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Cablegate: Afghanistan Reconstruction Trust Fund: Quarterly Donors

VZCZCXRO0451
PP RUEHIK
DE RUEHBUL #3701/01 3211454
ZNR UUUUU ZZH
P 171454Z NOV 09
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 3209
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0938
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEABND/DEA HQS WASHINGTON DC
RUEHC/DEPT OF AGRICULTURE WASHINGTON DC 0135
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 03 KABUL 003701

SIPDIS

DEPT FOR SRAP, SCA/FO, SCA/RA, AND SCA/A
DEPT PASS FOR AID/ASIA SCAA
DEPT PASS USTR FOR DELANEY AND DEANGELIS
DEPT PASS OPIC
DEPT PASS USDA FOR FAS MICHNER
DEPT PASS TDA FOR STEIN AND GREENIP
NSC FOR JJONES AND GSMITH
DASD FOR DSEDNEY
TREASURY FOR MHIRSON, ABAUKOL, AWELLER, AND MNUGENT
COMMERCE FOR HAMROCK-MANN, DEES, AND FONOVICH

E.O.12958: N/A
TAGS: EINV EFIN ECON AF
SUBJECT: AFGHANISTAN RECONSTRUCTION TRUST FUND: QUARTERLY DONORS
REVIEW

REF: Kabul 2056

KABUL 00003701 001.2 OF 003


1. (U) This is an action message. See paragraph 11.

2. (U) SUMMARY: At the November 10 quarterly review meeting with
donors of the World Bank's Afghanistan Reconstruction Trust Fund
(ARTF), Finance Minister Zakhilwal challenged the international
community to channel more assistance through the government's core
budget. He noted that the ARTF is one of the most prominent,
credible vehicles for such on-budget support. (Approximately 80% of
donor funding to Afghanistan currently passes through the
Government's 'external, off-the-book budget.') Zakhilwal also
announced that Article 61 (an ARTF Incentive program benchmark -
Reftel) was recently put into effect, with full legal status,
according to the Ministry of Justice. Article 61 of the Public
Financial Management Law enables the Ministry of Finance to conduct
internal audits of other line ministries. At the meeting, the
Ministry of Rural Rehabilitation and Development (MRRD) rejected
recent press allegations that the National Solidarity Program's
(NSP) was providing indirect financing for the Taliban. ARTF
remains an important and transparent vehicle for international
assistance to Afghanistan, and a prime means through which to
encourage the Afghan government to make needed economic reforms. We
recommend that the United States encourage other donors to increase
their contributions to the fund. END SUMMARY.

---------------------
ARTF Financial Status
---------------------

3. (U) Finance Minister Omar Zakhilwal and World Bank Country
Manager Mariam Sherman co-chaired the ARTF quarterly meeting, which
had been delayed by the attack on a UN guest house in Kabul on
October 28. They reviewed current financing: Donors have currently
pledged $654 million to the ARTF in FY 1388 (March 21, 2009 - March
20, 2010), up from $626 million in FY 1387 (March 21, 2008 - March
20, 2009). Key sectors in the active investment portfolio (which
funds programs), valued at over a $1 billion, include: Agriculture
and Rural Development; Microfinance, Energy, Health and Education,
and justice. USAID Mission Director William Frej stressed the
importance that ARTF-funded programs demonstrate concrete results
and impact. In addition to a newsletter and video to improve
communication and outreach, the World Bank is discussing putting a
new third-party monitoring agent in place for the investment window.
PricewaterhouseCoopers of Netherlands is currently the monitoring
agent engaged by the Bank in its role as ARTF Administrator to
review expenditures through the ARTF recurrent cost window (which
funds government operating expenses such as salaries, operations and
maintenance).

-----------------------------------------
ARTF Financing Strategy/Incentive Program
-----------------------------------------

4. (U) To build on the forward-looking ARTF incentive program and
to reduce the amount of preferencing (earmarking) over time, the
Government of the Islamic Republic of Afghanistan (GIRoA) and the
donors endorsed a Financing and Investment Framework at the July 29,
2009 Quarterly donor meeting. The Framework will improve the
predictability, efficiency and transparency of ARTF resource
allocations by establishing principles for the allocation of
investment fund monies. It will also set priorities for ARTF donors
and the GIRoA. ARTF operations are governed by a Management
Committee, consisting of representatives of the Asian Development
Bank (ADB), Islamic Development Bank, UNDP and World Bank.
Day-to-day administration is undertaken by the World Bank as the
Administrator of the ARTF. The Management Committee meets once a
month and is attended by the Government of Afghanistan as an
Observer.

