Investment Horizons: Afghanistan

Transcription

1 Benchmaking FDI Oppotunities Investment Hoizons: Afghanistan INVESTMENT HORIZONS: AFGHANISTAN 1

2 Copyight 2005 The Wold Bank Goup/MIGA 1818 H Steet, NW Washington, DC All ights eseved Manufactued in the United States of Ameica Fist pinting Apil 2005 Available online at Pinted on ecycled pape Fo moe infomation contact: MIGA Opeations 1818 H Steet, NW Washington, DC t f The mateial in this publication is copyighted. Requests fo pemission to epoduce potions of it should be sent to MIGA Opeations at the above mentioned addess. Investment Hoizons: Afghanistan, a study of foeign diect investment costs and conditions fo fou industies in Afghanistan, is pat of a lage poject funded though a gant fom the Fedeal Ministy fo Economic Coopeation and Development, Gemany (also known as BMZ - Bundesministeium fü witschaftliche Zusammenabeit und Entwicklung). The Afghan Investment Suppot Agency (AISA) was established in August 2003 with the suppot of BMZ. The Multilateal Investment Guaantee Agency (MIGA) of the Wold Bank Goup was established in 1988 to pomote the flow of pivate foeign investment to developing membe counties. MIGA offes political isk insuance coveage to eligible investos fo qualified investments in developing membe counties. MIGA also offes technical assistance pogams to develop and implement effective stategies fo attacting and etaining foeign diect investment. This hands-on technical assistance focuses on thee pimay aeas: dissemination of infomation on investment oppotunities and business opeating conditions in developing membe counties though online sevices; capacity building of the oganizations and institutions involved in the pomotion of foeign investment; and, investment facilitation activities suppoting the effots of developing counties to identify and attact investment. 2 INVESTMENT HORIZONS: AFGHANISTAN

3 Benchmaking FDI Oppotunities Investment Hoizons: Afghanistan A Study of Foeign Diect Investment Costs and Conditions in Fou Industies Apil 2005 INVESTMENT HORIZONS: AFGHANISTAN 3

4 The Multilateal Investment Guaantee Agency is not, by means of this publication, endeing accounting, business, financial, investment, legal, tax, site selection, o othe pofessional advice o sevices, and shall not be esponsible fo any loss sustained by any peson, company o oganization that elies on this publication as a substitute fo such pofessional advice o sevices. Befoe making any decision o taking any action that may affect you business, you should consult a qualified pofessional adviso. 4 INVESTMENT HORIZONS: AFGHANISTAN

5 Table of Contents Executive Summay Poject Context... 7 Summay of Findings... 8 Chapte I: Intoduction and Study Objectives Intoduction Poject Objectives Chapte II: Methodology Puposes of the Benchmaking Pogam Assumptions The EBP Model Data Gatheing The Pocess Chapte III: Results Oveview of Foeign Investment in Afghanistan Post-Conflict and County-Specific Challenges and Conclusions Inteviewee Composition Cost and Quality Conclusions by Industy Secto Obsevations Based on Data Analysis Local Vesus Foeign Investo Pespectives Appendices Appendix 1: Endnotes Appendix 2: Aconyms and Abbeviations Appendix 3: Data Definitions and Resouces Appendix 4: Tables of Findings Company Inteviews Appendix 5: Tables of Findings Local Infomation Appendix 6: Bibliogaphy INVESTMENT HORIZONS: AFGHANISTAN 5

6 6 INVESTMENT HORIZONS: AFGHANISTAN

7 Executive Summay Benchmaking in a conflict-affected county like Afghanistan is necessaily faught with methodological and logistical difficulties, and the esults ae fa moe susceptible to change than those in counties that have not ecently undegone conflict. In this sense, these findings should be seen as a snapshot, an initial baseline on Afghanistan s oad to ecovey. As such, this publication povides valuable infomation on cuent aeas of stength and oppotunity fo investment in Afghanistan. Howeve, most impotant fom the investo s point of view should not so much be the cuent situation, (which has aleady significantly impoved fom ecent yeas), but athe the dynamic movement of the county s economic and secuity ealities, and the futue oppotunities ceated fo business. As the findings make clea, and as is tue acoss many sectos, investos enteing Afghanistan now will benefit fom being fist moves in a vigin maket that is highly po-business. Poject Context The Islamic Republic of Afghanistan and its dono patnes ae making pogess in econstucting the county s infastuctue, evitalizing the economy, and ceating institutions and legal famewoks to suppot the development of a multi-ethnic state. As pat of this effot, the Multilateal Investment Guaantee Agency (MIGA) of the Wold Bank Goup, with funding fom Gemany's Fedeal Ministy fo Economic Coopeation and Development (BMZ), commissioned a study to assist the Govenment of Afghanistan and the Afghan Investment Suppot Agency (AISA) in thei effots to pomote investment. The study employed a methodology consistent with MIGA's global Entepise Benchmaking Pogam (EBP), which enables fai compaison of Afghanistan and othe counties benchmaked unde the EBP, including Afghanistan's egional neighbos. Additionally, as in its othe entepise benchmaking initiatives, MIGA hopes to povide a useful tool fo investos in tems of identifying potential investment oppotunities. The specific objectives of the Afghanistan benchmaking study wee to: (1) document the cuent costs and conditions associated with the selected industies, towad detemining Afghanistan s oveall competitiveness as a location fo investos; (2) analyze stengths, weaknesses, oppotunities, and theats (SWOT) to identify the pospects and challenges in the fou selected sectos; (3) identify the county s pesent compaative advantages and make ecommendations fo impoving the secto-specific investment climate and attacting foeign diect investment (FDI) in the coming months and yeas, and (4) set a baseline fom which impovements in the investment climate can be measued in the futue. It is expected that the esults of the study will help to claify and infom AISA s FDI pomotion stategy and maketing effots. The study aimed to examine both quantitative and qualitative factos elating to the business envionment as they stood at the paticula time of the study. Fo example, fims wee asked to epot the costs incued fo such items as land and utilities as well as to discuss peceptions of the ease of opeating in Afghanistan. As elaboated moe fully in Chapte II, the esults of the study ae based pimaily on thee souces of data: 32 fim suveys and inteviews, local souces such as utility povides and govenment agencies, and intenational souces of data. The analysis was futhe supplemented by a eview of elevant liteatue on Afghanistan s investment climate and meetings with govenment and othe stakeholdes. With input fom AISA and MIGA, fou sectos wee selected fo analysis based on INVESTMENT HORIZONS: AFGHANISTAN 7

