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

UNCLAS SECTION 01 OF 03 KABUL 003701 
 
SIPDIS 
 
DEPT FOR SRAP, SCA/FO, SCA/RA, AND SCA/A 
DEPT PASS FOR AID/ASIA SCAA 
DEPT PASS USTR FOR DELANEY AND DEANGELIS 
DEPT PASS OPIC 
DEPT PASS USDA FOR FAS MICHNER 
DEPT PASS TDA FOR STEIN AND GREENIP 
NSC FOR JJONES AND GSMITH 
DASD FOR DSEDNEY 
TREASURY FOR MHIRSON, ABAUKOL, AWELLER, AND MNUGENT 
COMMERCE FOR HAMROCK-MANN, DEES, AND FONOVICH 
 
E.O.12958: N/A 
TAGS: EINV EFIN ECON AF
SUBJECT: AFGHANISTAN RECONSTRUCTION TRUST FUND: QUARTERLY DONORS 
REVIEW 
 
REF: Kabul 2056 
 
KABUL 00003701  001.2 OF 003 
 
 
¶1.  (U) This is an action message.  See paragraph 11. 
 
¶2.  (U) SUMMARY: At the November 10 quarterly review meeting with 
donors of the World Bank's Afghanistan Reconstruction Trust Fund 
(ARTF), Finance Minister Zakhilwal challenged the international 
community to channel more assistance through the government's core 
budget.  He noted that the ARTF is one of the most prominent, 
credible vehicles for such on-budget support.  (Approximately 80% of 
donor funding to Afghanistan currently passes through the 
Government's 'external, off-the-book budget.')  Zakhilwal also 
announced that Article 61 (an ARTF Incentive program benchmark - 
Reftel) was recently put into effect, with full legal status, 
according to the Ministry of Justice.  Article 61 of the Public 
Financial Management Law enables the Ministry of Finance to conduct 
internal audits of other line ministries.  At the meeting, the 
Ministry of Rural Rehabilitation and Development (MRRD) rejected 
recent press allegations that the National Solidarity Program's 
(NSP) was providing indirect financing for the Taliban.  ARTF 
remains an important and transparent vehicle for international 
assistance to Afghanistan, and a prime means through which to 
encourage the Afghan government to make needed economic reforms.  We 
recommend that the United States encourage other donors to increase 
their contributions to the fund.  END SUMMARY. 
 
--------------------- 
ARTF Financial Status 
--------------------- 
 
¶3.  (U) Finance Minister Omar Zakhilwal and World Bank Country 
Manager Mariam Sherman co-chaired the ARTF quarterly meeting, which 
had been delayed by the attack on a UN guest house in Kabul on 
October 28.  They reviewed current financing: Donors have currently 
pledged $654 million to the ARTF in FY 1388 (March 21, 2009 - March 
20, 2010), up from $626 million in FY 1387 (March 21, 2008 - March 
20, 2009).  Key sectors in the active investment portfolio (which 
funds programs), valued at over a $1 billion, include: Agriculture 
and Rural Development; Microfinance, Energy, Health and Education, 
and justice.  USAID Mission Director William Frej stressed the 
importance that ARTF-funded programs demonstrate concrete results 
and impact.  In addition to a newsletter and video to improve 
communication and outreach, the World Bank is discussing putting a 
new third-party monitoring agent in place for the investment window. 
 PricewaterhouseCoopers of Netherlands is currently the monitoring 
agent engaged by the Bank in its role as ARTF Administrator to 
review expenditures through the ARTF recurrent cost window (which 
funds government operating expenses such as salaries, operations and 
maintenance). 
 
----------------------------------------- 
ARTF Financing Strategy/Incentive Program 
----------------------------------------- 
 
¶4.  (U) To build on the forward-looking ARTF incentive program and 
to reduce the amount of preferencing (earmarking) over time, the 
Government of the Islamic Republic of Afghanistan (GIRoA) and the 
donors endorsed a Financing and Investment Framework at the July 29, 
2009 Quarterly donor meeting.  The Framework will improve the 
predictability, efficiency and transparency of ARTF resource 
allocations by establishing principles for the allocation of 
investment fund monies.  It will also set priorities for ARTF donors 
and the GIRoA.  ARTF operations are governed by a Management 
Committee, consisting of representatives of the Asian Development 
Bank (ADB), Islamic Development Bank, UNDP and World Bank. 
Day-to-day administration is undertaken by the World Bank as the 
Administrator of the ARTF.  The Management Committee meets once a 
month and is attended by the Government of Afghanistan as an 
Observer. 
 
¶5.  (U) At the meeting, Deputy Finance Minister Mastoor presented 
the GIRoA's proposed detailed implementation for the Financing 
Strategy Framework: 1) the ARTF would remain the main financing 
channel for GIRoA priorities; and 2) as stated at the 2008 Paris 
Conference, Agriculture, Energy, and Irrigation would continue to be 
 
KABUL 00003701  002.2 OF 003 
 
 
its top priorities.  Next steps would include aligning the ARTF 
Financing strategy with the FY 1389 (March 21, 2010 - March 20, 
2011) national budget.  Finance Minister Zakhilwal also asked donors 
to provide funding more closely aligned to the Afghan solar year to 
ensure a smoother implementation of national programs vs. the more 
common practice up to now of receiving funds in the winter, which 
delays implementation of programs.  USAID plans to submit an early 
release of FY 2010 ARTF funds to better align to the Afghan Solar 
Year (March 2010), thereby providing financial support to GIRoA 
programs on a more timely basis. 
 
