Supporting Self-Reliance in Afghanistan

Strategic Vision for the Transformation Decade

May 16, 2012 1.0 v1 Draft

Supporting Self-Reliance in Afghanistan

Abstract
The Government of the Islamic Republic of Afghanistan (the Government) prepared this paper to present its strategic vision and a coherent, realistic plan to achieve the goals of self-reliance, prosperity and stability in the country through phases of Transition (2012-2014) and Transformation (2015 - 2025). Building upon the Afghanistan National Development Strategy (20082013) and the Kabul Process, the Government has developed a blueprint to be implemented through the National Priority Programs that will allow Afghanistan to gradually reduce its reliance on international assistance by generating private sector led growth, increasing revenues and building capacities. In addition, the government has laid out its plan to meet challenges of providing good governance to people, fighting corruption and integrating itself to region for mutual benefits within an accountability framework agreed upon with the international partners.

May 16, 2012 b

Supporting Self-Reliance in Afghanistan

Contents
Vision for 2025 and Beyond ........................................................................................................... 1 Achievements ................................................................................................................................. 1 Challenges ...................................................................................................................................... 3 Afghanistans Growth and Development Strategy ......................................................................... 4 Growth, Revenue Generation and Infrastructure Development ................................................... 5 Jobs and Employment .................................................................................................................... 8 Food Security/Agriculture and Rural Development ....................................................................... 9 Capacity Development and Budget Execution ............................................................................. 10 Vibrant Private Sector .................................................................................................................. 11 Essential Services.......................................................................................................................... 13 Good Governance: the Key to Successful Implementation of the Strategy ................................. 13 Governance Achievements (2001-2011) ...................................................................................... 14 Pre-Tokyo Governance Achievements (March 2012 July 2012)................................................ 15 Post-Tokyo Governance Indicators .............................................................................................. 15 Regional Integration ..................................................................................................................... 16 Cross-Cutting Sectors ................................................................................................................... 18 Prioritization and Sequencing of NPPs ......................................................................................... 18 Strategy to Address the Fiscal Gap ............................................................................................... 19 Mutual Accountability .................................................................................................................. 20

May 16, 2012 c

Vision for 2025 and Beyond

Afghanistan has made tremendous progress over the past ten years, and the Government will continue to deliver results for its people in partnership with the international community. We recognize the challenges of pursuing economic development while simultaneously pursuing peace-building. Like its partner New Deal states, Afghanistan must continue to address the interrelated challenges of peacebuilding, state-building and development. Afghanistan will continue to be a relatively less developed country for some time, but as the economy diversifies and grows, more Afghans are educated, the health and wellbeing of the Afghan people improves, and government becomes increasingly transparent and accountable, Afghanistan will establish a foundation for future prosperity. By 2015 Afghanistan will have taken over full operational responsibility for its own security though financing will be needed through transformation decade and beyond, and will be leading development initiatives to build on foundational investments that will pave the way to economic growth and fiscal sustainability. By 2025 Afghanistan will have reduced its dependence on international assistance to non-security sectors to levels consistent with other least developed nations. A robust and growing extractive industries sector will have developed. Peace and stability will be consolidated in Afghan communities through effective development and improved delivery of Government services. By 2030 Afghanistan will be substantially funding and operating a professional, highly effective ANSF. Achievements in development and governance will allow Afghanistan to emerge as a model of a democratic developing Islamic nation.

Achievements
Afghanistan has seen remarkable growth in its economy and infrastructure, as well as dramatic improvements in the health and education of the Afghan people. Afghanistans per capita Gross Domestic Product was estimated at $591 in 1390 (2011). This is nearly a five-fold increase from

Supporting Self-Reliance in Afghanistan the $123 per capita GDP 10 years ago. Access to primary health care has increased from 8% of the population to more than 60%; more than 8 million students are enrolled in school and more than 157,000 students graduated from high school in 2011. Nearly 8,000 kilometres of national and regional highways and provincial roads have been built, cutting travel times between centres by 75%, and the Afghan ring road should be completed by 2014. The civil aviation services to the customers have considerably improved and the use of air transport has increased substantially. Access to electricity has increased by 250% and the national power utility has grown into a more efficient, well-managed corporation. Eighty per cent of the population now has access to telecommunication services, and the National Solidarity Program has empowered communities across rural Afghanistan to decide how to allocate a total of $1.2 billion in support of their priorities. The significant progress the international community and Afghanistan have achieved in the past ten years provides a testimony and promise of advancement that can be made over the next decade. The Government has continued to build systems for revenue mobilization and public financial management, achieving a 24.4% increase in domestic revenue collection over 2010, and a 57.5% increase since 2009. Afghanistans economy remains strong, growing over 8% this fiscal year despite a global economic downturn and continuing the trend of an average of 9% growth per year since 2002. The groundwork has been laid for foreign investment in the mining sector through improvements in the business environment and increasingly transparent processes, resulting in the award of several large mining contracts, including the Hajigak and Aynak. Afghanistan is one of the 23 candidate countries of the Extractive Industries Transparency Initiative (EITI). The transparency pillar in the Public Finance Management (PFM) Roadmap, a National Priority Program (NPP) endorsed in the Kabul Conference, demonstrates the Governments unwavering commitment to open public finances. Afghanistan has emerged as a new democracy, holding successive elections under challenging circumstances for both the legislative and executive branches of government. A vocal and vibrant civil society has emerged, and open media provides a forum where a range of views are publicly debated. The role of women in society has grown; girls make up 38% of pupils in schools and successful women have emerged as political, business and civil society leaders and role models. Over the past year, the Government has increasingly taken the lead and ownership of security, development and governance. As of early July 2012, 75% of population is estimated to be living May 16, 2012 2

Supporting Self-Reliance in Afghanistan in areas that have been transitioned to full Afghanistan National Securities Forces (ANSF) control. Ministries, led by their respective Cluster Coordinators, have prepared detailed National Priority Programs (NPPs) in line with the mandate from the 2010 Kabul Conference. As of early July 2012, the international community and Afghan Government have agreed to (XX) NPPs through the Kabul Process.

