The World Bank FOR OFFICIAL USE ONLY · Document of The World Bank FOR OFFICIAL USE ONLY ... ATM Automated Teller Machine PDO Project Development Objective ... highlights the vision

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 63549-AF

EMERGENCY PROJECT PAPER

ON A

PROPOSED EMERGENCY RECOVERY GRANT

IN THE AMOUNT OF SDR 11.9 MILLION (US$19.0 MILLION EQUIVALENT)

TO THE

ISLAMIC REPUBLIC OF AFGHANISTAN

FOR A

FINANCIAL SECTOR RAPID RESPONSE PROJECT

August 3, 2011

Finance and Private Sector Development Unit South Asia Region

This document is made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s Policy on Access to Information.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective: June 30, 2011)

Currency Unit = Afghani (AFN) AFN 46.94 = US$1

US$1.60045 = SDR 1

FISCAL YEAR March 21 – March 20

ABBREVIATIONS AND ACRONYMS ABA Afghanistan Banks Association GPN General Procurement Notice ACH Automated Clearing House LCS Least Cost Selection ACSS Afghanistan Clearing and Settlement

System NPS National Payment System

AIBF Afghanistan Institute of Banking and Finance

NCB National Competitive Bidding

APS Afghan Payments System PCR Public Credit Registry ATM Automated Teller Machine PDO Project Development Objective BIS Bank for International Settlements PIC Project Implementation Cell CR Collateral Registry POS Point of Sale CSD Centralized Securities Depository PSDG World Bank Payment System

Development Group CAO Control and Audit Office PEFA Public Expenditure and Financial

Accountability DAB Da Afghanistan Bank PFM Public Financial Management DFID Department for International

Development PSC Project Steering Committee

DoD United States Department of Defense PL Procurement Law DA Designated Account PPU Procurement Policy Unit EGGI Economic Governance and Growth

Initiative PMIS Procurement Management Information

System EC European Commission QCBS Quality and Cost Based Selection FAIDA Financial Access for Investing in the

Development of Afghanistan QBS Quality Based Selection

FSSP Financial Sector Strengthening Project RTGS Real Time Gross Settlement FSD Financial Supervision Department RFQ Request for Proposal FBS Selection Under Fixed Budget REOI Request for Expression of Interest HR Human Resources SDR Special Drawing Rights IDA International Development Association SDU Special Disbursement Unit IFC International Finance Corporation SBD Standard Bidding Documents IMF International Monetary Fund SQS Selection Based on the Consultants’

Qualification IT Information Technology SSS Single Source Selection ICB International Competitive Bidding

Vice President: Isabel M. Guerrero Country Director: Nicholas J. Krafft Sector Manager: Ivan Rossignol

Task Team Leader: Guillemette Jaffrin

AFGHANISTAN


CONTENTS Page

A. Introduction ......................................................................................................................... 1

B. Emergency Challenge: Country Context, Recovery Strategy and Rationale for Proposed Bank Emergency Project ............................................................................................................. 1

C. Bank Response: The Project ............................................................................................... 4

D. Appraisal of Project Activities ............................................................................................ 7

E. Implementation Arrangements and Financing Plan .......................................................... 10

F. Key Risks and Mitigating Measures ................................................................................. 14

G. Terms and Conditions for Project Financing .................................................................... 15

Annex 1: Detailed Description of Project Components ........................................................... 16

Annex 2: Results Framework and Monitoring ........................................................................ 21

Annex 3: Summary of Estimated Project Costs ....................................................................... 24

Annex 4: Operational Risk Assessment Framework (ORAF) ................................................ 25

Annex 5: Financial Management and Disbursement Arrangements ..................................... 32

Annex 6: Procurement Arrangements ...................................................................................... 45

Annex 7: Implementation and Monitoring Arrangements ..................................................... 60

Annex 8: Project Preparation and Appraisal Team Members ............................................... 65

Annex 9: Environmental and Social Safeguards Framework ................................................ 66

Annex 10: Economic and Financial Analysis ........................................................................... 67

Annex 11: Documents in Project Files ...................................................................................... 68

Annex 12: Statement of Loans and Credits .............................................................................. 69

Annex 13: Country at a Glance ................................................................................................. 71

Annex 14: Maps........................................................................................................................... 73

AFGHANISTAN


PROJECT PAPER

Basic Information Country Director: Nicholas J. Krafft Sector Manager/Director: Ivan Rossignol Team Leader: Guillemette Jaffrin Project ID: P119047 Expected Effectiveness Date: September 2011 Lending Instrument ERL

Sectors: Payment systems, banking, general financial sector Themes: Other financial and private sector development Environmental category: C Expected Closing Date: June 30, 2014 Joint IFC: N/A Joint Level: N/A

Project Financing Data [ ] Loan [ ] Credit [X] Grant [ ] Guarantee [ ] Other: Proposed terms: IDA Grant Standard

Financing Plan (US$m) Source Total Amount (US $m)

Total Project Cost: Cofinancing: Borrower: Total Bank Financing: IBRD: IDA: New: Recommitted:

19 0 0 19 0 19 19 0

Client Information Recipient: Islamic Republic of Afghanistan Responsible Agency: Da Afghanistan Bank (DAB) Contact Person: Mr. Zalmei Sherzad Telephone No.:+93 202 104 836 Fax No.: N/A Email: [email protected]

AF Estimated Disbursements (Bank FY/US$m) FY 2012 2013 2014 Annual 6 9 4 Cumulative 6 15 19

Project Development Objective and Description Project development objective: The Project's development objective is to assist DAB to develop actions plans for improved banking supervision and implement a modern national payment system for efficient and transparent payment transactions. Project description: The proposed project would finance costs associated with the following activities: (i) Audits (financial, portfolio and institutional audit) of ten commercial banks operating in Afghanistan (US$3.5 million); (ii) Modernization of the national payment system to facilitate payments within the country (US$11 million); (iii) Support to the development of the Afghanistan Institute of Banking and Finance (AIBF) (US$1 million) and (iv) Technical assistance and training for project implementation (US$3 million). The project will also include a provision of US$0.5 million as contingencies.

Safeguard and Exception to Policies Safeguard policies triggered: Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waterways (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60)

[ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No

Does the project require any waivers of Bank policies? Have these been endorsed or approved by Bank management?

[ ]Yes [X] No [ ]Yes [ ] No

Conditions and Legal Covenants: Financing/Project

Agreement Reference Description of Condition/Covenant Date Due

Article V. 5.01/5.02 of the FA

Afghanistan shall enter into a Subsidiary Grant Agreement with DAB; and both Afghanistan and DAB shall have produce their respective legal opinions certifying that the Subsidiary Grant Agreement is valid upon them in accordance with its terms without further ratification.

Condition of effectiveness

Section IV.B.1(b) of Schedule 2 to the FA

(i) DAB and APS shall enter into the APS Sub-Grant Agreement for DAB’s contribution to APS on terms and conditions acceptable to the Association; and (ii) APS shall undergo certain corporate restructuring.

Disbursement Condition

Section I.A.1 of the Schedule to the PA

DAB shall: (i) maintain a Project Steering Committee albeit enlarged to include representative of AIBF and APS; and (ii) maintain the Project Implementation Cell

On-going


DAB shall revise the National Payment Council’s mandate, composition and institutional organization

3 months after the Effective Date (for the update)


DAB shall carry out the Project pursuant to an updated FMM November 30, 2011


DAB shall establish a Project Budget Committee November 30, 2011

Section I.C.1 of the Schedule to the PA

DAB and APS shall enter into an APS Sub-Grant Agreement provision for DAB’s support to APS and APS undertaking of: (i) a corporate restructuring; and (ii) compliance with the Association’s fiduciary and anti-corruption requirements.

N/A

Section I.D of the Schedule to the PA

DAB shall prepare Annual Work Plans by December 31, of each year (commencing on Dec. 31, 2011)

December 31, of each year

Section III.2 of the Schedule to the PA

DAB shall carry out all procurement activities pursuant to an updated Procurement Manual

November 30, 2011 (for the update)

Section III.3(a) of the Schedule to the PA

DAB shall establish an operational procurement documentation and record keeping system acceptable to the Association, including a publicly accessible website with updated procurement information regarding the Project.

November 30, 2011

Section III.3(b) of the Schedule to the PA

DAB shall establish a procurement complaints handling mechanism acceptable to the Association.

November 30, 2011

Article IV, 4.01 (a) & (b) of the FA

Afghanistan shall not alter the DAB’s legal framework and or APS legal framework in a manner incompatible with the Project.

Additional Event of Suspension

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A. Introduction

1. This Project Paper seeks the approval of the Executive Directors to provide an emergency grant in an amount of SDR 11.9 million (US$19 million equivalent) to the Islamic Republic of Afghanistan for the Financial Sector Rapid Response Project (P119047). The project is being processed under the Rapid Response to Crises and Emergencies (OP/BP 8.00). 2. The proposed project would support the government’s effort to respond to the Kabul Bank crisis. The proposed grant would help finance the costs associated with four activities: (i) carrying out audits of ten commercial banks in Afghanistan (US$3.5 million); (ii) modernization of Afghanistan National Payment Systems (US$11 million); (iii) support to Afghanistan Institute of Banking and Finance (AIBF) (US$1 million); and (iv) technical assistance and training for project implementation (US$3 million). The project will also include a provision of US$0.5 million as contingencies. 3. These activities would lead to the following key outcomes: (i) Commercial banking sector strengthened following implementation of action plans developed based on the findings of the audits, with support and oversight of DAB; and (ii) Payment system conforms to international norms by the end of project, contributing to safety and efficiency of the financial sector.

4. The two key activities supported by the project, i.e.; audit of commercial banks and implementation of a modern national payment system are an important part of the international community’s collective response to assist the government in tackling the Kabul Bank crisis. The project has been prepared and will be implemented in close collaboration with development partners, in particular the IMF, the UK Department for International Development and USAID. B. Emergency Challenge: Country Context, Recovery Strategy and Rationale for Proposed Bank Emergency Project

5. Country context. In 2002 after the fall of the Taliban regime, the formal financial sector in Afghanistan was almost inoperative and the legal framework was virtually non-existent. The focus was first on re-building the basic legal and institutional framework for a modern financial sector, which led to the enactment of the Law of Da Afghanistan Bank and the Law of Banking in Afghanistan in 2004. This then allowed the emergence of formal financial services and to a rapid growth (from an extremely low base) of the banking sector. 6. The Afghanistan National Development Strategy (ANDS) 2008-2013 – under the pillar of “Economic Governance and Private Sector Development” – highlights the vision of the government of Afghanistan for financial sector development. The ANDS sees a modern and competitive financial sector as one of its main development objectives, and articulates a strategy to expand the availability and range of financial products and services.

7. The US Government, through USAID, has provided significant support to the Central Bank on financial sector development, first through its Economic Governance and Private Sector

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Strengthening Program (initiated in 2003) and then, more recently, through its Economic Growth and Governance Initiative (initiated in 2009 and phased out in 2011).

8. Although significant growth of the formal financial sector was achieved in terms of entry of a large number of private commercial banks and increase in the volume of loans and deposits, banking supervision capacity at DAB has remained weak.

9. In responding to the challenges in the financial sector and GoA’s commitment to financial sector reforms, the World Bank approved the Financial Sector Strengthening Project (FSSP) for IDA financing on April 30, 2009 in the amount of SDR 5.5 million (US$8.0 million equivalent). The project is scheduled to close on June 30, 2014. The project’s development objective is to help DAB improve its core function of banking supervision and regulation, and to help improve access to formal banking services by establishing key initial building blocks for further financial sector reform. The project comprises two components: (1) Strengthening capacity of DAB in the areas of banking supervision, accounting, internal audit, human resources management; and (2) Developing necessary financial sector infrastructure, such as public credit registry (PCR), collateral registry (CR) and Afghanistan Institute of Banking and Finance (AIBF). The FSSP aimed at building on the work already undertaken by development partners in the financial sector, notably USAID and IMF. 10. Initial project implementation has been slow. Despite DAB’s efforts, procurement of technical assistance critical for project start-up encountered delays and difficulties as the deteriorating security situation in the country has diminished the willingness of consulting industry to operate in Afghanistan. The start-up delays were mostly caused by the failed procurement of the IT Consultant, initially responsible for 80 percent of the costs of the project. DAB has made considerable progress in the contracting of key technical assistance in the past six months. It is expected that by end September 2011, 50 percent of the grant funds will be committed, as key contracts are in the final stages of procurement. The Implementation Status Report (ISR) of February 2011 rated the project Implementation Progress (IP) Moderately Satisfactory. However, the recent banking crisis (see below) has highlighted critical banking supervision weaknesses which prevent the achievement of the project’s development objective (DO). As a result, the project’s DO is currently rated as Moderately Unsatisfactory. 11. An underdeveloped and fragile financial sector. There are currently 17 commercial banks operating in Afghanistan, which include: (i) 2 state-owned commercial banks (SCB); (ii) 10 private commercial banks (PCB); and (iii) 5 branches of foreign commercial banks (BFCB)1. These banks combinedly operate 177 full-service branches in 34 provinces with the largest concentration of branches located in the capital, Kabul.

12. As of March 2011, total assets of the banking system amounted to US$4.4 billion. Total deposits stood at US$3.4 billion (with 62.4 percent of deposits in US$) and gross loans stood at

1 Seventeen commercial banks include: 2 SCBs :(i) Bank-e-Millie and (ii) Pashtany Tejaraty Bank; 10 PCBs : (i) Kabul Bank, (ii) Azizi Bank, (iii) Afghanistan International Bank, (iv) First Microfinance Bank, (v) Arian Bank, (vi) BRAC Bank, (vii) Bakhtar Bank, (viii) Afghan United Bank, (ix) Maiwand Bank, and (x) Ghazanfar Bank; 5 BFCBs : (i) Standard Chartered Bank, (ii) Punjab National Bank, (iii) National Bank of Pakistan, (iv) Habib Bank Limited, and (v) Bank Alfalah Limited.

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US$1.45 billion (with 73 percent of total loans in US$). The three major banks – Kabul Bank, Azizi Bank and AIB – represented 51.3 percent of total banking sector assets (26.1, 13.9 and 11.4 percent of total assets respectively). Non-performing loans represent 48.4 percent of total gross loans (which is extremely high). As demonstrated by these figures, financial intermediation is particularly low, as commercial banks are undertaking little lending (due to an unfavorable enabling environment) and banking sector liquidity is high. The high level of non-performing loan reflects the recent banking crisis (see below) and underscores the fragility of the sector.

13. Lending in Afghanistan is dominated by private banks, which represented 87 percent of total gross loans of the banking system. State-owned banks represent 9 percent of lending and branches of foreign banks 4 percent. In March 2011, commercial real estate and construction loans represented 26 percent of total loans; trade, 34 percent; residential mortgage to individuals, 9 percent; and services, 7 percent. 88 percent of loans originate from Kabul province. According to the 2008 Investment Climate Assessment in Afghanistan, 51 percent of enterprises report having a bank account and 3.4 percent of Afghan firms report having a loan with a financial institution. Domestic credit to private sector (as a percentage of GDP) stands at 9.1 percent in 2009 (compared to 4.4 percent in 2006). This figure stands at 43.5 percent for South Asia. These figures demonstrate a very limited access to financial services in Afghanistan. 14. Recent financial sector developments. The Afghanistan financial sector has been deeply affected by the near collapse in September 2010 of Kabul Bank, Afghanistan’s largest private bank, with estimated bad loans amounting to above US$900 million. In an emergency response, the Afghan authorities put the bank under conservatorship, extended a lender of last resort loan and announced a full guarantee of its deposits. In April 2011, the Central Bank announced that receivership proceedings would be instituted against Kabul Bank. Since then, the International Monetary Fund (IMF) has been leading discussions with the Afghan authorities on a program of actions to address the Kabul Bank crisis but a full agreement is yet to be reached. 15. The Kabul Bank crisis has revealed not only the critical weaknesses in banking supervision (and has thus cast a doubt over the health of the Afghanistan’s entire financial sector) but also the monopoly role Kabul Bank has been playing in processing payments of salaries to civil servants and security personnel, which in turn hampered the implementation of the bank resolution plan (currently no other commercial bank is able to provide the level of payment services provided by Kabul Bank). The national payment system is currently inadequate and the Kabul Bank crisis underscores the urgent need to improve the banking sector capacity to make payments within Afghanistan. The modernization of the national payment system is therefore considered a key priority to strengthen the overall financial sector in Afghanistan, as it will allow to efficiently and transparently process payments (including salary payments) within Afghanistan. 16. Government request for support. The Kabul Bank crisis calls the government authorities to take immediate actions in two fronts to: (i) provide comfort to the Afghan people that their deposits in the banks are safe and the government will continue to make payments for salaries and services; and (ii) demonstrate to the donor community the government’s commitment to tackling the Kabul Bank crisis and improving banking sector oversight, which is crucial to mitigate the risks of disruptions in the flow of donor funding support to Afghanistan. In this

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context, the Afghanistan Central Bank (DAB) and the Ministry of Finance requested World Bank support to finance audits according to international standards of ten commercial banks to assess their true financial position and develop action plans to tackle potential weaknesses. In addition, DAB has requested support from the World Bank to modernize its payment system. The modernization of the payment system would – in addition to contributing to the safety and efficiency of the financial sector – also enable efficient government payments, in particular salary payments. These activities are considered critical to restore public confidence in the financial sector. 17. Rationale for Financial Sector Rapid Response Project. In the wake of the Kabul Bank crisis, the international community, led by the IMF, and the Afghan authorities have been in intensive discussions on priority steps to stabilize the banking sector and lay foundations for a broad banking sector reform. In response to the Government’s request for help, the UK Department for International Development (DFID) has agreed to finance the audits of Kabul Bank and of another large bank (for an estimated amount of US$11 million). The IMF is providing technical assistance on Kabul Bank resolution (with funding from DFID). While USAID has suspended the support provided to the Central Bank via its EGGI project2 (Economic Governance and Growth Initiative), it has agreed to provide renewed support to the Central Bank via its new Financial Access for Investing in the Development of Afghanistan (FAIDA) project, notably on mobile banking.

