Document of The World Bank FOR OFFICIAL USE ONLY Report No: 48074-AF EMERGENCY PROJECT PAPER ON A PROPOSED GRANT IN THE AMOUNT OF SDR 4.9 MILLION (US$7.5 MILLION EQUIVALENT) TO THE ISLAMIC REPUBLIC OF AFGHANISTAN FOR A PENSION ADMINISTRATION AND SAFETY NET PROJECT September 17, 2009 Human Development Unit South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective July 31, 2009) Currency Unit = Afghani (AFN) AFN 50.16 = US$1 US$1.55533 = SDR 1 FISCAL YEAR March 21 ­ March 20 ABBREVIATIONS AND ACRONYMS ANDS Afghanistan National Development Strategy DA Designated Account EPAP II Second Emergency Public Administration Project FM Financial Management FMA Financial Management Agent GMU Grant Management Unit IARCSC Independent Administrative Reform and Civil Service Commission ICB International Competitive Bidding IDA International Development Association MoD Ministry of Defense M&E Monitoring and Evaluation MIS Management Information System MoF Ministry of Finance MoJ Ministry of Justice MoLSAMD Ministry of Labor, Social Affairs, Martyrs & Disabled MoWA Ministry of Women's Affairs MRRD Ministry of Rehabilitation and Rural Development NCB National Competitive Bidding NGO Non-governmental Organization P&G Pay and Grading PCN Project Concept Note PCU Project Coordination Unit PPF Project Preparation Facility PPU Procurement Policy Unit PSC Project Steering Committee SBD Standard Bidding Document SDR Special Drawing Rights SIL Specific Investment Loan SOE Statement of Expenditure TA Technical Assistance TOR Terms of Reference TWGs Technical Working Groups UNDP United Nations Development Programme Vice President: Isabel Guerrero Country Director: Nicholas J. Kraft Country Manager Mariam Sherman Sector Manager: Mansoora Rashid Task Team Leader: Oleksiy A. Sluchynsky FOR OFFICIAL USE ONLY AFGHANISTAN Pension Administration and Safety Net Project 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 ............................................................................................... 5 D. Appraisal of Project Activities .......................................................................................... 12 E. Implementation Arrangements and Financing Plan .......................................................... 13 F. Project Risks and Mitigating Measures ............................................................................ 17 G. Terms and Conditions for Project Financing .................................................................... 20 Annex 1: Detailed Description of Project Components ........................................................... 22 Annex 2: Results Framework and Monitoring ........................................................................ 27 Annex 3: Summary of Estimated Project Costs ....................................................................... 32 Annex 4: Financial Management and Disbursement Arrangements ..................................... 33 Annex 5: Procurement Arrangements ...................................................................................... 44 Annex 6: Implementation and Monitoring Arrangements ..................................................... 58 Annex 7: Project Preparation and Appraisal Team Members ............................................... 61 Annex 8: Environmental and Social Safeguards Framework ................................................ 62 Annex 9: Economic and Financial Analysis ............................................................................. 63 Annex 10: Documents in Project Files ...................................................................................... 76 Annex 11: Statement of Loans and Credits .............................................................................. 77 Annex 12: Country at a Glance ................................................................................................. 79 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. EMERGENCY PROJECT PAPER DATA SHEET ISLAMIC REPUBLIC OF AFGHANISTAN PENSION ADMINISTRATION AND SAFETY NET PROJECT (P113421) South Asia Region Date: September 17, 2009 Team Leader: Oleksiy Sluchynsky Country Director: Nicholas J. Krafft Sectors: Non-compulsory pensions, insurance and Sector Manager: Mansoora Rashid contractual savings (50%); Public Administration- Lending instrument: Emergency operation Other social services (50%) Project ID: P113421 Themes: Other social protection and risk management (30%); Administrative and civil service reform (35%); Social safety nets (35%) Environmental category: C Recipient: Islamic Republic of Afghanistan Responsible Agency: Ministry of Finance, Government of Afghanistan Implementing Agency: Ministry of Labor, Social Affairs, Martyrs and Disabled (MoLSAMD), Government of Afghanistan Type of Operation: New Operation [ X ] Additional Financing [ ] Existing Financing (restructuring) [ ] Financing type: Loan [ ] Credit [ ] IDA Grant [ X] Other [ ] Total Amount: US$7.50 million Expected implementation period: 48 months Expected effectiveness date: December 31, 2009 Expected closing date: December 31, 2013 Development Objective: The project development objectives are: (i) improve the administration of the public pension schemes; and (ii) pilot a modest social safety net program as a first step to developing a sustainable approach to safety nets in the country. Short Description: The project will have three components: (1) pensions, with sub-components in designing new administrative arrangements for the public pension system; and modernization of the existing pension system, (2) safety nets, with sub-components of designing and implementing a pilot safety net program; and strengthening the institutional capacity of MoLSAMD, and (3) project management. For the implementation of these components, the project will provide technical assistance, training, office renovations, equipment, materials, and cash payments for safety net pilots. Financing Plan (USD m.) Source Local Foreign Total Borrower 0.00 0.00 0.00 Total IBRD/IDA 4.70 2.80 7.50 Total 4.70 2.80 7.50 Estimated disbursements (Bank FY/USD m.) 2010 2011 2012 2013 2014 Total Total IBRD/IDA 1.60 3.00 2.00 0.50 0.40 7.50 Total 1.60 3.00 2.00 0.50 0.40 7.50 Does the emergency operation require any exceptions from Bank policies? Yes [ ] No [X] Have these been approved by Bank management? Yes [ ] No [ ] Are there any critical risks rated "substantial" or "high"? Yes [X] No [ ] What safeguard policies are triggered, if any? N/A Significant, non-standard conditions, if any: None A. Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide a grant in an amount of SDR 4.9 million (US$ 7.5 million equivalent) to the Islamic Republic of Afghanistan for a Pension Administration and Safety Net Project. 2. The proposed grant would help finance the costs associated with modernization of the public pension system administration and design and implementation of a basic safety net pilot program. The project would support specific objectives of the Afghanistan National Development Strategy (ANDS) toward implementing a modern and financially sound pension system and developing a targeted safety net scheme. It would also lay the institutional groundwork for implementing future initiatives in social protection. 3. The proposed grant would finance investments and technical assistance for (i) improving administration of the public pension system, and (ii) piloting a modest social safety net scheme as a first step in starting to develop a sustainable approach to safety nets in Afghanistan. Furthermore, the grant will contribute to strengthening program planning and administration in the Ministry of Labor, Social Affairs, Martyrs and Disabled (MoLSAMD). B. Emergency Challenge: Country Context, Recovery Strategy and Rationale for Proposed Bank Emergency Project. 4. Afghanistan is one of the poorest countries in the world with income per capita hovering around US$300 and around 42 percent of the population living below the poverty line; an additional 20 percent are clustered just above the poverty line. Altogether, some 15 million people are poor or at risk of poverty. Poverty is highest in rural areas and among nomadic Kuchi tribes at 45 percent; urban poverty is 27 percent. Poverty correlates relate to education and employment of households heads, seasonality in rural areas, asset ownership and remoteness. Women and children, and the disabled, are the highest risk poverty groups. A combination of natural disasters, extreme seasonal variations in food production, security problems, and the recent global economic crisis drive the high levels of chronic and transient poverty in the country. 5. While economic growth will be the main prerequisite for poverty reduction, a well- designed social protection system with its four main pillars ­ safety nets, social care services, social security, and employment programs ­ that is suitably adapted to the country context can help households mitigate and cope with the risks of falling into poverty. 6. The Afghan formal social protection system consists largely of a pension scheme for public sector employees and uniformed servicemen of the military and police, and social safety nets encompassing a number of government and donor schemes that transfer cash and in-kind benefits to various population groups. Existing government interventions, however, remain small, both in terms of beneficiaries and spending. For example, the current spending on the public sector pension program is less than half percent of GDP (with 60,000 beneficiaries); roughly the same amount is spent on the program of benefits for families of martyrs and disabled in the conflicts (with around 220,000 survivors and 90,000 disabled beneficiaries). The main 1 issues with social protection program implementation include lack of well-designed targeting instruments, poor coordination across programs, and weak administrative capacity. 7. The Government has recently laid out its vision of reforms in the social protection sector in the ANDS ­ both in the pensions and safety net areas. In pensions, the main objective is to ensure fiscal sustainability and mitigate fiscal impact of the Pay and Grading reform on the pension program, making it consistent with the broader public sector reform agenda. The reform would ensure that scarce public resources could be used for re-distributional and development programs of the Government. Among the immediate and important priorities is the enhancement of administrative capacity of the Pension Department. The strategy also recognizes that it is critically important to develop fiscally sound and well-targeted social protection interventions, including safety nets, for improving the poverty outcomes in the country. 8. Pensions. The Ministry of Labor Social Affairs Martyrs and Disabled (MoLSAMD) operates the formal pension scheme that covers public sector employees, including the security sector, and pays benefits to over 60,000 beneficiaries (see Table A9.2 in Annex 9 with details on beneficiaries as of 2006). It is a defined benefit scheme that pays 40 percent of the last wage after 10 years of service at retirement and provides for up to 100 percent of the last wage for civil servants who worked for 40 years (See Table A9.7 in Annex 9 for program parameters).1 9. While rules stipulate employee and employer contributions (3 and 8 percent correspondingly), the funding largely constitutes direct subsidies from the central budget of around US$30 million annually. The Pay and Grading reform with changes in the scale and composition of pay as well as structural adjustments in the civil service will have serious implication for the pension liabilities (currently estimated at the range of 6 percent of GDP). Despite its low coverage, the demographics of the civil service combined with the coming wage increases may produce considerable fiscal impact in the short to medium term (see Annex 9). 10. The lack of adequate protection mechanisms in the rules and regulations of the scheme lead to deterioration of the benefit value and ad hoc payments stipulated in the Government decrees. Various recent decisions lacked proper policy context and sound financial analysis, and resulted in arbitrary disparities across cohorts of retirees.2 11. The administration of the pension system is weak, inefficient and antiquated, making it difficult to translate policy reforms into practice on the ground. Systems remain weak and financial management lacks transparency. The complete cycle of record-keeping is still a manual process. Processing of pension claims takes a long time, is cumbersome, and highly centralized. Investments in the new systems and capacity to operate the reformed scheme will be required. Administrative modernization will require analysis and some important decisions, for example, on organization of contribution collection, financial controls, payment methods, 1 For detailed discussion of the program parameters and operations see Public Sector Pension Scheme: From Crisis Management to Comprehensive Reform Strategy. The World Bank. June 24, 2008. 2 For example, civil servants who retired prior to 1382 (2003) receive flat pension amounts, while calculations for the new retirees incorporate length of service in accordance with the formula. Hence, two individuals retired before and after 1382 in the same rank and with the same length of service receive different pensions, with the difference primarily being the function of length of service. 2 information technology systems, etc. A census of beneficiaries will be required to address issues of the legacy scheme such as ineligible claims, arrears, weak monitoring capacity, etc. 12. After years of ad hoc measures, in mid-SY1386 (2007), the Government formed a senior Steering Committee on Pension Reform tasked to oversee the process of the reform policy formulation. An assessment of the parameters of the pension programs was conducted and a comprehensive draft strategy note was produced at the end of 2007. The new Pension Regulation was subsequently endorsed by the Steering Committee and recently adopted by the Government. The proposed Government reform program is a major step towards establishing a fiscally sound and modern pension program. The objective of the new regulation is to introduce a sustainable, affordable, equitable and well-administered pension scheme tailored to the context of the Pay and Grading reform. A summary of the most important reform provisions for the civil service pensions as reflected in the new Regulation is presented in Table A9.7 in Annex 9. The changes will primarily affect those who would retire under the terms of the Pay and Grading reform. Apart from introducing transparent benefit indexation provisions, the rights of the existing retirees will not be affected. In parallel to this process, there are initiatives to introduce legal revisions to the existing retirement provisions for the military and the police. 13. The social safety nets. Despite a high level of poverty, formal safety net programs in Afghanistan are modest, both in terms of coverage and spending (with the main public cash transfer program of benefits for families of Martyr and Disabled consuming less than half percent of GDP). These programs consist of humanitarian aid and various, largely uncoordinated, public programs (see Annex 9 for description, funding, and coverage of the public and select donor programs). Informal safety nets (kinship and community arrangements) still appear strong, although the combined effects of prolonged security, economic and environmental risks may have weakened them over time. Recent studies also suggest that informal arrangements are not able to adequately protect households from aggregate shocks, such as natural disasters (e.g., droughts and earthquakes) and economic shocks (e.g., the recent economic crisis). 14. In addition to the cash benefit program for families of martyrs (mainly close kin to persons killed in active combat) and war-related disabled ­ the largest public cash assistance scheme ­ MoLSAMD operates a number of other social protection programs, most notably skills development programs and social services (some supported by donors or implemented by NGOs). 15. At the same time, various other ministries operate programs with implications for social protection, and a number of donor-driven safety net programs transfer resources to needy households, including during emergencies. The formal programs are listed in Table A9.8 in Annex 9, with numbers for beneficiaries for some of the public programs provided below: 3 Public Program Beneficiaries (2006) Families of Martyrs 224,800 Conflict-related disability 87,700 Orphans 10,500 Children in kindergartens 25,000 Public sector pensioners (payments) 54,000 Public works and skills development 1,750,000 Microfinance 340,000 Source: ANDS 16. Coordination across programs is weak, although the ANDS provides a loose strategic framework within which programs and projects need to fit and the Ministry of Economy has been designated to develop and operate a system of monitoring and evaluation of the ANDS implementation across various sectors. Still, MoLSAMD as the line Ministry for social protection does not have a thorough understanding of social protection programs operated by other ministries, donors or NGOs. The absence of a strong coordination function coupled with weak administrative capacity in public agencies give rise to inefficiencies through duplication of effort and missing out on eventual synergies between interventions. When programs are aimed at poor groups, incompatible targeting criteria may lower overall efficiency. 17. Little is known on poverty outcomes of the specific programs. While none of the programs mentioned above and listed in Annex 9 specifically is targeted at poor households, it still is likely that the majority of recipients are poor, given high poverty levels. For example, various food aid programs attempt to prioritize needier households; and public works schemes (often in the form of food for work) have strong elements of self-selection, as well as elements of direct encouragements to members of the poorest households to participate. However, simply improving their coordination, strengthening their poverty focus, and enhancing delivery mechanisms could improve protection for the neediest population groups. 18. Developing an effective safety net program will involve decisions about inter-agency coordination, targeting criteria, award process (eligibility determination and enrollment), delivery and accountability mechanisms. Attention will need to be paid to ways of improving collaboration with donors in order to leverage assistance by building on complementarities that should offer opportunity to benefit from economies of scale. This project helps the Government to make the first but very important step towards this development goal by piloting a set of safety net interventions and operational platform(s) that when scaled up would help consolidate the poverty reduction effort and offer economies of scale in implementation. 4 19. Organization. The main responsibility for social protection lies with the Ministry of Labor, Social Affairs, Martyrs and Disabled (MoLSAMD).3 While centrally located in Kabul, the MoLSAMD has a network of local offices in all 34 provinces, as well as 11 Provincial Employment Services Centers. 20. The public pension scheme is managed by the Pension Department of MoLSAMD, with the head office in Kabul and a total staff of around 150 employees. Notably, operation of the pension program at present is heavily centralized, with 90 percent of payments processed from the center in Kabul. In future, while sanctioning authority would remain with the center, some viable decentralization strategy, for example in payment processing, would have to be devised. 21. While the cash transfer scheme for Martyrs and Disabled has been administered by a separate department, it has recently been proposed to merge its operation with the Pension Department. While operationally such an objective seems reasonable, implementing such a merger will have to be carefully planned. The scheme suffers from the absence of viable strategic planning, it has no robust mechanisms ensuring adequacy of benefits, no proper record keeping arrangements, no effective accountability mechanisms, and no clear budgeting procedures. Initially, a strategic plan will need to be developed to deal with transitional issues. Subsequently, the above-listed weaknesses will need to be addressed. C. Bank Response: The Project 22. The World Bank has extensive experience in designing social protection reforms in a wide variety of settings ­ transitional and emerging economies, developing countries and conflict and post-conflict situations. It is well-placed to provide support to Afghanistan in this area. 23. Pensions. Over the past three years, the World Bank has been providing support to the government pension reform program in the form of technical assistance. The effort focused on fiscal analysis and financial projections of the pension program and various reform options, as well as basic operational analysis of the pension administration system. A comprehensive report "Public Sector Pension Scheme: From Crisis Management to Comprehensive Reform Strategy" was delivered in June 2008. Furthermore, under the Bank's Emergency Public Administration Project (EPAP)-II, assistance has been provided to the Government in drafting the new Pension Regulation. No other donors have been working on the issues of pensions directly. While UNDP had developed a project proposal for assessment and reform of the pension scheme for Martyrs and Disabled back in 2005, the funding was not secured promptly. The US Government-funded effort of modernization of the Afghan security sector led to formulation of some retirement provisions for the military, although with little or no coordination with the overall fiscal framework. The work supported by the Bank has led to the formulation of the project to implement the reform of the public pension system. At the point when significant donor support is needed on the implementation side of the reform, the Bank is seen by the 3 In addition, several other ministries and government agencies play an important role in social protection. In particular the Ministries of Rehabilitation and Rural Development, Education, Agriculture and Livestock, Public Health, Women's Affairs and Urban Development. 5 Government as an agency that possesses significant technical expertise needed for success of such an undertaking. 