AFGHANISTAN RECONSTRUCTION TRUST FUND

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized AFGHANISTAN RECONSTRUCTION TRUST FUND NEWSLETTER ISSUE Inside Letter from the Editor Introducing the ARTF September 2009 Development in Depth Expanding the Availability of Power The ARTF at Work Building Better Lives What s New A Fresh Approach to Financing Point of View An Interview with Nick Krafft 1

2 Welcome! For seven years the Afghanistan Reconstruction Trust Fund (ARTF) has brought the resources of many donors together and helped the Government of Afghanistan both meet its wage bill and deliver the beginnings of a long-term development program to citizens across the country. There is much, much more still to be done. The village that has a new school still awaits a clinic; the village with the clinic looks forward to a better road; and the village with the road needs a new irrigation system. The development initiatives supported by the ARTF are beginning to have a real impact on the lives of Afghans but the examples of what can be achieved serve also to highlight the many needs that remain to be addressed. As administrator of the fund, the World Bank considered it timely to begin sharing some of these gains more widely in a modest newsletter. We hope to share progress, but also to remind donors and their constituencies of the multiple challenges that remain unmet and unfunded. And we hope too to demonstrate how, very often with the passionate leadership and work of the communities themselves, a little goes a long way to rebuilding lives for people who see hope for the first time. Our newsletter carries a logo we had specially designed at the Turquoise Mountain Foundation. We wanted something that looked Afghan and we were inspired by the foundation s work teaching local crafts to young Afghans, thus the calligraphy and the resonant turquoise color which speaks to the traditional pottery from Istalif, both crafts being nurtured at the school. In Dari and Pashto script, the logo says Rebuilding Together. We hope this reflects the interwoven spirit of the international community working together, and Afghans in turn working with each other in government and in communities across the country, to build a safer nation. 2 Best regards, Abdul Raouf Zia Editor

3 WHAT is the artf Introducing the Afghanistan Reconstruction Trust Fund The ARTF is now the leading multidonor funding mechanism in the country Following the fall of the Taliban regime at the end of 2001 and the return of international aid agencies to Afghanistan, it was agreed with the interim government early on that a pooled financing mechanism was needed to ensure a coherent and coordinated reconstruction effort. Consequently, the ARTF was established in April 2002 with support in the first year from 20 donor countries. Seven years later, the ARTF has become the leading multi-donor funding mechanism in the country, providing a predictable source of funding for essential government costs on the one hand and helping government align its development planning with available resources on the other. As nearly two thirds of financial aid to Afghanistan flows into the country outside the government s own budget, ARTF resources have been critical to government planning. As a sign of strong commitment and support for the ARTF, donors agreed in 2008 to extend the lifetime of the mechanism for a further 10 years, through June To date, 30 donors have made contributions to the fund, of which around half are regular contributors. Annual contribution levels have risen substantially since the outset and have been at around $630 million for the last two years. Over the seven years of the ARTF s existence, donors have contributed a total of $3 billion. These contributions enable the ARTF to finance both the essential running costs of the government (Recurrent Cost Window) and the key national programs under the Afghan National Development Strategy (Investment Window). Grant financing under the ARTF s Investment Window has enabled communities to rehabilitate school buildings and provide text books and school supplies to their children. 3

4 Investment Window: Support for Development Since 2002, the ARTF has committed $1.2 billion to the reconstruction of the country by financing those programs the government considers most important. This approach ensures that the Afghan government owns these programs and keeps the focus on scaling up the delivery of essential infrastructure and basic services across the country. Some of the main programs that receive grant financing under the Investment Window are: ARTF financing under the Recurrent Cost Window enables the Afghan government to pay the salaries of teachers and health care workers. The National Solidarity Program (NSP) which is putting Afghanistan s rural people in charge of their own development for the first time in history. The National Rural Access Program (NRAP) which is working to improve access for impoverished rural areas across the country. 4 Recurrent Cost Window: Support to Government The ARTF s Recurrent Cost (RC) Window finances the running costs of the Afghan government, as well as operations and maintenance expenses. To date, the window has disbursed over $1.7 billion for the government s operating budget. Funds disbursed under the window have ensured that the government continues to function and deliver essential services, such as education and health care, to its people. These enable the government to pay the salaries of the 250,000 or so civil servants all over the country, including teachers and health care workers. Funds disbursed under the window are monitored by the auditing firm, PricewaterhouseCoopers. The process has helped build capacity in the Ministry of Finance by creating a predictable source of funding that is administered through government. The Microfinance Program which is helping to develop a sustainable microfinance sector to provide flexible, convenient, and affordable financial services to poor people. The Education Quality Improvement Program (EQUIP) which is enabling communities, through school shuras, to rehabilitate school buildings and access quality teaching and learning materials. The microfinance program is helping women to earn independent incomes by setting up small businesses.

