Document of The World Bank FOR OFFICIAL USE ONLY Report No: RES23016 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF KABUL MUNICIPAL DEVELOPMENT PROGRAM (GRANT TF17016, US$110 MILLION) BOARD APPROVAL: APRIL 3, 2014 TO THE ISLAMIC REPUBLIC OF AFGHANISTAN November 13, 2017 SOCIAL, URBAN, RURAL & RESILIENCE PRACTICE SOUTH ASIA REGION This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ABBREVIATIONS AND ACRONYMS AFMIS Afghanistan Financial Management Information System FM Financial Management IDA International Development Association KM Kabul Municipality KMDP Kabul Municipal Development Program PDO Project Development Objectives Regional Vice President: Annette Dixon Country Director: Shubham Chaudhuri Senior Global Practice Director: Ede Jorge Ijjasz-Vasquez Practice Manager/Manager: Catalina Marulanda Task Team Leader: Deepali Tewari Page 2 of 12 AFGHANISTAN Kabul Municipal Development Program (P125597) CONTENTS A. SUMMARY 5 B. PROJECT STATUS 6 C. PROPOSED CHANGES 7 Page 3 of 12 DATA SHEET Afghanistan Kabul Municipal Development Program (P125597) SOUTH ASIA Social, Urban, Rural and Resilience Global Practice . Report No: RES23016 . Basic Information Project ID: P125597 Financing Instrument: Investment Project Financing Regional Vice President: Annette Dixon Original EA Category: Partial Assessment (B) Country Director: Shubham Chaudhuri Current EA Category: Partial Assessment (B) Senior Global Practice Ede Jorge Ijjasz-Vasquez Original Approval Date: 03-Apr-2014 Director: Practice Manager: Catalina Marulanda Current Closing Date: 31-Dec-2019 Team Leader(s): Deepali Tewari . Borrower: Islamic Republic of Afghanistan Responsible Agency: Kabul Municipality (KM) . Restructuring Type Form Type: Full Restructuring Paper Decision Authority: CD Decision Restructuring Level: Level 2 . Financing Key Dates Approval Effectiveness Original Revised Closing Project Ln/Cr/TF Status Signing Date Date Date Closing Date Date P125597 TF17016 Effective 11-Apr-2014 11-Apr-2014 11-Apr-2014 31-Dec-2019 31-Dec-2019 Disbursements (in Millions) % Project Ln/Cr/TF Status Currency Original Revised Cancelled Disbursed Undisbursed Disbursed TF- P125597 Effective USD 110.00 110.00 0.00 53.69 56.31 48.81 17016 . Policy Waivers Does the project depart from the CAS/CPF in content or in other significant Yes [ ] No [ X] Page 4 of 12 respects? Does the project require any policy waiver(s)? Yes [ ] No [ X] . A. Summary of Proposed Changes The following changes are proposed: (i) an extension of the Grant closing date by 18 months from December 31, 2019 to June 30, 2021; (ii) reallocation of funds between Project components; (iii) update of the results framework, disbursement forecast, and implementation schedule; and (iv) transition to World Bank Procurement Regulations for Borrowers under Investment Project Financing, dated July 1, 2016 (Procurement Regulations). Change in Implementing Agency Yes [ ] No [ X ] Change in Project's Development Objectives Yes [ ] No [ X ] Change in Results Framework Yes [ X ] No [ ] Change in Safeguard Policies Triggered Yes [ ] No [ X ] Change of EA category Yes [ ] No [ X ] Other Changes to Safeguards Yes [ ] No [ X ] Change in Legal Covenants Yes [ ] No [ X ] Change in Loan Closing Date(s) Yes [X ] No [ ] Cancellations Proposed Yes [ ] No [ X ] Change to Financing Plan Yes [ ] No [ X ] Change in Disbursement Arrangements Yes [ ] No [ X ] Reallocation between Disbursement Categories Yes [ ] No [ X ] Change in Disbursement Estimates Yes [ X ] No [ ] Change to Components and Cost Yes [ X ] No [ ] Change in Institutional Arrangements Yes [ ] No [ X ] Change in Financial Management Yes [ ] No [ X ] Change in Procurement Yes [ X ] No [ ] Change in Implementation Schedule Yes [ X ] No [ ] Other Change(s) Yes [ ] No [ X ] Appraisal Summary Change in Economic and Financial Analysis Yes [ ] No [ X ] Appraisal Summary Change in Technical Analysis Yes [ ] No [ X ] Appraisal Summary Change in Social Analysis Yes [ ] No [ X ] Appraisal Summary Change in Environmental Analysis Yes [ ] No [ X ] Appraisal Summary Change in Risk Assessment Yes [ ] No [ X ] . B. Project Status The Grant for the Kabul Municipal Development Program (KMDP) was approved on April 3, 2014 and was declared effective on April 11, 2014. The current closing date of the Grant is December 31, 2019. The objective of Page 5 of 12 KMDP is to: (i) increase access to basic municipal services in selected residential areas of Kabul city; (ii) redesign Kabul