P 261631Z JUL 09
FM AMEMBASSY KABUL
TO SECSTATE WASHDC PRIORITY 0390
INFO DEPT OF TREASURY WASHINGTON DC 0859
AFGHANISTAN COLLECTIVE
NATO EU COLLECTIVE
DEA HQS WASHINGTON DC
USDA FAS WASHDC
DEPT OF COMMERCE WASHINGTON DC

UNCLAS KABUL 002076 
 
 
DEPT FOR SRAP, SCA/FO, SCA/RA, AND SCA/A 
DEPT PASS FOR AID/ASIA SCAA 
DEPT PASS USTR FOR DELANEY AND DEANGELIS 
DEPT PASS OPIC 
DEPT PASS USDA FOR FAS MICHNER 
DEPT PASS TDA FOR STEIN AND GREENIP 
NSC FOR JJONES AND GSMITH 
DASD FOR DSEDNEY 
TREASURY FOR MHIRSON, ABAUKOL, AWELLER, AND MNUGENT 
COMMERCE FOR HAMROCK-MANN, DEES, AND FONOVICH 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ENRG ETRD ECON AF FAS
SUBJECT: AFGHANISTAN RECONSTRUCTION TRUST FUND: 
ACHIEVING ECONOMIC AND POLICY REFORMS 
 
This is an action message. See paragraphs 4 and 14. 
 
SUMMARY 
 
¶1.  On July 20, 2009, the Government of the Islamic 
Republic of Afghanistan and the donors reached 
agreement on the Afghanistan Reconstruction Trust 
FundQs (ARTF) Incentive Program for FY 1388 (March 
20, 2009 - March 19, 2010), which is intended to 
support needed economic policy reforms and funding 
for the ARTF recurrent cost window.  A Memorandum of 
Understanding is planned to be signed between the 
World Bank and the Ministry of Finance and presented 
at the upcoming July 29, 2009 ARTF Quarterly Donor 
meeting. 
 
¶2.  Minister of Finance Zakhilwal and Deputy Minister 
Mastoor led a whole-of-Afghan-government approach in 
putting forth an ambitious reform agenda in 
negotiating the ARTF FY 1388 benchmarks with donors. 
The FY 1388 Incentive Program scheme is $60M (25% of 
which is tied to a revenue target matching the IMF 
program and 75% allocated to other structural 
benchmarks).  The new Incentive Program essentially 
offers additional discretionary funding if the GIRoA 
meets certain pre-agreed benchmarks on an annual 
basis.  The benchmarks are allocated by three themes: 
 
A) Sustaining domestic revenues; B) Improving public 
sector governance; and C) Enabling private sector 
development with three benchmarks per theme; thus, a 
total of nine benchmarks.  The GIRoA and ARTF donors 
agreed on equal weights for all three themes, i.e. 
$15 million per theme and the expectation that if one 
benchmark within each theme is not fulfilled the 
government would forgo the entire resource allocation 
for that theme.  The Incentive Program is funded by 
the ARTF donors in the same way that the Recurrent 
Cost Window is funded. 
 
If the GIRoA meets all of the benchmarks, the $60M 
will be included as part of the FY 1389 budget. 
Where incentive funds are not allocated due to 
underperformance on revenue or against benchmarks, 
funds are allocated by the ARTF Management Committee 
through ARTFQs Investment Window to well-performing 
national priority programs. 
 
¶3.  Embassy staff was closely involved in the 
formulation of the benchmarks and aligning a USG 
whole-of-government approach to align technical 
assistance and programs to support the Afghan-led 
reform agenda.  Embassy staff also worked closely 
both formally and informally with donors to present 
common messages.  For example, the U.S. and the U.K. 
prepared a joint statement at the July 20 meeting. 
The World Bank played a key role in facilitating the 
working group meetings leading up to the agreement. 
 
¶4.  Action request: We ask Washington support to 
encourage other donors (the U.S. and the UK now 
provide half of the total ARTF funding) to contribute 
to the ARTF to support national programs, GIROA-led 
economic policy reforms, and contribute to aid 
effectiveness goals as outlined in the Paris 
Declaration.  END SUMMARY 
 
 
AFGHANISTAN RECONSTRUCTION TRUST FUND (ARTF) 
BACKGROUND 
 
¶5.   The Afghanistan Reconstruction Trust Fund (ARTF) 
is a partnership between the international community 
and the Afghan government for the improved 
effectiveness of the reconstruction effort. Since 
early 2002, 30 donors have contributed over $3 
billion (as of April 20, 2009), making the ARTF the 
largest contributor to the Afghan budget Q for both 
operating costs and development programs.  ARTFQs 
support for national priority programs, for operating 
costs of government operations and for the policy 
reform agenda is contributing to the achievement of 
the Afghanistan National Development Strategy goals. 
 
¶6.  In addition, the specific objectives of the ARTF 
are to: 1) position the national budget as the key 
vehicle to align the reconstruction program with 
national development objectives; 2) promote 
transparency and accountability of reconstruction 
assistance; 3) reduce the burden on limited 
government capacity while promoting capacity-building 
over time; and 4) enhance donor coordination for 
financing and policy dialogue. 
 