24. Social Safety Net. While the pension program remains focused only on a relatively small group of the population (likely composed of mainly non-poor), the needs for the social protection and capacity building in the sector are much broader. Some donors have already recognized the need and have begun providing resources to strengthening the capacity of MoLSAMD in delivery of social protection benefits and services. The European Commission, for example, has recently initiated a social protection project with the MoLSAMD to strengthen a public-private partnership for the provision of social care services at both national and sub-national levels. It focuses on the five provincial capitals and aims at developing replicable models of service delivery and improved capacity of strategic planning and implementation. Similarly, USAID has committed to supporting the reorganization and HR reform efforts within MoLSAMD as part of the broader Government effort of the public sector administration reform. There are initiatives by UNDP to support the Ministry of Economy in its mandate to implement effective monitoring and evaluation system to track implementation progress of the ANDS, although its scope would be across all the sectors covered in the ANDS. 25. At the same time, there is a need to gradually develop a well-targeted safety net and a coherent institutional framework for it. In this, the Government, as well as donors, is looking to the Bank to provide the necessary impetus. Given Bank's expertise in design and implementation of safety nets both in the region and internationally, the Bank would help the Government prepare a modest pilot safety net program for transferring resources (conditional or unconditional) to a selected subset of poor households. The fiscal sustainability and administrative arrangements of such a program and relevance to the Afghanistan context would be explored in designing the program. Consultations held with the Government and key donors in Kabul confirmed a strong demand for this program. 26. Particular attention would be paid to organizational and institutional aspects of safety nets design. International experiences suggests that safety nets are often planned and financed centrally but implemented locally as local authorities and communities are better able to identify the needy and reach them while national authorities set the rules and guidelines. Therefore, during the pilot phase, an implementation approach, which can fit into such a framework, could be developed and tested. While Afghanistan does not yet have elected local governments in connection with the implementation of the National Solidarity Program (NSP), it has developed NGO-supported representative structures in villages covered by the NSP, which might allow significant implementation authority to be divested to local levels. Given extensive support from the World Bank towards this process, there is strong rationale for developing synergies between the previous Bank's involvements and the activities of devising sustainable and coherent mechanisms for addressing the issue of poverty operating at the national scale. Project Development Objectives 27. The project development objectives are: (i) improve the administration of the public pension schemes; and (ii) pilot a modest social safety net program as a first step to developing a sustainable approach to safety nets in the country. By doing that, the project will contribute to the broader ANDS objectives to build a fiscally sustainable pension system and an affordable 6 social protection system, as well as strengthen the policy capacity and institutional framework of the MoLSAMD. Summary of Project Components 28. The project will have three components: (1) pensions, (2) safety nets, and (3) project management. The pension component has two sub-components: (a) designing new administrative arrangements for the public pension system; and (b) modernization of the existing pension system. The safety net also has two sub-components: (a) designing and implementing a pilot safety net program; and (b) strengthening the institutional capacity of MoLSAMD. For the implementation of these components and the project management component, the project will provide technical assistance, training, office renovations, equipment, materials, and cash payments for pilot. The components are as follows: Component 1: Pensions (a) Designing new administrative arrangements for the public pension system (US$2.5 million). This sub-component will help implement a reform of the administrative arrangements of the public sector retirement pension program, in line with activities of the broader public sector reform. Activities will include: (i) evaluation of existing systems and processes of the pension programs and design and implementation of new mechanisms of claims processing and benefit delivery; (ii) elaboration of operational procedures, manuals and guidelines, including training for staff; (iii) design and implementation of the new Management Information System (MIS) for the Pension Department (including software development, licenses, hardware procurement, backup system development, etc.); (iv) outsourcing of the new IT system maintenance; (v) securing basic office infrastructure and stable electricity supply for the Pension Department in Kabul; and (vi) developing a strategy for effective administrative integration of the payment systems of pensions for families of Martyrs and Disabled and the public sector retirement pensions. The MIS procurement will be implemented in two stages, whereby at the first stage, detailed system specifications will be drawn to constitute part of the tender documents for the second stage of selection of a provider to design or customize an MIS to support the claims processing and benefit payment functions. To ensure effective implementation of the contributory mandate established under the new Pension Regulation, support will be provided to strengthening the systems of pension contribution deduction, including public information campaign and training for personnel of the budget spending units responsible for payroll processing, necessary redesigning of accounting and treasury systems, ensuring effective compliance monitoring. These activities will be implemented in coordination with the MoF Revenue and Treasury departments. The project will hire a team of consultants to develop and implement the public awareness campaign for budgetary units in support of the new contributory mandate and rules of contribution processing. The project team will also work with MoF to define needs and to provide necessary technical assistance to strengthening the contribution compliance function within the MoF, as directed to 7 modernization of the existing monitoring and accounting mechanisms. For this purpose, the project will provide for training and consultancy services hired by PCU. Similarly, the project will help define needs and, through the PCU, will provide required technical assistance to the Fiscal Policy Unit of MoF in strengthening budgeting and financial management of the public pension schemes. The sub-component will provide for technical assistance; in-service training; equipment, materials and supplies related to the institution building; and some renovation works for the existing offices. Some initial preparations, e.g., on surveying operations of the existing schemes, have already been taken place under a Project Preparation Facility (PPF) advance. (b) Modernization of the existing pension system (US$0.8 million). This sub-component will deal with the legacy issues by systematizing and cleaning records of the old schemes. It will also enable evaluation of the project performance using beneficiary surveys. Activities will include: (i) design and implementation of pensioners census and the life certification process; (ii) digitizing of records of the old systems; and (iii) survey of pensioners of the existing schemes to monitor reform outcomes. These activities will cover both the public sector retirement schemes (civil service, military, police, etc.) and the pension scheme for the families of martyrs and disabled. Furthermore, the Government has expressed interest in exploring options of paying out some of the liabilities of the old public sector retirement scheme in the form of lump sums. This subcomponent will set the groundwork for this process by developing procedures of beneficiary selection for the payouts and proposing the payment mechanisms. The sub-component will include technical assistance; in-service training; equipment, materials and supplies. The following table depicts responsibilities of various agencies pertaining to operation of the pension programs and nature of the project support to their mandates. Agency Functions vis-à-vis pensions Project support Budgeting, planning, and oversight of the Strengthening capacity of the program MoLSAMD pension programs monitoring, budgeting, and planning Day to day administration of the public sector Strengthening administrative and management retirement pension program; planned transfer capacity to operate both the new and legacy Pension Department of the management responsibilities over the retirement schemes. Modernizing Martyrs & Disabled scheme administration of the pension system for families of martyrs and disabled. Budgeting and accounting of the program Strengthening capacity of the Revenue and finances. Collection and management of the Treasury departments of MoF in pension MoF pension contributions contribution compliance monitoring and audit. Strengthening capacity of the Ministry in the program fiscal analysis and budgeting. 8 Deduction of the pension contributions; Ensuring awareness of the new contributory Line ministries, budget support to the benefit application process mandate and supporting smooth spending units implementation of the new contribution Component 2: Safety Nets (a) Designing and implementing a pilot safety net program (US$2.7 million, including US$1.8 million benefit payments under the pilot scheme). This sub-component will help design a pilot safety net program and implement it over a period of two years. Towards the end of the project an operational evaluation will be undertaken to determine whether, and if so, how to scale up the scheme. The design phase was launched under the PPF advance, and it will be completed early during project implementation. The design of the pilot includes the selection of target groups and pilot areas. It is envisaged to apply the scheme in selected districts in two groups ­ some relatively more developed and the other poorer ones (as defined, e.g., in terms of income, infrastructure, availability of public sector services, etc.). The most recent household survey will allow detailed poverty mapping that will facilitate site selection. This approach will allow mechanisms to be tested in different circumstances. The design of the pilot safety net program will be reflected in a Pilot Safety Net Program Plan, to be prepared by the project, and will include the definition of eligibility and targeting processes, organizational and institutional arrangements (centralized and decentralized responsibilities; benefit award and delivery) information management, and monitoring and oversight mechanisms. All will be tailored to local realities. Whatever design is finally agreed on during the pilot design phase, implementation of that design would be closely monitored throughout the project, and an operational evaluation of the pilots would be undertaken to determine the feasibility of scaling up the scheme as well as the directions such a scaling up might take. The evaluation would focus on: institutional relationships; adequacy of operational processes (i.e., award and benefit delivery mechanisms); beneficiary and other stakeholder perceptions; costs and cost effectiveness of program delivery mechanisms; and unanticipated effects. The sub-component will include technical assistance; in-service training; materials and supplies. A total of US$1.8 million has been allocated for the payment of benefits under the pilot scheme. (b) Strengthening the institutional capacity of MoLSAMD ($0.5 million). The sub- component will improve capacity in MoLSAMD to (i) plan and administer its own social protection programs, including developing policies and strategies regarding eligibility, coverage goals and benefits; and using monitoring and evaluation techniques to assess program performance; (ii) develop and maintain a simple database on ongoing social protection activities, including data exchanges with the relevant external entities; and (iii) use the data base in advancing the national social protection agenda. The sub-component 9 will include technical assistance and training, including study tours; and equipment, materials and supplies related to institution building. Component 3: Project Management Strengthening capacity for program management ($1.0 million). This component will facilitate implementation of the project by using appropriate mechanisms of project management and proper tools of project progress monitoring. Activities will include: (i) consultancy services in the project management, financial management, procurement, etc.; (ii) design and implementation of training programs for management and staff; administration of the local/international workshop participation and study tours; and (iii) overall project implementation support. The component will provide technical assistance, training, equipment, materials and supplies. Eligibility for Processing under OP/BP 8.0 29. All projects in Afghanistan continue to be prepared under OP/BP 8.0. Specifically, the Pension Administration and Social Safety Net Project's eligibility under OP/BP 8.0 is based on the following: (a) The project is an integral part of the Bank's support to the state building in Afghanistan. It contributes to establishing efficiency, transparency, and accountability in the public service delivery in the country. (b) By reforming administration of the Pension Department, the project will support implementation of the new Pension Regulation recently introduced to complement the on-going reform of the Civil Service in Afghanistan. (c) Finally, the project responds to the urgent needs of the poverty alleviation in the country. While this is the first Bank-supported project in social protection in Afghanistan, it draws on experience from other Bank's projects, in particular the community development projects, as well as field level experience of other donors and agencies that have been extensively consulted during project preparation. In addition, project design draws on Bank's experience and lessons learned in developing social insurance and assistance schemes in other parts of the world, including conflict and post- conflict areas. Consistency with the Interim Strategy Note (ISN) 30. The proposed activities are fully in line with the current ISN for Afghanistan, specifically in supporting the Government's efforts of reducing poverty, strengthening governance, and improving service delivery. Furthermore, as part of the Safety nets component, the project will seek to build upon the previous Bank's involvement in promoting community participation to support and monitor social services provision. 10 31. The project is an integral part of the Bank's program and instruments as outlined in the ISN. Expected Outcomes 32. Progress towards achieving the project development objectives will be measured by a set of the primary and intermediate outcome indicators as defined in Annex 2. In summary, by the end of the project, the following would have been achieved: · Pensions Outcome indicators: (i) A central register provides computerized record-keeping of participants and flow of funds, (ii) improved services to beneficiaries, (iii) improved revenue and financial management of the pension programs, and (iv) streamlined monitoring, budgeting and planning of the pension program. Process indicators: o New operational procedures, rules, and record-keeping systems would be developed; mandates for the units and staff clearly defined; o Staff of the Pension Department would be trained in implementation and management of the programs; o Budget units of various ministries would be trained in deducting and remitting pension contributions and transferring to the special account of the pension program; a contribution compliance monitoring function within MoF would be strengthened; o A robust management, monitoring, and financial planning systems would be put in place both in MoLSAMD and the Fiscal Policy Unit of the MoF; regular information on pension beneficiaries would be obtained from the provincial offices and consolidated in the center; o Arrears in pension payments would be assessed and strategy to gradually eliminate them would be defined; o Census of pensioners would be conducted and ineligible payments be removed from the payroll; a life certification mechanisms would be introduced; o Claim processing time (including the ones from provinces) would be shortened and system of benefit payments would be modernized; o Strategy of integration of operation of the public sector retirement pensions and the pensions for the families of martyrs and disabled would be developed and implemented; · Safety net Outcome indicators: Safety net framework developed and tested; evaluation of the pilot program undertaken. Process indicators: o Criteria for selecting the households targeted under the pilots would be developed and applied; o Targeting instrument(s) would be defined and applied; o Beneficiary registries would be developed and applied for benefit delivery, control, audits; o The process for benefit delivery would be defined and operational; 11 o Pilot schemes incorporating benefit eligibility verification, award and delivery, control and audits would be developed and implemented; o Indicators for monitoring pilot implementation at each stage of the program cycle would be in place and in use o Staff of MoLSAMD would be trained in safety net planning, and overall program management and implementation oversight D. Appraisal of Project Activities 33. Economic and financial analyses. The proposed project will support the implementation of a new public sector pension scheme with modernization of an administrative platform to process claims, deliver benefits and monitor performance of the scheme. The reform of pension administration would contribute to better quality services delivered to the beneficiaries of the pension scheme and improved transparency. 34. Through reinforcement of the contributory mandate of the public sector pension scheme and improved planning capacity on the benefit payment side, the fiscal management of the pension program would be strengthened and financing of the scheme would gradually move away from the subsidy base to the fully sustainable contribution principle. 35. As indicated in Annex 9, if the new contributory mandate gets fully implemented, as supported by this project, and the Pay and Grading reform progresses as planned, the balances of the public sector pension scheme could be completely reversed within the timeframe of the project. Today, subsidies constitute around 80 percent of the total expenditures of the scheme or over US$30 million annually. Within four to five years, the system could generate a temporary surplus of a similar magnitude that could be used to clear some of the accumulated liabilities of the legacy scheme. 36. The project will contribute to addressing inefficiencies of the legacy programs by enabling the census of beneficiaries and the cleanup of the legacy records. These activities will lay the groundwork for the Government to develop and assess options of partial liquidation of liabilities of the legacy schemes. 37. The safety net component would set the basis for a mechanism that would allow more efficient channeling of scarce public resources to the neediest among the population. This would be achieved through design, implementation, and subsequent assessment of a pilot safety net program with subsequent recommendations on a scaling up strategy. 38. Technical. The proposed project is designed to help the Government implement a reform of administration of the pension system and begin to introduce safety nets as outlined in the Social Protection program of ANDS by providing technical support otherwise not available in the country towards: (i) setting up new institutions and systems including MIS for claims processing and benefit payments of the pension programs as well as robust monitoring, budgeting and evaluation mechanisms, (ii) developing a workable program of modest but scalable social safety nets, and (iii) building capacity within MoLSAMD to plan and administer interventions in the social protection. 12 39. Financial Management. The Project will be implemented by the MoLSAMD, the nodal agency for the proposed project. A Project Coordination Unit (PCU) has been established within MoLSAMD, under direct supervision of GMU. The PCU will handle the financial management arrangements under the Project. The PCU will benefit from the existing capacity of the GMU. A dedicated Financial Management specialist will be hired by the PCU for the duration of the Project. The implementation arrangements are designed to ensure transparency and efficient fiduciary arrangements and will be adequate to account and report for project resources and expenditures. 40. Procurement. The key risks associated with procurement have been identified in the risk table presented below. A dedicated Procurement Specialist will be hired by the PCU for the duration of the Project. The Specialist will be responsible for procurement management under the project. 41. Social. During project preparation, a series of strategic consultations with government and other stakeholders was carried out to understand current status of the pension program. There is no gender or age disparity in operationalizing the pension reform as envisioned by the Government. Neither will there be a disparity associated with defining and implementing the safety nets objectives and the program, including the pilot. Ethnic and cultural considerations will be mainstreamed into the pilot design to ensure equal and culturally appropriate accessibility for minority or otherwise disadvantageous populations. 42. Environment and safeguards. No resettlement or land acquisition will take place in the project and the project will have no impact on the environment; only renovations of the existing offices, as minor civil works, will take place; therefore, the project is rated as environmental category C. At the same time, the Government will ensure that all such civil works carried under the Project are carried out in accordance with its Environmental and Social Safeguards Framework. E. Implementation Arrangements and Financing Plan 43. Institutional arrangements. The governance structure of the project has been approved by the President and consists of a high level Steering Committee, two Technical Working Groups -- one for the pension component and another one for the safety net component, and a Project Coordination Unit (PCU). 44. The Steering Committee is chaired by the Minister of MoLSAMD and includes Deputy Ministerial level members of ministries and agencies most concerned with issues of pensions and social protection (MoF, MoWA, MRRD, IARCSC and MoLSAMD). The Steering Committee oversees project implementation and addresses inter-sectoral issues that may arise during the design and implementation of the pilot scheme. 