Mujtaba Nezamyar's Project2

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Chapter- one

Introduction

In Afghanistan having untouched abundant natural resources, no doubt investment is the

most profitable venture which has attracted many private investors from within and

abroad like USA, Canada, India and China. Therefore its called as the land of business

and investment opportunities.

Today, even if Afghanistan is not the land of dreams, it certainly is the land of countless

business opportunities. Afghanistan is strategically located between the energy rich

republics of Central Asia and the major seaports of South Asia. This unique geographical

advantage has enabled Afghanistan to be the crossroad of Central Asia for centuries and

in the current tide of globalization, its strategic location has bestowed upon Afghanistan

the potential to develop into a regional business hub over the years, especially in therecent decades till now.

Kabul enjoys significant advantages over its neighboring capitals; its relative short

distance to the major business centers around the region enables shorter flight distances

and continued and strong presence of the international community in the coming years

will also provide a unique and fruitful opportunity for investment. Investment is a

challenge in any environment; more so is the establishment of a new business in a

country where the economy is in transition and the government new. However, the

government of Afghanistan is working towards an environment of peace and security

with the prospect of good profits in order to provide investors credible investmentincentives and an excellent business environment.

Afghanistan Investment Support Agency (AISA) is currently the main agency in

Afghanistan that promotes and encourages the establishment of private, domestic and

foreign investment. The mission of AISA is to "facilitate and promote investment and

rapid development of competitive private enterprise and thereby robust sustainable

economic growth in Afghanistan. The unofficial translation of the Law on Private

Investment in Afghanistan, Chapter 1 Article 2 (Purpose of Legislation) states: The State

is committed to maximizing private investment, both domestic and foreign, in the

economy. It aims to create a legal regime and administrative structure that will encourage

and protect foreign and domestic private investment in the Afghan economy in order topromote economic development, expand the labor market, increase production and export

earnings, promote technology transfer, improve national prosperity and advance the

peoples standard of living.

The Ministry of Foreign Affairs of Afghanistan gives its full support and assistance to the

establishment of private domestic or foreign investment in Afghanistan. Devoting a

separate deputyship to Economic Affairs within the Ministry of Foreign Affairs is a

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testimony to our commitment and determination to play an active role in the process of

reconstruction and development of the country.***

In this descriptive research you will be reading the domestic and foreign direct

investment developments, problems, trends and opportunities in Afghanistan in a

systematic manner from 2003 to 2012 in general. The focus point in this project shall beinvestment in the Mining, Agriculture, Industry, Construction, and Telecommunication.

Based on the analysis of facts and figures of investment from 2003 to 2012 in the country

the findings and conclusions will be provided and at the end suggestions will be given

too.

1. 1: Objectives

To Understand Meaning and Importance of Domestic and Foreign Direct Investment.

To Understand the Importance of FDI in the Emerging Economies like Afghanistan

To know the effect of FDI in sustainable development and economic growth.

To study the Investment trends in Afghanistan from 2003 to 2012 focusing on four

sectors, Agriculture, Industry, Construction and Mining.

To understand investment opportunities, government roles and regulations both for

domestic and foreign investors.

1.2: Research Methodology

This research is based on secondary data. Theoretical aspects of the research are gatheredfrom different Afghanistans official websites and international investment related news

papers. Analysis is based on secondary data published by few institutions inside Afghanistan

and some other magazines and publications from abroad. The main data is collected from

Afghan Investment support Agency, Afghan Chamber of Commerce, Afghanistan Central

Bank, World Bank, IMF Reports, and reputed International news papers like Reuters,

Pajhwok news agency, etc.

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Collection of primary data about different topics in this paper was difficult as collection of

Primary data and information needs sufficient budget to provide the instruments and

materials for conducting survey, or direct interviews and some other processes. So in short

time and lack of facilities I preferred to use secondary data and it is analyzed based on mypersonal knowledge, and experiences.

1. 3: Limitation

This project for some reasons has its own limitations as well; these limitations are listed

as bellow:

Non availability of data and international publications in college and university.

Weakness of government institutions for collecting and reporting of exact data

related to investment in the country has led to incomprehensive data.

Lack of reliability has made people to undervalue their investments so; the

published data doesnt convey all the investment opportunities and threats in the

country, Afghanistan.

Besides, lack of research centers within Afghanistan for doing research regarding

such issues behind the Project work.

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CHAPTER-TWO:

FOREIGN DIRECT INVESTMENT

2.1: Definition & meaning

According to the International Monetary Fund (IMF), foreign direct investment,

commonly known as FDI, "refers to an investment made to acquire lasting or long-terminterest in enterprises operating outside of the economy of the investor." The investmentis direct because the investor, which could be a foreign person, company or group ofentities, is seeking to control, manage, or have significant influence over the foreignenterprise.

Foreign direct investment (FDI) plays an extraordinary and growing role in global

business. It can provide a firm with new markets and marketing channels, cheaper

production facilities, access to new technology, products, skills and financing. For a host

country or the foreign firm which receives the investment, it can provide a source of new

technologies, capital, processes, products, organizational technologies and management

skills, and as such can provide a strong impetus to economic development. Foreign

direct investment, in its classic definition, defined as a company from one country

making a physical investment into building a factory in another country. The direct

investment in buildings, machinery and equipment is in contrast with making a portfolio

investment, which is considered an indirect investment. In recent years, given rapid

growth and change in global investment patterns, the definition has been broadened to

include the acquisition of a lasting management interest in a company or enterprise

outside the investing firms home country. As such, it may take many forms, such as a

direct acquisition of a foreign firm, construction of a facility, or investment in a joint

venture or strategic alliance with a local firm with attendant input of technology,licensing of intellectual property.

In the past decade, FDI has come to play a major role in the internationalization of

business. Reacting to changes in technology, growing liberalization of the national

regulatory framework governing investment in enterprises, and changes in capital

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markets profound changes have occurred in the size, scope and methods of FDI. New

information technology systems, decline in global communication costs have made

management of foreign investments far easier than in the past. The sea change in trade

and investment policies and the regulatory environment globally in the past decade,

including trade policy and tariff liberalization, easing of restrictions on foreign

investment and acquisition in many nations, and the deregulation and privatization of

many industries, has probably been the most significant catalyst for FDIs expanded role.

Proponents of foreign investment point out that the exchange of investment flows

benefits both the home country (the country from which the investment originates) and

the host country (the destination of the investment). Opponents of FDI note that

multinational conglomerates are able to wield great power over smaller and weaker

economies and can drive out much local competition. The truth lies somewhere in the

middle.

For small and medium sized companies, FDI represents an opportunity to become more

actively involved in international business activities. In the past 15 years, the classic

definition of FDI as noted above has changed considerably. This notion of a change in

the classic definition, however, must be kept in the proper context. Very clearly, over 2/3

of direct foreign investment is still made in the form of fixtures, machinery, equipment

and buildings. Moreover, larger multinational corporations and conglomerates still make

the overwhelming percentage of FDI. But, with the advent of the Internet, the increasing

role of technology, loosening of direct investment restrictions in many markets and

decreasing communication costs means that newer, non-traditional forms of investmentwill play an important role in the future. Many governments, especially in industrialized

and developed nations, pay very close attention to foreign direct investment because the

investment flows into and out of their economies can and does have a significant impact.

2.2: FDI in the past Decades

As mentioned above, the overwhelming majority of foreign direct investment is made in

the form of fixtures, machinery, equipment and buildings. This investment is achieved or

accomplished mostly via mergers & acquisitions. Within the past decade, however, there

has been a dramatic increase in the number of technology startups and this, together with

the rise in prominence of Internet usage, has fostered increasing changes in foreign

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investment patterns. Many of these high tech startups are very small companies that have

grown out of research & development projects often affiliated with major universities and

with some government sponsorship. Unlike traditional manufacturers, many of these

companies do not require huge manufacturing plants and immense warehouses to store

inventory. Another factor to consider is the number of companies whose primary product

is an intellectual property right such as a software program or a software-based

technology or process. Companies such as these can be housed almost anywhere and

therefore making a capital investment in them does not require huge outlays for fixtures,

machinery and plants.

