## 1afgea2021001 - PREFACE ## Source details **Canonical URL:** [1afgea2021001 - PREFACE](https://www.imf.org/-/media/files/publications/cr/2021/english/1afgea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1afgea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1afgea2021001.pdf.json) --- ### Mission background and objective - Mission timeframe: remote mission undertaken intermittently from June 22 through July 30, 2020. - Mission participants: Jacques Charaoui (lead-FAD), Jonas Frank (METAC), Olya Kroytor (LEG), Mathilde Ravanel-Vassy (FAD Expert). - Objective: provide advice to the authorities on the management of fiscal risks; work to be followed up by FAD, METAC, and LEG to support implementation. - Parallel mission: Middle East and Central Asian Department (MCD) mission led by Mr. Azim Sadikov discussing a new Extended Credit Facility (ECF) arrangement. ### Executive summary — scope and focus - Mission covered three interrelated topics: - (i) the Public Finance and Expenditure Management (PFEM) Law and fiscal risks oversight and management; - (ii) the State-Owned Corporations (SOC); and - (iii) the Public-Private Partnerships (PPP). - Emphasis: reforms implementable during the life of the next IMF program. ### Key summary findings on fiscal risk oversight and management - Institutional status and legal framework: - Emerging institutional framework for fiscal risk oversight and management exists but is not fully consolidated. - Macro-Fiscal Policy Department (MFPD) performs overarching fiscal risk function in practice and has begun disclosing fiscal risks in the Fiscal Strategy Paper (FSP). - Legal framework does not yet envisage a consolidated fiscal risk oversight mandate for the MoF; SOEs/SOCs are excluded from the scope of the PFEM Law. - Recommended initial priorities: - Initial quantification of contingent liabilities from SOEs/SOCs and PPPs. - Widen the scope of fiscal risk by adopting a guarantee framework. - Clearly enshrine the MoF fiscal risk oversight mandate in the legal framework. ### Key findings on SOEs/SOCs fiscal risks and status - Aggregate and concentration: - SOCs and SOEs’ total liabilities represent over 6 percent of GDP in 2017. - From a total of 51 SOEs/SOCs: - about 23 SOEs and 8 SOCs were not profitable on their core business. - Five SOEs or SOCs account for about 80 percent of the total income and about 60 percent of the workforce. - One of the five largest SOEs, DABS, had total long-term loans amounting in 2017 to AFN 26 billion, almost 2 percent of the 2017 GDP. - Conclusion: fiscal risk in this sector is quite concentrated; monitoring should prioritize the largest entities while expanding oversight to the 40+ smaller SOEs/SOCs. - Reporting, governance, and data limitations: - Financial reporting of SOEs/SOCs is seriously deficient: - Only a fraction regularly produce financial statements and they are often incomplete. - Most SOEs/SOCs have not established a balance sheet for over 10 years. - External audits: over the last years only five out of the 15 SOCs had their statements audited. - Data discrepancies example: Afghan telecom corporation net earnings for year 2016 reported AFN 1 193 100 413 in the excel spreadsheet versus AFN 483 506 124 in the income statement. - Liability structure: SOCs’ liabilities are mostly current (for SOCs, apart from DABS, current liabilities represent over 80 percent of total liabilities). - Public banks: represent 11 percent of the loans of the sector but 96 percent of the deposits. - Institutional roles and implementation status: - SOC Law was adopted in 2018 but is yet to be fully implemented; SOC regulation has not been developed. - Conversion process: state-owned enterprises are being converted into State-owned corporations in a process expected to be concluded in December 2020. - Counts: 36 SOEs and 15 SOCs; Ministry of Commerce and Industry has 11 SOEs/SOCs. - Oversight: SOC Oversight Board composed of five members and chaired by the Minister of Finance but has not been fully discharging functions (no annual report published; meetings/minutes not fully evidenced). ### Key findings on PPP fiscal risks and disclosure - Current scale and disclosure: - Six PPP projects under contract with a total investment cost of around USD 960 million (5 percent of GDP). - 23 projects in the pipeline worth around USD 1.4 billion (about 7.2 percent of GDP). - Total commitments under PPPs and similar arrangements are not disclosed in any government document. - No central government database consolidating total noncontingent payments and contingent liabilities across projects. - Institutional and procedural risks: - PPPs regulated by their own Law; PPP project development runs in parallel to traditional government projects risking inefficient modality choices. - The Central Partnership Authority (CPA) is designated a central role but the PEC has no formal role in the public investment process in law. - Assessment: - Fiscal risks from PPPs currently appear relatively modest but could grow materially as PPP use scales up; contingent liabilities are not quantified in the budget. ### High-level substantive recommendations - SOEs/SOCs monitoring improvements: - Continue focus on the largest SOEs/SOCs and move towards monitoring of balance sheets. - Improve quality of financial information; conduct additional external audits. - Deepen disclosure of fiscal risks at SOE/SOC level and create accountability for financial results. - Differentiate functions between the SOE Department and the SOC Oversight Board; Oversight Board to establish a fiscal risk tolerance level and publish annual report. - PPP oversight and fiscal risk management: - Enforce the MoF’s “gate-keeping” role. - Establish an integrated PIM-PPP process. - Integrate PPPs into the budget process with disclosure of fiscal risks and full costs, including contingent liabilities. - Legal enhancements: - Articulate clearly in legal instruments the mandate and powers of the MoF for monitoring and managing fiscal risks. - Improve SOC law risk oversight provisions; consider incorporating comprehensive fiscal risk mandate for the MoF in the PFEM Law. - Choice of legal instrument to be determined by nature and timing of reform priorities. ### Condensed recommended actions and timeframes (selected items) - Part A: Fiscal risk framework - 1.1 Prepare a concept note determining the scope and objectives of the fiscal risk function in Afghanistan. - Timeframe: December 2020 - Responsibility: MFPD - Part B: SOEs/SOCs Oversight and fiscal risks - 2.1 For the five largest SOEs/SOCs: submit financial statements (including balance sheets) for the last 3 years to external audit; define financial targets for 2021-2023; analyze contingent liabilities. - Timeframe: December 2020 - Responsibility: SOE/SOC Department of MoF - 2.1 Disclose gaps in reporting from all SOEs/SOCs on a MoF website and update regularly. - Timeframe: June 2021 - Responsibility: SOE/SOC Department of MoF - 2.2 Submit first annual report covering financial statements of SOEs/SOCs of 2019 to Oversight Board for analysis and approval. - Timeframe: January 2021 - Responsibility: SOE/SOC Department of MoF - 2.3 Prepare an initial quantification of contingent liabilities of SOEs/SOCs using the IMF’s SOE health check tool; disclose in the annual FSP. - Timeframe: Budget 2022 - Responsibility: MFPD - Part C: PPP Oversight and fiscal risks - 3.1 Use the IMF’s PFRAM tool to ensure fiscal risks associated with PPPs are assessed at contract signing and on an ongoing basis. - Timeframe: On-going - Responsibility: CPA - 3.2 Disclose information on PPPs in FSP and budget documentation. - Timeframe: Budget 2022 - Responsibility: MFPD with input from CPA *Content derived from 1afgea2021001 - PREFACE (IMF mission report content provided).* ### Legal and institutional arrangements for fiscal risks — overview - PFEM Law provisions and gaps: - PFEM Law includes contingent liabilities references (Article 33(6); Article 58(6)) and requires MoF to maintain records of borrowing or lending including “guarantees and contingent liabilities.” - Article 20: MoF may only issue a loan guarantee “where authorized by Law” and in the amount specified in the law. - PFEM Law contingency allocation may not exceed 3 percent of “total program expenditures” (Article 46). - PFEM Law excludes SOCs; SOC Law (Article 12) vests MoF with responsibility to “monitor, analyze, disclose and mitigate” fiscal risks from SOC activities, and entitles MoF to obtain “all relevant data and information” including quarterly reports and annual financial statements. - Institutional clarification needed: - Fiscal risk monitoring should cover central government, municipalities, SOEs/SOCs, and state-owned banks. - Clarify powers for information requests and sanctions for non-compliance. - Recommended separation of specialized data collection units (SOE Department, PPP Unit) and aggregate analysis (MFPD). ### Information provision, disclosure, and enforcement gaps - PFEM Law: State administration authorities obliged to report under Article 5; municipalities under Article 25 — but no enforcement mechanisms (sanctions) specified. - MoF must submit fiscal risk evaluation and mitigation reports to SOCs, Oversight Board, other ministries, the Supreme Audit Office, the President and the National Assembly and publish them on the MoF website (SOC Law Article 12(1)(e)). - The annual Fiscal Strategy Paper (FSP) is the main vehicle for reporting on fiscal risks; MFPD discontinued separate quarterly fiscal risk reports and reporting on SOEs/SOCs and PPPs in the FSP is limited. - Potential legal enhancements: - Incorporate comprehensive MoF fiscal risk management function into PFEM Law or other instruments. - Clarify definitions of fiscal risks and coverage (specifically include SOCs). - Provide MoF powers to collect information and consider sanctions for non-compliance. - Use secondary legislation (SOC Regulation, PFEM Regulation) to detail reporting types and frequency, and operational roles between MFPD, SOE/SOC department, and SOC Oversight Board. ### Country examples cited for fiscal risk management provisions - Summaries provided for Bahrain Budget Law 2002; Brazil Fiscal Responsibility Law 2000; Ecuador Organic Code for Planning and Public Finances 2010; Ghana Public Financial Management Act 2016; Montenegro Law on Budget and Responsibility 2014; New Zealand Public Finance Act — illustrating reporting powers, sanctions, requirement to disclose fiscal risks, and MoF information request powers. ### Recommendations — legal and operational - Prepare a concept determining scope and objectives of the fiscal risk function (types of fiscal risks; information