve its impact target.

42. Overall assessment. Overall, ADB’s private sector development and finance sector operations through the public sector window are rated less than successful, and summarized in Table A10.1.

Table A10.1: Performance Rating for Private Sector Development and Finance Sector Program (Public Sector Operations) Weighted Criteria Average Rating Criteria Weight Assessment Score Score Strategic positioning 0.1 Satisfactory 2 0.2 Program relevance 0.1 Less than relevant 1 0.1 Efficiency 0.2 Less than efficient 1 0.2 Effectiveness 0.2 Less than effective 1 0.2 Sustainability 0.2 Less than likely 1 0.2 Impact 0.2 Less than satisfactory 1 0.2 Overall assessment 1.0 Less than successful 1.1 Source: Independent Evaluation Department.

2. Nonsovereign Operations

a. Development Impact

43. The development impact of ADB’s NSOs is rated satisfactory. This is based on satisfactory ratings for each of the development impact sub-criteria: PSD; business success; contributions to economic development; and environment, social, health, and safety (ESHS) performance.

44. Private sector development. AIB had a salutary demonstration effect on the Afghanistan banking sector by adopting and manifesting high standards of management and corporate governance. Strong public confidence in AIB was evident in a shift of significant deposits to the bank after the Kabul Bank crisis. However, the relatively slow growth of AIB’s domestic loan portfolio in terms of lending as a percentage of deposits and its reliance on investments in high yield DAB securities and through internationally managed fixed-income portfolios show that AIB was unable to on-lend capital to the Afghanistan private sector in more than limited amounts. On balance, AIB’s PSD impact is considered satisfactory. Roshan demonstrated the commercial viability of mobile communications in Afghanistan while fostering increased competition and introducing innovative services—its M-Paisa mobile money transfer and payment system, for example, and the Malomat mobile agricultural trade data service. It also built linkages with local enterprises through its network of contractors, distributors, and resellers. Roshan’s PSD impact is considered excellent. The ARFL had a very limited effect on PSD through SME- level capacity building activities and was closed down prematurely. Its PSD impact is considered less than satisfactory.

45. Business success. AIB’s real return on invested capital during 2005–2010 period was 53.3%, which is greater than the benchmark of weighted average cost of capital of 32.3% plus 700 basis points. This gives it a business success rating of excellent. The bank’s key financial ratios fluctuated widely from year to year, however. Return on equity reached a high of 86.23% in 2008. Its low was – 36.75% in 2005 it showed a sharp drop from 2009 to 2010. AIB also had a consistently low loan-to- Summary of Private Sector Development and Financial Sector Assessment 165 deposits ratio, which reached a high of 38.26% in 2007 but was at a low of 13.30% in June 2010. This reflected the poor market situation in Afghanistan, which in turn limited AIB’s lending opportunities. Roshan’s real financial internal rate of return (FIRR) is estimated to be 20% during the 2004–2014 period, which exceeds the weighted average cost of capital of 14.4% in 2011 and gives it a satisfactory rating for business success. Roshan’s profit margin for 2003–2011 has been stable but relatively low at 26%, while its liquidity position remained tight over the period. 48 Prior to 2006, Roshan enjoyed double-digit revenue growth that reached a top of 635% in 2004. But revenue growth has been declining as the market becomes saturated and Roshan must share it with two major competitors (MTN and Etisalat).49 An intense price war during 2010–2011 has eased as competitors realized that their pricing campaigns were not sustainable. Financial and operational performance has improved across the sector.50 ARFL failed to make any investments, was dissolved after a year of operation, and thus is considered unsatisfactory on this criterion.

46. Contributions to economic development. AIB’s real economic return on invested capital (EROIC) over the 2005–2010 period was 56%, which is greater than the 20% hurdle rate for an excellent rating. The EROIC calculation takes into account the AF354.5 million in corporate income tax paid by AIB to the government during the period. Roshan’s real EROIC during 2004–2014 is expected to be 47%, giving it an excellent rating as well. This EROIC estimate considers the willingness to pay for additional services and improved service quality measured by the company’s revenues to be the economic benefits.51 ADB loans to Roshan contributed significantly to Afghanistan’s economic growth during the evaluation period through approximately $400 million in investments and payments of $146 million in taxes that made up 6% of the government’s domestic revenue. Roshan is the only operator whose services cover all of Afghanistan’s 34 provinces. The ARFL made no actual investments and had no positive effect on the economy and so is considered unsatisfactory in regard to contributions to economic development.

47. Contributions to environment, social, health, and safety. As a recipient of an ADB investment, AIB was classified as a financial intermediary under ADB’s Environmental Policy (2002). AIB adopted an environmental management system, has incorporated environmental management procedures, and conducts environmental due diligence in its loan and credit process. ADB’s investment in AIB has been classified as category C under ADB’s Safeguard Policy Statement (2009) and no involuntary resettlement or impact on indigenous peoples has resulted from AIB’s activities. AIB is thus considered satisfactory on ESHS performance. ADB’s loans to Roshan were classified as environmental category C because they did not have a significant adverse environmental impact. Roshan put satisfactory procedures in place for site selection, construction of base transceiver stations, use and disposal of fuels and hazardous materials such as batteries, solid and liquid waste management, and minimization of noise and air emissions during construction and operation of the diesel generators at the base transceiver stations. Under phase III, ADB supported Roshan’s installation of solar photovoltaic panels to power telecommunication towers, which reduced diesel fuel consumption and greenhouse gas emissions in the company’s operations. As of September 2011, Roshan had equipped 22 sites with

48 ADB’s extended annual review report (XARR) on Roshan explains that a tight liquidity position is not unusual for telecommunications companies because most of their revenues come from paid-in-advance subscribers and they thus always carry a significant unearned revenue liability on their balance sheets. The report also notes that the Roshan’s cash position has been strained by (i) payments to shareholders of relatively high management fees; (ii) significant accounts payable to suppliers and contractors for purchase of network equipment; and (iii) costs related to security, which has deteriorated and often requires the shutdown of facilities. 49 As the end of September 2011, Roshan’s market share in the standard voice market was 35% (5.35 million subscribers), approximately 8.71% above projections in its business plan for 2009–2014). It was followed by MTM with 29.2% and AWCC with 14.7%. 50 The YEAR XARR on the Roshan project stated that the standard voice market in Afghanistan had reached maturity and therefore data services offered the best potential for growth. While Roshan enjoys the leadership position in data services, it is likely that it will face new competitive challenges over the next few years. In response, Roshan needs to keep up with the latest third and fourth generation technologies to maintain competitiveness. 51 The XARR on Roshan considered this EROIC estimate conservative because the impact on economic growth of the greater penetration of mobile communications was not taken into account as an economic benefit. 166 Appendix 10

solar power. ADB’s loans to Roshan were classified as category C for social safeguards and no involuntary resettlement or impacts on indigenous peoples have resulted from the company’s activities. In August 2011, 186 of Roshan’s 1,210 permanent workers were women, as were 65 of its 93 temporary workers. Roshan has a corporate social responsibility program under which about 1% of its revenue is allocated to funding social programs, particularly in the health and education sectors. Roshan is thus considered satisfactory on ESHS performance. The ARFL incorporated ADB’s environmental and social safeguard requirements in its legal documentation but had no opportunity to demonstrate its ability to apply ESHS standards in practice.

b. ADB’s Investment Profitability

48. ADB’s investment profitability through these NSOs is rated satisfactory. ADB’s investment in AIB yielded a FIRR of 29.8%. This calculation was based on ADB’s investment of $2.6 million, a $2.5 million cash dividend received in 2010, and residual value of the put option at book value as of 31 December 2009 of $9.6 million. It is 1.62 times the hurdle rate of 18% (the average of the 13%–23% range quoted at investment approval) and earns the investment a rating of excellent. ADB disbursed all agreed facilities to Roshan. As of September 2011, ADB’s exposure to the company was about $57.12 million in direct loans, including $8.24 million for Phase II, and $48.88 million for Phase III. Originally, each ADB direct loan carried a floating rate set at 4.75% over the London interbank offered rate (LIBOR), while the CFS was at 6.50% over LIBOR.52 The Phase III loan was subsequently converted into a fixed interest rate of 6.8075% at Roshan’s request. Roshan has been making principal and interest payments on time. The Phase I direct loan and Phase II CFS and PRG-covered facilities had been fully repaid by July 2011.53 ADB incurred a loss in connection with the ARFL of $462,000 in administrative expenses. This investment is considered unsatisfactory.

c. ADB’s Work Quality

49. ADB’s work quality in these NSOs is rated satisfactory based on satisfactory ratings for each of the subcriteria: (i) screening, appraisal, and structuring; (ii) monitoring and supervision; and (iii) ADB’s role and contribution.