18. At the same time, the Government and the international community are looking to the Bank to play an important and urgent role in helping to address major weaknesses in the Afghan financial sector. Specifically, the government has requested the Bank to provide financing for the audits of ten commercial banks and the modernization of Afghanistan National Payment Systems. The proposed activities are an important and integral part of the international community’s collective response to assist the governmental authorities in tackling the banking sector crisis. The IMF supports the proposed activities and the proposed audits are part of the IMF program under discussions with the authorities. C. Bank Response: The Project 19. The proposed project is designed as a rapid response operation, focusing on the selected set of most critical and clear-cut activities that would help restore public confidence in the banking sector and provide the basis for a broad financial sector reform and strengthening program. The project supported activities will complement support provided notably by the IMF, USAID and DFID. 20. Considering the weak governance environment in the Afghan financial sector, the World Bank will provide support to selected activities with limited risks. First, at the request of the Afghan authorities, the project will finance audits (undertaken according to international standards) of ten commercial banks, as the Kabul Bank crisis has raised concerns about the

2 Because of its still important but declining budget for Afghanistan, USAID is reviewing its assistance strategy and has reduced or cancelled a number of projects. In addition, the USAID funded consultants at DAB have been blamed for failing to prevent the Kabul Bank crisis.

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health of the entire banking sector in Afghanistan. Second, it will finance the modernization of the national payment system, as the recent crisis highlighted the near monopoly role of Kabul Bank in paying civil servants salaries. A modernized national payment system will lead to a reduction in the systemic importance of Kabul Bank, as the modernized system would allow civil servants to choose the banks where they want to receive their salaries, while so far banks were selected by the Ministry of Finance3. In addition, a modernized payment system will allow the development of alternative payment mechanisms, such as card and mobile payments, which will facilitate payments across the country, including remote areas and will reduce the need to physically move cash. Third, the crisis also highlighted the critical lack of banking skills in Afghanistan, following 30 years of conflict. The sound development of the financial sector in Afghanistan will depend upon the availability of qualified personnel (from tellers to managers). The project will therefore provide support to the Afghanistan Institute of Banking and Finance. Finally the project will provide technical assistance and capacity building to DAB and other stakeholders to ensure efficient project implementation.

Project Development Objectives

21. The Project Development Objective is to assist DAB to develop actions plans for improved banking supervision and implement a modern national payment system for efficient and transparent payment transactions.

Summary of Project Components

22. The proposed project will finance the following activities: Audits (financial, portfolio and institutional audit) of ten commercial banks operating

in Afghanistan (US$3.5 million); Modernization of the national payment system to facilitate payments within the

country, which will involve the establishment of a Real Time Gross Settlement (RTGS), Automated Clearing House (ACH) and Central Securities Depository (CSD), as one system, at DAB; and a national card payment switch at Afghan Payment System (APS, a consortium of commercial banks) (US$11 million);

Support to the development of the Afghanistan Institute of Banking and Finance (US$1 million);

Technical assistance and training for project implementation (US$3 million). 23. Further details on the proposed activities are included in Annex 1.

Eligibility for Processing under OP/BP 8.0

24. Given the country circumstances, the Bank Group’s Interim Strategy Note (ISN) of May 2009 for Afghanistan informed the Board that processing of lending operations in Afghanistan will follow two tracks: (i) project document is prepared in accordance with OP/BP 8.00, in the

3 Because of the lack of modernized payment system, the Ministry of Finance had to select, through a Request for Proposal process, the commercial banks through which it would pay civil servants (with Kabul Bank being responsible for the vast majority of payments).

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form of an Emergency Project Paper with standard Annexes to ensure uniform format of project documentation; and (ii) to ensure project quality at entry, project review process follows the more regular processing used for Investment Lending with PCN Review Meeting and Decision Meeting being the two decision points where management provides guidance and instructions to the task team. 25. The proposed project would provide critical and urgently needed assistance to help the government to effectively respond to the Kabul Bank crisis. Time is of essence to deliver the assistance. In this context, the proposed project qualifies for processing under OP/BP 8.00.

Consistency with Country Strategy

26. The proposed project is aligned with the third pillar “supporting private sector growth” of the Bank Group’s 2009 Interim Strategy Note (ISN) for Afghanistan. Bank support under this pillar includes lending and advisory work for improving access to finance and strengthening key financial sector foundations, e.g. banking supervision, credit management and banking training.

Expected Outcomes

27. The achievement of the PDO will be measured with the following Project Outcome Indicators:

Commercial banking sector strengthened following implementation of action plans developed based on the findings of the audits, with support and oversight of DAB;

Payment system conforms to international norms (as established by Bank for International Settlements, BIS, and PSDG, World Bank) by end of project, contributing to safety and efficiency of the financial sector.

28. The Intermediate Outcome Indicators are:

Ten commercial banks audited according to international standards RTGS operational and transactions settled in real time by end of project; Improvement in timeline for inter-bank payment to (at the end of project) same day all-

over Afghanistan from (baseline) T+1 for Kabul area and T+3 for other areas; Card payment system established and operational by end of project; system provides full

interoperability for all domestic card payments and also support mobile payments; At the end of the project, the rating of the national payment system as measured by the

indicators developed by the World Bank Payment Systems Development Group (PSDG) would have a rating of Medium-High for indicators a, b, d and f, and medium-low for indicators c and e.

a. Legal and Regulatory framework b. System design and policies for large value payment systems c. Usage of large-value payment systems d. Retail payments infrastructure and policies for retail payment systems e. Efficiency of retail payment instruments and extensiveness of usage of non-cash

payment instruments f. Oversight functions

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Number of commercial banks’ staff trained in AIBF reaches 4,500 by end of project. D. Appraisal of Project Activities

Economic and financial aspects 29. Economic development literature shows the critical role of the financial sector in private sector development and broader economic development. The financial sector was virtually non-existent in Afghanistan following the fall of the Taliban regime in 2002. Since then, it has grown fast, but as the recent crisis is showing, the financial sector remains very fragile. It is now critical for the Afghan authorities to restore financial sector stability. The proposed audits – to be conducted according to international standards – of the ten commercial banks will allow DAB to have an accurate picture of their financial situation. The audits would lead to the elaboration of actions plans, with oversight from DAB, to address the weaknesses identified during the audits. The audits will therefore support the efforts of the authorities to restore financial sector stability. 30. Payment systems play a critical role in supporting the financial and real economies. From a broader perspective, a less than optimal use of payment instruments and/or inefficient or poorly designed systems to process these instruments will ultimately have an impact on systemic stability, economic development and growth. Payment systems are moving from being a narrow channel for transferring funds to a much wider integrated network for transferring additional forms of value. Moreover, the creation of networks and systems for retail payments can have a substantial role in supporting financial access in developing countries. Indeed, modern retail payment technologies and innovative programs to channel recurrent payments efficiently can, and are already being used to, integrate the previously underserved and non-served population into the formal financial sector. A well-functioning infrastructure to efficiently and safely process modern payment instruments is necessary to successfully enhance a country’s population access to, and widespread use of, such modern payment instruments. Cash is currently the main means of making payments in Afghanistan. Reducing the use of cash and transitioning to electronic payments remains a major challenge that needs to be addressed by DAB in cooperation with commercial banks and other stakeholders. Modernizing the national payment system is a critical step towards that aim. Technical aspects 31. Audits of ten commercial banks. The terms of reference for the audits of the ten commercial banks were drafted with support from an international consultant. The terms of reference for the audits include: (i) a financial audit according to international standards (International Accounting Standards, International Financial Reporting Standards, or International Standards on Auditing), (ii) a portfolio audit and (iii) an institutional audit. Two auditing firms will be selected, with each responsible for five banks. The procurement process is well advanced: two auditing firms have been selected and DAB has entered into negotiations with the firms. The World Bank has provided No Objection at the different steps of the process. The contracts with the auditors will be signed as soon as the proposed grant is declared effective (tentatively September 2011).

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32. Based on the audit reports, DAB will request each commercial bank to elaborate an action plan on how it intends to address the audit’s findings and recommendations. DAB will validate these action plans and monitor their implementation as part of its banking supervision mandate. It is however important to recognize in advance the limitations of such audits as auditors may not uncover all malfeasance and deliberate misinformation.

33. Modernization of payment system. The World Bank Payment Systems Development Group (PSDG) undertook an assessment of the National Payments System (NPS) in Afghanistan in March 2010, in co-ordination with DAB. This assessment concluded that: “The progress made by DAB to modernize the national payments system and, in particular, to develop a sound legal basis for its functioning is impressive. However, further efforts are needed to define and agree on the Payments System strategy and the specific actions to implement the strategy”. The list of recommendations included in the assessment is provided in the appendix of Annex 1. This assessment was updated during a technical mission undertaken in May 2011 and the appraisal mission undertaken in July 2011.

34. The World Bank Payment Systems Development Group (PSDG) will provide technical support during the modernization of the national payment system. In particular, PSDG will provide support to the elaboration of technical specifications for the required systems. The procurement process for the national card payment switch will start in August 2011, while the process for the integrated RTGS, ACH and CSD system will start in September 2011. Further details are provided in Annex 1 and 7. Annex 7 discusses in particular the role of APS (Afghan Payment Systems) in the implementation of the national card / mobile payment switch.

35. Afghan Institute of Banking and Finance (AIBF). AIBF was established in 2010 with the support of the Financial Sector Strengthening Project. The current banking sector crisis has also highlighted the critical lack of financial skills in Afghanistan (most banks have to rely on staff from neighboring countries for managerial positions). Further support to AIBF is required to support a rapid and robust expansion of its training activities. The US funded Financial Access for Investing in the Development of Afghanistan (FAIDA) and Harakat (a DFID funded initiative to support private sector development) have committed funding to AIBF. However additional funding is required for the 5 year AIBF business plan, which aims at allowing AIBF to reach sustainability by year 5. Institutional aspects 36. The Central Bank of Afghanistan (DAB) will be responsible for the implementation of this project. The proposed project will rely on the implementation mechanisms of the Financial Sector Strengthening Project (FSSP), through the Project Implementation Cell (PIC). As discussed in paragraph 11, DAB has made considerable progress in implementation of FSSP in the last six months. The recruitment of the IT consultant (now responsible for 52 percent of total project costs) is almost completed (contract negotiation stage), the implementation of the Collateral Registry has started and the procurement of the Public Credit Registry is well advanced (bid evaluation stage). In addition, the recruitment of the two auditing firms (in charge with auditing the ten commercial banks) is close to completion (contract negotiation stage).

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37. DAB has been playing a critical role in the recent months in dealing with the aftermath of the Kabul Bank crisis. While still facing significant capacity constraints, DAB has nevertheless demonstrated its willingness to implement difficult decisions.

38. The proposed project design takes into account the current operating environment in the financial sector (weak governance and low capacity). The project activities, i.e., audits of commercial banks and modernization of payment system, are relatively low risk. The modernization of payment system will benefit from significant technical assistance from the World Bank Payment System Development Group, complemented by external technical assistance and capacity building activities for all stakeholders. Fiduciary aspects 39. The proposed project will rely on the fiduciary arrangements of the Financial Sector Strengthening Project. The Project Implementation Cell (PIC) includes an international procurement specialist and an international financial management specialist, a national procurement specialist and a national finance officer. The PIC’s performance in both procurement and financial management is considered moderately satisfactory. It should be noted that the PIC’s performance has improved significantly over the last six months, after the international procurement specialist and international financial management specialist coming on board. Environment and social aspects 40. The project finances services (audits and technical assistance) and information systems (modernization of payment systems). It has therefore no potential negative environment and social impacts. The project is Environment Category C. Lessons learnt 41. The key lesson learnt from the ongoing Afghanistan Financial Sector Strengthening Project (FSSP) is that in the current Afghan context, it has proved increasingly difficult to attract qualified consultants. With the experience of FSSP, the PIC has developed mitigation measures: (i) advertizing Expressions of Interest for a long period until there is a strong long list of consultants who expressed interests, which in turn allows to have a strong short list; (ii) including, when deemed necessary, a security provision (budget) in the Requests for Proposal; and (iii) organizing pre-bid conference calls to reassure bidders about the situation in Afghanistan and in Kabul. Exceptions to Bank policies 42. The project does not involve any exceptions to Bank policies.

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E. Implementation Arrangements and Financing Plan

43. Implementation arrangements. The proposed project will rely on the implementation arrangements as the Financial Sector Strengthening Project (FSSP). Under FSSP, a Project Implementation Cell (PIC) has been established. The PIC includes four DAB staff comprising a Project Director, a Deputy Project Director (currently under recruitment), a national finance officer and a national procurement specialist, and one international procurement specialist and one international financial management specialist recruited under the project. These two specialists provide support to the PIC on fiduciary matters, as well as to DAB, more generally. The PIC works in close collaboration with focal points of the various departments / parties partaking in the project activities. 44. With regard to the proposed Financial Sector Rapid Response Project, the PIC will work closely with focal points from the following entities:

Within DAB: Financial Supervision Department (for the audits of the ten commercial banks), Payment System Department (for the modernization of the national payment system) and other departments, as required by the project (such as Legal Department);

Afghan Payment System (for the inter-bank payment card switch); and Afghan Institute of Banking and Finance

45. The proposed Financial Sector Rapid Response Project will also rely on the Project Steering Committee (PSC) established for the FSSP. The PSC is chaired by the DAB Governor or by the DAB First Deputy Governor and meets at least twice a year. The FSSP PSC will be extended to include all DAB Department Heads involved in the project, and representatives of APS and AIBF. 46. The National Payments Council (NPC), chaired by the DAB, will play a key role in payment system modernization. The NPC was formed in April 2010, and has since then met twice. The NPC consists of representatives from three commercial banks, one representative from the Ministry of Finance and three members from DAB. The NPC is chaired by the First Deputy Governor of DAB and DAB also provides one representative to act as the secretary of the NPC. One of the commercial bank representatives serves as the Vice Chairman. The NPC has established three standing committees – Technical, Operation and Legal, to discuss the specific topics on an ongoing basis. Further details are provided in Annex 7.