powers; sanctions). - Produce manuals and guidelines as needed. - Develop and adopt legislative amendments (PFEM Law, PFEM Regulation, SOC Regulation) where appropriate. - Timeline note: Recommendation categorized "Within one year – duration of ECF" and status "As of mid-2021". ### Reporting from SOEs/SOCs on financial statements — coverage, timeliness, and audit findings - Per Article 21(3) of the SOC Law SOCs must prepare quarterly and annual financial statements including balance sheet, profit and loss account, cash flows; SOCs required to follow IFRS. - Availability and completeness: - 13 of the 15 SOCs regularly produce financial statements (quarterly; annual); two SOCs do not. - Ten SOCs include last year’s financial performance; five do not. - Most SOEs/SOCs have not established a balance sheet for over 10 years. - Many SOCs have a backlog in preparing financial statements; backlog affects 8 of the 15 SOCs including four of the five SOCs which have audited statements (Ariana Afghan Airline, Hotel intercontinental, DABS and Afghan Telecom). - External audits and observations: - Over the last years only five out of the 15 SOCs had their statements audited; audits through the Supreme Audit Office (SAO) are apparently not conducted. - Audit observations include changing financial statements during audits (Ariana); grants not properly recorded (DABS); revaluations of assets that “overinflate” balance sheet; inconsistent exchange rates (Hotel Intercontinental); lack of updated asset inventories (Ariana). - Aggregate liabilities and fiscal risks: - SOCs and SOEs’ total liabilities represent over 6 percent of the GDP in 2017; considering 7 SOEs/SOCs representing around 90 percent of total income, total liabilities amount to 6.4 percent of the GDP in 2017. - Table highlights (as provided by MoF): DABS — Total liabilities 61,6 bn (as share of 2018 GDP: 4%); Afghan Telecom Company — Total liabilities 10,7 bn (1%); Fuel and Liquid Gas SOC — Total liabilities 10,6 bn (1%); Mazar Fertilizers & Electricity SOE — Total liabilities 6,8 bn (0%); Public Protection force SOE — Total liabilities 4,9 bn (0%); North coal mining SOE — Total liabilities 2,1 bn (0%); Ariana Airlines SOC — Total liabilities 1,4 bn (0%); Slaughter SOE — Total liabilities 0,4 bn (0%); Water Supply and Sewerage Company SOE — Total liabilities: NA. - Note: Data for SOEs rely on information provided by the MoF and not financial statements. - Profitability and liquidity: - The total operational profit of the SOEs and SOCs sector amounts to AFN 4,062 million including non-operational income. - The total income of SOEs/SOCs running a deficit represents around one fifth of the sector total income. - Majority run operations at a loss in the latest fiscal year: 23 SOEs and 8 SOCs were not profitable on their core business; including other incomes, 12 SOEs and 3 SOCs still displayed deficits. - Afghan Telecom reports a commitment of AFN 6bn (0.5% of the 2018 GDP) towards certain telecom vendors; reported current ratio almost 11; adding the AFN 6bn commitment the current ratio falls to 2.4. - Ariana Airlines’ current ratio fell from 3.5 to 2.0 over the last four years; Slaughter company current ratio around 1. ### SOE/SOC oversight: reporting lines and gaps - Reporting framework under SOC Law anticipates four reporting lines: (i) SOC/SOE Department at MoF; (ii) SOC Oversight Board; (iii) reporting from the SOC Oversight Board to the High Economic Council; (iv) reporting from the Executive to Parliament. - Current gaps: - No monitoring of balance sheets due to inconsistent information flow. - No performance indicators set for any SOC despite legal requirement. - Quarterly and annual reports required by Article 10 of the SOC Law have not been produced or submitted to the High Economic Council to date. - FSP 1399/2020 does not provide an analytical frame disclosing fiscal risks related to SOEs/SOCs nor presents mitigating measures; only a general paragraph noting SOCs “do not have enough revenues.” ### Strategy to strengthen SOE/SOC oversight — key elements and recommendation set - Key elements: - Continue a risk-based approach: focus on largest SOEs/SOCs, move to balance sheet analysis, improve and enforce financial reporting, and gradually expand monitoring to the 40+ smaller SOEs/SOCs. - Improve governance by further separating SOC Oversight Board functions from MoF to address conflicts of interest. - Use the current Fiscal Strategy Paper as main disclosure avenue, starting with an initial quantification of fiscal risks and refine over time. - Recommendation set (Within one year – duration of ECF; As of mid-2021): - 2.1 Improve compliance and quality of financial reporting at individual SOEs/SOCs: - For the five largest SOEs/SOCs: audited financial statements of the last 3 years should be available; an analysis of contingent liabilities will be conducted; targets for 2021 with indicative targets for 2022-2023. - Disclose a list of reporting gaps for all SOEs/SOCs on MoF website (updated regularly). - Expand financial indicators to include current ratio, debt ratio and interest coverage ratio where applicable. - Increase quality and coverage of financial information for all other SOEs/SOCs; provide capacity development and conduct regular audits; adopt graduated sanctions for non- or under-reporting (assess appropriate legal instrument). - 2.2 Strengthen SOC Oversight Board: - Submit first annual report covering 2019 financial statements for analysis and approval. - Clarify distinction between MoF approval of funding and Oversight Board establishing fiscal risk tolerance. - Improve professional capacity of the secretariat; review staffing profile of existing 80 staff. - Determine a plan for each SOE/SOC (privatize, liquidate, merge, restructure). - 2.3 Improve aggregate fiscal risk reporting for SOEs/SOCs: - Prepare initial quantification of contingent liabilities using SOE health check tool; disclose in FSP for Budget 2022. - Prepare concept for institutionalized budgetary treatment of SOEs/SOCs (Timeframe: January 2021 responsibility: Budget Department with inputs from MFPD). - Develop and adopt a framework for issuance of guarantees (may require PFEM Law enhancements). ### PPP overview: scale, legal framework, and main fiscal risks - Scale and pipeline: - Six PPP projects under contract with a total investment cost around USD 960 million (5 percent of GDP). - 23 projects in the pipeline worth around USD 1.4 billion (about 7.2 percent of GDP). - Legal and institutional framework: - PPP Law (2018) designates the Central Partnership Authority (CPA) within MoF a central role; MoF powers include approving Concept, Prefeasibility and Feasibility Studies; High Economic Council decides on financial/economic support, guarantees and commitments; Cabinet approves/amends/rejects partnership contracts attested by High Economic Council. - PPP Law requires risk analysis before entering contracts; MoF to carry out risk and financial analysis for contingent and non-contingent liabilities. - Viability Gap Fund (VGF) not established yet; Project Development Fund (PDF) established and funded by World Bank. - Main fiscal risks from PPPs (examples): - guarantees for market risks or changes in government policy; minimum revenue guarantees; protections against force majeure; capital subsidies (VGF); availability payments; volume-based payments; tax incentives; payments related to revenue, exchange-rate, and interest-rate guarantees; payments related to regulatory risks, early termination, extraordinary events; debt guarantee payments; costs from renegotiations and disputes; implicit guarantees. - Current vulnerabilities in Afghanistan: - No central PPP database; lack of disclosure of cumulative multi-year fiscal commitments and contingent liabilities. - Government has not provided explicit guarantees but implicitly guarantees Power Purchase Agreements (PPAs) via DABS which sells power at a loss. - Example electricity price: household price 0.049 USD per kWh versus PPA contract price 0.059 USD. - Most operational PPPs in energy structured around “take or pay” Purchase Agreements that can create payment obligations even if demand falls. ### Assessing and containing PPP fiscal risks — tools and ceilings - PPP Fiscal Risk Assessment Model (P-FRAM): - Standardized Excel-based tool to assess PPP fiscal risks; follows a four-step decision tree and generates project cash flows, fiscal tables/charts, debt sustainability analyses, and sensitivity analyses. - Assessing maximum exposure: - For variable service payments, estimate maximum payment assuming full capacity; for minimum-revenue guarantees, present value of guaranteed revenue over contract life. - Use of numerical ceilings (international examples): - Brazil: ceiling on current spending from PPP contracts of 3 percent of net current revenue. - Peru: ceiling on present value of accumulated PPP liabilities of 7 percent of GDP. - Hungary: limits nominal value of new long-term commitments to 3 percent of total state budget revenues in any given budget year. - El Salvador: limits present value of cumulative firm and contingent future PPP payments to 5 percent of GDP. - Current Afghanistan situation: - No overall limits or clear procedures to ensure long-term affordability; no conclusive data on total investment value of signed PPPs. ### PPP recommendations and implementation timeline (selected) - Overarching strategy elements: - Enforce “gate-keeping”; establish integrated PIM-PPP process; integrate PPPs into the budget process with disclosure of fiscal risks; disclose full costs and contingent liabilities; publish tender documents, evaluation reports, PPP contracts and verification results. - Specific recommendations (Within one year – duration of ECF; As of mid-2021): - 3.1 Strengthen monitoring and assessment of PPP project risks: - Use IMF’s PFRAM at contract entry and on-going basis. - Establish and maintain a PPP database (Annex III) or augment Integrated Bank of Projects with service payment and guarantee data. - Publish tender documents, evaluation reports, PPP contracts, private partners’ financial statements, and construction verification results. - 3.2 Integrate PPPs into the budget framework and improve affordability assessment: - Require new PPPs be assessed within medium-term fiscal objectives and account for existing project liabilities (end-2020). - Disclose PPP information in budget documentation (Budget 1400/2021). - Add quantification of contingent liabilities to PPP section of FSP (Budget 1400/2021). - Develop framework to assess aggregate PPP exposure and consider establishing a ceiling on PPPs (2021). - 3.3 Strengthen integrated PIM-PPP framework: - Institutionalize PEC role in investment process through legal mechanisms ensuring clarity of PEC interaction with CPA, MoF and other participants. ### Annex materials (selected templates and disclosure fields) - Annex III: Template for a PPP Database — core fields include project identifier; project name; responsible Ministry; responsible Authority; type (greenfield/brownfield); contract signature (year); contract duration; financial closure (year); first year of operation (year); total project value (planned/actual) (local currency); time-profiled investment, maintenance, operation and revenue data; NPV of total government payments; government payments by year; government financing/equity/on-lending details; government guarantees (type, maximum amount, outstanding amount); tax exemptions; major project risks. - Annex IV: Disclosure of PPPs in Fiscal Strategy Paper — background information; PPP portfolio table with project-level details; risk analysis; mitigating measures and risk management approach. - Annex V: Disclosure fields for PPPs in Budget Documentation — separate templates for new projects as PPPs, ongoing PPP projects, new public investment projects, and ongoing public investment projects with detailed time-profiled spending and government payment fields. *Source: 1afgea2021001 - PREFACE (IMF mission report content provided).