Arguably the most daunting challenge the Government of Afghanistan faces is to make the nation secure and establish the rule of law. Approximately $9 billion of foreign assistance has been spent on the security sector between 2003-2007, and a further $14 billion is expected to be spent over 2007-2010. Greater scrutiny is required over this foreign assistance to test whether it is delivering the desired outcomes of peace and a stronger, more accountable Afghan state. One important question to ask is whether the current financing model is the correct one, and how it affects the incentives around the reform process.

This paper takes an aid effectiveness approach to assess the financing model and finds that it falls short of good practice. This assessment is of real concern: donors are perpetuating a high level of aid dependence; not setting strong incentives for institutional reforms; and generating fiscal risks for the state. The drivers of these fiscal sustainability and delivery problems are unpacked, analysed, and used to formulate policy prescriptions over the short and long term. These include:

- Over the short term (1-2 years): a viable sector strategy which applies a fiscal lens to the sector and is incorporated in to the ANDS (Afghanistan's PRSP); a reformed LOTFA mechanism to bring more aid on-budget and on-plan; improved donor reporting of aid and compliance with the national budget cycle; and stronger efforts to accelerate tax collection.

- Over the long term (3-10 years): expansion of the tax base, which is the only route to fiscal sustainability; improved fiduciary standards in the security sector ministries and greater Government ownership of security sector reforms; development of a medium term expenditure framework to guide resource allocation; and changes to US foreign assistance that brings it more in to line with the Paris agenda.