47. Afghan Payment System (APS) is a non-financial services institution that intends to act as the national provider of secure financial message switching and communications link to participating banks in Afghanistan. APS was established in close coordination with DAB and it fulfills DAB’s objectives for establishing a shared ATM/POS – Mobile Commerce network in Afghanistan. Three banks have so far joined APS (Bank-e-Millie, Pashtany Bank and Ghazanfar Bank), but membership in APS is open to all institutions involved in financial message transmission that operate in Afghanistan under license from the appropriate Afghan authorities (i.e. all commercial banks and mobile network operators). Support will be provided to APS for a national card/mobile payment switch (and possibly for operating expenses) with the proviso that DAB (drawing on the powers vested with it to regulate and oversee payment systems in Afghanistan) would exercise effective oversight over the operations of APS in line with the

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payment systems oversight policy. During project appraisal, agreement has been reached that the amendments of APS by-laws to ensure that they fully comply with the agreed principles established under the project (satisfactory to the Bank) would be a condition of disbursement for the financing of the national card/mobile payment switch. 48. Under the proposed project, DAB and APS will enter into a subsidiary agreement, under which DAB would undertake to procure the payment switch on behalf with APS (and with close technical involvement of APS), whereas APS will undertake to comply with the key principles agreed with the World Bank (further details are provided in the appendix of Annex 1). 49. The Afghanistan Institute of Banking and Finance (AIBF) was incorporated as a non-profit organization in 2009 and was inaugurated in November 2010. As of July 2011, it has provided training to over 1,000 participants. AIBF is a joint venture of the Afghanistan Bankers Association (ABA) and Da Afghanistan Bank (DAB), with both holding 49 percent of its shares; the Microfinance Investment Support Facility for Afghanistan (MISFA) holds the remaining 2 percent. The institute was established with support from the Financial Sector Strengthening Project (which included US$250,000 for its establishment). Support to AIBF under the proposed project will be provided based on a five year business plan (2011-2015), by the end of which AIBF is expected to be self-sustainable. 50. Project costs. The total project costs are estimated at US$19 million (see summary table below). Table 1: Project Costs (in US$)

Activities

Audit of ten commercial banks 3.50

Modernization of national payment system 11.00

Support to AIBF 1.00

Technical assistance and training for project implementation 3.00

Unallocated 0.50

Total 19.00 51. Financial Management, Disbursement & Audit Arrangements. A PFM performance rating system has been developed for Afghanistan by the Public Expenditure and Financial Accountability (PEFA) multi-agency partnership program, which includes the World Bank, IMF, EC, and other agencies. Afghanistan’s ratings against the PFM performance indicators portray a public sector where financial resources are, by and large, being used for their intended purposes as authorized by a budget that is processed with transparency and has contributed to aggregate fiscal discipline. 52. Financial management and audit functions for the proposed project will be undertaken through the agents contracted under the IDA-financed Public Financial Management Reform Project. These are the primary instruments for continuing to strengthen the fiduciary measures put in place for ensuring transparency and accountability of funds provided by the Bank and

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other donors. Under these contracts, two advisers – Financial Management and Audit – are responsible for working with the government and line ministries to carry out these core functions. The former, the Financial Management Adviser (FMA) is responsible for helping the MoF maintain the accounts for all public expenditures, including IDA-financed projects and for building capacity within the government offices for these functions. The latter, the Audit Agent is responsible for providing technical assistance to the Control and Audit office in the performance of annual audits.

53. At the project level, the existing Project Implementation Cell (PIC) in DAB, together with the DAB Finance department will undertake responsibility of the financial management functions.

54. Quarterly Interim Un-Audited Financial Reports (IUFRs – formerly FMRs) will be prepared by the PIC/DAB Finance department every quarter and submitted to the Bank within 45 days from the end of the quarter. Consolidated project reports will be prepared, reviewed and approved by the MoF/DAB, supported by the FMA.

55. A Designated Account (DA) will be opened at Da Afghanistan Bank (DAB, Central Bank) in the name of the project on terms and conditions satisfactory to IDA. The DA will be maintained by the MoF. Withdrawal applications for new advances and submission of expenditure reporting will be made monthly. Financial management arrangements for the project are stated in detail in Annex 5.

56. Fund Flows. Fund management for the Project will follow existing procedures. As with all public expenditure, all payments under the project will be routed through MoF. The FM advisor will assist the MoF in executing and recording project payments. In keeping with current practices for other projects in Afghanistan, the DA will be operated by the Special Disbursement Unit (SDU) in the Treasury Department of MoF. Requests for payments from DA funds will be made to the SDU, through the Administration department of MoF, by PIC/DAB. In addition to payments from DA funds, PIC/DAB can also request the SDU, through the Administration department of MoF, to make direct payments to consultants or consulting firms, and special commitments for contracts covered by letters of credit. Such requests will follow World Bank’s procedures. All withdrawal applications to IDA, including advances, reimbursement, and direct payment applications, will be prepared and submitted by MoF.

57. Accounting and Reporting. The PIC/DAB Finance department will maintain essential consolidated project transaction records using computerized accounting system / Excel spreadsheets and generate required monthly, quarterly, and annual reports.

58. Financial Management Manual. The FM Manual being prepared for the FSSP and to be approved by the Bank will be used for the proposed project. The FSSP FM Manual will include: (i) roles and responsibilities for all FM staff; (ii) linkages between the FM staff of the PIC and DAB’s finance department; (iii) documentation and approval procedures for payments; (iv) project reporting requirements; and (v) quality assurance measures to help ensure that adequate internal controls and procedures are in place and are being followed.

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59. The FSSP FM Manual will also established project financial management in accordance with standard Afghan government policies and procedures, including use of the government Chart of Accounts to record project expenditures. The use of these procedures will enable adequate and timely recording and reporting of project expenditures. Overall project accounts will be maintained centrally in SDU, which will be ultimately responsible for recording all project expenditures and receipts in the Government’s accounting system. Reconciliation of project expenditure records with MoF records will be carried out monthly by the PIC.

60. Disbursement Method. Disbursements from the IDA grant will be made using advances, reimbursement, direct payment, and payments under Special Commitments including records or against reports, in the form of statements of expenditures, as appropriate.

61. Retroactive financing. A provision has been made to reimburse the Government for payments it makes, up to a maximum of US$3.5 million equivalent, for eligible project expenditures made in accordance with the Bank’s procurement guidelines, paid by the Government after August 1st, 2011 and up to the signing of the Financing Agreement.

62. Audit of Project Funds. The Auditor General, supported by the Audit Agent, is responsible for auditing the accounts of all IDA and ARTF-financed projects. It will also be responsible for this project’s audit. Annual audited project financial statements will be submitted within six months of the close of GOA’s fiscal year.

63. The Bank-funded projects already or currently being implemented by MoF have no overdue audit reports. The key issues raised in these projects’ audit reports up to Solar Year 1388 have been resolved satisfactorily, except for PFMRP, which has minor issues and in the process of being resolved.

64. Audit-Responsible Entity. The responsible entity for the audit report is Ministry of Finance. 65. Procurement Arrangements. Procurement for the project will be administrated in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated January 2011, “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated January 2011, and the provisions stipulated in the Financing Agreement. In addition, the World Bank’s “Guidelines on Preventing and Combating Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants” dated October 15, 2006 and revised in January 2011 has been shared with the recipient. The World Bank’s Standard Bidding Documents, Requests for Proposals, and Forms of Consultant Contract will be used. Goods following National Competitive Bidding (NCB) procedures shall be procured using the agreed Standard Bidding Documents (SBDs) for Afghanistan. In case of conflict/contradiction between the World Bank’s procurement procedures and any national rules and regulations, the World Bank’s procurement procedures will take precedence as per the Article 4(2) of the Procurement Law July 2008 (Amendments in January 2009 incorporated) of the GOA. The general description of various procurements under different expenditure categories are described in Annex 6: Procurement Arrangements. A detailed procurement plan has been prepared for the project as part of the Procurement arrangement.

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66. The proposed project will be implemented by DAB, which is currently implementing the Financial Sector Strengthening Project (FSSP) and which has therefore become relatively familiar with World Bank procurement procedures. Project procurement mainly comprises the purchases of consultant services and Information Systems. DAB Director General / General Services Department is responsible for all procurement in DAB. DAB is currently carried out small value procurement under FSSP. All large value procurement of goods (NCB/ICB) and hiring of consultant services is carried out with the assistance of the Afghanistan Reconstruction Development Service (ARDS) under the Ministry of Economy. A Procurement Manual has been prepared by DAB in the context of the FSSP and has been submitted to the World Bank for review on June 18, 2011. This Procurement Manual will also apply to the proposed project.

67. Arrangements for Bank supervision, monitoring, and evaluation. The Bank’s supervision of the project will be led by a task team leader based at the Bank’s office in Kabul. The World Bank Payment System Development Group will continue to provide implementation support. DAB will have primary responsibility for monitoring and evaluation, as per the result framework in Annex 2. A timeline for the implementation of the payment system modernization is included in Annex 1. The audits of the ten commercial banks should start in September and be concluded within around six months. F. Key Risks and Mitigating Measures

68. The main risks of the project relate to (i) the Afghanistan security situation, which affects all projects as it diminishes the willingness of firms and suppliers to bid for contracts in Afghanistan, (ii) the latest developments in the financial sector in Afghanistan and, in particular, the Kabul Bank crisis and (iii) the limited capacity of DAB and of the Afghan financial sector (especially with regard to the modernization of the payment system). The Operational Risk Assessment Framework (ORAF) is included in Annex 4. 69. The project activities take place in Kabul, which limits the security risks. In addition, as described in paragraph 41, with the experience of FSSP, the PIC has developed mitigation measures to cope with the prevailing security situation in Afghanistan and to ensure a minimum number of qualified bidders, such as: (i) advertizing Expressions of Interest for a long period until there is a strong long list of consultants who expressed interests, which in turn allows to have a strong short list; (ii) including – when deemed necessary – a security provision (budget) in the Requests for Proposal; and (iii) organizing pre-bid conference calls to reassure bidders about the situation in Afghanistan and notably in Kabul. In addition, the budget estimates for the different activities include a “risk premium” for Afghanistan.

70. The Kabul Bank crisis has highlighted critical weaknesses in banking supervision as well as weak corporate governance in the banking sector. Strengthening the banking sector will be a major challenge and will take a longer time. The design of the proposed project takes this difficult environment into account and focuses on essential and clear-cut activities to develop action plans for improving banking sector oversight and to modernize the national payment system, both will inform the design of a broad banking sector reform program. There is a reputational risk for the World Bank to be active in (and associated with) a sector with weak

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governance. However, this risk is mitigated by the narrow focus on the selected (non-controversial) activities and the involvement of other development partners in the financial sector (notably, IMF, USAID and DFID). 71. The limited capacity of DAB and of the financial sector was also taken into account when designing the project. The Terms of Reference for the audits were developed with support of an international consultant and are comprehensive. The procurement process for the audits was closely monitored to ensure a satisfactory outcome. The design of the component aiming at modernizing the National Payment System benefited from significant support from the World Bank Payment System Development Group – which will continue provide intense technical assistance during project implementation. Additional technical assistance (estimated at US$1 million) has also been included in the project. Finally, considering the fragility of the financial sector, an allocation for the initial operating costs of the national payment system has also been included (US$1 million). This aims at making sure that the modernized payment system is fully embraced by the financial sector and that it therefore becomes indispensable for all operators by the end of the project (a similar approach is being used in the Democratic Republic of Congo). G. Terms and Conditions for Project Financing

72. The proposed financing will be on standard IDA grant terms and will finance 100% of project expenditures, including taxes. 73. The proposed financing includes the following Additional Condition of Effectiveness: the Subsidiary Grant Agreement has been executed on behalf of the Recipient and DAB.

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Annex 1: Detailed Description of Project Components

AFGHANISTAN: Financial Sector Rapid Response Project The proposed Financial Sector Rapid Response Project involves the following activities (as summarized in Table 1 below):

Audits of ten commercial banks (US$3.5 million). The project will cover the cost of the audits (financial audit according to international standards, portfolio audit and institutional audit) of ten commercial banks. The audits will allow DAB to have a better assessment of the true financial situation of the banks; in addition, the audits will provide action plans on how to address the identified weaknesses in the banks. DAB will be responsible for monitoring the implementation of these actions plans and taking remedial actions if need be. The two auditing firms (each responsible for five banks) have been selected through Quality Based Selection. DAB is currently negotiating with the selected auditing firms. The cost of these audits is estimated at US$3.5 million4. The audits are expected to start in September 2011 (as soon as the proposed project is declared effective) and to last for around six months. This activity is strongly supported by other development partners (notably the IMF). Each auditing firm will audit the following five banks – one lot representing 17.6 percent of total banking sector assets, the other lot representing 14.6 percent of total banking sector assets. The ten banks were selected by DAB based on their CAMEL5 rating (a higher CAMEL rating indicating higher risks).

Modernization of Afghanistan National Payment Systems (US$11 million). The

proposed project will finance the modernization of the Afghanistan National Payment System. A modernized payment system is the cornerstone of the overall financial infrastructure in a country. The EGGI project provided support to the establishment of the Afghanistan Clearing and Settlement System (ACSS), while the US Department of Defense (DoD) was supposed to finance the inter-bank card payment system. However, as mentioned earlier, the EGGI project was significantly reduced and no longer includes activities on the financial sector, while the DoD budget6 is no longer available for the card payment system. The Kabul Bank crisis highlighted the monopoly role this bank has been playing in paying civil servants salaries and the need to improve banking sector capacity to make payments within Afghanistan

The World Bank payment system unit undertook an assessment of the DAB payment system in March 2010 and a follow-up technical mission took place in May 2011. These missions highlighted the need for further modernization of the payment system (further

4 The recruitment of the two auditing firms was undertaken following the Quality Based Selection method. The financial proposals of the selected firms were opened on July 16, 2011. Final contract signature will take place once the proposed project is declared effective. 5 CAMEL stands for: Capital adequacy, Asset quality, Management, Earnings, Liquidity. 6 This also appears to be a consequence of the Kabul Bank crisis, which prompted the US Government to re-assess its support to the financial sector in Afghanistan.

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details are provided in the appendix below). The modernization of the payment system would cover the following components.

o Deploy four key payment systems infrastructure components (US$8.5 million):

(i) a RTGS system to process large value inter-bank payments and other systemically important payments like settlement of market transactions in future; (ii) an Automated Clearing House (ACH) for processing of retail payment transactions like funds transfer, bill payments, salary payments and other non-time critical payments; (iii) a centralized securities depository (CSD) for holding record of securities account holdings of market participants in a de-materialized form and amenable to automated pledging and lending of securities; and (iv) an inter-bank card/mobile payment switch to support payment card transactions and mobile payments. Increasingly the leading vendors of payment systems infrastructure components are providing platforms that integrate the components (i), (ii) and (iii) in one integrated modular system (for an estimated US$4.25 million) which can be implemented in one go and the individual modules turned-on over a period of time in line with the needs of the country. The payment switch cost (iv) is estimated at US$4.25 million;

o Develop an inter-bank communications network (US$0.5 million) to support the four payment systems infrastructure components. It is proposed that DAB avail this as a service from the existing telecom service providers instead of building a dedicated network. The project will cover the initial setup cost. It is possible that this would need to be allocated between the APS and the DAB, if an integrated solution does not work well.

o Upgrade the existing core banking system and other internal systems of DAB (US$1 million) to enable integration with the proposed additional components;

o Support the payment system operational expenses (US$1 million) for a period of 2-3 years to provide DAB and APS a transition period for implementation of full-cost recovery pricing model.

Support to the Afghanistan Institute of Banking and Finance, AIBF (US$1 million):

the Kabul Bank crisis has highlighted the weaknesses in banking supervision, as well as the very limited banking sector skills currently available in Afghanistan. It is therefore proposed to provide further support to AIBF (which was established with support from FSSP and inaugurated in November 2010) to allow the institute to scale up its activities, in coordination with the USAID funded Financial Access for Investing in the Development of Afghanistan (FAIDA) project. A five year business plan was prepared by AIBF with support from FAIDA. Donor contributions will be coordinated based on this business plan. According to this business plan, AIBF should be self-sufficient by end 2015.

Technical assistance and training for project implementation (US$3 million). This technical assistance will include the following:

o Technical assistance on payment system modernization (US$1 million)

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Strengthen the legal and regulatory framework for payments, remittances and securities settlement systems by developing a comprehensive national payment systems law;

Strengthen DAB capacity to pilot the modernization of the payment system and enhance its capacity to effectively oversee, operate and regulate the payment systems. This will also include a review of future plans of DAB and the Government to issue securities and create the necessary arrangements for settlement of these securities in an efficient manner;

o Technical assistance to DAB for project implementation (US$1.6 million) on, inter alia, audits follow-up, procurement and financial management;

o Training (US$0.2 million) related project implementation (notably payment system modernization).

o Support to PIC operating costs (US$0.2 million). The Project Implementation Cell (PIC) operating costs are partly covered by DAB, which demonstrates strong ownership to the Project. It is proposed to partially contribute to the operating costs of the cell to ensure smooth implementation (to ensure that the PIC always has the required funding to operate smoothly and efficiently).