Therefore, the expanded role of technology and intellectual property has changed the

foreign direct investment playing field. Companies are still motivated to make foreign

investments, but because of the vagaries of technology investments, they are now finding

new vehicles to accomplish their goals.

What would be some of the basic requirements for companies considering a foreign

investment?

Depending on the industry sector and type of business, a foreign direct investment may

be an attractive and viable option. With rapid globalization of many industries and

vertical integration rapidly taking place on a global level, at a minimum a firm needs to

keep abreast of global trends in their industry. From a competitive standpoint, it is

important to be aware of whether a companys competitors are expanding into a foreign

market and how they are doing that. At the same time, it also becomes important to

monitor how globalization is affecting domestic clients. Often, it becomes imperative to

follow the expansion of key clients overseas if an active business relationship is to be

maintained.

New market access is also another major reason to invest in a foreign country. At some

stage, export of product or service reaches a critical mass of amount and cost where

foreign production or location begins to be more cost effective. Any decision on investing

is thus a combination of a number of key factors including:

Assessment of internal resources,

Competitiveness,

Market analysis

Market expectations

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www.going-global.com

2.3: FOREIGN DIRECT INVESTMENT (FDI): THEORITICAL SETTINGS

Most of the present day underdeveloped countries of the world have set out a planned

programme for accelerating the pace of their economic development. In a country

planning for industrialization and aiming to achieve a target rate of growth, there is a

need for resources. The resources can be mobilized through domestic as well as foreign

sources. So far as, the domestic sources are concerned, they may not be sufficient to

acquire the fixed rate of growth. Generally domestic savings are less than the required

amount of investment. Also the very process of industrialization calls for import ofcapital goods which cannot be locally produced. Hence, comes the need for the foreign

sources. They not only supplement the domestic savings but also provide the recipient

country with extra foreign exchange to buy imports essential for filling the saving

investment gap and foreign exchange gap.

The means of getting foreign resources available to a developing country are mainly

three:

1. Through export of goods and services

2. External aid

3. Foreign investment

Export of goods and services do contribute to foreign resources but they can meet only a

small part of the total demand for foreign resources. External Aid from foreigngovernments and international institutions, by increasing the rate of home savings and

removing the foreign gap allows the utilization of previously underutilized resources and

capacity. But generally the aid is tied and distorts the allocation of resources. So its use

has been on the decline.

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Foreign investment is of following two types:

1. Foreign Direct Investment (FDI) and

2. Portfolio Investment.

Foreign Direct versus Portfolio Investment

By Foreign Direct Investment (FDI) we mean any investment in a foreign country where

the investing party (corporation, firm) retains control over investment. A direct

investment typically takes the form of a foreign firm starting a subsidiary or taking over

control of an existing firm in the country in question. FDI consists of equity capital,

technical and managerial services, capital equipment and intermediate inputs and legal

rights to patented or secret products, processes or trademarks. It is the direct type of

foreign investment which is associated with multinational corporations because most ofFDI is transferred through firms and remains outside of ordinary, functioning markets.

FDI can be done in the following ways

1. In order to participate in the management of the concerned enterprise, the stocks of

the existing foreign enterprise can be acquired.

2. The existing enterprise and factories can be taken over.

3. A new subsidiary with 100% ownership can be established abroad.

4. It is possible to participate in a joint venture through stock holdings.

5. New foreign branches, offices and factories can be established.

6. Existing foreign branches and factories can be expanded.

7. Minority stock acquisition, if the objective is to participate in the management of the

enterprise.

8. Long term lending, particularly by a parent company to its subsidiary, when theobjective is to participate in the management of the enterprise.

Portfolio investment, on the other hand, does not seek management control, but is

motivated by profit. Portfolio investment occurs when individual investors invest, mostly

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through stockbrokers, in stocks of foreign companies in foreign land in search of profit

opportunities.

FDI flows are usually preferred over other forms of external finance because they arenon-debt creating, non-volatile and their returns depend on the performance of the

projects financed by the investors. FDI also facilitates international trade and transfer of

knowledge, skills and technology. In a world of increased competition and rapid

technological change, their complimentary and catalytic role can be very valuable.

2.4: Superiority of FDI over Other Forms of Capital Inflows

FDI is perceived superior to other types of capital inflows for several reasons:

1. In contrast to foreign lenders and portfolio investors, foreign direct investors typically

have a longer-term perspective when engaging in a host country. Hence, FDI inflows

are less volatile and easier to sustain at times of crisis.

2. While debt inflows may finance consumption rather than investment in the host

country, FDI is more likely to be used productively.

3. FDI is expected to have relatively strong effects on economic growth, as FDI

provides for more than just capital. FDI offers access to internationally available

technologies and management know-how, and may render it easier to penetrate world

markets.

A recent United Nations report has revealed that FDI flows are less volatile than portfolio

flows. To quote, FDI flows to developing and transition economies in 1998 declined byabout 5 percent from the peak in 1997, a modest reduction in relation to the effects on the

other capital flows of the spread of the Asian financial crisis to global proportions. FDI

flows are generally much less volatile than portfolio flows. The decline was modest in all

regions, even in the Asian economies most affected by the financial crisis.

FDI is the appropriate form of external financing for developing countries, which have

less capacity than highly developed economies to absorb external shocks. Likewise, the

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evidence supports the predominant view that FDI is more stable than other types of

capital inflows. Moreover, the volatility of FDI remained exceptionally low in the 1990s,

when several emerging economies were hit by financial crisis.

FDI is widely considered an essential element for achieving sustainable development.

Even former critics of MNCs expect FDI to provide a stronger stimulus to income growth

in host countries than other types of capital inflows. Especially after the recent financial

crisis in Asia and Latin America, developing countries are strongly advised to rely

primarily on FDI, in order to supplement national savings by capital inflows and promote

economic development.

2.5: Macro-economic and Micro-economic Aspects of FDI

In judging the significance of FDI, especially from the view point of developing

countries, it is useful to make a distinction between macro-economic and micro-economic

effects. The former is connected with issues of domestic capital formation, balance of

payments, and taking advantage of external markets for achieving faster growth, while

the latter is connected with the issues of cost reduction, product quality improvement,

making changes in industrial structure and developing global inter-firm linkages.

In this context, it needs to be recognized that FDI is an aggregate entity, the sum total of

the investments made by many diverse multinationals, each with its own corporate

strategy.

The micro-economic effects of the investment made by one multinational may be quite

different from that of another multinational even if the investments are made in the same

industry. Also, what benefits the local economy will depend on the capabilities of the

host country in regard to technology transfer and industrial restructuring.

Resource-seeking and Market-seeking FDI: Two major types of FDI are typically

differentiated: resource-seeking FDI and market-seeking FDI. Resource-seeking FDI is

motivated by the availability of natural resources in the host countries. This type of FDI

was historically important and remains a relevant source of FDI for various developing

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countries. However, on a world-wide scale, the relative importance of resource-seeking

FDI has decreased significantly.

The relative importance of market-seeking FDI is rather difficult to assess. It is almost

impossible to tell whether this type of FDI has already become less important due to

economic globalization. Regarding the history of FDI in developing countries, variousempirical studies have shown that the size and growth of host country markets were

among the most important FDI determinants. It is debatable, however, whether this is still

true with ongoing globalization. Globalization essentially means that geographically

dispersed manufacturing, slicing up the value chain and the combination of markets and

resources through FDI and trade are becoming major characteristics of the world

economy. Efficiency-seeking FDI, i.e. FDI motivated by creating new sources of

competitiveness for firms and strengthening existing ones, may then emerge as the most

important type of FDI. Accordingly, the competition for FDI would be based increasingly

on cost differences between locations, the quality of infrastructure and business-related

services, the ease of doing business and the availability of skills. Obviously, this scenario

involves major challenges for developing countries, ranging from human capital

formation to the provision of business-related services such as efficient communication

and distribution systems.