45. The Technical Working Groups also have a broad representation of ministries and agencies concerned with pensions and safety nets, respectively. The working groups are headed by Deputy Ministers of MoLSAMD and include technical staff with good knowledge of pensions and safety net issues. Their tasks are to monitor development of project design and technical aspects of its implementation, including recommendations for adjustments to project design 13 before they are submitted to the Steering Committee. Likewise, they review quarterly reports on project progress before they go to the Steering Committee. 46. MoLSAMD is the nodal ministry for pensions and social protection and is therefore the logical prime counterpart for project implementation. 47. MoLSAMD is assisted by a Project Coordination Unit (PCU) that has been established under supervision of the Ministry's Grant Management Unit (GMU). The GMU has been accumulating capacity in project design and implementation (e.g., in procurement, financial management, etc.), and the proposed project will greatly benefit from this experience at the very outset. The GMU is staffed with the administration, procurement, and financial management teams, along with teams supporting project design, monitoring and evaluation, and economic and financial analysis. The M&E unit of GMU, in particular, will help with implementation of the beneficiary survey to set baseline for tracking the project performance over time. 48. The PCU is staffed with local and international consultants who will work with Ministry staff on project implementation. The MoLSAMD, through its GMU, will oversee the day-to-day work on both components. On pensions, the work is coordinated with MoF (as pertains to strengthening the systems of contribution collection monitoring and accounting as well as fiscal analysis and budgeting) and the IARCSC (as pertains to coordination with a broad set of activities of the public sector reform and implementation of HR policies). On safety nets, the PCU is responsible for ensuring that activities are coordinated with the major government agencies and donors involved in the sector. Financing plan 49. The tables that follow show the allocation of IDA proceeds and the expected co- financing. The single category for "goods, works, consultancy services, training, and operating costs" is defined in the financing agreement to facilitate preparation of withdrawal applications and record-keeping. There is a disbursement condition for Category 2 ensuring that IDA receives the Steering Committee's approval of the program plan(s) for the piloting of safety net programs, as set forth under the Covenants for this project. IDA Financing by Category of Expenditure (US$ million) Category Amount of the Grant Percentage of Expenditures to Allocated be Financed (Inclusive of Taxes) (1) Goods, works, consultants' 4,850,000 100% services and Incremental Operating Costs for the Project4 (2) Pilot Benefits under 1,800,000 100% 4 Incremental Operating Costs refers to operating costs of the PCU incurred on account of implementation of the Activities, including vehicle rental and other transportation costs, office rental and maintenance, utilities, telecommunications, and other incident costs, office equipment and consumable supplies, bank charges and advertising costs. 14 Component 2 (a) of the Project (3) Refund of Preparation 850,000 Advance TOTAL AMOUNT 7,500,000 Estimated Co-financing (US$ million) IDA ARTF JSDF Beneficiaries Total 7.5 7.5 50. Annex 3 summarizes cost estimates for the Project and its components. It is anticipated that the total of US$7.5 million will be required to finance activities in support of the objectives stated for this project. 51. Procurement. Procurement for the proposed project would be carried out in accordance with World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits " dated May 2004, revised in October 2006 and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, revised in October 2006, and the provisions stipulated in the Financing Agreement. 52. 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. 53. IDA has agreed to allow the GMU/PCU to carry out small value procurement. All large value procurement of goods (NCB/ICB), including hiring the services of consultants, will be carried out with the assistance and guidance of the Procurement Facilitation Unit of the Afghanistan Reconstruction Development Service (ARDS-PU) under the Ministry of Economy. IDA will conduct capacity building programs for MOLSA/GMU procurement staff to mitigate procurement-related risks. In addition, several capacity building programs for MoLSAMD staff have been agreed at international and in the country level. (See Annex 5 for further details.) 54. The Procurement Manual will be prepared by MoLSAMD as part of the Project Implementation Plan (PIP) to be approved by the Bank. 55. Financial management (FM), disbursement and 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. 15 56. Financial management and audit functions for the proposed project will be undertaken through the agents contracted under the IDA-financed Public Administration Capacity Building and the Public Financial Management Reform projects. 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 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 Agent (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. 57. At the project level, a Project Coordination Unit (PCU) has been established within MoLSAMD under direct supervision of its Grants Management Unit (GMU). The GMU will undertake responsibility of supervision of implementation of the financial management functions by the PCU. 58. Quarterly Financial Monitoring Reports will be prepared by the PCU every quarter and submitted to the Bank within 45 days from the end of the quarter. Corresponding consolidated annual reports will be prepared, reviewed, and approved by the MoF, supported by the FMA. 59. 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 submitted monthly. Financial management arrangements for the project are stated in details in Annex 4. 60. 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 Adviser 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 MoF. Requests for payments from DA funds will be made to the SDU by MoLSAMD. In addition to payments from DA funds, MoLSAMD can also request the SDU 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 procedures. All withdrawal applications to IDA, including advances, reimbursement, and direct payment applications, will be prepared and submitted by MoF. 61. Accounting and Reporting. The PCU/GMU will maintain essential project transaction records using computerized accounting system and/or Excel spreadsheets and generate required monthly, quarterly, and annual reports. 62. The FM Manual, to be prepared by MoLSAMD, as part of the Project Implementation Plan (PIP), and to be approved by the Bank, will include: i) roles and responsibilities for all FM staff, ii) documentation and approval procedures for payments, iii) project reporting requirements, and iv) quality assurance measures to help ensure that adequate internal controls and procedures are in place and are being followed. 16 63. 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 recording and reporting of project expenditures. Overall project accounts will be maintained centrally in SDU, which will be ultimately responsible for recording of 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 PCU. 64. Disbursement Method. Disbursements from the 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. 65. 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. Annual audited project financial statements will be submitted within six months of the close of GoA's fiscal year. 66. Monitoring and evaluation of results under the Pension component will draw on the information consolidated as part of implementation and operation of a new Management Information System (MIS) that will avail data on physical and financial progress of implementation. The MIS would produce timely reports and track achievement of selected project performance indicators. In addition, a beneficiary survey has been designed and is being implemented under the Project Preparation Facility (PPF) and with Technical Assistance from the World Bank to define and trace a set of outcome indicators associated with the pension component of the project. 67. Under the Safety nets component, monitoring and evaluation mechanisms will utilize process and impact information generated by qualitative and quantitative surveys undertaken by the PCU and the MoLSAMD units involved with implementation of the pilot. Staff at headquarters and in local offices will be trained under the project in the application of monitoring and evaluation techniques, and in the adaptation of policy and program strategies to their findings. 68. Overall, the project will be assisted by the Monitoring and Evaluation unit of the GMU. 69. To ensure timely and effective implementation, the Banks technical team will undertake supervision and implementation support missions to the country at least three visits per year. 70. It is planned that the grant would become effective on December 31, 2009 and would close on December 31, 2013. F. Project Risks and Mitigating Measures 71. Security Risks. The security situation in Afghanistan remains precarious and poses a risk to all development activities, particularly those that involve working in rural areas. Operation of modernization of the pension system, however, will largely be focused on the central office of the Pension Department where most of the claims and payments are being processed. In provinces the work will be focused on the departments in the district capitals. While safety net 17 work will cover analysis, pilot(s), evaluation, and development activities with nation-wide implications, pilot activities will be limited to areas where the security risk is relatively low and the roll out phase for the safety net program subsequent to this project will occur with a view to the evolution of the security situation in the country. 72. Political Risks. While the 2009 elections may bring changes in leadership, support for the pension reform program has been diversified across the ministries of the Government given the multi-agency approach to the pension reform design work. Furthermore, Pension Regulation has recently been promulgated in the Cabinet without major changes. It is unlikely therefore that the plans for implementation of the new pension program will be reversed. With regard to the safety net, there is broad recognition of the need for initiatives to protect poor and vulnerable population groups. Moreover, there is broad consensus on piloting a poverty benefit that consolidates resources going into poverty relief and improves the targeting of such resources. 73. Operational Risks. The modernization effort of the Pension Department assumes building basic but robust infrastructure for benefit delivery. Without (a) proper customized software and trained staff, (b) stable electricity supply, and (c) robust communication system with the provincial offices, the new systems are not likely to be successful. All these aspects have been considered as part of the project design. With regard to the social safety net component operational risks have been minimized proposing a phased approach to implementation. Risk Description of risk Ratinga of Mitigation measures Ratinga of factors risk residual risk Sector, Governance, Policies and Institutions Sector · So far, MoLSAMD has been weak in Substantial · The ANDS provides a strategic and Substantial Specific exercising leadership in social policy framework that facilitates Risks protection, and it has only partial coordination of the kind envisaged understanding of initiatives in other under the project. The project itself ministries and of donor activities. This will provide support to strengthening risks leading to inefficiencies in the SP the planning and management system: Consequently, while donor functions within MoLSAMD. resources are abundant, they may not be used well, and the impact of very limited domestic resources may be diminished. The situation is exacerbated by the relatively low capacity for planning and program management in MoLSAMD. Political / · The 2009 elections may bring Substantial · Support for the pension reform Moderate Country changes in leadership across ministries program has been diversified across ownership involved with the pension reform effort the ministries of the Government so far. As a result, Government given the multi-agency approach to commitment to reforms may weaken in the pension reform design work. It is the transition to a new Government. unlikely therefore that the plans for implementation of the new pension program will be reversed, even more so after the recent promulgation of 18 the Pension Regulation. Likewise, there is broad consensus on the need for constructive action for the poor. Political/ · The Government focus on the need of Substantial · Recently adopted ANDS SP Moderate Sector design of a coherent national safety net strategy indicates government policies and program may weaken as impact of the commitment to instituting an institutions recent food crisis wears out affordable safety net system. Externally too, from the multiple donors involved in the sector, there is a call for a well-coordinated and 74. targeted social protection policies. Operation-specific Risks Technical · Government reform proposal Substantial · The project implementation Moderate Design foresees operational integration of the schedule will be developed in such schemes for retirement pensions and way that all the critical reform pension for families of Martyrs and activities are stages rather than Disabled. This may put additional approached simultaneously. Likely stretch on the Pension Department at the first core activity will be the time when it will involve an modernization of the public sector extensive effort of operational retirement scheme, while integration modernization of the retirement with the Martyrs and Disabled scheme. scheme will follow. · In safety nets, implementation of a · A staged approach is suggested for new scheme represents a considerable the scaling up. At the initial stage, a challenge in the environment with stock taking exercise will limited policy formulation and recommend a particular pilot design implementation capacity. for the policy makers; the pilot would be implemented in a limited set of communities; subsequently the pilot will be evaluated and a scale up strategy will be developed. Implementati · Lack of capacity within the Ministry Substantial · The project has a specific Substantial on Capacity to implement the reform in the time component on building capacity of And frame envisioned. the implementation agency at all Sustainability levels. · Implementation of MIS has serious · Staged approach will be adapted to contingencies in timing, budget, and implementation the new IT system, overall success whereby at the first stage detailed specifications will be drawn (under the PPF) by an experienced MIS consultant and only then the shortlist of potential providers will be compiled. · Modernization effort of the Pension · The project will provide for (a) Department and on-going operation of stable electricity supply in the MIS will require basic but robust Pension Department, and (b) infrastructure of power supply, redundancies of the paper and communications, etc., which are still electronic document tracking, ­ both weak in the country. to ensure steady uninterrupted work flow and sustainable modernization effort. Financial · Administrative and fiduciary capacity Substantial · Best practices for accountability Substantial 19 Management of MoLSAMD is weak. and transparency of programs will be applied. Specific lessons from the country experience will be utilized and training will be provided. The GMU within the Ministry will provide an initial support. The Project Implementation Plan (PIP) will have a separate section of Financial Management Manual. Procurement · Procurement capacity is weak. High · Dedicated procurement officer will Substantial be recruited. The GMU will provide an initial support. Coaching and training will be provided in procurement, primarily on consultant selection and information systems, as the project will finance these categories. The Project Implementation Plan (PIP) will contain section with the Procurement Manuals detailing the procedures and standard documents to be used. Social and · No safeguard policies are expected to No risk Environmenta apply to the proposed project. l Safeguards Overall Risk Substantial (due to country and sector-specific risks) a Rating of risks on a four-point scale ­ High, Substantial, Moderate, Low ­ according to the likelihood of occurrence and magnitude of potential adverse impact. G. Terms and Conditions for Project Financing 75. The project is supported by an IDA Grant and will finance 100 percent, including taxes, of project activities. 76. Disbursement of the pilot benefit cash grant under Component 2 of the project will be conditional upon satisfactory furnishing to the Association of the documentary evidence of the Project Steering Committee approval of the Pilot Safety Net Program Plan containing detailed program implementation parameters for the pilot scheme(s) including principles and procedures for the selection of targeted group(s) and covered areas, determination of benefits, financial management modes, administrative arrangements, monitoring and impact evaluation mechanisms, definition of roles and responsibilities of various departments of MoLSAMD both at the central and provincial levels and other involved agencies. 77. Condition of Effectiveness: Prepare by the time of effectiveness of the Project, a Project Implementation Plan (PIP) acceptable to the Association. The PIP shall include: (i) an outline of the responsibilities of the staff of the PCU as well as the Project Steering Committee and the Technical Working Groups; (ii) a description of a coordination mechanism between the PCU and both the PSC and TWGs as well as external agencies; (iii) a Financial Management manual incorporating policy and procedures, acceptable to the Association, regarding accounting, reporting, disbursement, internal control and audit mechanisms and procedures; and (iv) 20 Procurement manual incorporating procedures and model contracts for services and goods as set forth in the Procurement Plan. 78. Covenants. The Government of Afghanistan shall: (i) maintain, throughout the period of the implementation of the Project, a Project Steering Committee (PSC) chaired by the Minister of MoLSAMD, including deputy ministerial level representation from MoF, IARCSC and other ministries to monitor the overall progress of the Project, including approving proposed annual Project implementation plans; (ii) maintain, throughout the period of the implementation of the Project, the Technical Working Groups (TWG) with representation of ministries/agencies concerned with pensions and safety nets, respectively, to facilitate coordination and implementation of both the pensions and the safety net components of the project; (iii) maintain, throughout the period of the implementation of the Project, a Project Coordination Unit (PCU), within the MoLSAMD, with terms of reference and staffing as per the PIP, acceptable to the Association, which will under the supervision of MoLSAMD and guidance of the PSC be responsible for the overall coordination and supervision of the execution of the Project, including undertaking procurement and carrying out financial management, and monitoring and evaluation of the Project; (iv) cause MoLSAMD through the PCU to coordinate with MoF on the implementation of activities related to strengthening contribution compliance function. In this respect the PCU shall be responsible for providing training and consultants' services to assist MoF in strengthening monitoring compliance. MoF shall remain responsible for contribution collection and compliance monitoring. (v) require the MoF to 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 Bank; (vi) require the PCU to submit to the Bank un-audited project interim financial reports on a quarterly basis and a copy to SDU-MoF within 45 days after the end of each quarter; (vii) require MoLSAMD to ensure that key FM staff of the PCU are retained throughout the duration of the project in order to ensure smooth project implementation. 21 Annex 1: Detailed Description of Project Components AFGHANISTAN: Pension Administration and Safety Net Project 79. The project development objectives are to improve administration of the public pension schemes (civil service, security sector, and families of martyrs and disabled) as well as to pilot a modest safety net program as a first step to developing a sustainable approach to safety nets in Afghanistan, including the institutional capacity to make social protection policy and deliver social protection programs. By doing that, the project will contribute to the broader ANDS objectives to build a fiscally sustainable pension system and an affordable social protection system, as well as strengthen the policy capacity and institutional framework of the MoLSAMD. To meet the objectives, the project will do the following: (a) improve administrative capacity of the Pension Department to operate public pension schemes; and by doing so, ensure effective implementation of the new Pension Regulation that introduces a fiscally sustainable pension system for public sector employees and improve transparency of the legacy schemes; (b) develop a policy framework for safety nets and on that basis implement pilot activities to transfer resources in cash and/or kind to a subset of very poor households (conditional or unconditional); and use the findings from the pilot to develop a scaled up approach to safety nets; and (c) develop capacity in MoLSAMD to plan and administer program implementation in pensions and safety nets. 80. The project will have three components: (1) pensions, (2) safety nets, and (3) project management. The pension component has two sub-components: (a) designing new administrative arrangements for the public pension system; and (b) modernization of the existing pension system. The safety net also has two sub-components: (a) designing and implementing a pilot safety net program; and (b) strengthening the institutional capacity of MoLSAMD. For the implementation of these components and the project management component, the project will provide technical assistance, training, office renovations, equipment, materials, and cash payments for pilot. Component 1: Pensions 81. Within the context of the administrative reform of the public pension system, the project will have two principal sub-components. Sub-component I will deal with design and implementation of the modernized operational framework for the reformed pension schemes. Sub-component II will deal with the legacy issues by systematizing and cleaning records of the old schemes; it will also enable evaluation of the project performance using beneficiary surveys. 