Municipality (KM)’s Financial Management system; and (iii) enable early response in the event of an eligible emergency. The project comprises five components: (i) Infrastructure Upgrading Program; (ii) Redesign KM’s Financial Management System; (iii) Studies; (iv) Project Management, Works Design and Supervision; and (v) Contingency Emergency Response. Project implementation progress had slowed in 2016, but commitments have picked up since December 2016. As of November 5, 2017, US$73.40 million (67 percent) of the Grant is committed and US$53.70 million (49%) disbursed. The likelihood of achieving the project development objective (PDO) and implementation progress are rated as “Satisfactory� and “Moderately Satisfactory� respectively. KMDP has exceeded the Year 3 targets established at Appraisal for the first PDO element: 755,000 beneficiaries against a target of 426,000 beneficiaries; 2316 hectares against a target of 943 hectares. These targets have been exceeded because of a decline in unit upgrading costs since Appraisal. KMDP has covered more area, and therefore there are more beneficiaries. In the case of the second PDO element, the end of project target of the PDO indicator at Appraisal (delivery of the final report on FM reforms) has already been achieved: the final report was delivered in December 2016. A two-phased approach was adopted because of the complexity of institutional reforms and the complexity of procurement. At Appraisal, it was anticipated that this diagnostic report would be the basis to develop either a separate standalone project to implement the recommendations or implement a slice of the recommendations under this project either through reallocation of uncommitted funds or through additional financing. (see para # 65 (ii) PAD). The status of implementation of the project components is summarized below. Component A: Infrastructure Upgrading Program (US$85 million) - KMDP has delivered over 337 km of community roads, 457 km of community drains, 23 km of trunk roads, and 25 km of water supply pipes, as well as small parks and public open spaces. The upgrading works have generated over two million man-days of temporary employment through the execution of labor intensive works contracts. The average unit costs of upgrading are almost 18% lower than the estimates at appraisal, in large measure because of fierce competition due to a deterioration in economic opportunities. Goods procurement for US$20.0 million was dropped. Component B: Redesign of KM's Financial Management System (US$3 million) - All reports have been delivered. KM has automated its’s payroll system and payroll processing time has been reduced from 10 days to one day. Restructuring will enable the implementation of Accounting, Budgeting, HR, Inventory, Asset, Fleet, Procurement, and Revenue modules. Component C: Studies – Proposed to be dropped. Component D: Project Implementation, Design and Supervision - Recruitment to fill vacancies, as well as to augment the KMDP Team's capacity to expedite implementation, is underway and needs to be expedited. Component E: Contingency Emergency Response - This component has not been triggered by an emergency. The Project is in compliance with legal covenants as well as Bank fiduciary and safeguards policies. It is confirmed that there are no overdue audit reports and no outstanding audit issues. . C. Proposed Changes . Development Objectives/Results Page 6 of 12 Project Development Objectives Original PDO The Project Development Objectives are to: (i) Increase access to basic municipal services in selected residential areas of Kabul city; (ii) Redesign KM’s Financial Management system to support better service delivery; and (iii) Enable early response in the event of an eligible emergency. Change in Project's Development Objectives Change in Results Framework Explanation: PDO level results to be achieved by the proposed Grant closing date, i.e., June 30, 2021, are: (i) Component A (Infrastructure Upgrading Program) - 3020 hectares (area to be upgraded increased to due to an increase in allocation for upgrading from US$65.0 million to US$91.5 million and after an analysis of implementation experience during the Mid Term Review June 2016). (ii) Component B (Redesign KM’s FM System) - KM presents on its website annual financial statements as per international standards and a report providing expenditure details by types of services provided (changed from the completion of diagnostic