* ### PREFACE _________________________________________________________________________________________ 6 ### 1afgea2021001 - PREFACE _________________________________________________________________________________________ 6 ### Preface - Mission timeframe: remote mission undertaken intermittently from June 22 through July 30, 2020. - Mission participants: Jacques Charaoui (lead-FAD), Jonas Frank (METAC), Olya Kroytor (LEG), Mathilde Ravanel-Vassy (FAD Expert). - Objective: provide advice to the authorities on the management of fiscal risks; work to be followed up by FAD, METAC, and LEG to support implementation. - Parallel mission: Middle East and Central Asian Department (MCD) mission led by Mr. Azim Sadikov discussing a new Extended Credit Facility (ECF) arrangement. - MoF interlocutors met: Mr. Sayed Naseer (Director General of Budget); Mr. Rafiullah Nabeel (Director of Legal Board); Mr. Abdul Rahman Rahimi (Director General of Fiscal Policy); Mr. Talha Hidayat (Director General for PPP); Mr. Aboozar Karimi (Senior Finance Specialist State Owned Enterprises & Corporations). - Acknowledgements: special thanks to Mr. Rafiullah Nabeel and the IMF country team in MCD. ### Executive summary — scope and focus - Mission covered three interrelated topics: - (i) the Public Finance and Expenditure Management (PFEM) Law and fiscal risks oversight and management; - (ii) the State-Owned Corporations (SOC); and - (iii) the Public-Private Partnerships (PPP). - Emphasis: reforms implementable during the life of the next IMF program. Key summary findings on fiscal risk oversight and management - Institutional status: - Emerging institutional framework for fiscal risk oversight and management exists but is not fully consolidated. - Macro-Fiscal Policy Department (MFPD) performs overarching fiscal risk function in practice and has begun disclosing fiscal risks in the Fiscal Strategy Paper (FSP). - Legal framework does not yet envisage a consolidated fiscal risk oversight mandate for the MoF; SOEs/SOCs are excluded from the scope of the PFEM Law. - Recommended initial priorities: - Initial quantification of contingent liabilities from SOEs/SOCs and PPPs. - Widen the scope of fiscal risk by adopting a guarantee framework. - Clearly enshrine the MoF fiscal risk oversight mandate in the legal framework. Key findings on fiscal risks of State-Owned Enterprises / State-Owned Corporations (SOEs/SOCs) - Aggregate and concentration: - SOCs and SOEs’ total liabilities represent over 6 percent of GDP in 2017. - From a total of 51 SOEs/SOCs: - about 23 SOEs and 8 SOCs were not profitable on their core business. - Five SOEs or SOCs account for about 80 percent of the total income and about 60 percent of the workforce. - One of the five largest SOEs, DABS, had total long-term loans amounting in 2017 to AFN 26 billion, almost 2 percent of the 2017 GDP. - Conclusion: fiscal risk in this sector is quite concentrated; monitoring should prioritize the largest entities while expanding oversight to the 40+ smaller SOEs/SOCs. - Reporting and governance limitations: - Financial reporting of SOEs/SOCs is seriously deficient: - Only a fraction regularly produce financial statements and they are often incomplete. - Most SOEs/SOCs have not established a balance sheet for over 10 years. - SOC Law provisions to strengthen governance and reporting to MoF are yet to be fully implemented. - Blurred lines of accountability between the SOE Department at the MoF (secretariat to the SOC Oversight Board) and the SOC Oversight Board, particularly regarding financial support. - The Oversight Board is not yet fully discharging functions; no annual report on fiscal risks has been published. Key findings on fiscal risks of Public-Private Partnerships (PPPs) - Current scale and disclosure: - Six projects under contract with a total investment cost of around 5 percent of GDP. - 23 projects in the pipeline worth a further 7.2 percent of GDP. - Total commitments under PPPs and similar arrangements are not disclosed in any government document. - No central government database consolidating total noncontingent payments and contingent liabilities across projects. - Institutional process risks: - PPPs are regulated by their own Law and the PPP project development runs in parallel to traditional government projects, risking inefficient modality choices. - Overall assessment: fiscal risks from PPPs currently appear relatively modest but could grow materially as PPP use scales up; contingent liabilities are not quantified in the budget. ### Strengthening monitoring and management — substantive recommendations (high level) - SOEs/SOCs monitoring improvements: - Continue focus on the largest SOEs/SOCs and move towards monitoring of balance sheets. - Improve quality of financial information (depth and scope). - Conduct additional external audits of financial statements. - Deepen disclosure of fiscal risks at SOE/SOC level and create accountability for financial results. - Differentiate functions between the SOE Department (secretariat) and the SOC Oversight Board. - SOC Oversight Board to establish a fiscal risk tolerance level to guide approval of financial support. - SOC Oversight Board to publish its first annual report on SOEs/SOCs performance and issue implementation instructions and guidelines for mitigating measures. - Require higher transparency before considering an institutionalized budgetary framework for SOEs/SOCs. - PPP oversight and fiscal risk management: - Enforce the MoF’s “gate-keeping” role. - Establish an integrated PIM-PPP process to strengthen efficiency considerations. - Integrate PPPs into the budget process with disclosure of fiscal risks and full costs, including contingent liabilities. - Facilitate more efficient risk sharing among stakeholders. - Legal enhancements: - Articulate more clearly in legal instruments the mandate and powers of the MoF for monitoring and managing fiscal risks. - Improve the SOC law’s risk oversight provisions (law is in force but still being considered by Parliament). - Consider incorporating a comprehensive fiscal risk mandate for the MoF in the PFEM Law; details may be provided in regulations. - Choice of legal instrument should be determined by nature and timing of reform priorities. ### Condensed extract of the mission's key recommended actions and timeframes (from Table 1) - Part A: Fiscal risk framework - 1.1 Strengthen the fiscal risk framework: Prepare a concept note determining the scope and objectives of the fiscal risk function in Afghanistan. - Timeframe: December 2020 - Responsibility: MFPD - Part B: SOEs/SOCs Oversight and fiscal risks - 2.1 Improve compliance and quality of financial reporting at individual SOEs/SOCs: - Receive and submit to external audit the financial statements (including balance sheets) of the five largest SOEs/SOCs for the last 3 years; define financial targets for 2021-2023; analyze contingent liabilities. - Timeframe: December 2020 - Responsibility: SOE/SOC Department of MoF - Disclose quality of reporting: publish a list of gaps in reporting from all SOEs/SOCs on a MoF website and update regularly. - Timeframe: June 2021 - Responsibility: SOE/SOC Department of MoF - 2.2 Strengthen the SOE/SOC Oversight Board: - Submit a first annual report covering the financial statements of SOEs/SOCs of 2019 to Oversight Board for analysis and approval. - Timeframe: January 2021 - Responsibility: SOE/SOC Department of MoF - Provide clear distinction between approval of funding / SOCs financial support at MoF level and the Oversight Board’s role to establish risk tolerance levels within which financial support can be granted. - Timeframe: December 2020 - Responsibility: SOE/SOC Department of MoF and SOC Oversight Board, or MoF - Improve professional capacity of the secretariat of the SOC Oversight Board; review staffing profile of the existing 80 staff in light of responsibilities and fiscal risk. - Timeframe: December 2020 - Responsibility: SOE/SOC of MoF - 2.3 Improve fiscal risk reporting on SOEs/SOCs at the aggregate level: - Prepare an initial quantification of contingent liabilities of SOEs/SOCs using the IMF’s SOE health check tool; first as a technical paper then disclosed in the annual FSP. - Timeframe: Budget 2022 - Responsibility: MFPD - Prepare a concept note for an institutionalized budgetary treatment of SOEs/SOCs. - Timeframe: January 2021 - Responsibility: Budget Department, with inputs from MFPD - Part C: PPP Oversight and fiscal risks - 3.1 Strengthen monitoring and assessment of PPP project risks: - Use the IMF’s PFRAM tool to ensure fiscal risks associated with PPPs are assessed at contract signing and on an ongoing basis throughout the contract. - Timeframe: On-going - Responsibility: CPA - 3.2 Integrate PPPs into the budget framework and improve capacity to assess budget affordability of PPPs: - Disclose information on PPPs in FSP and budget documentation. - Timeframe: Budget 2022 - Responsibility: MFPD with input from CPA ### I. Legal and institutional arrangements for fiscal risks — overview (selected points) - Role of the Ministry of Finance: - SOC Law mandates establishment of a fiscal risk unit in the MoF, to be “organizationally separate and independent from the Secretariat of the SOC Oversight Board”; such unit has not been established. - MoF indicates MFPD is