Document of The World Bank FOR OFFICIAL USE ONLY...This Emergency Project Paper (EPP) seeks the...

Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 53955-AF

EMERGENCY PROJECT PAPER

ON A

PROPOSED GRANT

IN THE AMOUNT OF SDR 33.3 MILLION (US$ 50.48 MILLION EQUIVALENT)

TO THE

ISLAMIC REPUBLIC OF AFGHANISTAN

FOR A

SECOND CUSTOMS REFORM AND TRADE FACILITATION PROJECT

April 21, 2010

Sustainable Development Department Afghanistan Country Management Unit South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective March 31, 2010)

Currency Unit = AfghaniAfs 48.35 = US$1

US$ 1 = 1.51824 SDR

FISCAL YEAR March 21 – March 20

ABBREVIATIONS AND ACRONYMS

ABP Afghan Border Police ESMP Environment and Social Management Plan ACD Afghanistan Customs Department ESSMF Environmental and Social Safeguard

Management Framework ADB Asian Development Bank EUPOL European Union Police Mission ANDS Afghanistan National Development

Strategy FBI Federal Bureau of Investigation

AP ASYCUDA ++ FMA Financial Management Agent ARDS Afghanistan Reconstruction and

Development Services FMR Financial Monitoring Reports

ARTF Afghanistan Reconstruction Trust Fund FYP Five Year Plan ASYCUDA Automated System for Customs Data G2G Government to Government AW ASYCUDA World GAAP Governance Accountability Action Plan BMTF Border Management Task Force GAC Governance and Accountability C2C Customs-to-Customs GDP Gross Domestic product CAs Customs Authorities GOC Government of Canada COSO Committee of Sponsoring

Organizations GOIRA Government of Islamic Republic of

Afghanistan CP Customs Police GOJ Government of Japan CTA Chief Technical Advisor HOO High Office of Oversight CURE Customs Reform Unit HR Human Resources DA Designated Account IA Implementing Agency DC Direct Contracting IALA Inter Agency Letter of Agreement DCA Development Credit Agreement IBRD International Bank for Reconstruction &

Development DFID Department for International

Development ICB International Competitive Bidding

DG Director General ICD Inland Clearance Depot DM Deputy Minister ICN Informal Customs Network DPD Deputy Project Director ICT Information and Communication

Technology DPM Deputy Project Manager ISAF International Security Assistance Force DAB Da Afghanistan Bank IDA International Development Association DPS Declaration Processing System IERR Internal Economic Rate of Return EC European Commission IMF International Monetary Fund ECA Europe and Central Asia IOC Incremental Operating Cost ECMTFP Emergency Customs Modernization

and Trade Facilitation Project IP Implementing Partner

EIA Environment Impact Assessment IPCB International Police Coordination Board EIS Executive Information System IS International Shopping Procedures EPP Emergency Project Paper ISN Interim Strategy Note ERP Enterprise Resource Planning ISO International Organization for Standards

ISR Implementation Status and Results PPU Procurement Policy Unit ITIL Information Technology Infrastructure

Library PRAL Pakistan Revenue Automation Ltd.

IUFRs Interim Unaudited Financial Reports PRR Priority Reform and Restructuring JCIUs Joint Customs Intelligence Units PSC Project Steering Committee LICs Low Income Countries PWP Project Work Plan LMICs Low and Middle Income Countries RFP Request for Proposal MOCI Ministry of Commerce and Industries SAR South Asia Region MOC Ministry of Commerce SBDs Standard Bidding Documents MOF Ministry of Finance SCRTFP Second Customs Reform and Trade

Facilitation Project MOI Ministry of Interior SIA Social Impact Assessment MOPH Ministry of Public Health SOE Statement Of Expenditure MOU Memorandum of Understanding SRFQ Standard Request for Quotations MSA Management Services Agreement SY Solar Year NCB National Competitive Bidding TA Technical Assistance NEPA National Environment Protection Agency TER Technical Evaluation Report NPV Net Present Value TL Team Leader NS National Shopping Procedures TOR Terms of Reference NTBs Non-Tariff Barriers TRSU Tariff, Research and Statistics Unit O&M Operations and Maintenance UMICs Upper and Middle Income Countries OFC Optical Fibre Cable UNAMA United Nations Assistance Mission in

Afghanistan PACBP Public Administration Capacity Building

Project UNComtrade United Nations Commodity Trade

Statistics Database PC Policy Committee UNCTAD United Nations Conference on Trade

and Development PCA Post-clearance Customs Audit UNCAC United Nations Convention Against

Corruption PD Project Director UNIDO United Nations Industrial

Development Organization PDO Project Development Objective UNODC United Nations Office on Drugs and

Crime PFM Public Finance Management UNOPS United Nations Office for Project

Services PIU Project Implementation Unit USAID United States Agency for International

Development PFMRP Public Finance Management Reform

Project VCAs Vulnerabilities to Corruption

Assessments PL Procurement Law WCO World Customs Organization PM Project Manager WTO World Trade Organization

Vice President : Isabel M. GuerreroCountry Director : Nicholas J. Krafft

Sector Director : John Henry SteinSector Manager : Michel Audigé

Task Team Leader : Amer Z. Durrani

ISLAMIC REPUBLIC OF AFGHANISTAN Second Customs Reform and Trade Facilitation Project

TABLE OF CONTENTS

A. INTRODUCTION .......................................................................................................................................................... 2

B. EMERGENCY CHALLENGE: COUNTRY CONTEXT, SECTOR CONTEXT, RECOVERY STRATEGY AND RATIONALE FOR PROPOSED BANK EMERGENCY PROJECT ............................................................. 2

Country Context ............................................................................................................................................................... 2 Sector Context – The Afghanistan Customs Department: current, and desired, performance ......................................... 3 Government’s Recovery Strategy .................................................................................................................................... 6 Donor Coordination and World Bank’s Role ................................................................................................................... 8 Rationale for proposed Emergency Project ...................................................................................................................... 8

C. WORLD BANK RESPONSE: THE PROPOSED PROJECT ................................................................................... 9

D. APPRAISAL OF PROJECT ACTIVITIES ............................................................................................................... 11

Technical Evaluation ...................................................................................................................................................... 11 Economic Analysis and expected impact of the project ................................................................................................. 14

E. INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS .................................................................... 15

Institutional Arrangements ............................................................................................................................................. 15 Financial Management and Disbursement Arrangements .............................................................................................. 18 Fund Flows and Disbursement ....................................................................................................................................... 19 Accounting and Reporting ............................................................................................................................................. 19 Disbursement Method .................................................................................................................................................... 19 Audit of Project Funds ................................................................................................................................................... 19 Procurement ................................................................................................................................................................... 20

F. PROJECT RISKS AND MITIGATING MEASURES ............................................................................................. 21

G. TERMS AND CONDITIONS FOR PROJECT FINANCING ................................................................................. 25

ANNEX 1: ECMTFP IMPLEMENTATION STATUS AND RESULTS (ISR) RATING .............................................. 26

ANNEX 2: CUSTOMS PERFORMANCE AND MACRO INDICATORS ..................................................................... 31

ANNEX 3: GOVERNANCE ACCOUNTABILITY ACTION PLAN (GAAP) ............................................................... 32

ANNEX 4: RESULTS FRAMEWORK AND PROBLEM TREE ANALYSIS INCLUDING PROJECT PERFORMANCE INDICATORS ....................................................................................................................................... 42

ANNEX 5: DETAILED DESCRIPTION OF PROJECT COMPONENTS ..................................................................... 46

Appendix 5.1: Legislative Matrix .................................................................................................................................. 54 Appendix 5.2: Preliminary HR Analysis for ACD ASYCUDA Unit ............................................................................ 56

ANNEX 6: ECONOMIC AND FINANCIAL ANALYSIS ................................................................................................. 59

ANNEX 7: ENVIRONMENT AND SOCIAL SAFEGUARDS MANAGEMENT FRAMEWORK (ESSMF) ............. 74

Appendix 7.1: Negative List of Infrastructure Activities Attributes .............................................................................. 80 Appendix 7.2: Guidelines for Land and Asset Acquisition, Entitlements and Compensation ....................................... 81 Appendix 7.2(i): Land Acquisition Assessment Data Sheet .......................................................................................... 83 Appendix 7.2(ii): Format to Document Contribution of Assets ..................................................................................... 84 Appendix 7.3: Protection of Cultural Property .............................................................................................................. 86 Appendix 7.4: Procedures for Landmine Risk Management in World Bank-Funded Projects in Afghanistan ............. 88 Appendix 7.5: Applicable Codes of Practices for Prevention and Mitigation of Environmental & Social Impacts ...... 93