Nature of FDI: Almost all modern (FDI) is carried out by corporations rather than

individuals. Somewhat like portfolio investment, the flows of FDI have historically been

highly concentrated, both in terms of geography and by industry and at both the investor

and receptor poles. Geographically, the ownership of global stocks of FDI is highlyskewed towards only a few large, high income countries. Each investing country has,

whether by accident or design , tended to direct the major part of its FDI to only a very

few receiving countries; in fact the pattern of global distribution of FDI have been highly

similar to historical relationships based on colonial ties or other forms of political

hegemony.

Viewed industrially, for any given country, FDI generally comes from less than four or

five out of twenty or so major industry groups and inflows into those same industries in

the receptor country. General attribute of FDI is that it has evoked by type over time.

Prior to First World War, a crude but valid generalization, a large part of FDI was inservice sector of the host economy (particularly transportation, power, communication

and trading) while most of the rest was of the backward vertical integration type.

During the inter-war period, most of the currently largest manufacturing multinational

corporations (MNCs) made their initial foreign investments, but these horizontal or

market extension types of investments have now become major category.

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The fourth recognized characteristic of manufacturing FDI is that it originates in

industries that are technologically intensive, skill oriented or progressive. In addition,

the FDI prone industries are typically more concentrated, have higher advertising outlays

per unit of sales and exhibit above average export propensities. Industries from which

FDI tends to originate display many characteristics associated with oligopoly.

Another universal property of FDI is that it is really a package of complementary inputs,

a collective flow of both tangible and intangible assets & services.

2.6: FDI in Developing Countries

FDI is now increasingly recognized as an important contributor to a developing countrys

economic performance and international competitiveness. After the debt-crisis that hit the

developing world in early 1980s, the conventional wisdom quickly became that it had

been unwise for countries to borrow so heavily from international banks or international

bond markets. Rather countries should try to attract non-debt-creating private inflows

(DFI). The financial advantage is that such capital inflows need not be repaid and that

outflow of funds (remittance of profits) would fluctuate with the cycle of the economy. It

has also been widely observed that the structural adjustment efforts of the 1980s failed to

lead to new patterns of sustained growth in developing countries. In particular, structural

adjustment programs failed to restore private investment to desirable levels. Again it is

hoped that FDI could play an important role; the World Bank observes that FDI can be an

important complement to the adjustment effort, especially in countries having difficulty

in increasing domestic savings.

Against this background of balance of payments problems and low level of private

investment, it is probably not surprising that attitudes in developing countries towards

FDI have shifted. In the 1960s and 1970s many countries maintained a rather cautious,

and sometimes an outright negative position with respect to FDI. In the 1980s, however

the attitudes shifted radically towards a more welcoming policy stance. This change was

not so much due to new research finding on the impact of FDI but to the economic

problems facing the developing world.

Developing countries are liberalizing their foreign investment regimes and are seeking

FDI not only as a source of capital funds and foreign exchange but also as a dynamic and

efficient vehicle to secure the much needed industrial technology, managerial expertise

and marketing know-how and networks to improve on growth, employment, productivity

and export performance.

At the global level the flows of FDI and PFI to developing countries have indeed

increased. The average net inflow of FDI in developing countries had been US$ 11

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billion in 1980-86, but in 1987 it started to increase, by 1991 the annual net inflow had

risen to US$ 35 billion and by 2004 to US$ 233 billion. The share of developing

economies in total inflow of Foreign Direct Investment in the world has been rising

continuously since 1989.

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CHAPTER-THREE:

RESEARCH ANALYSIS

ADVANTAGES AND DISADVANTAGES OF FDI FOR THE HOST

[AFGHANISTHAN] COUNTRY

3.1: Advantages of Foreign Direct Investment

Foreign Direct Investment has the following potential benefits for less developed

countries.

1. Raising the Level of Investment: Foreign investment can fill the gap between desiredinvestment and locally mobilized savings. Local capital markets are often not well

developed. Thus, they cannot meet the capital requirements for large investment projects.

Besides, access to the hard currency needed to purchase investment goods not available

locally can be difficult. FDI solves both these problems at once as it is a direct source of

external capital. It can fill the gap between desired foreign exchange requirements and

those derived from net export earnings.

2. Up-gradation of Technology: Foreign investment brings with it technological

knowledge while transferring machinery and equipment to developing countries.

Production units in developing countries use out-dated equipment and techniques that canreduce the productivity of workers and lead to the production of goods of a lower

standard.

3. Improvement in Export Competitiveness: FDI can help the host country improve its

export performance. By raising the level of efficiency and the standards of product

quality, FDI makes a positive impact on the host countrys export competitiveness.

Further, because of the international linkages of MNCs, FDI provides to the host country

better access to foreign markets. Enhanced export possibility contributes to the growth of

the host economies by relaxing demand side constraints on growth. This is important for

those countries which have a small domestic market and must increase exports vigorouslyto maintain their tempo of economic growth.

4. Employment Generation: Foreign investment can create employment in the modern

sectors of developing countries. Recipients of FDI gain training of employees in the

course of operating new enterprises, which contributes to human capital formation in

the host country.

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5. Benefits to Consumers: Consumers in developing countries stand to gain from FDI

through new products, and improved quality of goods at competitive prices.

6. Resilience Factor: FDI has proved to be resilient during financial crisis. For instance,

in East Asian countries such investment was remarkably stable during the global

financial crisis of 1997-98. In sharp contrast, other forms of private capital flows likeportfolio equity and debt flows were subject to large reversals during the same crisis.

Similar observations have been made in Latin America in the 1980s and in Mexico in

1994-95. FDI is considered less prone to crises because direct investors typically have

a longer-term perspective when engaging in a host country. In addition to risk sharing

properties of FDI, it is widely believed that FDI provides a stronger stimulus to

economic growth in the host countries than other types of capital inflows. FDI is

more than just capital, as it offers access to internationally available technologies and

management know-how.

7. Revenue to Government: Profits generated by FDI contribute to corporate taxrevenues in the host country.

3.2: Disadvantages of Foreign Direct Investment

FDI is not an unmixed blessing. Governments in developing countries have to be very

careful while deciding the magnitude, pattern and conditions of private foreign

investment. Possible adverse implications of foreign investment are the following:

1. When foreign investment is competitive with home investment, profits indomestic industries fall, leading to fall in domestic savings.

2. Contribution of foreign firms to public revenue through corporate taxes is

comparatively less because of liberal tax concessions, investment allowances,

disguised public subsidies and tariff protection provided by the host government.

3. Foreign firms reinforce dualistic socio-economic structure and increase income

inequalities. They create a small number of highly paid modern sector executives.

They divert resources away from priority sectors to the manufacture of

sophisticated products for the consumption of the local elite. As they are located

in urban areas, they create imbalances between rural and urban opportunities,

accelerating flow of rural population to urban areas.

4. Foreign firms stimulate inappropriate consumption patterns through excessive

advertising and monopolistic market power. The products made by multinationals

for the domestic market are not necessarily low in price and high in quality. Their

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technology is generally capital-intensive which does not suit the needs of a labor-

surplus economy.

5. Foreign firms able to extract sizeable economic and political concessions from

competing governments of developing countries. Consequently, private profits of

these companies may exceed social benefits.

6. Continual outflow of profits is too large in many cases, putting pressure on

foreign exchange reserves. Foreign investors are very particular about profit

repatriation facilities.

7. Foreign firms may influence political decisions in developing countries. In view

of their large size and power, national sovereignty and control over economic

policies may be jeopardized. In extreme cases, foreign firms may bribe public

officials at the highest levels to secure undue favours. Similarly, they may

contribute to friendly political parties and subvert the political process of the hostcountry.

Key question, therefore, is how countries can minimize possible negative effects and

maximize positive effects of FDI through appropriate policies.

3.3: DETERMINANTS OF FDI

To understand the scale and direction of FDI flows, it is necessary to identify their major

determinants. The relative importance of FDI determinants varies not only between

countries but also between different types of FDI. Traditionally, the determinants of FDI

include the following.