Challenges
Despite the remarkable progress Afghanistan has made with the assistance of international partners, there are still significant challenges ahead, and much remains to be accomplished. An estimated 36% of Afghans live below the poverty line1, and the population continues to experience high rates of malnutrition and food insecurity. Thirty percent of the school aged children are out of school and many of Afghan youth do not have productive skills to participate in a growing economy. Infrastructure remains nascent, an especially important issue for a land-locked country. The narcotics trade poses a serious threat to Afghanistans future, distorting the economy and contributing to instability of the region. While the economy has grown substantially over the past ten years, steps need to be taken to improve the investment climate for private sector, and to better integrate Afghanistan into the regional economy. Afghanistan ranked 180 of 182 countries in Transparency Internationals most recent Annual Corruption Perception Index. In the IFCs Doing Business 2012 report, Afghanistan ranks 160th out of 183 economies2 and last among the 8 economies that make up the South Asia region. There are numerous opportunities for further reforms. Afghanistan remains heavily reliant on foreign aid. In spite of the increase in revenue collection from less than 7% of GDP in 2005 to 11% of GDP in 2011, the Government remains dependent on foreign aid for continued development initiatives and operational support. Aid in 2010-2011 was about $15.7 billion about the size of nominal GDP. Over 30 percent of government

1 2

World Bank; Afghanistan Economic Update, October 2011 The ease of doing business ranking is a simple average of the country percentile rankings on each of the topics covered by Doing Business.

May 16, 2012 3

Supporting Self-Reliance in Afghanistan revenue is from customs and import duties, which are closely linked to foreign aid. Although domestic revenues have grown by around 57% during last three years, the Governments operating expenditures on average have been rising at around 30% per year for the past three years.3The operating budget is likely to face increasing pressures and iin spite of donor commitments to increase on-budget funds nearly 80% of those funds still flow through offbudget mechanisms. Quick-impact projects which aim to win hearts and minds have often by-passed the Government, leaving unsustainable demand and infrastructure that the Afghan Government cannot afford to operate and maintain. Donors can substantially improve consultations and coordination with the Government for alignment of donor-funded projects to Afghan priorities. Building on the strong foundation that has been laid over the past decade, Afghanistan and its partners will continue to address the challenges throughout the Transformation Decade. This paper outlines what the maturing partnership between Afghanistan and the international community will look like, and presents a framework for mutual accountability.

Afghanistans Growth and Development Strategy

For Afghanistan to achieve self-sufficiency it must develop a vibrant, growing, equitable, and sustainable economy. This will require significant financial investments even while Afghanistan is highly dependent on donor funds, which are likely to decline with the reduction of International Forces. In response, Afghanistan has determined to pursue a development strategy which will generate fast economic growth. Critical infrastructure, private sector development and agriculture will be the main drivers of this growth strategy while good governance and human resources development will prepare the ground for successful implementation. Underpinning this work are peace, reconciliation, and reintegration efforts which lay the foundation for security and a more stable future. The strategy will lead to higher revenues, job creation, improved capacity within government and outside (including for better budget execution), infrastructure development, presence of a vibrant private sector, provision of essential services, food security, regional cooperation, and a sustainable peace. Issues related to gender, environment and counter-narcotics cut across all Clusters and programs. The strategy is embedded in and implemented through the Governments National Priority Programs (NPPs). The basic pillars and outcomes of the development strategy are depicted in Figure 1.

3 Salaries constitute almost 80% of operating expenditure. Current pressures on the wage bill include an increase in the number in the Afghanistan National Army (ANA) and Afghanistan National Police (ANP) as well as Pay and Grade reform, both of which will result in a higher wage bill in the next three years.

May 16, 2012 4

Supporting Self-Reliance in Afghanistan Figure 1: Afghanistan's Economic Drivers

The sections below describe how various NPPs achieve Afghanistans strategic goals. Each sector identifies a two-pronged approach of strategic investments and government action to realize the envisaged growth.

Growth, Revenue Generation and Infrastructure Development

Initiatives in all sectors are oriented toward contributing to growth and revenue in small or large measures. Accelerating growth and revenue will require a balanced recipe of many elements, but improvements in Afghanistans infrastructure will be critical especially to facilitate access and trade in the mining sector, which is the main driving sector for the growth story. Infrastructure development will also increase economic productivity and unleash forces of growth through ripple effects in terms of down-stream industries and trade. Key infrastructure reduces transaction costs for the transportation of people, goods and services and improves access to markets. This further reduces costs of production/trade, increases efficiency of all factors of production particularly labor, attracts domestic and foreign investment, and

May 16, 2012 5

Supporting Self-Reliance in Afghanistan contributes to increased specialization. Better access to inputs and markets will provide impetus to agriculture sector as well. Regional Resources Corridors: The National Regional Resources Corridors Program (ID Cluster) is the Governments flagship program to provide effective mobility through roads, railways, and civil aviation. The program will facilitate open transport corridors within the country and to the region to increase international trade by ten-fold, cut travel times by at least half, and reduce vehicle operating costs by 1040%. Increased economic activities and trade through further, these corridors will attract private investment in extractive industries and in infrastructure development and complementary economic activities. This program alone accounts for roughly 22.54% of the total funding requirement of all the NPPs, which reflects its priority and importance role in Afghanistans economic future. The primary expected results outputs of this program include rehabilitation and construction of 1,400 km of roads, construction of 800km of railways, improvements to five international airports, ten regional airports, and airfields in other provinces. Efforts to stimulate Afghanistans resource corridors also include creation the institutional mechanisms through Road, Railways and Civil Aviation Authorities for better operation and maintenance of the infrastructure..