50. Screening, appraisal, and structuring. The project documents for ADB’s AIB investment described the evolution of the concept from an initial idea to establish a trade development bank with other multilateral financial institutions to ADB’s subsequent decisions to withdraw from this plan and establish a bona fide commercial bank as a core shareholder rather than a debt provider. By adhering to the commercial banking model, as opposed to the model espoused by International Finance Corporation and the Aga Khan Fund for Economic Development, and by taking on the risk of shareholding, ADB played a leading role in establishing the overall direction and structure for what has become a successful institution. In view of this, ADB’s investment is considered excellent on this subcriterion. ADB carried out adequate at-entry analysis on the growth potential and opportunities in the telecommunication sector in its Roshan support and the project design throughout the three phases responded appropriately to these opportunities. The front-end work quality met ADB’s good practice standards. This investment is also considered satisfactory. ADB also generally applied good practice standards in the front-end work for the ARFL. However, during the initial screening stages of the project, it failed to realize that the concept of forming a private equity fund was somewhat misaligned with the rest of the financial system in Afghanistan at the time. ADB’s investment in ARFL is thus considered less than satisfactory on this criterion.

52 At the time of loan processing, no benchmark existed for pricing loans in Afghanistan other than from vendor financing facilities for Roshan. The proposed pricing was based on the 3.5% margin charged on the financing of Grameenphone in Bangladesh, plus an amount to represent the additional country risk. Afghanistan still has no relevant pricing benchmarks for loan transactions. 53 Final repayment for the Phase II direct loan was due in June 2012 and for the Phase III loan in September 2014. Summary of Private Sector Development and Financial Sector Assessment 167

51. Monitoring and supervision. ADB has actively participated in AIB’s governance structure through the consistent high-level representation and contributions to AIB’s board proceedings of its ADB’s Private Sector Operations Department staff. This has been particularly the case in the areas of risk identification and management, strategic direction, and business development. ADB’s investment in AIB is thus considered excellent on this subcriterion. ADB has closely tracked Roshan’s progress through document review, site visits, and direct interactions with executive management. During the project’s operational phases, ADB maintained close communications with Roshan’s management. ADB’s interventions in Roshan are thus considered satisfactory on this subcriterion. The project objective of the ARFL was not met but a bigger loss was avoided because ADB kept itself sufficiently informed in all the material areas that led to its decision to wind the fund down. For this reason, ADB’s monitoring and supervision work on ARFL is considered satisfactory.

52. ADB role and contribution. ADB assistance to AIB and Roshan showed high degrees of responsiveness to the government’s pro-private sector strategy and was designed with activities that addressed inclusive growth (through Roshan) and good governance (through AIB) and were thus in line with ADB’s Strategy 2020. These two projects are thus considered satisfactory on this subcriterion. The intended role and contribution of the ARFL were in line with ADB country strategies, which had PSD as a thematic focus. However, the project failed to play its intended role and is thus considered less than satisfactory on this subcriterion.

d. ADB’s Additionality

53. ADB’s additionality through these NSOs is rated satisfactory. With respect to AIB, ADB added value by (i) playing a strong, steady role throughout AIB’s formative years, particularly through the guidance it provided after termination of a management services and technical assistance arrangement with the international advisory group;54 (ii) supporting the establishment of a correspondent banking relationship between AIB and Citibank and helping AIB develop a customer relationship with the US Army, which was a key depositor and contributed substantially to AIB’s liquidity and financial success; and (iii) providing a technical assistance grant for AIB to engage the services of an international consulting firm from October 2008 to November 2009 to develop its 5-year strategy and implementation plan.55 ADB’s investment in AIB is thus considered satisfactory on this criterion. ADB added value in its support of Roshan as a provider of PRG and CFS, through which commercial financing was mobilized, especially for Phase II.56 Without ADB’s participation, the Roshan’s expansion program would likely have been scaled down or delayed. ADB’s interventions in Roshan are thus considered excellent on this criterion. As a lead investor in ARFL, ADB was heavily involved in the establishment of the fund through development and structuring support. ADB’s participation was critical to the establishment of ARFL. ADB even obtained Board approval to waive the 25% equity investment limit in a project so that ARFL could achieve a reasonable size in the first closing. ADB added value in these ways and in its investment in ARFL is thus considered satisfactory on this criterion.

54 The services of ING-IGA had been engaged as part of the agreement to establish AIB. However, ING-IGA produced very poor results in its 2 years of managing AIB. Upon termination of ING-IGA, AIB’s board helped recruit qualified personnel to manage and operate AIB. ADB’s dealing officer contributed to this process and the renewed management successfully carried out AIB’s turnaround operations as mandated. 55 ADB. 2006. Technical Assistance for Capacity Building for Financial Institutions. Manila (TA 6332). Part of the funds from this TA was allocated to AIB. 56 ADB’s second loan of $35 million was supplemented by a CFS of $22.29 million (comprising $12.39 million through Standard Bank to settle outstanding Alcatel financing and a $10 million loan, with equal participation from Standard Bank and National Bank of Pakistan); and PRG of $7.2 million (for CFS participants). The other senior lenders included Societe de Promotion et de Participation pour la Cooperation Economique (Phases II and III) and Deutchche Investitions und Entwicklungsgesellsellschaft (Phase II). 168 Appendix 10

e. Overall Assessment

54. Overall, the ADB’s NSOs in PSD and the finance sector in Afghanistan during the CAPE period are rated successful, and summarized in Table A10.2.

Table A10.2: Performance Rating for Nonsovereign Operations Rating Criteria Ratings Development impact Satisfactory ADB investment profitability Satisfactory ADB work quality Satisfactory ADB additionality Satisfactory Overall assessment Successful Source: Independent Evaluation Department.

E. Conclusions

1. Findings and Lessons

55. Two success stories. ADB’s NSOs in Roshan and AIB have been effective and timely. They also showed an appropriate sector focus and the right choice of instruments and partnerships. This has helped the private sector in Afghanistan play a constructive role in building economic activity in the telecommunications and banking sectors despite the country’s fragile status and serious protracted security concerns. ADB has also demonstrated the effectiveness of making use of its diverse set of nonsovereign window tools—loans, equity investments, PRGs, CFS, and grants—while catalyzing resources from international financial institutions for Roshan and contributing to the upgrading of corporate governance and management through its participation on the AIB board.

56. Progress stalled. Notwithstanding these past successes, no nonsovereign project has materialized since 2009 under the current CPS.57 No ADB staff member in the Afghanistan Resident Mission or at ADB headquarters is engaged in promoting ADB’s PSD operations in Afghanistan. This means that relevant government agencies and other development partners are not well aware of the role that ADB can potentially play in this field. The weak presence in the country also limits ADB’s opportunities to network with potential local, regional, and Afghan diaspora investors and lenders, thus constraining business development activities.

57. Greater use of political risk guarantees. The PRG has played a limited role in ADB operations so far and its potential has perhaps not yet been fully tapped. ADB used PRGs effectively to mobilize commercial financing for Roshan. But the AIGF did not meet its initial target of serving SMEs and ADB’s participation in a second component through a supplementary PRG facility did not materialize. As pointed out by Peschka (2011), 58 the existing political risk insurance options are not adequate to mobilize large amounts of investment in fragile and conflict-affected situations.59 Recognizing this and incorporating lessons drawn from previous operations, especially the AIGF, MIGA is contemplating the launch of a new kind of program it calls conflict-affected and fragile economies facilities (CAFEF).60 ADB

57 By contrast, IFC has scaled up its investment activities over the last few years. Its committed portfolio grew from $8 million in 2004 to $63 million in 2009 and its current investment portfolio totals more than $90 million in six companies. Since 2007, IFC has contributed to the development of the finance sector in particular through support for small business and trade finance, telecommunications, hospitality, and health care sectors. 58 Peschka, Mary Porter. 2011. The Role of the Private Sector in Fragile and Conflict-Affected States. (Background Paper for World Development Report 2011 of the World Bank). 59 For instance, existing public and private PRG providers cover new cross-border investments but generally do not cover (i) local investors, despite the fact that acts of political violence could be covered by insurance and this is the most urgent concern of local investors; and (ii) existing investments, even though disinvestment increases unemployment. 60 According to IDA, DFID, CIDA, SIDA, AusAID, and BMZ have expressed an interest to finance the CAFEF. Summary of Private Sector Development and Financial Sector Assessment 169 may wish to consider widening the scope of PRG operations and explore possible future collaboration in CAFEF with MIGA.

58. ADB shortcomings. ADB’s PSD and finance sector policy support operations through the PSFMDP suffered from several critical flaws: (i) duplication of the efforts of other development partners in some areas; (ii) absence of analysis and discussions on the implicit objective of fiscal contributions at entry; (iii) inadequate consideration of skill transfers in designing the capacity building TA; (iv) ineffective M&E and inadequate policy discussions on critical program outputs, such as bank supervision, at the time of the second tranche release, which suggested a weak commitments to results by ADB; and (v) a lack of follow-on activities on PSFMDP results, which raises questions about ADB’s commitment to creating the enabling environment for PSD that was envisaged in the CPS.

