AFGHAN AMERICAN CHAMBER OF COMMERCE ONLINE NEWSLETTER JUNE 2016 Greetings to all Afghan-American Chamber of Commerce Members and Friends of the AACC! This edition of our AACC newsletter includes some new content from Clements Worldwide on the role that risk management and insurance can play in structuring foreign direct investment and trade relationships with fragile nations such as Afghanistan. We welcome their input as a valuable member of the Afghan and American business community helping to forge strategic business decisions through risk mitigation and related services. For your information and according to AACC by-laws, the AACC held its 13 th annual General Assembly meeting on Saturday, May 14, 2016 from 10:30 A.M. to 2:30 P.M. at the "Washingtonian Ballroom" of the Westfield s Marriott Washington-Dulles Hotel located at 14750 Conference, Center Drive, Chantilly, Virginia, U.S.A. The AACC welcomed nearly 100 attendees and participants for this annual meeting which summarized AACC activities over the last year and discussed the current state of private sector development in Afghanistan and U.S. public and private sector assistance to Afghanistan s private sector economy. In addition, the General Assembly Meeting discussed future program activities, held elections for members of the Board of Directors and received an official financial report from the AACC Treasurer. The AACC is pleased to announce the following results from the 2016 election: AACC Executive Committee Members include: Sulaiman Lutfi, Chairman of the Board, Hon. Don Ritter, Sc. D., President and CEO, Jeffrey Grieco, Vice President, William C. Joern, Board Secretary, Yama Azami, Treasurer, Leslie M. Schweitzer, At-Large Board Member, Doug Brooks, At-Large Board Member. On a more personal note, AACC also proudly bestowed the AACC Distinguished Service Award to Ms. Sahar Javidtash, former AACC Office manager and introduced AACC s new Program Associate, Mr. Haseeb Habibi, who can be contacted at: info@a-acc.org for new member or current membership questions. Thank you. Sulaiman Lutfi Don Ritter Jeffrey Grieco Sulaiman Lutfi Hon. Don Ritter, Sc. D. Jeffrey Grieco Chairman President & CEO Vice president Foreign Direct Investment (FDI) and Risk Management for Afghanistan
By Scott Lockman, Director of Commercial Insurance, Clements Worldwide Afghanistan has suffered from over a decade of war. It has also benefitted from over a decade of war and related spending. According to the country s Ministry of Finance, almost 100 percent of its development budget and 45 percent of its operating budget is externally financed, with the U.S. being the major donor. The result was a decade of double-digit economic growth. Afghanistan s GDP increased from $3 billion in 2002 to $20 billion in 2012. This increase in output, built on war-related spending, was not sustainable and much of it did not produce returns as determined by standard economic measures. Yet this external financing did enable investments in education, health care, infrastructure and other necessary building blocks of long-term growth. And, critically, the taste of prosperity and liberalization this growth encouraged, particularly in urban areas, gave many Afghans hope for a better future. Yet the drawdown of foreign military forces has put even these tenuous gains at risk. The drop in foreign military spending has been accompanied by a fall in foreign aid expenditures. For example, USAID spending fell by 50% between 2012 and 2013. This was part of a larger trend. According to the World Bank, in 2012 net official development assistance to Afghanistan totaled $6.7 billion. In 2013, that figure fell to $5.2 billion. In global terms, this was still a large number. But the drop in percentage terms was significant and the trend line is clear. It is not surprising this has all taken on toll on economic growth. According to the World Bank, Afghanistan s annual GDP growth dropped from around 12 percent in 2012 to around 3 percent in 2013, remaining at that level in 2014 and 2015. While the National Unity Government promised stability, it is generally acknowledged it has not been effective at implementing key economic and other reforms that would help reignite growth sufficient to lift Afghans out of poverty. Perhaps most troubling, foreign direct investment (FDI) never large--has slowed to a trickle. According to the IMF, in 2010 FDI in Afghanistan totaled $211 million. In 2012, it fell to $83 million. By 2014, it was $54 million. If a country routinely receives FDI that exceeds 5-6% of GDP each year, it is considered to have a
very good business climate, including basic economic opportunities and the governance institutions to realize them. As the chart below indicates, Afghanistan s FDI is below 1% of GDP and falling. It is this source of external funding, FDI, that must increase if Afghanistan s economy is ever to achieve sustainable growth and political stability. FDI will hit critical mass when the level of risk falls in Afghanistan. Of course, that will require a political solution that accommodates the interests of relevant states and ethnic groups and leads to stable and reliable governance. Given that reality still lies in the future, there are other steps private companies (whether Afghan or foreign) and other entities (like NGOs) can take to reduce risks for existing investment or human capital, while managing risk to protect themselves against devastating losses. These steps essentially come down to managing privatized risk, the threats to business interruption, staff and property usually managed through stable public institutions. The following recommendations are strategies investors interested in Afghanistan should consider using: Recommendation #1 - Better integrate and elevate risk management services: This means improved emergency planning, better training, more integrated security planning and other techniques to manage and reduce risk overall. This includes testing an emergency plan, which typically highlights gaps. To achieve this, organizations investing and operating in Afghanistan (or in any fragile state) need to elevate the role of risk management executives. They are more than simply security consultants brought in to protect operations. Risk managers can and should play a role during actual investment planning and implementation. This enables risk managers to help shape initiatives that reduce the need for security personnel longer term and perhaps build the capacity of host nation institutions to support the protection of critical investments on the ground.
