Working Group Proposal: ARTF Recurrent Cost Program

1
Working Group Proposal ARTF Recurrent Cost
Program

• ARTF Donor Meeting
• 17 December, 2008

2
What has been the process?

• Options note discussed Sep 16, 08
• Recommendation to develop a technical proposal
  for December ARTF Qly meeting
• ARTF WG MoF, Germany, US, Italy, EC, UK, WB,
  IMF (6 meetings to date)
• Understand positions/views
• Discussion technical options
• Seek resolution

3
The RC Window background

• Established in 2002 to pool funds towards the
  operating budget
• Achievements to date
• Combines financing from 30 donors
• Channeled US1.6 billion for salaries/OM
• Established strong fiduciary controls
• Has helped strengthen governments public
  financial management
• Secured transparency efficiency on operating
  budget

4
ARTF in macro-fiscal context

• Revenues have increased by 6 times between SY1382
  and SY1386
• Nevertheless, fiscal sustainability has not been
  achieved (revenue/GDP ratio still low)
• and new pressures are emerging on operating
  expenditures
• External budget impact on OM
• ANA ANP expansion
• Pay grade
• With the government facing these difficult
  challenges, ARTF remains an important source of
  predictable financing for GoA

5
Why change the approach?

• 2002 ARTF Board Document
• Principle of phase-out
• ARTF Evaluation in Aug 2008
• Programmatic approach, including the merging over
  time of recurrent investment cost windows
• Strengthened policy dialogue and donor engagement
• ARTF Donors
• Pressure to shift weight towards investments
• Opportunity for a strategic approach with a long
  term vision - 2020

6
Objectives of ARTF RC Program

• Maintains ARTF RC as the main provider of
  operating budget support for the Government of
  Afghanistan
• Maintains ARTF role as fiduciary agent on
  operating budget
• Strengthens predictability aid effectiveness
• Supports Government reform program
• Strengthens ARTF as a platform for policy
  dialogue
• Clearer strategic objectives for ARTF RC

7
Key components of the proposal

• Baseline Phase-Out RC window set to decline at
  US25m/year (11 year exit path)
• Policy Incentive Scheme annual contribution
  linked to achievement of reform commitments
• Structural benchmarks
• Revenue matching grant scheme
• Existing decision-making maintained
• MC as executive Donor Committee as
  shareholders
• New program introduced for SY1388 budget
• Establish the operational principle early
• Review of policy incentive mechanism in SY1389

8
Indicative ARTF RC Profile (ANDS period)
SY1387 is preliminary actual. SY1388 is
indicative.
9
How does it work?

• Schedule (T1 mechanism)
• For predictability of annual budget formulation
  process Performance in year T is reflected in
  incentive for next year (T1)
• Agreement on structural benchmarks
• Donor/Government WG meets in November.
• Facilitated/advised by Administrator.
• Benchmarks approved by ARTF Donor Meeting.
• Review of structural benchmarks
• Administrator reviews in November.
• Informs the Donors.
• Advises the MC on T1 RC allocation ceiling
  (i.e. approved in following March).
• Revenue matching grant scheme
• review in June of every year (based on previous
  financial years actual revenue performance) and
  RC ceiling adjusted accordingly

10
Timing
11
Policy Benchmarks Principles Themes

• Principles
• Support strengthen MoFs role as arbiter of
  budget
• Avoid over-benchmarking
• Avoid overly ambitious policies
• Relevant policy areas
• Must support an ARTF RC exit strategy (i.e fiscal
  sustainability sound country systems)
• Multi-year reform efforts
• Increasingly cross-government scope

12
Targeted Policy Outcomes
Policy Outcome Monitoring
Sustained increases in domestic revenue generation Quantitative ARTF scheme PRGF
Improved public sector governance PAM PEFA
Enabling private sector development Doing business indicators Investment climate assessment
13
Indicative Benchmarks
Policy Outcome SY1388 Benchmark
Sustained increases in domestic revenue generation Enact amendment to the income tax law Adequate staffing of revenue department
Improved public sector governance Teacher competencies defined as part of MoE PAR PG costing update with donors
Enabling private sector development Enact secured transactions law Submit MFTR to WTO
14
What does this mean for SY1388?

• Overall program design approved by the ARTF
  Donors December 17, 2008
• ARTF Donors to delegate authority to
  Administrator to agree on benchmarks for SY1388
  finalise revenue scheme
• MoF budgets for US250m ARTF RC in SY1388
• SY1388 development budget to include a
  contingency line of US40m
• Review by Administrator before end Hoot SY1387
  (March 2009)
• If benchmarks have been achieved, ARTF Management
  Committee approves additional 40m for ARTF RC,

15
Key decisions for today

• MC declines the baseline of ARTF RC support by
  US25 million a year
• Institute the annual Policy Incentive Scheme as
  described
• Delegate a small WG, led by the World Bank, to
  finalize agreement with MoF on benchmarks
  revenue design

16
Risks Rewards

• Risks
• Non-agreement amongst ARTF donors.
• Too many benchmarks.
• Benchmarks not met.
• Ad hoc fiscal pressures emerge.
• Revenue continues to lag.
• Increase in bilateral approach

• Rewards
• Achieves predictability for donors government
• Establishes the right incentives
• Strengthens ARTF as policy platform
• Clearer strategic outcomes for ARTF