intended to perform the role and publishes fiscal risk sections in the Fiscal Strategy Papers. - The overall fiscal risk function is not fully articulated in legal instruments; monitoring should cover central government, municipalities, SOEs/SOCs, and state-owned banks. - Clarification needed on powers for information requests and sanctions for non-compliance. - Responsibilities between MFPD, State-Owned Enterprise Department, and PPP Unit should be clarified; separate data collection (specialized units) and aggregate analysis (MFPD) functions recommended. - Fiscal risks recognized in legal framework: - PFEM Law includes “contingent liabilities.” Specific provisions: - Article 33(6): budget assets and liabilities information must incorporate “[d]etails of the estimated amount of contingent liabilities of the State that will rise to actual liabilities during the fiscal year.” - Article 58(6): budget reporting must incorporate an “[d]etails of difference” between estimated and materialized contingent liabilities. - MoF required to maintain records of borrowing or lending by the state, including “guarantees and contingent liabilities.” - PFEM Law on loan guarantees: - Article 20: MoF may only issue a loan guarantee “where authorized by Law” and in the amount specified in the law, and where a non-expended amount is available within the appropriations. - No guarantees have been issued according to MoF information to date. - Current provisions do not yet constitute a full framework for guarantee management. - PFEM Law contingency allocation: - May not exceed 3 percent of “total program expenditures” and is to be included in “the revenue and expenditure plan.” - Article 46 outlines its use for “urgent and unforeseen requirements”; MoF may propose to the President changes to contingent expenditure appropriations. - MoF working on a regulation detailing terms and conditions for contingency allocation use; expected adoption by end-December 2020. - Fiscal risks from SOCs under SOC Law: - Article 12 vests MoF with responsibility to “monitor, analyze, disclose and mitigate” fiscal risks from SOC activities, aiming to ensure fiscal sustainability. - MoF entitled to obtain “all relevant data and information considered necessary to monitor and analyze the potential fiscal risks,” including quarterly reports, annual financial statements and auditor's reports. - Based on analysis, MoF should produce and publish fiscal risk evaluation and mitigation reports related to SOCs. _Italic: Content derived from 1afgea2021001 - PREFACE (IMF mission report content provided)._ ### 8. The PFEM Law incorporates information provision requirements for state ### 8. The PFEM Law incorporates information provision requirements for state administration authorities and municipalities but lacks specifics. ### Information provision requirements and enforcement - State administration authorities are obliged to report on public spending under Article 5. - Municipalities are subject to reporting requirements under Article 25 of the PFEM Law. - There are no mechanisms to enforce this requirement (inter alia, sanctions). - It is unclear whether the details of such information provision requirement (e.g., type of information, frequency etc.) are specified in a secondary legal instrument (e.g., regulation). - References in the PFEM Law and related laws cited: - Article 17(4) of the PFEM Law. - Article 32(9) of PFEM Law; it specifies that the details on contingency expenditures are to be included in the revenue and expenditure report (Article 57(8)). - Article 2(7) of the SOC Law refers to fiscal sustainability. ### Fiscal Risk Reporting and Disclosure - MoF obligations: - MoF must submit to SOCs, the SOC Oversight Board, other relevant Ministries, the Supreme Audit Office, the President and the National Assembly, all the produced fiscal risk evaluation and risk mitigation reports, as well as publish them on the official website of the MoF. - Article 12(1)(e) states that fiscal risk functions (including production and publication of the reports) are performed “through the unit or department within the Ministry of Finance assigned with the responsibility to control and oversee fiscal risks.” - See Article 12(1)(d) of the SOC Law. - Main vehicle for reporting: - The annual Fiscal Strategy Paper (FSP) is the main vehicle for reporting on fiscal risks. - The MFPF previously published separate quarterly fiscal risk reports but has discontinued doing so in recent years. - Fiscal risk reporting is mainly done through the annual FSP today. - If a future, self-standing Fiscal Risk Statement is published, its function and objective must be aligned with the corresponding sections of the FSP. - Reporting specifically on SOEs/SOCs and PPPs could be strengthened and the corresponding sections in the FSP further enhanced. ### Potential legal enhancements (summary of proposed amendments) - A careful analysis of potential legal enhancements and choice of legal instrument is necessary; issues could be addressed through amending the PFEM Law (which also needs alignment with the SOC Law, as appropriate), in particular to: - Incorporate a comprehensive MoF fiscal risk management function (not only limited to fiscal risks stemming from SOEs/SOCs). - Determine what constitutes fiscal risks and fiscal risk management. - Clarify PFEM Law coverage for purposes of managing fiscal risks (specifically including SOCs) thus bringing PFEM Law in compliance with the SOC Law. - Envisage MoF powers to collect information from respective entities to implement fiscal risk management function and corresponding requirements for relevant entities to provide such information, as well as, potentially, enforcement powers (sanctions – see below). - Reconfirm that the FSP is used to report on fiscal risks from SOEs/SOCs and PPPs as part of the annual budget process. - Introduce and/or enhance a sanctions regime for non-compliance with the requirements of the law, in particular information provision requirements (if incorporating those in the PFEM Law is appropriate under the legal tradition in Afghanistan). ### Secondary legislation and operationalization - MoF has indicated the SOC Law is still being discussed with the Parliament and amendments to it are possible. - Amending or developing secondary legislation could contribute to resolving issues identified at the level of primary law. - In developing the SOC Regulation, the MoF powers on information collection from SOCs could be detailed (e.g., specifying types of information, frequency of reporting). - Operationalization of the SOC Law will need to ensure clarity in the distribution of roles between the MFPD, the SOE/SOC department of the MoF and the SOC Oversight Board. - Adopting these legal changes would strengthen the mandate and powers of MoF regarding monitoring and managing fiscal risks; MoF could draw from international references and practices. ### Country examples of fiscal risk management provisions in PFM legal frameworks (summaries) - Bahrain Budget Law 2002 - Article 47 requires Government Organizations subject to this Decree Law to submit to the MoF regular reports on their activities. - Article 55 requires that fully owned Government Companies submit to the MoF, inter alia, proposed budgets, investment plans, as well as other information that may be specified by the MoF. - Prior approval of the MoF is required before fully owned Government Companies may obtain a loan “for expansion, modernization or other similar purposes.” - Brazil Fiscal Responsibility Law 2000 - Article 4 requires that the Budgetary Guidelines Law encloses a Fiscal Risk Appendix, “evaluating contingent liabilities and other risks that may affect public accounts, and detailing the measures to be taken, should such occur.” - Ecuador Organic Code for Planning and Public Finances 2010 - Article 152 requires public sector entities to submit the financial and budget information (specified in the law or regulations) within the designated timeframe. - Failure to do so will result in a suspension of the allocation of resources and/or transfers from the general budget. - Ghana Public Financial Management Act 2016 - Section 5 allows the MoF to request a report or other information from any “covered entity” or “any other person receiving grants, advances, loans, guarantees or indemnities from the Government.” - Section 75 specifies reporting requirements of local government authorities; Sections 76 and 77 specify borrowing and reporting requirements by public corporations (PCs) and SOEs. - Article 94 specifies the MoF power to issue a “financial directive” to PCs and SOEs to “provide financial information that the Minister may specify.” - Article 98 specifies individual liability for refusal or failure to produce or submit any information required under the PFM Act, including fines or imprisonment or both. - Montenegro Law on Budget and Responsibility 2014 - Article 44 requires spending units to submit to the MoF “an accurate and complete report on receipts, expenditures and commitments.” - Article 83 envisages a fine for a responsible person in specified entities for submission of “an incorrect and incomplete report on receipts, expenditures, and commitments” and other reporting failures. - Article 84 envisages a fine for failure by the responsible person of a spending unit to “report for recording in the Treasury General Ledger the State Budget receipts, expenditures, and commitments.” - New Zealand Public Finance Act - Section 26Z enables the Secretary to request “any department, any departmental agency, or any entity referred to in section 27(3)(a) to (f), or any entity that manages an asset or liability of the Government,” to provide “any information that is necessary to enable the preparation of any fiscal forecasts and projections referred to in sections 26L, 26N, 26NA, 26O, 26Q, 26S, and 26T.” - Section 26Q requires that fiscal forecasts include “a statement of specific fiscal risks of the Government as at the day on which the forecast financial statements are finalized,” and “discloses the rules used to determine what is and is not a fiscal risk.” ### Recommendations (key elements of a strategy to strengthen the fiscal risk framework) - Prepare a concept determining the scope and objectives of the fiscal risk function in Afghanistan (describing types of fiscal risks; fiscal risk management; information request and collection powers; requirements for information provision; and sanctions for non-compliance), including an analysis of the legal instruments to be used and/or that may need to be amended. - Produce manuals and guidelines, as necessary. - Develop and adopt legislative amendments (PFEM