Unallocated provision (US$0.5 million). An unallocated provision is also proposed to

absorb unexpected cost increase (such as security costs).

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Appendix: Modernization of National Payment System 1. Payment systems play a critical role in supporting the financial and real economies. From a broader perspective, a less than optimal use of payment instruments and/or inefficient or poorly designed systems to process these instruments may ultimately have an impact on systemic stability, economic development and growth. 2. Payment systems are moving from being a narrow channel for transferring funds to a much wider integrated network for transferring additional forms of value. Moreover, the creation of networks and systems for retail payments can have a substantial role in supporting financial access in developing countries. Indeed, modern retail payment technologies and innovative programs to channel recurrent payments efficiently can, and are already being used to, integrate the previously underserved and non-served population into the formal financial sector. A well-functioning infrastructure to efficiently and safely process modern payment instruments is necessary to successfully enhance a country’s population access to, and widespread use of, such modern payment instruments.

3. The Payment Systems Development Group (PSDG) of the World Bank undertook an assessment of the National Payments System (NPS) in Afghanistan in March 2010, in co-ordination with DAB. This assessment was conducted as part of the South Asia Payments Initiative which is a regional initiative funded by the FIRST Initiative (Financial Sector and Strengthening Initiative). The key findings of the assessment are summarized below.

“The progress made by DAB to modernize the national payments system and, in particular, to develop a sound legal basis for its functioning is impressive. However, further efforts are needed to define and agree on the Payments System strategy and the specific actions to implement the strategy, in particular the following:

Considerable improvement in the payments landscape can be achieved with the introduction of an Automated Transfer System (ATS) for processing all electronic payments, both large-value and low-value, which will replace the current Afghanistan Clearing and Settlement System (ACSS). The ATS will feature both Real Time Gross Settlement (RTGS) functionality for systemically important and time critical payments and Automated Clearing House (ACH) functionality for clearing and netting large volumes of low-value payments, thus reducing systemic and settlement risk and improving efficiency of payments. It is recommended that DAB does not expend effort or resources on improving the efficiency of cheque processing, but rather that efforts should be devoted to promoting the use of more efficient electronic payment instruments.

Promoting the establishment of efficient infrastructure for payment cards, and other innovative instruments and channels, such as mobile payments, is another priority for the DAB and the commercial banks.

It is recommended that DAB and the Government explore, agree, and implement ways to automate the processing, clearing and settlement of government payments and receipts, and to link the Government internal systems with the electronic systems of the DAB.

Legal reforms need to be completed through the adoption of the proposed draft Regulation on domestic payment operations in Da Afghanistan Bank, 2009, and other implementation regulations.

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Another priority is to strengthen the settlement of DAB Capital Notes (and Government bills and bonds in the future) by implementing a fully automated Central Securities Depository (CSD) and Delivery versus Payment mechanism.

With regard to international remittances, the implementation of the BIS-World Bank General Principles for International Remittance Services is highly recommended. The World Bank can assist the DAB in development of price remittance database.

Finally, the DAB should enhance its oversight function by strengthening the legal and regulatory framework for payments oversight, drafting and publishing its Oversight Policy, developing oversight tools and strengthening its capacity to regulate and oversee payment and securities settlement systems.”

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Annex 2: Results Framework and Monitoring

AFGHANISTAN: Financial Sector Rapid Response Project

PDO Project Outcome Indicators Use of Project Outcome Information

To assist DAB to develop actions plans for improved banking supervision and implement a modern national payment system for efficient and transparent payment transactions.

Commercial banking sector strengthened following implementation of action plans developed based on the findings of the audits, with support and oversight of DAB Payment system conforms to international norms (as established by Bank for International Settlements, BIS, and PSDG, World Bank) by end of project, contributing to safety and efficiency of the financial sector.

To monitor progress towards achievement of PDO

Intermediate Outcomes Intermediate Outcome Indicators Use of Intermediate Outcome Monitoring

Ten commercial banks audited according to international standards

Audit reports completed highlighting strengths and weaknesses of each bank

To monitor progress of audits implementation

The modernized national payment system is fully operational

RTGS operational and transactions settled in real time by end of project Improvement in timeline for inter-bank payment to (at the end of project) same day all-over Afghanistan from (baseline) T+1 for Kabul area and T+3 for other areas Card payment system established and operational by end of project; system provides full interoperability for all domestic card payments and also support mobile payments At the end of the project, the rating of the national payment system as measured by the indicators developed by the World Bank Payment Systems Development Group (PSDG) would have a rating of Medium-High for indicators a, b, d and f, and medium-low for indicators c and e. a. Legal and Regulatory framework b.System design and policies for large value payment

systems c. Usage of large-value payment systems d.Retail payments infrastructure and policies for

retail payment systems e. Efficiency of retail payment instruments and

extensiveness of usage of non-cash payment instruments

f. Oversight functions

To monitor progress of modernization of national payment system

AIBF trains an increasing number of commercial banks’ staff

Number of commercial banks’ staff trained in AIBF reaches 4,500 by end of project

To monitor achievements of AIBF

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Arrangements for results monitoring

Target Values Data Collection and Reporting Project Outcome Indicators Baseline YR1 YR2 YR3 YR4 YR5 Frequency and Reports Data Collection

Instruments Responsibility for Data Collection

Commercial banking sector strengthened following implementation of action plans developed based on the findings of the audits, with support and oversight of DAB Payment system conforms to international norms (as established by Bank for International Settlements, BIS, and PSDG, World Bank) by end of project, contributing to safety and efficiency of the financial sector

No action plan Not conform

Draft action plans Not conform

Action plans under implem-entation Not conform

Action plans under implem-entation Conform

One time audits Annually

Financial Supervision Department, DAB BIS and PSDG

PIC PIC

Intermediate Outcome Indicators Audit reports (according to international standards) completed highlighting strengths and weaknesses of each bank

Audits not completed

Audits completed

- - One time audits Financial Supervision Department

PIC

RTGS operational and transactions settled in real time by end of project Improvement in timeline for inter-bank payment to (at the end of project) same day all-over Afghanistan Card payment system established and operational by end of project; system provides full interoperability for all domestic card payments and also support mobile payments

No RTGS T+1 for Kabul area and T+3 for other areas No interbank card system

No RTGS T+1 for Kabul area and T+3 for other areas No system

No RTGS T+1 for Kabul area and T+3 for other areas No system

RTGS operational Same day all over Afghanistan System operational

Six-monthly reports Six-monthly reports Six-monthly reports

Payment System Department, DAB Payment System Department, DAB Payment System Department, DAB

PIC PIC PIC

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At the end of the project, the rating of the national payment system as measured by the indicators developed by the World Bank Payment Systems Development Group (PSDG) would have a rating of Medium-High for indicators a, b, d and f, and medium-low for indicators c and e.

a. Legal and Regulatory framework

b. System design and policies for large value payment systems

c. Usage of large-value payment systems

d. Retail payments infrastructure and policies for retail payment systems

e. Efficiency of retail payment instruments and extensiveness of usage of non-cash payment instruments

f. Oversight functions

Low: a, e, f Med-low: d n.a.: b, c (2007)

- Med. High: a Med-low: f Low to Med-low: others

Med-High: a, b, d, f Med-low: c, e

Bi-annually (Afghanistan did not respond to the 2010 survey, the next survey is in 2012)

World Bank Global Payments System Survey

PIC

Number of commercial banks’ staff trained in AIBF reaches 4,500 by end of project

1,017 (203 female)

2,000 (400)

3,200 (640)

4,500 (900)

Monthly reports AIBF PIC

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Annex 3: Summary of Estimated Project Costs


Activities

Audit of ten commercial banks 3.50

Modernization of national payment system 11.00 RTGS, ACH and CSD 4.25 National card/mobile payment switch 4.25 Inter-bank communication network 0.50 Upgrading of DAB IT system 1.00 Support to payment system operational expenses 1.00

Support to AIBF development 1.00

Technical assistance and training for project implementation 3.00 Technical assistance on payment system modernization 1.00 Technical assistance to DAB (including: audits follow up, procurement and financial management) 1.60 Training 0.20 PIC operating costs 0.20

Unallocated 0.50

Total 19.00

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Annex 4: Operational Risk Assessment Framework (ORAF)


Concept to Appraisal Package Version Project Development Objective(s) To assist DAB to develop actions plans for improved banking supervision and implement a modern national payment system for efficient and transparent payment transactions.

PDO Level Results Indicators:

Commercial banking sector strengthened as a result of actions taken in compliance with action plans developed based on the findings of the audits, with support and oversight of DAB Payment system conforms to international norms (as established by Bank for International Settlements, BIS, and PSDG, World Bank) by end of project, contributing to safety and efficiency of the financial sector

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Risk Category Risk Rating Risk Description Proposed Mitigation Measure

1. Project Stakeholder Risks

1.1 Stakeholder

Medium -I

The Kabul Bank crisis has focused the attention of the international community on the Afghan financial sector. The financial sector has been at the center of the recent discussions between the Afghan Government and the IMF in the context of a renewed ECF. Following the Kabul Bank crisis, the US Government has reconsidered its support to the banking sector and the Central Bank. Furthermore, President Karzai has publicly blamed Western advisors for the problems at Kabul Bank, and announced that they will be the subject of a public enquiry. These moves will make it more difficult for donors to engage and find suitable firms willing to work in Afghanistan’s financial sector Other stakeholders (DAB, commercial banks, Afghanistan Institute of Banking and Finance) will directly benefit from the project and it is therefore very unlikely that they will oppose the project. The proposed audits (for the 10 commercial banks) will provide useful information to the banks on their areas of strengths and weaknesses (for banks operating “in good faith”, banks involved in criminal activities might not welcome the audits).

Close dialogue with development partners (in particular IMF, US Government and DFID) on the need for continuous support to Afghanistan financial sector. The World Bank will also regularly liaise with the Afghanistan Banking Association (ABA) on the progress of the project and with the Ministry of Finance. Two recognized international audit firms have been selected following the Technical Evaluation Reports (under Quality Based Selection). DAB has started contract negotiations with the selected firms. Contract signature will take place as soon as the project is effective.

2. Operating Environment Risks

2.1. Country High

Escalating insurgency-related violence has increased the level of fragility in the political and governance environment, while also impacting the ability of the government to deliver services and programs. Key risks include impact on project implementation and ability to supervise in parts of the country. The formal systems of the state are penetrated by a variety of informal networks and vested interests. The most powerful of these are based on the opium economy.

Mitigation of this risk is outside the scope of the Bank – however the Bank will continue to monitor developments closely and will modify programs if necessary. Political governance risk outside the scope of World Bank. Impact on corruption at project level is medium, however can be partially mitigated through fiduciary ring-fencing (see below).

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The state itself is a fragile coalition of interest groups mostly anchored in particular ethnic groups, factions, parties or geographical areas. Key risks include cabinet reshuffles, impacting on key policies or project implementation.

2.2 Economic Management

High

Large inflows of money from donors, remittances and drug-related activities are likely to create upward pressures on the real exchange rate reducing competitiveness in the future.

WB & IMF monitor economic & fiscal management closely through HIPC, DPG and PRGF programs.

2.3 Security Constraints

High

The security environment impacts the government’s ability to deliver services and programs in certain areas and pose a risk to Bank operations.

Continue to be vigilant with regards to security readiness and adjustment of operational posture to minimize risks to staff. Have flexible implementation arrangements that take into account access and movement restrictions and can quickly adapt to changing circumstances on the ground. For example, the Bank will develop delivery mechanisms through nongovernment channels, third-party monitoring, remote sensing/GPS for monitoring & supervision, and strengthening government capacity at the provincial level.

2.4 Political Change / policy reversal

Medium-I

Mitigation of this risk is outside the scope of WB – however WB will continue to monitor developments closely and will modify program if necessary.

Continue strong dialogue and AAA with all levels of Government and political parties to make the case for priority reforms and to position the Bank to engage with different players. Make disbursements for a significant part of the priority program contingent on results, which will help mitigate the risk impact of policy reversal. Strengthen governance and political economy analysis to better understand the political landscape in case of significant changes.

2.5 Country Governance

Medium-I

Governance is a considerable concern for Afghanistan. The worldwide governance indicators suggest that Afghanistan is at or below the 10th percentile on key dimensions of governance. Institutions of accountability have not provided a strong framework for holding the executive or service delivery agents accountable for results.

Undertake operational risk assessment in sectors, and improve governance risk profiling in sectors and projects Provide support to continued reforms that are making progress on good governance (e.g. public financial management, education and social protection). Play a supporting role with partners leading in the

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areas of civil service and judicial reforms. Play a complementary role with partners on public sector governance in the cities the project is focused on.

2.6 Systemic Corruption

High

Perception of corruption has increased in the past year: Afghanistan’s Transparency International corruption ranking was 176 in 2010 out of 178 countries surveyed.

Support strengthening of public accounting and auditing systems. Support tax administration reforms. Provide strong upstream project preparation, including procurement. Provide strong support to sectors more susceptible to corruption, such as power, with a strong focus on transparency. Broaden/strengthen policy dialogue with government on greater transparency and public accountability in government transactions.

2.7 Institutional Risk (sector & multi-sector Level)

Medium I

The Ministry of Finance and the Central Bank (DAB) play a key role in financial sector development. Both institutions have been closely involved in the design of the Kabul Bank resolution plan. The Ministry of Finance and the DAB are two of the strongest institutions in the country.

Continuous dialogue, in collaboration with other development partners, notably the IMF, with the Ministry of Finance and DAB on the importance of strengthening the stability of the Afghan financial sector.

3. Implementing Agency Risks (including FM and PR Risks)

3.1 Capacity

Medium I

DAB is one of the strongest institutions in the country, though still has capacity constraints. The proposed project will benefit from the project implementation mechanisms of the FSSP. DAB started implementing the FSSP in 2009. Since January 2011, there is a fully staffed Project Implementing Cell (PIC), with a Director, a Finance Officer, Procurement Specialist, which received support from an international Financial Management Specialist and an International Procurement Specialist. A Deputy Project Director is under recruitment.

The World Bank has been closely working with the PIC in the context of the FSSP. It is closely monitoring its performance with regard to procurement, financial management and overall project implementation. The limited capacity of DAB and of the financial sector was also taken into account when designing the project. The Terms of Reference for the audits were developed with support of an international consultant and are extremely comprehensive. The procurement process for the audits was closely

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The capacity of the PIC has significantly improved over the last 6 months, through support from international consultants (financial management and procurement). The PIC Director closely monitors the transfer of capacity from international consultants to DAB staff, in particular with regards to Procurement and Financial Management. Staff turnover might be a lesser concern in DAB, as the PIC staff are either international consultants or DAB staff.

monitored to ensure a satisfactory outcome. The design of the component aiming at modernizing the National Payment System benefited from significant support from the World Bank Payment System Development Group – which will continue provide intense technical assistance during project implementation. Additional technical assistance (estimated at US$1 million) has also been included in the project. Finally, considering the fragility of the financial sector, an allocation for the initial operating costs of the national payment system has also been included (US$1 million). This aims at making sure that the modernized payment system is fully embraced by the financial sector and that it therefore becomes indispensable for all operators by the end of the project (a similar approach is being used in the Democratic Republic of Congo).

3.2 Governance

Medium I

The project could be captured by vested interests. It should be noted that the Acting Governor (former First Deputy Governor) of the Central Bank has been closely following project preparation. It is also very involved in the ongoing Financial Sector Strengthening Project. The project focuses on a limited number of activities that are not controversial and that are not likely to suffer from the weak governance environment in the Afghanistan financial sector.

Close supervision from the World Bank of procurement activities, financial management and overall project implementation. The implementation of the audits will be closely monitoring by the World Bank and the IMF (the TOR state that the IMF will also have access to the audit reports). If the audits uncover significant governance issues, such issues could be raised and addressed in the context of the IMF and World Bank dialogue with the authorities.

3.3 Fraud & Corruption

Medium I

There could be fraud and corruption in the procurement of goods and consultants. However, there are a limited number of procurement activities to be undertaken in the project and they are all closely monitored by the World Bank. In addition, DAB (and the PIC) appears very committed to the success of the project.