Extractive Industries: The National Extractive Industries Excellence Program (ID Cluster), through strategic partnerships led by the national and international private sector, will create a vibrant and dynamic extractive industries sector and serve as the main vehicle for revenue generation. In the short-term, hydro-carbon assets will quickly begin to contribute to the growth of Afghanistans GDP and revenue generation. Current estimates suggest that by 2021, mineral and hydrocarbons will reach up to $ 1 billion annually to the Governments fiscal revenues. The largest contributors in this sector are iron and copper mines, which will enter production as the Transformation Decade begins. Production from the Amu Darya oil fields will begin this year. The mines at Aynak and Hajigak, if combined with vertical integration and infrastructure development, could generate up to $500 million in annual revenue by 2020.Further investments must be made in the Sheberghan gas fields. Royalties the Government collects will be invested into ensuring a more sustainable level of public services. The Government will ensure that the development of extractive industries is transparent and beneficial to the people of Afghanistan. For example, companies will need to invest a portion of their profits in the environment and local communities affected by the extraction. Following the international best practices, the May 16, 2012 6

Supporting Self-Reliance in Afghanistan government is committed to develop a Mining Revenue Fund to better manage and protect mining revenue and allocate it in the sectors that have multiplier effects. The exploration for minerals, hydro-carbons, and coal will be a major activity during the Transformation Decade, in addition to exploiting existing available resources for the benefit of the country. The Ministry will develop the required capacity to supervise and manage private projects worth billions of dollar and lead extractive sector growth in a transparent manner. Energy Supply: The National Energy Supply Program (NESP -ID Cluster) is instrumental in achieving energy security by addressing critical infrastructure deficits in the power supply chain (of generation, transmission and distribution). Afghanistan continues to face demandsupply imbalances due to sub-optimal development and management of its vast available resources. The sector remains institutionally fragmented and centralized, and lacks integrated energy planning to address countrys energy needs in the short, medium and long terms. Energy is the most vital factor in the growth equation sustainable and affordable energy supplies could only guarantee equitable and broad based economic and social growth. The Private Sector has identified lack of availability of reliable energy as the most critical impediment in their growth. The World Bank Indicators of Doing Business in Afghanistan has also identified it as a major constraint. Afghanistan's per capita energy consumption is among the lowest and only 10% rural and 30% urban populace have access to regular energy supplies. In addition to importing cheap power from competing neighboring countries and act as a power hub, there is a need for improved energy resource use and management, including identification and promotion of renewable energy and enhanced use of indigenous resources, promotion of energy efficiency and facilitation of public-private investment into the sector. Since 2008, Afghanistan has embarked upon a comprehensive program for power grid expansion of existing grid power operations and connectivity through new transmission and generation projects. The sector is undergoing reforms including commercialization of power sector operations and improved sector governance, and consolidation of public energy functions and agencies. The corporatization of Da Afghanistan Beshna Sherkat (Afghan Power Corporation), progress towards separation of sector regulatory/policy and operational functions and sector masterplanning including tariff reforms are under implementation in a phased manner and definitive timelines and outcomes. Although substantial ground has been gained from a lower base, the NESP envisages an additional investment of $1.5 billion through sequencing of key projects over the short term through till transformation decade to achieve sustainable energy security for Afghanistan.

May 16, 2012 7

Supporting Self-Reliance in Afghanistan Information, Communication and Telecommunication (ICT): In this information era an efficient ICT infrastructure is a basic requirement for economic growth and social development. Afghanistan has made tremendous strides in the last decade on this front. The E-Afghanistan Program aims to further modernize the Information and Telecommunications sector and egovernment to enhance the effectiveness, efficiency, and transparency of the public sector, develop a vibrant private sector, and create a connected and productive society. Strengthening the fiber-cable network, e- and m- governance, and information networks is planned during coming years.

Jobs and Employment

To translate growth into meaningful results for Afghans, the economy must generate a sizeable number of sustainable jobs while unemployment and especially underemployment in Afghanistanestimated at 8% and 48% respectively remain very high, even with todays rapid economic growth. With 68% percent of the population under the age of 25, with many of them will soon entering the labor market, makes the employment scenario only more competitive. The aspirations of an increasing number of secondary and higher education graduates need to be met to prevent disenchantment with the government and avoid their falling into the trap of anti-government forces. While demand for job creation remains huge, the decline in international spending in Afghanistan will likely have an adverse effect on employment opportunities. The Governments strategy outlines a response to address this huge challenge. Sustainable jobs can only be created by a growing economy and thats why growth is central to the development strategy. The private sector is to generate sustainable jobs while the government facilitates its development and provides the enabling environment and infrastructure. Improvements to the legal framework and business enabling environment for all sectors are likely to create significant employment opportunities in information and communication sector, banking and finance, extractive industries, etc. Development of infrastructure itself will create a large number of direct and indirect jobs. The resources corridors program is likely to generate about 7 million labor days while the mining and hydrocarbon projects combined with community development projects, could together create 150,000 jobs. Additionally smaller investments in mining operations such as existing cement plants, sand, gravel and stone quarries could increase employment especially in rural Afghanistan. The efforts of increasing productivity in the May 16, 2012 8

Supporting Self-Reliance in Afghanistan agriculture sector, down-stream food processing industries and linking farmers to markets will generate significant job opportunities. While jobs are created by growth, the people have to be simultaneously equipped with appropriate knowledge and skills so that they can productively perform in these jobs. The Human Resource Development Cluster programs, therefore, aim primarily to prepare youth for Afghanistans future labor market. The Programs for Education and Higher Education under the Cluster will continue to provide basic knowledge to students to participate in jobs markets including through development of Afghan National Qualification Framework. The Facilitation of Sustainable Decent Work through Skills Development and Market-Friendly Labor Regulations Program will focus on developing policy and institutional frameworks that enable the government to prepare appropriate evidence-based policies for employment and labor, and jobrich growth. Technical Vocational Education and Training, through formal and informal mechanisms, will be utilized along with literacy initiatives to bridge the current skills gaps in the country and enhance the employability of the labor force in relevant, market driven skills with focus on vulnerable groups. According to the International Labor Organization (ILO), SMEs are responsible for the creation of 70% of the new jobs worldwide. The Government of Afghanistan gives high priority to the development of this sector and the Integrated Trade and SME Support Facility Program will take policy, institutions, infrastructure and other initiatives for robust SME development. The Agriculture and Rural Development Cluster Programs will generate jobs in big numbers by increasing productivity in rural areas especially farm sector, linking agriculture and rural products to markets and creating opportunities in non-farm sector through rural enterprises.