1. Size of the Market: Large developing countries provide substantial markets where

the consumers demand for certain goods far exceed the available supplies. This

demand potential is a big draw for many foreign-owned enterprises. In many cases,

the establishment of a low cost marketing operation represents the first step by a

multinational into the market of the country. This establishes a presence in the

market and provides important insights into the ways of doing business and possible

opportunities in the country.

2. Political stability: In many countries, the institutions of government are still

evolving and there are unsettled political questions. Companies are unwilling to

contribute large amounts of capital into an environment where some of the basics

political questions have not yet been resolved.

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3. Macro-economic Environment: Instability in the level of prices and exchange rate

enhance the level of uncertainty, making business planning difficult. This increases

the perceived risk of making investments and therefore adversely affects the inflow

of FDI.

4. Legal and Regulatory Framework: The transition to a market economy entails theestablishment of a legal and regulatory framework that is compatible with private

sector activities and the operation of foreign owned companies. The relevant areas in

this field include protection of property rights, ability to repatriate profits, and a free

market for currency exchange. It is important that these rules and their administrative

procedures are transparent and easily comprehensive.

5. Access to Basic Inputs: Many developing countries have large reserves of skilled

and semi-skilled workers that are available for employment at wages significantly

lower than in developed countries. This provides an opportunity for foreign firms to

make investments in these countries to cater to the export market. Availability ofnatural resources such as oil and gas, minerals and forestry products also determine

the extent of FDI.

The determinants of FDI differ among countries and across economic sectors. These

factors include the policy framework, economic determinants and the extent of

business facilitation such as macro-economic fundamentals and availability of

infrastructure.

Chapter FOUR

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FOREIGN DIRECT INVESTMENTS IN AFGHANISTAN

Afghanistan today is the land of countless business and investment opportunities. Despitepersistent successes in making Afghanistan a place suitable for investment, an important

policy decision which the government has made is the creation of the Afghanistan

Investment Support Agency (AISA); a one-stop shop to serve the interests and needs of

investors. AISA has been charged with the responsibility to facilitate registration,

licensing and promotion of all investments in Afghanistan. It concentrates on pro-active

measures to attract industrial investment from both within and outside Afghanistan, thus

generating employment and economic growth towards the achievement of these goals;

AISA has full support of the Afghan government.

During the past four years, the Afghan people have achieved major progress towardspeace and prosperity. We are building a country where men and women can find suitable

employment opportunities; where products in international demand can be produced and

traded; and where national and international firms can do great business. The

Government of Afghanistan actively supports investment in the private sector as a means

to creating a prosperous market economy in Afghanistan.

Historically, Afghanistan has been at the heart of major trading routes, amongst them, the

fabled Silk Road, which is one of many that have served the region throughout the

centuries. Over the past ten years, the Afghan people have steadily progressed towards

peace and prosperity, and its economy has seen meteoric growth. Once again,Afghanistan is emerging as a central hub for trade as the economies of Central and South

Asia continue to grow and become increasingly integrated into the global economy.

The Government of Afghanistan understands the critical role it must play to create a

favorable environment for investment. The passage of the Private Investment Law in

2006 was an important milestone demonstrating the Governments commitment to

attracting new investment. The Investment Law allows for one hundred percent foreign

ownership, easy repatriation of profits, and treats foreign investors in the same fashion as

domestic investors, meaning a foreign investor can achieve 100% ownership of his or her

investment.

With this in mind, the Government has adopted a pro-private sector stance and a liberal

trade regime. In this environment, the economy has been growing at approximately 10%

per year. Although real GDP growth is expected to close the fiscal year 2011-12 at 5.7%,

down from 8.4% in 2010-11. However, this year (2012-13) GDP growth is projected to

pick up again and is estimated to reach 7.1%.

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Additionally, our Financial Management Law emphasizes fiscal discipline and

management of public finances in line with the current international standard of best

practice. The 100 % write-off of Afghanistans past debt, combined with the

Governments policy of maintaining a balanced budget, allows for Afghanistan to now be

one of the least indebted governments in the world. Afghanistan has a very liberal foreign

exchange system that allows people to legally bring money to the country and easily take

it out again. Therefore, individuals, companies, and banks are allowed to operate foreign

exchange accounts in Afghanistan. In 2005, the tax code was restructured and clarified

with an emphasis on simplicity and low taxation with export taxes removed for almost all

products. Afghanistan has the lowest tariffs in the region and its tariff categories are

simple and few in number.

The Government of Afghanistan has created a highly pro-business investment

administration and scores very highly when measured by the World Banks Doing

Business Indicator. We rank 30th out of 183 countries in terms of ease in starting a

business in Afghanistan.

4.1: Prior Sectors for Investment

1. Agriculture: Agriculture remains fundamental to the livelihood in Afghanistan,

generating one third of the countrys GDP and supporting nearly 80 per cent of its people.

The climate of Afghanistan is well suited for the cultivation of horticultural crops. Thats

why; the country is the origin of many high-end crops like raisins, pomegranates,pistachios and almonds. One industry related to the agricultural sector is packaging,

which provides great opportunities for investors. Although demand for Afghan

agricultural goods is high, current packaging procedures are outdated and prevent trade

and commerce. Processing is another great investment opportunity. Due to the growing

markets for fruits and vegetables, the potential for processed agricultural products is

enormous, including snack foods, fruit concentrates as well as fresh fruit jams.

2. Construction Materials: Creating a competitive national construction industry is a

prerequisite for the reconstruction of Afghanistan. Currently, the sector is one of the

fastest growing in the country. Thats why; the demand for construction materials isrising rapidly in Afghanistan, making the market more attractive for foreign investors.

For example, urban planners and government officials develop a new urban area in the

north of Kabul which will be home to estimated 1.5 million people.

3. Telecommunication: Core telecommunication service providers supply the Afghan

market already in a sufficient manner with increased competition and price pressures.

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While there are still opportunities for mobile service providers, the other supply and

service areas of the telecommunication sector represent a far more virgin market.

Examples are: Data processing, basic business-processing operations, information and

communication technologies, data transfer, process control and call centers.

4. Transport and Logistics: Afghanistan shares borders with six neighbors Iran,Turkmenistan, Uzbekistan, Tajikistan, China and Pakistan and is considered as a land

bridge connecting emerging markets in Middle East, Central and Southern Asia. The

countrys large and growing market for transportation and logistics services presents a

ground floor opportunity for new providers.

5. Mining: Afghanistan has a huge potential of mineral and energy resources which

is still to a large extent unexploited. The development of the extractive industries

sector has been identified as the single most important lever to develop the economy,

create employment and raise government revenues. According to globalwitnes.org,

Announcements of mineral and petroleum reserves worth up to $3 trillion have raisedhopes that these resources could transform Afghanistans future. Managed well, they

could bring essential revenue and employment into the country ensuring a better quality

of life for the Afghan people and a move away from aid dependency. Managed badly,

such resources could exacerbate corruption and give rise to further conflict, undermining

prospects for future peace, stability and development.

Early investors report modest start-up costs and low overheads, and even smaller

operators are moving large volumes of freight. Investments in the transportation and

logistics sector are vital to the overall economic development, as it will enable the

transportation and distribution of products throughout the country and to overseasdestinations.

4. 2: Incentives for Investment

The Government of Afghanistan has announced 10-years tax exemption and land

subsidies for businesses that invest over $1 million in Afghanistan during 2013. The

Ministry of Finance has said other incentives will be offered and companies will get free

land for factories and business centers, and loans from Afghan state banks on easy terms.

The announcement is part of the plan to avoid flight of capital from Afghanistan amid the

increasing concerns of insecurity and instability after 2014. The current security and

political uncertainties about the situation after the US and NATO withdrawal has already

caused a flurry of capital and other assets' flight from country.

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Recent reports say the new trend is that people with assets in the country are now

transferring it as gold bars inside airlines. Similar cash outflow was reported earlier,

which continues. On the other hand, ordinary Afghans, particularly the youth are

increasingly seeking for ways to leave the country.

