The common preconception of Afghanistan is that you would be crazy to invest there. But it turns out that it is not so easy to sum up investment opportunities in this country in just one sentence. It is at times dangerous and desperate but it has hope and promise in equal, if not greater, measure. And, as a growing band of investors are proving, you can do business there.

Outside of the region, Afghanistan is known for little else but war, other than perhaps its notorious distinction for being the hideout of Osama bin Laden. From December 1979, when the Soviets invaded the country to prop up the communist regime in Kabul, until December 2001, when a US-led coalition routed the ruling Taliban, the country has weathered a near uninterrupted period of bloodshed and destruction.

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The removal of the fundamentalist and insular Taliban was the first opportunity to properly catalogue the full extent of the devastation wreaked by more than two decades of war. It is estimated that one in four Afghan children dies before the age of five; the country ties with Sierra Leone for having the highest maternal mortality rate; 60% of the population is malnourished; and the average life expectancy is just 43 years.

Indeed, Afghanistan is at or near the bottom of every socio-economic indicator used to measure human and economic progress. In a similar vein, public institutions, physical infrastructure and the quality and competency of the civil service are all in a deplorable state. The transitional government that assumed power in 2002 inherited a decrepit, broken-down state sector (most state-owned enterprises had ceased operation); a chronically under-developed economy (over 50% unemployment, for instance); and a population bearing the raw scars of war.

 

 

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Development targets

With the help of the international community, the Afghan government drafted its National Development Framework, stressing three key goals: private sector development, investment in infrastructure and good governance. It is a simple but coherent approach: create an environment conducive to private sector growth, which in turn creates jobs and prosperity. But since the government is dependent on foreign aid to fund the bulk of its recurrent expenditure and all of its capital spending, it is also under pressure to grow the private sector rapidly and mobilise revenues by taxing private enterprise and working individuals.

Yet private sector expansion is inhibited by numerous challenges. The recent deterioration in May of the security situation, including the ambush and murder of 11 Afghan aid workers and the kidnap of an Italian aid worker in Kabul, was a sharp reminder the country is not yet secure.

On top of this, Afghanistan’s weak infrastructure poses a number of problems. Irregular power supply necessitates the use of generators; bulk water supplies are not readily available; and the country’s transport and logistics networks will be limited, even after rehabilitation. There is a serious shortage of skilled workers, since most qualified Afghans fled the country and those left behind received little education and training. Specific skill sets, such as general management and accounting, are almost non-existent.

The country’s laws and regulations – many dating back to the Soviet communist era – are hopelessly out of date and inappropriate, if they exist at all. Ambitious legislative reform is being held up by severe capacity constraints in ministries, meaning draft laws are not being passed into legislation. Even if laws are made, the judicial system has no capacity to enforce them.

Clearing hurdles

In the face of this, key ministers and a small team of technocrats – a wafer-thin layer of competent bureaucracy – are working to remove the many obstacles to private sector development.

“Our main objective is to create an environment conducive to local and foreign private investment. We must provide security – both physical and legal – infrastructure and skills. These are the bare basics that any country must provide to attract investment. But we must also be competitive relative to our neighbours, offering tax rates and incentives that offset the risks. We will provide incentives that are greater than the risks,” says finance minister Anwar Ul-Haq Ahady.

Afghanistan’s economy has averaged more than 20% growth each year since the Taliban was overthrown, fuelled in the most part by the large injection of donor funding. Many small businesses are opening their doors and Afghans who fled the country, particularly to Pakistan and Iran, are trickling back in, bringing with them business ideas, start-up capital and know-how.

There is also growing prosperity. Average incomes have almost doubled since 2001, albeit on an uneven basis. Education is improving and there is a growing and general acceptance that business is good for development.

“You just have to compare Kabul to a year ago. There are new businesses, more cars on the street and a lot more activity,” says John Haye, CEO of Afghanistan International Bank, one of a number of substantially sized private sector start-ups that have been lured to the country by the promise of peace and stability.

Opportunities abound

Billions of dollars are being poured into reconstruction, fuelling red-hot demand for construction materials. Many of the inputs needed in the production of these materials are available in Afghanistan, but there is a lack of expertise. No slowdown in construction is expected until at least 2010.

Rejuvenation of Afghanistan’s agriculture and processing sectors also present opportunities for domestic import substitution and export. The country is heavily dependent on imports to meet its most basic needs, representing an instant market, while free trade agreements with Pakistan, India, the EU and others pave the way for Afghanistan to recoup its one-time status as a world leader in fresh and dried fruit production.

Afghanistan’s minerals and mining sector has barely been touched despite exciting Soviet-era geological work, hinting at viable deposits of numerous minerals. Copper prospects are close to going to international bidding.

Perhaps most interesting are transport and logistics opportunities as Afghanistan deepens regional economic integration with its neighbours, linking the countries to the north with seaports in Pakistan and Iran. Given its central location in the region, Afghanistan is poised to become the transit hub.

Defining factors

Realising these opportunities, however, depends on whether the Afghan government will succeed in creating a competent, functioning state; whether it can hold together Afghanistan’s many fractious ethnic groups; whether it can effectively sideline anti-government elements; and whether it can clamp down on drug lords who destabilise the rural areas. And it has to do all this before donor funds and assistance dry up.

“I think we have reached a point where we have done a lot of ‘unseen’ work; results will become far more visible in the next three years, once projects are implemented such as the ring road and electricity transmission lines. In the first three and a half years we re-established services, like education; in the next three years we must focus on the quality of these services. We will also see the country’s security forces becoming more effective,” says Mr Ahady.

Part Two