8 an initial sense of thei viability fo attacting investment. These fou sectos ae: tanspot and logistics; food and beveage pocessing; capets and textiles; and mining. The findings ae divided into geneal obsevations that affect all sectos, as well as secto-specific conclusions. Summay of Findings The pogess made in Afghanistan since the end of majo fighting in 2002 has been maked, especially consideing the despeate and damaged state in which the county was left afte 23 yeas of wa and isolation. Theefoe, a ealistic assessment of the Afghan business climate must eflect the dynamic pace of change and pogess set against a seies of undelying ealities. This document aims to eflect both quantifiable factos and the nuances inheent in this sot of tansfomational, even paadoxical, envionment. Fo example, the county s licit Goss Domestic Poduct has gown appoximately 50 pecent in the past two yeas, and yet basic public sevices such as wate and powe ae still uneliable. Seveal multinational copoations have aleady invested in Afghanistan, but the bulk of the economy emains infomal. Theefoe, an analysis of pospects fo investment eveals challenges and significant oppotunities. The fact that a benchmaking execise can be undetaken in Afghanistan at all is emakable, and a sign of the significant pogess that has been made in the economic and secuity sphees duing the past thee yeas. It also eflects the taditionally entepeneuial spiit of the Afghan people, which emained unboken though two geneations of conflict and is futheed by the Afghan diaspoa, now etuning to the county. Although the situation emains in flux, and the study's findings may eflect vaiable opeating conditions among the suveyed companies, thee is no eason to believe the findings ae not epesentative of the cuent situation in Afghanistan in the fou subject sectos. Coss Sectoal Challenges and Pospects Impoving legal famewok fo investment Investos in Afghanistan face an evolving legal egime egading investment. Many poposed laws intended to impove the county s legal egime and suppot a moden maket economy ae in vaious stages of enactment. Fo the time being, howeve, seveal aeas of commecial activity emain pooly egulated o not egulated at all, and the judiciay has limited capacity. This contibutes to the county s oveall isk peception. Developing tax egime and low tax compliance Although the tax egime emains cumbesome and tax compliance is low, this aea is tageted fo impovement. Officially, hundeds of nuisance taxes emain on the books at the Ministy of Finance and othe govenment agencies collect a ange of licensing and pemit fees and othe quasi-tax payments. In geneal, company awaeness of tax policy and law is low. Tansitionally, the lack of tax enfocement offes the obvious benefit that many fims pay no taxes othe than customs fees. At the same time, lage fomal companies complain that the moe visible and esponsible companies ae shouldeing a dispopotionate shae of the copoate tax buden in Afghanistan. Refoms in customs administation Customs administation cuently lacks consistency and tanspaency. Investos suggest that individual povinces (some only gadually coming unde contol of the cental govenment) clea goods and collect vaious amounts of customs evenue without coodination with the cental govenment. Recent efoms have helped steamline pocesses, but investos see the need fo futhe impovements. 8 INVESTMENT HORIZONS: AFGHANISTAN

9 Developing tanspot infastuctue quality and high tanspotation costs With some notable exceptions, Afghanistan s oad netwok is in poo condition, ai feight is still limited and costly, and most goods must be shipped though Pakistan o Ian, adding anothe laye of costs, delays, and administative pocessing. This aises costs fo all fims that impot o expot, and must be an ugent govenment pioity. In that context, oppotunities fo constuction fims, engineeing companies, etc., ae geat. Complex popety maket If the consideable amount of govenment-held land is appopiately pivatized, investos in Afghanistan will have a ange of attactive investment location options. While steps ae being taken to impove the pocess, accessing govenment land cuently still seems to be a highly individualized pocess chaacteized by many individual govenment agencies owning, leasing, and selling land in a nontanspaent and inconsistent manne. The govenment owns most land in the county and the pivate popety maket woks lagely on a negotiated basis with pices ising apidly. The ability of investos to puchase o lease land is fustated by a highly nontanspaent popety maket. Title disputes ae common, pocedues fo leasing o selling land vay widely, and ecouse and judicial settlement ae difficult. Impoving capacity of the state to povide utility sevices Cetain public sevices such as wate, powe, and wastewate teatment, ae not yet geneally available. Indeed, few of the fims inteviewed elied on public electicity, waste collection, o wastewate sevices. Most oganizations ely on mobile phones, pivate wells, and geneatos fo basic utility needs. The govenment is addessing this, and in tuning to the pivate secto is ceating additional investment oppotunities. Impoving secuity The impoving secuity situation is educing instability fo investos, paticulaly non-afghan entepeneus. Gadually the entie county is being bought unde cental govenment contol, but anti-govenment foces, while significantly weakened, do continue to mount spoadic attacks in majo cities. Nonetheless, the outside peception of the secuity situation emains negative. Stengthening financial makets Seveal intenational banks and the Cental Bank povide conventional financial sevices to business, but standad financial poducts such as commecial loans and expot financing ae not yet available in Afghanistan fo domestic investos. As a esult, business finance is not fully developed and most loans seem to be infomal secto tansactions between family and fiends. Sectoal Conclusions In geneal, the stengths acoss the sectos eflect the economic landscape of a county with a po-business climate and a ange of oppotunities fo fowadlooking investos as Afghanistan egains its position as a hub between Asia, Euope, and the Middle East. The weaknesses, as expessed by investos aleady opeating in the county, ae an unvanished expession of the cuent eality that still exists afte 25 yeas of wa and civil conflict and is changing evey day. But even in the weaknesses, cuent and potential futue investos can see oppotunities. To name but one example, the inadequate oad netwok within the county and to neighboing makets epesents a pime oppotunity fo foeign and domestic companies in the engineeing and constuction fields. This oppotunity, in tun, will bing with it upsteam and downsteam business linkages in equipment leasing, cement and othe mateials, and elated business activity. INVESTMENT HORIZONS: AFGHANISTAN 9