ANNEX 8: IMPLEMENTATION AND MONITORING ARRANGEMENTS .............................................................. 97

Appendix 8.1: Afghan Customs Department Organizational Chart ............................................................................. 107

ANNEX 9: FINANCIAL MANAGEMENT ARRANGEMENTS ................................................................................... 110

Appendix 9.1: Emergency Customs Modernization and Trade Facilitation Project Interim Unaudited Financial Reports ......................................................................................................................................................................... 120

ANNEX 10: PROCUREMENT ARRANGEMENTS ....................................................................................................... 122

Appendix 10.1: Details of Procurement arrangements involving International Competition ...................................... 129 Appendix 10.2: Description of Services of UNOPS .................................................................................................... 139

ANNEX 11: PROJECT PREPARATION AND APPRAISAL TEAM MEMBERS ..................................................... 141

ANNEX 12: DOCUMENTS IN PROJECT FILES .......................................................................................................... 143

ANNEX 13: STATEMENT OF LOANS AND CREDITS ............................................................................................... 144

ANNEX 14: COUNTRY AT A GLANCE ......................................................................................................................... 146

MAP - IBRD 37817

1

ISLAMIC REPUBLIC OF AFGHANISTAN SECOND CUSTOMS REFORM AND TRADE FACILTATION PROJECT

DATA SHEET, SOUTH ASIA REGION, SASSD Date: April 21, 2010 Country Director: Nicholas J. Krafft Sector Manager: Michel Audigé Lending instrument: Emergency Recovery Grant Project ID: P112872

Task Team Leader: Amer Zafar Durrani Sectors: General transportation (50 percent); central government administration (25 percent); general industry and trade (25 percent) Themes: Other public sector governance; trade facilitation and market access; technology diffusion; infrastructure services for private sector development; regional integration. Environmental category: B

Recipient: Islamic Republic of AfghanistanResponsible Agency: Ministry of Finance, Government of Afghanistan Implementing Agency: Afghan Customs DepartmentType of Operation: New Operation [ X ] Additional Financing [ ] Existing Financing (restructuring) [ ] Financing type: Loan [ ] Credit [ ] IDA Grant [X] Other [ ] Total Amount: US$ 50.48 million Expected implementation period: 48 monthsExpected effectiveness date: June 30, 2010 Expected closing date: June 30, 2014 Development Objective: To improve the release of legitimate goods in a fair and efficient manner. Short Description: The proposed grant for the Second Customs Reforms and Trade Facilitation Project (SCRTFP) will help finance costs associated with: countrywide computerization of Customs Clearance operations; installation of executive information systems for Customs allowing real time monitoring of operations; development of possible options for cross border Customs-to-Customs (C2C) Cooperation; provision of selected Customs infrastructure to enable modernized operations; and technical assistance to support the development of an adequate regulatory, administrative and institutional framework for Customs. Through these initiatives the project will continue the Bank’s support as part of the overall donor effort to reform and modernize Afghan Customs and thus also facilitate improvements in Customs governance environment in line with the Governance Accountability Action Plan (GAAP) for the Afghan Customs. This project builds on the Bank’s existing Emergency Customs Modernization and Trade Facilitation Project (ECMTFP) which is closing satisfactorily in December 2010.

Financing Plan (US$ 50.48 million) Source Local Foreign TotalIDA Total

0.000.00

50.48 50.48

50.4850.48

Estimated annual disbursements (Bank FY/US$ million) 2011 2012 2013 2014 TotalIDA 15.00 17.50 12.50 5.48 50.48Total Cumulative 15.00 32.50 45.00 50.48 50.48Does the emergency operation require any exceptions from Bank policies? Have these been approved by Bank management?

Yes [ ] No [X]Yes [ ] N/A [ X ]

Are there any critical risks rated “substantial” or “high”? Yes [X] No [ ]What safeguard policies are triggered, if any? Environmental

Assessment (OP/BP 4.01)

Significant, non-standard conditions, if any? None

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A. Introduction

1. This Emergency Project Paper (EPP) seeks the approval of the Executive Directors to provide a grant in an amount of SDR 33.3 million (US$ 50.48 million equivalents) to the Islamic Republic of Afghanistan for the Second Customs Reform and Trade Facilitation Project (SCRTFP).

2. The proposed grant for the SCRTFP will help finance costs associated with: (i) countrywide computerization of Customs Clearance operations; (ii) installation of executive information systems for Customs allowing real time monitoring of operations; (iii) development of possible options for cross border Customs-to-Customs (C2C) Cooperation; (iv) provision of selected Customs infrastructure to enable modernized operations; and (v) technical assistance to support the development of an adequate regulatory, administrative and institutional framework for Customs.

3. Through these initiatives the project will continue the World Bank’s support as part of the overall donor effort to reform and modernize Afghan Customs and thus also facilitate improvements in Customs governance environment in line with the Governance Accountability Action Plan (GAAP) for the Afghan Customs. This project builds on the World Bank’s existing Emergency Customs Modernization and Trade Facilitation Project (ECMTFP). The funds from ECMTFP are already fully committed and the actual project closing date is December 31, 2010. The outcomes of ECMTFP to-date have successfully contributed to its Project Development Objectives (PDO). The project ratings are satisfactory. The implementation status (along with the rating) and the key lessons learned from the ECMTFP are summarized in Annex 1.

4. Partnership arrangements: The SCRTFP is part of a multi-donor, concerted and coordinated effort under way to reform Afghan Customs and introduce collaborative border management1. Parallel and complementary support to Afghan Customs Department (ACD) by other donors for the Customs and Border Management Sector is coordinated through an Informal Customs Network (ICN)2. The ICN ensures partnerships in sector policy, reform program, financing, implementation and evaluation through non-binding mutual agreements reached at the quarterly ICN meetings. There are no other multi-or bi-lateral agencies co-financing this project. It is completely financed by IDA.

B. Emergency Challenge: Country Context, Sector Context, Recovery Strategy and Rationale for Proposed Bank Emergency Project

Country Context

5. Afghanistan is fragile – Afghanistan has a total population of approximately 30 million. Real Gross Domestic Product (GDP) growth in the fiscal year ending March 2010 is projected at 15 percent3, bolstered by a recovery in agricultural output and higher government spending and grants. This is up from 3.4 percent in 2008/09. Since its re-emergence onto the world stage after the fall of the Taliban in late 2001, the country has begun an enormous political, economic, and social transformation. However, despite the progress achieved over the past few years, Afghanistan remains poor4 and highly dependent on agriculture and foreign aid. Given the heavy dependence on foreign aid, institutional and staff capacity constraints, an extremely low

1 The term Collaborative Border Management [CBM] is gradually replacing the notion of “Integrated Border Management—IBM” as it is seen as going beyond mere coordination of effort between border agencies and is less threatening than IBM, which brings with it a strong connotation of organizational integration (such as the US Homeland Security Department.). The Collaborative Border Management concept is based on the premise that agencies and the trading community need to work together to achieve common aims that benefit all parties. Such a model suggests that border management agencies can increase the level of control while simultaneously providing a more efficient service to customers and can do so while retaining their own organizational integrity. (Gerard McLinden and Tom Doyle, in “Border Management Modernization: A Practical Guide for Reformers”, World Bank, International Trade Department) 2 Currently, the United States (US) Border Management Task Force (BMTF), USAID, EC, DFID, the Government of Canada (GOC), UNAMA, the Government of Japan (GOJ), IMF and the World Bank are active members of the ICN. 3 “Islamic Republic of Afghanistan: Sixth Review under the Arrangement under the Poverty Reduction and Growth Facility, Request for Waiver of No observance of a Performance Criterion, Modification of Performance Criteria, and Rephrasing and Extension of the Arrangement,” IMF Country Report No.10/22, January 2010. 4 Poverty headcount in 2007 was 36 percent

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domestic revenue base, the threat of large illicit opium activity and poverty, the government is faced with daunting challenges in carrying forward the reforms it has committed to.

6. Insecurity, conflict and opium trade are adding to this fragility – These challenges are further compounded by the security situation which often obstructs and distorts reconstruction efforts and legitimate trade. In the past few years insurgency has spread, security has deteriorated, and the opium economy, which still represents almost half of the non-opium GDP, remains substantive despite recent declines in production and increase in the number of opium-free provinces. Afghanistan’s economy is dominated by the informal sector with opium production being the dominant activity. Total opium production in Afghanistan was estimated5 to be 7,700 metric tons (mt), which equated to over 90 percent of world’s opium supply.