59. Central bank capacity building. It is crucial that capacity at DAB be improved. The Kabul Bank undermined confidence in the banking sector because it exposed the weak rule of law in the sector, the inexperience of DAB in bank supervision and management, poor corporate governance in many banks, and a lack of political commitment by government to enforce banking rules and regulations. On the other hand, the government may have learned valuable lessons. DAB has taken measures to strengthen its supervision, including regular reviews of bank compliance and more timely recommendations and time-bound enforcement letters when appropriate. DAB is also revising the existing banking law, making new regulations, and revising others. DAB also recognizes the urgent need to build its ability to prevent bank fraud and economic crime. Its bank supervision department prepared a report on lessons learned from the Kabul Bank crisis and the government intends to develop a comprehensive plan based on the findings to build DAB’s institutional capacity to prevent and respond promptly to economic crimes. The government may also need to develop a credible medium-term finance sector strategy that has the particular aim of enhancing the private investment and financial inclusion. Such a strategy should help rebuild confidence by showing what an improved financial sector would look like in the medium term and might thereby help put financial intermediation on a sustainable growth path again.

60. DAB may need further external assistance to cope with the challenges ahead.. The Kabul Bank crisis has changed the landscape of external assistance in the finance sector. USAID decided to withdraw its support for capacity building at DAB. DFID agreed to a government request to finance the audits of Kabul Bank and of another large bank. The IMF has been providing technical assistance in the resolution of the Kabul Bank collapse, with DFID funding, in other broad areas of DAB operations. The World Bank agreed to support the audits of 10 commercial banks in collaboration with the IMF and DFID and the modernization of the national payment systems under its Financial Sector Rapid Response Project (FSRRP). The scope of the activities under the FSRRP is limited. The World Bank task team leader for the FSRRP has pointed to DAB’s limited capacity and underscores the need for further external assistance to the finance sector. The DAB bank supervision department head has also emphasized the severe shortage of staff in his department. In this regard, ADB may consider assistance to DAB in areas related to rural finance or to financial inclusion in general, based on the achievements under the TA for Rural Finance Expansion approved.

61. Rural impact. PSD activities have supported the rural population and the TA for Rural Finance Expansion will extend these efforts. In some fragile and conflict-affected situations where illegal trade has fueled conflict—as it has in Afghanistan—long-term PSD initiatives need to focus on strengthening alternative livelihoods and creating conditions under which parallel grey markets can transform into legitimate private sector business sectors. The CAPE team notes the importance of this TA from this perspective and particularly supports the concept of targeting pockets of profitability. 61 However, the feedback from the key implementing agency, the Microfinance Investment Support Facility for Afghanistan, and from development partners such as the World Bank and DFID suggests that ADB’s

61 This TA focuses on up to 10 pilot pockets of profitability to be created directly and indirectly by rural development projects and services funded by government and development partners with an aim to strengthen the rural finance appraisal skills of commercial banks and MFIs in Afghanistan. 170 Appendix 10

communications with these agencies have been limited since the country consultation mission was conducted in June 2010. Closer communications with these agencies at this stage would help reaffirm and, if necessary, fine-tune the TA design and the DMF and ensure complementarity and mitigate risks.

2. Suggestions

62. Based on the above findings and lessons, the CAPE team has the following recommendations:

(i) ADB should strengthen its business development activities in the PSD domain, possibly by allocating additional resources for the Afghanistan Resident Mission so that it can become more actively engaged in promoting ADB’s relevant products and services and networking with local, regional, and Afghan diaspora investors and lenders. (ii) ADB should keep track of the ongoing discussions on the CAFEF, a multilateral risk mitigation facility for fragile and conflict-affected situations (para. 57), and explore potential further collaboration with MIGA in this initiative, which is based on its experience with the AIGF. (iii) The government should develop a credible medium-term strategy to promote sound financial sector development based on the results of the ongoing commercial bank audits (para. 60). ADB should consider refocusing on the finance sector in its CPS should the government identify the significant external assistance gap in preparing and/or implementing its medium-term finance sector strategy. (iv) ADB should closely communicate with the Microfinance Investment Support Facility for Afghanistan, DAB, and the relevant development partners in its implementation of the ongoing TA for Rural Finance Expansion to ensure its complements other related activities. APPENDIX 11: SUMMARY OF RESETTLEMENT ASSESSMENT

A. Introduction and Background to the Assessment

1. The assessment was part of the country assistance program evaluation (CAPE) conducted by the Independent Evaluation Department of the operations of the Asian Development Bank (ADB) in Afghanistan during 2002–2011. The assessment used qualitative methods of evaluation that involved (i) desk review of aide-memoire and back-to-office reports for ADB projects during the period in the agriculture, energy, natural resources management, and transport sectors; (ii) interviews with social development specialists working on resettlement in the Central and West Asia Department and the Regional and Sustainable Development Department in ADB headquarters in Manila; (iii) in-country interviews with Afghanistan Resident Mission staff working on these sectors; and (iv) in-country interviews with resettlement focal persons, project management staff and consultants in the implementing agencies, key personnel in the executing agencies, and other government ministries and agencies related to involuntary resettlement. The unstable security situation prevented travel to the field. For this reason, the CAPE team consultants were unable to interview persons or households affected by ADB projects. In addition, staff turnover at the resident mission and in the project management of the implementing agencies compelled the evaluators to focus on ongoing projects of ADB in Afghanistan.

2. This report presents the overall findings of the assessment and suggestions arising from the findings. The report addresses (i) the preparation, approval, and financing of the land acquisition and resettlement plan (LARP); (ii) LARP implementation; (iii) findings on impacts on displaced persons; and (iv) operational and policy suggestions to improve the implementation of involuntary resettlement safeguards.

3. In general, the land acquisition situation has improved in recent years. In the past, only titled landowners were compensated despite the fact that most of the land in the countryside is untitled and only legitimately held by owners who are members of a traditional community. ADB has established the principle that affected parties without land titles also need to be compensated, as long as the local village councils vouch that they are members of the village community. Without this principle, land compensation and ADB’s resettlement policy could not be carried out in most cases.

B. Land Acquisition and Resettlement Plan Preparation to Financing

1. Preparation

4. In coordination with the government, LARP preparation is done by the project implementation unit (PIU) or project management unit (PMU). In many ADB projects in Afghanistan, the PIU or PMU was supported by private firms acting as project management consultants and construction supervision consultants (CSC). In design–build contract arrangements or engineering procurement contracts (EPCs), as they are called in the energy sector, the LARP was prepared in the detailed design by the civil works firm under the supervision of the CSC. Only after detailed design could the project management office (PMO) and ADB determine the extent or significance of involuntary resettlement impacts. The valuation of affected land, structures, trees, and crops was undertaken by a committee consisting of provincial officials representing the Ministry of Finance (MOF); the implementing agencies; the Land Authority; the Ministry of Agriculture, Irrigation and Livestock (MAIL); and others. Projects are designated category A when 200 or more people are to be displaced and/or are losing 10% or more of their productive and income-generating assets. A category A project requires a full LARP to be cleared by ADB’s Regional and Sustainable Development Department. When the number of persons to be displaced is below 200 and the extent of losses does not exceed 10%, the 172 Appendix 11

project is labelled category B and requires a short LARP to be approved by the safeguards specialists of the Central and West Asia Department. When no resettlement impacts are determined, the project is given a category C rating.

5. Learning curve. Informants interviewed for this assessment from ADB’s headquarters and the Afghanistan Resident Mission, the government, and a nongovernment organization (NGO) said that the involuntary resettlement safeguards are relatively new to Afghanistan. ADB’s involuntary resettlement policy—specifically, the principle of compensating all losses prior to the start of civil works and the use of replacement cost valuation for affected assets and other losses—required a shift from the traditional approach in the country, which normally involved the government simply taking over land and starting construction. Afghanistan made some progress during the CAPE period, but understanding and appreciation are still evolving. Some ministries have advanced further than others. The Ministry of Public Works (MPW), for example, has demonstrated its commitment to the ADB standards by hiring its own resettlement manager for ADB projects and agreeing to have an NGO, the Afghan Bureau of Collaboration (ABC), undertake LARP preparation. Fears do remain that the use of replacement cost can drive up the market price for land and encourage speculation but, by and large, government ministers have accepted the principles underlying ADB’s involuntary resettlement safeguards requirements.

6. Detailed design. Delays in procuring the services of a detailed design consultant can push back the scheduled completion of the LARP, since the exact list of affected persons, the extent of land to be taken, the impacts on structures, and the effects on sources of livelihood of a project are based on the completed detailed design. The feasibility of avoidance and minimization measures can only be determined, moreover, during the detailed design stage. In energy and transport projects, the detailed design and civil works portions of ADB projects in Afghanistan have often been lumped into one design–build contract. The unstable security situation can discourage many bidders, so much so that the procurement process becomes uncompetitive or uneconomical.

7. Quality of resettlement consultants. Resettlement planning depends on the quality of resettlement consultants mobilized by the detailed design firm. Subpar work by poor quality consultants can significantly delay resettlement planning. In one project assessed under the CAPE, a LARP had to be revised 17 times. The security situation, however, makes it difficult to recruit high quality resettlement specialists.