10 Tanspot and Logistics Of the fou sectos consideed fo this study, the tanspot and logistics secto saw the lagest pesence of FDI and some unique demand-diven advantages. An analysis of the tanspot and logistics secto evealed seveal stengths and weaknesses, including: Stengths Little o no competition and fetile gound fo new ideas Because of the difficulties of Afghanistan s ecent past, investment levels ae still low and new entants in the secto face limited competition and stable demand fo innovative, new, and cost-effective sevices. Steady demand Foeign assistance, govenment demand, and pivate secto demand fo the equipment and machiney needed to undetake the county s massive econstuction pogam should continue fo yeas to come at its cuent level, theeby ceating a stable maket fo tanspot and logistics sevices. High pofit magins The logistics companies opeating in Afghanistan that wee inteviewed fo this study epoted that they had begun with a modest initial investment of only a few thousand o tens of thousands of dollas and ae making hundeds of thousands o even millions in etun. While these magins ae expected to fall ove time with inceased competition, in the inteim the tanspot and logistics secto demonstates the benefits of fist move advantage. Weaknesses Inconsistent oad conditions Only about 65 pecent of the main cicuit of highways compising the Afghan oad netwok is in good condition, and the main tansit oad fo goods to Pakistan, Afghanistan s most impotant tading patne, is in disepai. Futhemoe, many companies inteviewed expessed dismay that majo highways wee fequently closed without pio notice fo secuity puposes and emained closed fo as long as seveal days. Lack of a seapot While many pivate industy epesentatives see Afghanistan s lack of a seapot as a majo obstacle fo industy in the county, some inteviewees see the county s landlocked status as a distinct advantage. Afghanistan is dependent on the coopeation of its neighbos who do have seapots, has highe costs of tanspotation, and cannot pomise fixed delivey times to oveseas customes. Refoming customs authoity Although the Afghan customs authoity has automated many of its pocesses, the system is not fully integated and is limited in its capabilities. Also, thee ae multiple customs checks (not all of them official) once goods have enteed Afghanistan s bodes. The cuent pocedue equies that all tucks be cleaed at once fom a cetain bill of lading. Abitay ules and egulations in the Afghan countyside The cental govenment s authoity has been limited in cetain egions of the county, but is impoving. Local walods wee accustomed to imposing abitay taxes and customs chages on oveland tanspot. Undeveloped electic infastuctue and high costs Sophisticated logistics sevices equie telecommunications and inventoy management systems, and 10 INVESTMENT HORIZONS: AFGHANISTAN

11 these depend on a eliable electic infastuctue. All the logistics companies inteviewed elied on a back-up geneato fo at least some of thei opeations, and fou of the foeign companies said they eithe had no municipal powe at all o depended 100 pecent on thei own pesonal geneatos. Theefoe, electic powe costs in Afghanistan ae high. Food and Beveage Pocessing Yeas of conflict have left Afghanistan s indigenous food pocessing industy lagely devastated and today the county impots most of its pocessed food. Thee is consideable potential fo impot substitution in the secto. The following majo stengths and weaknesses wee identified in the analysis of the food and beveage pocessing secto: Stengths Fist move advantages As little is cuently poduced in Afghanistan in the food and beveage industy, companies that establish poduction o bottling opeations ae well-poised to eap geat benefits as the fist domestic supplies of thei poducts as well as lowe tanspotation costs than thei impoting competitos. Afghanistan s band name fo taditional poducts Afghanistan has seveal makets to which it has long expoted cetain poducts such as died fuits and nuts. Restoing poduction and maketing the county s taditional eputation fo quality may confe an advantage to new poduces. Poximity to low-cost aw mateials Afghanistan s aid to semiaid climate and hot summes ae paticulaly good fo cultivating a lage vaiety of fuits and vegetables that can be died, canned, o othewise pocessed. Afghanistan also has good suface wate availability as compaed to the Cental Asian Republics and Ian. This means that Afghanistan could develop lowe iigation costs as compaed to those counties. Poximity to lage makets Some of the most populous counties of the wold including China, India and Pakistan ae in close poximity to Afghanistan and constitute natual buye makets fo Afghanistan s poducts. Taditional fuit poducts aleady have an outstanding eputation in India which could, with some maketing, extend to othe food and beveage poducts. Weaknesses Tanspotation and logistics challenges Poo oads and abitay oad closings, lack of a seapot, delays at customs, and the absence of effective tansit ageements with neighboing counties all militate against the quick, inexpensive tanspot of peishable food and beveage poducts aboad and within the county. Lack of quality standads and poo envionmental conditions Thee ae, as of today, few contols in this taditional industy and thee is a geneal absence of witten standads, inspections, pice suppots, and technical assistance. Cuent tades lament elevated quantities of dust, sulphu and othe toxins in the ai and wate, a fact which has been confimed though laboatoy tests. Died fuits may equie two to thee washings, which can deteioate thei quality. The wate used to wash them is sometimes not sanitay. As the secto seeks expot makets, quality assuance will become an inceasing issue. INVESTMENT HORIZONS: AFGHANISTAN 11