Apart from such financial incentives for investment, the Government needs to take solid

steps to undermine the perception of post-2014 uncertainty about political stabilitythe

main source of all the worries. People are not actually afraid of return of Taliban or that it

is even a distant possibility, but any political adventure with the transfer of power in

Kabul scheduled for 2014 will cause our demise.

Such steps include all preparations for smooth power transfer through free, fair and

transparent elections. The election law and voter registration are fundamental issues on

which the rulers are playing delay tactic to turn the events in favor of their longevity and

influence the process.

The international community, particularly major stakeholders such as the US and other

NATO powers should also encourage their private sector for investment in Afghanistan.

It increases the uncertainty among other international companies to see that any major

American or European company has not invested in private sector in Afghanistan,

particularly our mining sectoran insurance of our economic independence and stability.

Recently there was $700 million investment by a joint US-Afghan company in the oil

refinery plan in Northern Afghanistan. Governments of other NATO and donor countries

should encourage their companies to benefit from the 10-years tax exemption incentive

and invest in Afghanistan. They can do a great help by this to ensure suitability of their

contributions in reconstruction of Afghanistan throughout the last decade.

Outlook Afghanistan.net

4.2: BILATERAL INVESTMENT AGREEMENTS & OVERSEAS CORPORATIONS

BILATERAL INVESTMENT AGREEMENTS: Afghanistan has bilateral investment

treaties (BITs) with Turkey and Germany. Afghanistan became a full member of the

South Asia Free Trade Area (SAFTA) on August 7, 2011. Most products originating in

Afghanistan can be imported into the U.S. duty-free under the Generalized System of

Preferences (GSP) Program, and EU tariffs on Afghan products are also very low.

Afghanistan is a member of the South Asian Association for Regional Cooperation

(SAARC) and Central Asian Regional Economic Cooperation (CAREC). The

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Afghanistan Pakistan Transit Trade Agreement (APTTA) was signed by both countries in

Kabul in October 2010. Once fully implemented, APTTA should cut down on

transportation costs and promote trade within the region. Afghanistan signed a Trade and

Investment Framework Agreement (TIFA) with the United States in 2004, but a BIT has

not been negotiated. Afghanistan does not have a bilateral taxation treaty with the United

States.

OVERSEAS PRIVATE INVESTMENT CORPORATION AND OTHER

INVESTMENT INSURANCE PROGRAMS: The U.S. Overseas Private Investment

Corporation (OPIC) has an active and expanding portfolio of political risk insurance and

provides both direct and indirect financial support to private business investments in

country. OPIC makes direct loans of up to 60% of long-term investments that are at least

25% owned by a U.S. investor. OPIC provides political risk insurance coverage for the

U.S. equity component, as well as reinsurance support for insurance that is written in-

country. Afghanistan is a member of the Multilateral Investment Guarantee Agency

(MIGA).

4.3: OPENNESS TO FOREIGN INVESTMENT

Government Official support for open markets and private sector participation is stated in

the Afghanistan National Development Strategy (ANDS), which President Karzai and the

international donor community endorsed in June 2008. The Afghan Constitution and the

2005 Law on Private Investment specifically prohibit discrimination against foreign

investors. According to the Afghan Investment Support Agency (AISA), a quasi-

government agency under the Ministry of Commerce that operates a streamlined business

registration process ("one-stop shop") and conducts a host of business and investmentpromotion and facilitation activities, discussions are underway to improve regulations

under the law.

Investment in certain sectors, such as non-banking financial activities, insurance, natural

resources, and infrastructure (defined to include power, water, sewage, waste-treatment,

airports, telecommunications, and health and education facilities) is subject to special

consideration by the High Commission on Investment (HCI), in consultation with

relevant government ministries. The HCI is GIROAs focal point for investment policy-

making and is composed of the Ministers of Commerce, Agriculture, Foreign Affairs,

Finance, AISA, and Da Afghanistan (Central) Bank. Investments can be 100 percentforeign-owned and foreigners are not required to secure an Afghan partner. However, the

Afghan Constitution and the Private Investment Law prohibit foreign ownership of land,

which compels most foreign firms to work with an Afghan partner. Foreigners may lease

land for periods up to 50 years for arable land or longer for non-arable land. Some leases

have been negotiated with an automatic renewal clause for terms of up to 99 years. Many

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businesses cite access to land as one of the greatest impediments to investment in

Afghanistan.

Private investors have the right to transfer their capital and profits out of Afghanistan,

including for debt service for off-shore loans. GIROA has adopted economic reform

programs, which rely heavily on foreign experts who base their initiatives oninternational best practices. GIROA has also adopted progressive policies to foster trade

and investment, including currency reform, rationalized customs tariffs, and a simplified

tax code. It has also set up structures to help promote investment and investment-friendly

policies.

Important commercial laws currently in effect cover partnerships, corporations and

limited liability companies, competition, arbitration, mediation, copyrights, trademarks,

and patents. Laws modernizing legislation on trademarks, transportation, the Chamber of

Commerce and competition have also been passed by Parliament and approved by the

President. In March 2011, the President signed the newest Telecommunications Law,replacing the previous law enacted by decree. A related Information Communication

Technology Law was submitted to Parliament and is expected to be approved in mid-

2012 (approved as of now), which will lay the groundwork for a new industry in

electronic commerce and cyber security. An anti-hoarding law, commercial agency law,

and a contract Law are also under consideration. Accounting and standards regimes have

yet to be set up. The primary challenges with the new laws and pending legislation and

regulations will be their implementation and enforcement.

The Afghanistan Chamber of Commerce and Industries (ACCI) advocates for the

establishment of a legal framework for private business in Afghanistan, engages withsenior-level GIROA officials, and provides an array of services to members, such as

providing sector analysis and economic and trade statistical data. ACCI became a private

chamber of commerce in 2008. Since then, ACCI has elected its leadership, endorsed the

2005 Private Investment Law, and established offices in 21 provinces of Afghanistan.

ACCI works with Parliament, the Office of the President, and the Ministries of Finance,

Commerce, Interior, Transport, Justice (among others) to bring about reform and

encourage investment in Afghanistan. ACCI also has affiliations and partnership

agreements with investors, business and trade associations in the United States,

Tajikistan, Iran, Pakistan, Kazakhstan, China, Germany, Turkey, India, Croatia, Czech

Republic, Russia, the United Arab Emirates, Italy, and many other countries.

Afghanistan's legal system is only just beginning to be rebuilt. Much of the framework

necessary for encouraging and protecting private investment is not yet in place, and the

existence of three overlapping systems (the Sharia-Islamic Law, the Shura-traditional law

and practice, and the formal legal system instituted under the 2004 Constitution) can be

confusing to both investors and legal professionals.

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Although most senior Afghan government officials express strong commitment to a

market economy and foreign investment, many businesses maintain that this attitude is

not always reflected in practice. Many government officials -- some of whom demand

bribes, levy unofficial taxes, and inflict bureaucratic delays -- are out of step with official

government policy. Commercial regulatory bodies are often understaffed.

While not sanctioned by law or official policy, small groups of businessmen, many of

whom are alleged to have connections with current or former warlords and militias,

dominate the trading market in many areas. These individuals, because of their wealth

and insider access to land, credit and contacts, and their ability to manipulate prices,

enjoy excessive advantages that result in a non-competitive environment in some fields,

notably gem-mining, fuel transport, and construction. In addition, some industries,

including money changing and carpet production, have well-organized guilds which

protect existing firms and create barriers to entry.

The World Banks 2012 Doing Business Report ranks Afghanistan at 160th out of 183economies for the ease of doing business overall. This ranking reflects the reality that the

legal, regulatory frameworks and enforcement mechanisms are in a nascent stage.

USAID launched a Doing Business Indicators (DBI) Project in January 2011 to focus on

improving the business-enabling environment in Afghanistan. Minister of Commerce and

Industries (MOCI) leads the initiative. Under the initiative, five working groups were

created to study and make recommendations for improving Afghanistans rating on the

following selected World Bank index indicators: 1) Starting a business; 2) Registering

property; 3) Protecting investors; 4) Trading across borders; and 5) Closing a business.