7. Establishing good governance is proving to be extremely difficult – While there have been some encouraging developments such as the passing of the anti-corruption law, the ratification of the United Nations Convention Against Corruption (UNCAC) and the establishment of the High Office of Oversight (HOO) for Anti-Corruption, the overall progress in improving governance and fighting corruption has been limited. Corruption in Afghanistan has become more widespread and systemic over the course of the last few years. In 2005, Afghanistan ranked 117 out of 159 countries covered in Transparency International’s Corruption Perception Index; two years later it dropped to 172 out of 180 countries, and in 2009 it was ranked 179 out of 180 countries. Available survey evidence and other information show that a majority of Afghans view the payment of bribes to be a necessity in order to obtain services from the government6. The predominance of the opium economy with its powerful criminal networks and its nexus with the ongoing insurgency has made drug-related corruption one of the major challenges. Addressing governance issues is further complicated by the limited sphere of influence of the central government, lack of control over large parts of the country, and the persistence of the insurgency. The report referenced above further notes that the police, the justice system and the Customs Department are widely considered to be the most corrupt public institutions.

8. Afghanistan’s development and sustenance needs remain enormous – Although Afghanistan has sustained high GDP growth rates of 8 percent on average over the past three years, it has been marked by a great degree of volatility, which can be attributed largely to droughts as well as global food and energy price fluctuations. Some of the most pressing needs include the enhancement of the domestic revenue base, rehabilitation of key economic and social infrastructure, the establishment of functional state institutions, security, and the rule of law throughout the country.

9. At the core of establishing the State’s legitimacy is the requirement to expand the domestic revenue base – Enhanced revenue mobilization is a priority goal for the Government as outlined in the Afghanistan National Development Strategy (ANDS) and the Ministry of Finance Revenue Action Plan of May 2009. The country’s development budget is, to a large extent, externally financed, and is foreseen to remain so over the medium term. Domestic revenue collection (US$ 800 million, and 7 percent of GDP in Solar Year [SY] 1387 [2008/09]7) and (US$ 1.25 billion and 9 percent of GDP in SY 1388 [2009/10]8) in Afghanistan is one of the lowest in the world. In 2008/09, this revenue was estimated to finance only 55 percent of the total operating expenditures of the Government of Islamic Republic of Afghanistan (GOIRA), despite a manifold increase since 2002/03.

Sector Context – The Afghanistan Customs Department: current, and desired, performance

10. Revenues collected by the ACD have steadily increased and ACD is contributing a sizeable part of the domestic revenue – Customs revenues include Customs Duties, other taxes, fees, fines, and Red Cross contributions. Being a major source of domestic revenue and given its role in border management, the Afghan Customs Department (ACD) has received considerable donor support for infrastructure improvement and operational technical assistance. This has included the World Bank support for computerization of customs clearance operations under the ECMTFP. Through the assistance of the ECMTFP and other donor 5 United Nations Office on Drugs and Crime website [http://www.unodc.org/afghanistan/en/illicit-drugs.html], accessed on October 5,2009. 6 See “Fighting Corruption in Afghanistan – Summaries of Vulnerabilities to Corruption Assessment,” World Bank, June 2009 7 Estimates by IMF Country Report of April, 2009 8 Estimates by ACD, yet to reconciled

4

initiatives, the ACD has been able to increase the total Customs revenue from US$ 50 million in SY 1382 (2003/4) to over US$ 434 million9 in SY 1387 (2008/9) and to almost double that in the first 11 months of SY 1388 (over US$ 728 million)—this is more than a 1400 percent increase in six years. In the last one year, Customs revenues have increased by about 90 percent.

11. ACD, however, remains structurally weak and ineffective as a Customs Agency; at the same time, potential exists to further increase the revenue collected – The improvements in ACD’s collection performance notwithstanding, fundamental weaknesses remain with respects of ACD’s mandate, its internal administration, operational systems, processes and procedures, its governance structure, and human resources capacity. The growth in Customs Duties—distinct from Customs Revenues—has stagnated over the last two years despite growth in overall trade. The real-time transit declaration data available through Automated Systems for Customs Data (ASYCUDA)10 on the two major transit routes—Torkham-Jalalabad and Islam Qala-Herat—shows that there is potential to collect more taxes, as the real trade flows are under-estimated. Total commercial imports for 2008/09 were estimated at US$ 7.8711 billion as compared with the official declared value of nearly US$ 4.9 billion. Higher imports should translate into higher Customs collection; hence potential exists for the government to further increase tax collection.

12. ACD can be more effective and can further improve its revenue collection by increasing its border control over goods and people, and the vehicles carrying them –

(a) Customs procedures can be made less cumbersome, globally aligned and transparent –Different clearance procedures exist all over the country, which are neither internally nor regionally or globally aligned. While computerization is slowly resolving this, a coordinated effort to review, revise and audit these clearance procedures is lacking.

(b) Interference from other government entities in Customs matters can be reduced by introducing collaborative ‘borders’12 management –

(i) Roles and responsibilities at borders need clarification; Customs should have complete control on bringing about a fundamental shift in their fiscal, commercial and social business model – Measures necessary to meet governance objectives are, to a very large extent13, out of the direct control of the ACD. The overlap in responsibilities between ACD and other participants in Customs operations directly affects major Customs functions linked to control and enforcement. Basic activities, including arrival procedures for goods and cargo control, post-release verifications and investigations, or the management of transit or other suspense regime, all have a high impact on the efficiency of Customs and the level of duties paid. These are among the most difficult to implement in Afghanistan due to overlaps, interference, or institutional rivalries and as collaborative border

9 Source: ACD, yet to be reconciled. 10 ASYCUDA is a computerized Customs management system which covers most foreign trade procedures. The system handles manifests and Customs declarations, accounting procedures, transit, and suspense procedures. ASYCUDA generates trade data that can be used for statistical economic analysis. The ASYCUDA software is developed by UNCTAD. It operates in a client server environment under LINUX and Windows operating systems and utilizes RDBMS Software. ASYCUDA takes into account the international codes and standards developed by ISO (International Organization for Standardization), WCO (World Customs Organization) and the United Nations. The system has been installed or is being implemented in over 90 countries and regions. 11 Based on ASYCUDA and TRSU data and the export and transit data from countries trading with Afghanistan in the: “Rapid Logistics Review: Transit of Afghan Goods through Pakistan – Afghanistan Border Crossings and the Implication of Transit Trade on the Economies,” Draft Report, World Bank, December 2009. 12 The border is less geographical and more chronological, e.g., the sequence of Customs and other controls affecting goods leaving one country and entering the other country. The physical borders of a country are now extended to the duty free or ‘bonded’ areas inside its territory, such as airports, but also warehouses and generally wherever goods under a Customs suspense regime might be stored; which could also include private premises. Even a bilateral digital financial transaction has a ‘border’, which, in the case of electronic payment of duties and taxes, creates an electronic border. The model that equates Customs with borders is no longer entirely valid anywhere in the world, and Customs intervention is expected instead to take place anywhere where the status of goods is assessed or changed. 13 As shown by the GAAP matrix, see Annex 3. Only 23 percent can be implemented by Customs autonomously. Fifteen (15) percent are under the control of other institutions, and the remaining 62 percent require the close cooperation of another ministry, administration, or policy decision that is not within the scope of Customs.

5

management is essentially lacking. This interference is not limited to the central government agencies but also spills over into the provincial governments or other power holders (especially those in the border provinces) who consider it their traditional right to interfere in Customs.

(ii) Customs need enforcement powers – The ACD has yet to develop an enforcement “culture”; risk management14 has not been implemented; the intelligence function is barely operational; the organization of the enforcement program is not adequate to manage the customs police; limited enforcement training has been provided; and equipment shortages and a lack of infrastructure plague almost all areas of the department. While the revised Customs Act can be improved, it does include extensive enforcement provisions and addresses most of the critical issues required, providing a sound basis for an effective Customs enforcement program. The approach adopted so far in Afghanistan has consisted of centralising all the law enforcement mandates of the country in the hands of the Afghan police; but the police force does not have the capacity to deal with Customs matters.

(iii) The ACD and neighbouring countries’ Customs Agencies need to cooperate better – This absence of cross-border information linkages has clear fiscal, social and trade facilitation concerns. Of the total commercial imports estimated at US$ 7.87 billion in 2008, approximately US$7.71 billion moved over land routes from surrounding countries. The ACD needs to exploit this advantage to improve its governance and its control; and needs to further improve cooperation with the Customs agencies of the neighbouring countries.

