A liberal new investment law, awaiting ratification by the parliament, will give Afghanistan a boost as it tries to attract foreign investors to a country seen by many abroad as dangerous and too poor to offer good business prospects. Investment will form a key part of the country’s struggle to rebuild its political, economic and physical infrastructure.
The new law will give foreign companies the right to full ownership of projects inside the country as well as the right to repatriate 100% of profits after tax. Together with progress in cementing a stable political environment, the authorities in Kabul hope the new law will convince hitherto sceptical investors that the chance to rebuild Afghanistan’s economy – almost from scratch – will also provide aggressive business opportunities.
“Today, we have three five-star hotels being built in Afghanistan by foreigners, a $200 million mobile phone industry that has significant scope for growth, and a variety of other investments in the aviation industry and in construction which are driven by foreign investment,” president Hamid Karzai told Emerging Markets in an interview last year. “Investment comes when there is an opportunity for profit – and there are many companies operating today demonstrating how profitable Afghanistan can be.”
Investment depends on political stability – and the four and a half years since the fall of the Taliban have seen a slew of reforms and institutional creations designed to assist that process. A constitution has been adopted, presidential and parliamentary elections have been successfully held, and many new institutions have been built. Hundreds of thousands of refugees have returned from Iran and Pakistan, and a January London international conference pledged more than $10 billion in aid.
The participation of over 50% of voters in September’s parliamentary elections arguably demonstrated popular legitimacy for the government. However, most of the votes were still apparently cast on the basis of local patronage, showing how far Kabuli reforms must go to reach large areas of the country.
Security issues
Security in the capital has greatly improved, with only occasional attacks against the government and foreign interests. But in the hard facts of boots on the ground and shootings in the night, several parts of Afghanistan still live effectively beyond the protection of the law. New, multi-ethnic, army and police forces are being built to carry government rule further into the provinces, but foreign peacekeepers will be crucial still.
The government argues that this support from the international community must be echoed in terms of investment to help the recovery. “I think we all learned well the lesson of what happened the last time the world forgot about Afghanistan,” said Karzai. “I don’t think that the international community will fail to live up to its promises in Afghanistan.”
Economic growth
The economy is growing very rapidly – estimated by the IMF at 14% in 2005-6 – but from a very low base. Per capita GDP is only $315, one of the lowest in the world. According to the World Bank, investment accounts for up to 90% of the economy, mostly in the form of public-sector spending financed from international aid. All that adds up to an economy where few people can afford consumer goods, but those that are used, from foodstuffs to car parts, are all imported.
So far the best-performing sectors for investment have been telecoms and construction, reflecting the government priority of developing national infrastructure. Two GSM networks are running, and licences were awarded for another two in September. Construction work mainly focuses on residential and government buildings in Kabul, and road and utilities projects like irrigation networks and small dams in the provinces.
The construction boom is having a knock-on effect for related businesses like cement. Afghanistan now has three state-owned cement plants, one of which is still unworkable following war damage. All three use near-obsolete technology. Now the plants are up for sale as part of the government’s privatization scheme.
“The price of cement is increasing across the region because of the reconstruction work in Afghanistan and Iraq,” says Shakib Noori, chief spokesman for the Afghanistan Investment Support Agency (AISA), a one-stop shop set up by the government to promote and facilitate investment. “We have gypsum and limestone that can be mined domestically and, with some investment, can have an entirely local cement industry.”
AISA is also trying to promote investment in the mining sector, taken out of government monopoly by a new law. Afghanistan has commercial quantities of precious stones and marble as well as copper, iron ore and coal. Because of the long years of conflict, little exploration work has been done using modern geo-surveying techniques, opening up the possibility that there is more mineral wealth yet to be found.
The Asian Development Bank, one of the largest investors now in Afghanistan, is working with the government on rehabilitating its gas network. The country has sizeable deposits of natural non-associated gas, which were partly developed during communist rule. Pipelines within the country and to the former Soviet Union need restoring, and there is a large, but mothballed, gas treatment plant at Sherbegan, west of Mazar-e Sharif.
So far AISA has registered $1.3 billion-worth of investment projects, of which Noori says 50% to 60% has already gone ahead. A recent report by the World Bank put the figure lower, claiming that only a fraction has occurred. However, the investment authority has made it much easier for potential investors. It has shortened the process of registering a company from months to days, and Afghanistan is now listed as one of the fastest countries in the world for setting up a company.
Business challenges
For all the good prospects, Afghanistan remains a very difficult place to work. “You can see which challenges are greatest by the costs of running your business,” says Tamim Samee, an Afghan businessman who returned from the US in 2002, and last year started running a string of projects in IT, media and agribusiness.