12 Uneliable and expensive electic powe Voltage vaiations ( bownouts ) damage equipment and inteupt poduction pocesses, subjecting peishable food and beveage poducts to spoilage o significantly educing thei shelflife. Of the seven companies inteviewed in this industy, five had no publicly povided powe and wee incuing geneato costs, and those with powe epoted fequent bownouts. Need fo appopiate equipment and stoage facilities In the died fuit and nut secto, most poduces have not invested in equipment since the Taliban came to powe, meaning that the cuent equipment is old and obsolete in many cases. Raisin agents see a need fo moe stoage facilities to maintain aisins in a contolled envionment. This need will likely also extend to othe sectos as they ecove fom conflict. Limited financing fo small and medium-sized entepises (SMEs) Little longe-tem financing is cuently available fo SMEs in Afghanistan. Many of the companies in this industy, especially in the died fuit industy ae SMEs. Capets and Textiles As one of Afghanistan s taditional economic sectos and with its linkages to ual incomes, much govenment and pivate secto attention has been paid to evitalizing the Afghan capets and textiles secto. An analysis of the capets and textiles secto eveals some paticula stengths and weaknesses: Stengths Taditional expetise etained The capet industy is one of Afghanistan s taditional poducts and, despite the wa, entepeneus in the business suggest that a sufficient supply of the necessay skilled labo emains in the county. Intenational band etains value Although moe needs to be done, the Afghan capets and taditional textiles secto etains a geneally favoable intenational image. Capets made in Afghanistan ae consideed a taditional handicaft, eflecting a ich histoy and a ange of quality designs. While poduction quality is inconsistent, the geneally favoable image offes the secto a good basis fo impoved maketing. Pefeential tade access Handmade Afghan capets have been ganted pefeential duty fee access to the impotant United States and Euopean Union makets. This povides a picing advantage fo Afghan capets that poduces without such access will not enjoy. Non-peishability of poduct Although capets ae sensitive to humidity, they ae othewise vey easy to stoe. This means that output can be stockpiled nea to the end custome in oveseas makets fo a long time. This also confes a tansitional advantage in Afghanistan whee tanspot and stoage systems ae not well suited fo expotes of peishable poducts. Weaknesses Inability to access affodable land Many inteviewees in the capet secto suggest that finding affodable land fo waehouses and othe facilities is a majo concen. 12 INVESTMENT HORIZONS: AFGHANISTAN

13 Developing supply of aw mateials Due in pat to the devastation of local souces of wool and dyes, most inputs fo the capet industy must be impoted though Pakistan. Some fims complained of having difficulty finding egula and affodable supplies of quality dyes, wool, and othe inputs. In some cases, impoting these aw mateials simply adds tanspot and customs costs, and in othe cases the quality of impots is suspect. High tanspot costs fo a heavy poduct In addition to having to pay to impot aw mateials, capet tades also epoted that almost 100 pecent of thei output was expoted, which inceases the basic costs of the business. Capet makes suggest that shipping lage volumes of capets a elatively heavy commodity fom Afghanistan via ai is not a viable option given the high cost and limited outbound ai cago space, although aifeight costs ae beginning to become moe competitive. Shipping though Pakistan o Ian adds costs and time. Developing finishing capacity in Afghanistan At pesent, nealy all capets ae shipped as quasi-finished goods to Pakistan fo final finishing. Ove the past two decades, Afghanistan s finishing infastuctue was eithe destoyed o outmoded. This not only inceases the costs that capet selles face, it also constains the gowth of the indigenous industy and ceates oppotunities fo infingements of intellectual popety. Capet vendos indicate that one finishing facility in Maza-e-Shaif has ecently opened, but it is not clea if the factoy has the capacity to lue back a significant amount of the finishing business pesently being shipped to Peshawa. Mining The mineals secto, which is scacely functioning in Afghanistan and still lagely in public hands, offes geat potential in the mid- to long-tem. Some of the moe significant consideations include: Stengths Consideable gowth potential Afghanistan has a wide aay of known mineal esouces as well as vast aeas whee the potential is not known. Few of its eseves ae being commecialized pesently, ceating a vacuum that can be filled by pivate investment. High demand fo constuction mateials As a esult of the econstuction boom that Afghanistan is pesently undegoing, thee is significant local demand fo mineal-based constuction mateials, including paving stones, cement and cement blocks, bicks, gavel, wood, steel, sand, glass, and tile. Pesently, even basic mateials like cement ae impoted fom Pakistan and Ian, offeing geat potential fo impot substitution. Costs associated with tanspot povide advantage to locally poduced mateials Assuming mineals-based poducts such as constuction mateials can be poduced at a quality on pa with impots, the costs associated with impoting such mateials confes an advantage to companies that poduce locally. Significant unmet demand fo enegy Afghanistan s domestic enegy needs emain unmet despite significant deposits of coal. When pivatization is complete and the egulatoy egime govening pivate investment is established, demand fo locally poduced coal is estimated to be steady. INVESTMENT HORIZONS: AFGHANISTAN 13