(c) ACD administration, management oversight and governance structure should be improved –

(i) Singular focus on revenue targets dilutes commitment to structural reforms – The public mandate of the ACD is largely unclear to the government as well as to the public as it focuses almost exclusively on revenue objectives. Currently, under the revenue targets established by the government and other donors (sometimes arbitrarily), the main goal of Customs is to collect as much revenue as possible. As a consequence, Customs officials see themselves above all, as collectors of revenue15. The obsession of meeting revenue targets prevents the efficient deployment of resources in the broader context of a modern Customs administration.

(ii) Customs budget is limited – ACD is under-staffed and under-resourced. ACD has one of the lowest collection costs (dollar spent per dollar collected) when benchmarked against other countries. The overall Customs budget increased by 47 percent between 2005/06 and 2008/09 while the revenues collected increased by 78 percent (refer to Annex 2). The Customs cost increase simply reflects the donor contribution to developing Customs infrastructure and providing technical assistance; the recurrent budget of ACD has hardly changed in the last four years. This is leading to a larger systemic problem—ACD does not get enough recurrent

14 For Customs (and other border agencies) risk management implies (among others); (i) selectivity and targeting to determine the likelihood that declared goods, vehicles and persons fully comply with all governmental requirements, and based on that determination selecting shipments, vehicles or persons for Customs inspection and deciding upon the extent of the inspection; (ii) detecting suspect illegal activity (contraband smuggling, illegal immigrants); and (iii) identifying potential weaknesses in supply chain security. While risk management can operate in a manual environment, the use of Information Technology greatly enhances the effectiveness of risk management systems and should form a part of any enforcement strategy. Effective application of risk management techniques also supports trade facilitation by expediting compliant (low risk) shipments. 15 Besides revenue collection, Customs also plays an essential role in preventing the movement of hazardous goods, weapons, drug smuggling and smuggling of precursor chemicals, all essential for the stabilization of the country. Globally, Customs usually seizes the largest percentage of illicit drugs; however in Afghanistan, Customs does not even account for 5 percent of the total illicit drugs seizures. Although the scope of the project does not address drug issues, it is very difficult to envisage Customs reform without bearing in mind the core results of Customs activity, which is the detection of illicit goods (i.e., including drugs and precursors), as this has a direct effect on organisation of, and operations in, Customs.

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budgets for operation and maintenance of the new facilities. Scanners without operators, offices without the right staff, warehouses without cranes and loaders, and power generators without fuel are commonly seen around the Afghan Customs territory.

(iii) Human resources management is poor, remuneration packages are inappropriate and employee morale is weak – The entire current stature of Customs prevents proper operations and sustainable reforms. The Customs cadre is not adequately managed by headquarters, and provincial and political interference prevents the emergence of a professional and dedicated corps of Customs officers. Pay scales are unrealistic, and do not recognize the specificity of Customs work, let alone allow performance rewards16. Bench-marking with other countries’ Customs remunerations at the various grades relative to their average public sector remuneration in comparable grades, ACD pay and benefits are low. Attractive pension schemes in terms of superannuation, which discourage rent seeking activities, do not exist. Poor job satisfaction, political pressures, life-threats and no recognition of the value of their work are all contributors to the absence of an “esprit de corps” thereby stunting the development of an ethical cadre in ACD.

(iv) Customs Management oversight is weak – Afghanistan’s geography and current environment (conflict, opium and weak governance) make it difficult for ACD to provide the required oversight over its operations across the Afghan Customs territory. Despite this, modern information and communication technologies, often part of the computerization or linked to automated information capturing equipment, can help improve and provide this supervision. However, in ACD even where information and modern technology is currently available, it is not always easily accessible to or effectively utilized by the management.

(d) Infrastructure, equipment, processes and skills are not yet appropriate for Customs control – Since 2002/03, ACD has, financed by many donors, made good progress in improving its basic physical infrastructure to support the reform and modernization effort. Much more needs to be done, and done better. A lot of infrastructure delivered does not conform to location requirements based on the traffic types, traffic volumes, processes and operations, or adequate maintenance. Basic inspection and patrolling equipment is absent in key Customs locations.

(e) Donors have not seen “eye-to-eye” on a Customs reform policy during the early years of Afghanistan’s reconstruction; but this has changed drastically over the last year and a half – From 2003 through till the middle of 2008, there was no real donor coordination mechanism in place; despite numerous attempts by ACD. This negatively impacted the reform process as Customs reforms are not modular17 in nature; primarily in that it delayed the implementation and deepening of reforms, despite the early revenue gains. For example, ASYCUDA roll-out was delayed by almost three years due to a lack of understanding amongst the various donors on the overall scope of ASYCUDA implementation. Donors eventually realized the cause of these poor results and in September 2008, the EC, US BMTF and the World Bank got together and convinced all Customs reform donors to commit to a coordination mechanism—the Informal Customs Network (ICN). This mechanism has since borne good results.

Government’s Recovery Strategy

13. Improving Customs is at the core of the Afghanistan National Development Strategy (ANDS) – Completed in April 2008 and presented to the international community at the Paris Conference in Support of Afghanistan, the ANDS was prepared as Afghanistan’s Poverty Reduction Strategy covering the five-year 16 While it is recognized that salary increases do not solve the corruption issues, there should be modes of remuneration that allow officers to receive at least the bare minimum wage necessary to feed their families. 17 The “selective” or “multi-modular” approach works well only when there is a very precise strategic framework designed for Customs reform (e.g., in former transition countries of Eastern and Central Europe where there was a comprehensive template for EU accession).

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period from 2008 to 2013. The ANDS builds on a series of earlier strategy documents, and on the commitments made by Afghanistan in the context of the 2006 Afghanistan Compact. The ANDS is a comprehensive strategy whose national pillars and goals are Security, Governance, Rule of Law, Human Rights, and Economic and Social Development. In the ANDS, the Government emphasizes the need to (i) increase domestic revenue mobilization; (ii) improve transport services, customs administration, and logistics management to facilitate trade; (iii) remove trade impediments and lower trade barriers to enhance the flow of goods, services and investments; and (iv) improve border management and strengthen customs cooperation at the regional level so as to increase security and help to fight cross-border crimes such as drug smuggling.

14. ACD’s Second Five Year Plan (FYP) – The ACD’s Second FYP (2007-2012) was prepared with the assistance of the ECMTFP and laid down ACD’s priority activities to achieve its reform objectives of augmenting revenue mobilization, facilitating economic activities of the private sector, strengthening enforcement and legal compliance, promoting professionalism and integrity among Customs staff, and improving physical infrastructure. The FYP put special emphasis on continuing with the Customs automation process in support of improved governance and anti-corruption, by implementing ASYCUDA throughout Afghanistan. However, it did not address some major issues, including the necessary means to establish an efficient, credible, and professional administration, or the business environment in which it should operate. Overall, it was not sufficiently centered on the Afghan paradigm.

15. MOF’s Anti-Corruption Action Plan, 2009 – The MOF anti-corruption action plan provided an approach to the fight against corruption taking into account the priorities set forward in the National Anti-Corruption Strategy. The MOF anti-corruption action plan was also informed by the Vulnerability to Corruption Assessments under taken by the World Bank, as well as work conducted till then in preparation of the Governance Accountability Action Plan (GAAP) for ACD.

16. ACD’s Governance Accountability Action Plan, 2009 – At the London Conference on January 28, 2010, the Government announced that "all Government Ministries and Agencies will be required to prepare an anti-corruption plan and their performance at delivering the results of this plan will be monitored and reported by the HOO."18 With World Bank assistance and in extensive consultation with other Government agencies and development partners, ACD has prepared a detailed GAAP which was approved by the Minister for Finance in November 2009; and has been endorsed by donors working on Customs and border management. The GAAP prioritizes the areas where immediate reforms can bring about governance improvements in the ACD and reduce the opportunities for corruption.

17. Accountability for the GAAP: identifying timelines, milestones and lead donors and counterpart agencies for the various GAAP reforms – The GAAP will become a part of the ACD’s Third FYP, which will be under preparation as soon as the SCRTFP commences. The GAAP further maps (refer to Annex 3) the activities that SCRTFP will be supporting in addition to those that other donors will be undertaking, as well as how risks associated with these reforms are going to be spread and minimized. Capitalizing on the much improved donor coordination since the inception of the ICN, the process of identifying timelines, milestones and lead donors and responsible Government institutions has already started.