Law, PFEM Regulation, other legal instruments as may be appropriate). - Timeline note as presented: Recommendation categorized "Within one year – duration of ECF" and status "As of mid-2021". ### State-Owned Corporations (SOEs/SOCs) — definitions, status, and oversight - Definitions and legal distinction: - PFEM Law excludes SOEs; SOC Law defines SOCs (Article 3(1)) as “a company that is separate and distinct from its owners and is established under this law, with capital that is specific and divided into shares, and with the responsibility of each shareholder limited to the proportion of his or her shares and where at least 25 percent of the issued shares are owned by organs of the state, including subnational governments, or when organs of the state, including subnational governments, can exercise control over the company, regardless of the proportion of shares they own.” - The SOC Law intends to cover all existing state-owned companies and mixed companies. - A Mixed Company is defined in Article 3(18) of the SOC Law as ”any commercial entity not wholly owned by organs of the state, but where the proportion of capital owned by organs of the state is 25 percent or more, or when the organs of the state can exercise control over the company regardless of the proportion of capital they own.” - State-owned banks are governed by the Banking Law. - Conversion process: - State-owned enterprises are being converted into State-owned corporations in a process expected to be concluded in December 2020. - Article 50(3) of the SOC Law requires that all SOEs amend their articles of association in compliance with the SOC Law. - The start of this process was the approval of sample articles of association by the Cabinet in June 2020. - The timeline established in the SOC Law has not been followed; Article 50(6) of the SOC Law states that “all existing government positions in entities that change into SOCs in compliance with the present law, are required to accordingly change their articles of association by December 2019.” - Status of the SOC Law: - SOC Law adopted in 2018 aims at strengthening oversight; it has the force of law from Presidential ratification (2018) but is yet to be fully implemented. - The SOC Law was enacted as a “legislative decree” pursuant to Article 79 of the Constitution and was submitted to the Parliament; the legislative decree becomes void if rejected by the National Assembly. To date, the National Assembly has not formally rejected the SOC Law. - No SOC regulation has been developed based on the SOC Law, partly due to the possibility of Parliamentary amendment. - Overview of SOCs and SOEs (counts and concentration): - There are 36 SOEs and 15 SOCs distributed unevenly among different ministries. - With 11 SOEs/SOCs the Ministry of Commerce and Industry has the largest number of entities. - The SOCs and SOEs of the Ministry of Finance (MoF) account for 18 percent of the total 2019 income. - The most important SOC in terms of income accounts for 35 percent of the total income of SOEs and SOCs and is Afghanistan Telecom. - Five SOEs/SOCs account for about 80 percent of the total income and about 60 percent of the workforce. - Note: DABS is not included in some analyses for lack of data since 2017. - Oversight framework and institutional roles: - There is a centralized oversight model with the option of sector ministries to become shareholders. - MoF is the State’s registered shareholder in a SOC. - The SOC Oversight Board: - Acts as “a central advisory, monitoring and oversight body with respect to SOCs.” - Composed of five members appointed by the President and chaired by the Minister of Finance. - Powers include establishing an ownership policy framework; reviewing strategy and performance of all SOCs; prescribing corporate governance standards; conducting periodic evaluation of SOCs; reviewing salary scales; selection and appointment of Board members for each SOC from shortlists prepared by the Civil Service Commission. - Despite requirements that some members serve full-time, the SOC Oversight Board has not been meeting on a daily basis as prescribed by the SOC Law, does not publish minutes of its meetings, and annual reports on the performance of each SOC have neither been prepared nor submitted to the High Economic Council. - MoF State-Owned Enterprises Department: - To be transformed into an SOC Department and would act as the secretariat of the SOC Oversight Board (Article 11 of the SOC Law). - The department has 80 staff and appears to have capacity constraints to perform more strategic fiscal risk analysis of SOEs/SOCs; the mission was not able to analyze staffing profiles and tasks further. - A separate SOE oversight unit for four SOEs supervised by the Ministry of Mines and Petroleum will cease to exist once the transition to SOCs is completed. *Source: IMF staff.* ### 22. Reporting from SOEs and SOCs on their financial statements is limited in terms of ### 1afgea2021001 - 22. Reporting from SOEs and SOCs on their financial statements is limited in terms of ### Coverage and timeliness of financial reporting - Per article 21(3) of the SOC Law, SOCs must prepare and approve quarterly and annual financial statements containing at least: (i) the balance sheet; (ii) profit and loss account (income statement); and (iii) cash flows, and other information requested by the SOC Oversight Board. All SOCs are per SOC Law required to follow the IFRS standards in reporting. - Availability and completeness: - 13 of the 15 SOCs regularly produce financial statements (quarterly; annual); two SOCs do not regularly prepare financial statements either on a quarterly or annual basis. - Ten SOCs include the last year’s financial performance in their financial statements; five do not. - The financial statements themselves are often incomplete and there is limited detailed information regarding income statement or balance sheet; balance sheet information is most often missing and income statement information is typically based on large aggregates (income, expenses and profit). This information is not available in the budget documents. - Most SOEs/SOCs have not established a balance sheet for over 10 years; the MoF therefore lacks information about the size and structure of SOEs/SOCs liabilities. Completing balance sheets is a sine qua non condition before equity can be transferred to the private sector. - Many SOCs have a backlog in preparing financial statements; this holds for 8 of the 15 SOCs, among them four of the five SOCs which have audited statements (Ariana Afghan Airline, Hotel intercontinental, Da Afghanistan Breshna Sherkat (DABS) and Afghan Telecom); some audits were not shared with MoF. ### External audits and audit findings - External audits are not conducted regularly; over the last years only five out of the 15 SOCs had their statements audited. External audits cover mostly SOCs with high financial volume. Audits through the Supreme Audit Office (SAO) are apparently not conducted. - Audit observations (Box 3) include, inter alia: - financial statements that keep changing while the audit is being conducted (Ariana); - evidence that SOCs receive grants from the government (DABS); - non-monetary grants from donors and bilateral agencies not recorded properly or recognizing fair value of economic benefit; - revaluations of assets that “overinflate” the balance sheet; - valuation of land in a way that prevents fair valuation (DABS); - inconsistent applications of exchange rates (Hotel Intercontinental); - inconsistent recording of receivables given they are from entities which were later outsourced (Ariana); - lack of updated asset inventories (Ariana). ### Overview of financial situation and fiscal risks - Data limitations: the financial analysis may not be entirely reliable given data discrepancies across SOC-published data and MoF spreadsheets; example discrepancy for Afghan telecom corporation net earnings for year 2016 reported AFN 1 193 100 413 in the excel spreadsheet versus AFN 483 506 124 in the income statement. - Aggregate liabilities: - The SOCs and SOEs’ total liabilities represent over 6 percent of the GDP in 2017, but this amount could be underestimated. - Considering the liabilities of 7 SOEs or SOCs representing around 90 percent of total income of the SOEs and SOCs, the total liabilities amount to 6.4 percent of the GDP in 2017. - Table 2. Main SOEs/ SOCs Financial Data (as provided) - DABS — Status: SOE — Total liabilities (in bn): 61,6 — As share of 2018 GDP (in %): 4% — Latest information on liabilities: 2017 — Total income (in bn): 28,6 — As share of 2018 GDP (in %): 2% — Latest information on total income: 2017 - Afghan Telecom Company — Status: SOC — Total liabilities (in bn): 10,7 — As share of 2018 GDP (in %): 1% — Latest information on liabilities: 2019 — Total income (in bn): 10,2 — As share of 2018 GDP (in %): 1% — Latest information on total income: 2019 - Fuel and Liquid Gas SOC — Total liabilities (in bn): 10,6 — As share of 2018 GDP (in %): 1% — Latest information on liabilities: 2017 — Total income (in bn): 1,1 — As share of 2018 GDP (in %): 0% — Latest information on total income: 2019 - Mazar Fertilizers & Electricity SOE — Total liabilities (in bn): 6,8 — As share of 2018 GDP (in %): 0% — Latest information on liabilities: 2016 — Total income (in bn): 0,8 — As share of 2018 GDP (in %): 0% — Latest information on total income: 2019 - Public Protection force SOE — Total liabilities (in bn): 4,9 — As share of 2018 GDP (in %): 0% — Latest information on liabilities: 2013 — Total income (in bn): 5,2 — As share of 2018 GDP (in %): 0% — Latest information on total income: 2019 - North coal mining SOE — Total liabilities (in bn): 2,1 — As share of 2018 GDP (in %): 0% — Latest information on liabilities: 2018 — Total income (in bn): 3,0 — As share of 2018 GDP (in %): 0% — Latest information on total income: 2019 - Ariana Airlines SOC — Total liabilities (in bn): 1,4 — As share of 2018 GDP (in %): 0% — Latest information on liabilities: 2019 — Total income (in bn): 4,1 — As share of 2018 GDP (in %): 0% — Latest information on total income: 2019 - Slaughter SOE — Total liabilities (in bn): 0,4 — As share of 2018 GDP (in %): 0% — Latest information on liabilities: 2018 — Total income (in bn): 1,3 — As share of 2018 GDP (in %): 0% — Latest information on total income: 2019 - Water Supply and Sewerage Company SOE — Total liabilities: NA — As share of 2018 GDP: #VALUE! — Latest information on liabilities: NA — Total income (in bn): 0,6 — As share of 2018 GDP (in %): 0% — Latest information on total income: 2019 - Source: MoF. Note: Data for SOEs rely on information provided by the MOF and not financial