C I V I L - M I L I T A R Y

F U S I O N

C E N T R E

AFGHANISTAN
September 2011

IN TRANSITION
Comprehensive Information on Complex Crises

Towards Bottom-Up Budgeting: Budgetary Decentralisation in Afghanistan

Stefanie Nijssen Governance & Rule of Law Knowledge Manager
stefanie.nijssen@cimicweb.org

This report reviews open-source information regarding the flow of public resources from line ministries budgets to provincial institutions in Afghanistan. Related information is available at www.cimicweb.org. Hyperlinks to source material are highlighted in blue and underlined in the text.

inister of Finance Omar Zakhilwal said that of the USD 57 billion spent on aid to Afghanistan thus far only 18% has been spent through Afghanistan's national budget. In August 2011, the Afghanistan Reconstruction Trust Fund (ARTF) and the Afghan Ministry of Finance (MoF) signed a USD 60 million grant agreement which aims to channel more donor funding through the Afghan governments core budget by Box 1. Core Budget Solar Year 1390 improving public financial management (PFM). Such an (21 March 2011 20 March 2012) agreement was driven by Afghan government concerns that Passed by Wolesi Jirga: 2 May 2011 international agencies had been allocating too much money directly to projects at the provincial, district, municipal and Total budget: AFN 224.780 billion village levels without involving relevant central public (USD 4,782 billion) institutions. With the upcoming security transition scheduled for 2014, the Afghan governments ability to manage its own Operating budget: AFN 150,726 billion (USD 3, 207 billion) finances and fund sub-national structures (e.g., provincial and district departments) will be increasingly important. As the UNDevelopment budget: AFN 74, 054 billion affiliated Integrated Regional Information Network (IRIN) (USD 1, 575 billion) reports, funding to the provincial and district administrations by international actors will likely decrease in the coming years. Hence, Afghan government institutions may be increasingly pressed to take charge in distributing funds throughout the countrys administrative hierarchy.

WHAT IS AFGHANISTAN IN TRANSITION? Afghanistan is in the midst of what is commonly referred to as a transition or inteqal. The Afghan government has established a Transition Commission, and the international community is preparing to handover security responsibility throughout the country to Afghan forces by 2014.

Given the importance of this process, which will come to define and guide international efforts and Afghan government preparations for the next few years, the CFC is featuring reports on topics related to the civilian and security elements of the transition in Afghanistan. Readers are invited to suggest topics for this series.

AFGHANISTAN IN TRANSITION // BUDGETARY DECENTALISATION

Figure 1. Development Expenditures (% of Development Allotments)

Zabul Wardak Uruzgan Takhar Sar-e Pul Samangan Parwan Panjshir Paktiya Paktika Nuristan Nimroz Nangarhar Logar Laghman Kunduz Kunar Khost Kapisa Kandahar Jowzjan Herat Helmand Ghor Ghazni Faryab Farah Dai Kundi Bamian Balkh Baghlan Badghis Badakhshan 0% 20% 16% 41% 40% 60% 80% 100% 32% 17% 38% 58% 18% 33% 45% 70% 18% 51% 30% 50% 9% 22% 69% 35% 41% 66% 59% 48% 41% 52% 57% 24% 85% 18% 42% 34% 45% 86% 61%

Afghanistans Budgetary Process: Status Quo

Afghanistans budget is divided into the core budget, which is under the control of the Government of the Islamic Republic of Afghanistan (GIRoA), and the external budget, which includes all external financial assistance not flowing through Government coffers.1 The core budget is in turn divided into an operating budget and a development budget. A 2010 Public Expenditure Review by the UK Department for International Development (DFID) and the World Bank notes that concerns about accountability and weak management of public expenditures have led donors to bypass the government and deliver more and more resources directly to implementing agencies outside the Afghan governments budgetary process. As a result, Afghanistans domestic revenue-to-GDP2 ratio remains amongst the lowest in the world, despite recent increases in revenue, reports the World Bank.3 The collection of government revenue by central government entities contributes to the widespread accountability concern that local officials sometimes seek to retain or revenues, informs a United States Congressional Research Service (CRS) report on government performance. The ARTF reported that of the roughly USD10.6 billion in total public spending in 2010, only USD 4.6 billion was routed through the core budget.4 The Afghanistan Research and Evaluation Unit (AREU) reported that, in 2010, only 37% of the core development budget was actually disbursed (see CFC Report, Use it or Lose it: Budget Execution in Afghanistan). This low execution rate is said to have been a primary reason preventing donors from shifting their aid funds from the external budget to the core budget.5 The Fiscal Year 1390 (2011-2012) Afghan government budget suggests that a lack of provincial participation in the budget-making process has led to weak public service delivery and institutional capacity and poor coordination among stakeholders.6