5 In addition, the ARTF is contributing to other important development areas like urban infrastructure, power supply, public sector capacity building, justice reform, and agriculture. Across the spectrum, the ARTF has enabled program managers to plan ahead and scale up the reach of nationwide initiatives. For the foreseeable future, the ARTF will remain vital to these efforts as millions of citizens remain in line for further assistance in rebuilding their lives. The National Solidarity Program is putting people in charge of their own development for the first time in history. ARTF Donors Australia Bahrain Belgium Canada Denmark European Commission Finland France Germany India Iran Ireland Italy Japan Korea Kuwait Luxembourg Netherlands New Zealand Norway Poland Portugal Russia Saudi Arabia Spain Sweden Switzerland Turkey UK US 5

6 Development in depth Expanding the Availability of Power Demand for power is soaring as millions return from exile, hoping for a better standard of living Urgent expansion in power generation and supply offers one of the best hopes for growth in Afghanistan as the country struggles to create new jobs, keep businesses afloat, and bring light and heat to homes and schools. In a recent survey, citizens across the country identified the lack of electricity as the most pressing problem facing them today. Although Afghanistan faces enormous challenges in bringing power to its people, a glimmer of hope has recently begun to emerge. From January 2009, as part of a new agreement, power has begun to flow into the country from Uzbekistan. It is first improving the situation in Kabul and is a welcome precursor to larger inflows to come by late 2009 that will spread the benefits to other parts of the country as well. ARTF s Role Expanding the availability of power across the country is a key element of the national reconstruction program. In support of this effort, the ARTF is currently financing the rehabilitation of the country s two largest hydro-power plants - Naghlu and Mahipar - that supply the city of Kabul and surrounding areas. It is doing so in collaboration with the European Commission, German KfW, and the World Bank. The Mahipar plant is scheduled to be completed in 2009 and Naghlu by mid The sales of TVs and other electrical products have shot up in Kabul since January 2009, when power from Uzbekistan began to flow into the city. I sold 30 TVs yesterday and that was a record, said Aziz Azizi, a local shopkeeper. 6

7 The fund is also working with two other major investors to expand power distribution to the remote northern region of the country. From late 2009 onwards, when the full 150 MW of power from Uzbekistan begins to flow, the ARTF will facilitate its distribution to a string of northern towns, restoring their old economic vibrancy and unleashing the enterprise of their people once again. The fund is also working to introduce energy efficiency to Afghanistan s nascent electrical power sector. This is particularly important given the ubiquitous use of polluting diesel generators to augment the inadequate power supplies across the country. Accordingly, the government is setting up an energy efficiency unit in the energy ministry, and is planning a campaign to educate consumers in energy efficiency, with a pilot project to demonstrate its impact. The rural areas, where most Afghans live, are also benefitting. Large swathes remain unconnected to the grid or other affordable means of electrical power. As a result, people have little option but to cut down trees for firewood, and rely on kerosene lamps for dim illumination a practice that has caused a sharp increase in bronchial diseases. The ARTF, with donor partners, is financing the National Solidarity Program (NSP) that funds community development projects chosen by the villagers themselves. Since 2003, when the program began, the NSP has funded more than 800 micro-hydro or solar power generation projects across 21 of the country s 34 provinces. These projects have brought light to over 300,000 villagers, ending centuries of their isolation by connecting them to the world beyond. Many more such projects are planned or underway. Unique Challenges Despite these gains, expanding the availability of power in Afghanistan remains a major challenge. The country s infrastructure has been largely destroyed by successive wars and virtually no skilled manpower is available. At the same time, demand for power has soared exponentially as millions of refugees return from exile, hoping for In many villages, people no longer have to cut down tress for firewood or rely on kerosene lamps for dim illumination. Links with the outside world are strengthened with the easier availability of power. 7

8 A newly-commissioned transmission line streams additional power from Uzbekistan into Kabul, crossing the Hindu Kush mountains through the formidable Salang Pass for the first time in history. From late 2009 onwards, when the full 150 MW of power contracted under the new power purchase agreement with Uzbekistan begins to flow, the ARTF will facilitate its distribution to revitalize a string of once-bustling northern towns that lie along the line. Map created by Afghanistan Information Management Services, Afghanistan 8 88

9 Rebuilding Together ARTF Support To date, the ARTF has committed some $140 million in financing for the power sector. Total donor commitments to the sector exceed $1 billion. Rehabilitation of Hydropower Plants Naghlu 100 MW : $20 million Mahipar 62.5 MW : $7.4 million Transmission Substation at Aybak: $7 million Substation at Mazar-e-Sharif : $7 million Rehabilitation of Naghlu and Mahipar Switchyards : $12 million Distribution Kabul : $20 million Mazar-e-Sharif : $23 million Pul-e-Khumari, Charikar, Gulbahar and Jabul-es- Seraj, etc : $32 million Aybak, Doshi : $10 million Technical Assistance Program Implementation Support Unit in Ministry of Energy and Water : $3 million completed Energy Efficiency Unit in Ministry of Energy and Water : $3 million 9 99