5. (U) At the meeting, Deputy Finance Minister Mastoor presented
the GIRoA's proposed detailed implementation for the Financing
Strategy Framework: 1) the ARTF would remain the main financing
channel for GIRoA priorities; and 2) as stated at the 2008 Paris
Conference, Agriculture, Energy, and Irrigation would continue to be

KABUL 00003701 002.2 OF 003


its top priorities. Next steps would include aligning the ARTF
Financing strategy with the FY 1389 (March 21, 2010 - March 20,
2011) national budget. Finance Minister Zakhilwal also asked donors
to provide funding more closely aligned to the Afghan solar year to
ensure a smoother implementation of national programs vs. the more
common practice up to now of receiving funds in the winter, which
delays implementation of programs. USAID plans to submit an early
release of FY 2010 ARTF funds to better align to the Afghan Solar
Year (March 2010), thereby providing financial support to GIRoA
programs on a more timely basis.

6. (U) The Finance Minister "welcomed pressure" from donors in
promoting reforms via the ARTF Incentive Program, in the areas of:
A) Sustaining domestic revenues; B) Improving public sector
governance; and C) Enabling private sector development. The Finance
Minister is fully committed to meeting benchmarks in the off-setting
incentive program, which essentially offers additional discretionary
funding if the GIRoA meets certain pre-agreed benchmarks on an
annual basis. He also requested that donors "relax" preferencing to
allow for increased flexibility in ARTF funding. Preferencing at
the program/project level, he said, has been too restrictive and
limits the ability of the GIRoA to adopt sector-wide approaches
implementing the Afghanistan National Development Strategy (ANDS).
USAID Mission Director William Frej noted that lobbying for specific
programs by individual Ministers, in particular, MRRD Minister Zia,
has resulted in legislative earmarks to the National Solidarity
Program (NSP).

----------
Article 61
----------

7. (U) In 2007, the Control and Audit Office (CAO) objected to
Article 61 of the Financial Management and Expenditure Control Law
(included under the ARTF's benchmarking incentive program). The CAO
argued the article ceded too much power to the Ministry of Finance
(MoF). As a resultof CAO's objection, the president assigned a
commission to study the matter. The commission later recommended
terminating Article 61 and restricting the purview of the Ministry
of Finance's Internal Audit Department to MoF-related departments
only. The president signed off on this opinion. The Ministry of
Justice recently clarified, however, that Article 61 is in force,
granting the MoF purview over internal audits in line ministries.
MOJ added that any changes to the Financial Management Law require
going through proper channels and publication in an official
gazette, which were not done in this case.

------------------------
NSP ALLEGATIONS NOT TRUE
------------------------

8. (U) The Ministry of Rural Rehabilitation and Development's NSP
Executive Director Tariq Ismati provided an update on his ministry's
investigation into recent press allegations that the NSP indirectly
funds the Taliban. (On August 10, 2009 a Global Post article
claimed that "in Farah province, local officials report that the
Taliban are taking up to 40% of the money coming in for the NSP..."
) According to Ismati, a high-level MRRD delegation uncovered no
indications that monies were paid to Taliban groups. Ismati also
said that NSP operates in six out of Farah's 11 districts, with 76
projects currently underway (47 of which are in insecure districts),
at a total value of $1,127,723. Key results include: 1) 9,522
wells dug with pumps; 2) 31 schools opened, in coordination with the
Ministry of Education; 3) 470 culverts built; and 4)658 kms. of
village and districts gravel roads. All of these projects came in
at costs well below similar ones executed by PRTs using CERP funds.

9. (U) The investigation included interviews with the Farah
Governor, the PRT (i.e. PRT Commander, USAID Representative, Marine
Forces, etc.), the Director of Tribes and Frontiers, Community
elders, Community Development Councils, UN-Habitat, Provincial
Officials, etc. Documents and financial records were also
cross-checked and noted as compliant with NSP Operational Manual
standards. (Comment: On November 12, Ambassador Wayne asked MRRD
for a report on NSP projects performance in the South after

KABUL 00003701 003.2 OF 003


receiving reports that NSP projects had floundered in several
southern provinces with heavy insurgent activity. The Deputy MRRD
Minister admitted problems and promised a report including how the
MRRD has adapted its approach.)

-------
COMMENT
-------

10. (U) In concert with the Afghan government and other donors, our
Mission will continue to work with the ARTF to track progress, align
technical assistance to meet and implement economic reform
benchmarks (i.e. Article 61), and implement the ARTF's Financing
Strategy. In particular, the Afghan government's Financing Strategy
offers donors an opportunity to work with the new Government to
further align ARTF resources to GIRoA priorities. Donors were also
pleased to see that the World Bank/MRRD is taking investigations
into corruption seriously and conducting due diligence. Clear
follow-up on the allegations and a reiteration of risk mitigation
measures are needed, however. We also recommend additional measures
be explored and implemented in high-risk areas vulnerable to Taliban
extortion moving forwards.

11. (U) Action request: We recommend Washington consider
undertaking a broader diplomatic effort to solicit greater ARTF
pledges from other donors. (The U.S. and the UK now provide half of
the total ARTF funding). This initiative is consistent with
President Obama's emphasis on greater Afghanization of assistance,
enabling the Afghan government to take the lead in national
programs. As noted above, USAID also plans to submit a request for
an early release of FY 2010 ARTF funds to provide financial support
to GIRoA programs on a more timely basis.

EIKENBERRY

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