8. Multiple claimants. Land is often subject to multiple claimants in Afghanistan, particularly in the areas surrounding major cities and other urban areas. Multiple claims can involve :

(i) one property claimed by two or more private individuals, (ii) government land whose use is claimed by a ministry and a municipality or district, (iii) government land for which different government agencies have issued different rights documents to private individuals, (iv) government land occupied by speculators in the expectation of obtaining ownership in the future, and (v) land disputed between government and private claimants

9. Disputes over land ownership between private individuals are common. In a number of cases, especially in major cities, returning Afghans have reclaimed ownership over land and buildings that are occupied by persons unknown to them. The land has sometimes been obtained by the current occupants by such means as (i) purchase from the supposed owner or an unlawful purchase facilitated by high-ranking government officials, (ii) forcible seizure by a warlord, and/or (iii) redistribution by the former communist regime. Where two claimants are present in a community, especially in the rural Summary of Resettlement Assessment 173 areas, and have more or less equal standing, the disputes can be resolved through a shura.1 However, when the power and status of the disputants are asymmetrical, the conflicts can linger indefinitely.

10. The cases involving government land arise in several ways (para. 8 [ii], [iii], and [iv]). While all government lands fall under the MAIL, ministries or municipalities were sometimes given jurisdiction over particular parcels of land to use for their offices and other facilities. The situation has become complicated when one ministry/municipality entered into agreements with certain parties regarding use of the land while another ministry/municipality allegedly issued land rights documents on the same property to another set of individuals. An example of this is occurring under tranche 2 of ADB’s Energy Sector Development Investment Program. Land identified as a site for a substation in Dascht-e-Barchi in southwest Kabul is the subject of an ongoing discussion between the municipality, which had certified the land for use as a substation and transmission line, and MOF, which has leased the land to a private individual. Government land is also sometimes claimed by private individuals who have been able to secure dubious land rights documents authorizing them to occupy it.

11. A clan or family often disputes land ownership claimed by the government. In ADB’s Transport Network Development Investment Program (TNDIP): Bagramy-Sapary Road, the LARP consultants had to return to the field to resurvey the road corridor after the cutoff date to verify demands from purported owners to compensate them for land that they were claiming to be theirs. During the first survey, the government identified these lands as government property.

12. Land disputes are both frequent and difficult to solve, because most of the land in Afghanistan is unregistered. Property is exchanged informally, and transactions are not recorded officially to avoid high taxes, bureaucratic red tape, and corruption, and due to a lack of trust in the government land system. 2 The country needs a modern land tenure system, however, and a thorough land titling program must be carried to further its economic growth and development.

2. Approval

13. Under Afghanistan’s Land Acquisition Law, all expenditures for land acquisition—be it for foreign-assisted projects or locally financed projects, and regardless of amounts and categorization— are subject to the approval of the Council of Ministers. After approval by the Council of Ministers, LARPs for ADB projects are endorsed by MOF as the executing agency or by the implementing agencies to ADB for no objection. The Council of Ministers either gives its approval or requests revisions before doing so.

14.S low approval by the council of ministers. According to ADB’s resident mission and to PMU staff, 3 months usually elapse between the day a LARP is submitted and the first day council discusses it. MOF said the first discussion could actually come only 6 months after the LARP is submitted to the Office of Administrative Affairs (OAA), which prepares the schedule and agendas of the council meetings. This is partly because discussion of a LARP can be postponed when other pressing matters arise, and this can happen three or four times.

15. Approval is not assured in the first discussion. The Council of Ministers discussed the LARP for the Qalai-Naw airport (under the Regional Airports Rehabilitation Projects, Phase 1) three times. This was due to the large LARP budget and the lump sum presentation. The project required 132 jeribs 3 or 26.4 hectares of land, and the LARP budget was approximately AF300 million. The Ministry of Transport

1 This is a formal traditional consultative institution under Islam that can coordinate and help implement all development activities at the community level and resolve conflicts. 2 Informal transactions are accomplished by the parties preparing, approving, and signing a document called qabala-i-hurfi. The document is signed by witnesses such as relatives, neighbors, and friends. The government sales tax is 2% for all immovable property transactions of up to AF1 million. It is 3% for all transactions above AF1 million. In Kabul, sales tax for an apartment at current prices is approximately $26 per square meter. 3 This is a unit used in Afghanistan to measure land area. One jerib is approximately 0.2 hectares. 174 Appendix 11

and Civil Aviation had been unable to justify the amount in the meetings. The council asked for a revision in the land price. The PIU worked with the provincial governor and the valuation committee to persuade the affected persons to reduce the land price.

16. Resettlement was delayed on three land packages under the North–South Corridor Project, because the Council of Ministers did not accept the land prices in the LARP and ordered a revaluation of the affected land. A revaluation by the provincial valuation committee arranged by the PMO reduced the price of package 2 for the Pul-e-Baraq–Dar-i-Suf Road by 10% but sustained the assessed value of the two other land packages. All told, this took about 2 years. In the meantime, the market price on land had increased by 50%.

3. Financing

17. The government usually financed land acquisition, while either it or ADB shouldered the costs of compensation for affected structures, crops, trees, business losses, and allowances for poor and vulnerable households. Government funds were available. For example, in the fiscal year that ended on 20 March, Afghanistan earned AF7 billion ($140 million) more than the targeted revenues agreed upon with the International Monetary Fund. For the coming fiscal year, the budget allocated for land acquisition was AF550 million ($11 million).4 Land acquisition was a line item under the contingency category of the discretionary budget of the Afghan government. Other categories under the discretionary budget were salaries and operating expenses. Loan and grant proceeds from multilateral development banks and bilateral donors went into the development budget.

18. The government’s budget proposal was submitted to Parliament for approval every year. The Parliament could either reject or approve the budget by a simple majority vote. Normally, the Parliament submitted a list of revisions, usually on the development budget, for the Council of Ministers and the President to consider. When the budget was approved by Parliament, the President signed it into law through a presidential decree. If Parliament failed to pass the budget, the current fiscal year’s budget would be carried over to the next.

19. Afghanistan maintained a single treasury system. To access the amount allocated for land acquisition for government projects, each implementing agency or line ministry had to submit a request. Representatives of MOF in each line ministry reviewed the requests and passed them on to the MOF main office, where they were studied further. Requests were entertained on a first come, first served basis. Unused amounts in the discretionary budget remained in MOF’s account and, if needed in the succeeding fiscal year, would have to be reintroduced in the budget proposal sent to Parliament, although the development budget could be rolled over to the following year.

20. ADB projects had different ways of requesting and disbursing their budgets for land acquisition. Once a LARP under the North–South Corridor Project had been approved, the PMU at MPW submitted the list of affected persons along with their bank account information to MOF, which would transfer the amounts to private banks for direct crediting into the recipients’ savings accounts. No funds were released directly to MPW to pay for land acquisition costs.

21. The Energy Sector Development Investment Program (ESDIP) implemented by the Ministry of Energy and Water (MEW) through Da Afghanistan Breshna Serkat (DABS) had two proposed payment schemes.5 The first involved the transfer of funds to the provincial directorate of MOF, which then paid

4 The fiscal year in Afghanistan has coincided with the solar year. The current fiscal year began on March 20 but it will last only about 9 months and end on 31 December 2012 as Afghanistan makes a transition to a fiscal year based on the calendar year. The next fiscal year and those that follow will begin on 1 January 2013 and end on 31 December 2013. 5 ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility and Administration of Grant from the Japan Fund for Poverty Reduction to the Islamic Republic of Afghanistan for Energy Sector Development Investment Program. Manila. Summary of Resettlement Assessment 175 the affected persons. Under the second, affected persons in Kabul would collect their payments directly from the DABS main office in the Afghan capital.6

22. Under the first scheme, MOF would transfer the compensation through the Afghanistan Management Information System (AFMIS) either to the MOF provincial directorates or DABS or MEW provincial offices. Through the AFMIS, posting could be done in a single day. MOF would verify online that the sums had been posted. The MOF provincial directorates would be authorized to pay cash for purchases of less than AF5,000. For amounts of AF5,000–AF50,000, the provincial directorate could issue government checks. Over this amount, the payee would have to open a bank account into which payment could be deposited.

23. Delayed payment of allowances to affected groups. MEW, the implementing agency, initially refused to pay the allowance due to poor and vulnerable persons affected by ADB’s Regional Power Transmission Line Project despite inclusion of this allowance in the LARP approved by the Council of Ministers. The government had agreed to shoulder the entire LARP budget, because the number of affected persons and the amounts were small. MEW based its refusal to pay this allowance on its contention that no such entitlement existed in Afghan law. It said that MOF did not have an item in its chart of accounts for payment of allowances to vulnerable groups. Apparently, MEW officials were apprehensive that they would run afoul of the Attorney General’s Office, which investigated corruption cases. This issue remained pending even when the transmission line was energized in late 2011. In early 2012, MOF finally agreed to pay the allowances but was working on creating a code in the chart of accounts to record allowances paid to vulnerable people. Because the fiscal year had ended, the authorization for the allowances had to be reintroduced in a new annual budget proposal that was pending in Parliament. A key informant said that a new code would require a presidential decree. As a consequence, the project’s closing date had to be extended 9 months from December 2011 to September 2012 to enable payments. The allowance left pending totaled only AF5,000 due to 15 households or AF75,000 in total.