statements. - DABS specific risk: - Total long-term loans in 2017: AFN 26 billion, almost 2 percent of the 2017 GDP. First repayment dates for this loan are between 2017 and 2024. DABS had been running a deficit on operational income for three consecutive years in 2017 and was running a deficit on total income basis for the first year in 2017, raising risk of inability to meet repayment obligations. - Liability structure: - SOEs and SOCs liabilities are mostly current (short term). For SOCs, apart from DABS, current liabilities represent over 80 percent of total liabilities. For SOEs, accessible data does not display long-term liabilities. - Profitability and liquidity: - Most of the largest SOEs and SOCs are generally profitable, or in balance, limiting fiscal risk associated with losses. The total operational profit of the SOEs and SOCs sector amounts to AFN 4,062 million for profit including non-operational income. - The total income of SOEs and SOCs running a deficit represents around one fifth of the sector total income. Ariana airlines is the largest loss maker and accounts for most of that figure; it runs a deficit in 2019 both excluding and including non-operational income. - However, the majority of SOEs and SOCs run their operations at a loss in the latest fiscal year: 23 SOEs and 8 SOCs were not profitable on their core business; including other incomes, 12 SOEs and 3 SOCs were still displaying deficits. - Other incomes (mainly rents of buildings) often convert operational deficits into overall profits, representing what could be interpreted as non-financial transfers from the Government to SOEs/SOCs. - Afghan Telecom displays a profit in the last five years, aided by monopolistic positions in land lines, satellite and optic fiber; the company reports a commitment of AFN 6bn (0.5% of the 2018 GDP) towards certain telecom vendors. Reported current ratio is almost 11; adding the AFN 6bn commitment the current ratio falls to 2.4. - Out of the five largest SOC/SOEs, all except one have seen an improvement in liquidity positions in past years. The weakest is the Slaughter company with a current ratio around 1. Over the last four years, Ariana Airlines’ current ratio fell from 3.5 to 2.0. - Public banks: - The three public banks mainly handle deposits with very limited loans. Public banks represent 11 percent of the loans of the sector but 96 percent of the deposits. In August 2020, the merger of two SOCBs (Bank-e -Millie Afghan (BMA) and New Kabul Bank (NKB)) was announced. ### Fiscal risk reporting and oversight - Reporting framework (SOC Law) — four reporting lines being built: (i) SOC/SOE Department at the MoF; (ii) SOC Oversight Board oversight of SOCs; (iii) reporting from the SOC Oversight Board to the High Economic Council; (iv) reporting from the Executive to Parliament. - Roles (Box 4) include: - SOC/SOE Department at MoF: develop and implement Government SOE policy, strategy and regulations for divestment, control financial affairs, develop procedures, and serve as secretariat of SOC Oversight Board (Article 11 of SOC Law). - SOC Oversight Board: coordinate and monitor operations of SOCs, select and appoint Board of Directors members, analyze annual balance sheets and quarterly reports and report concerns or observations (Article 10(9)(1) of the SOC Law). - Macro-Fiscal Policy Department (MFPD): analyzes financial and economic risks and is charged by Article 12 of the SOC Law with SOC fiscal risks monitoring, analysis, disclosure, and mitigation. - High Economic Council: determine financial and economic objectives and policies, evaluate and decide on national economic plans and reforms. - MoF SOC/SOE Department activities: - Receives annual budgets from SOEs/SOCs and analyzes actual vs. planned budgets. - Analyzes profitability in two dimensions: (i) operational profitability; and (ii) total profitability (including other income, mainly renting out properties). SOEs not profitable on operations are considered at risk, but little is known about corrective measures or enforcement. - There is no monitoring of balance sheets, in part due to inconsistent information flow from SOEs/SOCs. - Supervision imbalance: - Monitoring focuses on largest SOEs; 40+ smaller SOEs receive insufficient attention despite potential for contingent liabilities to build up. - Many small SOEs benefit from public assets; a plan to review usefulness of each smaller SOE/SOC would be useful. - Weak accountability and blurred monitoring responsibilities: - Unclear authority of supervision tasks on behalf of the SOE/SOC Department as secretariat of the Oversight Board. - SOC Oversight Board appears active in monitoring, holds meetings with contact points, and issues recommendations, but depth of analysis and enforcement is unclear. No performance indicators have been set for any SOC despite legal requirement; there are no minutes of Oversight Board meetings. - Future plans include monitoring the application of HR policy on behalf of the Oversight Board. - Reporting to High Economic Council: - Quarterly and annual reports demanded by Art. 10 of the SOC Law with economic performance of each SOC have not been produced or submitted to the High Economic Council to date. SOC Oversight Board is required by law to produce and publish an annual report and submit it to the High Economic Council. - Fiscal Sustainability Report (FSP) coverage: - The latest FSP 1399/2020 published by the MFPD does not provide an analytical frame disclosing fiscal risks related to SOEs/SOCs nor presents mitigating measures. The FSP contains one general paragraph noting SOCs “do not have enough revenues” and that “the continued functioning of these enterprises without their accurate financial statements could bring serious financial risks to the economy,” but provides no quantitative information. - SOEs/SOCs are explicitly excluded from the PFEM Law; the legal framework does not require that FSP covers SOCs, and there is no requirement on inclusion of a fiscal risk statement in the FSP in the PFEM Law. *Source: IMF staff summary of the provided chapter content.* ### 39. The following are key elements of a strategy to strengthen SOE/SOC oversight while ### 1afgea2021001 - 39. The following are key elements of a strategy to strengthen SOE/SOC oversight while addressing fiscal risk ### Key elements of the strategy - Continue with a risk-based approach by: (i) focusing on the largest SOEs/SOCs – however moving to balance sheet analysis; improving and enforcing financial reporting by creating adequate incentives; and (ii) gradually expand risk monitoring to the 40+ smaller SOEs/SOCs. - Improve governance for SOE/SOC oversight by further separating the functions of the SOC Oversight Board from the Ministry of Finance in order to address the risk of conflict of interest. - For disclosure, use the current Fiscal Strategy Paper as main avenue, starting with an initial quantification of fiscal risks and refine over time. - While many reform steps can be implemented with the existing legal framework, further sharpening of different legal instruments could be considered by authorities. ### Recommendation set: Within one year – duration of ECF (As of mid-2021) - 2.1. Improve compliance and quality of financial reporting at the level of individual SOEs/SOCs - For the five largest SOEs/SOCs: - audited financial statements of the last 3 years should be available; - an analysis of contingent liabilities will be conducted; - targets for the largest SOEs/SOCs for year 2021 will be formally adopted, with indicative targets for 2022 and 2023. - Disclose quality of reporting: a list of the gaps in reporting from all SOEs/SOCs to be published in a website of MoF and updated regularly. - For the five largest SOEs/SOCs: - expand the set of financial indicators to include, on the balance sheet when data is available: current ratio (current liabilities / current assets), debt ratio (debt / total assets) and, for SOEs/SOCs with large debts – DABS at this point – interest coverage ratio (Earnings before Interest and Taxes/Interest Expense); - new indicators for outbound years (firm for 2021 and indicative for 2022-2023); - non-financial performance indicators as methods of identifying potential risks alongside more standard financial indicators. - For all other SOEs/SOCs, increase the quality and coverage of financial information. Provide capacity development to SOEs/SOCs to improve accounting capacities. - Conduct regular audits of financial statements. - Adopt graduated sanctions for non- or under-reporting on behalf of SOEs/SOCs. To this end, carefully assess the legal instrument that could be used for this purpose, taking into account the existing legal framework and the legal tradition (to ensure enforceability, sanctions, or the power to impose the same, should be specified in primary law). - 2.2. Strengthen SOE/SOC Oversight Board in its regulatory and supervisory tasks - Submit, on behalf of the SOC Oversight Board secretariat, a first annual report covering the financial statements of SOEs/SOCs of 2019 to SOC Oversight Board for analysis and approval. The report should focus on profitability on operational income and non-operational income; and include instructions and guidelines on the implementation of the mitigation measures for fiscal risk, recommended by the MoF. - Provide for a clear distinction between (i) the approval of funding / SOCs financial support at the level of MoF and (ii) the role of the Oversight Board to establish a fiscal risk tolerance level and corresponding consent to financial support. - Improve professional capacity of the SOC Oversight Board secretariat. In addition, review the staffing profile of the existing 80 staff in light of the responsibilities of the Department and fiscal risk of SOEs/SOCs. - Increase coverage and regularity on reporting on SOEs performance by the SOC Oversight Board secretariat, alongside instructions and guidelines on the mitigation measures. - Determine a plan for each SOE/SOC (privatize, liquidate, merge, restructure...). - 2.3. Improve fiscal risk reporting on SOEs/SOCs at the aggregate level - Prepare an initial quantification of contingent liabilities of SOEs/SOCs using the SOE health check tool. First as a technical paper and then disclosed in the annual FSP (published and prepared by the MFPD and submitted for the 2022 Budget). - Prepare a concept for an institutionalized budgetary treatment of SOEs/SOCs, clarifying information requirements, types of assistance, and approval process, and including an analysis of the relevant legal instruments. Given that SOCs are excluded from the application of the PFEM Law, integration of information on SOCs into the