The Policy Options Paper for the Municipal Incentive Fund for Afghanistan will build on Chapter 16

of the Municipal Law and will support both IDLG and the Government of Afghanistan to better articulate the provisions of the said law. The outcome will also include a comprehensive framework for its implementation.

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The Consultant will:

(a) At the MIF Legal Level: Review the legal and institutional provisions for establishing the MIF by IDLG under Chapter 16 of the Municipal Law. The Consultant will assess the current legal framework for performance-based financing of municipalities in Afghanistan and will identify any legal, regulatory or policy limitations that might hamper municipal financing through an MIF approach. The Consultant would recommend legal I procedural remedies to be opted by the client. Finally, the consultant will recommend a set of criteria for evaluating the MIF in terms of simplicity, transparency and allocative efficiency.

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(b) At the MIF Governance and Institutional Level: The Consultant will conduct institutional assessments of the 5 PCC municipalities under the CIP to identify appropriate performance indicators to be used for the MIF. The institutional assessments would include among others the organizational structure, staffing as well as municipal and financial management capacity. Such assessments would build on earlier evaluations conducted for the five cities under the Cities Investment Program (ClP). In parallel, the Consultant will assess the potential governance role of concerned national, regional and local institutions under a future MIF. This will involve among others: Ministry of Finance, IDLG-DMM, Ministry of Urban Development and Land, Municipalities and others. At the local level, the role of both the Municipal Council and the Provincial Governor will be reviewed. The Consultant will recommend the governance and administrative structure of the performance-based municipal financing and roles and responsibilities of each institution. Finally, the Consultant will consider the limited management capacities and will identify the related institutional support arrangements for the success of the MIF.

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(c) Funding Sources: The Consultant will explore both potential sources and level of funding that could be allocated on an annual basis by the Ministry of Finance (MoF) to the MIF. Also, considering that the Municipal Law stipulates that MIF funding allocated per municipality is not to exceed quarterly and annual limits to be established by IDLG, the Consultant will propose such limits and review the adequacy of frequent project applications (one per quarter in each fiscal year) and assess the resulting institutional implications and capacity to manage the MIF. The Consultant will also assess mechanisms for assigning a discretionary budget for performance based municipal financing. The consultant is to determine donors' or other funding received by the municipalities and its impact on the quota of financing to the concerned municipality. The consultant is to recommends the best decision-making criteria and formulas for assigning a discretionary budget without complicating the intergovernmental fiscal transfer program. More specifically the criteria should indicate how to determine the total amount is allocated for the performance-based financing, how to allocate the resources across eligible municipalities and how to restrict using financing.

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(d) At the MIF Operational Level: The Consultant will attempt at classifying Afghan municipalities based on their current development activities, need for the development, their income level, population and remoteness. Accordingly, the Consultant will review both the comprehensiveness and relevance of project application requirements under the provisions of Chapter 16 of the Municipal Law of Afghanistan and will design an appropriate template to be used by IDLG. The Consultant will propose a set of Minimum Conditions (MCs) derived from statutory requirements for Afghan municipalities that demonstrate a basic level of absorptive capacity. This implies that basic fiduciary and other safeguards are in place before grants are made available to municipalities. The Consultant will also identify and articulate the specific social objectives to be achieved by local government under Chapter 16 of the Municipal Law and propose appropriate indicators and KPis to assess progress by municipalities towards political, social and economic objective - Finally, the Consultant will define the metrics for measuring municipal operational performance under the above objectives and will formulate KPI to capture project impacts and prepare both the relevant template and description needed for the IDLG Annual Report as stipulated in Chapter 16 of the Municipal Law of Afghanistan.

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(e) Policy Options: Subsequent to the MIF Legal, Governance and Institutional, Financial and Operational reviews, the Consultant is to propose policy options in line with the findings of aforementioned reviews. The policy options are to be consulted and advocated with the Ministry Finance, IDLG-DMM, Municipalities and the leadership of the Government of Afghanistan as key stakeholders in the process of policy development. Final policy options paper is to be translated in one of the local languages as a prerequisite.