UPCOMING PROGRAM: AACC's 12th Annual General Assembly Meeting (GAM) for 2014
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Probably some of you recall that a few years ago I argued in front of you that Afghanistan’s business legal/regulatory environment is quite liberal, a trait which investors should find attractive. I still believe that based on our business- friendly legal/regulatory environment, we can compete with other countries for attracting investors. Today, I will reiterate some of my arguments regarding the merits of our legal/regulatory business environment that you might be familiar with. Furthermore, I will talk about specific sectors which we believe offer great investment opportunities. Here I would like to be a bit elaborate. So, please bear with me. I would also address the issue of post -2014 expected increase insecurity and uncertainty which usually make investors, hesitate to commit.
Ladies and gentlemen: I am sure that you would agree with me that investors find a combination of a liberal legal/regulatory regime, adequate development of infrastructure, and the availability of both skilled as well as low cost unskilled labour force quite attractive for doing business. I think in the past 10 years, President Karzai’s government has established a very business friendly legal/regulatory framework; has, at the very least, built the minimum level of infrastructure required for modern businesses, and our vocational training institutions have graduated a large number of skilled workers; I should also add that there are also millions of less skilled Afghans who are looking for work at much lower wages.
Let me elaborate on our liberal legal/regulatory business regime. As you know, our constitution includes provisions on the sanctity of private property and establishes a market economy as our economic system. Our Central Bank Law establishes the independence of the Central Bank and the autonomy of our monetary policy. Our Banking Law regulates the operations of a privately owned banking system in accordance with the principles of a market economy. We have adopted a very liberal investor-friendly foreign exchange system which allows people to legally bring money to the country and easily take it out again. We have allowed banks to open foreign exchange accounts. We have adopted a Financial Management Law that emphasizes fiscal discipline and management of public finances in line with best international practice. Our Income Tax Law emphasizes simplicity and our tax rates are the lowest in the region. Similarly, we have the lowest custom tariffs in the region and our tariff categories are simple and few in number. Our Investment Law is very investor friendly. We allow 100% foreign ownership of enterprises, easy repatriation of profits, treat foreign investors identically to domestic ones, and we allow accelerated depreciation as well as tax- holidays.
In the past year the Ministry of Commerce and Industry has reviewed and updated the legal framework for business in Afghanistan. Amendments have been proposed to the Law on Corporations and Limited Liability Companies, the Law on Arbitration and the Private Investment Law with the intention to make all of them even more business friendly. Final drafts of a Bankruptcy Law, a Competition Law and a Consumer Protection Law and regulations for a range of sectors have been sent to the Ministry of Justice for processing.
Similarly, the newly revised Mining Law of 2010 makes it significantly easier to invest in extractive industries. It streamlines bidding processes and has reduced royalties.
In short, we are well on the way to creating a modern, world class, business friendly legal framework. However, there is some concern that in spite of a business friendly legal framework, the business climate in Afghanistan is compromised by administrative obstacles. Although Afghanistan ranks quite well with respect to some of the World Bank’s Doing Business Indicators it is not doing well with regard to others.
The government intends to improve its DBI ranking. At the Ministry of Commerce and Industry, we are focusing this year on improving our rank with regards to the trading across borders indictor, the closing a business indicator, and the protecting investors indicator. Next year, in addition to these indicators, we will focus on registering property and dealing with construction permits. Our intention is to improve our ranking to the point where we sit above the global average by the end of 2014. Perhaps more significantly we intend to address the concerns of the investors across all areas even in those which are not measured by the DBI indicator.
Investors also desire fiscal and monetary stability. Currently we are operating under our third IMF program. Throughout the past decade we have exercised great fiscal discipline - we have never had a budget deficit. We successfully negotiated a 100% write off of our old loans, totaling $11 billion, under the Paris Club agreement. We are now one of the least indebted states in the world. We have also pursued a tight monetary policy which has ensured that inflation is low and the exchange rate for our national currency, the Afghani, stable.