14 Weaknesses Legal egime in pocess While a daft mining law is awaiting appoval by the Cabinet, egulations and administative pocedues ae not yet in place to goven pivate secto involvement in mining. Of paticula impotance is detemining the tax egime facing mining companies. As a esult, the Ministy of Mines and Industy has not licensed any mineals exploation, extaction, o pocessing. Existing mining is eithe state-sponsoed o illegal activity. Incomplete pivatization pocess Cetain mining esouces, including coal fo which thee is a demonstated local maket, emain in the contol of failing state-owned entepises (SOEs). Repotedly, few of the majo mines ae opeational and those that ae have lagely eveted to non-mechanized coal mining and poduction. At the same time, pivate investment in mining is not yet pemissible. The lack of pogess on pivatization not only keeps cetain assets out of pivate hands, but also sends a geneally negative signal to investos about state intusion in the mining secto. Lack of effective govenment contol ove cetain mineal-ich aeas Some of the county s most pomising aeas fo mineals exploation, paticulaly along the bode of Pakistan, emain vulneable to attack by anti-state actos. This makes investments an uncetain poposition, unless coveed by investment insuance. Shotage of skilled mining labo Industy expets suggest that Afghanistan lacks a eady supply of skilled technical and manageial wokes. Because most of the county s majo mining facilities wee outfitted with Czech and Soviet machiney, even if individuals woking in the secto ae familia with machiney, it is likely to be outmoded. This will incease stat-up costs fo new investos, as they will need to ely on moe expensive foeign labo and facto in costs fo lodging and pe diems fo enginees, machinists, and manages, until local wokes can be appopiately tained. 14 INVESTMENT HORIZONS: AFGHANISTAN

15 Chapte I: Intoduction and Study Objectives Intoduction To suppot the joint assistance effots of the Multilateal Investment Guaantee Agency (MIGA) and the Wold Bank in the Islamic Republic of Afghanistan, MIGA commissioned a study in Afghanistan unde the famewok of the Entepise Benchmaking Pogam (EBP). Funded though a gant fom Gemany's Fedeal Ministy fo Economic Coopeation and Development (BMZ), the objective of the study was to benchmak the opeating costs and conditions in Afghanistan fom the vantage point of a foeign investo. Consistent with the methodologies and appoaches developed fo the EBP, the study allows fo futue compaison of Afghanistan and its neighboing and othe counties as locations fo investment. The study was conducted in Decembe of 2004, with the facilitation and suppot of the Afghan Investment Suppot Agency (AISA). The Afghanistan benchmaking study involved conducting a total of 32 inteviews with companies opeating in fou selected sectos: tanspot and logistics; food and beveage pocessing; capets and textiles; and mining. These sectos wee chosen as a esult of input fom AISA and MIGA based on an initial sense of these sectos as viable fo attacting investment. The inteviews wee guided by a detailed suvey of investo peceptions and costs designed by MIGA unde the EBP. The eseach team conducted suveys with indigenous, Afghan expatiate and foeign investos ove a two-week peiod. As discussed in moe detail late, the esults highlight the opeating costs, constaints, and peceptions of doing business in Afghanistan. The suvey analysis is supplemented by obsevations based on a thoough eview of gemane liteatue about the business envionment in Afghanistan and numeous inteviews with othe stakeholdes, including individuals woking in the dono community and govenment in Afghanistan. This publication is oganized in five sections. The Executive Summay pesents an oveview of the study's findings. Chapte 1 summaizes the poject backgound and objectives. Chapte II explains the EBP methodology and its application in Afghanistan. Chapte III summaizes the esults of the suvey data and pesents an analysis of the stengths, weaknesses, oppotunities, and theats also called a SWOT analysis of each secto. Endnotes fo efeences to souces noted in the main text appea as Appendix 1. Appendix 2 contains a list of aconyms and abbeviations used in this publication. Appendix 3 povides backgound on data definitions and esouces. Appendix 4 pesents tables of findings deived fom infomation obtained though company inteviews. Appendix 5 pesents tables of findings deived fom data collected fom local infomation souces. Appendix 6 is the bibliogaphy fo the study. INVESTMENT HORIZONS: AFGHANISTAN 15

16 Poject Objectives The benchmaking study povides valuable data on fou sectos with good pospects fo attacting investment tanspot and logistics, food pocessing, capets and textiles, and mineals. The study also povides insights into county competitiveness and investo peceptions that can infom the Afghan Investment Suppot Agency s stategic planning pocess and policy advocacy agenda, as well as povide the basic infomation aound which sectoal investment guides can be pepaed. The objectives of the study wee as follows: To compae the competitiveness of costs and conditions associated with the selected industies which could then be used by AISA in the fomulation of its foeign diect investment (FDI) stategy and maketing effots; To use SWOT analysis to identify the stengths, weaknesses, oppotunities, and theats in the selected industies; To identify the county s compaative advantages and make ecommendations fo impoving investment climate and attacting FDI; To set a baseline fom which impovements in the investment climate can be measued. The Afghan Investment Suppot Agency the pincipal agent fo attacting and facilitating investos is faced with a challenging task given the post-conflict chaacte of the county and intense global competition fo investment. Fomally opening in August 2003, AISA is a new and elatively small agency in the ealy stages of development. In addition to pomoting investment, AISA is also tasked with egisteing investos, ceating a one-stop shop fo investment infomation and appoval, and developing industial estates. Of the 31 cuent staff membes, only eight wok in investment pomotion and thee in industial estate development. 1 Two impotant tasks facing AISA include advocacy fo administative, egulatoy and policy efom that can impove the investment climate and disseminating infomation to investos about the opeating envionment and costs. The lack of had, eliable data compaing economic oppotunities and costs in Afghanistan to othe counties has poven to be a significant obstacle to maketing the county fo investment. To help addess this baie and stimulate FDI in the county, MIGA has pogammed the benchmaking execise in sectos with good potential fo attacting investment, including among both foeign and domestic fims. (Specific ecommendations pepaed fo AISA ae not included in this publication.) 16 INVESTMENT HORIZONS: AFGHANISTAN