Organizations also need to institutionalize risk management at the country and project level. If HQ is the last to know they often cannot take the necessary steps to minimize losses in a variety of situations, whether it be an increase in civil protest or disobedience, increases in raids or political violence, or worker strikes and disruption. Requiring weekly, or even daily situation reports, or other reporting tools can help ensure lines of communication remain open and any on-theground operating changes can be immediately spotted. Recommendation #2 Now that Afghanistan has achieved WTO accession, hedging risk for improved trade and foreign direct investment becomes even more important. With Afghanistan acceding to the World Trade Organization (WTO), the hope is that it can rapidly integrate its economy into the prosperous regional economy of Central Asia and beyond but this is not a given. The WTO accession is a positive step and provides hope regarding economic development due to lowering of tariff and non-tariff barriers, but that must be tempered with the situation on ground where attacks such as the recent Kabul bombings in late April killing 64 and wounding over 300 continue to threaten development. Now more than ever it is critical that your elevated risk manager have access to experts on this country because underwriters and banks offering trade credit have reason to be wary and the Afghanistan s WTO status will not change that. Experts can provide services and advice regarding trade and transport route management, customs management and mitigation, political risk, trade facilitation, etc. that can help counter the security challenges that are limiting investment. There are entities that provide political intelligence and situational analysis for Afghanistan (and other countries). Although the quality of these services can sometimes vary per provider and country of interest, experienced firms can provide high quality, useful insights into potential risks investors, sales or marketing organizations might encounter, especially when starting operations or support services in a new location. As important, risk management consultancies can help investors manage operations and personnel in ways that reduce the likelihood insurance coverage will ever be used. The identification of reliable local partners, more secure delivery routes and other seasoned professional counsel to increase operational efficiency and resiliency is available from a variety of risk management organizations, including insurers. Take for example fleet management - a critical cost for any organization transporting goods. An insurance broker partner can help you lower your insurance costs by looking for trade routes with less risk or can provide insights in managing customs regulations. Security consultancies can also provide specific expertise preparing your staff to avoid a kidnap and ransom situations or medical evacuation or managing an incident where these extreme risks do occur. With the right international insurance, these types of services would be covered under the insurance policy. Recommendation #3 Conduct a regular international insurance program review with a qualified and experienced insurer. Insurance coverage and requirements for insurance will vary by country, so a one-size fits all approach to an insurance policy is not sufficient. As it relates to Afghanistan given the variety of risks, it is important to pursue extensive coverage, including property coverage with political
violence, evacuation, K&R, business interruption and salary continuation policies. If available full political risk insurance is also encouraged which would cover the most extreme circumstances including forced abandonment and currency inconvertibility. An international expert can help determine how to most efficiently spend limited funds to secure customized coverage for specific needs. Of course, there will be a cost to this, but it will help ensure business continuity in even the most high-risk environments. Companies may have heard in the past that some of these insurance products are not available given the high-risk in Afghanistan. This is not the case. It will be harder to find policies if you are new to operations in Afghanistan, because insurers worry that you are not prepared for the specific geo-political challenges in that country. But the insurance market does still have capacity. It helps to work with an insurance broker experienced in the region. In closing, Afghanistan continues to face many challenges. Patient and appropriate foreign direct investment remains a key tool to meet them. As in any country, tailored risk management strategies are what make that tool usable. Scott Lockman is Director of Commercial Insurance at Clements Worldwide and can be reached at: slockman@clements.com. The Afghan-American Chamber of Commerce (AACC) is a not-for-profit organization dedicated to promoting a strong U.S. Afghanistan economic and commercial relationship. The AACC is proud to provide these articles and information from or on behalf of our members. Please feel free to contact the AACC or our contributing member(s) at their email listed above should you have questions about this article. Should you require any additional information, please feel free to contact the AACC office at (703) 505-0892. Please note our new address at the Ronald Reagan Building as:
Afghan-American Chamber of Commerce (AACC) Ronald Reagan Building and International Trade Ctr. 1300 Pennsylvania Ave. NW G003 - The Atrium Washington, D.C. 20004, USA