For many years Afghanistan did not have an official industrial policy. Many Afghan industrialists complained that the government’s laissez-faire approach to industrialization has made it very difficult for infant industries to succeed in Afghanistan. In response, almost one year ago, the Ministry of Commerce and Industries prepared an industrial policy which was approved by the cabinet two months ago. Consequently, the government will establish a fund to help SME’s acquire credit at affordable rate; the government, within the WTO guidelines, will use custom tariffs for a limited period to help infant industries compete with foreign producers; the government will provide industrial land to our industrialists; and government will give investors the choice of 7 years tax- holiday or accelerated depreciation. Thus, we have made significant progress in establishing a business-friendly legal/regulatory environment and we have provided the necessary policy clarifications.
Of course it is not enough to create a benign legal and regulatory environment; action is also required to address weaknesses in other areas. In particular there is a need to ensure that infrastructure is adequate and that necessary skills and services are readily available.
Since 2002 we have built the basic infrastructure necessary to support a modern economy. The ring road around Afghanistan has been open for a number of years now and is almost completely paved. Critical highways connecting Afghanistan to Iran, Turkmenistan, Uzbekistan, Tajikistan and Pakistan are completely asphalted. Thousands of kilometers of new highways are under construction such as the North-South corridor, the Kabul-Jalalabad alternate highway, the West East-Highway and the Sarobi-Jabal-Soraj by-pass. In the last decade, the supply of power has increased by 800%. Transmission lines have been built throughout the country which have enabled us to import electricity from our neighbours. A national power grid is being developed which will connect the entire country. New power generation capacity will be opening next year in a number of areas. In the longer term, we are planning to build a number of major hydro-power dams. These plans were endorsed at the RECCA 5 conference in Tajikistan and the Tokyo conference. And in the short to medium term we intend to further increase our imports of power from neighbouring countries. In short, therefore, I can assure you that in most parts of the country you will find that power supply for both consumers and industry is more than adequate.
Similarly, the first segment of the new railway connecting us toUzbekistan was completed last year and is currently operational. Afghanistan
intends to extend this railway to connect Mazar Sharif to Heart, Iran and eventually Europe. Similarly, we would like to build another railway to connect Shir Khan Bander to Kabul, Jalalabad and Pakistan. These projects have moved beyond the design phase with funding for the Mazar-Herat line having been secured from the ADB, and China committing itself to build the Shir Khan Bander- Kabul-Jalalabad line. Building these railways is a critical part of Afghanistan’s strategy to become the land bridge between Central and South Asia and the Middle East. These railways will also benefit the development of our mineral resources which will have great developmental impact on our economy.
We have also worked hard to improve other aspects of our transport system. We have a new international airport in Kabul which is now served by more than 10 international airlines. Work on upgrading the airports in Mazar Sharif, Khandahar and Herat is complete and they are already receiving international flights.
We are intensifying our efforts at building industrial parks. Six are now operational in Kabul, Khandahar, Herat, Helmand, Bagrami and Mazar-i-Sharif. A further seven will open in Jalalabad, Khandahar, Herat, Helmand, Parwan and Mazar-i-Sharif in the next two years.
The market for professionals has also changed. Until a few years ago we suffered from acute shortages of qualified workers in key professions. While this problem has not gone away completely, many expatriate professionals have returned home in recent years and they have been joined by a large number of Afghans who have completed their studies abroad, particularly in India. Furthermore, there has been a dramatic increase in Afghanistan in enrollments in vocational education and in our universities.
In short, I believe that in the past ten years we have created a business- friendly legal/regulatory regime; we have trained skilled professionals and dramatically increased our vocational training services; we have built the infrastructure that a modern economy requires; we have kept our wages competitive and our labour practices flexible; and we have increased our access to regional markets for exports.
Ladies and gentlemen; as I am sure you are aware, the establishment of a business-friendly environment does not in itself guarantee investment. There also have to be profitable projects to invest in.
In a more mature market economy, the identification of investment opportunities can safely be left to the private sector. However, in an emerging economy like Afghanistan, there is a need for the public sector to go further and help potential investors identify investment opportunities and work with them to ensure that this potential is realized.