Close supervision from the World Bank of procurement activities, financial management and overall project implementation to detect early on potential fraud and corruption and take remedial actions if needed. For example, the World Bank team will monitor the expertise and qualifications of selected firms or IT systems providers.

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3.4 Overall rating Medium I A weak implementing agency would have a detrimental impact on the implementation of the project.

The PIC is benefiting from a broad range of technical assistance, both on fiduciary matters and on technical matters (with technical assistance from the World Bank and IFC). DAB has shown strong commitment to the World Bank FSSP and forthcoming project, recognizing its key role in strengthening the financial sector in Afghanistan.

4. Project Risks

4.1 Design Medium I

The proposed project focuses on key activities to address some of the financial sector issues identified following the Kabul Bank crisis. The design is simple and the project focuses on the following activities: (i) audits of commercial banks, (ii) modernization of the payment system, (iii) support to AIBF and (iv) technical assistance for project implementation. The World Bank Payment System Unit undertook a diagnostic of DAB payment system in March 2010, which is providing very helpful guidance. This assessment was completed by a technical mission undertaken in May 2011. The project plans to provide significant financial support to APS, a consortium of banks established as a private entity. The TOR for the audits were drafted by an international consultants and they are exhaustive.

The World Bank will closely supervise the implementation of the project and will ensure it has the required technical expertise. The World Bank Payment System Unit is playing a key role in the design and supervision of the payment system sub-component. To ensure that APS – a private entity – will not unduly take advantage of the public funds provided under the project, key principles of engagement were agreed between APS and the World Bank. APS by-laws will need to be amended to fully reflect these key principles. Such amendment will be a condition of disbursement.

4.2 Social & Environmental

Low This project is Environment Category C. There are no social or environment risks.

No social and environment risks.

4.3 Program & Donor Medium I

The Kabul Bank crisis has impacted donor support in the financial sector. USAID cancelled the activities of the EGGI project focusing on the Central Bank. USAID is now considering providing support to the Central Bank through another project (FAIDA), initially focusing on mobile banking.

The World Bank has been in close contact with the IMF and the US Government on their proposed support for financial sector, in particular with regard to banking supervision and support to Kabul Bank resolution plan. Efforts to coordinate activities will continue during the implementation of the project.

4.4 Delivery Quality High Because of the security situation in Afghanistan, it is sometimes difficult to get the right consultants / firms to apply for to the assignments. Recent bad publicity

The PIC and the World Bank have developed the following mitigating strategies: (a) ensure high quality TOR, (b) ensure high quality of short lists,

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surrounding the role of consultants in the Kabul Bank crisis may exacerbate these risks. If firms / consultants do not have the required expertise, the quality of their deliverable can be unsatisfactory.

if the short list is not satisfactory, the assignment should be re-advertized, (c) for critical assignments, provide a provision for security costs in the RFP, (d) for critical assignments, rely on firms (it is easier for firms to organize security, than for individuals), (e) closely monitor the work of the consultants / firms and take remedial actions early on. The WB Global Payment System Team is playing a key role in project preparation and will be playing a key role in project implementation. An additional US$1 million of technical assistance has also been budgeted.

4.5 Reputational risk Medium I

The challenges faced by the banking sector in Afghanistan are significant. Strengthening the banking sector will require difficult decisions (as they affect very powerful individuals) that will be complex to implement (the powerful individuals might easily refuse to comply). When providing technical assistance to financial sector strengthening, there is therefore a risk of being associated with an unsatisfactory situation.

The project complements focuses on selected non-controversial activities, where reputational risk is minimized (the project does not involve support to Kabul Bank resolution). If the audits uncover significant governance issues, such issues could be raised and addressed in the context of the IMF and World Bank dialogue with the authorities

Overall Risk Rating: Preparation

Overall Risk Rating: Implementation

Comments

Medium I High The implementation risk rating is High given the weak governance in the financial sector in Afghanistan. Nevertheless, the project design aims at mitigating this risk by keeping the project highly focused on a few essential, relatively non controversial activities.

Annex 5: Financial Management and Disbursement Arrangements


Country Issues

1. The Bank has gained substantial experience and understanding of the financial management environment in Afghanistan through the large number of projects under implementation over the past four years. The Public Financial Management Reform Project (PFMRP) is the primary instrument to continue and enhance the fiduciary measures put in place during the past years to help ensure transparency and accountability for the funding provided by the Bank and other donors. 2. A PFM performance rating system using 28 high-level indicators that was developed by the Public Expenditure and Financial Accountability (PEFA) multi-agency partnership program was applied in Afghanistan in June 2005. PEFA is comprised of the World Bank, IMF, EC, and several other agencies. The system is structured around six core dimensions of PFM performance: i) budget credibility, ii) comprehensiveness and transparency, iii) policy-based budgeting, iv) predictability and control in budget execution, v) accounting, recording, and reporting, and vi) external scrutiny and audit. Afghanistan’s ratings against the PFM performance indicators generally portray a public sector where financial resources are, by and large, being used for their intended purposes. This has been accomplished with very high levels of support from international firms; this assistance will continue to be needed over the medium term if these ratings are to be maintained. There is also much room for improvement. 3. In spite of undeniable gains made in reconstruction since the end of 2001, the challenges facing Afghanistan remain immense; not least because of the tenuous security situation in the region and continued prevalence of a large illegal and illicit economy. The policy framework benchmarks have not yet been fully estimated so various priorities are funded through the annual budgeting process. The rising costs of the security sector constitute the major constraint on attainment of fiscal sustainability. With regard to executive oversight, the national assembly will play an increasingly active role. All in all, the new national strategy has created high expectations of the executive which could prove to be quite difficult to meet. 4. The public sector, in spite of considerable efforts to reform its core functions, remains extremely weak outside of Kabul. The lack of qualified staff in the civil service and the absence of qualified counterparts in the government after 30 years of war and conflicts is a binding constraint. Delays in reforming the pay structure and grading of civil servants have severely crippled the public administration of the country. Domestic revenues lag behind expenditures by a factor of ten to one. Large-scale corruption could emerge to undermine the government’s efforts to enhance aid flows through national accounts. Capacities to track expenditures and monitor expenditure outcomes have improved, but they need rapid and substantial strengthening if progress toward the attainment of national development targets is to be monitored. Currently, 75% of external revenues bypass government appropriation systems.

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5. The World Bank is financing a Financial Management Advisor to assist the Ministry of Finance, an Audit Advisor to assist the Control and Audit Office, and a Procurement Advisor to assist in Procurement-related activities. Also an Internal Audit function is being developed within the Ministry of Finance with World Bank financing. USAID, and earlier the Indian Aid Assistance Program, is financing a team of consultants and advisors to assist the Da Afghanistan Bank (DAB) in local as well as foreign currency operations. The activities carried out under the existing Public Financial Management Reform projects have helped the Government to ensure that appropriate fiduciary standards are maintained for public expenditures, including those supported by the Bank and the donor community. 6. Progress has been slower than expected in shifting from operations support provided by the three Advisors to capacity development and knowledge transfer to the civil servants. Given that, is expected that the Advisors will continue to be required for the medium term. Challenges still remain in attaining the agreed upon fiduciary standards and also to further enhance them. And to make matters more complex, the regulatory environment in Afghanistan has advanced significantly in the past three years. Unfortunately, even mastery of basic skills in the early environment does not fully qualify the civil servants to work effectively in the new emerging environment. Risk Assessment and Mitigation 7. The table below identifies the key risks that the project may face and indicates how these risks are to be addressed. The overall FM risk rating is “High” but the residual risk rating after application of the mitigating measures is “Substantial”. Risk Risk

Rating Risk Mitigation Measures Residual

Risk Condition of negotiations, Board or Effectiveness (Y/N)

Inherent Risk

Country Inherent Risk M Source – PFM study M N Project Financial Management Risk

H Ensure Designated Account remains active with regular expenditure reporting, maximize usage of direct payment method for expenditures; major procurement through Procurement Advisor FM and procurement functions to be performed by the Project Implementation Cell (PIC) with qualified staff. Additional support will be provided by the DAB Procurement and FM units, whose capacity are strengthened through funding from the FSSP project

S N

Perceived Corruption H Government commitment, internal controls and internal audit will help to reduce the high level of perceived corruption. Improving the systems and strengthening

S N

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the FM and Procurement capacity in DAB through funding from this project and the existing FSSP Project will also help to reduce the high level of perceived corruption.

Overall Inherent Risk H S Control Risk 1. Weak Implementing Entity

S Utilization of the existing Project Implementation Cell (PIC) to coordinate and supervise the implementation of the project and perform the key financial management and procurement functions. This unit is adequately staffed by international and national consultants. However, will require an additional Finance Officer to implement this project. The PIC is responsible for overall control and coordination of the project’s activities. The Financial Supervision Department through its Accounting and Reporting section will provide support and liaise with the auditors for the commercial banks’ audit assignment. In addition, the Head of the Internal Audit Department of DAB, Head of DAB’s Accounts Department, and the IMF banking supervision technical assistant will also provide support to the auditors. Oversight functions will be performed by a Project Steering Committee, chaired by the Governor or the first deputy governor and consisting of all the department heads who are implementing the project

M

N

2. Funds Flow S Payments will be made to contractors, consultants, and suppliers from the Designated Account (DA) by SDU-MoF. In addition to payments out of DA funds, the implementing entity can also request the SDU to make i) direct payments from the Grant Account to contractors, consultants or consulting firms, and ii) special commitments for contracts covered by letters of credit. These payments would only be made by SDU after due processes and proper authorization from the implementing entity

M N

3. Budgeting S Ensure that project funds are allocated in the annual Government Development Budget. The implementing entity is responsible for the preparation of annual work plans and the derivation of annual budget there from for the project. The PIC will coordinate

M N

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with the MoF to facilitate this process and to consolidate the overall budget for the project. A Budget Committee comprising of representatives from relevant departments of DAB, PIC and PSC will coordinate the budget process and the quarterly budget reviews.

4. Accounting Policies and Procedures

S Project will follow international standards. Project accounting procedures and details of the FM arrangements will be documented in an FM Manual already being finalized for the FSSP and which will be approved by the Bank

M N

5. Internal Audit H The internal audit unit of DAB will review project internal control systems. This unit will be strengthened with funding from this project and the existing project

S N

6. External Audit H Will be audited by CAO with support from Audit Advisor

S N

7. Reporting and Monitoring

H Strengthening the SDU is a priority under the FM Advisor’s contract, to provide information that will comply with agreed format of financial reports. This will be facilitated by the excel-based accounting system that will be utilized by the PIC/ DAB’s finance department to maintain records and generate required reports.

S N

Overall Control Risk H S Detection Risk S Adequate accounting, recording, and

oversight will be provided in project procedures. Accounting/Recording/oversight by SDU – MoF of all advances/M-16 supported by Financial Management Advisor.

M N

Risk rating: H=high risk; S=substantial risk; M=modest risk; L-low risk

Overall FM Risk Rating H S Strengths and Weaknesses Strengths 8. The Government provides assurance to the Bank and other donors that the measures in place to ensure appropriate utilization of funds will not be circumvented. The Government strongly supports reforms through the Public Financial Management Reform Project to enhance

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financial management in Treasury operations, public procurement, internal audit in the public sector, and external audit by the Auditor General. 9. The implementing entity, DAB has implemented a Bank funded project prior to this, so the agency has experience in implementing Bank projects and following Bank procedures. Weaknesses and Action Plan 10. The main weakness in this project, as in many others in Afghanistan, is the ability to attract and retain suitably qualified and experienced counterpart staff especially for Financial Management. The utilization of the existing Project Implementation cell and the staffing of the PIC and DAB Finance/Internal audit departments with consultants to be funded by the project, together with intensive training programs included in this project are expected to strengthen the fiduciary arrangements. Action Plan – To be reviewed at ‘Initial Supervision’ Significant Weaknesses

Action Responsible Agent

Completion Date

Shortage of qualified and experienced FM staff

Utilization of the existing PIC and staffing of the Unit with qualified specialist.

DAB Achieved

Project internal controls and procedures need to be defined

Finalization of the FSSP’s Financial Management Manual and approval by the World Bank

DAB/IDA 30th November, 2011

Interim reports need to include required information

Un-audited interim financial report formats for the project confirmed

IDA/DAB Before negotiations

Implementing Entity 11. The project will be implemented by DAB, through a Project Implementation Cell (PIC). The PIC is already responsible for the implementation of the Financial Sector Strengthening Project. The PIC includes a Finance Officer as well as an international Financial Management Specialist. They have the responsibility to carry out day-to-day financial management operations of the project including preparation of: M-16 forms (payment orders), project coding sheets, and B27 allotment forms as well as overall contract and project management. Detailed FM reporting requirements, staffing, systems, internal control procedures, and other FM arrangements are to be included in the FSSP’s Financial Management Manual which is currently being finalized and to be approved by the Bank. Implementation Arrangements and Support for the Audits of Ten Commercial Banks Component. 12. The Financial Supervision Department will be the technical counterpart for the audit assignments. Within Financial Supervision Department (FSD), the Accounting and Reporting Section Manager will monitor the activities of the auditors and provide support and guidance when required. In addition, the Head of the DAB Accounts Department, head of the Internal

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Audit Department of DAB and the IMF banking supervision technical assistant will also provide support and guidance to the auditors. Implementation arrangements for project activities relating to APS and AIBF 13. The PIC will have overall fiduciary responsibility for the project (APS and AIBF will have no fiduciary responsibility). The PIC will therefore be responsible for the procurement of the activities planned with APS and AIBF and for the payments of the different contracts signed for APS and AIBF. Operating costs for APS and AIBF will be paid by DAB/MoF. All payment records will be kept at DAB. Project coordination and monitoring 14. The PIC has the responsibility for overall project implementation, coordination, and monitoring. The PIC will work closely with the relevant departments within DAB to facilitate this function. The PIC is also responsible for: (a) assuring steady progress of execution in accordance with an implementation schedule reviewed and approved by the World Bank, (b) ensuring adequate and smooth transfer of skills to the national contracted staff and civil servants, and (c) ensuring that transparency and high ethical standards are maintained throughout the process. Project oversight 15. Oversight function will be performed by a Project Steering Committee (PSC) chaired by the Governor or First Deputy Governor of DAB, which will be responsible for the overall policy, strategic planning and project oversight and guidance. The Project will rely on the Project Steering Committee (PSC) established for the FSSP. The FSSP PSC will be extended to include all DAB Heads of Department involved in the project. Budgeting 16. A budget committee will be appointed to coordinate the preparation of annual work plan and the derivation of annual budget. This committee will be made up of representatives from the PIC and other relevant units of DAB, and shall report to the Project Steering Committee. The Budget Committee shall also coordinate quarterly budget reviews to ensure adequate budget discipline and control. The committee will be responsible for ensuring that project expenditures for each fiscal year are captured in the Governmental Development budget of that fiscal year. In addition, project should also ensure that it seeks for MoF’s approval of unutilized budget amount at each year end, as carried forward budget. Approved carried forward budget are used at the beginning of the new year, and ensure disbursements are made while waiting for the Parliament’s approval of the new year’s budget. Project should seek for approval of carried forward budget forty-five (45) days before the end of the fiscal year end. 17. The budgeting process and the key role of Budget Committee on periodic budget reviews will be detailed in the FM Manual. The annual work plans and the annual budgets will be

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submitted to the Bank for review and approval, not later than three months before the end of the fiscal year (i.e. December 31st). Funds Flow 18. The standard funds flow mechanism in Afghanistan will be followed in this project. Project funds will be deposited in the Designated Account (DA) to be opened and maintained at the Da Afghanistan Bank (DAB). The DA, in keeping with current practices for other projects in Afghanistan, will be operated by the Special Disbursement Unit (SDU) in the Treasury Department of MoF. Requests for payments from the DA will be made to the SDU by the project when needed. 19. In addition to payments out of DA funds, the project can also request the SDU to make i) direct payments from the Grant Account to consultants, consulting firms or suppliers, and ii) special commitments for contracts covered by letters of credit. These payments will follow World Bank procedures. All project payments will be made to either international firms or local firms that have bank accounts in DAB, a local commercial bank, or an overseas bank. All payments will be made either through bank transfers into the account of such firms or by check.

