Afghanistan’s Mineral Potential: A Farce Or Reality? – OpEd

By Tamim Asey

Afghanistan’s mineral potential represent the future hope for the country’s economy. A mineral based economy is one of the few limited options towards building an indigenous Afghan economy. Though insecurity, political instability, lack of a clear legal framework and policy direction, absence of basic infrastructure and transit agreements with the neighboring countries has hampered the development of this sector but it still stands as a comparative advantage and an alternative to the already aid dependent economy of the country.

According to the United States Geological Survey (USGS) agency – Afghanistan’s mineral wealth is estimated to be around US$ 1 trillion dollars and this is only for the 30% of the combined Swedish, British, former Soviet Union and recently the USGS surveyed territory of the country. This mineral wealth contains metal and non – metals as well as strategic minerals such as Lithium, Uranium, Ambium among others. Even this 30% surveyed geological landscape of the country is not an indepth survey. It has been based on the previous Swedish, British and former Soviet Union geological studies updated with recent aerial geophysics and geochemical studies of the surface of the Afghan geological landscape. In otherwords – through these updated surveys we only know that there are signs of minerals presence but we don’t know have other detailed technical studies of the geological deposits such as the size, capacity, depth and economic feasibility of these mineral deposits. There are already doubts that many of these deposits may turn out to be economically unviable for extraction and development.

While there is almost an across the board consensus to develop the mineral sector in Afghanistan but there are various schools of thoughts within the Afghan policy making circles and political elites over the pace of such a development. There are mainly three schools of thought: the first category are the pro-sector developers who believe that in the wake of the declining foreign aid, Afghanistan needs to replace this declining aid with cash revenues of the mineral sector; the second category believe on prioritizing the minerals and developing those deposits which are not of strategic importance for the country and finally the third category are the ones who oppose any sort of development until a later date when the political and security situation in the country improves. Given the economic circumstances in the country – Afghanistan does not have a choice but to move faster in developing its nascent minerals sector.

Such a fast paced development requires upto date complete geological information on the mineral deposits; which is unavailable. Therefore – access to complete geological information on the mineral deposits remains a challenge and undertaking such a survey is a costly exercise. This can only happen through investment and drastic reforms and tough political decisions to build a strong and reformed Afghanistan Geological Survey agency, which is now deeply politicized and almost monopolized by a generation of Soviet trained geologists with little to show and do.
Furthermore – as a tradition it is the state’s responsibility to furnish the geological information to the firms for investment and this crucial element for investment in the Afghan minerals sector is missing because the Afghan government can not afford millions required to undertake such costly geological surveys and studies. This is where the donor community of Afghanistan can play a crucial role.

To date, the Afghan government through the support of the US Department of Defense, USAID, DfID and the World Bank has been able to put 8 tenders into the bidding process and only two major contracts awarded. These include the Aynak Copper Mine, Hajigak Iron Ore Deposit, Badakhshan Gold, Shaida Copper Mine and Ghazni Gold and Copper deposits. Almost all of these tenders alongwith their bids have had their flaws but still sends a strong a signal to the investor community around the world that Afghanistan’s nascent mineral industry is open for business.

Though recently the new National Unity Government (NUG) have decided to review all these contracts and the bids. This only sends the wrong signal to the international investors on the top of all the security, political and infrastructure problems of Afghanistan. While – the new Afghan administration reserves the right to review and even revise the existing contracts and bids but stopping the process will be disastrous for the development of the minerals sector of Afghanistan. A lot of these contracts suffers from shortcomings such as feasibility clauses, promises of processing minerals which does not exists in sufficient quantities, energy and water shortages, human resources challenges and lack of transit agreements among others but the best way to address these shortcomings is through bilateral negotiations and contract revision mechanisms and not cancellation of the bids and contracts.