82. Sub-component (a): Designing new administrative arrangements for the public pension system (US$2.5million). This sub-component will help implement a reform of the administrative arrangements of the public sector retirement pension program, in line with activities of the broader public sector reform. 22 83. This sub-component will include provisions of technical advisory services, goods, training, and office renovation works to the MoLSAMD for the implementation of: (i) Evaluation of existing systems and processes of the pension schemes and design of new mechanisms of claims processing and benefit delivery. This will include extensive operational survey of existing systems and processes (civil service, military/police pensions, and benefits for the martyrs and disabled), gap analysis, benchmarking and design of new processes and terms of reference for various units. (ii) Design and implementation of the new Management Information System (MIS) for the Pension Department. This will include design of specifications for the new software and hardware (to be implemented under the PPF); software development, licenses, and testing; hardware procurement and installation; backup system development, etc. The software will deal specifically with functions of claim processing, benefit calculation and authorization, payments (both in centers and the provinces), reporting, etc. On the Pension Department side, no individualized records of contributions will be maintained. (iii) Outsourcing of the IT system maintenance. For the duration of the project, the costs of external system maintenance will be covered. This is to ensure efficient troubleshooting and smooth system operation during the initial states of operation. (iv) Strengthening systems of pension contribution deduction, accounting, record keeping, monitoring, and compliance enforcement. A team of technical experts, as supported by the PCU, will develop and implement public awareness campaign and provide training to the budget spending units on procedures of deduction, accounting, and reporting of the new pension contributions. The project team will also work with MoF to define needs and to provide necessary technical assistance to strengthening the contribution compliance function within the MoF, as directed to modernization of the existing monitoring and accounting mechanisms. For this purpose, the project will provide for training and consultancy services hired by PCU. Similarly, the project will help define needs and, through the PCU, will provide required technical assistance to the Fiscal Policy Unit of MoF in strengthening budgeting and financial management of the public pension schemes. (v) Developing strategy for effective administrative integration of the record-keeping and payment system for pensions for families of Martyrs and Disabled with the civil service retirement pensions. Activities will include operational survey of the payment practices of the program and design of the new benefit delivery mechanisms in line with the principles defined for the public sector retirement pension program. (vi) Support will be provided to upgrade the basic office infrastructure of the Pension Department in Kabul. This in particular will help ensure client friendly operational environment. Furthermore, operation of the new MIS will require provision of stable alternative electricity supply for the Pension Department in Kabul. 84. Sub-Component (b): Modernization of the existing pension system (US$0.8million). This sub-component will deal with the legacy issues by systematizing and cleaning records of the old schemes; and will enable evaluation of the project performance using beneficiary surveys. The sub-component will include provisions of technical advisory services, goods, and training to implement the following activities: 23 (i) Digitizing of records of the old schemes. This will cover assessment of the types, locations, and quality of the existing pension records. Furthermore, it will require development of a software utility and training of a dedicated technical team to capture records of the legacy schemes. Various data exceptions will be categorized and dealt with in systematic manner. (ii) Design and implementation of the pensioners' census and the life certification process. Based on the record consolidated on electronic media, and process specifications to be defined, a census of retirees will be conducted (including Kabul and the provinces); it will help verify legitimacy of existing payments and clean database from the ghost payments and duplicate records; it will facilitate assessment of the outstanding stock of pension liabilities towards existing retirees and their survivors. A robust life certification mechanism will be designed and implemented in parallel to the census as a mandatory new element of the pension program to ensure quality of pension records going forward. (iii) Survey of pensioners of the existing schemes will be conducted to monitor reform outcomes. The above activities will cover both the public sector retirement schemes (civil service, military, police, etc.) and the pension scheme for the families of martyrs and the disabled. Furthermore, the Government has expressed interest in exploring options of paying out some of the liabilities of the old public sector retirement scheme in form of lump sums. This subcomponent will set the groundwork for this process by developing procedures of beneficiary selection for the payouts and proposing the methods for public notification, application, verification, claim processing, amount calculation, and payments. Component 2: Safety nets 85. Sub-component (a): Designing and implementing a pilot safety net program (US$2.7million, incl. US$1.8million benefit payments under the pilot scheme). This sub- component will implement the pilot safety net program and assess the results, including examining alternatives for eventual scaling up. This will include technical assistance in developing mechanisms for enrollment, eligibility determination, payment, and control and accountability mechanisms. The design phase was launched under the PPF advance, and it will be completed early during project implementation.. The sub-component will include (i) award and payment of benefits in cash and/or in kind to beneficiary households; (ii) technical assistance (see above); (iii) in-service training; and (iv) equipment, materials and supplies related to the scheme. 86. In preparing the pilots for implementation, the following design work will have been undertaken: the characteristics of families that need support (the targeting mechanism) defined; the form and size of benefits to transfer or services determined; the administration modalities determined, including: beneficiary selection process; benefit delivery mechanism; verification system; monitoring and evaluation systems; management information system; inspection and technical supervision; and inter-agency coordination. 24 87. International experiences suggests that safety nets are often planned and financed centrally but implemented locally as local authorities are better able to identify the needy and reach them while national authorities set the rules and guidelines. Therefore, during the pilot phase, an implementation approach could be developed and tested which can fit into such a framework. While, Afghanistan does not yet have elected local governments, in connection with the implementation of the National Solidarity Program (NSP), it has developed a representative structure in villages covered by the Program that could function in the interim as facilitator of the local government function. This structure includes an elected group called the Community Development Council (CDC) and an elected District Development Assembly (DDA). An approach, which could evolve into a sustainable solution for the country, would be to use the CDCs as partners to implement the safety net pilot. In this role, they would be contracted by MoLSAMD to implement the pilot according the program criteria which would be spelled out in an agreement. CDCs would identify the beneficiaries according the targeting criteria and administer the program. MoLSAMD would plan, finance, monitor and supervise the implementation. MoLSAMD would also use services of facilitating partners. Once local governments are created, this approach could easily fit in with conditional fiscal transfers under fiscal decentralization. 88. During implementation, these mechanisms will be tested and assessed to determine the feasibility of the design, as well as adjustments to it, and cost implications ­ all with a view to a gradual scaling up of the scheme, if that proves feasible. To ensure that the experience will be valid, extensive technical assistance will be provided for the design, and the work will include the following: (i) A high level strategy and definition of the pilot program, including targeted group(s) and/or areas, principles of targeting and eligibility assessment, financial management modes, monitoring and impact evaluation provisions. (ii) Design and implementation of pilot schemes ­ administration, financing, operating procedures ­ for a basic safety net program that would provide support in cash or in kind to a pre-determined subset of very poor households. This will also include a rigorous impact evaluation of the pilot schemes and recommendations for expansion on a national scale. A complete and comprehensive set of operational manuals would have been prepared to put the proposed strategy of the safety net implementation in action. This will include definition of roles and responsibilities of various departments of MoLSAMD (including in the provinces) and other involved agencies as well as sharp financial management provisions to secure safe channeling of the grant money to the identified beneficiaries. 89. The design of the pilot safety net program will be reflected in a Pilot Safety Net Program Plan to be prepared by the project. This document will be submitted for review and endorsement to the government prior to the pilot roll out. 90. Sub-component (b): Strengthening the institutional capacity of MoLSAMD (US$0.5million). The sub-component will improve the capacity in MoLSAMD to (i) plan and administer its own safety net programs, including using monitoring and evaluation techniques to do so; (ii) develop and maintain a data base on ongoing social protection activities in the country; 25 and (iii) use the data base in advancing the national social protection agenda. The sub- component will include technical assistance and training, including study tours; and equipment, materials and supplies related to the institution building. 91. The project will in particular include a series of the workshops and training in-country and outside Afghanistan (to expose the policymakers and senior management to the regional and international practices) as well as implementation of the supporting information management systems with a longer term view to link information systems of various programs; and it will develop public information/outreach programs to ensure effective implementation of the pilot in the selected locations. Component 3: Project Management 92. Strengthening capacity for program management ($1.0mil). This component will ensure adequate capacity in the policy analysis and program management and will facilitate implementation of the project by using appropriate mechanisms of project management and proper tools of project monitoring. It will include provisions of technical advisory services, goods, and training in support of the following activities: (i) Consultancy services in the project management, financial management, procurement, etc.; (ii) Design and implementation of training programs for management and staff in policy and reform as well as in technical aspects of the project management (planning, supervision, financial management, procurement, etc.); administration of the local/international workshop participation and study tours; and (iii)Overall project implementation support. (See Annex 6 for further details.) 26 Annex 2: Results Framework and Monitoring AFGHANISTAN: Pension Administration and Safety Net Project Results Framework Project Development Project Outcome Indicators Use of Project Outcome Outcomes Information 1. Administrative capacity of the · A central register provides · Assess efficiency of business Pension Department to operate computerized record-keeping of processes in the Pension Department; public pension schemes participants and flow of funds; monitor capacity to operate the improved program and legitimacy of benefits · Improved services to · Monitor service quality and user beneficiaries satisfaction · Improved revenue and financial · Monitor fiscal position of the public management of the pension pension programs programs · Streamlined monitoring, · Monitor capacity to do planning and budgeting and planning of the budgeting pension program 2. A modest safety net program as a · Safety net framework developed · Use the framework and pilot test for first step to developing a and tested. An evaluation of the dialogue towards a sustainable sustainable approach to safety pilot program undertaken national safety net program including nets in Afghanistan piloted appropriate institutions to develop and implement social protection. Intermediate Outcomes Intermediate Outcome Use of Intermediate Outcome Indicators Monitoring Component One: · The Pension Department has · Developed new operational · Rate of development of central efficient and transparent procedures and rules, record- register to identify bottlenecks in administration keeping systems (hardware and processes, procedures, training software), TORs for the departments and staff, and fully trained staff of the Pension Department · Legacy schemes modernized. Eligibility verification Monitor implementation of the procedures defined, pensioners eligibility rules census conducted · Improved services to · Claims processing and benefit beneficiaries payment time shortened · Contribution compliance · Contribution compliance section · Progress with implementation of the monitoring and enforcement within MoF established and contributory mandate of the new within MoF strengthened; proper monitoring systems scheme introduced 27 Component Two: · The safety net pilot program has · Parameters of a safety net · Determine feasibility and been successfully implemented in program defined. effectiveness of a comprehensive a limited number of provinces · Mechanisms to award and safety net program · MoLSAMD has capacity to deliver benefits in place. · Evaluate outcomes and determine if undertake knowledge-based policy Computerized implementation and how to scale up the pilot formulation tracking system in place and operational Component Three: · Project management ensures · Project implementation · Determine bottlenecks in project professional implementation of the according to schedule implementation project · Fiduciary obligations fulfilled 28 Arrangements for results monitoring Target Values Data Collection and Reporting Project Outcome Indicators Baseline YR1 YR2 YR3 YR4 Frequency and Data Collection Responsibility Reports Instruments for Data Collection 1. A central register provides Legacy paper Program of n/a New systems All systems in Ongoing Pension Pension Dpt computerized record-keeping based institutional and piloted and Pension tracking Department of participants and flow of mechanisms administrative implemented Department fully funds reform defined. operational 2. Improved services to n/a Beneficiary survey n/a n/a Survey indicates YR1/YR4 Beneficiary Pension Dpt/ beneficiaries. designed and improved survey PCU conducted; beneficiary baseline defined satisfaction 3. Improved revenue and n/a Requirements for Public On-going training Financial Annual Reports from PCU financial management of the the revenue information for the budget management and MoF Revenue pension programs. administration and campaign spending units compliance and Treasury monitoring designed monitoring departments function defined systems in place 4. Streamlined monitoring, Highly Mechanisms and 1/3 of provincial 2/3 of provincial all provincial Annual Records in Pension Dpt budgeting and planning of the aggregate formats of data offices covered offices covered offices covered Pension pension programs. reports exchange and with new data with new data with new data Department consolidation consolidation and consolidation and consolidation and (including reporting process reporting process reporting process provinces) developed 5. Safety net framework None Baseline Pilot in select Pilot Evaluation Semiannual MoLSAMD MoLSAMD/ developed and tested. An parameters of the locations implementation activities M&E team PCU evaluation of the pilot pilot defined and initiated; completed; conducted and program undertaken agreed; training evaluation team scaling up initiated trained strategy defined 29 Intermediate Outcome Baseline YR1 YR2 YR3 YR4 Frequency and Data Collection Responsibility Indicators Reports Instruments for Data Collection 6. Developed new operational None Departmental New operational MIS system Staff fully trained Quarterly Operational Pension Dpt procedures and rules, record- structure and TOR procedures and implemented and in new survey keeping systems, TORs for of staff defined rules defined fully aligned with procedures and the departments and staff, and the new procedures uses of the MIS fully trained staff of the and rules Pension Department 7. Legacy scheme modernized. Weak Census procedures Census Census completed MIS systems Ongoing Pension Pension Dpt Eligibility verification verification defined; staff completed for for the martyrs and fully cover tracking Department procedures defined and mechanisms; trained; census public pension disability pension management of pensioners census conducted No census initiated program. program. the legacy conducted Necessary data Necessary data programs consolidated, consolidated, records cleaned records cleaned 8. Claims processing and benefit n/a New procedures Training Claim processing Claim processing Annual Records in Pension Dpt payment time shortened defined provided; time in Kabul time in provinces Pension implementation shortened shortened Department of new procedures initiated 9. Contribution compliance n/a Necessary changes Training on Training on Regular Ongoing Reports from MoF / PCU function within MoF in the existing deduction deduction contribution tracking MoF Revenue strengthened monitoring and processing and processing and compliance and Treasury accounting reporting reporting provided reports produced mechanism provided to half to all institutions by MoF introduced. of institutions 30 10. Parameters of a safety net None Pilot Safety Net Pilot in select Pilot n/a On-going Record in PCU MoLSAMD/ program defined Program Plan locations initiated implementation tracking PCU prepared completed 11. Mechanisms to award and None Operational Staff trained in n/a n/a On-going Record in PCU MoLSAMD / deliver benefits in place. manuals prepared, implementation tracking PCU Computerized implementation implementation of the pilots. MIS tracking system in place and roles defined. MIS developed and operational specifications tested. drawn. 12. Project implementation None PIP Schedule n/a n/a n/a Quarterly Record in PCU PCU according to schedule defined and approved Quarterly Records in PCU PCU 13. Fiduciary obligations fulfilled None Operational n/a n/a n/a Manual outlines all fiduciary provisions 31 Annex 3: Summary of Estimated Project Costs AFGHANISTAN: Pension Administration and Safety Net Project AFGHANISTAN Pension Administration/Social Protection Project Components Project Cost Summary % % Total (Afghani Million) (US$ Million) Foreign Base Local Foreign Total Local Foreign Total Exchange Costs A. PENSION 1. Systems and Institution Building for the Reformed Pension System 39.8 78.5 118.3 0.8 1.6 2.4 66 32 2. Modernization of Legacy Pension Provisions 35.8 4.0 39.8 0.7 0.1 0.8 10 11 Subtotal PENSION 75.6 82.5 158.1 1.5 1.7 3.2 52 43 B. SAFETY NET 1. Pilot Safety Nets 113.0 21.0 134.0 2.3 0.4 2.7 16 37 2. Institution Building 20.3 4.0 24.3 0.4 0.1 0.5 16 7 Subtotal SAFETY NET 133.3 25.0 158.3 2.7 0.5 3.2 16 43 C. PROGRAM MANAGEMENT 22.9 25.0 47.9 0.5 0.5 1.0 52 13 Total BASELINE COSTS 231.7 132.5 364.2 4.6 2.7 7.3 36 100 Physical Contingencies 1.2 1.7 2.8 0.0 0.0 0.1 59 1 Price Contingencies 3.0 4.0 7.4 0.1 0.1 0.1 54 2 Total PROJECT COSTS 235.9 138.2 374.5 4.7 2.8 7.5 37 103 AFGHANISTAN Pension Administration/Social Protection Project Expenditure Accounts Project Cost Summary % % Total (Afghani Million) (US$ Million) Foreign Base Local Foreign Total Local Foreign Total Exchange Costs I. Investment Costs A. Minor Civil Work 10.5 - 10.5 0.2 - 0.2 - 3 B. Goods 13.0 10.0 23.0 0.3 0.2 0.5 43 6 C. Consultants Technical Assistance 77.5 117.5 195.0 1.6 2.4 3.9 60 54 Local consultant 30.0 - 30.0 0.6 - 0.6 - 8 Subtotal Consultants 107.5 117.5 225.0 2.2 2.4 4.5 52 62 D. Training 9.0 5.5 14.5 0.2 0.1 0.3 38 4 E. Grant for Pension Liabilities 90.0 - 90.0 1.8 - 1.8 - 25 Total Investment Costs 230.0 133.0 363.0 4.6 2.7 7.3 37 100 II. Recurrent Costs Total BASELINE COSTS 230.0 133.0 363.0 4.6 2.7 7.3 37 100 Physical Contingencies 1.2 1.7 2.8 0.0 0.0 0.1 59 1 Price Contingencies 3.0 4.0 7.4 0.1 0.1 0.1 54 2 Total PROJECT COSTS 234.2 138.7 373.3 4.7 2.8 7.5 37 103 AFGHANISTAN Pension Administration/Social Protection Project Expenditure Accounts by Components - Totals Including Contingencies (US$ Million) PENSION Systems and Institution Building Modernization SAFETY NET for the of Legacy Pilot Reformed Pensio Pension Safety Institution PROGRAM System Provisions Nets Building MANAGEMENT Total I. Investment Costs A. Minor Civil Work 0.2 - - - - 0.2 B. Goods 0.3 - - - 0.1 0.5 C. Consultants Technical Assistance 1.5 0.8 0.8 0.3 0.5 4.1 Local consultant 0.2 0.0 0.1 - 0.3 0.6 Subtotal Consultants 1.8 0.8 0.9 0.3 0.8 4.7 D. Training 0.2 - - 0.2 0.0 0.3 E. Grant for Pension Liabilities - - 1.8 - - 1.8 Total Investment Costs 2.5 0.8 2.7 0.5 1.0 7.5 II. Recurrent Costs Total PROJECT COSTS 2.5 0.8 2.7 0.5 1.0 7.5 Taxes - - - - - - Foreign Exchange 0.7 0.1 0.2 0.2 0.5 0.4 32 Annex 4: Financial Management and Disbursement Arrangements AFGHANISTAN: Pension Administration and Safety Net Project A. Country Issues 93. 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 years. The Public Administration Capacity Building Project (PACBP) and the Public Financial Management Reform Project (PFMR) are the primary instruments 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. 94. 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. 95. 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 costed 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. 96. 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 percent of external revenues bypass government appropriation systems. 33 97. 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 in local as well as foreign currency operations. The activities carried out under the existing Public Administration 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. 98. 