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Graph 1: Funds flow chart

Legal requirements for authorized signature 20. Ministry of Finance has authorization to disburse funds from the Grant. If necessary, specimen signatures of authorized signatories’ in MoF will be submitted to the Bank prior to commencing disbursements. Accounting 21. The SDU will maintain a proper accounting system of all expenditures incurred along with supporting documents to enable IDA to verify these expenditures. The FM staff of the PIC will: i) supervise preparation of supporting documents for expenditures, ii) prepare payment orders (Form M16), iii) obtain approval for M-16s from the relevant authority depending on the payment amount, and iv) submit them to the Treasury Department in MoF for verification and payment. Whilst original copies of required supporting documents are attached to the Form M16, the project is required to make and keep photocopies of these documents for records retention

World Bank / IDA

SDU (MOF)

PIC/ DAB Finance Dept

Consultants/ Suppliers/

Firms & Associations, etc

Payments

Designated Account

Provides SOEs

with supporting documentation, reconciliations,

& requests replenishment transfers to Designated Account, OR requests

Direct Payments

IDA

Replenishes Designated

Account

Direct

payments

FUND FLOW DIAGRAM

Invoices

Administration department of MoF

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purposes. The FM Advisor in the MoF/SDU will use the government's computerized accounting system, AFMIS, for reporting, generating relevant financial statements, and exercising controls. 22. The PIC FM staff will maintain essential project transaction records using accounting system/Excel spreadsheets and generate required monthly, quarterly, and annual reports. 23. The FM Manual being prepared for the FSSP and to be approved by the Bank will be used for the proposed project. The FSSP FM Manual will include: (i) roles and responsibilities for all FM staff; (ii) linkages between the FM staff of the PIC and DAB’s finance department; (iii) documentation and approval procedures for payments; (iv) project reporting requirements; and (vi) quality assurance measures to help ensure that adequate internal controls and procedures are in place and are being followed.

24. The FM Manual will also establish project financial management in accordance with standard Afghan government policies and procedures including use of the government Chart of Accounts to record project expenditures. The use of these procedures will enable adequate and timely recording and reporting of project expenditures. Overall project accounts will be maintained centrally in SDU, which will be ultimately responsible for recording all project expenditures and receipts in the Government’s accounting system. Reconciliation of project expenditure records with MoF records will be carried out monthly by the PIC. Internal Control & Internal Auditing 25. The PIC/DAB Finance department will be responsible for coordinating FM activities for the project with the SDU. Project-specific internal control procedures for requests and approval of funds are to be described in the FSSP’s FM Manual including segregation of duties, documentation reviews, physical asset control, asset verification, and cash handling and management. 26. Annual project financial statements will be prepared by SDU/MoF detailing activities pertaining to the project as separate line items with adequate details to reflect the details of expenditures within each component. 27. The project financial management systems will be subject to review by the internal audit department of DAB. Due to the weak internal audit arrangements within the implementing agency, an internal auditor was hired under FSSP to build the capacity of the DAB Internal Audit department staff in performing the audits and building capacity. The programs will be determined by the DAB’s Director General of Internal Audit using a risk-based approach. Internal audit TORs are to be included in the project’s FM manual. 28. The frequency of the internal audit exercise should be at least every six months. A copy of each internal audit report should be provided to the World Bank once completed. The Bank also reserves the right to conduct an external review of the project activities and financial flows.

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External Audit 29. The project accounts will be audited by the Auditor General, with the support of the Audit Advisor, with terms of reference satisfactory to the Association. The audit of project accounts will include an assessment of the: (a) adequacy of the accounting and internal control systems; (b) ability to maintain adequate documentation for transactions; and (c) eligibility of incurred expenditures for Association financing. The audited annual project financial statements will be submitted within six months of the close of fiscal year. All agencies involved in implementation and maintaining records of expenditures would need to retain these as per the IDA records retention policy. 30. The following audit reports will be monitored each year in the Audit Reports Compliance System (ARCS): Responsible Agency Audit Auditors Date MoF SOE, Project Accounts and

Designated Account Auditor General Sep 22

31. The Bank-funded projects already or currently being implemented by MoF have no overdue audit reports. The key issues raised in these projects’ audit reports up to Solar Year 1388 have been resolved satisfactorily, except for PFMRP, which has minor issues and in the process of being resolved. Financial Reporting 32. Financial Statements and Project Reports will be used for project monitoring and supervision. Based upon the FM arrangements of this project, Financial Statements and Project Reports will be prepared monthly, quarterly, and annually by the PIC/DAB Finance department. These reports will be produced based on records from three sources: (i) PIC’s accounting system; (ii) expenditure statements from SDU (as recorded in AFMIS) and reconciled with the PIC; and (iii) bank statements from DAB. 33. The quarterly Project Interim Unaudited Financial Reports will show: (i) sources and uses of funds by project component, and (ii) expenditures consolidated and compared to governmental budget heads of accounts, the project will forward the relevant details to SDU/DBER with a copy to IDA within 45 days of the end of each quarter. The government and IDA have agreed on a pro forma report format for all Bank projects; a final customized format for the proposed project will be provided before project negotiation. 34. The annual project accounts to be prepared by SDU from AFMIS after due reconciliation to records maintained at the PIC/DAB Finance department, will form part of the consolidated Afghanistan Government Accounts for all development projects. This is done centrally in the Ministry of Finance Treasury Department, supported by the Financial Management Advisor.

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Disbursement Arrangements 35. Table 1 below shows the allocation of IDA proceeds in three expenditure categories (as a disbursement condition is proposed for APS). The closing date of the project will be June 30, 2014 with a final disbursement deadline six months after the closing date. 36. During this additional 6-month grace period, project-related expenditures incurred prior to the closing date are eligible for disbursement or documentation against advances to the designated account. Disbursements procedures will follow the World Bank procedures described in the World Bank Disbursement Guidelines and the Disbursement Handbook for World Bank Clients (May 2006). Table 1: IDA Financing by Category of Expenditure (US$ million) Categories Amount Goods, non-consulting services, consulting services, training, workshops and operating costs

13.0

Goods, non-consulting services, consulting services and operating costs for APS

5.5

Unallocated 0.5 Total 19 Summary Reports 37. Summary reports in the form of Statements of Expenditure will be used for expenditures on contracts i) for goods valued at less than US$200,000 equivalent per contract; ii) for consulting firms valued at less than US$100,000 equivalent per contract; and iii) for individual consultants valued at less than US$50,000 equivalent per contract; all training programs and workshops, and operating costs. Full documentation will be required for payments against contracts for goods and consulting services with values above the above-mentioned thresholds. Designated Account 38. A single segregated designated account (DA) will be opened at DAB in US dollars for a ceiling of advance up to four (4) months’ worth of eligible expenditures to be paid out of the funds in the DA. The SDU in MoF will manage payments from and new advances/replenishments to this account. Further advances in the form of cash advances may be taken from the Designated Account, and held and managed by DAB. This agency’s controls, holding, accounting, and preparation of Statement s of Expenses (SOEs) have been satisfactorily assessed. New cash advances will only be made when all other prior cash advances have been justified through submission of SOEs to the SDU. Expenditure reporting on the designated account will be submitted on a monthly basis and requests for fresh advances will be made as needed.

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Direct Payments 39. Third-party payments (direct) and Special Commitments will be permitted for amounts exceeding 20 percent of the advance in the Designated Account. All such payments require supporting documentation in the form of records (copies of invoices, bills, purchase orders, etc). Preparation of Withdrawal Applications 40. PIC/DAB will prepare Summary Reports and forward those reports to the SDU, through the Administration department of MoF, for further processing into withdrawal applications. The SDU will review withdrawal applications for quality and conformity to Treasury procedures, and then obtain signature. Selected PIC and SDU finance staff will be registered as users of the World Bank Web-based Client Connection system, and take an active hand in managing the flow of disbursements. Financial Management Covenants 41. DAB shall submit audited financial statements for the project within six months of the end of each fiscal year. The Project’s audit report will cover the financial statements, the Designated Account, and SOEs, in accordance with terms of reference agreed with the Association. 42. Un-audited project interim financial reports will be submitted by PIC/DAB on a quarterly basis to the World Bank and a copy to SDU-MoF within 45 days after the end of each quarter.

Special Financial Management Covenant 43. The implementing entity will ensure that key FM staff of the PIC is retained throughout the duration of the project in order to ensure smooth project implementation. Regular Supervision Plan 44. During project implementation, the Bank will supervise the project’s financial management arrangements. The team will:

Review the project’s quarterly un-audited interim financial reports as well as the project’s annual audited financial statements and auditor’s management letter.

Review the project’s financial management and disbursement arrangements (including a review of a sample of SOEs and movements on the Designated Account and bank reconciliations) to ensure compliance with the Bank's minimum requirements.

Review agencies’ performance in managing project funds to ensure that it is timely, accurate, and accountable. Review Internal Audit reports. Particular supervision emphasis will be placed on asset management and supplies.

Review of financial management risk rating, compliance with all covenants, and follow up on the action plan.

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Conclusion 45. The FM arrangements, including the systems, processes, procedures, and staffing are adequate to support this project – subject to implementation of the items listed in the action plan.

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Annex 6: Procurement Arrangements


1. The Bank has gained substantial experience and understanding of the procurement environment in Afghanistan through its involvement in the interim procurement arrangements put in place under the Emergency Public Administration Project (2002) and though working with the institutions currently responsible for procurement functions, including the Afghanistan Reconstruction and Development Services. As part of the broader review of Afghanistan’s Public Finance Management (PFM) system, the Bank carried out two assessments, in June 2005 and September 2007, of the procurement environment in the country based on baseline and performance indicators developed by a group of institutions led by the World Bank and OECD/DAC. 2. The first key issue identified through the procurement assessments was lack of ownership and lack of a procurement champion in the Government, which is a serious impediment to reform and to inter-ministerial dialogue. A second, related issue is the lack of capacity in the line ministries, as evidenced by their inability to define and communicate effectively their desired functional specifications/terms of reference in their procurements. The lack of capacity is also evident in the local private sector—while the number of bids is reasonably high, there is a lack of understanding about how to apply public procurement rules. Government Reforms 3. A new Procurement Law (PL) was adopted in November 2005 that radically transforms the legal and regulatory framework. In accordance with the law, GoA established a Procurement Policy Unit (PPU) under the Ministry of Finance to provide oversight for the PL’s implementation. PPU has issued several circulars regarding implementation of the PL including “Rules of Procedures for Public Procurement” (Circular: PPU/C005/1386 of April 12, 2007) and “Procurement Appeal and Review Mechanism” (Circular: PPU/N001/1385 of March 18, 2007). PPU and MoF have developed several standard bidding documents (SBDs), standard requests for proposal (SRFPs), standard requests for quotation (RFQs) for national and international procurement of goods/works and consulting services following national procedures as per the PL’s Glossary of Procurement Terms in English and Dari. MoF has now mandated the use of: (i) SBDs for Goods and Works (Circular PPU/C024/1388 of June 10, 2009); (ii) SRFQs (Circular PP/C026/1388); and (iii) SRFPs (Circular PPU/C029/1388 of January 13, 2010). A Procurement Management Information System (PMIS) has been developed and is being piloted in three line ministries. In addition, a PPU Web site will facilitate publication of procurement notices and contract awards in addition to similar action being done under the ARDS-Web site and the Web sites of the line ministries, as applicable. 4. In the absence of adequate capacity to manage procurement activities effectively, a central procurement facilitation unit (ARDS–PU) has been established under Ministry of Economy to support line ministries and project implementing agencies. The Bank and the Government have agreed on a program for country-wide procurement reform and capacity

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building, leading to the transition from centralized to decentralized procurement services. The above was implemented by an international consultant under the supervision of PPU/MoF and financed under the Public Administration Capacity Building Project (PACBP) and the Public Finance Management Reform Project (PFMRP). The consultant has conducted several basic, intermediate, and advanced level training programs. The implementation of the procurement reform component of the PACBP/PFMRP should be considered with due priority to ensure that fiduciary standards are further enhanced and that capacity is developed in the Government to maintain these standards. 5. The Procurement Law has been revised in July 2008 and amended in January 2009 and issued as a new Law by the Ministry of Justice and was published in the Official Gazette Number 957, 29.10.1387 (18 January 2009). The revised “Rules of Procedures for Public Procurement” have been issued as circular PPU/C027/1387 of November 18, 2009. General Procurement for Financial Sector Rapid Response Project 6. Procurement for the project will be administered in accordance with the World Bank’s Guidelines: “Procurement under IBRD Loans and IDA Credits”, dated January 2011 and “Selection and Employment of Consultants by World Bank Borrowers”, dated January 2011, and the provisions stipulated in the Financing Agreement. In addition, the World Bank’s Guidelines on Preventing and Combating Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants dated October 15, 2006 and revised January 2011 has been shared with the recipient. The World Bank’s Standard Bidding Documents, Requests for Proposals, and Forms of Consultant Contract will be used. Civil works and goods following National Competitive Bidding (NCB) procedures shall be procured using the agreed Standard Bidding Documents (SBDs) for Afghanistan. It has been agreed by both parties that in the event of a conflict between IDA Procurement/Consultant Guidelines, as per Article 4 (2) of the Procurement Law July 2008 (Amendments in January 2009 incorporated) of the GoA, the IDA Procurement/Consultant Guidelines shall prevail. Procurement of Works 7. The project will not finance civil works. Procurement of Goods and Non Consulting Services 8. Procurement of the goods will be done using Bank’s SBD for Goods for all contracts following International Competitive Bidding (ICB) procedures. National SBDs agreed with IDA, or satisfactory to IDA, will be used for the procurement of goods following National Competitive Bidding (NCB) procedures. Shopping shall be in accordance with paragraph 3.5 of the Bank’s Guidelines. Any contract estimated costing more than US$200,000 shall be procured following ICB procedures (except otherwise agreed by the World Bank in the Procurement Plan). Any contract estimated to cost more than US$50,000 equivalent and less than US$200,000 shall be procured following NCB procedures. Any contract estimated to cost less than US$50,000 equivalent shall be procured following shopping procedures. Goods that meet the

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requirements of paragraph 3.7 of the World Bank Procurement Guidelines may be procured following direct contracting procedures with prior agreement with IDA. Selection of Consultants 9. The proposed grant would finance several consultancy assignments. The major part of these assignments involves hiring the services of consultants. Firms 10. The following consultancy firms will be hired under the project: firm to provide technical assistance to DAB for the modernization of payment system. Individual consultants 11. Short lists of consultants: for services estimated to cost less than US$100,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. The selection methods applicable for consultants are QCBS, QBS, CQS, LCS, FBS, and SSS for firms as per Section V of the Bank’s Guidelines for Individuals. The threshold for CQS will be less than US$200,000 equivalent per contract. Operating Costs 12. The cost which would be financed by the project would be procured using the implementing agency’s administrative procedures such as Procurement Law, which were reviewed and found acceptable to the Bank. The operating costs will include operations and maintenance of equipment and vehicles, hiring of vehicles, office rent, costs of consumable, fuel, office utilities and supplies, bank charges, and advertising expenses but exclude any salaries and allowances of civil servants. For APS, operating costs would cover issuance of cards and network costs. Assessment of the Agency’s Capacity to Implement Procurement 13. DAB will have overall responsibility for all procurement under the project. An assessment of the capacity of DAB to implement procurement actions for the project has been carried out by Abdul Hamid, Procurement Specialist, in July 2011. The assessment reviewed the organizational structure for implementing the project and interactions. 14. During the procurement capacity review it was revealed that the PIC has limited capacity to handle procurement under the project (consultancy firms and goods), as it is currently responsible for procurement under the Financial Sector Strengthening Project. The PIC counts one international procurement specialist and one national procurement specialist. 15. Afghanistan continues to be a challenging environment, as such, to mitigate risks, the following measures need to be taken.

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Risk Factor Mitigation Measure Due DateAccountability for Procurement Decisions in the Implementing Agency or Agencies

Ensure the procurement decision making is fully covered in the Manual of the Agency and is available/known to staff

30-Nov-2011

Internal Manuals and Clarity of the Procurement Process

Organize dissemination effort and improved accessibility to manuals and instructions

31-Aug-2011

Record Keeping & Document Management Systems

Implement record security and backup program as early as possible in the project

30-Nov-2011

Bidding documents, pre-qualification, short listing, and evaluation criteria

Involve technical staff and users in preparation of specifications or agree to hire competent consultants to draft TS/TORs

30-Jun-2012

Review of Procurement Decisions and Resolution of Complaints

Establish/improve and implement complaint management system

30-Nov-2011

Contract Management and Administration

Establish Contract Management system 30-Nov-2011

The procurement specialist (with support from the international procurement specialist)

will be responsible for managing procurement for the project based on technical specifications/TOR provided by the technical departments in DAB and other beneficiary entities (APS and AIBF).