While the Afghanistan National Development Strategy (ANDS) and the SY 1390 budget both stipulate the need for decentralisation, the 2004 Afghan Constitution does not explicitly endow provinces with any budgetary power; nor is there a specific budget for each province.
Source: MoF, AFMIS Report 7 September 2011
1 2

According to the AREU about 90% of the national budget is externally financed, and 75% of foreign assistance bypasses the government entirely. Gross domestic product 3 At present, GIRoA operational budget revenues fund salaries, which are managed at the provincial level. 4 Afghanistans domestic revenues only accounted for 35 % of this on-budget spending and donors financed the bulk of the core development budget. 5 For a full explanation of budget execution, see the IMF Guidelines for Public Expenditure Management. 6 The Afghan Fiscal Year coincides with the Solar Year

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Instead, once the national budget is adopted by the National Assembly, the central government directs all funds to line ministries (i.e. the primary budgetary unit), which in turn make specific provincial allocations to the provincial and district directorates (secondary and tertiary budgetary units, respectively).7 The MoF produces a Medium-Term Budget Framework (MTBF), which sets budget priorities and ceilings to the line ministries and ensures budget policies are fiscally sustainable. According to the MoF, line ministries develop criteria for resource allocation, calculate baseline costs and identify new projects by consulting their provincial line directorates. Since provincial directorates are responsible for administering budgets, elected provincial councils, appointed provincial governors and district governors do not control their own budgets but simply approve the funds allocated by the central entities. These funds are then disbursed by provincial accounting offices, called mustofiats. At times, donors prefer to channel assistance directly through the mustofiat given that doing so may be faster than waiting for resources to trickle down from donors to national institutions and finally to mustofiats. An AREU report claims that the practice of donors directly financing subnational government institutions hampers transparency and makes it difficult for the Afghan government to track what is being spent where and for what sorts of activities.

Figure 2. The Budget Formulation Process in Afghanistan

Executive

Budget envelope prepared by MoF after consultation with International Monetary Fund (April-June)

Cabinet decision and legislative approval (November-February)

Ministerial

Budget department informs line ministries about procedure and timings (July-August)

Budget department provides budget ceilings to line ministries (September-October)

Line ministries prepare budget requests (October)

Source: Adapted from information in the World Banks Afghanistan Public Expenditure Review 2010.

Challenges
As Figure 2 demonstrates, the budgetary process is largely run at the central government level between the executive branch and individual ministries. As noted by the World Banks Afghanistan Public Expenditure Review, currently there is no breakdown of ministerial budgets at provincial level, and provincial allocations are generally only made after the budget has been enacted. In addition, concerns about local governance capacity and accountability have also hindered decentralisation efforts. Centralisation The 2010 Sub-national Governance Policy issued by the Independent Directorate for Local Governance (IDLG) reports that for every four dollars received by the ministries, one is remitted to the provincial departments.8 Each province has generated its own Provincial Development Plan (PDP) which is intended to align local priorities with national strategies and policy. However, though Balkh and Kandahar provinces have five-year development plans, the IDLG also reports that most provincial planning ignores local labour and business resources and is done so on an annual basis with annual plans being little more than a wish-list of projects in various sectors. RAND reports that budget decisions are still largely made in Kabul, and provincial-level administrators have little input until money is distributed to provincial ministry offices.
7 8

Municipalities have taxing authority and are allowed to collect, budget, spend and save their own revenue. It remains unclear whether this figure reflects the operating budget, the development side of the budget or both.