budget process will likely require amendments to the PFEM Law (as described above). - A framework for the issuance of guarantees should be developed and adopted. This might require enhancements of the PFEM Law (Art. 20) and development of additional legal instruments, as may be needed. ### Public-Private Partnerships (PPPs) — overview and institutional context - Previous missions recommended improvements to Public Investment Management (PIM) institutions. Preparations are underway supported by the World Bank’s Public-Private Partnership and Public Investment Advisory Project (PPIAP) launched in June 2018. - The PPIAP assisted MoF in establishing a project evaluation committee (PEC) to screen project proposals and recommend to the Minister of Finance those that should proceed for project preparation. - Current legal situation: the PEC has no formal role in the public investment process as institutional arrangements have not been reflected in national laws. Projects financed by the World Bank are reviewed by the PEC but this is not systematically applied to other projects. - Good practice: investment planning should start with robust project appraisal (PEC’s role) prior to procurement method evaluation (traditional procurement or PPP—CPA’s role). - A five-year PPP plan (2017-2021) lists over one hundred potential projects across sectors. Currently: - there are six PPP projects under contract, with a total investment cost of around USD 960 million (5 percent of GDP). - there are 23 projects in the pipeline (with three pending approval of the cabinet) worth around USD 1.4 billion (about 7.2 percent of GDP). - Total commitments under PPPs and similar arrangements are not disclosed in any government document, and there is no central government database consolidating total noncontingent payments and contingent liabilities across projects. ### Legal and oversight framework for PPPs - The PPP Law (adopted in 2018) sets institutional framework and procedure; it designates the Central Partnership Authority (CPA) within the MoF a central role. - The CPA responsibilities include developing PPP project selection criteria and evaluation indicators, reviewing the Concept, providing technical recommendations to the High Economic Council, the MoF, public entities, private partners and other stakeholders, and providing technical support to public entities after Concept approval. - In practice, the CPA has prepared Feasibility Studies though these are to be developed by relevant public entities (and reviewed by the CPA). - MoF powers include approving or rejecting the Concept, Prefeasibility, and Feasibility Studies of PPP projects. The High Economic Council decides on financial and economic support, guarantees, and commitments of the State and approves/rejects award of partnership contracts. The Cabinet approves/amends/rejects/reviews partnership contracts attested by the High Economic Council. - PPP Law requires: - a risk analysis before a PPP contract is entered into; - MoF to carry out risk and financial analysis for contingent and non-contingent liabilities before public entities enter contracts with private parties; - CPA to assess fiscal commitments and tangible and non-contingent liabilities in different phases of the project cycle. - In practice, CPA collects PPP information and produces annual reports shared with MoF for budget inclusion and with the Debt Management Office; these reports and Feasibility Studies are shared with the MFPD. - Currently there is no mechanism to implement MoF’s power to “control” potential risks from PPP projects despite legal provisions. - PPP projects may receive government support (Article 46), but terms and conditions are not detailed in the PPP Law or draft regulation. The law envisages: - creation of the Viability Gap Fund (VGF) and the Project Development Fund (PDF), both managed by the CPA. - VGF not established yet and expected to be funded through grant funds. - PDF established and currently funded by the World Bank. ### Main fiscal risks from PPPs - PPPs can improve infrastructure efficiency but can create fiscal risks by generating debt-like obligations and contingent obligations such as: - guarantees for market risks or changes in government policy; - minimum revenue guarantees; - protections against force majeure events; - capital subsidies (such as the VGF); - availability payments; - volume-based payments (shadow tolls or subsidies); - tax incentives; - payments related to revenue, exchange-rate, and interest-rate guarantees; - payments related to regulatory risks, early termination, and extraordinary events; - payments arising from debt guarantees; - costs from renegotiations, disputes, and implicit guarantees. - In Afghanistan, fiscal risks from PPPs currently appear to be relatively modest, but government intends to scale up PPPs. The budget does not quantify contingent liabilities from existing PPP projects. - To benefit from PPPs while safeguarding fiscal sustainability, governments should select good projects and strengthen capacity to manage and monitor all implementation phases in a transparent manner. The CPA has responsibility for this as stipulated in Article 12 of the PPP Law. - The type of PPP information to be disclosed in the budget documentation is presented in Annex V (of the source document). *Source: 1afgea2021001 - PDF chapter/section.* ### 49. Fiscal risks associated with contingent commitments should be assessed in order to ### Fiscal risks associated with contingent commitments should be assessed in order to test affordability at the point of decision, and risks should be monitored throughout the life of the project ### Assessing maximum exposure and monitoring PPP fiscal risks - Assessments of total exposure from PPPs are difficult but can be made by examining the maximum value of exposure. - For variable service payments linked to volume, estimate maximum payment by assuming the project operates at full capacity or sells as much as the contract permits; the present value of these payments is an estimate of the government’s maximum exposure. - Maximum exposure from a minimum-revenue guarantee is the present value of the revenue that is guaranteed over the life of the contract. - The PPP Fiscal Risk Assessment Model (P-FRAM) could be used to analyze specific PPP contracts to better identify and quantify total rights, obligations, and other exposures under PPP contracts. ### The PPP Fiscal Risk Assessment Model (P-FRAM) — functions and outputs - P-FRAM is a standardized, Excel-based tool to assess fiscal risks associated with PPPs; IMF Capacity Development support is available to deploy P-FRAM. - The tool follows a four-step decision tree: - Who initiates the project? (Impact on fiscal indicators depends on the public entity responsible.) - Who controls the asset? (Ownership, beneficial entitlement, or other means; control typically impacts fiscal indicators.) - Who ultimately pays for the asset? (Three funding alternatives: (i) government pays using public funds; (ii) private sector collects fees from users; (iii) combination of (i) and (ii).) - Does the government provide additional support to the private partner? (Guarantees, equity injections, tax amnesties, etc.) - Once project-specific and macroeconomic data are introduced, P-FRAM automatically generates: - project cash flows over the whole life cycle; - fiscal tables and charts on a cash and accrual basis (government’s cash statement, income statement, balance sheet); - debt sustainability analyses with and without the PPP project; - sensitivity analyses of the main fiscal aggregates to changes in macroeconomic and project-specific parameters. - Outputs can be compared to country-specific reporting standards of PPP transactions to evaluate conformity with best practices. ### Use of numerical ceilings to contain PPP fiscal risks — international examples - There are no overall limits on the government’s total exposure on PPPs in the assessed jurisdiction, and no clear procedures to ensure long-term affordability. - Numerical ceilings can help ensure overall risk exposure and long-term commitments are affordable and sustainable; ceilings can be imposed on the total stock of PPP commitments, the flow of PPP commitments within a given year, or both. - Examples of ceilings in other countries: - Brazil: ceiling on current spending from PPP contracts of 3 percent of net current revenue; new PPPs cannot be signed if existing commitments already amount to 3 percent of net current revenue or the new contract would entail commitments in excess of 3 percent of net revenues at any time during the forthcoming 10 years. - Peru: ceiling on the present value of the accumulated stock of both contingent and non-contingent liabilities in PPP projects of 7 percent of GDP. - Hungary: limits the nominal value of new long-term commitments to 3 percent of total state budget revenues in any given budget year (ceiling excludes local governments not covered by state budget). - El Salvador: limits the present value of the cumulative amount of quantifiable firm and contingent future payments, net of revenue, assumed under PPPs to 5 percent of GDP. ### Current situation and vulnerabilities in Afghanistan - There is no conclusive data identifying basic financial information regarding the total investment value of signed PPPs in Afghanistan; consequently, insufficient data exist to allow a full assessment of fiscal risks at a project or portfolio level. - The government has not provided explicit guarantees to any PPP project, but is implicitly guaranteeing Power Purchase Agreements (PPAs) supporting the energy sector. PPAs in Afghanistan are signed by DABS, the SOC which sells power to consumers at a loss, requiring a subsidy from the government. - Example price disparity: The price of electricity is 0.049 USD per kWh for households whereas the energy price agreed in one of the PPA contract is 0.059 USD. - Most operational PPP projects in the energy sector are structured around Purchase Agreements requiring a minimum purchase of the service provided (“take or pay” agreements); if demand falls below that level, the authority must pay anyway, creating risk of paying for power that is not needed. - The FSP 1399/2020 briefly describes PPP projects and related risks but lacks: - a summary of the PPP program, including policy and management framework; - a list of PPP projects and discussion of new contracts; - the cumulative overall multi-year fiscal commitments of the PPP program and gross exposure from guarantees and other contingent commitments attached to PPP contracts. - There is a need to set up a PPP database (simple Excel file suggested, see Annex III) or