17 Chapte II: Methodology Puposes of the Benchmaking Pogam MIGA s EBP methodology is about competitiveness using an established set of citeia to gauge a county s ability to compete with othe sites and locations available to the investo. Fo the puposes of this execise, competitiveness is defined as a county s o egion s elative ability to attact foeign diect investment. When a company has decided to open a factoy, epesentative office, call cente o waehouse, it is faced with the need to evaluate a vaiety of sites and choose the best one. This often implies a majo investment in company esouces and the daunting task of obtaining and analyzing a vast body of infomation. Benchmaking is a tool that companies use to oganize thei eseach on factos impotant to thei investment decisions, and to assign a compaable measue of value to each bit of infomation accoding to thei own pioities. When all data is in quantitative fom, it is possible to assign scoes and ank the most attactive options. Benchmaking is especially effective in helping investos educe a long-list of potential location options to a shot-list that can optimize the investo's poject and location equiements. It is only at the shot-listing stage that detailed financial analysis, due diligence and actual site visits usually take place, as it is too costly and time-consuming to go to that level of detail at the long-list phase. Investment pomotion agencies (IPAs) ae inceasingly using a benchmaking appoach simila to that of the investo to detemine how attactive thei counties o egions ae fom the investo s viewpoint and how thei stengths and weaknesses compae to those of othe sites. Assumptions MIGA s benchmaking appoach begins with a set of assumptions to be tested in the field though empiical data. It assumes, fo example, that flexible labo egulations, a steady supply of electic powe, abundant labo, and low telecommunications costs make a site moe attactive to foeign investos. These assumptions fall unde two majo categoies: costs and quality factos. Assumption 1: Lowe costs make an investment site moe attactive. The assumption is that when eseaching a site, all othe factos being oughly equal, an investo will pefe lowe costs to highe costs. Fo instance, assuming that the education level and poductivity of the wok foce is simila in two counties, the investo will pefe the county whee labo costs ae lowe. Assumption 2: Highe quality makes an investment site moe attactive. Cost factos being equal, the benchmaking appoach assumes that highe quality of INVESTMENT HORIZONS: AFGHANISTAN 17

18 infastuctue, sevices, and wok foce ae moe attactive to the investo. Fo example, if the electic powe costs in two counties ae simila, the investo will pefe the county that expeiences fewe powe outages. The EBP Model In ode to test the initial assumptions, MIGA has developed the EBP benchmaking model. This povides a famewok that can be used by IPAs to evaluate thei counties o egions in the same way that investos do. The model attempts to captue the pespective of the investo by administeing a detailed suvey to investos aleady functioning in the county in question. The suvey obtains infomation fom these investos as to thei costs on the gound and the quality of infastuctue and sevices of that site. Fo some factos elated to quality consideations, the model calls fo investos to assign values accoding to a basic ating scale of 1 to 5 (whee 1 = poo and 5 = excellent). The model obtains infomation fom investos on cost and quality factos in the county o counties being studied, as shown in Table 2-1, below. Table 2-1: Cost and Quality Factos of the EBP Model Cost Factos Labo costs fo manages, pofessionals, technicians, skilled and unskilled labo Wage buden equied by law and customay employe benefits Telecommunications costs (land lines, mobile phones, intenet connections) Cost of electic powe, wate, waste wate teatment Cost of maintaining a back-up geneato Tanspotation costs Inteest ates available fo cedit Puchase / lease ates Quality Factos Availability of qualified local pesonnel Language skills of the local labo foce Flexibility of labo egulations Annual tunove of pesonnel Availability of local poduction inputs and equipment Efficiency of local customs administation Quality of tanspotation sevices Quality of telecommunications Reliability of electic powe and wate Quality of life factos Govenment incentives 18 INVESTMENT HORIZONS: AFGHANISTAN

19 The EBP model also povides a poject desciption fo each secto including the key poject paametes to allow the estimate of poxy opeating costs into a epesentative secto-specific cost stuctue. Key poject paametes include the numbe of staff, the size of office o site, utility consumption, and the citical location equiements. The poject desciption in the methodology enables compaisons between counties, and between cuent and futue studies, since the same poject desciption is used when a specific secto is selected fo analysis unde the EBP, no matte the geogaphic focus of the paticula study. (Fo epesentative cost stuctues in Afghanistan, see Figues 3-1, 3-2, and 3-3 in Chapte III: Results.) Futhemoe, the model identifies investment motivation factos, that is, the easons the investo decided to locate in the county o egion being benchmaked. One of the model s geatest stengths is that it allows the eseaches using the model to select a goup of industies believed to be of impotance to the county o egion being studied. It then measues the ability of the county o egion to compete fo foeign diect investment in each of those industies by taking into account the unique equiements of each industy o sevice secto and evaluating the county o egion against those equiements. Fo example, a textile dyeing factoy may equie an abundant, low-cost wate supply and a lage chemical teatment plant, wheeas a call cente equies an excellent telecommunications infastuctue. If the site being studied has abundant, low-cost wate supply but a poo telecommunications infastuctue, the model will eveal that the site is less competitive fo attacting a call cente than a textile dyeing factoy. In coodination with AISA, the eseaches chose fou industies believed to be of geat cuent and futue impotance fo Afghanistan: (a) logistics and tanspot, (b) food and beveage pocessing, (c) textiles and capets, and (d) mining. Thitytwo companies opeating in these fou industies wee inteviewed fo this study. The EBP methodology has seveal othe impotant chaacteistics that make it a valuable appoach: It measues the county s competitiveness at a specific point in time. The EBP methodology is based on the concept of captuing a "snapshot" of the investos pespective fo each of seveal specific sectos. This "snapshot" povides a baseline fo monitoing pogess. The methodology is most effective when epeated on an annual o semi-annual basis so that it can identify investment tends and eveal aeas of declining o inceasing competitiveness in a county. It selects the pimay counties and specific sectos. The selected counties and sectos ae the object of in-depth eseach into the maco, mico, quality and cost chaacteistics of thei business envionments. The eseaches may also choose "compaato" counties that have achieved a level of success in one o moe of the subject sectos. Compaisons can then be made among the pimay counties, and among the pimay and "compaato" counties. Within the EBP famewok, the data obtained in the Afghanistan study may be incopoated into futhe compaative analysis of: (1) Afghanistan and its neighboing counties, (2) Afghanistan and egional and/o global leades in the fou subject sectos, and (3) Afghanistan's business envionment at the time of the study and that at some late date. It depends both on desk eseach and on field wok, seconday souces as well as pimay souces of infomation. The methodology equies that the analysts eseach county-specific infomation in intenational seconday souces as well as obtain infomation diectly fom the investos opeating in the county and othe local souces of infomation in the county o counties to be studied. INVESTMENT HORIZONS: AFGHANISTAN 19