Food Security/Agriculture and Rural Development

Agriculture continues to be the foundation of Afghanistans economy, and the primary source of survival for the Afghan people. A majority of Afghans work in this sector, which accounts for over 30% of the GDP. However, 7.4 million Afghans about a fourth of the population - cannot get enough food to live active, healthy lives, and an additional 8.5 million are on the borderline of food insecurity4.

National Risk and Vulnerability Assessment

May 16, 2012 9

Supporting Self-Reliance in Afghanistan The most important task in this sector will be to ensure Afghans have food in their households. In 2009, the most bountiful rainfall in 32 years brought harvests that made Afghanistan nearly selfsufficient in cereals. This demonstrated that if water can be properly managed, agriculture will offer a tremendous opportunity for achieving food security. However, only about a quarter of Afghan agricultural land is now irrigated, and much of it inefficiently. Also, the significant fluctuations in agricultural productivity over the past few years have demonstrated the importance of properly managing the pricing and reserves of grain. Agriculture will remain an important driver of GDP and job growth through the Transformation Decade. Continued development of agriculture productivity and value will improve livelihoods, and offer an alternative to production of narcotics. Investments in this area will be needed for: improvements in irrigation management and water supply5; bolstering programs to promote the growth of rural economies and consequently rapid growth in the agriculture sector6; facilitating private sector investment in agribusiness areas of processing, packaging, and transport7; and improving farm to market connections8. The Government will also issue a wheat sector policy and development a strategic grain reserve9. In areas that are already food secure (i.e. Helmand) focus must be on improving productivity and marketable produce. The National Water and Natural Resources Development Program in the Agriculture and Rural Development Cluster will create the infrastructure for development of our water resources for irrigation and natural resources to manage environment. The National Comprehensive Agriculture and Market Development Program (ARD Cluster) will boost the Agriculture Sector through forward and backward linkages leading to growth, jobs and food security. The National Rural Access Program and Strengthening of Local Institutions Program will continue to improve local mobility, infrastructure and institutions. Studies predict that an investment of $215 million per year in agriculture through the Transformation Decade will result in an increase in the value of agricultural production from $800 million to $3.1 billion per year by 202410.

10

Capacity Development and Budget Execution

Growth requires capacity at all levels, whether it is in the government, private sector, social organizations, academic institutions, or implementing agencies. Since 2002, capacity building

5 6

NPP on National Water and Natural Resource Development, Component A on National Water Resources and Irrigation NPP on National Comprehensive Agriculture Production and Market Development, Component B Rural Credit and Agriculture Development Fund 7 NPP on National Comprehensive Agriculture Production and Market Development, Component on Enterprise and Market Development, Sub-Component Comprehensive Agriculture and Rural Development Facility (CARD-F) 8 NPP on National Rural Access Program Components A, B Secondary and Tertiary Roads 9 NPP on National Comprehensive Agriculture Production and Market Development, Component A Improved Agriculture and Farm Economics 10 Dalberg Global Development Advisors, Afghan Agricultural Assessment and Framework Development

May 16, 2012 10

Supporting Self-Reliance in Afghanistan has been a major focus of the Government. Despite the progress made in this area through the determined efforts of assistance programs, capacity constraints still remains a big bottleneck to achieving growth, especially in increasing ministry budget execution. The National Public Finance Management Program in the Governance Cluster aims to improve public financial management system, increasing budget execution, efficiency, and transparency in the management of public finances. Key challenges in this area include capacity constraints at the national and especially sub-national levels, unrealistic planning and budget formulation; donor earmarking of funds and funding delays, and challenges in communication and coordination across ministries, among donors and between national and sub national entities. The Government is committed to improving provincial-level planning, budgeting and implementation, developing the capacity of line ministries in finance, procurement, project management, creating a Medium-Term Budget Framework that will be used to create hard budget ceilings, and to effectively reprioritize spending according to national priorities. The Effective and Efficient Government Program in the Governance Cluster aims to strengthen and promote individual leadership and institutional capacities for governance at both the central and local levels to enable service delivery, economic growth, justice, stabilization, and security. The Civil Service Commission is implementing the Capacity Building for Results Program to improve ministry budget execution through hiring competent Afghan staff at marketcompetitive salaries. The Civilian Technical Assistance Program (CTAP) and National Institutions Building Program (NIBP) both provide international capacity building advisors to ministries to improve their efficiency.