reports). Intermediate indicators have been revised in line with the changes in the project scope. . Financing Change in Loan Closing Date(s) Explanation: The Grant closing date is proposed to be extended by 18 months to enhance project outcomes by fully utilizing Grant funds freed up by the cancellation of goods procurement, and the request by the Government to implement FM reforms at KM.: (i) KMDP will need to execute additional works for US$26.50 million which will require time. Implementation experience makes clear that the Kabul contracting market for small contractors can absorb about US$9.20million per year. With US$65.26 committed as of September 17, 2017, KMDP will be require at least three years to execute the Grant, taking into account risks due to security, changes in leadership and a fragile operating environment. (ii) Institutionalizing KM’s Financial Management System will also require time. Market conditions for consulting firms are less than optimal in Kabul. Experience has already highlighted the delays that come with frequent changes in leadership. This is fourth mayor since Appraisal, the third Minister of Finance, and the second Director General of Treasury. This is the first extension of the Grant closing date. Original Closing Current Closing Proposed Closing Previous Closing Ln/Cr/TF Status Date Date Date Date(s) TF-17016 Effective 31-Dec-2019 31-Dec-2019 30-Jun-2021 31-Dec-2019 Disbursement Estimates Change in Disbursement Estimates Explanation: The proposed disbursement schedule reflects disbursements to date and estimated disbursements for the remainder Page 7 of 12 of the extended project period. Fiscal Year Current (USD) Proposed (USD) 2014 38,200,000.00 11,323,068.33 2015 18,700,000.00 11,771,158.39 2016 16,500,000.00 11,619,164.64 2017 12,300,000.00 26,200,295.00 2018 16,500,000.00 22,404,337.50 2019 7,800,000.00 14,367,204.00 2020 0 8,623,204.00 2021 0 3,691,568.14 Total 110,000,000.00 110,000,000.00 . Components Change to Components and Cost Explanation: Grant funds are proposed to be reallocated between KMDP components as follows: (i) Increase in funding for Component A: Infrastructure Upgrading Program to US$91.5 million to expand the scope. The Appraisal allocation of US$85.0 million consisted of US$65 million for upgrading and US$20.0 million for Goods, and the new allocation for upgrading, US$91.5 million, will be an increase of US$26.5 million). (ii) Increase in funding for Component B to US$6 million (an increase from the Appraisal allocation of US$3.0 million), so that Kabul Municipality’s Financial Management system can be strengthened to improve overall development effectiveness through support for rolling out the Afghanistan Financial Management Information system (AFMIS) to Kabul Municipality, including training, software license fees, the purchase and installation of servers /computers / printers, and training and capacity building. (iii) Zero allocation for Component C: Studies. (iv) Decrease in funding for Component D: Project Implementation, Design and Supervision to US$12.5 million (from the Appraisal allocation of US$17.0 million). (v) Component E. Contingency Emergency Response. No change - This component has not been triggered by an emergency Current Component Proposed Component Current Cost Proposed Cost Action Name Name (US$M) (US$M) Infrastructure Upgrading Infrastructure Upgrading 85.00 91.50 Revised Program Program Redesign KM’s Financial Redesign KM’s Financial 3.00 6.00 Revised Management System Management System Studies 5.00 0.00 Marked for Deletion Project Management, Project Management, Works Design and Works Design and 17.00 12.50 Revised Supervision Supervision Contingency Emergency Contingency Emergency 0.00 0.00 Page 8 of 12 Response Response Total: 110.00 110.00 . Other Change(s) Change in Implementation Schedule Explanation: KM’s KMDP Team has updated the timeline for project activities because of changes to Component A (Infrastructure Upgrading Program) and Component B (Redesign of KM’s FM System). For Component A US$65 million (71% of revised Component A allocation of US$91.5m) was committed by September 21, 2017. An extension in the time line is needed to complete upgrading works for the additional US$26.5 million in a complex and unpredictable operating environment. The security situation remains fluid, exacerbating the capacity of small contractors to deliver within the duration of their contracts. For example, the boundary of the “green zone� was