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, it 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. B. Risk Assessment and Mitigation 99. 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 Risk Mitigation Measures Residual Condition of Rating Risk negotiations, Board or Effectiveness (Y/N) 1. Inherent Risk Country Inherent Risk M Source - PFM study M N Project Financial H Ensure Designated Account not excessive S N Management Risk and remains active with regular expenditure reporting; FM and procurement functions to be performed by the Project Coordination Unit (PCU) in coordination with the Grant Management Unit (GMU) Perceived Corruption H Government commitment, internal controls S N and internal audit will help to reduce the high level of perceived corruption Overall Inherent Risk H S 2. Control Risk 1. Weak Implementing S A Project Coordination Unit (PCU) has M N Entity been set up under of GMU (Grant Management Unit) of MoLSAMD to 34 handle FM functions in addition to other relevant functions. This unit will be staffed by international and national consultants. PCU along with GMU will be responsible for overall control and coordination of project activities. Oversight functions will be performed by a Project Steering Committee, chaired by the Minister of MoLSAMD and including Deputy Ministerial level members from MoF, MoWA, MRRD and IARCSC. 2. Funds Flow S Payments will be made to contractors, M N consultants and suppliers from the Designated Account (DA) by SDU-MoF. In addition to payments out of DA funds, PCU 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 PCU/ GMU. 3. Budgeting S There will be a Budget Committee M N comprised of representatives from the PCU/GMU and the relevant units of MoLSAMD, which will coordinate the budget process. This Committee will report to the Project Steering Committee. The composition of the Budget Committee will be detailed in the FM Manual. 4. Accounting Policies S Will follow international standards. Project M N and Procedures accounting procedures and details of the FM arrangements will be documented in an FM Manual to be prepared by the PCU and approved by the Bank 5. Internal Audit H Internal audit department of MoF and that S N of MoLSAMD will review project internal control systems 6. External Audit H Will be audited by CAO with support from S N Audit Advisor 7. Reporting and H Strengthening the SDU is a priority under S N Monitoring the FM Advisor contract, to provide information that will comply with agreed format of financial reports. This will be facilitated by the accounting system that will be utilized by the PCU/GMU to maintain records and generate required reports. H S Overall Control Risk 3. Detection Risk S Adequate accounting, recording, and M N oversight will be provided in project procedures. 35 Accounting/Recording/oversight by SDU ­ MoF of all advances/M-16 supported by Financial Management Advisor. RISK RATING: H=HIGH RISK; S=SUBSTANTIAL RISK; M=MODEST RISK; L- LOW RISK C. Strengths and Weaknesses Strengths 100. 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 support for PACBP and PFMR is strength in itself to enhance financial management in Treasury operations, public procurement, internal audit in the public sector, and external audit by the Auditor General. The implementing line ministry, MoLSAMD has implemented a Bank-funded project prior to this, and is currently implementing another one, so the agency has experience in implementing Bank projects and following Bank procedures. Weaknesses and Action Plan 101. The main weakness in this project, as in many others in Afghanistan, is the ability to attract suitably qualified and experienced counterpart staff especially for Financial Management. The establishment of the Project Coordination Unit, staffing of the PCU with consultants to be funded by the project and availability of FM staff in GMU are expected to strengthen the fiduciary arrangements. D. Action Plan ­ To be reviewed at Supervision Significant Action Responsible Agent Completion Date Weaknesses Project internal controls and Financial Management Manual PCU By December 31, procedures need to be defined developed 2009 Interim reports need to Un-audited interim financial report IDA/MoF/PCU Before negotiations include required information formats confirmed E. Implementing Entity 102. The project will be implemented by the Ministry of Labor and Social Affairs, Martyrs and Disabled (MoLSAMD). A Project Coordination Unit (PCU) has been established under the GMU (Grant Management Unit) to coordinate and supervise the implementation of the project. This unit will be headed by a manager and staffed with technical (international and national) and FM staff, and will work closely with the GMU in performance of relevant functions. 36 103. The PCU finance staff in coordination with GMU finance staff will carry out day-to-day financial management operations of the project, preparation of M-16 forms (payment orders), project coding sheet, B27 allotment form and overall contract and project management. Detailed working relationships between the PCU and GMU, PCU's FM reporting requirements, staffing, systems and other FM arrangements will be included in the Financial Management Manual. 104. Project oversight. A Project Steering Committee (PSC), chaired by the Minister of Labor and Social Affairs, Martyrs and Disabled (or his representatives), and including Deputy Ministerial level members from MoF, MOWA, MRRD and IARCSC will be responsible for the overall policy, strategic planning and project oversight. 105. Project coordination and monitoring. The PCU along with GMU has responsibility for the overall project implementation, coordination and monitoring. The PCU will report to the Project Steering Committee on the consolidated progress of the project. It is also responsible for (a) assuring steady progress of execution in accordance to an implementation schedule reviewed and approved by the World Bank, (b) regular reporting to the PSC, (c) to ensure adequate and smooth transfer of skills to the national staff, and (d) ensuring that a high ethical standard and transparency is maintained throughout the process. F. Budgeting 106. 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 PCU/GMU and other relevant units of MoLSAMD, 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. The budgeting process and the key role of periodic budget reviews will be detailed in the FM Manual. The annual work plans and the annual budgets will be submitted to the Bank for review and approval, not later than three months before the end of the fiscal year (i.e. December 20th) G. Funds Flow 107. 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 PCU when needed. 108. In addition to payments out of DA funds, the PCU 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. 37 Expenditures for each component will be paid after relevant approvals from the component implementing entity and in accordance with the approval mechanisms documented in the project FM Manual. 109. A PPF in the amount of US$ 850,000 has been provided to MoLSAMD to facilitate the preparatory activities for the project. This amount will be part of the total IDA Grant for the project and the PPF will close once the project becomes effective. The PPF shall be used for the specific activities mentioned in the PPF Agreement. IDA Direct Payments to Consultants, Suppliers, etc. after approval of W.A initiated by the project and submitted through SDU Designated Account in DAB denominated in USD Project transactions processed through SDU and paid in USD or Afghanis Payment Payment Requests Requests GMU PCU H. Legal requirements for authorized signature 110. 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. 38 I. Accounting 111. 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 PCU and GMU 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 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. 112. The PCU and GMU FM staff will maintain essential project transaction records using accounting system/Excel spreadsheets and generate required monthly, quarterly, and annual reports. 113. The FM Manual, to be prepared by the PCU by December 31, 2009, and to be approved by the Bank, will include: (i) roles and responsibilities for all FM staff, (ii) documentation and approval procedures for payments, (iii) project reporting requirements, ( iv) quality assurance measures to help ensure that adequate internal controls and procedures are in place and are being followed, and (v) coordination and reporting between PCU and GMU with respect to FM functions. 114. 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 recording and reporting of project expenditures. Overall project accounts will be maintained centrally in SDU, which will be ultimately responsible for recording of 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 PCU/ GMU. J. Internal Control & Internal Auditing 115. Project­specific internal control procedures for requests and approval of funds will be described in the FM Manual including segregation of duties, documentation reviews, physical asset control, and cash handling and management. 116. The PCU will be responsible for coordinating FM activities for the project with GMU and SDU. 117. 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. 118. The project financial management systems will be subject to review by the internal audit directorate of MoLSAMD, with support, where required from the internal audit directorate of the 39 MoF, according to programs to be determined by the Director of Internal Audit using a risk- based approach. K. External Audit 119. 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 the 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. 120. The following audit reports will be monitored each year in the Audit Reports Compliance System (ARCS): Responsible Agency Audit Auditors Date MoF, supported by Special SOE, Project Accounts and Auditor General Sep 22 Disbursement Unit Designated Account L. Financial Reporting 121. 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 PCU/GMU. These reports will be produced based on records kept on the PCU's accounting system after due reconciliation to expenditure statements from SDU (as recorded in AFMIS) and bank statements from DAB. 122. The quarterly Project 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 PASNP will be provided after project effectiveness. 123. The annual project accounts to be prepared by SDU from AFMIS after due reconciliation to records maintained at the project, 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. M. Disbursement Arrangements 124. 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 shows the allocation of IDA proceeds and Table 2 presents the expected co- 40 financing. The single category for "goods, works, consultancy services, training, and operating costs" is defined in the financing agreement to facilitate preparation of withdrawal applications and record-keeping. A final disbursement deadline is six months after the closing date. There is a disbursement condition for Category 2 ensuring that IDA receives the Steering Committee's approval of the program plan(s) for the piloting of safety net programs, as set forth under the Covenants for this project. 125. During this additional 6-month grace period, project-related expenditures incurred prior to the closing date are eligible for disbursement. Table 1: IDA Financing by Category of Expenditure (US$ million) Category Amount of the Grant Percentage of Expenditures to Allocated be Financed (Inclusive of Taxes) (1) Goods, works, consultants' 4,850,000 100% services and Incremental Operating Costs for the Project5 (2) Pilot Benefits under 1,800,000 100% Component 2 (a) of the Project (3) Refund of Preparation 850,000 Advance TOTAL AMOUNT 7,500,000 Table 2: Estimated Co-financing (US$ million) IDA ARTF JSDF Beneficiaries Total 7.5 7.5 126. Summary Reports. Summary reports in the form of Statements of Expenditure will be used for expenditures on contracts below US$25,000 and for all training programs and operating costs -- regardless of whether Bank procurement prior review is required or not. 127. For all other expenditures, Government will provide records (supporting documentation) to substantiate expenditures. 5 Incremental Operating Costs refers to operating costs of the PCU incurred on account of implementation of the Activities, including vehicle rental and other transportation costs, office rental and maintenance, utilities, telecommunications, and other incident costs, office equipment and consumable supplies, bank charges and advertising costs. 41 128. Designated Account. A single designated account will be opened at DAB in US dollars for a maximum amount of US$ 400,000 representing 3 months of estimated expenditures. The SDU in MOF will manage payments from and new advances/replenishments to this account. Other transfers in the form of cash advances may be taken from the Designated Account, and held and managed by MoLSAMD. 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. 129. Direct Payments. Third-party payments (direct) and Special Commitments will be permitted for amounts exceeding 20 percent of the advance in the Designated Account (US$ 80,000). All such payments require supporting documentation in the form of records (copies of invoices, bills, purchase orders, etc.). 130. Preparation of Withdrawal Applications. MoLSAMD will prepare Summary Reports and forward those reports to the SDU for further processing as a reimbursement application. The SDU will review withdrawal applications for quality and conformity to Treasury procedures, and then obtain signature. Selected PCU, GMU 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. N. Financial Management Covenants · MoF 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. · Un-audited project interim financial reports will be submitted by PCU on a quarterly basis to the World Bank and a copy to SDU-MoF within 45 days after the end of each quarter. · MoLSAMD will ensure that key FM staff of the PCU and GMU are retained throughout the duration of the project in order to ensure smooth project implementation. O. Regular Supervision Plan 131. 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. 42 · Review agencies' performance in managing project funds to ensure that it is timely, accurate, and accountable. Particular supervision emphasis will be placed on asset management and supplies. · Review financial management risk rating and compliance with all covenants. P. Conclusion 132. 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. 43 Annex 5: Procurement Arrangements AFGHANISTAN: Pension Administration and Safety Net Project A. Country Context 133. The Bank has gained substantial experience and understanding of the procurement environment in Afghanistan. This has been through its involvement in the interim procurement arrangements put in place under the Emergency Public Administration Project. In addition experience gained working with the institutions with current responsibility for procurement functions including 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 of the procurement environment in the country based on the baseline and performance indicators developed by a group of institutions led by the World Bank and OECD/DAC in June 2005 and September 2007. 134. The first key issue identified through the procurement assessment is lack of ownership and a procurement champion in the Government. This 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 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 on application of public procurement rules. 135. A new Procurement Law (PL) has been adopted in November 2005, which radically transforms the legal and regulatory framework. As per the Law a Procurement Policy Unit (PPU) was established to provide oversight for implementation of the Law. PPU has issued several circulars regarding implementation of the Procurement Law including issuance of "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 has currently developed several SBDs/SRFPs/RFQs for national and international procurement of goods/works and consulting services following national procedures as per the PL. 136. In the absence of adequate capacity to manage procurement activities effectively, a central procurement facilitation unit (ARDS­PU) has been established under Ministry of Economy to support line ministries and project implementing agencies. The Bank and the Government has agreed on a program for country wide procurement reform and capacity building, leading to the transition from centralized to decentralized procurement services. The above is implemented by an international consultant under the supervision of PPU/MoF and financed under Public Administration Capacity Building project (PACBP)/ Public Finance Management Reform Project (PFMRP). There has been several training programs conducted by the consultant at Basic and Intermediate level. The implementation of the procurement reform component of the PACBP 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. 44 137. The Procurement Law was revised in July 2008, amended in January 2009, issued as a new Law by the Ministry of Justice and published in the Official Gazette Number 957, 29.10.1387 (18 January 2009). General 138. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; revised in October 2006 and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, revised in October 2006, and the provisions stipulated in the Financing Agreement. The general description of various items under different expenditure categories are described below. For each contract to be financed by the grant, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frames are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 139. 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 140. Works to be procured under the project would include upgrading Offices of Pension Department. The procurement will be done using the Bank's Standard Bidding Documents (SBD) for all ICB and National SBD agreed with (or satisfactory to) the Bank. Threshold for ICB civil works will be equivalent or more than US$5,000,000; threshold for NCB works will be less than US$5,000,000. All civil works contract estimated to cost US$50,000 or less per contract can be procured through shopping procedure of paragraph 3.5 of the procurement guidelines. Procurement of Goods 141. Goods to be procured under this project would include Office furniture, Office equipment, Generators, vehicle, and IT equipments. Procurement of the goods will be done using Bank's SBD for Goods and IT systems for all contracts following International Competitive Bidding (ICB) procedures. National SBDs agreed with IDA or satisfactory to IDA will be used for procurement of Goods following National Competitive Bidding (NCB) procedures. Shopping shall be in accordance with paragraph 3.5 of Bank's Guidelines. All contracts estimated to cost more than US$200,000 per contract shall be procured following ICB procedures. Contracts estimated to cost more than US$50,000 equivalent per contract and less than US$200,000 per contract shall be procured following NCB procedures. All contracts estimated to cost less than US$50,000 equivalent per contract shall be procured following Shopping procedures. 45 Selection of Consultants: 142. The proposed Grant would finance several consultancy assignments as follows: · Consultant firms: (i) Support to Payroll Deduction implementation (firm), (ii) Design and Implementation of M&E framework (firm), (iii) Training for SN Pilot roll out (firm), (iv) Pension Beneficiary Survey (Firm), (v) Design of Data Entry Utility (firm), (vi) Data Entry Management (firm), (vii) Conducting Pensioners Census (firm), (vii) Service for facilitating partners (firms), (viii) software design and development for the Pension Department, and (ix) software design and development for the Safety nets pilot. · Individual Consultants: (i) Project Manager, (ii) Project Advisor, (iii) Pension System Expert, (iv) MIS Specialist, (v) Lead Safety Net Expert, (vi) Safety Net Expert, (vii) Pension Regulation Expert, (viii)Treasury/Tax Systems Expert, (ix) Pension Systems Project Officer, (x) Safety Net Project Officer, (xi) MIS Project Officer, (xii) Pension Regulation Officer, (xiii) Accountant/Cashier, (xiv), Procurement Specialist, (xv) Financial Management Specialist, (xvi) Scoping of renovation activities of Pension Department. · 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 and Section V of the Bank's Guidelines for Individuals. Threshold for CQS will be less than US$200,000 per contract. · Operating Costs: The cost which would be financed by the project would be procured using the implementing agency's administrative procedures, 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. B. Assessment of the agency's capacity to implement procurement 143. MoLSAMD will have overall responsibility for all procurement under the project. 144. The Procurement activities under this project will be carried out through the Grant Management Unit (GMU) of the MoLSAMD. 145. An assessment of the capacity of GMU, the Implementing Agency to implement procurement actions for the project, has been carried out by Rahimullah Wardak, Procurement Specialist, on June 18, 2009. The assessment reviewed the organizational structure for implementing the project and interactions. 146. The GMU is a unit established by MoLSAMD to implement projects funded by government and donor budget on behalf of the MoLSAMD. 46 147. The agency has a general directorate and three sub-directorates, (i) Project Design & Formulation, (ii) Administration, Finance and Procurement, and (iii) M&E and Reporting. All the staff members hired under the GMU are consultants and their contracts are funded by donors. 148. The Administration, Finance and Procurement directorate is staffed with three procurement officers. During the assessment it was revealed that the GMU procurement staff do not have experience in procurement under Bank-financed projects. 149. As stated above the procurement staff does not have adequate experience in procurement. Hence, the procurement risk is "High". 150. The following mitigation measures are proposed: (a) competent procurement specialist will be hired under the project. The Procurement Specialist will be responsible for managing procurement for the project based on technical specifications/TOR provided by the technical team of the Ministry, (b) Bank staff to carry out an intensive training program for MoLSAMD/GMU staff both in English/Dari to carry out small value procurement and selection of individual consultants both local and international; (c) the staff of the MoLSAMD/GMU to attend training programs conducted by PPU/MoF at Basic and intermediate level to begin with; and (d) ARDS-PU to support MoLSAMD/GMU for large value procurement following NCB/ICB procedures and selection of firms regardless of value. With such arrangements in place the procurement risk could be rated as "medium". 