C. Implementation of Resettlement Plan

24. Resettlement implementation begins after the approval and disclosure of the final LARP and consists of payment of compensation and other entitlements, implementation of livelihood restoration activities, relocation of physically displaced persons, and monitoring compliance with LARP conditions. In the land acquisition and resettlement framework that was approved and disclosed for ADB’s multitranche financing facility (MFF) projects, full resettlement implementation was a condition for the issuance of a no-objection certificate for civil works to proceed. In category A projects, an independent external monitor was contracted to undertake monitoring of implementation. In category B projects, the CSC monitored LARP implementation and government compliance with LARP conditions.

25. ADB policy and grant covenants. The Afghanistan government’s view is that delays in ADB projects arose from ADB’s involuntary resettlement policy of prohibiting civil works from beginning until all entitlements had been paid to displaced persons, and monitoring had certified that LARP implementation had been completed satisfactorily. Delayed projects had difficulty completing LARP implementation for two major reasons: (i) disputes over land claims, and (ii) difficulties in dealing with absentee landowners.

26. Disputes occurred over only a few properties, but they nonetheless delayed the full implementation of LARPs. Tables A11.1 and A11.2 show the number of these disputes related to the

6 This proposal is still not final. The MOF said DABS would have to pay land acquisition costs through its budget. In this case, the costs would not be part of the contingency category of the discretionary budget. It remains to be seen whether the LARP would still require approval from the Council of Ministers or only approval from the DABs board, which consists of representatives of selected ministries. The ESDIP is a grant to MEW from ADB using the multitranche financing facility. In turn, MEW lent the ESDIP funds to DABS. 176 Appendix 11

North–South Corridor Project and the amounts involved vis-a-vis the total number of affected persons and the total LARP budget.

Table A11.1: Land Ownership Under Dispute, North–South Corridor Project, Package 1 (Mazar-e-Sharif–Pul-e-Baraq Road, April 2012) Amount of Land Compensation Item Number (AF) Lands/Titles under claim or dispute 51 2,016,313.25 Total number of affected persons 793 23,913,443.25 Total amount of compensation—land and all other entitlements (AF) 90,923,393.25 Source: Afghan Bureau for Collaboration.

Table A11.2: Number of Affected Persons with Land Ownership Claims under Dispute (North South Corridor Project, Package 2: Pul-e-Baraq to Dar-i-Suf Road) Amount of Land Compensation Items Number (AF) Lands/Titles under claim or dispute 1 150,600 Total number of affected persons 583 8,422,325 Total amount of compensation—land and 65,907,325 all other entitlements (AF) Source: Afghan Bureau of Collaboration.

27. On the Mazar-e-Sharif–Pul-e-Baraq Road, disputed claims involved 6.5% of the total number of displaced persons and 2.2% of the total compensation. The corresponding figures were even smaller for the Pul-e-Baraq–Dar-i-Suf Road: 0.17% of the total number of displaced person and 0.22% of the total amount of compensation.

28. Payment of resettlement entitlement was also delayed by the fact that some landowners lived outside the country or in another province. Payments could not be made immediately in the absence of an authorized representative or of the requisite documents—bank account information, for example, and an acceptable letter of authority from the owner to the representative. If the individual lived abroad, providing the letter of authority was made more difficult and expensive because the owner had to travel to the Afghan embassy and pay $1,000 to obtain the legally recognized letter. Even when the owner lived in another province or in neighboring Pakistan, the cost of travel sometimes far exceeded the compensation due and there was no incentive to claim it. Table A11.3 shows number of absentee landowners and the amount of their claims in packages 1 and 2 of the North–South Corridor Project.

Table A11.3: Number of Absentee Landowners—Packages 1 and 2 of the North–South Corridor Project, April 2012 Absent Percentage of Total Number Amount of Compensation Item Landowners of Affected Persons Involved (AF) Mazar-e-Sharif–Pul-e- Baraq Road 65 8.0 3,484,415 Pul-e-Baraq–Dar-i-Suf Road 3 0.5 338,200 Source: Afghan Bureau Collaboration.

29. Under the terms of the government’s agreement with ADB for the North–South Corridor Project and the TNDIP, delays in completing land acquisition and paying for the land also prevented the release by ADB of other entitlements to the affected persons. This was necessary to ensure proper rehabilitation of affected persons under ADB policy. To make efficient use of the compensation for land losses, the affected persons also needed to receive compensation for nonland losses. If this was not done, the affected individuals could not buy new residential land to rebuild their houses and therefore Summary of Resettlement Assessment 177 could not be considered resettled. In linear projects such as roads and transmission lines through densely populated areas, the compensation for land acquisition is usually smaller than that for entitlements. Table A11.4 shows the proportion of the total entitlement package going to land acquisition for the two affected sections of the North–South Corridor Project.

Table A11.4: Portion of Total Entitlement Amount Going for Land Acquisition Compensation—Packages 1 and 2 of the North–South Corridor Project Land Acquisition Land Acquisition Total Entitlements Compensation Compensation Item (AF) (AF) (%) Mazar-e-Sharif–Pul-e- Baraq 90,923,393.25 23,913,443.25 26 Pul-e-Baraq–Dar-i-Suf 65,907,325.00 8,422,325.00 13 Source: Afghan Bureau of Collaboration.

30. Under the terms of the agreement with ADB, inability to provide compensation for land acquisition to approximately 15% of the affected persons on the Mazar-e-Sharif–Pul-e-Baraq Road and 0.6% of the affected persons on the Pul-e-Baraq–Dar-i-Suf Road can hold up payment of entitlements (other than land acquisition) to the rest of the affected persons. This situation has led MOF officials to ask for flexibility in the application of ADB’s policy. When only a relatively few affected persons or a few absentee landlords have not been compensated, MOF is asking that ADB allow civil works to proceed.

31. Authorized government financial intermediaries. The North–South Corridor Project paid some entitlements through direct credits to the affected persons’ bank accounts. During the census, ABC—an NGO that MPW hired to undertake LARP preparation—collected the requisite documents such as identity cards and bank account information. When the affected person had no bank account, ABC facilitated the opening of one. After the Council of Ministers had approved the LARP and the Parliament had passed the budget, MOF disbursed the money to three private banks: the New Kabul Bank, the Aziza Bank, and Ghazanfar Bank. However, delays occurred because not all the affected persons had accounts with these three institutions. To facilitate payment, MOF was making arrangements with the three banks to transfer the amounts to the affected persons’ accounts in other banks.

32. Some measures could be taken to ensure the timely completion of the LARP. Among these are (i) dividing the project corridor into sections, (ii) promise of other benefits, (iii) land donation, and (iv) compensation through user fees. These are the measures that implementing agencies used to speed up LARP implementation. However, they may not all conform to ADB policy on safeguards. This report is not endorsing the use of these measures but deems them worth consideration.

33.D ividing the project corridor into sections. Where avoidance and minimization measures were not feasible, ADB’s safeguards specialist facilitated the start of civil works by identifying where in project corridors the resettlement impacts were concentrated, dividing the corridor into sections, and giving the civil works contractor a no-objection certificate on the sections with no resettlement impact. This was done in a number of ADB projects, including the Regional Power Transmission Interconnection Project, lots 1 and 2 of the Transmission and Distribution Project, and the North-South Corridor Project. Although easily accomplished in linear projects, sectioning could not be applied to such undertakings as airports, power plants, and agricultural projects. At first glance, it appears that this measure could lead to time savings and still properly compensate and rehabilitate affected people in a staggered manner in smaller sections of the impact corridor (Table A11.5).

34.P romise of other benefits. On the Pul-e-Baraq–Dar-i-Suf Road, the governor of Samangan Province persuaded landowners to reduce their asking price for land by promising the construction of a connecting road. On the Jabul-Saraj–Nijrab Road, a provincial governor promised to give disgruntled 178 Appendix 11

affected persons government plots on top of the entitlements provided by the project. Of course, if these promises were not kept, they would destroy the confidence people have in the government. However, the road construction may not restore AP livelihood, while land replacement is a viable alternative (Table A11.5).

35. Land donation. In ADB’s Western Basins Water Resources Management Program, land acquisition for secondary and tertiary canals and for on-farm infrastructure is expected to be minimal, involving only small portions of existing farm land. The practice of MEW and MAIL has been to obtain farmers’ consent to donate portions of their land for this kind of infrastructure. However, it may be difficult for the office of the water users’ association to obtain land for new access roads this way without cost.7 But land donation is an acceptable option if the donation is very small, does not entail livelihood losses, and would directly relate to dramatic improvements in land productivity (Table A11.5).

36.C ompensation through user fees. ADB’s Emergency Infrastructure Rehabilitation and Reconstruction Project proposed to compensate a landowner affected by the civil works for the Samarkandian Weir in the traditional irrigation component through the collection of user fees paid by farmers living downstream. Civil works for the weir had been substantially completed, but affected persons had yet to be paid. The measure had the advantage of cutting through the lengthy process of obtaining approval from the Council of Ministers and submitting a request for funds to MOF, but it did not comply with ADB’s principle of full payment of compensation and entitlements before land taking. Moreover, the payment of fees in the future could not be assured (Table A11.5).

D. Impacts of Implementation Issues on Displaced Persons

37. The CAPE mission found that displaced persons have been impacted in two ways by implementation hurdles: in the replacement value of assets, and the access to the banking system.