augment the Integrated Bank of Projects’ software to record PPP projects with critical fiscal information. ### Reporting, legal and procedural gaps - Existing legal procedures for issuance of government guarantees (Article 20 of the PFEM Law) do not provide proper procedural safeguards to ensure affordability is considered. - The FSP could estimate government liabilities under current PPP contracts if reporting were consistent with IPSAS 32, “service-concession arrangements.” - Annex IV lists data that could be included in the PPP section of the FSP. ### Key recommendations and implementation timeline - Overarching strategy elements to strengthen PPP oversight and address fiscal risk: - Enforce “gate-keeping” and strengthen efficiency considerations through establishment of an integrated PIM-PPP process. - Strengthen considerations of affordability by integrating PPPs into the budget process alongside disclosure of fiscal risks. - Disclose full costs of PPPs and associated contingent liabilities to facilitate more efficient risk sharing. - Strengthen transparency in PPP implementation by publishing tender documents and evaluation reports, PPP contracts, financial statements of private partners, and verification results of construction. - Specific recommendations (Recommendation: Within one year – duration of ECF; As of mid-2021): - 3.1. Strengthen monitoring and assessment of risks of PPP projects - Strengthen MoF/CPA monitoring and reporting of PPP projects by: - Using the IMF’s PFRAM tool to ensure fiscal risks associated with PPPs are assessed by the MoF at contract entry and on an ongoing basis throughout the contract; - Establishing and maintaining a PPP database (see Annex III) or augmenting the Integrated Bank of Projects with information on service payments over the life of the project as well as all guarantees or contingent commitments attached to the project. - Publish tender documents and evaluation reports, PPP contracts, financial statements of private partners, and verification results of construction. - 3.2. Integrate PPP projects into the budget framework and improve capacity to assess the budget affordability of PPPs - Require that new PPPs are assessed within the context of medium-term fiscal objectives and take account of liabilities of existing projects in assessing affordability (end-2020). - Disclose information on PPPs in the budget documentation (see Annex V) to give potential contractors foresight and demonstrate government commitment (Budget 1400/2021). - Add a quantification of contingent liabilities to the PPP section of the FSP (see Annex IV) to demonstrate risk awareness and management, potentially lowering the risk premium and cost of financing (Budget 1400/2021). - Develop a framework for assessing the aggregate exposure of the PPP portfolio and consider establishing a ceiling on PPPs (2021). - 3.3. Strengthen the integrated PIM-PPP framework - Institutionalize the role of the PEC in the investment (PIM and PPP) process through appropriate legal mechanisms and ensure clarity of PEC interaction with other institutional participants of the PPP process (CPA, MoF etc.). *Source: 1afgea2021001 - Section on PPP fiscal risks (excerpts).* ### Annex III . Template for a PPP Database ### Annex III . Template for a PPP Database ### Core database fields - Project identifier (unique number) - Project name - Responsible (supervising) Ministry - Responsible (implementing) Authority - Objective of project - Type of project (greenfield or brownfield, i.e., rehabilitation) - Contract signature (year) - Contract duration (number of years) - Financial closure (year) - Begin of construction (year) - First year of operation (year) - Total project value (investment cost plus cost for maintenance and operation) (planned) (local currency) - Total project value (investment cost plus cost for maintenance and operation) (actual) (local currency) - Total investment cost to private partner (local currency) ### Time-profiled investment, maintenance, operation, and revenue data - Investment cost (year 1, 2, 3, ..., n --- planned) - Investment cost (year 1, 2, 3, ..., n --- actual) - Annual maintenance cost to private partner (local currency) - Maintenance cost (year 1, 2, 3, ..., n --- planned) - Maintenance cost (year 1, 2, 3, ..., n --- actual) - Annual operation cost to private partner (local currency) - Operation cost (year 1, 2, 3, ..., n --- planned) - Operation cost (year 1, 2, 3, ..., n --- actual) - Annual revenues to private partner (local currency) - Revenues (year 1, 2, 3, ..., n --- planned) - Revenues (year 1, 2, 3, ..., n --- actual) ### Government payments, NPV and scheduled payments - NPV of total government payments (local currency) - Annual government payment (availability/fee for service) (local currency) - Government payment 1 (year 1, 2, 3, ..., n --- planned) (local currency) - Government payment 1 (year 1, 2, 3, ..., n --- actual) (local currency) - Government payment 2 (year 1, 2, 3, ..., n --- planned) (local currency) - Government payment 2 (year 1, 2, 3, ..., n --- actual) (local currency) - ... - Government payment n (year 1, 2, 3, ..., n --- planned) (local currency) - Government payment n (year 1, 2, 3, ..., n --- actual) (local currency) ### Government financing, equity and on‑lending - Government equity contribution contracted (local currency) - Government equity contribution paid in (local currency) - Government financing 1 contracted (e.g., on-lending) (local currency) - Government financing 1 drawn (e.g., on-lending) (local currency) - Government financing 2 contracted (e.g., on-lending) (local currency) - Government financing 2 drawn (e.g., on-lending) (local currency) - ... - Government financing n contracted (e.g., on-lending) (local currency) - Government financing n drawn (e.g., on-lending) (local currency) ### Government guarantees and other fiscal exposures - Government guarantee 1 (type, e.g., debt guarantee or minimum revenue guarantee) - Government guarantee 1 (maximum amount local currency) - Government guarantee 1 (outstanding amount local currency) - Government guarantee 2 (type, e.g., debt guarantee or minimum revenue guarantee) - Government guarantee 2 (maximum amount local currency) - Government guarantee 2 (outstanding amount local currency) - ... - Government guarantee n (type, e.g., debt guarantee or minimum revenue guarantee) - Government guarantee n (maximum amount local currency) - Government guarantee n (outstanding amount local currency) - Other government contributions (describe) - Tax exemptions and other benefits (describe) - Major project risks (describe) --- ### Annex IV. Disclosure of PPPs in Fiscal Strategy Paper ### Background information - PPP policy of the government and its objectives - Summary of current situation and expected development of PPP portfolio, including a quantification of PPP related assets and liabilities, and of any contingent liabilities, i.e. guarantees (this can be provided by P-FRAM if all ongoing projects are entered into the tool) ### PPP portfolio (required table content) - Table with information on a project by project basis - Project name - Responsible government entity - Total investment - Total contract value - Status of project - Contract duration (either including construction or construction and service period separately) - Start of construction - Start of service - Funding (government payments, user fees, combination) - Financing provided by government (loans or equity contribution provided to SPV) - Firm cash impact on government, i.e., payments from government (e.g., availability payments) and revenues to government (e.g., concession fees or revenue sharing) by year (annual for t trough t+5, for 5 years from t+6 through t+10 and t+11 through t+15, and cumulative for the remainder of the contract period) - Explicit contingent liabilities, e.g., debt or minimum revenue guarantees - Other contingent liabilities, e.g., pre-conditions in the government’s responsibility that may lead to penalty payments or to contract termination - Recent performance of project company as measured by performance indicators (service delivery and financial) ### Risk Analysis - Sources of major risks from PPPs, including related to performance of specific projects and capacity of responsible government entity to manage contract (this can be derived from the P-FRAM Fiscal Risk Matrix) - Assessment of risks (revenue, expenditure, debt, contingent liabilities, service provision, etc.) - Assessment of implications of risks for public finances ### Mitigating Measures and Risk Management Approach - Direct controls, ceilings or caps in place - Regulatory instruments in place - Risk transfer, sharing or insurance in place - Provisioning in budget --- ### Annex V. Disclosure of PPPs in the Budget Documentation ### Presentation of new projects as PPPs in the budget (fields) - Project - Responsible Ministry - Objective - Total project value - Total investment cost - Contract duration - Project begin - First year of operation - Annual maintenance cost - Annual operation cost - Annual revenues - NPV of total government payments - Annual government payment (availability/fee for service) - Government equity contribution - Government guarantee ### Presentation of ongoing PPP projects in the budget (fields) - Project - Responsible Ministry - Objective - Total project value - Total investment cost - Contract duration - Project begin - First year of operation - Annual maintenance cost - Annual operation cost - Revenues collected t-1 - NPV of total government payments - Government payments to date - Government spending Year t - Government spending Year t+1 - Government spending Year t+2 - Total government spending after Year t+2 - Government equity contribution - Government guarantees outstanding ### Presentation of new public investment projects in the budget (fields) - Project - Responsible Ministry - Objective - Expected start construction year - Total investment cost - Cost Year 1 - Cost Year 2 - Cost Year 3 - Annual revenues - Start of operation - Duration of operation - Annual operation and maintenance cost ### Presentation of ongoing public investment projects in the budget (fields) - Project - Responsible Ministry - Objective - Start construction year - Start of operation - Duration of operation - Total project cost - Annual operation and maintenance cost - Revenues t-1 - Total spending to date (incl. t-1) - Spending Year t - Spending Year t+1 - Spending Year t+2 - Total spending after Year t+2 *Annex III–V. Template and disclosure fields for PPP database, Fiscal Strategy Paper, and Budget Documentation.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1afgea2021001.pdf_