151. MoLSAMD will ensure that all invitations for bid, EOIs are given wide publicity using its own website, Afghanistan Reconstruction and Development Services (ARDS), United Nations Development Business (UNDB)/DG market and national newspapers. Further for individual consultants the REOI/vacancy notice will be published on the following websites www.acbar.org, www.devnetjobs.org and www.reliefweb.int 152. With regard to procurement complaints, MoLSA/GMU will be guided by Article 71-72 of Procurement Law -2008 and Bank Guidelines. MoLSAMD will inform IDA as soon as the procurement complaint is received and the final outcome subsequently. MoLSAMD should have system to register and monitor the receipt and resolving of complainants. The progress of such action will be reviewed by IDA during supervision missions. 153. MoLSAMD will prepare a Procurement Monitoring/Activity Schedule for Procurement of goods and Selection Monitoring Activity Schedule for consultants and update the schedules on a monthly basis. The above schedules will facilitate to monitor the time taken for procurement/selection activities and take remedial actions for delays. It has been agreed that all bid/proposal evaluations will be completed within: (i) 5-7 working days following shopping procedure; (ii) 15 ­ 20 working days following NCB/ICB procedures; (iii) 10 working days for individual consultants; and (iv) 15 working days for firms for REOI evaluation, 21 working days for Technical Evaluation Report (TER) and 20 working days to conclude the contract negotiations. 154. The framework of the procurement risk mitigation monitoring plan as given below has been agreed with the MoLSAMD. This will be updated during implementation 47 support/supervision missions (at least once in six months) and will be part of each mission's aide memoire. S Process Indicator Sources of Information and Use of Performance No Procurement means of verification information target to be Process/step for risk achieved. mitigation GPN Published Documentary evidence filled in To ensure 100% GMU GPN is widely General published to 1 Procurement increase Notice transparency Number of responses Existence of updated responses To increase 100% received against GPN registration file in GMU competition. REO/IFB Published Copy to be available in the file. To ensure 100% 10% of the procurement files SPN/REOI will be verified is widely published to increase transparency Minimum bidding time Deviations to be collected from To ensure 100% provided [4 weeks in NCB procurement files competition and RFP and 6 weeks in ICB and RFP with REOI/Invita complex assignments] tion for Bids Attention of the Copy to be available in the file. To ensure 100% 2 and Bidding firms/individuals who 10% of the procurement files competition process expressed interest against will be verified GPN while issuing REOI/SPN was called Number of Bid Documents Sale of bid documents register To ensure 100% sold and Number of firms and confirmation from competition confirmed participation consultants about receipt of against RFP issued RFP. 10% procurement files will be verified Clarifications/addendums Copy to be available in the file. To ensure 100 % issued 10% of the procurement files transparency will be verified 3 Cleared by IDA without Number of cases to be Capacity Continued seeking collected from procurement building progress Preparation clarifications/comments files measures of Bid initiated by Documents/ international RFPs procurement specialist Bid opening minutes sent Timeliness to be verified from To ensure 100% to all bidders procurement files transparency Bid 4 Submission 10% of the procurement files will be verified Bid Formation of bid Deviations to be collected from To expedite 100% 5 Evaluation/R evaluation committee procurement files finalizing of EOI and before bid closing. bids/proposa 48 S Process Indicator Sources of Information and Use of Performance No Procurement means of verification information target to be Process/step for risk achieved. mitigation proposal l evaluation. evaluation Timeliness of Evaluation: Deviations to be collected from Finalizing 20% reduction (a) 5-7 working days Procurement Activity Schedule of during every following shopping bids/proposa six months procedure; (b) 15-20 l evaluation period working days following in timely NCB/ICB procedures; (c) manner. 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. Number of Re-bids Procurement files 20% reduction during every six months period Bid Cleared by IDA without Data to be collected from To improve Evaluation seeking procurement files procurement Report and clarifications/comments process. 6 Technical Evaluation Report Contract award within the Deviations to be collected from To improve 100% original bid validity Procurement Activity Schedule procurement process. (a) Contract award Data to be collected from To ensure 100% Contract published within 14 days procurement files transparency 7 Award of NOA (b) Average time taken for publication of award (c) Number of cases award not published Delivery time: Percentage Data to be collected from To improve of Contracts completed/ procurement files procurement delivered within the process. original schedule as mentioned in Contract Liquidated damage: Data to be collected from To improve 60% Delivery/ Percentage of Contracts procurement files procurement 8 Completion having liquidated damage process. imposed for delayed delivery/completion Completion rate: Data to be collected from To improve 90% Percentage of Contracts procurement files procurement fully completed and process. accepted 49 S Process Indicator Sources of Information and Use of Performance No Procurement means of verification information target to be Process/step for risk achieved. mitigation Average number of days Data to be collected from To improve 15 days taken to release payment procurement files procurement process. 9 Payment Late payment: Percentage Data to be collected from To improve 20% of cases (considering each procurement files procurement installment as a case) with process. delayed payment Procurement complaints Complaint register To ensure 90% pending over 60 days transparency Resolution of complaints Complaint register and To ensure 0% resulted in modification of Procurement files transparency contract award 10 Complaints Resolution of complaints Complaint register To ensure 70% within 15 working days transparency Complaints forwarded to Complaint register To ensure 100% MoF for independent transparency review 11 Contract Unresolved Disputes over Procurement files To ensure 10% dispute 60 days transparency resolution Number of procurement To improve 80% staff to be staff trained in Civil procurement trained during Service Institute process. first year and Procurement 100% by 12 Capacity Procurement training plan second year. Building Number of staff trained To improve One staff outside Afghanistan procurement during first 18 process. 155. Governance and Anticorruption (GAC) agenda All the contract opportunities and contract awards will be widely published in the internet, ARDS website, MoLSAMD website and when required in DG Market/UNDB. The MoLSAMD will set up a system to ensure that the staff/consultants who handled the procurement process/contract management/contract execution does not join the consultants/contractors. This will be reviewed during supervision missions. C. Procurement Plan 156. The Borrower, at appraisal, developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on August 17, 2009, and is available at the GMU offices of the MoLSAMD. It will also be available in the Project's database and in 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. 50 D. Frequency of Procurement Supervision 157. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended two supervision missions per year. 158. Procurement Audit: In addition to prior review, Bank staff or Bank appointed consultant shall carryout post procurement audit. Attachment A5.1 1. Details of Procurement arrangements involving International Competition (covering period of first 18 months, including PPF) (a) Goods and Non Consulting Services (i) List of contract packages which will be procured following ICB and Direct Contracting procedures: 1 2 3 4 5 6 7 8 9 Domestic Review Expected Ref. Comm Contact Estimated Procurement Prequalification Preference by Bank Bid- No. ents Cost Opening (Description) Method Yes/No (Yes/No) Prior/Post (US$) Date Goods and Works There will be no ICB for goods and works during first year of the project All ICB contracts for goods and works regardless of value and all Direct Contracting regardless of value shall be subject to prior review by IDA. (b) List of consulting Assignments with shortlist of international firms or individuals 51 1 2 3 4 5 6 7 Ref. No. Description of Assignment Period Estimated Selection Review Expected Expected Contracts Cost Method by Bank Proposals Completion Date (Prior / Post) Submission Date SPP/C-1a Project Advisor PPF 80,000 IC Prior 15.05.2009 31.12.2009 SPP/C-1b 1st Year 200,000 IC Prior 30.11.2009 31.12.2011 SPP/C-2a Pension System Expert PPF 60,000 IC Prior 15.05.2009 31.12.2009 SPP/C-2b 1st Year 130,000 IC Prior 30.11.2009 31.12.2011 SPP/C-3a MIS Specialist PPF 40,000 IC Prior 15.09.2009 31.12.2009 SPP/C-3b 1st Year 100,000 IC Prior 30.11.2009 31.12.2011 SPP/C-4a Lead Safety Net Expert PPF 50,000 IC Prior 15.05.2009 31.12.2009 SPP/C-4b 1st Year 120,000 IC Prior 30.11.2009 31.12.2011 SPP/C-5a Safety Net Expert (Pilot PPF 60,000 IC Prior 15.09.2009 31.12.2009 SPP/C-5b development) 1st Year 150,000 IC Prior 30.11.2009 31.12.2011 SPP/C-11a Pension Regulation PPF 40,000 IC Prior 15.09.2009 31.12.2009 SPP/C-11b Expert 1st Year 80,000 IC Prior 30.11.2009 31.12.2011 SPP/C-12a Tax/Treasury Expert PPF 30,000 IC Prior 15.09.2009 31.12.2009 SPP/C-12b 1st Year 70,000 IC Prior 30.11.2009 31.12.2011 52 Procurement Plan I. GENERAL Project information Country/Borrower: Government of Afghanistan Project Name: Afghanistan Pension Administration and Safety Net Implementing Agency: Ministry of Labor, Social Affairs, Martyrs and Disabled Update as of: August 8, 2009 Bank's approval Date of the procurement Plan August 17, 2009 (original) Date of General Procurement Notice: August 2, 2009 Period covered by this procurement plan: 18 months, including PPF Notes: (i) Presented estimates cover only the first year expenditures of the project (including the PPF). II. GOODS AND WORKS AND NON-CONSULTING SERVICES 1. Procurement Method and Threshold Procurement Method Threshold for Methods, USD Comment 1. ICB (Goods) 200,000 Equivalent or more 2. 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. ICB (Works) 5,000,000 Equivalent or more 6. NCB (Works) 5,000,000 Equivalent or less 7. Shopping (Works) 50,000 Equivalent or less 2. 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, USD Comment 1. ICB (Goods) All Contracts Regardless of value 2. NCB (Goods) 200,000 Equivalent or more 3. ICB (Non-Consultant Services) 200,000 Equivalent or more 4. ICB (Works) All Contracts Regardless of value 5. NCB (Works) 500,000 Equivalent or more 6. Direct Contracting All Contracts Regardless of value 3. Prequalification. NIL 4. Procurement Packages with Methods and Time Schedule List of contract Packages that will be procured following ICB, NCB and direct contracting: 53 1 2 3 4 5 6 7 8 9 10 Period Ref. No. Contract Estimated Procurem P-Q Domestic Review Expected Expected (Description) Cost ent Yes/No Preferenc by Bank Bid- contract Method e (Prior / Opening Completio (yes/no) Post) Date n Date SPP/W-1 Upgrading Offices PPF - - - - - - - of Pension st Department 1 Year 150,000 NCB No No Post 1.06.2010 30.11.2010 SPP/G-1 Basic office PPF 12,000 Shopping No No Prior 30.09.2009 - furniture and equipment (PCU) 1st year - - - - - - - SPP/ G-4 Car Purchase (PCU) PPF 60,000 NCB No No Prior 30.09.2009 - 1st Year - - - - - - - Total 222,000 III. SELECTION OF CONSULTANTS 1. Selection Methods 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 2. Prior Review Threshold: Selection decisions subject to Prior Review by Bank as stated in Appendix 1 to the Guidelines Selection and Employment of Consultants: Selection Method Prior Review Threshold Comments 1. Competitive Methods (Firms) $100,000 or more 2. Competitive methods $50,000 or more (individuals) 3 Single Source All irrespective of value (Firms)/Individuals 3. Short list comprising entirely of 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. 4. Consultancy Assignments with Selection Methods and Time Schedule List of Consulting Assignments with short-list of international and national firms or individuals 54 1 2 3 4 5 6 7 Ref. No. Description of Estimated Selection Review Expected Expected Assignment Method by Bank Proposals Contracts Cost (Prior / Submission Completion Date Post) Date SPP/C-1 Project Advisor 280,000 IC Prior 15.05.2009 31.12.2011 SPP/C-2 Pension System Expert 190,000 IC Prior 15.05.2009 31.12.2011 SPP/C-3 MIS Specialist 140,000 IC Prior 15.09.2009 31.12.2011 SPP/C-4 Lead Safety Net Expert 170,000 IC Prior 15.05.2009 31.12.2011 SPP/C-5 Safety Net Expert (Pilot 210,000 IC Prior 15.09.2009 31.12.2011 Development) SPP/C-11 Pension Regulation 120,000 IC Prior 15.09.2009 31.12.2011 Expert SPP/C-12 Tax/Treasury Expert 100,000 IC Prior 15.09.2009 31.12.2011 SPP/C-6 Project Manager 65,000 IC Prior 15.09.2009 31.12.2011 SPP/C-7 System Project officer 52,000 IC Prior 16.05.2009 31.12.2011 SPP/C-8 Safety Net Project 52,000 IC Prior 10.05.2009 31.12.2011 officer SPP/C-9 MIS Project Officer 51,000 IC Prior 15.09.2009 31.12.2011 SPP/C-14 Pension Regulation 46,000 IC Prior 15.09.2009 31.12.2011 Officer SPP/C-10 Accountant/Cashier 43,000 IC Prior 27.05.2009 31.12.2011 SPP/C-13 Procurement Specialist 41,000 IC Prior 15.09.2009 31.12.2011 SPP/C-15 Financial Management 41,000 IC Prior 15.10.2009 31.12.2011 Specialist SPP/C-17 Scoping of renovation 10,000 IC Prior 15.10.2009 31.12.2009 activities of Pen Dep. SPP/C-18 Support to Payroll 90,000 QCBS Prior 15.10.2009 31.12.2011 Deduction implementation (firm) SPP/C-22 Design and 30,000 LCS Post 31.01.2010 31.07.2010 Implementation of M&E framework (firm) SPP/C-23 Training for SN Pilot 60,000 QCBS Prior 28.02.2010 31.12.2010 roll out (firm) SPP/C-19 Pension Beneficiary 80,000 QCBS Prior 15.10.2009 31.10.2010 Survey (Firm) SPP/C-16 Design of Data Entry 20,000 LCS Prior 15.09.2009 31.12.2009 Utility (firm) SPP/C-20 Data Entry 40,000 LCS Prior 15.11.2009 31.09.2010 Management (firm) SPP/C-21 Conducting Pensioners 200,000 QCBS Prior 15.11.2009 31.12.2010 Census (firm) SPP/C-16 Service for facilitating 150,000 QCBS Prior 30.06.2010 31.12.2012 partners (firms) Total 2,281,000 55 Capacity Building The following programs are proposed to enhance the knowledge of the staff of PCU/GMU. Expected outcome/Activity Estimated Cost Estimated Start date Comments Description Duration Familiarity of PCU/GMU staff Bank Budget 4 days August/ Bank staff attached Kabul in procurement of goods September office will conduct in following shopping 2009 English/Dari procedures/selection of consultants Familiarity of staff with PPU/MoF As per TBD Procurement under Bank standard of Financed Projects PPU/MoF Familiarity of staff with US$ 10,000 Two weeks TBD By ASCI or NIFM in India Procurement under Bank Financed Projects 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; 56 (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; (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; 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. 57 Annex 6: Implementation and Monitoring Arrangements AFGHANISTAN: Pension Administration and Safety Net Project 159. Figure A6 presents an outline of the institutional setup for the project. What follows is a concise presentation of the institutional and implementation arrangements for the project. 160. Governance framework. The Governance structure of the project consists of a high level Steering Committee, two Technical Working Groups ­ one for the pension component and another for the safety net component ­ and Project Coordination Unit (PCU). 161. The Project Steering Committee (PSC) has been established by the Government and it will oversee project implementation: it approves annual project implementation plans and reviews quarterly progress reports from a Project Coordination Unit that has been established under the MoLSAMD Grant Management Unit (see below). More frequent briefings reports will be required from the PCU by the Grants Management Unit (GMU) and the MoLSAMD senior management. The Steering Committee is chaired by the MoLSAMD Minister and includes Ministerial or Deputy Ministerial level members of ministries and agencies most concerned with issues of pensions and social protection. The Committee will meet not less than once every quarter. 162. The Technical Working Groups (TWG) also have a broad representation of ministries/agencies concerned with pensions and safety nets, respectively. The TWGs are headed by Deputy Ministers of MoLSAMD and include technical staff with good knowledge of pension and safety net issues. Their tasks are to monitor development of project design and technical aspects of implementation, and review reports and recommendations on eventual adjustments to the project before these are submitted to the Steering Committee. Their particular focus is on the feasibility of project elements in implementation and on the consistency of results with government development strategy, as reflected in the ANDS. The TWGs will meet periodically (but not less than once every two month during the first two years of the project implementation; the meetings may be less frequent during the subsequent years of implementation) and on ad-hoc basis as may be required by the project needs. 163. A similar two-tier institutional structure was in place to oversee the process of pension reform concept formulation for the past few years. It proved to be efficient in ensuring clear separation of tasks, greater focus, and ownership of the reform. 164. Implementation Agency. The Ministry of Labor, Social Affairs, Martyrs and Disabled (MoLSAMD) will be a nodal ministry that is responsible for management of the two major government cash benefit programs ­ public sector employee pensions and pensions for the families of martyrs and disabled. For the past three years it also has been a leading ministry in developing the pension reform concept. As such, it is the logical prime counterpart for the project. It is also assigned responsibility for safety nets through its Department for Social Protection. MoLSAMD would be responsible for implementing the project on behalf of the Government of Afghanistan. 165. Implementation Team. A Project Coordination Unit (PCU) has been established within the MoLSAMD, initially under the direct supervision of the Grant Management Unit (GMU) of 58 the MoLSAMD. The GMU has been accumulating capacity in the project design and implementation (e.g., in procurement, financial management, etc.), of which the new project is anticipated to be a beneficiary. The GMU is staffed with the administration, procurement, and financial management teams, along with teams supporting project design, monitoring and evaluation, and economic and financial analysis. 166. The PCU is staffed with both the local and international consultants who will work with Ministry staff on project implementation. The MoLSAMD, through its GMU, will oversee the day-to-day work on both components. It is anticipated that some significant sub-components of the project (like IT design and implementation, etc.) would be outsourced to firms rather than individuals. PCU will directly interact with the Pensions Department and the Social Protection Department of MoLSAMD and other relevant department of MoLSAMD in achieving the project objectives and managing its tasks. 167. Coordination. On Pensions, under leadership of the Steering Committee, the work is coordinated with MoF (as pertains to strengthening the systems of contribution collection and accounting) and the IARCSC (as pertains to coordination of activities in implementation of the pay and grading reform and new HR requirements). On safety nets, PCU will be responsible to coordinate activities with the Government Agencies involved in the sector (e.g., MRRD, MOWA, Ministry of Economy), and various donor agencies. Figure A6: Institutional setup for the project Project Steering Committee (PCS) (Main (deputy) Ministries concerned with pensions and safety nets) Technical Working Group (TWG) on Technical Working Group (TWG) on Safety nets Pensions (technical staff of relevant Ministries) (technical staff of relevant Ministries) Nodal Agency MoLSAMD Grant Management Unit (GMU) Project Coordination MoF, IARCSC Unit (PCU) MoLSAMD Pensions Department MRRD, MOWA and MoLSAMD other government bodies Coordination Reform Line Departments Donors, NGOs Other Government agencies and units 59 168. In strengthening the systems of contribution compliance within the MoF, the PCU, in close consultations with the Revenue and Treasury Departments of the MoF, will define needs and will arrange and fund the required training and consultancy services. Similarly, the PCU will work with the Fiscal Policy Unit of the MoF to define the work program of strengthening the budgeting and financial management of the pension schemes and will engage necessary technical assistance in form of consulting services and training. The Project Implementation Plan (PIP) will further detail the coordination mechanisms and the responsibilities of the MoLSAMD and the MoF. 169. On the Monitoring and Evaluation (M&E), the project will be assisted by the Monitoring and Evaluation unit within the GMU. 170. M&E under the Pension component will draw on the information consolidated as part of implementation and operation of a new Management Information System (MIS) that will avail data on physical and financial progress of implementation. The MIS would produce timely reports and track achievement of selected project performance indicators. In addition, a beneficiary survey is being designed and implemented, with the Technical Assistance from the World Bank, to define and trace a set of outcome indicators associated with the pension component of the project. 171. Special auditing arrangements will be designed to ensure quality of the beneficiary selection and payment process under the pension payouts sub-component. 172. Under the Safety nets component, M&E mechanisms will utilize process and impact information generated by the Technical Working Groups and the PCU, and by qualitative and quantitative surveys undertaken by the MoLSAMD on the impact of project interventions on the beneficiary population, as well as information gathered by the Ministerial units involved with implementation of the pilot. Staff at headquarters and in local offices will be trained under the project in the application of monitoring and evaluation techniques, and in the adaptation of policy and program strategies to their findings. 