Private sector development is a key pillar of the Afghan government’s economic policy and, to this end, the government has said it intends to privatise a number of state-owned enterprises. Since most of the country’s industries are government-owned privatisation holds huge potential for investors.

As with other situations in Afghanistan, however, privatisation will not be a simple process. The necessary legal and regulatory framework has yet to be passed; historical financial data for purposes of valuation and due diligence is in most cases patchy or missing altogether; and perhaps most ominously, rumours abound of a change of heart by the government, with hints of a slowdown in the process of selling off state-owned firms.

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Handle with care

While the finance minister, Anwar Ul-Haq Ahady, dismisses the idea that government is cooling on the idea of privatisation, he says the process must be handled carefully. “We must ensure that we value the assets of the state accurately, and not simply give them away. Other countries have made the mistake of undervaluing their state assets,” he adds. “Also, we do have to consider the interests of the workers in the state-owned enterprises. We cannot put them out of work without either compensation or alternative skills training.” Mr Ahady says a restructuring plan will be finalised by government “within weeks”.

In Afghanistan, progress is always just around the corner. In its most recent update of economic and financial policies to the IMF, the government promised to have concluded the restructuring plan by the end of March 2005. At this stage, there are few raised eyebrows at the missed deadline – critical capacity constraints are delaying the passage of nearly all legislation and regulation through government – but developments will be keenly watched.

Last year, the government completed a survey of state-owned enterprises, including a preliminary assessment of their financial situation. On the basis of this survey, a preliminary classification of state-owned enterprises according to how they might be best restructured was established, with as many as 41 slated for privatisation. Early indications are that the larger firms will be subject to an international tendering process.

State-owned enterprises span the full width of the economy, from agriculture to mining, from utilities to textiles. Most are in a parlous state and some are so bad they will not even make it on to the market and will be liquidated.

The privatisation process of a limited number of small state-owned companies has begun, including the sale of a cotton company and a sugar beet company. The Baghlan Sugar Factory was sold to a consortium led by German seed producer KWS SAAT AG and including a number of local Afghan investors. The deal almost fell apart when the government insisted on unrealistic valuations for the assets, which were essentially worthless. (See profile of New Baghlan Sugar Factory)

Funding needs rise

Last year, the government estimated that the funding requirements to set the privatisation process in motion would rise by $100m by the end of 2006. It says that while donor attention has been given to the matter, very little funding has been offered and, consequently, outcomes have been limited.

Afghanistan’s state-owned enterprises all require substantial capital investment for refurbishment and modernisation to a minimum standard of competitive efficiency. Just as important, investors need to commit management expertise to haul these companies into the 21st century.

However, with unemployment running at 50% in Kabul (and higher elsewhere), the government can ill afford policies that put more people out of work. It insists that a prerequisite for privatisation is a programme of reskilling to ensure workers can find new jobs and provide for themselves. This adds another hurdle to an already complex process – meaning privatisation may exist as an idea rather than a reality for some time to come.