18. Memorandum of Understanding between MOI and MOF on managing border crossing points, 2009 – A MOU was signed between the respective Ministers of Interior and Finance to describe the respective roles, responsibilities and administration of Customs Authorities (CAs), Customs Police (CP) and the Afghan Border Police (ABP) at the border, and to provide the framework for the development of cooperative working arrangements between the Ministries. This is an excellent step towards better and more collaborative border management.

19. MOF, recently, has been providing more autonomy to ACD– There has been significant improvement in the ability of ACD to administer itself more autonomously over the last 10 months. This is reflected in the postings and transfers made by ACD during the end of calendar year 2009, and the reduced

18 "Presentation of the Afghan Delegation to the London International Conference on Afghanistan", The London Conference on Afghanistan, January 28, 2010, Pg. 5.

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interference from the Provincial Administrations. However, this improvement is primarily due to the effort of the current administration and senior management in MOF, and needs to be institutionalized.

20. ACD coordinating with and supporting donor coordination to leverage assistance – ACD has established the Customs Reform Unit (CURE), funded by the World Bank under ECMTFP, to coordinate the overall reform program in ACD. The CURE is a good start but needs further capacity and effectiveness. The ACD also supports the Informal Customs Network (ICN) to effectively coordinate activities of various donors in the sector and to develop synergies and reduce overlap.

Donor Coordination and World Bank’s Role

21. The Informal Customs Network – Donor coordination, usually difficult until there is a real willingness to cooperate and share information, is now in place after many years of efforts under the ECMTFP. Afghanistan is still a tough environment for coordination, but the ICN mechanism is now well established and provides a means to unify policy approaches to Customs reforms. To sustain this accomplishment, there is a rotating responsibility for running and leading the ICN. The ICN meets on a bi-monthly basis; more frequent meetings are also called if specific issues require attention. Key members of the ICN are also part of a weekly coordination group on border management issues, which is more military led and organized by the US (Border Issues Working Group – BIWG). Since its inception the ICN has been meeting regularly to coordinate the various activities of donors and ensuring a coherent approach to donor assistance for the ACD and a rational division of labour among donors based on each donor’s comparative strength. Currently, the United States (US) Border Management Task Force (BMTF), USAID, EC, DFID, the Government of Canada (GOC), UNAMA, the Government of Japan (GOJ), United Nations Office on Drugs and Crime (UNODC), the International Monetary Fund (IMF) and the World Bank are active members of the ICN. The World Bank’s unique and most appreciated value added to donor coordination has been the task team’s ability to share the World Bank’s global experiences and knowledge in Customs and trade facilitation reforms with the ICN members. Since its establishment, donor coordination within the sector has improved significantly.

22. The ICN has been successful and can contribute a lot more – Examples are as follows: (i) Joint operations and consultations, such as the process and skills mapping, (ii) Avoiding overlaps (for example Border management program by EC in Central Asian Republics (BOMCA) presented to the ICN its plans for Badakhshan), (iii) joint contributions to development of Customs training, (iv) inputs to station design – thereby identifying and correcting occasionally misconceived policy options, and (v) a cautious approach to OSCE’s planned bottom-up approach at northern borders. Furthermore, the ICN is an outstanding way of gradually promoting common views on Customs reforms and collaborative border management.

23. Infrastructure and equipment requirements survey underway and a processes and skills survey being planned – ACD with assistance from USAID is undertaking a revised assessment of the infrastructure and equipment requirements in the Afghan Customs territory. Each point assessment will be preceded by a study under the SCRTFP to help in reengineering clearance processes; it will also facilitate matching of skills of key Customs personnel with their job requirements. Further, it will help understand the challenges in the implementation of ASYCUDA processes for further successful roll-out.

Rationale for proposed Emergency Project

24. Based on the World Bank’s role and value added, continued World Bank involvement in the Customs sector is critical at this particular juncture – There might be a greater reputational risk to the World Bank, should the support to important Customs reforms be discontinued or interrupted. The World Bank will continue to play a lead role in assisting the ACD in the roll-out of the program for computerization of Customs clearance and related operations, which is critical part of the ACD GAAP. Through provision of expert advisory services under the proposed follow-on operation, Afghanistan can benefit from international best practices in charting its reform road map. The proposed project is fully aligned with the World Bank’s Interim Strategy Note for Afghanistan.

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25. Assist with continuation and deepening of Customs reforms – The SCRTFP will continue19 to deepen support to the reforms successfully undertaken by ACD under the ECMTFP by capitalizing on the reform momentum (as explained later in this EPP) to: (a) reinforce what has already been accomplished (e.g., further rollout of the ASYCUDA system, additional infrastructure, support to new audit-based activities, and implementation of risk management); (b) contribute to improving governance and reducing opportunities for corruption; and (c) deploy Enterprise Resource Planning (ERP) and office automation systems to enhance organizational efficiency, transparency and productivity. While the SCRTFP will not directly address, for obvious reasons, issues of enforcement, it will help provide a framework of best practices for Customs operations, which other donors can then assist in implementing.

26. Support delivery of the World Bank’s ISN for Afghanistan – The SCRTFP is an important part of the World Bank’s overall emergency support to Afghanistan under its current assistance strategy. The project is closely aligned with two of the three pillars of the World Bank’s Interim Strategy Note (ISN), May 5, 2009, relating to building the capacity of the state to provide adequate quality services and fostering private sector growth. The project will contribute to improving the domestic revenue base, increasing financial transparency, implementing civil service and public administration reform, and improving governance. This will also help to improve the enabling environment for trade (infrastructure, regulation, rules and procedures) and improve conditions for private sector development.

27. World Bank has considerable global experience in Customs and Trade Facilitation Reforms – The World Bank has developed considerable expertise in assisting countries to streamline their Customs and transit regimes, and reducing trade costs—it is currently engaged in more than 60 projects related to Customs in countries across the world. During 1982-2002, the World Bank was involved in 117 projects alone with a Customs reform component, 38 of these were TA projects and 29 were Structural Adjustment Loans. The World Bank is also a key partner in the UN trade facilitation initiative on land-locked countries20.

28. World Bank is adding value in the sector – Given the unique role of the World Bank Group and the International Monetary Fund in overseeing the fiscal stability of countries, especially so in Afghanistan, the SCRTFP not only helps monitor but also deliver on these objectives. World Bank’s work on similar projects and its dialogue in the neighbouring countries will help create synergies between Afghanistan and its neighbours on Customs and trade facilitation issues. This has already been demonstrated by the ECMTFP. The complementary World Bank support to the public administration process and other governance initiatives, as well as its role in the ARTF can provide additional value added.

C. World Bank Response: The Proposed Project

29. The Project’s Development Objective (PDO) is to improve the release of legitimate goods in a fair and efficient manner. The achievement of the PDO will be measured through monitoring progress on the following outcome indicators.

30. The framework for results is based on the ACD Problem Tree analysis (refer to Annex 4). Effectiveness in terms of improved risk management and selectivity is taken as a proxy for “improving the release of legitimate goods.” The SCRTFP, combined with complimentary ICN donor interventions in Customs, will contribute to the resolution of ACD’s insufficient border control over movement of goods and people, and the vehicles carrying them.

19 The ACD GAAP identified that nearly 60 percent of the reform results hinge on increasing computer checks, management capacity, audits, e-linkages, inland checks, performance measurement, cross border coordination between neighbouring Customs, inter-agency coordination, legislation and risk management while improving the supporting Customs infrastructure. Under ECMTFP, the World Bank is one of the key donors engaged in these areas; however, the ECMTFP has now run out of funds to undertake new activities. To ensure that reforms under ECMTFP are continued and that the core activities and the teams responsible for them are not dispersed, the MOF has provided a bridge financing of US$ 2.86 million from its own scarce resources to transition into the new project; while requesting retroactive financing of this bridge finance from SCRTFP. 20 “Improving Trade and Transport for Landlocked Developing Countries” - A Report for the mid-term review of the on the implementation of the Almaty Program of Actions highlights World Bank’s contributions to implementing the Almaty Program of Action for Landlocked Developing Countries (LLDCs) was presented to the UN General Assembly in October 2008. (www.worldbank.org/trade)

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Table 1: Indicators for project performance measurement

31. To support these outcomes, the SCRTFP will finance activities as detailed below. Detailed description of the project components is provided in Annex 5.