10 a better standard of living. In the absence of adequate infrastructure, costly and polluting diesel generators have become the chief source of power, especially in the urban areas. This is more so in winter when the demand for power is at its peak and water in the rivers reduces to a trickle, leading to a drastic drop in hydropower generation. The cost of running diesel generators on a large scale is, however, prohibitive. One day s outages in Kabul alone can lead to additional diesel costs of up to $2-4 million. The urban poor, unconnected to the grid and without the means to generate their own power, are particularly hurt; they are often left to scramble for every drop of fuel they can find, even burning rags for a little warmth. Efforts to rehabilitate and expand power infrastructure are hampered by the tough security situation. Project costs escalate sharply when land has to be de-mined and construction teams provided with additional security. In addition, the Major Power Sector Donors Asian Development Bank European Commission German KfW Government of India Government of Iran USAID World Bank avalanche-prone high mountain passes and treacherous terrain create enormous engineering challenges, especially for the laying of transmission lines to carry power to energy-starved regions. Sustained and Long-term Efforts Needed Nonetheless, Afghanistan, with its cascading ranges of high snow-capped mountains, holds considerable potential for hydropower development, in addition to possessing gas and significant coal resources. In coming years, the development of these resources will be essential for the wellbeing of Afghanistan s people and for the country s social and economic stability. This will, however, require sustained and longterm efforts from both the Afghan government as well as the international donor community for some time to come. Micro-hydro and solar power generation projects have brought light to over 300,000 village dwellers, ending centuries of their isolation by connecting them through radio and television to the wider world beyond. 10

11 The ARTF at Work Building Rural Roads Builds Better Lives Improved connectivity to district and provincial centers has enabled villagers to buy essential supplies, sell their produce in distant markets, and generate new sources of income. Over 3,000 kilometers of rural roads have been rehabilitated or built, connecting 20 percent of Afghanistan s villages Rural roads are critical for improving the lives of the Afghan people, the vast majority of whom live in abject poverty in the countryside. For centuries, narrow paths and mule tracks have been their only means of contact with the outside world; three decades of conflict and upheaval have only made matters worse. It is arduous for children to reach school and for families to reach medical help in time. Without access to markets, villagers are unable to earn more from their land or develop other sources of income. The lack of licit livelihoods has driven some farmers to poppy cultivation. The government s National Rural Access Program (NRAP) one of its national priority programs is working to provide all-weather rural roads in all 34 provinces of the country. Since 2003, when the program began, the ARTF has provided $53 million out of the total donor funding for the program of almost $300 million. Now, ARTF donors are enabling a substantial expansion of the program to connect more villages to their district and provincial centers. So far, over 3,000 kilometers of rural roads have been rehabilitated or built, connecting 20 percent of Afghanistan s 38,000 or so villages. In addition, improved irrigation and drainage have helped to render 15,000 hectares of land productive. Construction works under the project have generated 5.4 million days of shortterm employment for impoverished rural men, effecting cash transfers of $20-30 million for work carried out under the project. 11

12 Afghan Voices Twenty kilometers of all-weather roads have recently linked nine villages in the Shahr-e-Buzurg district of Afghanistan s northeastern Badakhshan province to their district center. The roads were rehabilitated or built anew under NRAP and greeted with enthusiasm by community leaders: The new road has made life easier. When we had no road, the old and the sick had to ride on donkeys to get medical help or walk for over four hours to reach the nearest health center. The women had no option but to deliver their babies at home, and many died in childbirth. Now, all this has changed. The road has saved many lives. Haji Mirza, community elder, Baghak Village. A villager tends his vines. Our village is full of orchards. But we could never take our fruits to market because there was no road. People didn t value their trees and would cut them down for firewood. A few months ago we got a road. Now, for the first time, some villagers have taken their fruits to market. The rest are keen to do so too, and are working to develop their orchards. We hope to earn good money. Haji Alim, community elder, Korayi Mabain Village. As our village has no high school, our children could never study after class 6. But now that we have a road, we can send them to the high school at the district center. It used to take five hours to walk there. Now, it takes only one. Sabroddin, head of shura, Chawgani Village. 12 A little girl delights in learning.