20 It is geogaphically limited. Conditions within a single county can vay widely, and choosing five companies fom diffeent egions, especially fo a county as lage and divese as Afghanistan, may dilute the usefulness of the data. Theefoe, the benchmaking methodology is geneally limited to a adius of 20km fom the capital city. This study was limited to fims with offices in Kabul and its suounding aea except whee companies fo the chosen sectos wee only available outside this egion. Fo example, mining activities ae caied out in aeas thoughout Afghanistan, so the consultants wee equied to inteview company epesentatives of mining companies with opeations outside Kabul. In addition, the EBP methodology can povide diect suppot to local investment pomotion agencies in the following ways: It identifies sectos whee the county o egion has a stong competitive position, elative to its competing sites, and theefoe should be pomoted; It assesses the site s stengths and weaknesses fo inwad investment in paticula sectos; It identifies key policy aeas that need impovement and should theefoe be the focus of the IPA s lobbying effots; It assists an IPA in developing secto-specific key selling messages to attact inwad investment; and It povides IPAs with specific infomation that is fequently equested by potential investos. Data Gatheing The data used fo the benchmaking model is gatheed fom thee types of souces: Company inteviews: The bulk of the infomation is gatheed though company inteviews using a suvey. The suvey equests both quantitative and qualitative infomation and identifies the motivating factos behind the investo s decision to locate at that site. Five to ten companies pe industy ae inteviewed in each county being benchmaked. Foeign investos ae usually inteviewed, but in the absence of foeign investos, local investos ae often suveyed. Pefeence is given to the leading companies in each industy. Intenational souces: Desktop eseach is used to gathe impotant data fom intenational souces such as Euomoney s County Risk Poll, Tanspaency Intenational s Couption Peception Index, and macoeconomic statistics found in the Wold Bank s Wold Development Indicatos. Local souces: Local souces such as tax specialists, eal estate agents, constuction companies, govenment ministies and utility povides povide infomation equied by the methodology such as local tax ates, typical ental and land puchase ates, and electic powe and wate costs. This infomation is ideally gatheed in-county. All data must meet thee citeia: (1) Cedibility of the souce all infomation should be fom a espected and eliable intenational o national souce and coss-checked against othe souces; (2) Compaability of the data-point acoss locations; and (3) Updateability, that is, eseaches should be able to etun to the souce afte six months o a yea to obtain cuent infomation. Fo the Afghanistan study, expatiate Afghan investment was consideed to be foeign diect investment. Given Afghanistan s post-conflict eality, FDI was not pesent in cetain sectos (e.g., capets and textiles), and in anothe secto, the 20 INVESTMENT HORIZONS: AFGHANISTAN

21 majo playes wee local investos (food pocessing). At the time of the inteviews, only in the tanspot and logistics secto was thee a numeically significant numbe of foeign investos. This was due in pat to the pesence of intenational oganizations and the militay in need of supplies. Finally, in the mining secto vey few duly egisteed companies ae opeating, given that the industy is dominated by failing state owned entepises (SOEs) and indigenous mico-entepises, so the sample size fell shot of the nom. The Pocess The fieldwok fo the Afghanistan study was conducted in mid-decembe 2004, following seven days of pepaatoy time, document eview, and coodination with AISA. Fieldwok was conducted by a team of consultants fom The Sevices Goup, Inc., in conjunction with two local consultants, who wee engaged to assist in completing the study and in gatheing equied data in Afghanistan. The field eseach yielded the following inteviews: Tanspot and logistics Twelve companies including feight fowades, ai, sea, and land tanspotation companies, small package and document delivey companies, pocuement and supply companies, and povides of waehousing and distibution sevices Food and beveage pocessing Out of the a total of seven companies inteviewed, thee wee died fuit and nut pocessos, two distilled wate bottles, one soft dink bottle, and one was a vegetable oil poduce Capets and textiles Ten capet manufactues/tades Mining Of the thee opeating mineals elated companies in Kabul, one was a mineals manufactue and two wee end-uses of locally mined mateials. In addition to company inteviews, the consultants met with numeous othe stakeholdes to gathe infomation on the geneal investment envionment, business constaints, and legal and policy issues as well as to collect documents gemane to the study. INVESTMENT HORIZONS: AFGHANISTAN 21