¶7.  The new Incentive Program essentially offers 
additional discretionary funding if the GIRoA meets 
certain pre-agreed benchmarks on an annual basis. The 
objectives of the Incentive Program are: 1) 
predictable ARTF Recurrent Cost (RC) funding over the 
medium-term Q and hence aid effectiveness; 2) support 
for the governmentQs core policy reforms, including 
domestic revenue generation; 3) strengthening the 
ARTF as a platform for policy dialogue between donors 
and government; and 4) clearer strategic objectives 
for the ARTF RC Window.  The objective is not only to 
support the reform process, but also to allow for 
increased allocations towards the financing of the 
governmentQs core development programs through the 
ARTF Investment Window. 
 
¶8.  Under an earlier reform plan agreed by donors and 
the GIRoA, guaranteed recurrent cost support to the 
GIRoA will decline by $25 million per annum from its 
level of $276 million in FY 1387.  This decline is 
offset by the Incentive Program, which started out at 
$40 million in FY 2009-10, to reward GIRoA 
performance against a set of policy benchmarks.  The 
GIRoA met all benchmarks and will receive the full 
$40 million. 
 
 
REVENUE MATCHING GRANT SCHEME 
 
¶9.  The Revenue Matching Grant Scheme is designed to 
incentivize improved revenue performance, and 
therefore fiscal sustainability. The scheme will 
start in SY1389 (March 20, 2010 Q March 20, 2011), 
based on revenue performance in SY1388 (March 20, 
2009 Q March 20, 2010).  It is anchored in the annual 
revenue targeting negotiations between the Ministry 
of Finance and the International Monetary Fund (IMF). 
The Revenue Matching Grant scheme is capped at 25 
percent of the total ARTF Incentive funds available 
in any year.  Thus, in its first year, SY1389, the 
Revenue Matching Grant will have a pot of $15 
million.  It is important to recognize that in the 
event of an adjustment to the IMF revenue target 
during the fiscal year, the Matching Grant mechanism 
will adopt the new target to avoid confusion. 
 
 
Theme A: Sustaining Domestic Revenue Generation 
 
¶10.  The Poverty Reduction and Growth Facility (PRGF) 
program supervised by the IMF is the core framework 
for the GovernmentQs revenue generation program, in 
addition to broader macro-fiscal stability.  In 
addition, various donor agencies support the Ministry 
of Finance revenue department through technical 
assistance.  The ARTF Incentive Program can further 
support the GovernmentQs revenue measures, through 
strategic strengthening of existing benchmarks and 
commitments.  This policy objective will be 
complemented by the Revenue Matching Scheme.  The 
three benchmarks for FY 1388 in this theme focus on: 
1) customs reforms; 2) Tax and Non-tax revenue 
transparency; and 3) improving companiesQ compliance 
with the Business Receipt Tax (BRT). 
 
Theme B: Improving Public Sector Governance 
 
¶11.  Public administration reform (PAR), public 
finance management (PFM) and anti-corruption are all 
critical for the improved delivery of services and 
the broader state-building program in Afghanistan. 
Specifically with respect to the ARTF, PAR will be 
important for developing the sustainable core 
capacity in Government that will enhance the impact 
of external assistance through the Core Budget and 
from a longer-term perspective will reduce 
AfghanistanQs dependence on expensive and 
unsustainable technical assistance.  As a result, the 
three benchmarks for FY 1388 in this theme focus on: 
1) asset declaration; 2) strengthening GIRoAQs 
Internal Audit function; and 3) progress in Pay and 
Grade implementation (including teachers). 
 
 
Theme C: Enabling Private Sector Development 
 
¶12.  Private sector development is critical to 
transition the Afghan economy from one where the 
public sector plays a large role in the formal 
economy (and where there is substantial corruption) 
to a stable, licit, private-sector led growth path. 
This is crucial for job creation and poverty 
reduction as well as for increasing the productivity 
and competitiveness of the Afghan economy.  A broad- 
based economy will also support a broader tax base. 
The three benchmarks for FY 1388 in this theme focus 
on: 1) progress in AfghanistanQs Electricity 
Corporation (DABS) corporatization and governance 
reforms; 2) roll-out of the Central Business Registry 
to the provinces; and 3) improvement of the 
regulatory framework and transparency in the mining 
sector. 
 
 
NEXT STEPS 
 
¶13.  The World Bank is responsible for the annual 
Technical Review of benchmarks.  The date of the 
Technical Review has been set for November/December. 
In undertaking the Technical Review the World Bank 
may draw on the technical competencies of other 
agencies as necessary.  The World Bank will report 
the results of the Technical Review in early December 
2009 to the Donor/Government Working Group, which 
will make a recommendation to the Quarterly Donor 
Meeting on whether the benchmarks have been met. 
 
¶14.  Action request:  At the field level, we will 
continue to support the ARTF with the GIRoA and 
donors, to track progress, align technical assistance 
to meet the economic reform benchmarks, and to 
develop the ARTF Financing Strategy.  A key ARTF goal 
is to reduce the burden on limited government 
capacity while promoting capacity-building and fiscal 
sustainability over time.  We ask Washington to press 
a broader diplomatic effort among other donors (the 
U.S. and the UK now provide half of the total ARTF 
funding) to contribute to the ARTF to support 
national programs, and to contribute to aid 
effectiveness goals as outlined in the Paris 
Declaration.  With the incentive scheme in place, the 
objective is not only to support the reform process, 
but also to allow for increased allocations towards 
the financing of governmentQs core development 
programs through the ARTF Investment Window. 
 
 
 
EIKENBERRY