On the otherhand, artisanal and small scale mining i.e. construction materials, precious stones and others remain both a source of financial revenue for the Afghan government but also a major force for instability in areas where government presence is non-existent. The criminal economy capture of these small scale mines have been funding partially the war inside the country especially in the north and eastern part of the country. Today – part of the unrest in the northern, eastern and provinces such as Logar province in Afghanistan is due to local rivalries over mineral revenues of small mine deposits in these areas. In the short run – the best way to tackle this issue is through formalization of the small scale artisanal mining through a phased and gradual process while in the long run until the security forces and rule of law extends in all parts of the country then dismantling these groups will be an ideal option.

The Afghan govenrment institutions i.e. MOMP and AGS responsible for the development of the mineral sector of the country have little experience or no experience in managing big mineral contracts. From the design of the bids to the tendering process and awarding of the contracts there is little Afghan expertise.

The existing eight (8) mineral bids and some of the contracts have been awarded with the technical expertise provided by US Department of Defense Task Force for Business Stability Operation (TFBSO), the World Bank, DfiD among other donors. These 8 tender processes are first time experiences of Afghanistan in awarding of big mineral rights contracts. Many of these contracts have been awarded in a very uncompetitive environment where Afghan officials with little experience or negotiation skills have been negotiating with giant mineral development companies of the world such as MCC or CNPCI with years of experience and unparalleled expertise. This has been a negotiation of unequal parties with one side as clearly the most experienced and competent of the negotiators.

On the otherhand, there are certain circles within the Afghan public and private sector who oppose awarding of contracts to foreign firms and are advocating for the establishment of a few strong and big state owned oil and gas, iron and copper companies with possible public private partnership model. This view loses sight of the fact that indigenous Afghan technical knowledge and financial capital is lacking and upto date technical knowledge and huge financial capital required for developing mineral deposits can only come from the foreign firms until Afghans build their own financial and mineral industry. There are already struggling state owned enterprises such as Afghan Gas and the Afghan Fertilizer Factory in the north – both of which are financially struggling with old obsolete machinery and an incompetent management inherited from the years of war.

The Afghan Ministry of Mines and Petroleum (MOMP) have been primarily busy over the years in the management and awarding of small scale construction material and precious stones contracts through its Cadastre department. Whereas – the role of such an important institution should not only be confined to the awarding of small mineral contracts but proper implementation, oversight and control, audit and financial revenue management and finally technical oversight of big and small contracts. This institution needs a serious overhaul; if any serious long term development is envisioned to be undertaken in the mineral sector of Afghanistan.

Meanwhile, the tax and royalty regime for the mineral contracts is investor unfriendly and as compared to other countries i.e. African and South American countries are higher. For example the royalty set for the Aynak Copper Mine is almost 12%, followed by 8% for the Hajigak Iron Ore which are simply way higher than the average 4% and 6% international norm. The economic and financial regime governing Afghanistan’s mineral economy is simply investor unfriendly and complicated to say the least. These indicators and dynamic has to change if any long term sustainable development of the mineral sector of the country is seriously considered.

Infrastructure and access to regional ports remains an enormous challenge on the way of the development of the mineral sector of Afghanistan. Afghanistan needs an integrated infrastructure development strategy through building resource corridors to the nearest ports in Pakistan, Central Asian countries and Iran as well as energy lines to power the processing plants for the development of these minerals inside the country. Such an integrated infrastructure system would require billions of dollars in capital and technical expertise which at the moment is lacking in the country. Furthermore – the Afghan government should engage in a heavy resource diplomacy with its neighbors especially Pakistan and Iran to gain access to the nearest seaports in order to be able to export its commodities to the international markets.

With all these challenges, the Afghan mineral sector still remains an attractive sector for both domestic and international investors. None of these challenges are formidable and are being addressed through gradual steps by the Afghan government.

For now, Afghanistan needs to present a framework and strategy for the development of its nascent mineral sector through attracting domestic and foreign investors, reform its legal framework and provide a policy direction for international investors to develop this sector. While the potential remains vast but the Afghan government need to prioritize bids and mineral deposits which it intends to put to international and national tender. A few good and successful bids and its successful implementation would pave the way for more investment and also serve as a pilot project for attracting major investors to come and develop the Afghan minerals sector.