22 22 INVESTMENT HORIZONS: AFGHANISTAN

23 Chapte III: Results Oveview of Foeign Investment in Afghanistan The esults pesented heein ae dawn pimaily fom the data gatheed though the suvey inteviews with fims opeating in Afghanistan in the fou sectos examined. As well, seconday souces, including pevious Wold Bank and othe studies, and inteviews with a wide aay of othe stakeholdes infom the analysis. Challenges The post-taliban Govenment of Afghanistan (GoA) and its intenational patnes have made geat stides in speaheading econstuction, jump-stating the economy, esettling thee million efugees and intenally displaced pesons, and developing a policy and egulatoy famewok to suppot pivate investment. Indeed, appeciating the geat pogess made in Afghanistan in the past thee yeas equies an undestanding of the depths of the county s economic, political, and social decline duing the wa yeas. Emeging out of some 23 yeas of civil stife and isolation, Afghanistan emains one of the pooest counties among the Wold Bank s membeship. By 2002, its infastuctue and poductive assets wee lagely destoyed o degaded though neglect, moe than five million Afghans wee living as efugees aboad, 2 and a geneation had emeged with poo access to education, healthcae, and the othe essentials to pomise a healthy and poductive life. The Wold Bank estimates that seven million people emain vulneable to hunge and many odinay citizens ae dependent on humanitaian aid. With ates unning as high as 50 pecent in Kabul and even highe outside of the capital, unemployment and undeemployment emain majo poblems in Afghanistan. Goss domestic poduct (GDP) is estimated at US$4.7 billion, which tanslates to a GDP pe capita of about US$212 pe yea. 3 The Wold Bank estimates that non-dug elated GDP gowth ates, coming fom a vey low base in 2001, have isen by 45 pecent ove 2002 and Table 3-1: Afghanistan at a Glance GDP (2003) US$4.7 B GDP pe capita US$212 GDP gowth (2003) 27 % GDP by shae: Agicultue 52 % Manufactuing 26 % Sevices 22 % Inflation (2003) 5.2 % Population (2003) 22.2 M Wokfoce (2001) 11.8 M State evenues (2003) US$200 M State expenditues (2003) US$550 M Electicity consumption (2001) million kwh Licit expots (2002) US$98 M Impots (2002) US$1.007 B Male life expectancy (2003) Female life expectancy (2003) Souces: AISA, U.S. Depatment of State, Afghanistan Pofile, With much success, dono assistance has been mobilized to help etain pesonnel, estuctue institutions, and efom the policy making pocess, but the govenment is just eaching the point when it can manage basic state functions like collecting taxes and contolling its bodes. This has been accomplished in the context of nealy a quate centuy of stife and isolation duing which Afghanistan s govenment lagely lost the ability to povide public sevices. The newly econstituted govenment is still chaacteized by weak institutions, poo pesonnel pefomance, and a tendency to evet to outmoded command-and-contol style decision making, but intenal efoms have set the civil sevice on the ight path towad deliveing efficient sevices. Given this situation, thee is a widespead consensus that pivate secto-led economic gowth is citical to poviding Afghanistan with the employment and evenue base to enable the county to function without massive inflows of dono assistance. Wisely, pivate secto development was ecognized as a coe goal in INVESTMENT HORIZONS: AFGHANISTAN 23

24 The Natue of the Infomal Secto in Afghanistan One facto in Afghanistan s post-conflict tansition is the infomal natue of much of the economy. As the state s ability to egulate and monito the pivate secto collapsed duing the wa yeas, Afghans elied on a ange of infomal activities fo thei suvival. Data on the size and chaacteistics of the infomal secto ae had to gathe in any economy, but paticulaly so in as lage and ual a county as Afghanistan. Howeve, infomal secto activity can be seen in vitually all sectos of the economy, including agicultue, small-scale mining, and tading. While the Ministy of Commece and AISA have egisteed some 9,000 companies since 2002, Ministy of Finance advisos estimate that fewe than 10 pecent of companies pay income taxes and only 3,000 fims have eceived a tax identification numbe. In Afghanistan the illicit cultivation of poppies fo opium and heoin poduction epesents a lage shae of the infomal secto, accounting fo 35 pecent of national GDP by Wold Bank estimates. (continued on next page) the county s 2002 National Development Famewok (NDF). In the NDF, the govenment expessed a clea commitment to developing a competitive expot-oiented pivate secto and to adopting policies and pogams that enable the pivate secto to be the county s engine of gowth. While taditional entepeneuism is notable among Afghan fims afte yeas of opeating in exile o beyond the contol of laws and egulations, the Afghan pivate secto can be chaacteized as small in scale, lagely infomal, and unable to compete in the global maketplace. Theefoe, a cental stategy to facilitate pivate secto-led gowth is to boost fomal investment levels in post-conflict Afghanistan, including investment fom Afghan expatiates and foeignes. As seen in the columns (beginning at left), the infomal natue of Afghanistan s economy poses seveal development challenges. Pospects and Pogess Yet despite the challenges facing pivate entepise, business has come back to Afghanistan and the pace of impovements in the investment climate is notable. As GDP gowth estimates suggest, the economy is gowing apidly, albeit fom a slow pace duing the Taliban yeas. One can obseve a steady impovement in the sevices and goods available, and a few significant multinational copoations (MNCs) have an investment pesence in the county. Thee ae cuently some hidden and tansient advantages to investing in Afghanistan simply because of the failue of the govenment to collect taxes and chage fo public sevices. Fo example, few fims pay taxes except fo customs duties and most dill thei own wells. The MNCs that have invested in Afghanistan ae in the tanspot and logistics secto (DHL), food pocessing (Coca Cola), banking (Standad Chateed Bank, National Bank of Pakistan, Habib Bank Ltd., and National Bank of Punjab), touism (Hyatt Hotels and Seena Hotels), and tade (Toyota Motos and Alcatel Tade Intenational). AISA epots the value of investment at upwads of US$650 million since 2002 fom a total of 25 counties. Accoding to AISA, the lagest investo county is Tukey, with pojects amounting to about US$120 million, followed by Gemany, India, and Pakistan. Amounting to an estimated US$180 million, the telecommunications secto has thus fa attacted the most investment. 5 Table 3-2: Investment Pojects in Afghanistan Secto Investment (in US$ M) Diect Employment Constuction $389 54,800 Sevices $213 4,300 Industy $150 21,000 Ago Business $ Total $ ,635 Souce: AISA. The pimay taget goup of potential investos fo the county is the Afghan diaspoa, which has obvious cultual, family, and histoical ties. Fo the pupose of this study, Afghan diaspoa investment is consideed FDI. Indeed, many of the 24 INVESTMENT HORIZONS: AFGHANISTAN