USAID provided key recommendations for reform on five indicators and the reformactivities were transitioned to MOCIs leadership. One of the major contributions of the

working groups was raising awareness among GIROA and the private sector regarding

the provision of accurate feedback for the 2012 Doing Business in Afghanistan Report.

On October 1, 2011, USAID signed a partnership with the World Bank/International

Finance Corporation to improve business climate in Afghanistan. The project initiated

with a comprehensive assessment of status of the Doing Business in Afghanistan Report

in mid-September 2011. The recommendation memo is expected to be rolled out during

the second half of January 2012.

CONVERSION AND TRANSFER POLICIES: There are no restrictions on

converting, remitting or transferring funds associated with investment, such as dividends,

return on capital, interest and principal on private foreign debt, lease payments, and

royalties and management fees, into a freely usable currency and at a legal market

clearing rate. The Private Investment Law states that an investor may freely transfer

investment dividends or proceeds from the sale of an approved enterprise abroad.

Afghanistan does not maintain a dual exchange rate policy, currency controls, capital

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controls, or any other restrictions on the free flow of funds abroad. Access to foreign

exchange for investment is not restricted by any law or regulation.

In practice, however, particularly in the provinces, many banks may not have the capacity

to deal with foreign exchange. The large, informal foreign exchange markets in major

cities and provinces such as Kabul, Mazar-e Sharif, Jalalabad, Kandahar, and Herat,where U.S. dollars, British pounds, and Euros are readily available, are slowly starting to

become formal markets. As of October 2010, Da Afghanistan Bank had issued 209

licenses for money service providers (MSPs) and 271 licenses for money exchange

dealers in Kabul, all commonly referred to as hawaladars. It has licensed 88 MSPs and

396 money exchange dealers in the provinces. Despite these licensed service providers

and exchange dealers, there are thousands of unlicensed money changers that continue to

practice their trade. Non-official money service providers often cite the lack of

enforcement in the currency exchange area and the resulting competitive disadvantage to

licensed exchangers as a reason not to get MSP licenses. Foreign Investors investors

should only use licensed hawaladar money service providers, who are listed on thewebsite of Da Afghanistan Bank. The only requirements placed on the outflow of funds

are to prevent money laundering (and the financing of terrorism). The transport of more

than AFS 1,000,000 or equivalent in cash across the border of Afghanistan into another

country must be reported in advance to Afghan Customs.

EXPROPRIATION AND COMPENSATION: The Private Investment Law states,

"The State can expropriate an investment or assets only for the purposes of public interest

and on a non-discriminatory basis." It further states that the State shall provide prompt,

adequate and effective compensation in conformity with the principles of international

law, equivalent to the fair market value. The State may confiscate private property inorder to settle bad commercial debts. The law allows a majority investor to challenge the

expropriation, but this right does not extend to minority shareholders. There have been no

reports of State expropriation of foreign assets, "creeping" or otherwise.

DISPUTE SETTLEMENT: While a commercial court system exists, the lack of a law

on commercial agency is a significant impediment to the arbitration of commercial

matters. In addition, there is a shortage of qualified legal practitioners, and corruption in

the judicial system is endemic. The enactment of the Arbitration and Mediation Laws in

2007 established the foundation for an alternative dispute settlement system. Afghanistan

is a party to the Convention on the Settlement of Investment Disputes between States and

Nationals of Other States and the New York Convention of 1958 on the Recognition and

Enforcement of Foreign Arbitral Awards. The Private Investment Law provides for

dispute resolution under these mechanisms, under United Nations Commission on

International Trade Law (UNCITRAL) rules, or under any mechanism that the investor

has specified in a contract with another investor. The international donor community is

supporting the development of an Afghanistan Center for Dispute Resolution.

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Under these conditions, the legal system plays a limited role in adjudicating commercial

disputes and most businesses use informal mechanisms to resolve disputes and enforce

property rights. AISA, for example, has some capability to assist investors in the

mediation of certain disputes. Investment disputes are common in the areas of land titling

and contracts. The lack of a comprehensive land titling database means that several

individuals may hold deeds to the same property. Real estate agents are not reliable.Those foreign investors seeking to work with Afghan citizens to purchase property are

advised to conduct extensive and painstaking due diligence.

PERFORMANCE REQUIREMENTS AND INCENTIVES: Afghanistan has no

formal regulations or laws governing performance requirements. There are no separate

investment incentives or special treatment accorded to foreign investors. There are no

government-imposed conditions on investment, beyond the procedures required for

establishing or acquiring a business. GIROA does not impose offset requirements on its

procurements. GIROA does not apply discriminatory or excessively onerous visa,

residence or work permit requirements for foreigners, but bureaucratic processing ofvisas can be time-consuming and there have been reports of bribes being solicited for

faster processing. There are no discriminatory or preferential export and import policies

affecting foreign investors. As noted above, the HCI may choose to apply terms that are

different from those generally applied to investments for certain restricted sectors.

RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT: Under the Private

Investment Law, foreign and domestic private entities have equal standing and may

establish and own business enterprises, engage in all forms of remunerative activity and

freely acquire and dispose off interests in business enterprises.

PROTECTION OF PROPERTY RIGHTS: Property rights protection is weak due to a

lack of cadastres or a comprehensive land titling database, disputed land titles, incapacity

of commercial courts, and widespread corruption. The acquisition of a clear land title to

purchase real estate or a registered leasehold interest is complicated and cumbersome.

The World Bank estimated in its 2012 "Doing Business Report" that it takes an average

of 250 days and entails legal fees of five percent of property value to register property.

According to Da Afghanistan Bank and ACCI, there is no law in force that deals

specifically with bankruptcy, although the subject is discussed in some of the articles of

the Banking Law. The Corporation Limited Company Law, Mediation Law and

Partnership Law also discuss bankruptcy. The Law on Mortgage and Secured

Transactions was approved by Parliament and signed by the President in 2009.

While Afghanistan has laws on patents and copyright, they are not compliant with World

Trade Organization (WTO) standards and are in the process of being amended. A draft

Law on Trademarks is also being amended to conform to WTO standards. Afghanistan is

not a member of the WTO Trade Related Intellectual Property Rights (TRIPS)

Agreement or the World Intellectual Property Organization (WIPO) Internet Treaties.

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There is not serious enforcement of intellectual property rights and pirated DVDs and

software are sold throughout the country. Counterfeit pharmaceuticals and building

materials are also widespread.

TRANSPARENCY OF THE REGULATORY SYSTEM: In general, the Afghan

government promotes transparent policies and effective laws to foster competition,establish "clear rules of the game" and promote, rather than hinder, foreign investment.

The inadequacy of the regulatory system and corruption at every level of government

create larger obstacles to investors than the transparency of the regulations. Procedures

for obtaining a business license were streamlined in 2003 with the establishment of

AISA, which serves as a "one-stop shop" for investors, and has greatly facilitated the

process of establishing a business. Afghanistan ranks 30th out of 183 economies in the

ease of starting a business, according to the World Bank's 2012 "Doing Business Report."

There are no informal regulatory processes managed by non-governmental organizations

or private sector associations. However, in these cases, Parliament has the right to review

and amend the decrees.

EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT: Finance is

Afghanistan's second largest service industry (behind telecommunications) and an

important driver of private investment and economic growth. The sector has grown

rapidly since the end of Taliban rule. Today, 17 commercial banks operate in

Afghanistan, with total assets of $4.1 billion (compared to assets of less than $300

million in 2004). There are three state banks, Bank-e Milli (National Bank), Pashtani

Bank, and the recently-acquired New Kabul Bank. There are also branch offices of

foreign banks: Alfalah Bank (Pakistan), National Bank of Pakistan, Standard Chartered

Bank (UK), Brac Bank (Bangladesh), and Aryan Bank (Iran). However, most Afghansremain "unbanked," with only five percent currently holding deposits. In addition, many

Afghans continue to rely on money service providers (or hawalas) to access finance and

transfer money because of the unfamiliarity with a functioning banking system and

limited access to banks in rural areas.