38. Replacement value of assets. The lengthy delays that result from the complex and onerous processes required before paying compensation tend to diminish the possibility of restoring livelihoods at predisplacement or preproject levels, let alone improving the standard of living of poor and vulnerable affected persons. By the time the LARP had been approved by the Council of Ministers, the government budget approved, and the payments actually received, 2 or 3 years had passed since the valuation of the land affected. In the meantime, land prices, especially in the rapidly developing areas, as well as the cost of construction materials, had increased. In cases such as this, an impact valuation should be redone.

39.A ccessing the banking system. The use of the banking system had indirect positive effects in the form of training affected persons, especially in the rural areas, on how to access and use the formal banking system and in generating business for the banking sector; enhancing the security of the funds; and, most importantly, reducing if not totally eliminating opportunities for corruption.

E. Suggestions

The assessment has resulted in suggestions at the project or operational level and at the macro or policy level. The former can be implemented immediately, while the latter require further discussion with the relevant government ministries and even action by Parliament.

7 The MEW calls the organization of farmers and household users a water users’ association. The MAIL calls the same organizations irrigators’ associations. Summary of Resettlement Assessment 179

1. Operational Suggestions

40.E arly identification of problematic properties and proper design response. ADB has been using design-build arrangements or EPC in its transportation and energy projects in Afghanistan. 8 The use of design–build contracts presents an opportunity for hastening LARP implementation.

41. First, design–build arrangements make it necessary that the preliminary design be as robust and close to the final or detailed design as possible. This compels the feasibility studies consultants to undertake the social impact assessment and the LARP preparation as early and as carefully as possible to minimize surprises during the detailed design stage. Problematic properties, such as those with absentee owners or adverse claims, can be identified early in these feasibility studies so that the project can be designed to avoid impacting the property or at least to minimize such impacts.

42. Second, design–build arrangements provide a window for the government to complete LARP implementation and accomplish turnover of the right-of-way (ROW). Design–build contracts often impose penalty clauses if government does not turn over the ROW to the civil works contractor on time. These penalties could serve as incentives for government to implement the LARP as soon as possible to avoid cost overruns. Design–build arrangements in Afghanistan do not currently carry such penalties because of constraints in the government’s capacity and the security situation.

43. Third, it is in the interest of the designer-cum-builder to start and finish the work on time, notwithstanding any penalties that the government is paying. Every day of delay results in idle equipment, idle personnel, and idle financing that have to be paid for. Project cost escalation caused by the rising cost of materials or changes in ground conditions is an omnipresent risk. When the government experiences budgetary shortfalls, the contractor can assume payment of LARP costs subject to reimbursement by the government through the contractor’s progress billings. This is ideal for small sums for allowances to poor and vulnerable groups; crops; trees; and, in some cases, business losses and small parcels of land. In this way, LARP implementation can be completed even as budget releases or budget approvals are delayed. This could have been applied to the allowances due to the 15 vulnerable households in the Regional Power Transmission Interconnection Project. Minimal land acquisition in the water resources, agriculture, and natural resource management sectors can also be compensated for through this arrangement.

44. Design–build arrangements will require procedural flexibility in the application of ADB policy. The land acquisition and resettlement frameworks require completion of the LARP and approval of the same by the implementing agency and ADB as a condition for the signing of the civil works contract. This cannot be done in design–build arrangements, where the designer and civil works contractor are one entity or a joint venture.

45. Release of entitlements to all eligible affected persons present whose rights on the property are uncontested. ADB should not make 100% payment of all land compensation a condition for the release of the other entitlements. If affected persons are eligible and available and their claims are uncontested,

8 Design–build projects lodge the responsibility for both design and construction in a single entity. This is in contrast with the traditional mode of project implementation, wherein design and construction are procured separately. Design–build arrangements can reduce the time in project implementation in three ways: (i) by having a single lot for procurement rather than two, thereby diminishing the probability of delays resulting from bidding failures in either the design component or the civil works component or both; (ii) by eliminating the possibility that bidders or winners for the civil works component will not participate in the project at all or reject the design because it is unacceptable, or condition their participation or acceptance on a redesign, which will take time; (iii) by removing the need for a redesign because ground conditions have changed in the interim. In using design–build arrangements, the principal pays a premium to the agent. The principal risk in design–build arrangements lies in cost estimation. Since it is essentially a lump sum contract, where the contractor assumes most of the risk, the contractor will build the valuation of this risk into its cost estimates. The risk of cost overruns is mitigated by doing the feasibility studies as rigorously as possible so they result in a preliminary design that is as close to the final design as possible.

180 Appendix 11

then these affected persons ought to receive their other entitlements immediately after payment of land compensation. Delays can erode the value of their entitlements, prevent them from reorganizing and reconstructing affected structures, and affect the implementation of rehabilitation measures. Immediate payments also save the project from the additional cost that can arise from resurveys or revaluations of the affected immovable properties and businesses.

46. Financial education. ABC conducted livelihood training for poor and vulnerable households affected by the North–South Corridor Project and the Transport Network Development Investment Project. There is a similar need to assist affected persons receiving the largest compensation to prudently save and use their money through financial planning and financial education. Large lump sum payments can tempt people to spend unnecessarily.

47. Engaging local government officials. The assessment found that provincial and district government officials play an indispensable role as a bridge between central government ministries and local communities. In many cases where government was unhappy with the prices put on project land acquisition, provincial and district officials were called upon to use their influence on local communities to accept the government’s lower offer. In this role, local governments can significantly affect achievement of the objectives of involuntary resettlement safeguards. It is therefore important for ADB to engage provincial and district officials and the central government agency supervising them, the Independent Directorate for Local Government. The Independent Directorate for Local Government and local government officials need orientation and capacity development to play a positive role in LARP preparation and implementation.

2. Policy Suggestions

48. Delegation of authority from the Council of Ministers to the Ministry of Finance. All LARPs regardless of amount have to pass the scrutiny and approval of the Council of Ministers. This is often an important cause of delay, and it is not clear what value oversight at this high level adds to the process of involuntary resettlement safeguards implementation. Given their tight schedules and preoccupation with other concerns, it is doubtful that ministers and the president have the time to delve into the details, other than look at the cumulative figures in each LARP. If this oversight achieves anything all, it is usually to reduce valuation rather than increase it, as in the case of one package in the North–South Corridor. This oversight is exercised over land acquisition costs because of concerns over speculation and rising land prices9 and because the funds for land acquisition payment come from the discretionary budget and are therefore subject to present bias.10 As shown in the North–South Corridor Project, compensation for affected land is minor compared with other entitlements and the total LARP cost.

49. There are several ways to address the bottleneck in this part of the approval process. The first is by delegating authority to MOF for certain LARPs and reserving approval of the others for the Council of Ministers.

9 According to one interviewee, land speculation is rife in Kabul and in the other major cities of Afghanistan such as Jalalabad. Speculators who are well-connected to the powers-that-be in the central and local governments find ways to convince Arazi or the Afghan Land Authority and the local government to sell the land or allow them to occupy and use land. In Kabul, the speculators usually fence off the land and hold on to it until their possession is regularized into full ownership. The Afghan Civil Code recognizes preemption rights on undeveloped land. Sharia law also states that a person may develop unoccupied land and gain ownership over it after 10 years of continuous use. 10. Simply stated, present bias states that $1,000 received or paid out today is more valuable than $1,000 received or paid out at some point in the future. Hence, experiments by behavioral economists have shown that the typical person would choose to receive the $1,000 today rather than receive it at some indeterminate date in the future, even when the experimenters promised a reward. Conversely, from the spender’s standpoint, $1,000 spent now is more valuable than $1,000 to be paid out at some time in the future. For entitlements paid out from the loan proceeds, the government would still have to produce money from its discretionary budget to repay the loan. However, the impact is not immediately perceived or felt, since repayments would still be made in the future and would be staggered over the repayment period.

Summary of Resettlement Assessment 181

50. Authority could be delegated by dividing LARPs into categories A, B, and perhaps C to determined approval requirements. ADB categorizes the resettlement impacts of a project according to the number of affected persons displaced or percentage of the productive and income generating assets lost. Additional categorization could also be made based on the total budget for the LARPs. Above a predetermined and periodically adjusted monetary threshold, the LARPs would go to the Council of Ministers for approval. All those below this threshold would require only MOF approval. Another tier (C) could be introduced for LARPs below a certain amount, which would be approved by the implementing agencies, such as MPW and MEW, in lieu of MOF. The thresholds could be refined to include the severity of resettlement impact, such as the magnitude of physical displacement requiring resettlement in government lands. After all, exchange of government for private lands requires presidential approval. The introduction of these tiers would require a change in the Land Acquisition Law, but this would not affect the public financial management reforms now in place or soon to be introduced, since release of funds would remain with MOF.

51. While the government was delegating authority for LARP approval, other amendments could be introduced in the Land Acquisition Law that, among other things, would (i) require LARPs for all government projects, regardless of the source of financing; (ii) identify the agency responsible for financing and implementing land acquisition by government-owned and -controlled corporations, such as DABS; and (iii) expand entitlements in the law to cover compensation not only for physical assets but also for business and income losses and assistance to poor and vulnerable groups.

