As Afghanistan opens the doors to its first national park, the fate of its rich array of natural resources remains unclear. After three decades of conflict and civil war, the country is desperate to use its mineral wealth to get back on its feet. The Afghan government, meanwhile, is occupied with the difficult task of transitioning from foreign control to complete independence. Given the fact that two-thirds of Afghanistan’s national budget is derived from external funds, the extractive industries could prove to be a crucial source of independent revenue.

Private international companies are also eager to profit from Afghanistan’s mineral resources.  Some have already won lucrative mining contracts while others are submitting bids for various medium and large projects. With increasing pressure from the International Monetary Fund (IMF) for Afghanistan to open its mining industry to private investment, international companies will have plenty of opportunities to capitalize on the situation.

Whether or not the Afghan people will significantly benefit from their country’s mineral wealth will ultimately depend on how mining contracts are conceived, awarded and implemented.

Wealth and Concessions

According to the head of theAfghan Geological Survey, Afghanistan contains approximately 20 billion tons of iron, 11.3 million tons of copper and numerous chromite, gold, lithium, hydrocarbon and gem deposits.[i] The Ministry of Mines (MOM) estimates that 30% of Afghanistan’s surveyed mines are worth approximately 3 trillion dollars, with 70% of the resources yet to be evaluated.[ii] Despite unprecedented amounts of foreign aid and technical assistance, however, production capacity and institutional infrastructure have been severely limited due to ongoing strife.

As the constitutional custodian of Afghanistan’s natural resources, the MOM is charged with the task of approving mineral extraction projects. Thus far it has issued 106 large, medium and small licenses to various private and public companies. Among larger concessions is the Aynak Copper Contract, which was awarded to the MCC   consortium, a Chinese group composed of the China Metallurgical Group Corporation (MCG) and Jiangxi Copper Company Limited (JCCL). MCC has committed to investing $2.9 billion in the project and aims to extract copper in the next five years. The consortium has also has built a railway line connecting Afghanistan to its neighbors in the north and east.

Another important contract, which has yet to be awarded, is for the extraction of Hajigak iron ore mines, located in northern Afghanistan and currently estimated to contain 1.8 billion tons of iron ore. As one of the largest iron mines in the world, Hajigak has attracted six major international investors. A good contract might provide employment, infrastructure development and revenues for the government. MOM is also accepting bids for medium-sized contracts that provide licenses for gold, coal, chromites, and salt mines in the Hajigak region.

Corruption and the Lack of Transparency

Although mining concessions can provide benefits for the Afghan people, as more mines are opened to private bidders, there are serious concerns that must be addressed. The most troubling aspect of these concessions is the lack of transparency in evaluating the bids and contract content. Although Afghanistan agreed to implement the Extractive Industries Transparency Initiative(EITI) in March 2009, the process has been fraught with difficulties due to fluctuations in the political will necessary for enforcement.

Sources within Afghanistan’s inter-ministerial commission indicate that ministers have often intervened to help certain bidders increase their chances for securing contracts.[iii] Over-exploitation is also a major problem, for example in the Sabzak coal mine in Heart. However, as MOM’s inspectors have been unable to produce concrete data, the problem remains unresolved. In many cases, this general lack of oversight favors politically connected companies.[iv]

Although big contracts such as Hajigak and Aynak have captured the attention of the international media and other stakeholder, small and medium size contracts, which have mostly been awarded to local investors, are less closely monitored and provide more opportunities for corruption. One glaring instance of such corruption is the chromite mine in Khost, which was exploited for three years without remitting any royalties, and illegally exported the metal to Pakistan, according to customs documents. Many close observers, including Afghan politicians, members of parliament and state employees, fear that the situation will worsen as more mines are opened for bidding.

Limited Benefit of Existing Licenses

Given Afghanistan’s reliance on foreign aid, the importance of the mining industry’s potential as a generator of independent, domestic revenue cannot be overstated. Increasing pressure has been placed on the Afghan government to open up the country’s natural resources to private investment. According to sources within the Ministry of Finance, the IMF has been the most vocal proponent of policies that would open up the mining sector to private investment, as a way to generate revenue for Afghanistan’s national budget. Greater privatization in the extractive industries should, in theory, lead to increased government revenue. The terms of existing licenses, however, paint a different picture.

For example, while the royalty rate stipulated in the Aynak copper contract is progressive, it is capped at a maximum of 19.5% of the price of copper, as determined by the London Metal Exchange. After reaching this threshold, the royalty rate becomes flat. Under these terms, Afghanistan will receive little royalty when the price of copper is low, as it will be offset by the high cost of extraction. By the time the price of copper increases, however, the contract will have reached its cap and will generate a limited amount of revenue. Major operating costs for the company extracting the mine will remain constant in spite of increasing revenue, but the royalty payments for Afghanistan will remain constant at 19.5%. The result is higher profits for the private sector, but limited revenues for Afghanistan’s government.

Another example is the gold mine in the Qara Ghazhan Dushi district in Baghlan province, which is run by Afghan Krystal Natural Resources. This company is not only accused of having won the contract as a result of political favors,[v] but has paid little to no royalties on profits from the mines. The current production capacity of the mine is unknown, but according to sources it previously produced 1.5 kg of pure gold per week during the civil war that gripped Afghanistan in 1990s.[vi]

The lack of oversight has also affected other mining operations, such as the precious and semi-precious stone deposits extracted by local stakeholders who pay no royalties on these extractions to the state. The emerald mines in Panjsher province and the lapis mines in Badakhshan province are also exploited by politically connected individuals, including, in at least one case, a woman.[vii]

Potential Development of the Private Sector

Investment in the mining industry offers opportunities for numerous other associated businesses to generate revenue from large mining projects. For instance, the Aynak Copper Project and the soon to be awarded iron mine contract at Hajigak, will require a number of goods and services for their operations, such as heavy machinery, explosives, construction and maintenance services. Since Afghanistan is still extremely reliant on agriculture and lacks developed industries, its private sector cannot provide these special goods and services.