11

Vibrant Private Sector

Private Sector Development is the fulcrum of the economic growth strategy and the Government is committed to taking all steps necessary to facilitate its expeditious and orderly development. The Private Sector will not only be the harbinger of growth, jobs and revenues but will also create delivery mechanisms for goods and services in both economic and social sectors, facilitate good governance, generate capacities, productively utilize available human energies and natural resources, integrate Afghanistan with the region and the world, and above all generate hope. Its role, reach and impact will be cutting across all sectors. All ministries and agencies are involved in various ways with the private sector, but the Ministries of Commerce and Industries; Communication and Information Technology; Mines; May 16, 2012 11

Supporting Self-Reliance in Afghanistan Energy and Water; and Finance, along with the Afghanistan Investment Support Agency (AISA), are in the forefront to create an enabling environment for doing business. The Da Afghanistan Bank, as the regulator and the supervising authority of the financial sector, facilitates private sector growth by safeguarding monetary and financial stability. The Government has facilitated growth of the private sector by: establishing the rule of law and governance structures; enacting commercial laws and putting in place regulatory frameworks; promoting enabling and growthoriented sector focused policies; providing financial and fiscal structures; creating basic infrastructure for mobility, energy, and telecommunications.; developing industrial infrastructure through industrial parks.; streamlining processes and procedures for doing business; promoting trade through bilateral and multilateral agreements; supporting the development of factors of production such as credit, investments, entrepreneurship,; supporting human resources development; and improving access to land. As a result, the growth in the private sector has been quite significant in the last decade. For example, in the telecommunications sector more than five big companies are providing telecom and IT services around the country, and the sector is contributing around $100 million to the government exchequer every year. The Integrated Trade and SME Supports Facility Program in the Private Sector Development Cluster further aims to improve and harmonize Afghanistans business climate and address challenges to private sector growth in Afghanistan. . Despite these achievements, the road ahead is long. The growth of Afghanistans private sector is hindered by well-known challenges common to many land locked, lesser developed and post conflict countries. The overall business environment is still characterized by a weak regulatory and legal regime, institutional and structural deficiencies, poor infrastructure and corruption. The cost of doing business remains persistently high due to unwieldy bureaucratic procedures, cumbersome and complicated licensing and registrations processes, un-necessary and opaque regulation, weak credit frameworks, and cumbersome labor laws. There are also deficiencies in the delivery of those educational, health, and infrastructure services that businesses need if they are to operate efficiently. The combined effect of these factors on business is increased uncertainty and risk, shortened investment horizons, limited availability (and high cost) of financing (both external and domestic), reduced worker productivity, and, often, lower profits for businesses and limited employment opportunities. The promotion of private initiative, the provision of economic opportunities, the protection of investor and consumer rights along with improved economic governance are critical to the transformation of the private sector into an engine of equitable growth. The Government stands committed to facing, head-on, these challenges in the way of private sector development. It will improve its standing on the World Banks Doing Business Indicators. The Government will also develop a policy for Public-Private Partnership (PPP) to give impetus to initiatives in many sectors such as mining, telecommunications, energy, etc. We will be further improving the enabling environment for private sector growth by: strengthening the commercial legal and regulatory framework (enacting laws for regulating bankruptcy, intellectual properties, Corporations and Limited Liability Companies, fair competition, and consumer protection); modernizing and developing industrial parks; reducing regulatory and administrative barriers to growth (World Bank Doing Business Indicators); and reforming the May 16, 2012 12

12

Supporting Self-Reliance in Afghanistan business licensing and registration processes. Policies will be strengthened / development to take care of needs of specific sectors. As explained elsewhere, a major thrust is being given to development of critical infrastructure for mobility, energy, market linkages and human capital. The Government has learnt from the recent Kabul Bank crisis and is strengthening banking regulation so that financial services including credit, which is critical for private sector growth, are available unhindered. In order to move from the current largely agriculture and low-end manufacturing dominated economy to a higher value industrial economy, a twin emphasis is being given to rapidly increase exports and identify areas for rapid import substitution (such as cement, edible oil, eggs and live chickens, steel beams, etc.). For this purpose, the SME Sector Action Plans will be implemented and operations of Afghanistans border ports will be improved. To solicit the thoughts of Afghan business leaders and address their concerns, the Government recently held consultations with the leaders of industry and trade. As a result, the Government has prepared a paper to provide vision, guidance and a plan on future initiatives in the private sector. The paper is provided in Annex 3: Private Sector Development.

13

Essential Services
The successful implementation of the NPPs during the Transition and Transformation Decade will strengthen the capacity of the Government and its implementing partners to provide basic essential services to the population. The quality and coverage of these services will be improved substantially during this period. The Education for All Program in the Human Resource Development Cluster will improve equitable access, quality, and enrolment in primary and secondary education, especially for girls. It will also strengthen community ownership, especially in the most remote, less secure, and disadvantaged areas. The Expanding Opportunities for Higher Education Program (HRD Cluster) will increase access and the quality of higher education, especially in fields that directly contribute to economic growth, in partnership with the private sector. The Health for all Afghans (HRD Cluster) will provide improved health services by creating, maintaining, and operating requisite infrastructure, human resources, and appropriate systems. The National Rural Access Program (ARD Cluster) will link farmers and communities to the growing national road network while at the same time providing for nationwide labor-intensive road construction and maintenance.

Good Governance: the Key to Successful Implementation of the Strategy

The fight against corruption lies at the heart of our focus on improving governance. His Excellency Hamid Karzai, the President of Islamic Republic of
Afghanistan at the Hague Conference, Netherland (2009). This statement by the President amply reflects the commitment of the Government of Afghanistan for fighting corruption and captures its criticality for overall good governance, May 16, 2012 13

Supporting Self-Reliance in Afghanistan which in turn underpins every component of Afghanistans development strategy. The Government must respond to its peoples needs in transparent and accountable ways. It must foster a predictable and stable investment environment, and it must protect the rights of all citizens and hold accountable those who violate the law. Recognizing the central role that transparent, accountable governance plays in every aspect of Afghanistans future prosperity and peace, the Government organized a Governance Forum in March 2012 to take stock of its achievements, discuss the challenges that remain, and decide on a way forward.