It is in this context that I asked our experts in the Ministry of Commerce to study our economy to identify areas where we thought Afghanistan would either be able to export competitively or where it had the capacity to replace imports. Our study concluded that Afghanistan can compete in at least seven export oriented and ten import substitution industries. The export oriented sectors include: cashmere, marble slabs and tiles, hand-made carpets, agri- business (particularly adding value to fresh fruit), gemstones and jewelry, medicinal plants and leather goods. The eleven sectors where we believe we can substitute for imported goods are mostly in the area of refined petroleum products, cement, rebar steel and other rolled products, eggs and live poultry, edible oil, sugar, dairy products, plastic piping, fruit juice and a number of light manufacturing sectors.
Let me elaborate: our experts tell us that the best Afghan marbles are comparable to the finest Italian ones and we have managed to displace them in regional markets where we have become the preferred supplier for high-quality white marble. Our experts believe that Afghanistan can reasonably expect to be exporting $700-800 million worth of marble annually in the foreseeable future. There are some great investment opportunities in this area and with a number of foreign companies poised to enter the market and transport links continuing to improve, I would suggest that the time to act is now.
The weaving of carpets is Afghanistan’s oldest industry. Afghan carpets are world renown for their quality and are produced at a competitive price. However, this industry is for the most part stuck at the lower end of the value chain. Much of the value add is done outside of the country where cutting and washing of the carpets usually takes place. There are opportunities to repatriate this activity; introduce non-traditional designs and improve the marketing and export of these hand-made carpets. I know of some modern Afghan entrepreneurs who have done quite well in modernizing the Afghan carpet industry.
Afghanistan is one of three countries in the world that produces cashmere wool. We used to export these in their rawest form for processing abroad. Recently, we established a PPP in Herat with a Belgian and a British company to process our cashmere here and we have been approached by a number of international companies looking to set up factories to spin yarn, weave cashmere fabric and even make cashmere garments here.
Afghanistan’s climate is excellent for fruits and fresh and dry fruits have been our largest export item for years, currently around $250 million. There is significant room for adding value to our fruit through further processing, improved packaging and branding, and ample room to increase export volumes by increasing storage, developing new markets, and ensuring the certification of product to international standards. It is my view that substantial value can be realized in this area with relatively minor investment through commercializing and modernizing the production, packaging, storage and export processes of fruit. There are also opportunities in further processing in areas like the production of juice, caning fruit and the harvesting and export of medicinal plants.
In addition to export-oriented in industries, a number of import- substitution industries offer great investment opportunities. Lately, the Ministry of Mines has been reporting good news regarding the hydrocarbon deposits in Afghanistan. The Ministry believes that there are huge deposits of natural gas on the Afghan side of the Afghan-Turkmen border. A concession for extraction of petroleum has been given to a Chinese company on the Amu-Darya petroleum deposits. And the bidding process for similar concession on the Afghan-Tajik hydrocarbon deposit is progressing well. Given Afghanistan’s over three million tons demand per annum for refined petroleum products, building refining capacity also seems very attractive. Dear investors; these businesses are quite lucrative. You should really consider investing in these projects.
Similarly, despite having the raw materials that are required for cement production in abundance, Afghanistan imports almost a billion dollars of cement each year. Given the huge demand for cement here, the high cost of transporting it from neighbouring countries and the presence of the necessary mineral precursors, our experts believe that investment in the establishment of large scale efficient modern cement plant will be profitable. In passing, it is also worth noting that our experts believe that the current building boom will not end in 2014; rather, it will continue for some time; and a market this size is already large enough to accommodate a number of large modern efficient cement plants.
Similarly, the market for rebar and related rolled products is around $600-800 million per annum. Given the ready availability of scrap iron and the high cost of transport from neighbouring countries, our experts suggest that the production of rebar and other rolled products can be undertaken profitably in Afghanistan.
The companies that won the tender to develop the Hajigak iron ore deposit will be building a steel mill as part of their development of this mine, the output of which will further improve the competitiveness of any rolling mills established here.