13 What s NEW A Fresh Approach to Financing The Incentive Program allows the ARTF to make a phased and predictable exit from the Recurrent Cost Window. In December 2008, ARTF donors and the Afghan government agreed on a new approach to support the government s operating budget, including its wage bill. Known as the ARTF Incentive Program, the new approach establishes a phased decline in ARTF support for recurrent costs over the ten remaining years of the fund (through 2020). At the same time, it positions the ARTF as an important tool to support the government s revenue-raising efforts on its path to self-reliance. By providing the Afghan government with the right mix of incentives to strengthen its revenue collection, the program allows the ARTF to make a phased and predictable exit from the Recurrent Cost Window. It also proactively supports the government s economic reform agenda by empowering reformers to deliver on their programs. At the same time, the program ensures that ARTF donors, who are financing around half the civilian wage bill every year, have a genuine stake in the performance of the Afghan government. The program encourages the Afghan government to increase its collection of revenues through reform of the customs administration and other departments, as well as by creating an enabling environment for the growth of the private sector. It rewards progress in these areas against annual benchmarks agreed upon each year by the government and a core group of donors. If these benchmarks are met, the ARTF provides additional incentive funds to support the government s recurrent costs for the following year. In May 2009, the government successfully completed the first year of the program. It will therefore access the incentive funds of $40 million in (Solar Year 1388). A great deal has been achieved even in this first year of the program. This includes administrative reforms in the customs department, kicking off the asset declaration program for senior officials, and establishing the criteria to test teachers for competency. These, and the other areas supported, will be further pursued in the years ahead. The Afghan government is being encouraged to increase its revenue collection by reforming the customs administration and enabling the growth of the private sector. 13

14 Point of View Building the Legitimacy of the State An Interview with Nick Krafft, World Bank Country Director for Afghanistan It s only through building the legitimacy of the state that we will achieve long-term development. Coming together behind a strong pooled funding mechanism, donors have a real opportunity to support this objective. 14 Q: What are the biggest development challenges facing Afghanistan? NK: First of all, security is a major issue for Afghans. Without a basic level of security it is very difficult to make progress on the development side where there are enormous challenges. Afghanistan has some of the lowest human development indicators in the world. Life expectancy is 43 years compared to 57 in Sub-Saharan Africa. Infant mortality is as high as 165 per 1,000 births, compared to 85 in Africa. Female adult literacy is around 13 percent while it is 50 percent for Sub-Saharan Africa. So there are enormous development challenges, and in order to meet them, we need to continue to build effective national programs in areas like education, health, social protection, and microfinance. On the coordination side, one of the big challenges the Afghan government faces is that two-thirds of the development assistance it receives flows outside the budget, beyond its purview and ability to oversee. Many of these activities are not well linked to the successful programs that the government is leading. Q: How can ARTF help the government and donors meet these challenges? NK: One of the achievements of the ARTF program is that 30 donors have come together, contributed about $3 billion for the core budget, and work in a harmonized way across a whole number of important development areas. Together, ARTF donors have an important stake in the functioning of the Afghan government. ARTF donors are financing around half of the total civilian wage bill, in particular supporting the work of teachers and doctors across the country. ARTF donors are also financing a quarter of the government s core development spending, in critical areas like education, rural development, and national power supply. Just to give a couple of examples of how ARTF is making a difference: the Education Quality Improvement Program (EQUIP) is delivering block grants to communities in all 34 provinces now. The advantage of the block grant is that it draws communities into the management of the schools. In the two schools I visited recently,

15 the results were impressive, but I have to say that the need for further investment is great. Similarly, the ARTF is the main source of finance for the National Solidarity Program. NSP is delivering rural infrastructure through elected councils in over 22,000 villages in Afghanistan. We believe that this kind of assistance supports the Accra Agenda and can also help the government to meet the important development priorities it announced at the Hague Conference in March Q: When ARTF was set up in 2002, it was not expected to last more than six years; now it has been extended until How do you see the future of ARTF? NK: ARTF will continue to support the recurrent budget, however, now on a declining basis. With the new ARTF Incentive Program, donors are getting behind the government s reform agenda, focusing on the areas important for an eventual ARTF exit strategy. On the development side, I see an expanding role for ARTF as donors increasingly seek to harmonize their programs. The likely expansion of funding that may flow to the south and east of the country may pose some new questions however. I think we need to ensure that new activities in insecure areas are consistent with and support national programs and the government s objectives: it s only through building the legitimacy of the state that we will achieve long-term development. Coming together behind a strong pooled funding mechanism, donors have a real opportunity to support this objective. In the two schools I visited recently, the results were impressive, but I have to say that the need for further investment is great. Nick Krafft, a British national, is the World Bank s Country Director for Afghanistan. Earlier, he was Director of Operations in the World Bank s Human Development Network. He has also served as manager of the Bank s program in the West Bank and Gaza and as Program Director for Iraq, and the Bank s representative to the Office of the UN Secretary General s Special Envoy for Gaza Disengagement. 15

16 AFGHANISTAN RECONSTRUCTION TRUST FUND For more information contact Abdul Raouf Zia House 19, Street 15 Wazir Akbar Khan Kabul, Afghanistan Phone: 0093 (0) Design :