Three of the four mobile network operators Etisalat, MTN, and Roshan offer money

mobile services. Banking remains highly centralized, with more than 75% of total loans

made in Kabul Province. Bank lending is also undermined by a deficient legal and

regulatory infrastructure that impedes the enforcement of property rights and

development of collateral, leading banks to concentrate on short-term trade credit to well-

known customers. The difficulty of accessing credit through banks and other formal

financial institutions makes existing firms dependent on family funds and retained

earnings, limits opportunities for entrepreneurialism, and reinforces dependence on the

informal credit market.

The exposure of massive fraud in the countrys largest bank, Kabul Bank, in 2010 laid

bare the underlying weaknesses in banking regulation and supervision. Despite receiving

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significant technical assistance, Da Afghanistan Bank has been unable to match the pace

of the banking sectors growth with requisite improvements in monitoring and

supervision. These weaknesses have been compounded by a lack of political will in the

Afghan government more broadly to enforce laws against well-connected wrongdoers in

the financial sector. Credit to the private sector stands at less than ten percent of GDP,

significantly lower than other countries in the region. Afghanistan ranks 150th out of 183countries for ease of obtaining credit in the World Bank's 2012 "Doing Business Report."

Most Afghan entrepreneurs complain that the interest rate for a commercial loan from a

local bank ranges from 15-20 percent. In response to this situation, investment funds,

leasing, micro-financing, and SME-financing companies have entered the market;

however, despite strong donor support for many of their activities, these firms have been

handicapped by difficulties in securing repayment and other factors that impede bank

lending.

COMPETITION FROM STATE-OWNED ENTERPRISES: In principle,

government policies and regulations apply the standard of competitive equality to privateenterprises in competition with public enterprises with respect to access to markets, credit

and other business operations. However, in some instances, working-level government

officials have exhibited anti-competitive and protectionist bias in some sectors in which

state-owned enterprises (SOEs) are active. Under Presidential Decree No. 103 (2005), the

Ministry of Finance has sole responsibility for assessing the economic viability of State-

owned enterprises (SOEs). Since passage of the Decree, the Ministry of Finance has

determined that eight of 64 enterprises should remain state-owned for the time being,

while the other 56 should be divested-either through privatization, liquidation,

corporatization or other mechanisms. The Afghan government has identified for

divestment more than 1,400 SOE land parcels/buildings, from 44 SOEs evaluated. TheAfghan government has approved 29 SOE liquidations, restructuring, and corporatization

proposals. Foreign and domestic investors enjoy equal treatment under ongoing

privatization programs.

CORPORATE SOCIAL RESPONSIBILITY: GIROA is working with large

companies and foreign investors to encourage corporate social responsibility (CSR).

Large mining contracts include stipulations for environmental protection and community

inclusion. Afghanistan law prohibits mining that would result in the destruction of

antiquities unless the mining company has prior approval from the Ministry of

Information and Culture. All four competing mobile network operators in the country

have well-developed CSR outreach programs that include health, education, job creation,

environmental protection, and outreach to refugees. Some Afghan charities are also

benefiting from CSR funds from companies outside of the country. The newly-formed

American Chamber of Commerce in Afghanistan (AmCham Afghanistan) has identified

CSR as one of its core areas of focus. In addition, some Afghan entrepreneurs, such as

Ihsanullah Bayat, Hotak Azizi, and the Alokozay Group, have foundations that provide

assistance in the fields of health, education, and the eradication of poverty.

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4.4: CHALLENGES TO FDI

POLITICAL VIOLENCE: Afghanistan is struggling toward political stability, but anti-

government violence has constrained economic activity. The government is taking steps

to extend its reach in the provinces, but the risk of violence continues to be high in many

areas, and security remains a primary concern for most investors. Foreign firms operatingin country report spending a significant percentage of their revenues on security

infrastructure and operating expenses. The U.S. Department of State continues to warn

Americans against travel to Afghanistan. U.S. citizens should review the Consular

Information Sheet and Travel Warning for Afghanistan for the most up-to-date

information on the security situation and possible threats.

CORRUPTION: Corruption is pervasive in Afghanistan. In 2011, the country ranked

180th out of 182 countries in Transparency International's Corruption Perception Index.

Based on the Penal Code, corruption is a serious criminal act; articles 260 to 267, state

that anyone accepting or giving a bribe can be charged with criminal acts. While theseanti-corruption laws exist, enforcement has been very limited. President Karzai created

the High Office of Oversight for the Implementation of Anti-Corruption Strategy

("HOO") to coordinate anti-corruption measures for the government; this office,

however, does not control penalties and fines and has been largely ineffective.

Afghanistan acceded to the United Nations Convention against Corruption (UNCAC) in

August 2008, but is not a party to the OECD Convention on Combating Bribery of

Foreign Public Officials. The early 2011 establishment of the Independent Monitoring

and Evaluation Committee (MEC) for Anti-corruption should assist the Afghan

Government in assessing its compliance with UNCAC. However, questionable Afghan

Government commitment to supporting the MEC and early administrative challengesplague the new organization.

U.S. firms identify corruption as one of the biggest obstacles to foreign direct investment

and routinely report being asked for a bribe, called "sherini" or "baksheesh." Although

official working-level government salaries have recently raised, many officials at all

levels take small bribes for government services. U.S. companies are expected to comply

with the Foreign Corrupt Practices Act, which prohibits the bribery of foreign officials.

FOREIGN DIRECT INVESTMENT STATISTICS: Comprehensive foreign direct

investment (FDI) statistics for Afghanistan are unavailable. Available figures are not

reliable because of inconsistencies in data collection. The United Nations Conference on

Trade and Development (UNCTAD) 2010 World Investment Report estimates FDI flow

into Afghanistan in 2009 at USD 185 million and total FDI stocks at USD 1.55 billion,

representing 10.3% of GDP. According to AISA, the top FDI destination sectors in

Afghanistan on average over the 2003-2011 period, in descending order, were services

(56.3%), construction (32.6%), industries (10.2%) and agriculture (0.9%). AISA also

stated that in 2011, the three largest investors were the United States ($6.5 million),

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Turkey ($4.3 million), and India ($2.6 million). AISA's data track approved, rather than

actual, investment. * state.govt

CHAPTER FIVE

AFGHANISTAN OVERVIEW

5.1: Economic performance of Afghanistan has been remarkable:

The economy has grown at a remarkable pace since 2003; average growth rate over

the perio d 2003 -2011 ha s be en 11.2 percent . Only few countri es in the

re gi on ha ve experienced a growth rate above 10 percent in the last decade. For

Afghanistan, this is a remarkable achievement despite the fact that serious security

challenges exist in the country. Real GDP growth is estimated at 5.7 percent in

2011/12 and is projected to increase to 7.1 percent in 2012/13. Income per capita is

estimated by the World Bank at US $501, which puts Afghanistan in the 175th

position among 190 countries in the world.

Afghanistan GDP Per Capita: The Gross Domestic Product per capita in

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Afghanistan was last recorded at 575.97 US dollars in 2011. The GDP per Capita in

Afghanistan is equivalent to 5 percent of the world's average. GDP per capita in

Afghanistan is reported by the World Bank. Historically, from 1960 until 2011,

Afghanistan GDP per capita averaged 194.6 USD reaching an all time high of 576.0

USD in December of 2011 and a record low of 54.4 USD in December of 1962. The

GDP per capita is obtained by dividing the countrys gross domestic product, adjusted

by inflation, by the total population. This page includes a chart with historical data for

GDP per capita in Afghanistan.

5.2: Investment in Afghanistan

During the last ten years, private investment has had a strong and rapid growth in

the country. Share of private investment increased from 1.3 percent of GDP in

2003 to 8.6 percent in 2011. Total investment (including public and private),

however, amounted to 22.6 percent of GDP in 2011. Since 2003, more than

25,000 businesses in different sectors and activities registered with AISA, whichin total have invested almost $5.2 billion in Afghanistan. Foreign direct

investment (FDI) makes approximately one-third of all private investment in the

country.