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Communication and Coordination The GIRoAs Public Financial Management Roadmap, published Box 2. Communication Challenges in mid-2010, stated a particular need for increased regular and productive communication between line ministries and provincial In Samangan and Jawzjan [] delegations line departments during the budget formulation process. According of line ministries and the provincial council to an AREU report, one provincial council member complained were sent to the districts to discuss District that every line ministry makes its own annual plan and budget Development Plans and identify projects as a without involving them in planning and budgeting. This lack of direct result of PDC discussions. However, the Provincial Development Plans these involvement in budgeting and planning reportedly proves efforts produced were largely ignored when frustrating for government officials who are forced to operate with sent to Kabul, supposedly due to poor quality, budgets they had little hand in crafting. Communication should also inadequate information and a lack of detailed focus on increasing coordination with Provincial Reconstruction budgets. Team (PRT) development projects (see CFC Report, Measuring the Development Impact of Provincial Reconstruction Teams). Source: AREU, Local Governance in Additionally, the creation of Provincial Councils (PCs), alongside Afghanistan: A View from the Ground, 2011. the previously-established Provincial Development Committees (PDC) has caused confusion on roles and responsibilities with regards to budgetary priorities and management.9 Whilst the PDCs responsibilities include identification of priority projects, controlling and supervision of projects and improving the reporting system between the local and central governments, the PCs are tasked with appraising the development plan and annual expenditure process of provincial administration and monitoring the budget.10 Moreover, a case study on local governance in Nangarhar province by the Office of the Special Inspector General for Afghanistan Reconstruction (SIGAR) reported that PDCs and provincial line directorates are often not involved in the budget process and their input is not solicited. Capacity The Brookings Institution, in the article Afghanistan Ten Years after 9/11 reported that Afghanistans overall human capital has significantly increased since the fall of the Taliban. However, the low capacity of provincial administrations has left the budget-review process by the provinces in need of extensive revision, says a report from SIGAR. In the past year, the Administrative Reform and Civil Service Commission trained over 16,000 civil servants, many of them at mid-, and senior-level, positions.11 Yet the IDLG warns that, in provincial offices, budgeting is not done properly, and expenditures are not tracked systematically. Government still faces a relatively small recruitment pool of workers with Kandahar government only being staffed at 25%, reported a 2010 article from the US National Public Radio (NPR). Many are reluctant to serve in the provincial offices of the central government ministries, particularly in provinces where there is still substantial violence. While current MoF policy calls for awarding more discretion to provincial officials (so they can contract for higher value development projects), fundamental aspects of the reform, like the establishment of Provincial Revenue Offices have been held up due to political factors, reports the World Bank.

PDCs were also designed to operate outside the scope of provincial administrations. According to the Independent Directorate of Local Governance (IDLG) Subnational Governance Policy, the PDCs are intended to be used as a tool for donor coordination in each province by managing the planning of programmes based on priorities expressed by local people. PDCs perform this mediatory role by extensively discussing and revising provincial budget proposals to the ministries and organising periodic budget performance review meetings, raising concerns to relevant ministries for necessary action. 11 The Civil Service Commission conducted these trainings through the US government and USAID and with sponsorship from the Afghan Civil Services Institute.
10

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Accountability and Reporting Once provincial officials receive funds from their line ministries, they enjoy a measure of discretion regarding financial matters, and RAND reports that much of what happens to government money disbursed at the provincial level and below takes place outside the purview of any of the existing accountability mechanisms. Because the provincial governors merely approve disbursement of funds by central entities, they do not necessarily have an incentive to build administrative relationships and instead are relatively independent of central authority, informs a 2011 CRS report. Moreover, the Asia Foundation reports that the Governor, as Chair of the Provincial Development Committee, can block almost any of the programs or activities in their provinces because all expenditures must go through the provincial finance offices and require the signature of the governor in advance. Furthermore, the governor appoints the Procurement Committees, signs contracts and exercises expenditure authority by approving payments. With no ability to sanction or reward the governors, the line ministries have no ability to control the use, or abuse, of funds under their responsibility. According to RAND, governors may also have their own revenue sources, licit or otherwise; fund projects off-budget; or control access to government services. The fiscal accountability framework at provincial level, therefore, does not always mirror that of the central level.