32. Countrywide computerization of Customs Clearance operation (US$ 16.39 million) – This component will sustain and build upon the accomplishments of the current computerization effort; and will continue nation- and Customs- wide rollout of ASYCUDA, ASYCUDA version upgrade and functional expansion of ASYCUDA. Proposed activities in this component will include the following. Continue ASYCUDA rollout to new locations based on agreed priorities (between World Bank and ACD and other donors) and in parallel, upgrade from ASYCUDA ++ (AP) to ASYCUDA World (AW). Introduce additional ASYCUDA functionalities to reduce revenue leakage (risk management, valuation, exemptions, and post clearance control audit) and to reduce human interaction (electronic payment, public information displays, Internet-based submission of declarations, Internet-based Tax Identification Number Registration Module, cargo tracking capability, electronic gates, smart cards, and biometrics). Automate support functions (ERP, Office Automation) in order to promote standardization, transparency, and productivity. Develop ASYCUDA Unit within ACD including getting ISO and ITIL certification in order to increase robustness and sustainability of ASYCUDA. Support expansion and provision of redundant satellite connectivity to accommodate ASYCUDA rollouts and upgrade while leveraging Optical Fibre Cable (OFC) where available and secure. Inter office communication within Kabul City should be enabled through terrestrial micro-wave which is under implementation.

33. Installation of executive information systems for Customs allowing real time monitoring of operations (US$ 2.19 million) – This component will target introducing a new functionality (management summary and statistical reporting and alerts) in order to further reduce revenue leakage. This component will cover the provision and nationwide implementation, under the modality of a “Turn Key” solution, a business analytics and reporting software for the Afghan Customs Department (ACD) and the Ministry of Finance (MOF), with a view to supervise Customs revenue, Customs office operations and dwell time through different sources including primarily from ASYCUDA which is currently under implementation in ACD. This will provide: real-time, user-friendly information on key Customs parameters extracted from ASYCUDA; a monitoring and supervision system that supervises operations of Customs offices, individuals and transactions; facilitate Customs investigation and optimize verification and supervision mechanisms through the use of risk indicators associated to stakeholders as well as profile and financial trends; and track non compliant trade transactions in real time with the use of user defined alert notices. This system will reside on top of and be based on the ASYCUDA being rolled out.

21 www.worldbank.org/lpi 22 End Of Project

Variable Effectiveness Efficiency Fairness Indicator Border Performance

1. Time for clearance 2. Number of detections

Productivity 1. Effective rate (fiscal

productivity of Customs) 2. Economic cost per

declaration

User satisfaction 1. Customs Component Indicators

from the Logistics Performance Index (LPI)21

2. Subjective user satisfaction surveys

Source ASYCUDA Customs MIS Physical Observations

Revenue, cost, staffing, declarations, trade volume ACD statistics (ASYCUDA and TRSU)

LPI, Periodic Surveys

Baseline Will be established by September 2010

1. 8.76 percent of value of imports (EOP22 target is 9.34 percent).

2. US$ 8.20 per declaration (EOP target is to stay at or below US$ 15 per declaration)

1. Customs LPI is 2.22 (Rank in 2009 of 104) [EOP target is 2.40 for LPI; rank between 85 – 95]

2. Will be established by December 2010

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34. Development of possible options for cross border Customs-to-Customs (C2C) Cooperation (US$ 0.55 million) – This component will review the current available options to improve Customs to Customs cooperation between Afghanistan and its bordering countries. It will also help pilot the implementation of those options that are supported by Afghanistan and its neighbours.

35. Provision of selected Customs infrastructure to enable modernized operations (US$ 25.19 million) – This will include the following: improvement of Jalalabad Inland Clearance Depot (ICD); improvement of Kabul ICD; construction of Khost ICD; improvement of Nimroz ICD, Torkham Border Post, Andkhoi ICD and Aqina Border Post. The technical assistance under this component will also include the feasibility study for a multi modal container freight station near the Jalalabad Industrial Park.

36. Technical assistance to support the development of an adequate regulatory, administrative and institutional framework for Customs (US$ 6.18 million) – This component will provide technical assistance to ACD to addresses the major GAAP cross-cutting issues in the following areas: improvement of laws and procedures; inclusion of Customs value added activities; review of Customs Clearance Procedures; improvements to risk management and control requirements in the computerised framework; informing Customs role in Collaborative Border Management (CBM); organization and capacity development, and development of the reorganization plan for ACD; development of the integration and sustainability strategy for the ASYCUDA Unit; development of pay and pension reform package for ACD; assistance in coordination and partnerships with other government agencies; support for the Customs Reform and Modernization Unit (CURE), the International Customs Unit (ICU), the Post Clearance Audit Unit (PCAU) and the Tariff Research and Statistics Unit (TRSU); support for monitoring GAAP activities, milestones and benchmarks supported by ICN.

37. Project Costs – The total project cost is estimated to be US$ 50.48 million. The Table 2 provides the estimated breakdown of project costs by component. Further details description is provided in Annex 5.

Table 2: Project Costs Breakdown Summary

Component Description Amount23

(US$, million)(i) Countrywide computerization of Customs Clearance operations 16.385

(ii) Installation of executive information systems for Customs allowing real time monitoring of operations 2.186

(iii) Development of possible options for cross border Customs-to-Customs (C2C) Cooperation 0.546

(iv) Provision of selected Customs infrastructure to enable modernized operations 25.186

(v) Technical assistance to support the development of an adequate regulatory, administrative and institutional framework for Customs 6.179

TOTAL 50.482

D. Appraisal of Project Activities

Technical Evaluation

38. SCRTFP is a part of the overall donor effort to reform Afghan Customs and has a nationwide and ‘Customs’ wide scope – Project design and scope is based on the World Bank’s comparative advantage and value added, and the lessons learned from the ECMTFP. The project coverage and scope was based on the lessons learnt, the GAAP, and a review of World Bank’s strengths and of the activities of the other donors in the sector. SCRTFP will finance a slice of the overall Customs reform effort over the next 3 to 4 years and compliment the other ICN donors (see Table 3). The World Bank has learnt over the years that Customs reform should not be multi-modular in its strategic approach. It is proposed to partner with other donors in the entire Customs sector but not lead or fully intervene in each subsector. Clearly, the one exception to this rule is the enforcement subsector; where the other donors like the US and Canada and other G8 countries

23 Including all contingencies.

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supported by ISAF will take the lead. The ACD and MOF see the World Bank’s, and this SCRTFP’s, role as one of coordinating the overall donor effort in Afghan Customs Reform.

Table 3: ICN Planned and Under Implementation Assistance Summary (as of March 15, 2010) (All figure is US$ million) BMTF USAID EC Canada DFID British WB Japan JICA Total

Customs Infrastructure 48.00 55.00 26.00 12.63 141.63 TA 22.50 25.60 17.48 1.00 66.58 Goods 7.00 7.00

Subtotal 70.50 25.60 55.00 50.48 12.63 1.00 215.21 General Trade Facilitation

Infrastructure 13.25 7.16 20.41 TA 38.40 50.16 44.60 9.90 143.06 Goods 3.00 4.21 7.21

Subtotal 3.00 38.40 13.25 11.37 50.16 9.90 170.68 Total 73.50 64.00 68.25 11.37 50.16 44.60 50.48 22.53 1.00 385.89

39. SCRTFP activities are based on the lessons learned during the implementation of the ECMTFP (Annex 1) and on the recommendations of the ACD GAAP – The ECMTFP has demonstrated that Customs reforms are possible and are now taking root: substantial revenue gains accompanied by some key reforms leading to development of a better control environment have been delivered through deployment of ASYCUDA and improvements of infrastructure. In terms of project design, the following lessons were learned.

(a) Automation needs to be rolled out to further functions/steps as well as additional Customs offices to "dry-out" further opportunities for corruption and to ensure a consistent approach to clearance.

(b) Governance and accountability issues need to be addressed in a more strategic way looking also at improving the working conditions of Customs officers, improvements in the status of Customs and better rewards and incentives schemes.

(c) Collaborative border management has to be implemented within the framework of the ICN.

(d) Improved donor coordination presents an opportunity.

40. The ACD GAAP not only contextualizes these lessons but provides a global Customs governance context adapted to Afghan realities. The relationship of the project outputs (components) with the GAAP is clearly shown in Annex 3.

41. SCRTFP will leverage other initiatives for implementing the GAAP – This will be done by: (a) ensuring that the future budget support operations by the World Bank help implement the overall ACD GAAP actions, and especially those related to issues other than Customs; (b) continue incorporating some of the ACD GAAP actions as benchmarks in the ARTF incentive program; (c) coordinating with other donors through the Informal Customs Network (ICN) mechanism to advice the government to take action on the GAAP actions linked to border management, Customs and wider security apparatus (especially police); and (d) closely coordinating with other governance related assistance provided by the World Bank and development partners. Leverage through the ARTF incentive mechanism has proven to be effective in the past, as the previous ARTF Incentives Program review has demonstrated.