To ensure compliance with the World Bank policy and procedure, procurement documentation for complex and large value of goods and consultancy contracts with firm will be carried out through ARDS.

16. With the above arrangements in place, the risk is rated as “Moderate”

Table 1 Procurement Risk Mitigation Monitoring Plan

S No Procurement Process/step Process Indicator

Sources of Information and means of verification

Use of information for risk mitigation

Performance target to be

achieved

1 General Procurement Notice

GPN Published Documentary evidence filled in DAB/PIC

To ensure GPN is widely published to increase transparency

100%

Number of responses received against GPN

Existence of updated responses registration file in DAB/PIC

To increase competition. 100%

2 REOI/Invitation for Bids and Bidding process

REO/IFB Published

Copy to be available in the file. 10% of the procurement files will be verified

To ensure SPN/REOI is widely published to increase transparency

100%

Minimum bidding time provided [4 weeks in NCB and RFP and 6 weeks in ICB and RFP with complex assignments]

Deviations to be collected from procurement files

To ensure competition 100%

Attention of the firms/individuals who expressed interest against GPN while issuing REOI/SPN was called



Number of Bid Documents sold and Number of firms confirmed participation against RFP issued

Sale of bid documents register and confirmation from consultants about receipt of RFP. 10% procurement files will be verified


Clarifications/addendums issued


To ensure transparency 100 %

3 Preparation of Bid Documents/RFPs

Cleared by IDA without seeking clarifications/comments

Number of cases to be collected from procurement files

Capacity building measures initiated by international procurement specialist

Continued progress

4 Bid Submission Bid opening minutes sent to all bidders

Timeliness to be verified from procurement files 10% of the procurement files will be verified

To ensure transparency 100%

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achieved

5 Bid Evaluation/REOI and proposal evaluation

Formation of bid evaluation committee before bid closing.

Deviations to be collected from procurement files

To expedite finalizing of bids/proposal evaluation.

100%

Timeliness of Evaluation: (a) 5-7 working days following shopping procedure; (b) 15-20 working days following NCB/ICB procedures; (c) 10 working days for individual consultants; and (d) 15 working days for firms for REOI evaluation, 21 working days for TER and 20 working days to conclude the contract negotiations after commencement of contract negotiations.

Deviations to be collected from Procurement Activity Schedule

Finalizing of bids/proposal evaluation in timely manner.

Compliance and continuous

improvement for reduction in timelines for all

activities

Number of Re-bids Procurement files

continuous improvement

for reduction in number of re-

biddings

6 Bid Evaluation Report and Technical Evaluation Report

Cleared by IDA without seeking clarifications/comments

Data to be collected from procurement files

To improve procurement process.

7 Contract Award

Contract award within the original bid validity

Deviations to be collected from Procurement Activity Schedule


100%

(a) Contract award published within 14 days of NOA (b) Average time taken for publication of award (c) Number of cases award not published



8 Delivery/ Completion

Delivery time: Percentage of Contracts completed/ delivered within the original schedule as mentioned in Contract



Liquidated damage: Percentage of Contracts having liquidated damage imposed for delayed delivery/completion



60%

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achieved Completion rate: Percentage of Contracts fully completed and accepted



90%

9 Payment

Average number of days taken to release payment



15 days

Late payment: Percentage of cases (considering each installment as a case) with delayed payment



20%

10 Complaints

Procurement complaints pending over 60 days

Complaint register To ensure transparency 90%

Resolution of complaints resulted in modification of contract award

Complaint register and Procurement files


Resolution of complaints within 15 working days


Complaints forwarded to MoF for independent review


11 Contract dispute resolution

Unresolved Disputes over 60 days Procurement files To ensure transparency 10%

12 Procurement Capacity Building

Number of procurement staff trained in Civil Service Institute Procurement training

plan


80% staff to be trained during first year and

100% by second year.

Number of staff trained outside Afghanistan


One staff during first 18

17. Governance and Accountability (GAC) agenda. All the contract opportunities and contract awards will be widely published in the internet, ARDS website, DAB website and when required in UNDB World Bank external website. DAB/PIC will set up a system to ensure that the staff/consultants who handled the procurement process/contract management/contract execution do not join the consultants/contractors. This will be reviewed during supervision missions. Procurement Plan 18. The Borrower, at appraisal, developed a Procurement Plan for project implementation that provides the basis for the procurement methods. This plan has been agreed between the client and the IDA Task Team on July 13, 2011 and is available at DAB. It will also be available in the Project’s database and on the Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Frequency of Procurement Supervision 19. In addition to the prior review supervision shall be carried out from Bank offices. There will be two Implementation Support Missions per annum. Procurement Audit 20. In addition to prior review, Bank staff or Bank appointed consultant shall carryout post procurement audit once per annum.

Attachment 1. Details of Procurement Arrangements Involving International Competition

List of contract packages which will be procured following ICB and Direct Contracting procedures:

Table 2 Procurement Packages with Methods and Time Schedule

1 2 3 4 5 6 7 8 9

Ref. No.

Contract (Description)

Estimated Cost (in million USD)

Procurement Method

Prequalification (yes/no)

Domestic Preference (yes/no)

Review by Bank (Prior / Post)

Expected Bid-Opening Date

Comments

G1 RTGS, ACH and CSD 4.25 million ICB No No Prior November 15, 2011

G2 Card payment switch 4.25 million ICB No No Prior October 15, 2011

Table 3 List of Consulting Assignments with Shortlist of International Firms or Individuals

1 2 3 4 5 6 7

Ref. No.

Description of Assignment

Estimated

Cost (USD)

Selection Method


Expected Proposals Submission Date

Comments

C1 Audits of five commercial banks 1.75 million QBS Prior June 5, 2011 Procurement process ongoing

C2 Audits of five commercial banks 1.75 million QBS Prior June 5, 2011 Procurement process ongoing

C3 Technical assistance to DAB on payment system modernization

1 million QBS Prior September 15, 2011

PROCUREMENT PLAN

Project Information:

Country: Islamic Republic of Afghanistan Implementing Agency: Da Afghanistan Bank (DAB) Bank’s approval date of the Procurement Plan: June 18, 2011 Date of General Procurement Notice: July 28, 2011 Period covered by this procurement plan: 18 months

A. Goods and Works and Non-Consulting Services Procurement Method and Threshold Procurement Method Threshold for Methods

(US$) Comment

1. ICB (Goods) 200,000 Equivalent or more 1. NCB (Goods) 200,000 Equivalent or less 3. Shopping (Goods ) 50,000 Equivalent or less 4. ICB (Non-Consultant Services) 200,000 Equivalent or more 5. NCB (Non-Consultant Services) 200,000 Equivalent or less 6. Direct Contracting n/a Prior Review Threshold: Procurement Decisions subject to Prior Review by the Bank as stated in Appendix 1 to the Guidelines for Procurement: Procurement Method Prior Review Threshold Comments 1. ICB (Goods) All Contracts Equivalent or more 2. NCB (Goods) 200,000 Equivalent or more 3. ICB (Non-Consultant Services) 200,000 Equivalent or more 4. NCB (Non-Consultant Services) 200,000 Equivalent or more 5. Direct contracting All Contracts Prequalification: Not applicable

Procurement Packages with Methods and Time Schedule Goods, Works and Non-Consultant Services:

1 2 3 4 5 6 7 8 9

Ref. No.

Contract (Description)

Estimated Cost (USD)

Procurement Method

Pre-qualification (yes/no)

Domestic Preference (yes/no)


Expected Bid-Opening Date

Comments

G1 RTGS, ACH and CSD 4.25 million ICB No No Prior November 30, 2011

G2 Card payment switch 4.25 million ICB No No Prior October 30, 2011

NC1 Interbank communications network

0.5 million NCB No No Prior February 10, 2012

G3 Upgrading of DAB core banking system

1 million Direct contracting No No Prior May 15, 2012

B. Selection of Consultants Selection method and Thresholds Selection Method Threshold Comments 1. CQS for Firms US$200,000 equivalent or less 2. QCBS, QBS, FBS, LCS Depending on the nature of assignment 3. Individual Consultant Not applicable Prior Review Threshold: Selection decisions subject to Prior Review by World Bank as stated in Appendix 1 to the Guidelines Selection and Employment of Consultants: Selection Method Prior Review Threshold Comments 1. Competitive Methods (Firms) US$100,000 or more 2. Competitive methods (individuals) US$50,000 or more 3. Single Source (Firms/Individuals) All regardless of value Short list comprising entirely national consultants: Short list of consultants for services, estimated to cost less than US$100,000 equivalent per contract, may comprise entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

Consultancy Assignments with Selection Methods and Time Schedule

1 2 3 4 5 6 7

Ref. No.

Description of Assignment

Estimated Cost (in USD)

Selection Method


Expected Proposals Submission Date

Comments

C1 Audits of five commercial banks 1.75 million QBS Prior June 5, 2011 Procurement process ongoing C2 Audits of five commercial banks 1.75 million QBS Prior June 5, 2011 Procurement process ongoing C3 Technical assistance to DAB on

payment system modernization 1 million QBS Prior November 15, 2011

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Agreed Procedures for National Competitive Bidding:

(i) Standard bidding documents approved by the Association shall be used.

(ii) Invitations to bid shall be advertised in at least one (1) widely circulated national daily newspaper and bidding documents shall be made available to prospective bidders, at least twenty eight (28) days prior to the deadline for the submission of bids.

(iii) Bids shall not be invited on the basis of percentage premium or discount over the estimated cost.

(iv) Bidding documents shall be made available, by mail or in person, to all who are willing to pay the required fee.

(v) Foreign bidders shall not be precluded from bidding.

(vi) Qualification criteria (in case pre-qualifications were not carried out) shall be stated on the bidding documents, and if a registration process is required, a foreign firm determined to be the lowest evaluated bidder shall be given reasonable opportunity of registering, without any hindrance.

(vii) Bidders may deliver bids, at their option, either in person or by courier service or by mail.

(viii) All bidders shall provide bid security or a bid security declaration form as indicated in the bidding documents. A bidder’s bid security or the declaration form shall apply only to a specific bid.

(ix) Bids shall be opened in public in one place preferably immediately, but no later than one hour, after the deadline for submission of bids.

(x) Evaluation of bids shall be made in strict adherence to the criteria disclosed in the bidding documents, in a format, and within the specified period, agreed with the Association.

(xi) Bids shall not be rejected merely on the basis of a comparison with an official estimate without the prior concurrence of the Association.

(xii) Split award or lottery in award of contracts shall not be carried out. When two (2) or more bidders quote the same price, an investigation shall be made to determine any evidence of collusion, following which: (A) if collusion is determined, the parties involved shall be disqualified and the award shall then be made to the next lowest evaluated and qualified bidder; and (B) if no evidence of collusion can be confirmed, then fresh bids shall be invited after receiving the concurrence of the Association;

(xiii) Contracts shall be awarded to the lowest evaluated bidders within the initial period of bid validity so that extensions are not necessary. Extension of bid validity may be sought only under exceptional circumstances.

(xiv) Extension of bid validity shall not be allowed without the prior concurrence of the Association (A) for the first request for extension if it is longer than four (4) weeks, and (B) for all subsequent requests for extensions irrespective of the period in case of prior review.

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(xv) Negotiations shall not be allowed with the lowest evaluated or any other bidders.

(xvi) Re-bidding shall not be carried out without the Association’s prior concurrence in case of prior review; and

(xvii) All contractors or suppliers shall provide performance security as indicated in the contract documents. A contractor’s or a supplier’s performance security shall apply to a specific contract under which it was furnished.

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Annex 7: Implementation and Monitoring Arrangements

AFGHANISTAN: Financial Sector Rapid Response Project 1. The proposed project will rely on the implementation arrangements as the Financial Sector Strengthening Project (FSSP). Under FSSP, a Project Implementation Cell (PIC) has been established. The PIC includes: a Project Director, a Deputy Project Director (currently under recruitment), a Finance Officer and a Procurement Specialist – all DAB staff (and therefore not financed under FSSP). In addition, the PIC includes an international procurement specialist and an international management specialist – recruited under the project. These two specialists provide support to the PIC on fiduciary matters, as well as to DAB, more generally. The PIC works in close collaboration with focal points from the different beneficiary entities (whether within DAB or outside DAB). 2. With regard to the proposed Financial Sector Rapid Response Project, the PIC will work closely with focal points from the following entities:

Within DAB: Financial Supervision Department (for the audits of the ten commercial banks), Payment System Department (for the modernization of the national payment system), other Departments, as required by the project (such as Legal Department);

Afghan Payment System (for the card/mobile payment switch); Afghan Institute of Banking and Finance

3. The proposed Financial Sector Rapid Response Project will also rely on the Project Steering Committee (PSC) established for the FSSP. The PSC provides strategic direction for project implementation. The PSC is chaired by the DAB Governor or by the DAB First Deputy Governor and meets at least twice a year. The FSSP PSC will be extended to include all DAB Heads of Department involved in the project, as well as APS and AIBF. 74. The Afghanistan Institute of Banking and Finance (AIBF) was incorporated as a non-profit organization in 2009 and was inaugurated in November 2010. As of July 2011, it has provided training to over 1,000 participants. AIBF is a joint venture of the Afghanistan Bankers Association (ABA) and Da Afghanistan Bank (DAB), with both holding 49 percent of its shares. The remaining of the shares (2 percent) is held by Microfinance Investment Support Facility for Afghanistan (MISFA). The institute was established with support from the Financial Sector Strengthening Project (which included US$250,000 for its establishment). Support to AIBF under the proposed project will be provided based on a five year business plan (2011-2015), by the end of which AIBF will be sustainable. 75. The implementation of the National Payment System modernization is detailed further in the sections below. Implementation of payment system modernization 4. The diagram below represents how the infrastructure components of the modernized national payment system would interact.

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Figure 1: Architecture of modernized DAB payment system

4. The implementation timeline for the modernization of the payment system is summarized below.

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Figure 2: Modernization of Afghanistan National Payment Systems implementation timeline

5. The DAB Project Implementation Cell (PIC) will have the fiduciary responsibility for the implementation of the payment system modernization. The implementation of this activity will be undertaken in close collaboration with the DAB Payment System Department, which is the direct beneficiary of this activity (except for the payment switch, as highlighted below). The World Bank Payment Systems Development Group (PSDG) will provide support to project implementation. 6. Afghan Payments System (APS). As illustrated by Graph 1 above, the payment switch (for cards and mobile payments) will be located within APS (Afghan Payments System). APS is a non-financial services institution that acts as the national provider of secure financial message switching and communications link to participating banks in Afghanistan. APS was established in close coordination with DAB and it fulfills DAB’s objectives for establishing a shared ATM/POS – Mobile Commerce network in Afghanistan. Three banks have so far joined APS (Bank-e-Millie, Pashtany Bank and Ghazanfar Bank, with each having contributed US$250,000), but membership in APS is open to all institutions involved in financial message transmission that operate in Afghanistan under license from the appropriate Afghan authorities (i.e. all commercial banks and mobile network operators). DAB has made clear that it does not wish to be directly involved in APS, as the card (and mobile) payment system should be operated by commercial banks (and other institutions such as mobile network operators).

BudgetActivities ($ m.) Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2Provide technical assistance to DAB and strengthen its capacity (including review of legal and regulatory framework for national payment system) 1.0Deployment of RTGS, ACH and CSD 4.3* Procurement* Deployment* System fully operationalImplementation of interbank card payment switch 4.3* Procurement* Deployment* System fully operationalDevelopment of inter-bank communications network (service, no infrastructure required) 0.5Upgrading of the existing core banking system of DAB 1.0* Review* Procurement* ImplementationSupporting payment system operational expenses 1.0

2011 2012 2013 2014

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7. Support will be provided to APS for a national card / mobile payment switch (and possibly for operating expenses) with the proviso that DAB (drawing on the powers vested with it to regulate and oversee payment systems in Afghanistan) would exercise effective oversight over the operations of APS in line with the to-be adopted payment systems oversight policy.