Enhancing Budgetary Decentralisation

In response to concerns regarding budget execution and unequal distribution of resources amongst the provinces, the GIRoA has engaged various external organisations in its attempts to address such weakness in its public financial management so that it can engage in greater ownership and enable a more effective allocation of resources based on local needs and priorities. Decentralisation A presentation used for MoF training reports that the provincial budgeting initiative is a GIRoA-owned-and-led process which was started in 2006 to provide provincial authorities a greater role in formulating the national budget. The MoF states that this initiative, which is supported by the US government, strives to create a more participatory budgeting process that reflects citizens preferences. In provincial budgeting, the MoF works closely with line ministries and takes priorities of the people of the province through the incorporation of the PDPs.12 According to a report entitled The Budget Process of Afghanistan, the provincial budgeting initiative only affects the development side of the core budget and not the operational side. Under the provincial budgeting programme, pilot ministries are required to disaggregate their budget ceilings for pilot provinces based on the inputs from their provincial line directorates for both operating and development budget requirements. The initiative requires alignment with national sector-based approaches agreed between GIRoA and donors and does not represent the transitioning to a full budgetary autonomy to the provinces; instead, it provides ceilings that require prioritisation within national policy programs. Budgetary reform involves ministries working with their provincial line directors to jumpstart project documentation (preparation, feasibility studies, project design, procurement plan, donor agreements, etc.). The initiative thus focuses not so much on political decentralisation as it does on administrative decentralisation and increased transparency in the budget reporting process. The program was piloted in three provinces and has been extended to all 34 provinces effective for the SY 1390 budget. Communication and Coordination The Afghan governments SY 1390 (2011-2012) budget recommended the establishment of a mechanism through which PRTs can coordinate their projects with relevant government agencies so as to avoid duplication, improve
12

However, the IDLG reports that none of the projects incorporated into initial PDP planning were given cost estimates, and priorities for project implementation were not provided.

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sustainability, and link activities with overarching strategies. The United Nations Development Programme (UNDP) reports that the MoFs Budget Department is seeking to strengthen its communication with PRTs to align their respective development projects with MoF-run projects and strategies. This communication will aim to avoid the development of projects that may be financially unsustainable for communities once PRT financing stops. Such communication is also intended to insert information on the content and cost of the Commanders Emergency Response Program (CERP) project, which finances many US government PRT, into the governments information system. Moreover, the IDLG-led (and USAID/DfID sponsored) District Delivery Program (DDP) is partnering with the MoF to promote government visibility and presence by ensuring public service delivery at the lowest levels of governance. Regular meetings and sessions are held with the relevant line ministries to identify problems of slow execution, reports the aforementioned UNDP report. The first phase of the DDP will have USD 40 million to finance planned projects; the DDP is targeted to reach 80 districts by 2012. Capacity General training phases to address capacity shortfalls at the provincial level have addressed 33 of Afghanistans 34 provinces since their inception in 2009, states the SY 1390 Afghan government budget. Feedback showed that for many participants, this was their initial exposure to the planning, procurement and reporting aspects of the budget process. The training enabled officials to understand how provinces can access budget resources from central ministries. Hence, the MoF has made subnational capacity building a prerequisite before involvement in the provincial budget process. The Budget Integration and Reform Unit (BIRU) set up in the Budget Department of the MoF consists of provincial budgeting teams comprised of international advisors, managers and officers which conduct intensive training programs on provincial budgeting for provincial directors and finance officers.13 A provincial budgeting symposium was held from 17 to 18 May 2011 with a series of MoF-led regional trainings during the summer with provincial officials travelling to regional locations, the UNDP reports. The CERP has also offered budgetary training to local provincial officials, such as occurred in Kunduz province in January 2010. The MoF has also focused on the development of technical capabilities in the budgeting process. A July 2011 report by SIGAR noted that provincial governors had difficulties accessing their funds when carrying out their duties. In 2002, the MoF established the Afghanistan Financial Management Information System (AFMIS) under a USAID-funded program; by 2010 the AFMIS was deployed to all provinces. Additionally, the GIRoA deployed the Core Banking System throughout Afghanistan and distributed the AFMIS PRT users guide in 2011. A World Bank report on PFM in Afghanistan claims that the AFMIS can capture government fiscal, revenue and expenditure records on a real-time basis.14 These technological capabilities were created to facilitate the flow of funds to the provinces and provide more timely financial management information to line ministries. Accountability and Reporting The Performance-Based Governors Fund (PBGF), a USAID programme executed by the Asia Foundation, seeks to improve the planning, budgeting and auditing capacity of the provinces by incentivising good governance. Each province is provided an initial amount of USD 25,000 which the governor can spend only on predetermined items and services. Provincial governors will be subject to a review which measures performance against 30-indicators such as distribution of benefits over districts, documentation of fund expenditures, use of competitive procurement procedures and use of peer review mechanisms. Funding for subsequent months is adjusted based on performance levels. The Asia Foundation has an officer in each province responsible for actual disbursement of funds to the
13

