Security Sector Financing and Fiscal Sustainability in Afghanistan

M Manthri
2008

Summary

Is the current financing model for Afghanistan’s security sector appropriate? How does it affect incentives around the reform process? This Overseas Development Institute (ODI) paper finds that the current model falls short of good aid effectiveness practice. It implies that donors are perpetuating high levels of aid dependence, not setting strong incentives for institutional reforms and generating fiscal risks for the state. This weakens the state further, increases insecurity and damages the scope for genuine state building.

Approximately $9 billion of foreign assistance was spent on the Afghan security sector from 2003 to 2007, with over $14 billion planned for 2007 to 2010. This resource expansion should be accompanied by heightened scrutiny of how assistance is spent and whether it is delivering the desired outcomes of peace and a stronger, accountable state.

The Paris Declaration on aid effectiveness highlights five tenets of good donor practice: alignment, harmonisation, ownership, managing for results and mutual accountability. An aid effectiveness assessment of Afghanistan’s security sector financing model reveals significant challenges relating to fiscal sustainability and aid delivery. There is currently no effective financing mechanism to respond in a more aid effective way. The security sector lacks a transparent, forward-looking and costed strategy that the Government owns and all active donors subscribe to.

  • The Government of Afghanistan does not have the resources to finance all national security spending. The weak revenue base results from economic, political and administrative factors.

  • Key security sector institutions are captured by vested interests that protect rent-seeking opportunities at the expense of reform, transparency and institution building.
  • Government-level incentive structures undermine the potential for strong leadership and reform. Donor incentives limit alignment and harmonisation.
  • Donors make insufficient reference to sustainability when making policy decisions.
  • Most resource flows are unpredictable and not aligned with national budget and accountability frameworks. Most are also not harmonised nor jointly planned.
  • The US Government (USG) prefers bilateral to multilateral aid. Sheer financial clout means USG policy and decisions affect the entire sector and the interventions of other donors.

Four policy levers could improve aid quality and ensure the sustainability of security sector reforms: expanding the revenue base; reforming government systems and processes; strengthening the aid modality; and improving donor behaviour. In the short-term, the following is necessary:

  • A viable sector strategy delivered as part of the Afghanistan National Development Strategy (ANDS), which applies a fiscal lens to the sector and generates buy-in from donors on the trajectory for reform.
  • Reform of the Law and Order Trust Fund for Afghanistan (LOFTA) to bring more aid on-budget and allow for greater donor coordination.
  • Stronger donor reporting of aid and compliance with the national budget cycle, which should boost the credibility of the Government’s spending and planning frameworks.
  • Stronger efforts to create incentives for higher tax collection by provincial offices, and for their remittance to central authorities.

Source

Manthri, M., 2008, 'Security Sector Financing and Fiscal Sustainability in Afghanistan', Strategic Policy Impact and Research Unit Working Paper, no. 20, Overseas Development Institute, London