8. In addition, it has been agreed to provide financial support to APS under this project at the condition that APS fully supports the following key principles:

APS structure open to all institutions licensed by the DAB to offer payment card and mobile payment products, subject to objective qualifying criteria, publically disclosed;

Fair mechanism for determining capital requirement of new members, which: o Takes into account fixed and start-up expenses incurred by existing members; o Takes into account public money (IDA) component in any profits generated;

Equitable voting rights (one institution, one vote, but with the flexibility for tiered membership);

Fee structure: o Annual Fee (based on business volumes) o Per transaction fee (flexibility for volume discounts) o Additional service fees;

APS to be well capitalized; APS activities to be based on international standards; APS to establish strong risk management and governance arrangements; APS to be sustainable, with the initial three year profits to be re-invested in APS; APS to be subject to DAB oversight (as mentioned at the beginning of paragraph 8); No cross-subsidization of additional services (e.g. including card personalization costs in

the overall switching costs). 9. The amendments of APS by-laws to ensure that they fully comply with the agreed above principles will be a condition of disbursement for the financing of the payment switch. As such, DAB will enter in a subsidiary agreement with APS, under which DAB will provide contributions on kind and support of the operating costs (see paragraph below) of the APS, whereas APS will undertake to amend its charter/by-laws to ensure that the above principles are adhered to. 10. Potential support will be provided to APS for initial operating costs. To fully recover start-up costs, APS would likely have to price its services high, which in turn might diminish the take up of card / mobile payments. The proposed support would aim at helping to build critical mass. Financial support would be provided based on an updated business plan which would show profitability in the next 3/5 years. APS operating costs would include: issuance of cards, salaries, office expenses, network costs, POS/ATM installations, marketing and promotion expenses. The payment switch contract would include annual maintenance for 2/3 years. Based on the updated business plan, the project could support the issuance of cards and network costs, the amount of support reducing progressively. It should be noted that APS, with support from US DoD had elaborated a business plan, but as the proposed business model of APS has changed (moving from an outsourced third party processor to a national switch), the business plan needs to be revised.

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11. In addition, the National Payments Council (NPC), chaired by the DAB, will also play an important role in payment system modernization – as a discussion forum between stakeholders. The NPC was formed in April 2010, and has since then met twice. The NPC consists of representatives from three commercial banks, one representative from the ministry of finance and three members from the DAB. The NPC is chaired by the First Deputy Governor of the DAB and the DAB also provides one representative to act as the secretary of the NPC. One of the commercial bank representatives serves as the Vice Chairman. The NPC has established three standing committees – Technical, Operation and Legal, to discuss the specific topics on an ongoing basis. The NPC could provide an effective forum to discuss matters related to the design and monitoring of the development of the aforementioned initiatives. In the context of the modernization of the national payment system, various aspects related to the design, prioritization and operational aspects need to be discussed in detail. The NPC council and the existing committees can be used for this effectively. However, the NPC mandate, composition and organization will be revised during the first three months after the Project is declared effective. The current NPC composition is limited to three commercial banks, the DAB and the Ministry of Finance. A few of the major money service providers, smaller commercial banks and entities like APS should also be considered for inclusion in the NPC. 12. Specific technical issue: inter-bank connection network. There a range of communication network technologies available in Afghanistan – WiMax, fiber optic based networks, etc. Afghan Telecom has exclusive rights over these services, however it has leased some bandwidth to other competing telecom companies, which offer connectivity services using this. So this component can be procured through a competitive bidding process, however it needs to be noted that since Afghan Telecom would be the underlying provider there is likely to be very little variation in the overall technical aspects in the bids.

13. Specific technical issue: upgrading of DAB Core Banking System. DAB has implemented a Core Banking System provided by Virmati for automating its book of accounts and other services, including payment services provided by DAB to the banks. The changes required in the DAB's systems to integrate with the new RTGS, ACH and CSD components would likely be in the software components provided by this company. DAB would likely have to request Virmati for the necessary changes and hence this component would likely be procured as "Direct Contracting”.

65

Annex 8: Project Preparation and Appraisal Team Members

AFGHANISTAN: Financial Sector Rapid Response Project 1. The project team includes the following staff: Name Title Unit Guillemette Jaffrin Task Team Leader SASFP Ann Christine Rennie Lead Financial Sector Specialist SASFP Harish Natarajan Financial Sector Specialist FIPFI Nazir Ahmad Research Analyst SASFP John F. Speakman Lead Private Sector Development Specialist SASFP Michael D. Wong Senior Private Sector Development Specialist SASFP Khaleda Atta ET Consultant – PSD & Finance SASFP Parwana Nasiri Program Assistant SASFP Marjorie Espiritu Program Assistant SASFP Nancy Zhao Consultant (Operations) SACAA Asif Ali Senior Procurement Specialist SARPS Abdul Hamid Procurement Specialist SARPS Kenneth Okpara Senior Financial Management Specialist SARFM Asha Narayan Financial Management Specialist SARFM Zohra Faroq ET Consultant SARFM Muhammad Wali Ahmadzai Financial Management Analyst SARFM Martin Serrano Senior Counsel LEGES Aristeidis I. Panou ET Consultant LEGVP Chau-Ching Shen Senior Finance Officer CTRFC

2. The project preparation schedule is as follows: Decision Meeting: 21 July 2011 Negotiations: 30 July 2011 Board presentation: 23 August 2011 Effectiveness: September 2011

66

Annex 9: Environmental and Social Safeguards Framework

AFGHANISTAN: Financial Sector Rapid Response Project 1. Not applicable. The project is Environment Category C.

67

Annex 10: Economic and Financial Analysis

AFGHANISTAN: Financial Sector Rapid Response Project Not applicable.

68

Annex 11: Documents in Project Files


Afghanistan National Development Strategy (ANDS, 2008-2013) World Bank Interim Strategy Note (2009-2011) World Bank Financial Sector Strengthening Project, Emergency Project Paper (2009) Assessment of the National Payments System in Afghanistan, South Asia Payments

Initiative (March 2010)

69

Annex 12: Statement of Loans and Credits


Original Amount in US$ Millions

Difference between expected and actual disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

P122235 2011 AF: Irrigation Restoration &Development 0.00 97.80 0.00 0.00 0.00 98.24 0.00 0.00

P121755 2011 Afghanistan ICT Sector Development Proje

0.00 50.00 0.00 0.00 0.00 50.63 0.00 0.00

P118925 2011 Afghanistan SDNRP II 0.00 52.00 0.00 0.00 0.00 52.51 0.00 0.00

P118053 2011 AF: New Market Development 0.00 22.00 0.00 0.00 0.00 22.31 0.00 0.00

P117103 2010 AF: National Solidarity Program III 0.00 40.00 0.00 0.00 0.00 30.83 -12.64 0.00

P113421 2010 AF: Pension Admin and Safety Net 0.00 7.50 0.00 0.00 0.00 6.32 3.46 0.00

P112872 2010 AF: Customs Reform & Trade Facilitation 0.00 50.48 0.00 0.00 0.00 43.84 -8.72 0.00

P110407 2010 AF: Rural Enterprise Devt Program 0.00 30.00 0.00 0.00 0.00 25.91 -3.93 0.00

P112446 2009 AF: Strengthening Health Activities 0.00 79.00 0.00 0.00 0.00 48.04 -17.81 0.00

P110644 2009 AF: Financial Sector Strengthening Proj 0.00 8.00 0.00 0.00 0.00 8.03 2.25 0.00

P106259 2008 AF: Edu. Qlty. Improvement Program II 0.00 30.00 0.00 0.00 0.00 10.67 2.80 76.47

P101502 2008 AF: HIV/AIDS Prevention Project 0.00 10.00 0.00 0.00 0.00 2.60 2.31 0.00

P104301 2008 AF: Microfinance Project 0.00 30.00 0.00 0.00 0.00 13.82 13.74 0.00

P103343 2008 AF: National Emergency Rural Access Proj 0.00 152.00 0.00 0.00 0.00 43.95 6.08 2.88

P102573 2008 AF: Skills Development Project 0.00 20.00 0.00 0.00 0.00 8.71 5.98 0.00

P099980 2007 AF: Public Financial Management Reform 0.00 33.40 0.00 0.00 0.00 6.95 5.97 0.00

P097030 2007 AF: Civil Service Reform Project 0.00 20.40 0.00 0.00 0.00 8.58 7.83 0.00

P098118 2006 Afghanistan: Natural Resources Devt 0.00 40.00 0.00 0.00 0.00 20.15 7.25 0.00

P087860 2006 AF: Urban Water Sector 0.00 40.00 0.00 0.00 23.09 18.44 38.97 4.64

P089040 2005 AF: Strengthening Higher Educ. Program 0.00 60.00 0.00 0.00 0.00 23.07 1.53 3.20

P088719 2005 AF: Investment Guarantee Facility 0.00 5.00 0.00 0.00 0.00 2.84 2.59 0.00

P083908 2004 AF: Emergency Power Rehabilitation Proj 0.00 105.00 0.00 0.00 0.00 18.75 12.96 12.96

P078936 2004 AF: Emer Irrig Rehab 0.00 126.50 0.00 0.00 0.00 24.65 -66.19 -11.93

Total: 0.00 1,109.08 0.00 0.00 23.09 589.84 4.43 88.22

70

AFGHANISTAN STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions of US Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

2006 Areeba Afg. LTD 40.00 5.00 0.00 0.00 0.00 0.00 0.00 0.00

2003 FMBA 0.00 0.85 0.00 0.00 0.00 0.85 0.00 0.00

2006 FMBA 3.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2004 TPS (A) 0.00 0.00 7.00 0.00 0.00 0.00 7.00 0.00

Total portfolio: 43.50 5.85 7.00 0.00 0.00 0.85 7.00 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00

71

Annex 13: Country at a Glance


Afghanistan at a glance 2/25/11

P OVER T Y and SOC IA L So uth Lo w-

A fghanistan A sia inco me2009Population, mid-year (millions) 29.8 1,568 846GNI per capita (Atlas method, US$) .. 1,082 512GNI (Atlas method, US$ billions) .. 1,697 433

A verage annual gro wth, 2003-09

Population (%) 2.6 1.5 2.2Labor force (%) 3.1 2.2 2.6

M o st recent est imate ( latest year available, 2003-09)

Poverty (% of population below national poverty line) 42 .. ..Urban population (% of to tal population) 24 30 29Life expectancy at birth (years) 44 64 57Infant mortality (per 1,000 live births) 134 55 76Child malnutrition (% of children under 5) 33 41 28Access to an improved water source (% of population) 48 87 64Literacy (% of population age 15+) .. 61 66Gross primary enrollment (% of school-age population) 106 108 104 M ale 127 110 107 Female 84 105 100

KEY EC ON OM IC R A T IOS and LON G-T ER M T R EN D S

1989 1999 2008 2009

GDP (US$ billions) .. .. 11.8 14.5

Gross capital formation/GDP .. .. 25.0 ..Exports o f goods and services/GDP .. .. 15.6 ..Gross domestic savings/GDP .. .. 2.5 ..Gross national savings/GDP .. .. 50.1 ..

Current account balance/GDP .. .. -1.6 -3.2Interest payments/GDP .. .. 0.1 0.0Total debt/GDP .. .. 17.8 16.1Total debt service/exports .. .. .. ..Present value of debt/GDP .. .. .. 4.1Present value of debt/exports .. .. .. ..

1989-99 1999-09 2008 2009 2009-13(average annual growth)GDP .. 10.5 2.3 40.8 ..GDP per capita .. 7.7 -0.4 37.1 ..Exports o f goods and services .. .. .. .. ..

ST R UC T UR E o f the EC ON OM Y

1989 1999 2008 2009(% of GDP)Agriculture .. .. 28.5 32.5Industry .. .. 26.3 22.1 M anufacturing .. .. 17.4 13.3Services .. .. 45.2 45.4

Household final consumption expenditure .. .. 88.5 ..General gov't final consumption expenditure .. .. 9.0 ..Imports o f goods and services .. .. 47.7 ..

1989-99 1999-09 2008 2009(average annual growth)Agriculture .. 4.9 -11.7 49.1Industry .. 14.5 5.7 19.1 M anufacturing .. 8.7 2.3 29.1Services .. 13.5 13.8 45.2

Household final consumption expenditure .. .. .. ..General gov't final consumption expenditure .. .. .. ..Gross capital formation .. .. .. ..Imports o f goods and services .. .. .. ..

Note: 2009 data are preliminary estimates.

This table was produced from the Development Economics LDB database.

* The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.

-20-10

01020304050

04 05 06 07 08 09

GCF GDP

Growth of capital and GDP (%)

-80

-60

-40

-20

0

20

40

04 05 06 07 08 09

Exports Imports

Growth of exports and imports (%)

Afghanistan

Low-income group

Development diamond*

Life expectancy

Access to improved water source

GNIpercapita

Grossprimary

enrollment

Afghanistan

Low-income group

Economic ratios*

Trade

Indebtedness

Domesticsavings

Capital formation

72

Afghanistan

P R IC ES and GOVER N M EN T F IN A N C E1989 1999 2008 2009

D o mestic prices(% change)Consumer prices .. .. 26.8 -15.0Implicit GDP deflator .. .. 20.9 -15.5

Go vernment f inance(% of GDP, includes current grants)Current revenue .. .. 15.5 18.3Current budget balance .. .. 4.0 6.0Overall surplus/deficit .. .. -3.5 -0.5

T R A D E1989 1999 2008 2009

(US$ millions)Total exports (fob) .. .. .. .. Fresh fruits .. 8 .. .. Dried fruits .. 16 .. .. M anufactures .. .. .. ..Total imports (cif) .. 1,176 .. .. Food .. 251 .. .. Fuel and energy .. 3 .. .. Capital goods .. 72 .. ..

Export price index (2000=100) .. .. .. ..Import price index (2000=100) .. .. .. ..Terms of trade (2000=100) .. .. .. ..

B A LA N C E o f P A YM EN T S1989 1999 2008 2009

(US$ millions)Exports of goods and services 261 .. 2,181 2,128Imports of goods and services 727 .. 8,788 9,099Resource balance -466 .. -6,607 -6,681

Net income 12 .. .. 63Net current transfers 311 .. 6,710 6,838

Current account balance -143 .. -192 -462

Financing items (net) 123 .. 622 781Changes in net reserves 20 .. -430 -319

M emo :Reserves including gold (US$ millions) 631 .. .. ..Conversion rate (DEC, local/US$) 50.6 47.8 51.0 49.3

EXT ER N A L D EB T and R ESOUR C E F LOWS1989 1999 2008 2009

(US$ millions)Total debt outstanding and disbursed .. .. 2,089 2,328 IBRD .. .. 0 0 IDA .. .. 438 471

Total debt service .. .. 8 11 IBRD .. .. 0 0 IDA .. .. 2 2

Composition of net resource flows Official grants 96 116 4,031 4,990 Official creditors .. .. 95 109 Private creditors .. .. 0 0 Foreign direct investment (net inflows) .. .. 300 185 Portfo lio equity (net inflows) .. .. 0 0

World Bank program Commitments .. .. 0 0 Disbursements .. .. 44 27 Principal repayments .. .. 0 0 Net flows .. .. 43 27 Interest payments .. .. 2 2 Net transfers .. .. 42 25

Note: This table was produced from the Development Economics LDB database. 2/25/11

-6

-4

-2

0

2

4

03 04 05 06 07 08 09

Current account balance to GDP (%)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

03 04 05 06 07 08 09

Exports Imports

Export and import levels (US$ mill.)

-20

-10

0

10

20

30

04 05 06 07 08 09

GDP deflator CPI

Inflation (%)

B: 471

C: 106

D: 641

E: 1,090

G: 20

A - IBRDB - IDA C - IMF

D - Other multilateralE - BilateralF - PrivateG - Short-term

Composition of 2009 debt (US$ mill.)

Tirich MirTirich Mir(7690 m)(7690 m)

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Qal‘eh-ye NowQal‘eh-ye Now

¯ ¯¯Mahmud-e RaqıMahmud-e Raqı¸

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TURKMENISTAN

UZBEKISTANTAJIKISTAN

TAJIKISTAN

PAKISTAN

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IA

ISLAMICREPUBLICOF IRAN

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Helmand

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¯ ¯¯ ¯

Harırud¯ ¯

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30°N

30°N

35°N

60°E

35°N

75°E

60°E

65°E 70°E

65°E 70°E

AFGHANISTAN

0 50 100

0 50 100 Miles

150 Kilometers

IBRD 33358R

APRIL 2010

AFGHANISTANPROVINCE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.