Furthermore, Afghanistan’s import-dependent economy could benefit greatly from an expansion of the private sector, which will not only create employment and increase cash flow, but also generate income for the state. The challenges are nevertheless significant as there is very little engineering and technical expertise in the country. Moreover, according to the Chief Operating Officer of Afghan International Chamber of Commerce (AICC), Atiqullah Nusratin, industrial sectors such as hard manufacturing remain underdeveloped due to low local demand. Foreign entities operating in Afghanistan have little trust in local businesses, thereby increasing dependence on imports.

In the past, the MOM has organized a number of expositions in Europe, the United States and Asia to attract investment in Afghanistan’s mining sector. The MOM has also enacted a fiveyear business plan with the aim of creating an investment-friendly environment, encouraging investment and increasing revenues from the mining sector. Meanwhile, the World Bank has been working on a resource corridor to connect big mines and has been building the necessary infrastructure to connect Afghanistan with sea-routes in order to export minerals to outside market.[viii]

Institutional Capacities

Private investment in the Afghan mining sector has been increasing rapidly to help stave off effects from the decrease in international aid expected to begin in 2014.  While increased privatization in the extractive industries is a welcome development, the speed at which it is being carried out is alarming. For instance, the rate of privatization is outpacing the growth of critical oversight and support units within the MOM, including inspection, cadastre, and the development of the Afghan Geological Survey. While these departments are strengthening their abilities to fulfill their increased responsibilities, they face numerous access and security problems as the majority of the 106 awarded contracts are for mines in rural areas. At the same time, a number of local warlords active in the extractive industries are employing primitive and inefficient mining methods that had led to considerable waste of the available resources.

Coordination among various state institutions still remains at a rudimentary stage. The Ministry of Water and Energy, the National Environment Protection Agency, the Ministry of Public Works, the Ministry of Transportation, the Ministry of Finance, and the MOM must all work closely together to ensure the regular flow of revenue, and to enforce environmental, labor and other national laws. As evidence of this need for coordination, the National Environment Protection Agency has often been sidelined during the awarding of mining contract. In fact, members of the environment agency have indicated that all companies do not seek its permission to exploit mines, in violation of Afghanistan’s environmental laws.[ix]

Security and Governance

Another major obstacle is the deteriorating security situation in the country, which has allowed local strongmen to appropriate and exploit mines without authorization from the government. Although this type of illegal exploitation is currently limited to precious and semi-precious stones, there are legitimate concerns that, in the absence of proper supervision and monitoring procedures, this practice will expand to expensive metals.

The lack of proper supervision has also affected legal mining operations. Even though MOM contracts must comply with applicable legislation, the government is not always able enforce the law. While Afghanistan is a signatory to several international best practice protocols, such as ISO 14001 Environmental Management, it has a long way to go to ensure the correct implementation of these policies.

Social and Environmental Impact

The negative social consequences of increased activity in a country’s mining sector have been well documented. These often include displacement and social fragmentation in the short and medium terms. In order to mitigate these risks, governments must be proactive and use the instruments at its disposal to protect the environment and communities inhabiting the mining regions. The Afghan government has begun considering social and environmental policies to ensure responsible mining, but remains at the initial stages of this process.

Best practices from around the world indicate that the success of a mine is proportionate to the degree surrounding communities are included in the project. Companies that invest in social projects for the betterment of local communities often see better outcomes as social investment gives the local population a stake in the mining project and helps ensure its success. Consultative approaches that encourage discussion, debate and information sharing often generate social capital, which reduces the risk of conflict and helps prevent the resource curse that afflicts many Third World nations. In the case of Afghanistan, civil society organizations are working with the government to find ways to ensure communities are included in the decision-making process.

Conclusion

The economic potential of Afghanistan’s mineral resources is a source of hope for the country’s future. But in order to reap the benefits, the government must manage the mining sector in a responsible manner, particularly when it comes to financial, social and environmental policies.

Although Afghanistan’s natural resources are substantial, the institutional capacity of the Afghan state is limited. Private investment in the Afghan mining sector is, therefore, crucial. Collaboration could certainly benefit both the nation and international investors, but only if there is serious commitment to transparency and accountability. Unfortunately, however, the government’s current track record suggests that Afghanistan’s road to prosperity will be a long, chaotic ride.

 


[i] United States Geological Survey, “Preliminary Non-Fuel Mineral Resources Assessment of Afghanistan,” Virginia, 2007

[ii]MOM, Extractive Industry Initiative at the Ministry of Mines, AGS, Kabul, June 10, 2010.

[iii] Author’s interview with senior member of ministry that sought anonymity, August 24, 2011.

[iv] Author’s interview with a retired member of the MOM, who sought anonymity, July 21, 2007.

[v] Author’s interview with senior bureaucrat  who chose to remain anonymous, February 13, 2011.

[vi] Author’s interview with a member of the Ismaili community, resident of Kunduz, currently holding a senior position within the state, March 15, 2011.

[vii] Author’s interview with different sources who were close to the mining mafia and sought anonymity, August 13 and 22, 2011.

[viii] World Bank Workshop, Kabul, August 2, 2011; World Bank consultation with other stakeholders, August 8, 2011.

[ix] Author’s interview with Mr. Fazli, head of the Sustainable Development Department within the National Environment Protection Agency, August 10, 2011.

 

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