Provincial budgeting training initiatives have been supported by provincial budgeting advisors from ISAF Joint Command (IJC) and also from the USAID Economic Growth and Governance Initiative (EGGI), the US Embassys Interagency Provincial Affairs section (IPA) and the US Department of the Treasury Office of Technical Assistance (OTA). 14 The AFMIS maintains records for the Core budget only and does not factor in commitments.

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provincial governors office and for internal auditing. Although the provincial governors cannot spend money if the expenditure has not been budgeted for, the PBGF has contributed to consolidation of influence under the Office of the Provincial Governor by channelling funds directly to the subnational level. However, when the provincial directorates do not have to communicate with their ministries, they lose the ability to influence decisions at the central level. Conversely, line ministries lose information needed to develop realistic cost estimations by locality.

Conclusions
In some areas of the operating budget, Afghanistan is already administratively decentralised where provincial representatives managing their own payroll as well as the procurement of goods and services. Yet, an AREU report entitled Local Governance in Afghanistan: A View from the Ground labelled budgeting at the provincial level as dysfunctional and that, to a large extent, ministries are still controlling the budgeting process. Despite some positive results emanating from the selected decentralisation programmes, district and provincial governors roles are limited to coordination and have no direct control over budgets. The International Crisis Group (ICG), too, reports that efforts to enhance the provincial role in determining budget allocations have been slow. Problems with budget execution may persist. Insecurity also prevents the use of allocated budgets, as does the lack of clarity with regards to the roles and responsibilities of local governances and officials.15 The MoF reports that provincial budgeting has become a key instrument to local administrators/institutions to garner peoples participation in public service delivery with transparency and accountability. Although provincial budgeting initiatives have long been considered important to the Afghan government and the international community, a 2011 RAND report entitled Subnational Government in Afghanistan notes that progress has been slow. The RAND reports finds that the centralised nature of the Afghan government and the small size and weak capacity of provincial and district level government offices has left subnational institutions relatively unable to serve the Afghan people. UNDP recommends include adapting the provincial budgeting initiative to the operational budget to include more ministries, implementing a more equitable formula-based allocation procedure and providing more representative accountability for the Provincial Councils through increased expenditure authority in budget execution. While some international advisors and organisations, such as the ICG, have recommended that the central government should devolve greater fiscal and political authority to the provinces, recent policy has suggests that the GIRoA does not intend the provinces to become political units. Rather, it aims to keep decentralisation limited to consultation and administrative processes. Ensuring that provincial authorities have adequate resources and authority to implement and monitor the financial aspects of provincial development plans is vital to building the legitimacy and capacity for Afghanistans on-going transition.

The Civil-Military Fusion Centre (CFC) is an information and knowledge management organisation focused on improving civilmilitary interaction, facilitating information sharing and enhancing situational awareness through the CimicWeb portal and our weekly and monthly publications. CFC products are based upon and link to open-source information from a wide variety of organisations, research centres and media sources. However, the CFC does not endorse and cannot necessarily guarantee the accuracy or objectivity of these sources. CFC publications are independently produced by Knowledge Managers and do not reflect NATO or ISAF policies or positions of any other organisation.
15

Provincial municipalities come under the influence of the governors, but the governors have no direct authority over them. District or rural municipalities are supposed to report directly to the Ministry of Interior (MoI), though a 2007 Subnational Governance Assessment by the Asia Foundation states that in some provinces they appear to report to the provincial municipalities, which review their budgets and manage their finances. Under the Law of Municipalities, municipalities are authorised to collect taxes, raising their own revenue over which they have significant autonomy to budget for and spend on programs, subject to the oversight of the MoI.

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