recently expanded leading to additional road closures and traffic diversions, impacting the delivery of materials to works sites and delaying the work of contractors. Elections scheduled for July 2018 are also expected to contribute to further delays. These risks can be mitigated by a longer implementation period (based on experience with absorptive capacity), an increase in procurement, contract management and engineering staffing in the KMDP Team, and by transitioning to the Procurement Regulations, dated July 1, 2016. Procurement of emergency expenditures under Emergency Response Part of the Project will not be affected by transition to Procurement Regulations. Emergency response expenditures under Emergency Response Part remain to be procured in accordance with procurement methods and procedures set forth in Contingent Emergency Response Implementation Plan. Page 9 of 12 Project Project Kabul Municipal Development Program (P125597) Restructuring Status: FINAL Name: Stage: Team Requesting Deepali Tewari SACKB Created by: Deepali Tewari on 17-Mar-2016 Leader(s): Unit: Product Responsible Recipient Executed Activities GSU12 Modified by: Deepali Tewari on 6-Nov-2017 Line: Unit: Country: Afghanistan Approval FY: 2014 Financing Region: SOUTH ASIA Investment Project Financing Instrument: . Project Development Objectives Original Project Development Objective: The Project Development Objectives are to: (i) Increase access to basic municipal services in selected residential areas of Kabul city. (ii) Redesign KM’s Financial Management system to support better service delivery. (iii) Enable early response in the event of an eligible emergency. Results Core sector indicators are considered: No Results reporting level: . Project Development Objective Indicator (i) Increase access to basic municipal services in selected residential areas of Kabul city Corpor Status Indicator Name Unit of Measure Baseline Actual(Current) End Target ate Revised Number of beneficiaries from Number Value 0.00 755000 1052660 upgrading in both planned and Date 14-Feb-2014 21-Sept 2017 30-Jun-2021 unplanned areas that are upgraded. Comment Revised Number of people in urban Number Value 0.00 240352.00 500000.00 areas provided with access to Sub Type Page 10 of 12 all season roads within a 500 Supplemental meter range under the project. Project Development Objective Indicator (ii) Redesign KM’s Financial Management system to support better service delivery Corpor Status Indicator Name Unit of Measure Baseline Actual(Current) End Target ate Value KM presents on its website financial Qatia accounts statements as prepared per international Public access to key financial reporting standards and a Revised information, in particular, the Report published expenditures report providing expenditure by type of services. against single expenditure line budget. details by type of services provided. Date 21-Jun-2017 21-Jun-2021 Intermediate Results Indicators for PDO (i) Increase access to basic municipal services in selected residential areas of Kabul city Corpor Status Indicator Name Unit of Measure Baseline Actual(Current) End Target ate Revised Area Upgraded Hectare(Ha) Value 0.00 2316 3020 Date 14-Feb-2014 21-Sept-2017 30-Jun-2021 Comment Revised Kilometers of community roads Kilometers Value 0.00 337 560.00 paved Date 14-Feb-2014 21-Sept-2017 30-Jun-2021 Comment Revised Kilometers of trunk road paved Kilometers Value 0.00 23 37 Date 14-Feb-2014 21-Sept-2017 30-Jun-2021 Comment Page 11 of 12 Revised Kilometers of community Kilometers Value 0.00 457.00 745.00 drains lined Date 14-Feb-2014 21-Sept-2017 30-Jun-2021 Comment Revised Kilometers of trunk drains Kilometers Value 0.00 0 0.00 lined Date 14-Feb-2014 21-Sept-2017 30-Jun-2021 Comment Intermediate Results Indicators for PDO (ii) Redesign KM’s Financial Management system to support better service delivery Corpor Status Indicator Name Unit of Measure Baseline Actual(Current) End Target ate New KM’s Financial Management Text Value MOF financial FM framework, (FM) Framework regulations specific to KM used which are needs and based not specific to on best KM needs. practices, developed and implemented. Date 30-Sep-2017 31-Dec-2018 Comment New Implementation of Financial Text Value Payroll module Eight modules Management Information implemented. implemented System (AFMS/FreeBalance) (Accounting, Budgeting, HR, Inventory, Asset, Fleet, Procurement, Revenue) Date 30-Sep-2017 31-Dec-2019 Comment . Page 12 of 12