“Security is big – you have to hire security guards and fortify your compound. The lack of reliable electricity means you have to generate your own – which drives costs up further. And there’s a lack of skilled human capacity here, so we have to import people from Pakistan and India for technical services.”
Electricity shortages have been cited as the greatest single problem facing businesses in Afghanistan. According to the World Bank report, 64% of companies said it was a severe or major obstacle to doing business. While 76% of those surveyed said they were attached to the grid, they averaged only six and a half hours of electricity a day. The government is working to bring national operating capacity up from 270 megawatts to the 480 megawatts actually installed, but it will take time.
Dealing with government
Access to land has been a major headache in the past, but the government is working to improve matters. “Most of the land titles records were destroyed during the war or contested because of communist nationalization and Taliban seizures,” says Michael Barrow, senior structured finance specialist at ADB. “Up to 50% of the land in Kabul has been contested. Projects are delayed when claims are made. This is now improving, and what the government has done is to set up industrial and enterprise zones which are outside this issue. They exist in all the major cities now.”
Dealing with the government can have other problems. The regulatory environment is improving, with the help of legislation like the revised investment law, but the effectiveness of implementation is untested. The judiciary is trained but relatively inexperienced, and it is unclear how independent it is from factional interests. Pervasive corruption can also bog down even the most basic activities.
“Corruption is a big problem,” says Hassina Sherjan, who runs a high-end fabric handicrafts business employing more than 250 people. “You have to really fight. The problem is that the government doesn’t pay very good salaries, and the cost of living in Kabul is very high because foreign money is pushing up prices.”
Karim Khoja, chief executive of Roshan Telecom, Afghanistan’s largest company and a joint venture between the Aga Khan Fund for Economic Development, Monaco Telecom International and the US’ MCT Corp, agrees. “We do not pay bakhsheesh, and that causes huge delays,” he says. “We have 40 to 50 people a day trying to shake us down. But you can’t come here and just sit and complain. So we hire Afghan lawyers, we hire public relations people. We bring people in and explain to them why we cannot pay bribes.”
Khoja, Samee and Sherjan are typical of the investors really rebuilding Afghanistan. All three are returnees from the West, fired by national sentiment and the prospect of financial gain. “Notwithstanding all the difficulties, if you go to Afghanistan and look around, what most strikes you is the sense of renaissance,” says Barrow. “Money is pouring in, and it is the Diaspora Afghans who are leading the charge.”
Bitter harvest
The total value of opium exports in 2005 was $2.7 billion – exactly 50% of Afghanistan’s GDP. For a country where most people live in abject rural poverty, with per capita GDP of only $315 a year, fighting the poppy business is not only difficult, but fraught with peril.
So why is it so important for the government in Kabul to weed out so profitable, if pernicious, a crop? The size of the opium sector makes it far harder for the government to control an economy that is already mostly informal. It also diverts funds to undesirable elements – including the Taliban.
To some extent, foreign aid depends on the vim with which the government tackles the poppy. It also provides the hardware to tackle the drugs barons. A UK task force of 3,300 soldiers will start operating in Helmand province, the centre of the opium trade, in June, aiming to stop opium production and assist rural development.
“Growing poppies flies in the face of our religion and culture, and this is why I am convinced that, given an alternative, farmers will stop producing opium – as many of them have already demonstrated,” Afghan president Hamid Karzai told Emerging Markets in an interview last year.
“I am confident that this stain on Afghanistan will be removed, provided that we can provide sustainable alternatives to the people of Afghanistan,” he said.
But replacing opium comes at a heavy price, paid mostly by poor farmers in remote provinces. Incentives to replace the crop have had mixed success. In the past, some farmers actually started growing the crop in order to qualify for the compensation they receive to stop growing it. Others have become trapped by money lenders who work hand in glove with the big growers, and force farmers to cultivate the poppy as collateral on debt.
Failure to support farmers by replacing the poppy with a less damaging product comes at a heavy price. Urbanization is already a huge problem in Afghanistan, skewing the economy and breaking traditional social networks. It is driven mainly by poverty in the countryside and by the return of hundreds of thousands of refugees from Pakistan and Iran who do not want to return to a life without work in the villages.
Nevertheless, the government has had some success in reducing the poppy harvest. In 2005, the amount of land under poppy cultivation fell by 21%, but was slightly offset by an increase in the yield per hectare. The number of households involved in poppy farming also fell by 13% – but nearly 9% of Afghans still work in the business.