60 Annex 7: Project Preparation and Appraisal Team Members AFGHANISTAN: Pension Administration and Safety Net Project Planned Actual PCN review December 16, 2008 December 15, 2008 Initial PID to PIC December 18, 2008 December 15, 2008 Initial ISDS to PIC December 18, 2008 January 8, 2009 Appraisal May 26, 2009 July 12, 2009 Negotiations August 3, 2009 Board/RVP approval September 15, 2009 Planned date of effectiveness December 31, 2009 Planned date of mid-term review Planned closing date December 31, 2013 Key institutions responsible for preparation of the project: Ministry of Labor, Social Welfare, Martyrs & Disabled Bank staff and consultants who worked on the project included: Name Title Unit Oleksiy Sluchynsky Sr. Economist SASHD Qaiser Khan Lead Human Development SASHD Specialist Sheila Braka Mussiime Sr. Counsel LEGES Martin Serrano Counsel LEGES Nagaraju Duthaluri Sr. Procurement Specialist SARPS Deepal Fernando Sr. Procurement Specialist SARPS Kenneth O. Okpara Sr. Financial Management SARFM Specialist David Freese Sr. Finance Officer LOAFC Thao Le Nguyen Sr. Finance Officer LOAFC Birgit Hansl Economist SASEP Rahimullah Wardak Procurement Specialist SARPS Laura Kiang Operations Officer SASHD Asha Narayan Financial Management Analyst Gertrude Cooper Program Assistant SASHD M. Edrees Sahak Team Assistant SACAF Hjalte Sederlof Consultant SASHD Jorge Luis Alva Luperdi Consultant LEGES 61 Annex 8: Environmental and Social Safeguards Framework AFGHANISTAN: Pension Administration and Safety Net Project Environment: 173. As the project is expected to have minimal or no adverse environmental impacts, it is classified as Category C requiring no further EA action. This classification is the result of the environmental screening based on consultations with the regional safeguards team (SARDE). Safeguards: 174. No safeguard policies are triggered by this Category C project. 62 Annex 9: Economic and Financial Analysis AFGHANISTAN: Pension Administration and Safety Net Project A. Country and Sector Background 175. After more than two decades of conflict, Afghanistan has begun an enormous political, economic, and social transformation since it was catapulted onto the world stage in 2002. Progress to date has been encouraging, but tremendous challenges remain: despite the progress in improving macroeconomic stability, poverty remains the biggest problem for Afghanistan. 176. Afghanistan is one of the poorest countries in the world with income per capita hovering around US$300 and an over 40 percent the population living below the national poverty line; an additional 20 percent are clustered just above the poverty line. Altogether, some 15 million people are poor or at risk of poverty. Poverty is highest in rural areas and among nomadic populations (Kuchis) at 45 percent; urban poverty is 27 percent. Poverty correlates relate to education and employment of households heads, seasonality in rural areas, asset ownership and remoteness. Women and children, and the disabled, are the highest risk poverty groups. A combination of natural disasters, extreme seasonal variations in food production, security problems and consequent economic risks drive the high levels of poverty and family dysfunction. For many years to come, the majority of Afghan households will be poor or exposed to external risks that result in chronic or temporary bouts of poverty. 177. At present, Afghanistan social protection landscape is composed of (i) a wide variety of social assistance and social services programs supported by international agencies; (ii) development programs that play indirectly the role of safety nets, such as the National Solidarity Program (NSP); and (iii) some limited public cash benefit programs, including a scheme for families of martyrs and disabled and the public sector pension scheme (See Table A9.1 and for greater details, Table A9.8). Table A9.1: Coverage of the public programs with implications for social protection (2006) Families of Martyrs 224,800 Conflict-related disability 87,700 Orphans 10,500 Children in kindergartens 25,000 Public sector pensioners (payments) 54,000 Public works and skills development 1,750,000 Microfinance 340,000 Source: ANDS 63 178. There are a number of schemes run by the NGOs, supported by the United Nations and bilateral agencies, which have provided humanitarian support over the years and helped prevent mass destitution and hunger (including food-for-work and cash-for-work type programs). At the same time, food, cash and housing have also been provided to returning refugees, and relief food aid has been provided to internally displaced persons, female-headed households and disabled persons. (For details, see Table A9.9). 179. Among the development programs, the National Solidarity Program (NSP) is providing jobs and improving infrastructure throughout the country. The World Bank is the largest international source of funds for the NSP which finances small projects based on the priorities of the rural population. The program has financed over 47,000 community projects in more than 20,000 villages in all 34 provinces. About 80 percent of the projects involve infrastructure such as irrigation, rural roads, electrification, and drinking water supply, all critical for the recovery of the rural economy. The program also encompasses education, health, and livelihood, but these components receive less attention. Other important programs include the National Emergency Rural Access Program (NERAP) and the Expanding Microfinance Outreach and Sustainability Project that has disbursed 1.3 million loans worth around US$570 million. 180. MoLSAMD manages the scheme of pensions for families of martyrs and disabled that consume budget resources equivalent to the public sector pension program. Since 1992, around 300,000 individuals applied, including around 220,000 survivors of martyrs and 90,000 disabled. Actual figures for payment cases, however, are not available. It appears that some cases may not be eligible anymore, e.g., due to death, while others may remain pending. The eligibility process for disability involves verification by local community, government office, and special health commission. Payments used to be made quarterly but annual payments are becoming a norm. There are concerns with both the restricted definition of disability and potential increase in the required funding if those restrictions are to be lifted. At present, eligible disability and survivorship must be war-related6, which defines highly sensitive political context of the program. Furthermore, there are likely no robust mechanisms to substantiate evidence of war- related casualty, and discretion of community or authorities would have to direct the eligibility assessment process. Considerations have been given to introducing a more general disability definition (most recent estimates put the number of individuals with general disability at around 800,0007) but such measure will likely be prohibitive at the moment. At the same time, it is feared that even under the current conditions, there are a considerable number of individuals in the remote communities who have not yet been given a fair opportunity to apply. The program management has rather evolved around the ad-hoc approach. With lack of knowledge on actual eligibility cases, the planned number of recipients seems to have become an endogenous parameter. For instance, with the 2006 budget allocation and the new adopted benefit rate of Afs 400, it was expected that around 201,000 payments will be made in the current year. 6 It is possible that only selected conflicts and/or selected categories of the fighters and their families are eligible for benefits. 7 The estimate comes from the National Disability Survey in Afghanistan (NDSA) implemented in 2005 by Handicap-International in cooperation with government agencies and co-funded by a group of donors. In particular, it indicates that only 17% of all disabilities are war related (or between 126,000 and 146,000 cases), including up to 60,000 cases of landmine and UXO survivors. It is not clear if the latter category qualifies under the eligibility definitions of the cash program of the Ministry. 64 181. The main public sector pension scheme is a PAYG type scheme paying benefits to over 60,000 beneficiaries and providing insurance against the old age, disability, work-related injury or illness, and death for the public sector employees. It is funded by the contributions and transfers from the state budget. According to the Pension Rules, employers and employees contributions are correspondingly 8 and 3 percent of the basic pay. (The latter is only a component of the total take-home pay that includes various allowances). In practice, employee contributions constitute only a small share of all the receipts, while employers largely provide no matching amount at all. The direct budget allocations provide major source of funding8. Table A9.2: Beneficiaries of the public sector pension scheme (2006) Categories Registered Payments Total payments, Afs 000 Civil Pensioners 33,500 20,000 298,500 Civil Survivors 14,800 7,900 140,800 Military Pensioners 17,900 15,400 490,000 Military Survivors 5,800 2,600 76,000 Beneficiaries in provinces 11,100 8,500 103,700 Total: 83,100 54,400 1,109,000 Source: ANDS, MoLSAMD 2007. Note: The difference between the registered pensioners and actual payments is due to several factors, including: (a) outdated nature of accounting of the pensioner cases and double-counting in cases of death, (b) missing pensioners, (c) claims pending processing, (d) possible short-term shortages of funds to cover all outstanding claims. For more details, see: Afghanistan: Public Sector Pension Scheme: From Crisis Management to Comprehensive Reform Strategy, The World Bank. June 24, 2008. 182. By 1382 (2003) benefit value deteriorated significantly, so that only few seemed to be willing to claim eligibility and collected benefit. As an interim measure, Government announced a benefit increase. The new provisions stipulated flat but grade-specific benefit payments to all those who retired in the past (both civil servants and military), without connection to their length of service. Civil servants who retired in or after 1382 (2003) continued to be subject to the normal rules of benefit calculation based, however, on the new salary scale (a 7-fold increase from 1382). The interim measure introduced by the Government created some visible disparities. Two principal sources of differences in the pay for the old and the new retirees are lack of length of service consideration for those retired prior to 1382 (2003), and narrow definition of the pensionable base for the new retirees. Basically, two individuals retired before and after 1382 in the same rank and with the same length of service receive different pensions, with the difference primarily being the function of length of service. Disparities are significant, especially for the employees in the lower ranks, as those on average accumulate smaller number of years by the time of retirement. For the new retirees, however, the gap between the flat benefits and the new benefits supposedly is shrinking as the public sector wages are subject to constant increases. Furthermore, this gap will be completely reversed as the pay and grading 8 Historically, the scheme used to have reserves, invested both in physical assets (shops, buildings, cinemas, etc.) and bank deposits. In early 1980s, these assets were taken away from the pension system by the communist government. Discussions have been ongoing over the return of the control over the assets to the Pensions Department but ability to implement such a decision would be questionable given challenges of identifying legitimacy of ownership claims. 65 reform progresses and new retirees will be retiring with pensions calculated on the wages significantly higher than those that were paid in the past. 183. The Government is seeking to (partially) liquidate liabilities of the legacy scheme by introducing one off payments for some members of the scheme, with preference given to the survivors of those retired prior to 1382 (2003). See Section B of this Annex for discussion of options and financial impact. As part of this process, the Pensioners Census will be conducted and records of the legacy system will be cleaned and digitized. 184. At the same time, the Government has developed a comprehensive reform program based on parametric reform of the existing scheme. The parameters reflected in the Government proposal take into account key policy recommendations as to bringing the scheme back to balance. The reformed program will reinforce the contributory principle of the new scheme, whereby employees with their new higher wages will have to make (higher) contributions towards ensuring better pension in future. Incentives are also in place to defer early retirement and a longer span of the pensionable wage measure (3 years versus last wage in the past) helps prevent wage manipulations to gain the retirement system. 185. The choice of the combination of the benefit rate and contribution rate (as well as adjustment for early retirement) was made based on the fair actuarial calculations. The objective was to have a 50 percent replacement rate with the 25 years of service (an average for the retiring civil servants in Afghanistan). This resulted in the accrual rate of 2 percent and the contribution rate of around 14 percent. This contribution would fund the old age and pre-retirement survivorship pension. An additional 2 percent contribution was calculated as required to fund the post-retirement survivorship. The total contribution of 16% is proposed to be split equally between the employer and employee. See table A9.7 for summary of the parametric reform measures. 186. In order to successfully implement the reform, administrative capacity of the Pension Department will need to be upscaled. Current operation is completely paper based. No automated system of records exists. This makes the job of enforcing the rules and monitoring performance of the system extremely difficult. Clearly, investments in the new systems and capacity to operate the reform scheme will be required. Investments will have to go into automation of the benefit processing operation with computerized work-stations installed in application processing points. No manual calculation should be allowed anymore to avoid mistakes reported so far. The software should be able to incorporate all the rules introduced as part of the reform, including new accrual rates and lump sum conversions. This effort will considerably improve the quality of operation of the Pension Department. 187. Proper enforcement of the new contributory mandates will require expenses on the building capacity in monitoring and enforcement. Today, capacity to enforce and monitor collection of pension contributions within the MoF Tax Administration remains weak. There seems to be lack of managerial focus on the issues of pension contributions. A very passive role of accounting and monitoring is assumed. This project will facilitate building of such capacity (under Component 1). 66 B. Fiscal analysis of the pension program and reform options 188. Over the past few years, a concern has been growing about the impact of various public sector reform initiatives on liabilities of the pension system. Pay and grading reform with changes in the scale and composition of pay as well as structural adjustments in the civil service will have serious implication for the pension liabilities. In 1385/2006, under a Bank's TA, for the first time assessment of the outstanding pension liabilities of the public sector pension scheme was conducted. Results of that analysis as well as analysis of the short to medium term effect of the reform options is presented in this Annex. 189. Tables A9.1-2 provides details of components of the pension liabilities accrued on the system up to year 1385 (2006), with total estimate standing at around 6.2 percent of GDP (using a conservative 3 percent discount factor). International comparison with other civil service schemes (Table A9.3) indicates that Afghanistan still has quite low pension debt-to-GDP ratio. However, changes both in structure of the civil service and the military/policy as well in the compensation package have not been reflected here. Afghanistan: outstanding pension debt, by categories, US$9 Table A9.3: Active Employees Present value of pension debt Category Headcount 3% discount rate 5% discount rate Current Current CS ­ Regular 69,500 46,000,000 32,000,000 CS ­ Ajirs 67,500 30,000,000 22,000,000 SOEs ­ Regular 8,500 5,000,000 3,000,000 SOEs ­ Ajirs 13,500 6,000,000 4,000,000 Teachers 110,000 28,000,000 20,000,000 Police officers 21,000 57,000,000 36,000,000 Military & Security officers 17,500 101,000,000 63,000,000 Total 307,500 $ 273,000,000 $ 180,000,000 Share of GDP 3.8% 2.5% Share of domestic revenues 59% 39% Source: Authors' estimates. Notes: Teachers headcount was taken prior to recent significant new hires. Assuming most new hires are new employees of the public sector, impact on pension liabilities must be negligible. We do not account for 1384 mid-year salary review, which added Afs350, supposedly to base pay. For military and police, we did not apply any change in the pay scale post pay reform. Pay reform assumes new scales as provided by MoF Calculations assumed: The rules of current DB formula Eligibility to benefit based on rights accumulated thus far but at future times when current employee reached the normal retirement age (65/55). Mortality table to assess age-specific duration of periods in receipt of benefit No change in benefit in real terms over time. 9 Source: Public Sector Pension Scheme: From Crisis Management to Comprehensive Reform Strategy. The World Bank. June 24, 2008. 67 Table A9.4: Retirees Present value of pension debt Headcount 3% discount rate 5% discount rate Civil Service and Ajirs Retirees 18,700 49,000,000 43,000,000 Survivors 7,050 33,000,000 27,000,000 Military and Police Retirees 13,100 79,000,000 68,000,000 Survivors 2,350 10,000,000 8,000,000 Total 41,200 $ 171,000,000 $ 146,000,000 Share of GDP 2.4% 2.1% Share of domestic revenues 37% 32% Source: Authors' estimates. Notes: Liabilities vis-à-vis individuals who separated from the civil service or military at anytime in the past but have not yet applied remain unaccounted. For civil service and adjirs, flat pension amounts were imputed based on rank/grade at retirement. For military and police, actual awarded pension amounts were used. For retirees, mortality table was used to assess age-specific duration of periods in receipt of benefit. For survivors, assumed on average 25 years of payments in each case. Assumed no change in benefit in real terms over time. We did not account for possible pension increase for current retirees following the pay reform. Table A9.5: International comparison of outstanding pension debt of civil service schemes Year Outstanding Current pension debt, spending, % of GDP % of GDP Afghanistan 1 2005 6 0.3 Bhutan 2 2004 22 NA Brazil 1998 92 1.7 Iran 2001 38 0.5 Korea 1995 7 0.2 Nepal 3 2002 14 0.5 Philippines 1997 17 0.2 Sri Lanka 4 2002 60 1.8 Turkey 1997 75 1.7 Sources: For Afghanistan: authors' estimates (using 3% discount rate). Other sources include: Robert Palacios and Edward Whitehouse, "Civil-service pension schemes around the world", The World Bank, 2006. Robert Palacios, "Civil service pensions in South Asia: A rising tide of reform", The World Bank, 2004. Notes: 1- All civil servants, teachers, police & military 2 - All civil servants and military 3 ­ Pension debt: CS only. Pension spending: includes military & police 4 - All civil servants and military 190. The situation will change dramatically as the pay reform progresses. The effect would be a corresponding multi-fold increase in pension liabilities. To counterbalance the pay reform effect, parametrical reforms have been suggested, which we discuss further below. 68 191. At the same time, the government faces the challenge of addressing existing obligations to those that have been covered by the old system and to start paying possibly higher pensions as the pay reform progresses. At the same time, direct budget subsidies remain a principal source of the program revenues: Table A9.6: Funding sources of the pension scheme (million Afs), Revenues, 1383/2004 1384/2005 MoF net allocation1 382.3 870.1 Other sources2 127.3 190.9 Total 509.6 1,061 Source: MoF Monitoring Agent. Notes: 1 After netting out of funds returned to the MoF. 2 Includes employee contributions from government and SOEs. 192. Analysis of the short-to-medium term fiscal needs indicates growing burden for the budget. With the pay and grading reform measures, even the less generous benefit formula would provide for a growing fiscal gap. Analysis of various scenarios indicated that important choices had to be made. The final recommendation was to reduce the benefit accruals, increase the contribution rates, and make all allowances pensionable, among others (see Table A9.7 in this Annex). The anticipated result is streamlined finances and gradual shift away from the deficit financing (as indicated under option 3 in Table A9.10). 193. At the same time, Government has decided to use some project money to pay out some liabilities of the legacy scheme. Analysis of options in terms of coverage, mode of payment, amount, and fiscal feasibility of such payments has been conducted and it follows here. 194. Advantage of the lump sum payments is that it frees up administration of the pension program to focus on the needs of modernizing the operation and servicing retirees of the new reformed scheme better. It also can help reduce operational risks of continuous illegitimate payments to certain groups of beneficiaries (e.g., survivors). 195. However, a lump sum replacing periodic pensions could be spent too quickly or used for non-productive investment. Such individuals could find themselves in need of public assistance. Blame could be put on the Government. 196. While mandatory conversion may be neither feasible nor desirable, voluntary conversion could help to somewhat avoid the adverse effects. Different individuals will have different preferences for conversion (some will value today's cash vs. tomorrow's cash more than others). Voluntary conversion, would allow individuals to exercise their choice given information on the conversion method. Conversion to lump sum payments mandatory for some (say, survivors) and voluntary for the others could be a reasonable compromise that addresses both the needs of administration and the fiscal constraints. 