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Aynak and others – investing in Afghanistan…

June 13, 2012

By Tim Foxley

Summary: despite the theoretical potential economic wealth on and under Afghan territory, security, corruption, naivety and political uncertainty offer many very real reasons why money is unlikely to be flowing into Afghan government coffers any time soon…

Still under there somewhere: Afghan economic wealth as seen in 2006

There have been many excitable headlines over the years regarding the economic potential buried underneath Afghan rock and sand.

WASHINGTON — The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself, according to senior American government officials.  The previously unknown deposits — including huge veins of iron, copper, cobalt, gold and critical industrial metals like Lithium — are so big and include so many minerals that are essential to modern industry that Afghanistan could eventually be transformed into one of the most important mining centers in the world, the United States officials believe.”

This cautionary tale from the Wall Street Journal highlights the likely reality of many of the development projects underway – or, perhaps more crucially, not yet underway.  The Chinese investment in the Aynak (Logar province) copper mines has been valued at billions of dollars.

“Mes Aynak contains $40 billion worth of untapped minerals, by some estimates. Afghanistan’s finance minister, Omar Zakhilwal, says he expects the project to be generating at least $300 million in annual royalties for the government in Kabul by 2016. That would account for some 15% of its civilian budget.”

The China Metallurgical Group Corporation signed a deal with the Afghan government in 2007 and, as far as the WSJ can make out, nothing much has happened in the way of digging out copper.

“The project, however, has been plagued by delays and controversies from the start. Around the end of 2009, an Afghan mining official left his post shortly after an allegation surfaced in the U.S. press that he had accepted a bribe in connection with the awarding of the contract, an accusation that he and the alleged giver both denied.

According to a 2010 cable from the U.S. embassy in Beijing released by WikiLeaks, the organization that releases previously private documents and cables online, a commercial attaché at Afghanistan’s embassy in Beijing told U.S. diplomats that Afghan officials viewed the Chinese investors as “a cow to milk” for bribes.”

Nothing there that can’t be got out given 10 years of peace…

I suspect that the Aynak situation is merely the tip of the iceberg: let’s also remember that versions of the TAPI (Tajikistan, Afghanistan, Pakistan, India) pipeline have been under negotiation for years:

Long-awaited TAPI pipeline close to become reality

Islamabad, June 13, 2012—Two companies of Pakistan and India Wednesday signed Gas Sales and Purchase Agreements with Turkmenistan that will lead to the supply of up to 90 million cubic meters of natural gas a day via the Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline.

“After more than 20 years of delicate negotiations, a 1,800-kilometer natural gas pipeline that connects one of Central Asia’s largest energy suppliers with South Asia’s critically underserved market has come one step closer to reality, marking an unprecedented new chapter in regional relations,” said a press statement of Asian Development Bank received here Wednesday.

The “New Silk Road” – still more of a concept rather than a specific project – is intended to help Afghanistan regain its historic role as the trade, transport and communications link between West and East:

Bumps on the New Silk Road, May 18 2012

As the North Atlantic Treaty Organization (NATO) meets on May 20 in Chicago, coalition partners hope to stabilize Afghanistan with development projects beyond 2014. One initiative is the “New Silk Road,” which aims to revamp Afghanistan’s ancient position as the regional trade hub linking the West and Far East. But there are several roadblocks to turning this fantasy into reality.

The New Silk Road would develop the economic and political connectivity of countries across the region through the improvement of transit and energy infrastructure, the liberalization of trade barriers, and the removal of bureaucratic customs procedures.

While such a project seems feasible at an academic level, U.S. officials have been pushing this scheme since the Silk Road Strategy Act of 1999, with little effect.

First, Afghanistan’s instability poses the most daunting challenge…Second, the relationship among countries in Central Asia remains strained, making regional political and economic integration that much harder…Unsurprisingly, some regional actors view America’s New Silk Road with immense suspicion. Russia, an important member of the Shanghai Cooperation Organization, has been critical of U.S. motives for the initiative, while China, another member, is building its own version of the Silk Road that has legitimacy in the eyes of many in the region.

Finally, Pakistan and Iran, both critical players in the region, have extremely tense relations with the U.S. As Andrew C. Kuchins, one of America’s leading experts on Central Asia says, “Iran and Pakistan are skeptical of the New Silk Road strategy to the extent that they view it as a U.S. plan.”

So here is my generic “Problem checklist” for a hypothetical  development project in Afghanistan for the next five years (at least):

  • National security situation – large-scale insurgency unlikely to die away
  • Local security – militias, warlords, regional actors all wanting a share (see this on Dostum)
  • Project infrastructure and personnel makes tempting and tangible targets for attack or threat
  • Corruption of Afghan national and local authorities
  • Unrealistic or misguided expectations from the local population (fuelling local violence)

“This mine is not going to thrive if these communities fail,” said Michael Stanley, the lead mining specialist at the World Bank. “The No. 1 risk is the social license to operate.”

  • Unrealistic or misguided expectations from the Afghan government (China is only investing for the benefit of Afghanistan, right?)
  • Economic developments can become political footballs – anything going across borders can be closed at a moment’s notice – rail and road routes, pipelines (e.g. Pakistan closure of NATO supply routes.
  • Shrewd investors will have “get out clauses” allowing projects to be closed, delayed, suspended as necessary.  Aynak:

 “An Afghan mining minister called the railway commitment a “nonnegotiable” part of the deal with the Chinese, according to a 2010 U.S. diplomatic cable released by WikiLeaks. But Afghan officials now say the Chinese aren’t contractually obligated to build a railroad. They are expected to study the rail project but can shelve it if they conclude it isn’t worth the investment, Mr. Shahrani, the mining minister, said in an interview.

Other plans envisioned when the contract was let in 2007 also have yet to materialize, among them a 400-megawatt power plant and a coal mine.”

These factors all seem to apply to Aynak and I suspect most other potential mining ventures, along with the “New Silk Road”, the TAPI pipeline and others (Iranian rail link into Herat and Uzbek rail into Mazar?) will suffer from similar issues.

Afghanistan – not looking like a good investment at present, despite the theoretical “potential”…

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One Comment leave one →
  1. some afghan permalink
    July 15, 2012 3:43 pm

    It’s probably a good thing that it’s not a good deal at present, otherwise we’ll all be with our pants down.

    Look at it this way. The Indian contract was that Singh comes to Kabul and intices baldi and his cronies with $500m to get the Iron Ore deal … right.

    Then guess what, they get the deal, and don’t forget that they get it for $1-2/metric ton. Yes that’s 60% Fe2O3 for $1-2.

    Now with my schooling I calculated that Iron Ore prices are about $100/tonne. Yes it’s true that you have to concentrate it a bit, so let’s take 10% off for that. Oh, you have to transport it. Yes I’ve done the calc for that also, It’s $28/tonne by road.

    Well you might say that the Indians are building a rail network and that there where no other nbidders, but you will be wrong with the second bit.

    This is stealing from the Afghans.

    A real good price would have been a minimum of $25/metric tonne raw. Even We Afghans could have done it, but with NATO protecting these thugs, what can we do.

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