14

Governance Achievements (2001-2011)

Substantial progress has been made on governance issues in the last decade. In 2001, the government systems were either non-existent or were in shambles. Afghanistan has travelled a long way since then. The biggest achievement of the last decade has been the promulgation of the national Constitution and a series of successful parliamentary and presidential elections. The Government has established/strengthened a number of governing institutions during this period, such as the Independent Administrative Reforms and Civil Service Commission (IARCSC), the Election Commission, the Human Rights Commission, the Supreme Court, the Office of Attorney General, and the Independent Directorate of Local Governance (IDLG). Sectors covered by these institutions have witness substantial reforms. The business environment has improved significantly, supported by appropriate legal, regulatory and policy frameworks. Through Government program and interventions there have been substantial improvement in education, health, roads, rural development, civil service, justice, energy, urban development, mining, communications and information technology. The ability of the Afghan Government to both collect revenue and execute its budget has increased quite significantly over the past several years. The Open Budget Index, a barometer of public finances and progress on the PFM Roadmap, is expected to exceed 40% in 2012, up from 21% in 2010 and 8% in 2008. Compared with 2005, in the 2008 Public Expenditure Financial Accountability (PEFA) assessment, 18 of 28 indicators improved, eight were unchanged and only two deteriorated. Afghanistans results are relatively good within similar- income countries. The

May 16, 2012 14

Supporting Self-Reliance in Afghanistan World Banks Country Policy and Institutional Assessment (CPIA) score has been around 3.3 (highest 6.0). 11

15

Pre-Tokyo Governance Achievements (March 2012 July 2012)

At the Governance Forum in March 2012, the Government agreed to focus on a set of specific governance achievements it could accomplish prior to the Tokyo Conference and that were also highlighted by the international community. These issues covered five broad themes: 1) governance capacity and accountability; 2) anti-corruption; 3) budget planning and execution; 4) rule of law; and 5) economic governance. The progress the Government has made on each of these indicators demonstrates its firm commitment to improving governance in Afghanistan and serving its population responsibly. The status of the governance indicators can be found in Annex X). The Government has also made significant progress on issues that ministers identified as critical to improved service delivery and government reform. These include: 1) increase the capacity of the Taqnin to speed up the drafting, review and amendment of legislation; 2) improve planning and execution of budget at the local level; 3) resolve the issue of district-level representation; 4) improve procurement processes; 5) resolve budget execution constraints; and 6) improve the Central Banks oversight of private banks and public sector commercial banks.

Post-Tokyo Governance Indicators

Recognizing the significant challenges ahead, and that continued donor funding requires steady progress on key governance indicators, the Afghan Government commits to achieving the following outcomes by 2014: 1) Grow the ratio of revenue collection to GDP from 11% to 15% within four years, and to 20% by 2025; 2) Within five years improve the management of public funds as measured by the PEFA assessment by 20%, improve transparent accountable use of public funds measured by the Open Budget Index to more than 40%, and improve budget execution to 75%; 3) Develop a legal framework to clarify roles and responsibilities of different representative and government agencies at national, provincial and district levels

11

The CPIA has four clusters - Economic Management; Structural Policies; Policies for Social Inclusion/Equity; and Public Sector Management and Institutions.

May 16, 2012 15

Supporting Self-Reliance in Afghanistan 4) Strengthen institutional capacities and legal authorities and actively engage civil society in preventing and addressing corruption; 5) Undertake a national-provincial budgeting process that includes provincial input into the relevant ministries formulation of budgets requests. This should be linked to a provincial planning process in which Provincial Councils and civil society have a role. 6) Establish fundamental reforms upon which to build effective justice for all; and 7) Strengthen the enabling environment for private sector investment, including publicprivate partnerships which are bolstered by adequate regulatory and institutional reforms. 8) Enact fundamental legal frameworks that support the governments efforts to promote transparency, accountability and good governance and to fight against corruption at all levels; 9) Conduct free, fair, and transparent election in which all the people of Afghanistan participate freely without internal or external interference. 10) Devise mechanisms to enhance aid effectiveness and avoid corruption through improved procumbent practices, transparency, and accountability. 11) Strengthen anti-corruption institution, and revise and enforce its laws, as necessary, in accordance with its national and international obligation. 12) Further safe guard and enhance the Afghan financial system by implementing recommendation from the Financial Action Taskforce Asia Pacific Group (FATF/APG) regarding anti-money laundering and combating terrorist financing.

16

Regional Integration
Geopolitically, Afghanistan has the potential to transform not only itself but also others in Central Asia from land-locked to land-linked, as Afghanistan lies at the heart of Asia. As His Excellency President Karzai declared, Afghanistan aspires to become the Asian Roundabout, a central point of interconnection of goods, ideas, services and people in the fast expanding Asian economy, and a peaceful meeting place of civilizations. It connects three major economic, cultural, and geo-political regions in Asia: the Iranian Plateau and Persian Gulf states to the west, the Indian subcontinent to the southeast, and Central Asia to the north. Regional cooperation is both to the benefit of neighbouring countries as much as to the benefit of Afghanistan. By integrating with the dynamic Asian economies and leveraging its untapped human and natural resources, Afghanistan can become a financially sustainable trade and May 16, 2012 16