Investment in Afghanistan since 2003

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4.5 4.18 4.16

4

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0

Chapter six

Sector-wise study of FDI in Afghanistan

From the past ten years now (2003-2013), Afghanistan has been passing through aneconomic recovery period which was broken out during three decades of wars past 2001.

The strong presence of international community, untapped natural resources, strategic

location and fair governmental laws of the country has attracted the international

investors to invest in the country.

The flow of FDI to the country has brought remarkable changes and development in

different sectors, which has pushed up the economy to grow up.

However, in this research I am going to focus on the investments in five major sectors

which are; Agriculture, Construction, communication, transportation and mining from2003 to 2013.

Agriculture

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In the mid-1970s, Afghanistan was almost self- sufficient in its food supply. At that time,

nearly 3.3 million hectares were cultivated using various methods of irrigation,

representing approximately 85 percent of the countrys total crop production. The

cultivated area dropped to approximately two million hectares, due to Conflict, drought,

floods, and decrepit irrigation systems.

The total area under irrigation is increasing again, but remains vulnerable to water

shortages. Nevertheless, agriculture still accounts for over half of the countrys GDP,

with more than 80 percent of the population engaged in this sector, including livestock-

raising. According to the International Monetary Fund, however, the informal

agricultural sector devoted to opium production earns about 40-50 percent of GDP,

although as an illegal activity it does not register in official economic calculations.

1. Investment Opportunities in Agriculture Sector

Agriculture is a basic means of livelihood in Afghanistan, generating 36% of the

countrys GDP and supporting 85% of the total population in Afghanistan. The climate of

Afghanistan is well suited for the cultivation of horticultural crops and Afghanistan is the

geographic origin of many high-end crops like raisins, pomegranates, pistachios and

almonds. There are approximately one million farms in Afghanistan and more than 2,000

wholesalers for horticulture products. Products are brought directly from the farms to five

major wholesale markets located in Kabul, Mazar-e-Sharif, Kandahar, Herat and

Jalalabad. Between farmers and wholesalers, there are thousands more people employed

as middle-men.

The majority of private sector entrepreneurs in Afghanistan are farmers and the bulk of

industrial sector processing is geared to providing services to farmers and farm related

business. Because this sector contributes the most to national income and personal

livelihoods, increased investment in the agro-business and agriculture areas will have a

direct positive impact on the lives of thousands of Afghans. Intensive commercial

farming increases sustainable economic growth in rural areas, encourages competition,

contributes to regional development and helps sustain the growth of private businesses.

Afghanistan benefits from low labor and irrigation costs by regional comparison and high

value cash crops provide vital food security and an alternative to poppy cultivation in the

country.

Between 1999 and 2002, Afghanistan experienced the worst drought in decades, which

greatly damaged production levels of agricultural goods. Now Afghanistan is poised to

increase these production levels, but it will take investment and government support to

realize this potential. Part of this effort includes building capacity through training

farmers on how to increase output and adopt modern techniques. In a survey, nearly 70%

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of farms interviewed (around 730,000 farms total) revealed they are too small to achieve

self-sufficiency and are interested in farming higher value crops other than wheat. The

NGO community is playing a strong role in this training and there is an encouraging

willingness of local producers to receive technical assistance.

Agro-business and agro-processing provides an array of exciting investmentopportunities. The industry has first-mover advantages for investors in modern

processing techniques that involve cleaning, sorting and grading, and also packaging

plants that incorporate quality control measures like hygiene and traceability. Improved

transportation logistics for exports, including cold storage facilities, is one of the critical

priorities. Adequate infrastructure, especially an improvement in road conditions, will

alleviate the geographic constraints that accompany Afghanistans position as a

landlocked country. *3 Statistical year book, CSO 1386, Page: 153*

Investment in agro-business and agro-processing will make a positive impact on the

economic development of Afghanistan and will give Afghans pride in producing andpurchasing local Afghan products.

One industry related to the Agriculture sector is for example packaging which

provides great opportunities for investors, as demand for Afghan agriculture goods is

high, but current packaging procedures are outdated and damage fresh goods in route to

markets and prevents an effective export business for many corps. Some 20-40% of post-

harvest horticulture products are wasted because of poor packaging.

Processing is another great investment opportunity. Market potential for processed

agricultural products including snack foods, packaged biscuits, fruits concentrates,pickles and fresh fruit jams both in Afghanistan and in the region is enormous.

Domestic production of machinery related to the agro-business and agro-processing

industries is a lucrative opportunity for investors given that current equipment in

Afghanistan is currently imported from abroad, or date back from the Soviet era.

Demand for new machinery, such as grain cleaning and sieving equipment for flour, and

tractor trolleys and ploughs, will continue to grow and be vital to the production of

agricultural goods. In the long term, the manufacture of local machinery will be

profitable to the agriculture industry.

1.1 Investment Opportunity in Dairy Industry: Investment opportunities exist in the

following areas:

Milk processing

Manufacture of cheese, butter, yogurt, milk powder, ice cream, and other dairy

Scale of operations: Small, medium & large scale production potential

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Market: Mass & niche dairy product markets, both domestically & internationally

Potential (Underserved market) Domestic market:

National Market: 32 million growing at 4% per year;

Kabul City market: 5-7 million and growing at over 7% per year;

Domestic consumption rates (pre-war) 60kg of milk per person per year average;

Current consumption averages 0.1 liters per capita, per day (versus 0.41 in

Pakistan);

A potential domestic market of 1.92 billion kg of milk annually;

Regional consumption: 25% annual increase in Chinese demand for dairy goods;

Signing of preferential trade agreement with regional and industrialist nation is another

potential opportunity especially for the dairy product manufacturers. .

Returns

Monetary returns: The price of milk has increased to 15% over 5 years compared to a

low single digit annual general inflation rate.

Social returns in terms of rural Afghanistan, and local producers. It is estimated that

producer's income from milk production has increased almost 10 fold over the period

from 7.93 Afs per day in 2002 to 73.00 Afs per day, five years later.

Type of Assistance Requested:

There is need to establish private sector firms with a solid history in the milk anddairy

industry, and export/international market experience.Specific Technical Assistance

Needs: Collection, transportation and storage of milk; processing, pasteurization, quality

control of milk, cheese, butter, yogurt, milk powder, ice cream, etc.; packaging, labeling,

transportation, export, marketing, etc. It is necessary to have experienced locally based

managers who can relate to the dairy farmers.

Experience has shown that it is necessary for the management to have marketing skills aswell as technical dairy skills. Management should be able to identify relative demand for

different products and adjust supply appropriately.

Local Advantage: Afghanistan boasts both a favorable climate, and long experience in

animal husbandry, resulting in impressive production potential. Additionally investors

can expect, full government support, minimal government regulation, and expedited

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procedure to start a business. The domestic market itself is still in its infancy though

growing rapidly and so offers great potential for early entrants.

Location Advantage: Afghanistan is centrally located in the heart of Central Asia within

close proximity to major markets such as China and India and regional markets in the

Central Asian republics, Pakistan and Iran.

Production Advantage:

2.1 million Dairy cow herd, 8.7 million sheep herd, 7.3 million goats;

Average production of 500-1,000 L/year/cow (low) to 1,000-1,500 L/year

(High);

National Production 2.1billion liters per year cow milk, about the same for sheep/goat

milk & 8.1 tones of camel milk;

Growth: Milk production is increasing by 3,200 hectoliters per year.

Competition: Local competition is primarily comprised of numerous small scale

inefficient producers with varying degrees of success in quality control serving very

limited local markets. Several medium scale enterprises have been launched throughout

the country both by the private sector and with the support of donors. These include:

Cheese factory in Pol-e-Khomri, Baghlan;

Dairy plant at Ma

Mujtaba Nezamyar's Project2

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Transcript of Mujtaba Nezamyar's Project2