52. Introduction of easement or servitude for specific projects. The Land Acquisition Law allows only for purchase of property and transfer of ownership from the private owner to the acquiring government agency. Internationally, land acquisition in the energy and mining sectors is achieved by introducing easement or servitude in private lands affected by transmission lines and underground and surface pipelines. In easement agreements, ownership is retained by the landowner, who can continue to use the land subject to certain restrictions. Since many transmission lines pass through agricultural areas, easement does not divide the plot and prevent access from one side to the other. Land underneath the towers can be farmed subject to height or depth restrictions, and access can be maintained for nomadic and seminomadic herders. Compensation still has to be paid at replacement value for surface structures, trees, crops, and businesses affected by the transmission lines and for underground pipes during exploration and construction. Staggered rental payments can be made to compensate the landowner for restrictions on the use and development of the land area covered by easement. This item can also be paid in lump sum at current market value.

53. Easement facilitates land acquisition for these long-term projects by separating ownership issues from compensation. The comingling or conflation of ownership and compensation is a major source of delay in securing infrastructure ROW. Since no transfer of ownership is involved, the project need not await definitive resolution of ownership issues before compensating people with uncontested rights over surface structures, crops, trees, and other assets. For lands for transmission towers, substations, distribution poles, and access roads expected to become permanent, international practice is to purchase them outright. Though easement of tenure principles would facilitate the implementation of the LARP for transmission projects, this would take some time and requires a major overhaul of land tenure in the country.

182 Appendix 11

off dateand . The cooperation of of The cooperation . Key Issues/Lessons Good practice of of Good practice provincial with coordinating and officials and district obtaining agreement on the get to or corridor alignment be would cooperation their helpful is governments local the can they that so necessary cut- the enforce introducing from refrain the within developments corridor.date Cut-off of eligibility the determines receive to persons affected other and compensation entitlements. After the cut- improvements any date, off are land the on introduced compensation. for ineligible illustrates Darchi-e-Bashi several issues that delay project implementation: 1. the in speculation Land of or periphery suburbs country the in urban areas 2. land of Poor state management and records land incomplete 3. land of Fragmentation administration

(as of September 2012) (as

EPC contract EPC Status 1. Kunduz–Taloqan: SMEC is SMEC is 1. Kunduz–Taloqan: the is KEC LARP. the preparing procurement engineering contractor (EPC). last only granted the with 2011, 19 December getting of process project in municipalities the from clearance be will LARP corridor. the for final on the based finalized alignment. Not started. 2. Kunduz–Baghlan: (design– EPC for bids Awaiting LARP projects). or turnkey build prepared. be to has still land No wells: 3. Shiberghan because anticipated is acquisition rehabilitation. involve projects the last only EPC contract granted 19 December 2011. The project is land resolving of process in the in Darchi-e-Bashi involving issues and the municipality Kabul the LARP under Finance. of Ministry preparation. of rehabilitation Mainly venture A joint plant. hydropower the is firms Canadian two of is EPC consultant. supervision

B B C Category Resettlement

DABS DABS DABS Mines Mines Agency Executing Executing DABS and Ministry of of Ministry

Modality Financing MFF MFF 1 Tranche MFF 2 Tranche MFF 3 Tranche

Loan Number Grant or Grant 0134 Grant 0184 Grant 0280

2 03 04 Project 42094- 42093- 42094- Number

Table A11.5: Status, Issues, and Lessons on Key Ongoing ADB Projects in Afghanistan in Projects ADB Ongoing Key on and Lessons Issues, Status, A11.5: Table

Projects Sector Energy Development Investment I: Project Program, 1. Kunduz–Taloqan 2. Kunduz–Baghlan gas 3. Shiberghan wells Sector Energy Development Investment 2: Project Program. and Rehabilitation the of expansion Kabul transmission and distribution system SectorEnergy Development Investment 3 Tranche Program, Summary of Resettlement Assessment 183

Key Issues/Lessons peoples’ Vulnerable allowance has beendelayed reasons: two for the in code a of Absence 1. to accounts of MOF chart allowances. such pay for allows law Afghanistan 2. affected for compensation of loss for not but assets rehabilitation income and assistance. lessons: Pull-e-Hambri to need is There 1. and publicize effectively to date cut-off the enforce increasing avoid resettlement costs and works. civil delaying needed is Coordination 2. and preparation in LARP implementation between provincial district, and governments,

Status Arawali. New transmission lines lines transmission New Arawali. and acquisition land involve may be will LARP A resettlement. prepared. consultant Supervision yet. No EPC LARP. short prepare will Loan implementation. under LARP complete to extended date closing to allowances of payments and poor vulnerable displaced persons stipulates law Afghan affected for only compensation income for losses not but assets assistance. and rehabilitation for be made will LARP A separate Pull-e-Hambri and walls houses tower. underneath

B yet yet Category No rating as as No rating Resettlement

MEW DABS DABS Agency Executing Executing

Modality Financing MFF 3 Tranche Loan and Grant

Loan Number Grant or JFPR Grant JFPR Grant 9128 Loan 2304 and Grant 0230

06 02 Project 42094- 40043- Number

Projects Gereshk Plant Hydropower of Development Mini-Hydropower in Badaghsan Plants and Banyan Provinces Power Regional Transmission Interconnection Project: of Construction 1. line transmission Sangtuda from substation to Pianji river crossing of Construction 2. Kunduz substation 3. Kunduz–Pull-e- Hambri line transmission 184 Appendix 11 d by d by

Key Issues/Lessons implementing agency. agency. implementing and speculation 3. Land land of occupation major urban surrounding a problem. areas is peoples’ Vulnerable allowance has beendelayed reasons: two for the in code a of Absence 1. to accounts of MOF chart allowances. such pay for allows law Afghanistan 2. affected for compensation of loss for not but assets rehabilitation income and assistance. Issues: surveys, land 1. Incomplete and land maps, cadastral records valuation land of 2. Lack standard and system for requirement legal The 3. of LARP —regardless the be approve amount—to delays Ministers Council of resettlement implementation and the civil works of start

Status Lot 1: Civil works completed. LARP LARP completed. works Civil 1: Lot completed. problems Lot 2: Security civil of completion preventing sections three all for LARPs works. nonrelease to due completed not people. vulnerable for allowance of to due prepared been 2 has LARP affected of a number in increase decision the from arising persons towers of number the increase to one section. 11 in to seven from affected additional the for LARP four the by affected persons ADB.by approved been has towers airports regional four the Of has Chaigcharan only planned, completed. been Maimana: since issues, acquisition No land the only would finance ADB runway. the of shoulders be completed to was Construction LARP No 2012. April of end by the necessary. Qala-i-naw: the for land involved The issue airport. the zone of safety

B B Category Resettlement

MEW MTCA MTCA Agency Executing Executing

Modality Financing ADF Loan Loan ADF and Grant Loan

Loan Number Grant or Loan 2165 Loan 2165 Loan 2105

- 01 01 01/ Project 37078- 37136- 37075 Number

Projects Power Transmission and Distribution and 1 Project (Lot Lot 2) the I of Phase Airports Regional Rehabilitation Project Summary of Resettlement Assessment 185

to be approved by by be approved to

Key Issues/Lessons Issues: Issues: 1. for Legal requirement of LARP—regardless the amount— delays Ministers Council of resettlement implementation and the or d in

cts (118 jeribs (118 jeribs cts Status Payments of compensation were were of compensation Payments 2012. April by nearing completion awaiting is The project of verification independent LARP of Completion payments. by delayed was implementation secure to landowners for need the of magnitude the Qaballah; resettlement impa homes; and 90–95 23.6 hectares) prices land in the an adjustment of Council the by required unacceptability the and Ministers; by offered site relocation the of the of because government the city. the from distance Faizabad: land required The project The runway. the for acquisition 2 was length runway required kilometers 1.6 only but kilometers did ministry The available. were additional the know whether not privately government or was land ADB owned did land. not finance steppe has USAID runway. the the of asphalting the finance to necessary. No LARP runway. LARP has the delays, many After of Council the by approved been are payments but Ministers land compensation. for ongoing

A Category Resettlement

MPW MPW Agency Executing Executing

Modality Financing Loan and Loan and Grant

Loan Number Grant or Loan 2257 and Grant 0054

01 Project 39467- Number

Projects North–South Corridor Project, (3 packages): 1. Mazar-e-Sharif Pull-Baraq 2. Pull-e-Baraq–Dar- 186 Appendix 11

to them. essure on local local on essure Key Issues/Lessons Other compensation and and compensation Other start of civil works. civil works. of start 2. and disputes Claim a in landowners absentee are cases minority of land of completion delaying payments. compensation 3. travel and Transaction absentee for costs are landowners higher than of amount the due compensation 4. assistance rehabilitation cannot ADB through funded land until be released are payments compensation completed. is an NGO of The use LARP facilitating preparation. Lesson: Issues: 1. Council the of Decision land revise to Ministers of pr puts prices persuade to governments lower accept people to usually compensation, other of promises through that benefits and projects local the within are not officials’ power to grant. 2. surveys, Land records, incomplete. are and maps 3. Land valuation price. price.