Supporting Self-Reliance in Afghanistan transit hub that benefits its citizens and the people of the region by providing more economic opportunities. Conscious of these benefits, there have been significant efforts supported by the international donor community toward building the foundations for stronger regional economic cooperation between Afghanistan and its neighbours. Infrastructure projects with strong regional dimensions have been completed or are under way. The Ring Road, a network of nearly 2000 km, which is practically complete is transforming Afghanistan and the neighbourhood. The countrys first railway connecting the second largest city of Mazar-e-Sharif to Hairatan commenced operations in December 2011 linking to Uzbekistans vast rail network and to regional markets in Europe and Asia. These projects form part of transport corridors being built under the Central Asia Regional Economic Cooperation (CAREC) Program, supported by ADB as financier and secretariat and five other multilateral institutions (EBRD, IMF, ISDB, UNDP and the World Bank). In addition to transport projects, electricity transmission lines from Uzbekistan and Tajikistan have been built resulting in 24-hour power supply to Kabul. Energy trade is being planned involving Afghanistan and its neighbours through power transmission lines and gas pipelines. On the policy and regulatory aspects, progress is being made to advance trade, transit, investment, and border management toward regional and global integration and the creation of an enabling environment for becoming a regional trade and transit hub. Afghanistan signed and ratified the South Asian Free Trade Agreement (SAFTA), the Afghanistan-Pakistan Transit Trade Agreement, a bilateral transit agreement with Tajikistan, and the Agreement on Cross-Border Transport of Persons, Vehicles, and Goods (CBTA) with the Kyrgyz Republic and Tajikistan (within the framework of CAREC). Afghanistan continues to expand regional cooperation within the framework of the Economic Cooperation Organization (ECO). Significant progress has been made over the last two years toward advancing World Trade Organization (WTO) accession The Fifth Regional Economic Cooperation Conference on Afghanistan (RECCA V 26-27 March 2012 in Dushanbe), building on the progress achieved at previous RECCA Conferences (Kabul, Delhi, Islamabad and Istanbul) and other national and international policy conferences, provided an opportunity to translate the vision of a more stable and prosperous region through a stable and prosperous Afghanistan into a first ever concrete and time-bound action plan. Within the framework of Afghanistans National Priority Programs (NPPs), main commitments at RECCA-V are presented through fifteen Regional Investment Projects and Policy Priorities covering broad areas of: Development through building infrastructure (Railway, Roads, Energy, etc.); Human Resource Development, Vocational Training, and Labour Market Facilitation; Investment, Trade, Transit and Border Management; and Regional Disaster Management. Many of these projects and policy priorities are part of existing regional programs, such as CAREC.

17

May 16, 2012 17

Supporting Self-Reliance in Afghanistan Funding key regional projects in Afghanistan is a clear priority. The Afghanistan Infrastructure Trust Fund (AITF), 12which was established in November 2010 and pools donor resources to cofinance and complement ADB-assisted infrastructure projects, is a mechanism that could be explored.

18

Cross-Cutting Sectors
Cross-cutting issues are woven into the framework of many of the NPPs. The National Action Plan for Women Affairs Program (HRD Cluster) implements gender mainstreaming across all sectors by strengthening the Ministry of Womens Affairs and other ministries capacity to address the needs of women and girls. Issues related to counter narcotics and environment are mainly addressed in the Agriculture and Rural Development Cluster, though these issues also feature in the work of other clusters.

Prioritization and Sequencing of NPPs

Launched in 2008, the ANDS laid out national development priorities. At the Kabul Conference in July 2010, coordinating Ministers translated these development priorities into focused and prioritized implementation plans in the form of the 22 National Priority Programs (NPPs). These programs were chosen based on their contribution to sustainable economic growth, revenue generation, jobs and human development. The NPPs implements our long-term vision through revolving planning periods creating implementation capacity, establishing institutions, reforming concerned sectors and delivering essential services. They will create foundations for meaningful transition in socio-economic sectors and work as bridge between the Transition and Transformation phases. Their implementation will be reviewed periodically and necessary adjustments will be made to fine-tune them with changing realities, upcoming challenges and needs. The initial planning period for NPPs was three years and the total funding requirement for three years was estimated as $X billion, out of which $ X billion is already committed, thus leaving a gap of $X billion. But recognising the constraints of availability of donor financial resources and government implementation capacity, the planning period has been changed to five years and the funding requirement has been sequenced over these years. This change will take NPPs right into the Transformation Decade ensuring smooth and seamless transition. This change will

12

The AITF pools donor resources to co-finance and complement ADB-assisted infrastructure projects, and provides an ADB-managed financing and implementation window for donors to contribute to infrastructure development by leveraging on ADBs technical expertise, fiduciary arrangements, and local capacity to manage infrastructure projects.

May 16, 2012 18

Supporting Self-Reliance in Afghanistan further inculcate confidence in the people that their service delivery will not be affected by Transition. The details of Prioritization and Sequencing are given in Annex II: The Kabul Process Prioritization and Sequencing. The NPPs have been further categorized into the following areas based on their contribution to economic growth and the need to maintain certain essentials for the population: a) GrowthInducing NPPs, (b) Growth-Supporting NPPs, (c) Essential Services NPPs, and (d) Other Important NPPs. See Annex II: Prioritization and Sequencing of NPPs under Kabul Process. Based on our sequenced requirements, each Cluster Coordinator and Line Minister has identified specific deliverables and components within the NPPs that support growth areas. Some NPPs have deliverables which support multiple growth sectors, and these are clearly delineated in Annex II. The Government requests that donors focus their funding to support the components and deliverables that have been identified as requirements for accelerated growth.

19

Strategy to Address the Fiscal Gap

While the long term financial prospects for Afghanistan are promising, the Government is unable to address the fiscal gap in the medium term. Based on its initial analysis the Government must look to international donors to finance approximately XX% of GDP or approximately $XX billion in 2025. A long-term funding commitment by the international community, characterized by a gradual draw-down of aid would provide the necessary financial stability to allow Afghanistan to realize a stable and prosperous future. This approach allows Afghanistan to take full responsibility for its own security, continue to implement critical development and governance reforms, and grow its economy while gradually assuming the full burden of these financial obligations. The total cost to finance this plan until 2025 is lower than the cost of a single year of current military expenditure by international forces in Afghanistan. For the next five years most of Afghanistans growth will continue to be based on advancements in the agriculture sector and through small and medium enterprise development. However, the extractive industries will begin to generate significant revenues for the government through the Transformation Decade. Though the challenges of producing an accurate forecast of mineralrelated revenue are extremely complex, optimistic scenarios predict that from 2016 annual revenues could reach more than $350 million and grow to $2 billion by 2025. Combined with increases in efficiency in tax and customs, this would push the revenue to GDP ratio to an estimated 18 % by 2025. These estimates forecast mineral-related revenues to grow at an annual rate of 17% per year between 2016 and 2025. Achieving this scenario would require a significant positive change in security and the Afghan business climate leading to increases in direct foreign and national investment. To properly manage this trajectory, the Government re-commits itself to transparent, responsible use of mineral sector revenues.