¶6.  (U) The Finance Minister "welcomed pressure" from donors in 
promoting reforms via the ARTF Incentive Program, in the areas of: 
A) Sustaining domestic revenues; B) Improving public sector 
governance; and C) Enabling private sector development.  The Finance 
Minister is fully committed to meeting benchmarks in the off-setting 
incentive program, which essentially offers additional discretionary 
funding if the GIRoA meets certain pre-agreed benchmarks on an 
annual basis.  He also requested that donors "relax" preferencing to 
allow for increased flexibility in ARTF funding.  Preferencing at 
the program/project level, he said, has been too restrictive and 
limits the ability of the GIRoA to adopt sector-wide approaches 
implementing the Afghanistan National Development Strategy (ANDS). 
USAID Mission Director William Frej noted that lobbying for specific 
programs by individual Ministers, in particular, MRRD Minister Zia, 
has resulted in legislative earmarks to the National Solidarity 
Program (NSP). 
 
---------- 
Article 61 
---------- 
 
¶7.  (U) In 2007, the Control and Audit Office (CAO) objected to 
Article 61 of the Financial Management and Expenditure Control Law 
(included under the ARTF's benchmarking incentive program).  The CAO 
argued the article ceded too much power to the Ministry of Finance 
(MoF).  As a resultof CAO's objection, the president assigned a 
commission to study the matter.  The commission later recommended 
terminating Article 61 and restricting the purview of the Ministry 
of Finance's Internal Audit Department to MoF-related departments 
only.  The president signed off on this opinion.  The Ministry of 
Justice recently clarified, however, that Article 61 is in force, 
granting the MoF purview over internal audits in line ministries. 
MOJ added that any changes to the Financial Management Law require 
going through proper channels and publication in an official 
gazette, which were not done in this case. 
 
------------------------ 
NSP ALLEGATIONS NOT TRUE 
------------------------ 
 
¶8.  (U) The Ministry of Rural Rehabilitation and Development's NSP 
Executive Director Tariq Ismati provided an update on his ministry's 
investigation into recent press allegations that the NSP indirectly 
funds the Taliban.  (On August 10, 2009 a Global Post article 
claimed that "in Farah province, local officials report that the 
Taliban are taking up to 40% of the money coming in for the NSP..." 
) According to Ismati, a high-level MRRD delegation uncovered no 
indications that monies were paid to Taliban groups.  Ismati also 
said that NSP operates in six out of Farah's 11 districts, with 76 
projects currently underway (47 of which are in insecure districts), 
at a total value of $1,127,723.  Key results include:  1) 9,522 
wells dug with pumps; 2) 31 schools opened, in coordination with the 
Ministry of Education; 3) 470 culverts built; and 4)658 kms. of 
village and districts gravel roads.  All of these projects came in 
at costs well below similar ones executed by PRTs using CERP funds. 
 
¶9. (U) The investigation included interviews with the Farah 
Governor, the PRT (i.e. PRT Commander, USAID Representative, Marine 
Forces, etc.), the Director of Tribes and Frontiers, Community 
elders, Community Development Councils, UN-Habitat, Provincial 
Officials, etc.  Documents and financial records were also 
cross-checked and noted as compliant with NSP Operational Manual 
standards.  (Comment: On November 12, Ambassador Wayne asked MRRD 
for a report on NSP projects performance in the South after 
 
KABUL 00003701  003.2 OF 003 
 
 
receiving reports that NSP projects had floundered in several 
southern provinces with heavy insurgent activity.  The Deputy MRRD 
Minister admitted problems and promised a report including how the 
MRRD has adapted its approach.) 
 
------- 
COMMENT 
------- 
 
¶10.  (U) In concert with the Afghan government and other donors, our 
Mission will continue to work with the ARTF to track progress, align 
technical assistance to meet and implement economic reform 
benchmarks (i.e. Article 61), and implement the ARTF's Financing 
Strategy.  In particular, the Afghan government's Financing Strategy 
offers donors an opportunity to work with the new Government to 
further align ARTF resources to GIRoA priorities.  Donors were also 
pleased to see that the World Bank/MRRD is taking investigations 
into corruption seriously and conducting due diligence.  Clear 
follow-up on the allegations and a reiteration of risk mitigation 
measures are needed, however.  We also recommend additional measures 
be explored and implemented in high-risk areas vulnerable to Taliban 
extortion moving forwards. 
 
¶11.  (U) Action request:  We recommend Washington consider 
undertaking a broader diplomatic effort to solicit greater ARTF 
pledges from other donors.  (The U.S. and the UK now provide half of 
the total ARTF funding).  This initiative is consistent with 
President Obama's emphasis on greater Afghanization of assistance, 
enabling the Afghan government to take the lead in national 
programs.  As noted above, USAID also plans to submit a request for 
an early release of FY 2010 ARTF funds to provide financial support 
to GIRoA programs on a more timely basis. 
 
EIKENBERRY