Status Beharak Road: collection collection Road: Beharak LARP disclosed for all three three all for disclosed LARP projects. Road: Saraj-Nizrab Jabul on land Negotiations people as ongoing, compensation land the with happy are not To motivate peopleaccept to the promised governor the price, land to government land provide to people. affected Faizabad- ongoing. documents of Resurvey Road: Bagramy-Sapary

A Category Resettlement

MPW MPW Agency Executing Executing

Modality Financing MFF MFF

Loan Number Grant or Grant 0063

01 Project 44482- Number

Projects i-Suf 3. Bamyan– Yakawlang Network Transport Investment Development Project,1: Tranche Saraj–Nizrab Jabul Road Faizabad–Beharak Road Bagramy–Sapary Road Summary of Resettlement Assessment 187

d

Key Issues/Lessons standards and system lacking Lesson: help will an NGO of The use preparation. LARP facilitate Lesson: ADB for need is There if check to project officers indee is contribution land for especially and voluntary irrigators the of offices the to associations or waters’ the with issues avoid that ensure and authorities the of living of standard not is donors land diminished.

claiming that their their that claiming Status has to be done because of 12 12 of because done be to has people of cases The affected. been have lands land their identified survey initial This land. be government to land in problem the illustrates and surveying, recording, mapping. following the of 1 consists Tranche components: River Northern of Rehabilitation 1. two of project consisting Basins 250 structures about and weirs and canals secondary of consisting canals. irrigation on-farm in rehabilitative are works the As not is acquisition land nature, For issue. a major be to expected land of requirement the weirs, the be will or resettlement taking determined after the surveyand canals, the For weirs. the of design impact resettlement expected the or acquisition land temporary is impound and channel to use are canals the while water diverted repaired. Amu the at Management Flood 2. Uzbekistan bordering River Darya and Afghanistan: be will requirements Resettlement and survey after determined design. Development 3. Nagharar

B Category Resettlement

MAIL MAIL Agency Executing Executing MEW and MEW and

Modality Financing MFF MFF Loan and Grant

Loan Number Grant or Loan 2227, Grant 0033, and Grant 0052

013 Project 36252- Number

Projects Basins Western Resources Water Management Project 188 Appendix 11

rigation and Livestock; Livestock; and rigation Key Issues/Lessons

ransport and Civil Aviation, NGO = Aviation, Civil and ransport stry of Agriculture, Ir Agriculture, stry of fed land land fed

Status MTCA = Ministry of T MTCA = Ministry Authority: and canals the of Rehabilitation dam. Darunta the diverted impound and Channel 4. are canals the water while repaired. Amu the at Flood management 5. Uzbekistan bordering River Darya and Afghanistan: be will requirements Resettlement and survey after determined design. Development 6. Nagharar the of Rehabilitation Authority dam. Darunta and the canals MEW of development 7. Capacity management resources in water and development. project The ongoing. works Civil families three for a LARP prepared affected be to were whose lands contractor the but project by the the in people three these avoided works The civil design. final people contractor compensated government rain- in living crops standing losing who were project. the due to

ry of Public Works; Works; of Public ry B Category Resettlement

MPW MPW Agency Executing Executing

Modality Financing Grant ltitranche financing facility; MPW = Minist MPW facility; financing ltitranche

Loan Number Grant or Grant 0161 S = Da Afghanistan Breshna Sherkat; LARP = land acquisition and resettlement plan; MAIL = Mini plan; resettlement and acquisition = land LARP Sherkat; Breshna Afghanistan Da S =

02 Project 42533- Number

Projects Hairatan–Mazar-e- Sharif Railway Project MEW = Ministry of Energy and Water; MFF = mu Water; and Energy MEW = Ministry of nongovernment organization. Bank database. Asian Development Source: ADF = Asian Development Fund; DAB Fund; ADF = Asian Development APPENDIX 12: ADB AND GOVERNMENT PERFORMANCE

1. Asian Development Bank performance. The country assistance program evaluation (CAPE) assessed the performance of the Asian Development Bank (ADB) in Afghanistan during the 2002–2011 CAPE period based on the following criteria: (i) its roles in aid coordination and building partnerships with other development agencies, (ii) its roles in building government ownership and leadership, and (iii) the extent of delegation of activities to the resident mission.

2. ADB’s performance is rated less than satisfactory.

3. ADB’s operations started and have continued under highly uncertain and extremely difficult conditions, and the continued dedication and hard work of its resident staff and others has been very valuable. In general, the government had a favorable view of ADB support (Box A12). The strategic work of key development partners ensured effective aid coordination in the early stages of the CAPE period but collaboration later declined. ADB generally ceased to play a major role in aid coordination except in the infrastructure sector. Different development partners sometimes approved the same kind of support at the same time. Little emphasis was put on linking or complementing their efforts and those of the government to improve the outcomes. Feedback from government ministries and agencies confirmed the impression that ADB took longer than other development partners to resolve project administration issues. The same feedback suggested that this was due to the limited sector expertise in ADB’s resident mission (Box A12). ADB has maintained a far smaller international staff at its mission than did other major development partners, even taking into account the relative size of their support. The government and other development partners saw ADB’s decision making as centralized at its headquarters in Manila and its delegation of authority to field offices as limited. The low absorptive capacity of the government has been a pervasive and overriding concern since the resumption of ADB operations in 2002, yet ADB has not addressed it effectively, and its efforts in this regard have lacked continuity. Although, ADB was a member of the consultative process for public administration and economic management until 2006, its country partnership strategy (CPS) for 2009–2011 narrowed the public sector management and capacity development focus to only ADB’s sectors of engagement. As a result, about 95% of the public sector management and capacity development efforts undertaken during the evaluation period were approved during 2002–2008.

4. Government performance. Government performance was assessed based on (i) the extent of government ownership and commitment in the country’s development agenda, (ii) the extent of leadership in aid coordination, and (iii) the extent of compliance with ADB’s loan covenants and conditionalities and its involvement during implementation.

5. The government performance is rated less than satisfactory.

6. The government developed the National Development Framework with extensive external support in 2002 and the Afghanistan National Development Strategy in April 2008. The government also took initiatives to coordinate development partners, although this has been difficult, particularly due to large flows of assistance bypassing its budget. The government asked all development partners to focus on no more than three sectors, because the coordination issues that evolved with the increasing size of aid programs and number of partners made duplication of effort often unavoidable. Despite the fact that its absorptive capacity has been very limited, the government’s executing agencies have generally given priority to physical investments rather than capacity development. Because it has allowed design–build contracts for almost all projects involving civil works, the government has not been involved in planning, design, and contract management for these works and thus missed opportunities to build government skills and abilities. ADB’s use of the multitranche financing facility (MFF) modality presumes a government’s capability to design projects, but the government has rarely been able to do this. The CPS for 2009–2011 recommended that the bulk of ADB support be provided 190 Appendix 12

through sector-based MFFs but the government should propose a more appropriate lending instrument. Compliance with ADB’s loan covenants and conditionalities has been weak. ADB relied on assurances from the government that it would take responsibility for mitigating risks in the security situation, and this was built into loan covenants. However, security issues were a major reason for implementation delays and cost increases. Other compliance issues involved failure to reconcile financial records properly; lack of adequate procurement and other documentation; failure to comply with procurement and contract management aspects; and failure to meet audit requirements, with audit reports providing poor assurance on project finances and including financial misstatements (main text, paras. 98–99).

Box A12: Summary of Findings from Perception Surveys

The Independent Evaluation Department mission for the country assistance program evaluation (CAPE) of Asian Development Bank (ADB) operations in Afghanistan during 2002–2011 carried out perception surveys. Aimed at gathering client and stakeholder views on ADB programs and projects, the surveys gathered responses to a questionnaire from 26 staff members of executing agencies and concerned government departments, representatives of private sector firms that received ADB assistance, beneficiaries of ADB interventions, and a few development partners. The respondents overall held a favorable view of ADB’s development interventions. Slightly more than 90% felt ADB’s assistance was either highly relevant or relevant. A similar percentage rated the development outcomes and impacts of ADB assistance highly effective or effective, while 85% of respondents rated the sustainability of its projects very likely or likely. On the other hand, a lack of synergy between related sectors in ADB operations and overly ambitious and complex design were seen as some of the weaknesses in ADB operations. More than 40% of responses indicated that increasing government participation in the design of projects and country strategies and programs would improve the government’s ownership and leadership role in the country’s development agenda. Several ways were suggested to improve ADB operations. Many respondents felt that ADB should improve project implementation by simplifying its procurement procedures, engaging more closely with counterpart agencies, and changing its approach from one focused merely on completing and closing individual projects to one of continuing engagement to help implementation. Other suggestions included greater delegation of responsibilities to ADB’s resident mission, faster responsiveness and a less bureaucratic approach on the part of ADB, and improvement in the synergies between sectors in which ADB was involved and related activities in other development sectors. Most respondents pointed to infrastructure as a suitable focus area for future ADB assistance, since it continued to be a major constraint on socioeconomic development, but also recommended greater attention to support for operation and maintenance of the infrastructure that is created, as well as capacity development and improved governance. Ensuring food security and job creation though small- and medium-sized enterprises and the development of agriculture were among other areas in which respondents believe ADB should concentrate its efforts. Source: Independent Evaluation Department country assistance program evaluation team.