Further opportunities for import substitution exist in the egg and poultry sector and the sugar, dairy and edible oil sectors. These are all areas where Afghanistan previously was largely self-sufficient. Twenty years of war destroyed the infrastructure supporting these industries and while they have restarted, they often lack the technology, expertise and scale to be truly competitive. It is our belief that an investor willing to introduce more modern production in these areas will find that he or she makes an excellent return on their investment.
Similarly, a burgeoning light manufacturing sector has emerged. In it a number of ingenious local entrepreneurs have restarted production of goods as diverse as fans, washing machines, turbines and plastic piping. All of these sectors have ample room to grow and all would benefit from an injection of outside expertise, technology and marketing and export savy.
For the development of each of these seventeen sectors the Ministry of Commerce and Industry has prepared a strategy and an action plan. We are ready to advise national as well as foreign investors regarding the development of these industries and how best to profit from them. We will continue our efforts to identify additional industries where Afghanistan can compete with others. With the help of donors we would like to strengthen the capacity of the Ministry of Commerce and Industry to guide investors to more profitable projects and provide them with more detail on the financial returns they can expect.
However, some investors are reluctant to take a chance on Afghanistan because of the impending withdrawal of international forces from there and the expected uncertainty that will follow the withdrawal of forces. The relationship between security and growth is well known. A minimum level of security is precondition for growth. To paraphrase Thomas Hobbes, in a state of nature, i.e. insecurity, there is no economic development.
Ladies and gentlemen, let me assure you that our security forces will be able to protect the state and provide security for the people. The conflict may continue for a while, but I cannot believe that armed opponents of the regime will prevail. I believe that in the most parts of Afghanistan the level of security is well above that which is needed for economic development to occur; that is why there is so much interest in mining concessions in Afghanistan. The flip side of the exaggerated perceptions of the security risk involved in doing business in Afghanistan is that there are a wide range of highly profitable investment opportunities that have yet to be taken up. And I believe that even when we take into account the high level of risk, the return on investment there is greater than in most other parts of the world. With the assurance of continued donors’ support that was expressed at both Chicago and Tokyo conferences, combined with the strength of our security forces, I believe that our economy will continue to grow, and we will be able to manage our security.
Ladies and gentlemen let me recap. Presidents Karzai’s administration has established a very business-friendly legal and regulatory regime in Afghanistan. In this regard we can compete not only within the region but also beyond. We are now focusing on removing administrative obstacles to doing business and we are determined to significantly improve our rank in the World Bank’s Doing Business Indicators during the next three years. We have already built the minimum necessary infrastructure and we intend to invest a large sum on further improvements of our infrastructure. Indeed construction of railways and new highways, power generation, transmission and distribution constitute amajor part of our request for development assistant that were endorsed by donors in Tokyo and Tajikistan.
Our major cities such as Kabul, Heart and Mazar-e-Sharif already enjoy adequate power; Jalalabad and Kandahar will soon benefit from restoration of power generation facilities at Naghlu and Kajaki, respectively. The government’s focus on vocational training is supported by donors and we are graduating over thirty thousand skilled laborers annually from our vocational training institutes. We have identified a large number of export-oriented as well as import- substitution profitable industries. The Ministry of Commerce and Industry has begun to develop the capacity to advise potential investors in these as well as other industries.
In many sectors, Afghanistan is a virgin market. As a result, there are numerous opportunities for investment with high returns. And of course as we make progress on building our infrastructure, and connecting it to the rest of the world, and as the SME sectors expand and large scale mining and hydro-carbon extraction projects come on stream the prospects for investment will become brighter still.
Despite some security risks, I am very firmly of the view that even when you take into account the high level of risk, the return on investing in Afghanistan is much greater there than in most other parts of the world. Thus ladies and gentlemen, I invite you to come to Afghanistan and invest there, produce goods that you can sell there and aboard, employ Afghans, make a healthy profit and help our country grow. Your investment will not only benefit you and your employees, but will also help create conditions that will promote peace and stability in the region. This is a great case where self-interest coincides with public interest. I hope that you will not miss this opportunity, and decide to invest in Afghanistan.
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Last Updated (Wednesday, 19 December 2012 02:28)