197. The following three potential categories of beneficiaries of that program were defined: (a) some old age beneficiaries, (b) survivors, (c) some early retirees (forced to retire as part of the 69 Pay and Grading Reform). The broader the coverage, the more funds would be required, however. The amount of individual lump sum payment would depend upon several factors: the monthly pension amount received by a pensioner, the age of the pensioner, and the discount factor. Age, for example, is very important because the younger the individual is the longer s/he would receive a stream of pension payments. In addition, once a pensioner dies his/her family members who are the survivors normally continue collecting pensions while they are eligible. Three years of payments, therefore, have been added for survivors to make the lump-sum payments more generous and attractive. The three-year figure was chosen keeping in mind the affordability factor for the government and provisions of the new Pension Regulation whereby surviving family would receive 36 months worth of pensionable pay or pension. Results of the calculations follow: Option A. Amounts of payouts to the regular old-age retirees would be quite significant: At 5 % discount rate At 10% discount rate Coverage option Total LS Pay-Out Coverage option Total LS Pay-Out 86+ Age group $233,000 86+ Age group $217,000 81+ Age group $4,050,000 81+ Age group $3,557,000 All pensioners $311,760,000 All pensioners $235,140,000 Option B. If lump-sum payments made only to the survivors, with the current average survivor annual pension of around $450 and the total of approximately 15,000 active survivor cases, the total lump sum payouts could be between $20,000,000 and $34,000,000 depending on the decision on whether the lump sum compensation is to be equal 3 or 5 years of equivalent payments (with no further obligations). Options C. With the anticipated roughly 10,000 of the layoffs as result of the Pay and Grading reform, the early retirement package could be financed in part under this project. Under certain assumptions on the scheme design10, the total cost of the early retirement package can be as follows: Covered cohorts Discount rate 10 % 5% 45-54 Age group $23,500,000 $32,000,000 55-64 Age group $2,500,000 $3,000,000 Total 26,000,000 35,000,000 198. Given limited funding, options B or C would be the most appropriate in terms of addressing some of the urgent related policy issues. Option B (current Government's preference) would allow discontinuing survivors' payments, at least in part, and achieving measurable savings in the medium term, while option C would help finance part of the cost of the civil service reform. Under either approach, however, the currently provided IDA funding under the project is not sufficient to cover all the expenses. If the new contributory pension scheme is fully implemented, some anticipated short-to-medium term surplus (as indicated in fiscal projections under option 3 in Table A9.10) could be utilized to cover the funding gap. 10 Those between 55 and 64 receive present value of the payments until they reach age 65, at which point they return to the regular pension rolls; and those below 55 receive full compensation of their accumulated pension rights. 70 199. Definition of the category of beneficiates of the legacy scheme for the lump sum payments still remains open. While the government has agreed in principle to this approach and has strongly favored survivors (of pre-1382 scheme) as a target group, further elaboration of options and costing under this project will be required and will be supported under sub- component II of Component 1 of this project (including capturing and digitizing past records, census of current beneficiaries, procedures, financial arrangements, etc). Table A9.7: Comparative chart of key provisions of the new Pension Regulation11 Provision New Scheme Old Scheme Normal retirement age 65 65 Annual pension accrual rate 2.0% Sliding schedule of 4 % to 2.5% (2.5% for maximum service) Pensionable wage Average of last 3 years, including allowances Last wage at retirement. Allowances excluded. Maximum pension 80% of the Pensionable Wage 100% of the last wage Pension indexation Based on average index of public wage increases Not clear Min early retirement age 55 in all cases Not specified Voluntary early retirement 25 years of service and 55 years old 25 years of service Early retirement penalty 3% decrease in pension for each year below None normal retirement Employee survivors benefit 36 months of Pensionable wage in a lump sum or Benefit for unspecified/unlimited period of installments time to eligible family members Retiree survivors benefit 36 months of pension in a lump sum or Benefit for unspecified/unlimited period of installments time to eligible family members Disability benefit Differentiation on full vs. partial and work-related Not clear (more generous benefit) vs. normal disability. Financing Contributions of 8% (Employer) + 8% Contributions 3% (Employee); budget (Employee); budget will cover the deficit. covers the deficit. Transition Those retiring before Pay & Grading reform retire under the current pension rules Those retiring after Pay & Grading reform benefit from the new rules Previous years of service under the old scheme are fully recognized Accrual rate will be phased-in gradually over the five year period 11 Source: Based on the new Pension Rules covering non-uniform public sector employees. 71 Table A9.8: Public Social Risk Management Arrangements in Afghanistan12 Direct cash transfers Martyrs' families from war and individuals with war and land mine related disabilities are entitled to monthly cash transfers that range from US$3 to US$10, depending on the number of martyr family members and the level of disability. In 2006 this benefit was paid to 224,850 martyr's families and to 87,717 disabled. The annual amount spent on this was around US$20 million. Support to orphanages and kindergartens In 2006, the Government allocated some US$2.6 million to finance the operating cost of 32 orphanages sheltering around 10,500 orphans. The Government is also responsible for operating 365 kindergartens with around 25,000 children. The social protection character of the kindergartens system is in doubt, since most of the enrolled children come from civil servants and military families which in most instances are unlikely to be vulnerable or poor. Public works Public works schemes are of two kinds: · Cash-for-Work Programs, including a National Solidarity Program (NSP) and a National Rural Accessibility Program (NRAP); and · Food aid Programs: a Food for Work Program (FFW), and an Iodized Salt Program Neither category of programs appears to capture well the poor or very poor. Skills development A National Skills Development program (NSDP), introduced in 2004, targets unemployed and underemployed individuals. It has trained some 10,000 people since its inception ­ 42 percent of them women and 5 percent disabled. Some 82 percent of participants have found employment. The NSDP target is to provide training for 150,000 people by 2010, of which women should comprise at least 35 percent and the disabled at least 10 percent. Other formal (public) arrangements: · Targeted land distribution: land (and apartment) distribution for war-related disabled and martyr families; · Distribution of humanitarian aid and conditional payments in kind: humanitarian aid reached around 5.2 million people in 2004. School attendance, especially by girls, is encouraged through payments in kind; while "food for training" is used to encourage teachers; · Lump-sum payments support families who lost their breadwinners in the ongoing war against anti-government groups, civilian victims of conflict and victims of natural disaster; · Public subsidies: the cost of electricity, particularly for consumers in Kabul, has been heavily subsidized (in 1385/2006 with US$50 million). Pensions are subsidized from the general budget to make up for weak collections ­ in 2006; some US$21 million were transferred. 12 Source: Afghanistan National Social Protection Strategy, 1.17.2008 72 Table A9.9: Select donor initiatives in social protection13 EC will provide Euro 24m towards policy design, capacity development, and building delivery system for social services covering 5 urban areas. SIDA support to social integration of PWDs via Swedish Committee to Afghanistan (anticipated 2008-11, value unknown), largely north-eastern and central provinces. Denmark (US$0.80m) and Finland (US$0.12m) support to 'gender justice' including violence against women (2007/8), at central level (capacity building of legal entities) and UNIFEM-supported Women's Provincial Development Centres. Norway (US$0.60m), Germany and Japan (US$0.06m) support gender mainstreaming (2007/8) - Kabul technical support Belgium (US$1.00m), Germany and Japan (US$0.06m) support to chronically poor women (2007/8) - addresses an AC/MDG benchmark via technical support at central MoWA and selected provincial DoWAs, plus urban and rural direct service interventions in various provinces. CIDA (US$2.16m) support to urban and rural widows (2007/8 via CARE programme in Kabul Province UNICEF (US$1.98m) to Child Protection, Labour and Trafficking (2007/8) including TA to 11 departments of MoLSAMD. Germany, CIDA, Japan support to vocational training, including extremely vulnerable groups and with whom proposed service providers already collaborate. 13 Source: European Commission "ACTION FICHE FOR AFGHANISTAN, SOCIAL PROTECTION" 73 Tables A9.10: Medium Term Fiscal Projections for the Reformed Civil Service Pension Scheme Summary of Scenarios: Scenario Definitions/Assumptions Findings #1 (Baseline) All new wages, excluding allowances, are pensionable; Significant and growing deficit requires less generous benefit formula with full effect phased-in permanent subsidies gradually; lump sum payments to survivors; but same old contribution rates (3% from employees). #2 (Higher contributions) Same as Baseline but new contribution rates (16% Deficit disappears in the medium term combined employer and employee contributions) #3 (All allowances are Same as Baseline but new contribution rates and Improved fiscal situation in the short-to- pensionable) allowances are pensionable medium term (revenues grow faster than expenditures). The most preferable option Assumptions: 1386 1387 1388 1389 1390 1391 (MOY) 2007 2008 2009 2010 2011 2012 Actual Pensionable Headcount Total pensionable non-uniform 302,000 302,000 301,300 320,600 330,000 329,400 Civil Service (CS) 130,000 130,000 130,000 130,000 130,000 130,000 Teachers (TE) 150,000 150,000 150,000 170,000 180,000 180,000 SOEs 22,000 22,000 21,300 20,600 20,000 19,400 flow of retrenched as result of P&G reform (CS+TE) 2,500 2,500 2,500 2,500 0 flow of normally retired (CS+TE+SOEs) - includes dead 8,106 6,490 4,016 2,128 539 new hires (CS+TE) 0 9,847 29,067 18,502 8,010 CS+TE after P&G reform and (re-)appointed with new salary 30,000 80,000 70,000 70,000 20,000 Police officers (including gen, officers, sergeants) 25,000 26,000 28,000 30,000 32,000 34,000 Military officers (including officers, sergeants, an 27,000 26,500 26,000 25,500 25,000 25,000 Actual Pensionable Wagebill, $ Avg CS+TE+SOEs base wage $38 $45 $52 $59 $66 $74 Avg post-PG CS+TE total wage $147 $142 $144 $148 $151 Avg Police Wage $200 $205 $210 $215 $220 $225 Avg Military Wage $230 $235 $240 $245 $250 $255 Pre-PG non-uniform wage bill $138,655,849 $164,025,193 $163,488,405 $122,109,840 $75,926,997 $1,600,328 Post-PG non-uniform wage bill $0 $0 $67,694,970 $256,318,087 $414,847,391 $598,242,750 Police and Military Officers Payroll $138,575,641 $138,690,000 $144,027,101 $150,905,215 $157,942,316 $167,159,751 74 Scenario #1 1386 1387 1388 1389 1390 1391 Contributions (at 95% comlpliance) Pre-PG Civil Service Employees 3,952,000 4,674,950 4,659,750 3,479,850 2,164,100 45,600 Post-PG Employees Civil Service 1,328,100 5,004,600 8,078,800 11,661,250 Police&Military 3,949,150 3,952,950 4,104,950 4,300,650 4,501,100 4,764,250 Post-PG Government Civil Service - - - - Police&Military - - - - - Total 7,901,150 8,627,900 10,092,800 12,785,100 14,744,000 16,471,100 Expenditures Old scheme Old age benefits (not indexed) 28,000,000 30,200,000 32,000,000 33,300,000 34,200,000 34,400,000 Survivors benefits (not indexed) 7,000,000 8,900,000 10,100,000 10,900,000 11,200,000 11,200,000 New Scheme Old age benefits 2,200,000 4,200,000 6,900,000 9,800,000 12,700,000 Survivors benefits (lump sums) 4,000,000 5,500,000 12,200,000 16,500,000 24,500,000 Total 35,000,000 45,300,000 51,800,000 63,300,000 71,700,000 82,800,000 Balance -27,098,850 -36,672,100 -41,707,200 -50,514,900 -56,956,000 -66,328,900 Scenario #2 1386 1387 1388 1389 1390 1391 Contributions (at 95% comlpliance) Pre-PG Civil Service Employees 3,952,000 4,674,950 4,659,750 3,479,850 2,164,100 45,600 Post-PG Employees Civil Service 3,542,550 13,344,650 21,544,100 31,096,350 Police&Military 3,949,150 10,540,250 10,945,900 11,468,400 12,003,250 12,704,350 Post-PG Government Civil Service 3,729,000 14,047,000 22,678,000 32,733,000 Police&Military 11,095,000 11,522,000 12,072,000 12,635,000 13,373,000 Total 7,901,150 26,310,200 34,399,200 54,411,900 71,024,450 89,952,300 Expenditures Old scheme Old age benefits (not indexed) 28,000,000 30,200,000 32,000,000 33,300,000 34,200,000 34,400,000 Survivors benefits (not indexed) 7,000,000 8,900,000 10,100,000 10,900,000 11,200,000 11,200,000 New Scheme Old age benefits 2,200,000 4,200,000 6,900,000 9,800,000 12,700,000 Survivors benefits (lump sums) 4,000,000 5,500,000 12,200,000 16,500,000 24,500,000 Total 35,000,000 45,300,000 51,800,000 63,300,000 71,700,000 82,800,000 Balance -27,098,850 -18,989,800 -17,400,800 -8,888,100 -675,550 7,152,300 Scenario #3 1386 1387 1388 1389 1390 1391 Contributions (at 95% comlpliance) Pre-PG Civil Service Employees 3,952,000 4,674,950 4,659,750 3,479,850 2,164,100 45,600 Post-PG Employees Civil Service 5,145,200 19,479,750 31,528,600 45,466,050 Police&Military 3,949,150 10,540,250 10,945,900 11,468,400 12,003,250 12,704,350 Post-PG Government Civil Service 5,416,000 20,505,000 33,188,000 47,859,000 Police&Military 11,095,000 11,522,000 12,072,000 12,635,000 13,373,000 Total 7,901,150 26,310,200 37,688,850 67,005,000 91,518,950 119,448,000 Expenditures Old scheme Old age benefits (not indexed) 28,000,000 30,200,000 32,000,000 33,300,000 34,200,000 34,400,000 Survivors benefits (not indexed) 7,000,000 8,900,000 10,100,000 10,900,000 11,200,000 11,200,000 New Scheme Old age benefits 2,200,000 4,300,000 7,200,000 10,300,000 13,600,000 Survivors benefits (lump sums) 4,000,000 6,000,000 14,800,000 20,700,000 31,200,000 Total 35,000,000 45,300,000 52,400,000 66,200,000 76,400,000 90,400,000 Balance -27,098,850 -18,989,800 -14,711,150 805,000 15,118,950 29,048,000 75 Annex 10: Documents in Project Files AFGHANISTAN: Pension Administration and Safety Net Project Bank Staff Assessments Aide Memoire, Pre-appraisal Mission, June 18, 2009 Aide Memoire, Preparation Mission, January 2, 2009 Back-to-Office Report, September 10, 2008. Back-to-Office Report, December 12, 2008 Back-to-Office Report, April 9, 2009 Project Concept Note, December 4, 2008. Project Information Document, June 2007. Afghanistan Interim Strategy Note, April 12, 2006 Public Sector Pension Scheme: From Crisis Management to Comprehensive Reform Strategy, June 24, 2008 Semi-Annual Economic Brief, Economic Policy and Poverty Team, South Asia Region, The World Bank. Mimeo. 2009 Regional Social Protection Policy Review in South Asia, Human Development, South Asia Region, The World Bank. Draft. 2009 Other Afghanistan National Development Strategy, Social Protection Sector Strategy, January 2008. Strategy Note on Public Employee Pensions in Afghanistan. Ministry of Labor, Social Affairs, Martyrs and Disabled. December 2007 Islamic Republic of Afghanistan: Poverty Reduction Strategy Paper - Progress Report, IMF Country Report No. 08/73. 2008 76 Annex 11: Statement of Loans and Credits AFGHANISTAN: Pension Administration and Safety Net Project Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd P107921 2009 Afg Strengthening Institutions DPG 0.00 35.00 0.00 0.00 0.00 36.39 0.00 0.00 P110644 2009 AF Financial Sector Strengthening Proj 0.00 8.00 0.00 0.00 0.00 8.49 0.00 0.00 P112446 2009 Strengthng.Health Activts.for Rural Poor 0.00 30.00 0.00 0.00 0.00 28.03 -2.85 0.00 P101502 2008 Afghanistan HIV/AIDS Prevention Project 0.00 10.00 0.00 0.00 0.00 6.83 1.43 0.00 P102573 2008 Afghanistan Skills Development Project 0.00 20.00 0.00 0.00 0.00 17.12 2.23 0.00 P103343 2008 National Emergency Rural Access Project 0.00 112.00 0.00 0.00 0.00 73.13 -35.59 0.00 P104301 2008 AF Microfinance Project 0.00 30.00 0.00 0.00 0.00 11.91 -7.65 0.00 P106259 2008 Education Quality Improvement Program 0.00 30.00 0.00 0.00 0.00 21.10 -4.96 0.00 II P102288 2007 NSP II 0.00 195.00 0.00 0.00 0.00 78.35 -4.54 0.00 P100935 2007 Avian Flu 0.00 8.00 0.00 0.00 0.00 6.35 3.39 0.00 P099980 2007 AF: Public Financial Management Reform 0.00 33.40 0.00 0.00 0.00 29.08 0.30 0.00 P097030 2007 Civil Service Reform Project 0.00 20.40 0.00 0.00 0.00 18.40 6.98 0.00 P090928 2007 AF PSD Support Project 0.00 25.00 0.00 0.00 0.00 21.90 5.30 0.00 P098256 2006 AF: Hort. & Livestock Project 0.00 20.00 0.00 0.00 0.00 8.01 1.72 0.00 P098118 2006 Afghanistan: Natural Resources Devt 0.00 40.00 0.00 0.00 0.00 31.69 12.48 0.00 P087860 2006 Urban Water Sector 0.00 40.00 0.00 0.00 0.00 42.25 31.28 0.00 P083919 2005 Kabul Urban Reconstruction Project 0.00 25.00 0.00 0.00 0.00 14.66 13.37 0.00 P088719 2005 Investment Guarantee Facility 0.00 5.00 0.00 0.00 0.00 2.71 2.55 0.00 P089040 2005 Strengthening Higher Education Program 0.00 40.00 0.00 0.00 0.00 18.58 2.19 0.00 P083908 2004 Emergency Power Rehabilitation Project 0.00 105.00 0.00 0.00 0.00 35.28 29.47 2.95 P083906 2004 Emergency Customs and Trade Facilitation 0.00 37.81 0.00 0.00 0.00 7.11 -1.15 0.00 P083720 2004 AF: Emergency Communications 0.00 22.00 0.00 0.00 0.00 0.41 -0.65 0.00 Development P078936 2004 AF: Emer Irrig Rehab 0.00 126.50 0.00 0.00 0.00 65.27 -24.41 -24.41 P078324 2003 Afghanistan Health Sector Emergency 0.00 109.60 0.00 0.00 0.00 1.02 -55.20 -26.56 Reha P078284 2003 Emergency Transport Rehabilitation 0.00 153.00 0.00 0.00 1.25 0.73 -52.82 -12.45 Total: 0.00 1,280.71 0.00 0.00 1.25 584.80 - 77.13 - 60.47 COUNTRY 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 77 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 78 Annex 12: Country at a Glance AFGHANISTAN: Pension Administration and Safety Net Project 19 8 7 19 9 7 2006 2007 G ro wt h o f c a pit a l a nd G D P ( %) (% o f GDP Y P O V E R T ) a nd S O C IA L S o ut h Lo w- D e v e lo pm e nt dia m o nd* 60 A griculture A f gha nis t a n .. .. A s ia inc o m e .. .. 40 2007 Industry .. .. .. .. PMpulatio n, mid-year (millio ns) o anufacturing 27.1 1 .. ,520 1 .. ,296 20 .. .. Life expectancy GNI per capita (A tlas metho d, US$ ) 370 880 578 0 Services .. .. .. .. - 20 02 03 04 05 06 07 GNI (A tlas metho d, US$ billio ns) 1 0.1 1,339 749 Ho useho ld final co nsumptio n expenditure .. .. .. .. - 40 General go v't final gro wt h, 2 0 0 1- 0 7 A v e ra ge a nnua lco nsumptio n expenditure .. .. .. .. Impo rts o f go o ds and services .. .. .. .. GCF GDP P o pulatio n (%) 3.9 1.6 2.2 GNI Gro ss Labo r fo rce (%) .. 2.1 2.7 19 8 7 - 9 7 19 9 7 - 0 7 2006 2007 per primary M o s t re c e nt e s t im a t e ( la t e s t ye a r a v a ila ble , 2 0 0 1- 0 7 ) G ro wt h o f e xpo rt s a nd im po rt s ( %) capita enro llment (average annual gro wth) A griculture o f po pulatio n belo w natio nal po verty line) P o verty (% .. .. .. .. 60 Industry pulatio n (% o f to tal po pulatio n) Urban po .. .. 24 29.. 32.. 40 20 M expectancy Lifeanufacturingat birth (years) .. .. 43 64.. 57.. 0 Services rtality (per 1 Infant mo ,000 live births) .. 1 .. 65 62.. 85.. -20 02 03 04 05 06 07 Child malnutritio n (% o f children under 5) 33 41 29 A ccess to impro ved water so urce Ho useho ld final co nsumptio n expenditure .. .. .. .. -40 A ccess to an impro ved water so urce (% o f po pulatio n) 22 87 68 General go v't final co nsumptio n expenditure .. .. .. .. -60 Literacy (% o f po pulatio n age 1 5+) .. 58 61 Gro ss capital fo rmatio n .. .. .. .. Gro ss primary enro llment (% o f scho o l-age po pulatio n) 101 108 94 A fghanistan Exports Imports Impo rts o f go o ds and services .. .. .. .. M ale 1 26 1 11 100 Lo w-inco me gro up Female 75 104 89 No te: 2007 data are preliminary estimates. KE Y E C was pro duced T IO the Develo pment Eco no mics LDB This tableO N O M IC R Afro m S a nd LO N G - T E R M T R E N D S database. 19 8 7 19 9 mpared2 0 0 6 inco2 0 0 7 up average. If data are missing, the diamo nd will * The diamo nds sho w fo ur key indicato rs in the co untry (in bo ld) co7 with its me-gro E c o no m ic ra t io s * be inco mplete. GDP (US$ billio ns) .. .. 9.4 1 1 .6 Gro ss capital fo rmatio n/GDP .. .. .. .. Trade Expo rts o f go o ds and services/GDP .. .. .. .. Gro ss do mestic savings/GDP .. .. .. .. Gro ss natio nal savings/GDP .. .. .. .. Current acco unt balance/GDP .. .. .. .. Do mestic Capital Interest payments/GDP .. .. 0.1 .. savings fo rmatio n To tal debt/GDP .. .. 18.9 .. To tal debt service/expo rts .. .. .. .. P resent value o f debt/GDP .. .. 14.1 .. P resent value o f debt/expo rts .. .. .. .. Indebtedness 19 8 7 - 9 7 19 9 7 - 0 7 2006 2007 2 0 0 7 - 11 (average annual gro wth) GDP .. 1 .5 1 6.1 13.5 .. A fghanistan GDP per capita .. 7.1 2.0 9.2 .. Lo w-inco me gro up Expo rts o f go o ds and services .. .. .. .. .. S T R UC T UR E o f t he E C O N O M Y 79 B A LA N C E o f P A Y M E N T S 19 8 7 19 9 7 2006 2007 C urre nt a c c o unt ba la nc e t o G D P ( %) (US$ millio ns) Afghanistan Expo rts o f go o ds and services 574 .. .. .. 6 Impo rts o f go o ds and services 1,061 .. .. .. P R IC E S a nd G O V E R N M E N T F IN A N C E 4 Reso urce balance -487 .. .. .. 19 8 7 19 9 7 2006 2007 Inf la t io n ( %) 2 D o inco t ic Net m e sme pric e s 8 .. .. .. 40 (% change) Net current transfers .. .. .. .. 0 Co nsumer prices .. .. .. .. 20 01 02 03 04 05 06 07 Current acco unt balance .. .. .. .. -2 Implicit GDP deflato r .. .. 3.0 9.4 Financing items (net) .. .. .. .. -40 G o v e rnm e nt f ina nc e 02 03 04 05 06 07 Changes in net reserves -1 1 .. .. .. -20 (% o f GDP , includes current grants) -6 Current revenue M emo : .. .. .. .. -40 Current budget balance Reserves including go ld (US$ millio ns) 747.. .. .. .. GDP deflat or CPI Overall surplus/deficit Co nversio n rate (DEC, lo cal/US$ ) .. 50.6 .. .. 37.5 .. 37.6 TRADE E X T E R N A L D E B T a nd R E S O UR C E F LO WS 19 8 7 19 9 7 2006 2007 E xpo po a nd im po rt0le6 e lsbtUS $ $ m ill.) C o m rt s it io n o f 2 0 v de ( ( US m ill.) (US$ millio ns) expo o utstanding and disbursed To tal debt rts (fo b) .. 59 1 .. 1 .. ,771 .. 4,000 n.a. IB RD .. .. .. 0 .. 0 G: 11 n.a. IDA .. .. 358.. .. 411 3,000 B: 358 M anufactures .. .. .. .. To tal debt service .. .. 9 .. 2,000 To tal impo rts (cif) .. 462 .. .. IB RD .. .. 0 0 Fo o d .. 1 .. .. IDA .. .. 5 7 1,000 Fuel and energy .. 1 .. .. Capital go n o Co mpo sitioo dsf net reso urce flo ws .. 6 .. .. 0 Official grants .. .. 0 .. 01 E: 995 02 03 04 05 06 07 Expo rt price index (2000=1 00) .. .. .. .. Official credito rs .. .. 143 .. Impo rt price index (2000=1 00) .. .. .. .. Exports Import s P rivate credito rs .. .. 0 .. D: 407 Terms o f trade (2000=1 00) .. .. .. .. Fo reign direct investment (net inflo ws) .. .. .. .. P o rtfo lio equity (net inflo ws) .. .. 0 .. Wo rld B ank pro gram Co mmitments .. .. 0 0 A - IBRD E - Bilateral Disbursements .. .. 39 56 B - IDA D - Other mult ilateral F - Privat e P rincipal repayments .. .. 3 3 C - IM F G - Short -t erm Net flo ws .. .. 37 54 Interest payments .. .. 3 5 Net transfers .. .. 34 49 No te: This table was pro duced fro m the Develo pment Eco no mics LDB database. 9/24/08 80