42. The SCRTFP does not address corruption "head on" but focuses on supporting the overall effort to improve Customs governance – SCRTFP activities intend to support the creation of a framework and to some extent have a culture/environment where corruption will not only be made more difficult, but also easier to detect. This is based on past experience of the World Bank and others, which has shown that corruption is more effectively addressed by reducing opportunities as a result of improved procedures while strengthening enforcement and audit. The project will thus contribute to the improvement in governance within ACD.

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(a) The SCRTFP is not an anti-smuggling project – Smuggling is internationally and historically defined as the act of deliberately avoiding Customs control. Curbing smuggling is not an activity per se; like corruption24, it is not addressed on its own but rather through improving the overall governance. The SCRTFP aims at improving the control on what goes through Customs (as smuggling is the result, not the cause, of weak Customs control) and on simultaneously improving collaborated border management (such as by Customs-to-Customs links, or better coordination between border agencies) to increase the likelihood of more goods going through Customs control; as the system improves, it will negatively impact smuggling activities.

(b) SCRTFP will support improvement of procedures that reduce the opportunities for mis-declaration of goods – The London Paper's25 focus on starting with the sector analysis of import regime, may not be the best point of entry of an anti-smuggling strategy. As explained by the World Bank to MOF and Customs, this focus essentially results in encouraging mis-declaration (i.e., declaring under the wrong description category to avoid adequate targeting). A more holistic approach is therefore necessary, and the ICN is working to support what Customs is doing already (e.g., improve the overall exemption regime, the valuation and risk management system to stop evasion of Customs Duties). Using the existing ASYCUDA deployment is the basis for this and is currently supported by the ECMTFP and will be picked up under the SCRTFP.

43. The majority of technical assistance focuses on procedures, institutional realignment, policy, infrastructure and equipment delivery rather than on plain traditional capacity building of human resources and supporting incremental operating costs – The GAAP analysis clearly shows that a majority of the overall governance improvements can be delivered through emphasis on improving the policy environment, clarifying the institutional mandate and strengthening the procedures that efficiently deliver on the clear mandate; focus on human and administrative capacity building will only bear results once the aforementioned is being done. For all these improvements to take root, concerted action of all stakeholders will be required.

44. Without supporting infrastructure and equipment no reform can be implemented; the project will support selected infrastructure improvements – The SCRTFP basic objective of improving control relies on appropriate infrastructure and adequate equipment backed by an adequate Customs budget. While the SCRTFP is national in scope, as far as automation and technical assistance is concerned it is very much targeted in delivering infrastructure. This is an area where other donors like US BMTF, ISAF, Canada, EC and GOJ are very active. The SCRTFP will thus only focus on either small investments in infrastructure to support ASYCUDA rollout or in those areas where other donors are not providing infrastructure especially if trade volumes and control parameters so require; Annex 5 provides an initial list of the key infrastructure being financed under the SCRTFP agreed with ACD and will be reassessed during project implementation.

45. The project does not propose to finance law-enforcement activities, but relies on US BMTF, ISAF and relevant ICN members to further the enforcement agenda – The project has raised awareness among other donors of this issue, and a general consensus on the subject has been reached. Within a framework designed to upgrade Afghan Customs to international best practice standards, currently being prepared by the ICN, it is likely that the other donors, led by the US Government, would deal with the operational enforcement aspect of Customs, and possibly link it to non revenue-related issues, such as general border security. The SCRTFP will pursue earlier efforts in drawing from experience in other regions and countries, and will assist the Government in drafting a “Collaborative Border Management” strategy.

46. The SCRTFP builds on World Bank’s global best practices – World Bank projects in Customs and trade facilitation area are typically designed to replace inefficient, costly and outdated manual systems and procedures with modern approaches based on the harmonization and simplification of procedures in line 24 The reason the GOIRA paper for the London Conference on Afghanistan highlights smuggling as one of the six drivers of corruption is from a different but related dimension; which is, the smuggling of illicit goods such as opiates, precursors, cash, and of anti-state people fuelling the entire opium and war economy of Afghanistan. 25 "Presentation of the Afghan Delegation to the London International Conference on Afghanistan", The London Conference on Afghanistan, January 28, 2010.

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with international standards and good practice, the adoption of risk management to reduce inefficient and costly physical inspections, implementation of modern ICT systems, increasing the level of transparency of rules and regulations and minimizing opportunities for corruption. In recent years they have also focused on improving collaboration between the various government agencies operating at the border. The SCRTFP activities reflect this knowledge.

47. SCRTFP is being processed under World Bank’s Emergency Procedures – As noted in the Interim Strategy Note (ISN), time has demonstrated that despite the progress made, many critical elements of a post conflict situation are still applicable—capacity is uneven and weak overall, systems and procedures are weak, although improving, and many areas of the country are seriously affected by conflict. Given this situation, projects in Afghanistan, including the SCRTFP, continue to be prepared under the World Bank’s emergency procedures of OP/BP 8.0 (formerly OP/BP 8.5) and are consistent with the criteria for OP/BP 8.0.

Economic Analysis and expected impact of the project

48. Identification of Benefits and assumptions for analysis – The proposed project (as part of the overall ICN effort) is expected to yield significant economic benefits that will ultimately enhance Afghanistan’s overall competitiveness and facilitate trade. Improved procedures and a more efficient Customs service within Afghanistan could substantially reduce multiple cargo handling, truck waiting times and cargo delay times, transit costs and the overall trade costs, if accompanied by the streamlining transit procedures to allow a freer flow of vehicles and reduced restrictions on trade. In addition, improvements to ACD may reduce the variability in transit and clearance times and thereby introduce greater predictability into the system. These benefits, as well as the project’s costs, have been taken into consideration into the Cost-Benefit Analysis to determine the project’s net economic impact. Other benefits, however, are more difficult to quantify and, as a result, have not been included in the cost-benefit analysis despite their significance. These non-quantifiable benefits include reduced corruption, improved international image, enhanced transparency and accountability, and improved national security.

49. Overall Economic Benefits – The potential benefits from the project would be the improvement of the release of legitimate goods in a fair and efficient manner. These benefits are expected to be significant. It is expected that the project will extend the coverage of the formal trade sector, including at least part of the US$ 1.9 billion worth of trade which is currently not being documented in the formal trade channels, thus increasing the total trade volume (official and unofficial) to US$ 10.3 billion. The increase in official exports may also be due to the shifting of exports from unofficial to official channels. As a result, higher imports should translate into higher Customs collection; thereby not only increasing overall government revenue collection but also enhancing the competitiveness of the national economy.

50. Building on the success of the ECMTFP project, it is expected to continue to see significant savings in truck time, cargo time, handling cost, and cargo loss reduction. While these benefits may be underestimated, even if the project achieves 50 percent of its targets, the project will still generate a substantial economic rate of return, on the basis of these narrowly defined benefits. If the wider implications of increased Customs revenues to the foundations of the state are included, the overall economic and social returns would be much higher

51. Quantification of benefits – The results from the cost-benefit analysis indicate that the project is highly beneficial from an economic standpoint. Specifically, the relatively small investments corresponding to the project’s costs have a very significant economic impact. The project is expected to result into a Net Present Value (NPV) of US$ 1.44 billion over a 20 year period, a corresponding NPV of US$ 760 million over a 10 year period, and an internal economic rate of return (IERR) of roughly 146 percent. This NPV and IRR calculation is only based on the SCRTFP investments. Even if the overall ICN investments over the project period are factored into the calculation the returns are still very robust. Further details on the project’s economic analysis are given in Annex 6.

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Environmental and Social Safeguards

52. The project’s physical investment component involves improvement, upgrading and rehabilitation of ACD’s facilities which are largely of small scale. The project has no significant irreversible environmental and social impacts, and has a Category B environmental classification. An Environmental and Social Safeguards Management Framework (ESSMF) has been prepared (Annex 7); and will be followed to guide the assessment and mitigation of potential impacts for each specific physical investment under the project. No land acquisition is expected for the rehabilitation of existing ACD facilities, which all reportedly involve government land. The risk of involuntary resettlement is therefore considered to be extremely low. However, documentation is required that the land is free of encroachments, squatters or other encumbrances, and that the land has been transferred to the relevant authorities.

53. Most potential environmental impacts are related to locating of facilities (such as sub-stations), construction activities and the possible presence of landmines. Assessment and mitigation of potential impacts will be addressed through the application of appropriate environmental codes of practices, landmines risk and safety procedures detailed in the ESSMF.