May 16, 2012 19

Supporting Self-Reliance in Afghanistan The Government will seek to close the fiscal gap by 2025 through delivering on key reforms in governance and by maintaining a careful and disciplined investment strategy in key economic sectors. Afghanistan collected $2 billion in revenue during the 201112 fiscal year, corresponding to just over 11.6% of GDP, which is up from 7.8% three years ago. By fiscal year 2016, the Government believes it can achieve a revenue-to-GDP ratio of 15%. This is comparable to Nepal (15.7%), the Philippines (13.4%), and Sri Lanka (14.6%) and well above many other post-conflict, least developed nations. Succeeding would mean that the Government would collect $4.4 billion in 2016, and would reflect an average revenue growth rate from 2009 of more than 30%. To achieve this, the Government has committed to an aggressive program of efficiency and reform, agreed with the IMF on November 14th, 2011. The key elements of this program include: Measures to increase the efficiency of customs and revenue departments; Expanding the Governments ability to enforce the Afghan laws and continued commitment to and development of a sound public financial management architecture; Improved governance of state-owned enterprises and corporations; Increased capacity and an improved institutional framework to respond to economic crime, Implementation of a series of reforms to strengthen the financial sector, ensuring access to capital for legitimate investors; and Introduction of value-added tax by March 2014

20

To be successful, the financial support will be required for both security assistance, which the donor community has committed to at the Chicago NATO Summit, and for the non-security assistance. Improved peace and security will drive development through 2015, when the Transition period comes to an end, and serve as a fundamental building block for economic growth and sustaining gains made in human development. However, once Afghanistan enters the Transformation Decade, development will begin to drive security, thus entering a virtuous cycle. Job and food security, a growing economy, and good governance will be the foundations for maintaining and building upon the security gains that have been made.

Mutual Accountability
Mutual accountability means the reciprocal commitments that the Government of Afghanistan and international donors make and hold each other to account. Based on the experience of the last decade, the Government believes that we must continue to improve the systems that monitor progress on our commitments and strengthen mutual accountability. The Tokyo Conference can serve as a turning point in the Government-donor partnership because: the Government has laid down a clear economic and development vision with prioritized plans; our partners have committed to a long term engagement throughout the decade of transformation; May 16, 2012 20

Supporting Self-Reliance in Afghanistan with the transition round the corner, the context is suitable for changes in our behaviors; and we have lessons from past conferences on our successes and failures to prepare us better. Now is the time to move from promise to practice. The Government and its International Development Partners (DPs) commit to the following priorities based on principles of mutual accountability: Development Priorities: i. The Government will vigorously pursue its economic and development strategy stipulated in this document to move towards a self-reliant Afghanistan by 2025, while Development Partners (DPs) will provide effective and consistent technical and financial support for the implementation of the strategy. The Government of Afghanistan will continue with the planning and implementation of National Priority Programs well into the Transformation Decade reflecting the development and economic priorities of Afghanistan.

21

ii.

Development Effectiveness: i. Based on the 2010 Kabul Conference commitments, DPs will channel 50% of their assistance through Afghan national systems by the end of 2012. The Government recognizes the need to set more realistic timelines and clarify the steps required to make greater use of Afghan systems and increase the amounts of aid spent on budget. The Aid Management Policy now sets this out in detail. International experience amply demonstrates that a certain amount of risk is inherent in greater use of national systems. The Government will work closely with donors to identify specific joint riskmitigation strategies based on the fiduciary risks associated with on-budget mechanism, which will build the capacity of Afghan financial and administrative systems. In line with the Kabul Conference commitment, DPs will align 80% of their development spending within one year from the Tokyo Conference to support NPP deliverables. The Government will work with development partners to provide concrete guidance on the process of realignment with NPPs, as well as to put in place mechanisms to effectively monitor the alignment. The Government will enter into a dialogue with development partners to identify the appropriate funding modality for each NPP. DPs will increasingly use existing consultative mechanisms at the ministry and program level for planning development projects and aid allocation. They will adopt a participatory approach to allocate resources to projects and priorities identified in the NPPs framework. Keeping with best practices of aid coordination, the Government will develop and issues guidelines for sector-based division of labor (DoL) among development partners. DPs will adopt DoL guidelines and target their assistance accordingly.

ii.

iii.

iv.

May 16, 2012 21

Supporting Self-Reliance in Afghanistan v. GoIRA will enhance the aid information and reporting system and provide reliable access to information to donors and to line ministries. DPs will make aid more transparent by submitting periodic and detailed information to the Government on aid allocation, delivery and expenditure. In order to set clear principles and policies for improving development partnerships the Government and each DP will enter into a non-binding Development Partnership Agreement. Integrate the principles of new agreements such as the Busan Partnership for Effective Development Cooperation and the New Deal for Engagement in Fragile States to its individual national context, to increase the effectiveness of external assistance for improved impact.

22

vi.

vii.

A more detailed description of Governments plan to strengthen mutual accountability and its proposed way forward can be found at Annex 5: Aid Management Policy. The international community and the Government of Afghanistan will agree to establish a follow-up mechanism to review their mutual long-term commitments under the framework of the Kabul process. This will take place at the Ministerial-level every two years and every year at the Heads of Agency Level under the Joint Coordination and Monitoring Board (JCMB) mechanism. The first Ministerial-level meeting will be held in 2014 after the presidential election in Afghanistan.

Kabul, Afghanistan
May 16, 2012 22