54. Potential social issues include:

(a) Land ownership and land acquisition: No land acquisition is expected for the rehabilitation of existing ACD facilities, which all reportedly involve government land. The risk of involuntary resettlement or land acquisition is therefore considered to be extremely low. However, documentation is required that the land is free of encroachments, squatters or other encumbrances, and that the land has been transferred to the relevant authorities.

(b) Local employment: Employment benefits are expected from the ACD project works. Mechanisms to ensure that local populations are the beneficiaries are to be defined as much as possible and in a realistic way, within the social and ethnic context of each component of the project.

55. While field reviews have shown that no direct impacts on archaeological, burial or historical sites are to be expected, the project will institute “chance find” procedures to ensure protection of such sites if found when opening borrow pits and material sites.

E. Institutional and Implementation Arrangements

Institutional Arrangements

Implementing Agency

56. ACD is the Implementing Agency (IA) for this SCRTFP. The MOF is the responsible agency; being the parent ministry of ACD.

Implementation arrangements

57. The ACD (organization chart is shown in Appendix 8.1) will utilize the services of an Implementing Partner (IP) to execute SCRTFP financing. The IP will perform all functions related to the project (SCRTFP) under directions of the ACD. Given that the Director General (DG) Customs has to also manage the day-to-day Customs operations, the DG Customs as Project Director (PD) will be assisted by the Technical Director as the Deputy Project Director (DPD) and a Team Leader (TL)/Chief Technical Advisor (CTA) from United Nations Office for Project Services (UNOPS). A Management Services Agreement (MSA) will be signed between the IA (ACD) and the IP (UNOPS). The World Bank has agreed with ACD’s request to hire the services of UNOPS as the Implementing Partner following Single Source Selection procedures based on their past performance and the need to link with several UN agencies such as UNCTAD and UNIDO.

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58. The PDO of this project is to improve the release of legitimate goods in a fair and efficient manner. The project is also supporting the overall effort to improve the Customs governance environment in Afghanistan; thus the clear linkage of the SCRTFP components to the ACD GAAP. A large part of the reform process is underpinned by activities that require a one-time improvement, development and implementation followed and sustenance thereafter. Since ACD collects a major part of the domestic revenue which in turn enables the government to ‘govern’, it is important that sustainability of project interventions be viewed in that dimension. Thus, the agreement between the ACD and the World Bank is the use of an IP for supporting project implementation.

59. The GAAP clearly indicates that the priority is to complete the ‘control’ aspect of Customs such that revenue is secure, trade is facilitated and society is protected. Administrative capabilities are a part of the tools that will be required in order to deliver and sustain the reformed ACD; and are part of the overall reform. However Customs reform and achieving the aforementioned aim cannot be held hostage to first developing the administrative and project management capability of Customs. To make things worse, the overall state of institutions in Afghanistan is weak and does not lend itself easily to assign project implementation responsibilities to other public entities26. So it is important to work on both the reform implementation and on the capacity development, in parallel.

60. To ensure sustainability of the reform program, no specific “Project Implementation Unit” (PIU) has been set up in the ACD. The focus is on allowing the line functionaries in the ACD directly supervise and direct the IP, with the IP reporting to and requiring clearances on all activities from ACD (line offices/units/departments) through the DG. A clear achievement of the ECMTFP that continues to be supported by the SCRTFP is the focus on getting all project related staff (that are not already civil servants) to be absorbed in the MOF cadre. SCRTFP is specifically focusing on the development of the Customs cadre (distinct from the MOF and tax cadre)—this is also a key outcome of and recommendation from the ACD GAAP. That is why the three specific activities “Reorganization plan for ACD—including approval and implementation strategy and timelines,” “Integration and Sustainability Strategy for the ASYCUDA Unit—including piloting of strategy” and “Pay and pension reform package for ACD—including approval support and implementation assistance” are all being supported under the present project.

61. Project Oversight by the Project Steering Committee (PSC) - Oversight function will be performed by a Project Steering Committee led by the Finance Minister comprising of four Deputy Ministers of MOF, DG of ACD, Director Technical of ACD and Director Planning & Reforms of ACD. The key function of this PSC will be to: review project implementation focusing on achieving results; assist the ACD in resolving issues that are hindering the project and overall reform progress which are not just within ACD’s own domain; ensure that: the GOIRA policies are enabling the delivery of the results being sought through the project; and discuss any desired revisions to the project activities with the World Bank. Detailed TOR for the PSC will be agreed after declaration of project effectiveness.

62. The DG ACD as the PD will be supported by the Technical Director as the Deputy Project Director (DPD), the SCRTFP TL/CTA, and his relevant ACD and MOF Directors.

(a) Technical Oversight of ACD – On technical matters, the Director Technical ACD as DPD and the Director Reform and Planning will support the DG27. Specifically for matters related to ASYCUDA rollout, implementation of the EIS, and for C2C activities, Director Technical, IT and ASYCUDA Managers in ACD, together with the ASYCUDA Project Implementation Unit (PIU) will provide the required support to the PD in coordination with other Directors. National consultants will be hired through the SCRTFP to provide support and strengthen HR, procurement and finance functions at ACD.

(b) Financial Oversight of ACD – At present, the Director Finance and Administration (F&A) of MOF will support the DG. As mentioned earlier, one of the reforms sought that underpin the SCRTFP is to create “arms length” Human Resource (HR) and Administrative functionality

26 Such as the concept of assigning a relevant public ministry such as Public Works to deliver on the infrastructure and then maintain the same for ACD. 27 This may change once the ACD reorganization is underway.

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within ACD. This functionality was previously found within ACD, but was centralized by MOF without clear consultations with all stakeholders supporting ACD reforms. Until a decision is reached between MOF and ACD on the reform process, the current project will follow the established process. For SCRTFP this will entail the IP preparing the project accounts and submitting them through the ACD to the MOF for onward transmittal for the Government’s annual audit process; and to the World Bank for complying with its fiduciary requirements.

(c) Procurement and related administrative matters – The arrangements will again involve ACD providing oversight of the entire process executed by the IP. Further details of this are provided in the Annex on Procurement Arrangements (Annex 10). Specifically for ASYCUDA PIU, hiring, appraisals and firing of PIU staff will be undertaken by a panel comprising a member of the Policy Committee28 (PC), a representative of MOF, and the following members of the ASYCUDA PIU: ASYCUDA Project Manager or ASYCUDA Deputy Project Manager, ASYCUDA Functional Expert and ASYCUDA Technical Expert.

The United Nations Office for Project Services (UNOPS) as the Implementing Partner (IP)

63. The soon to close World Bank funded ECMTFP was implemented by UNOPS on behalf of ACD. As the Implementing Partner (IP), UNOPS has delivered, under a nationwide environment of insecurity and despite the various constraints, in a relatively cost effective and efficient manner. However this was not possible without the usual issues when working in the present Afghan country environment. There has been a large staff turnover—a problem usually associated with public sector; but not altogether unforeseen given the fragile security environment. Overall, UNOPS has performed well as an IP and provided services in accordance with the terms and conditions set in the Management Services agreement (MSA) and agreements with United Nations Conference on Trade and Development (UNCTAD) and UNIDO. It has executed the overall financial management, audit and procurement responsibilities of the project in full compliance with the GOIRA requirements, IDA reporting obligations and internal requirements of UNOPS/UN System. The UNOPS project support team has been instrumental in the good performance of the ECMTFP and continuity of the team would be critical for continued good performance and success of this SCRTFP.

64. The overall TOR for the IP (i.e. UNOPS) arrangement is being prepared as part of Request for Proposal (RFP). This TOR has improved over the ones used in the ECMTFP. Lessons learned from the ECMTFP have been considered, and necessary modifications and adjustments in the project design and implementation arrangements have been made, especially those pertaining to strengthening procurement and financial management aspects of the project.

Implementation period

65. The project implementation period is 48 months.

Project Work Plan

66. Prior to the signing of any contractual agreements with UNOPS, ACD jointly with IDA, and in consultation with UNOPS, UNCTAD, and UNIDO, will prepare a detailed work plan for the first year, based on a four-year implementation horizon. This work plan will form a part of the UNOPS contract and of the agreements between UNOPS and UNCTAD and UNOPS and UNIDO.

67. Subsequently annual Project Work Plans (PWP) will be prepared for the remaining three years. Each annual work plan will be finalized and agreed between the parties at least three months prior to the completion of the period of the last work plan.

Project management structure

68. As mentioned earlier,

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