Projects in Afghanistan often begin the same way: a special interest in the country; an import substitution opportunity; a new market for the investor’s products; lower cost development financing; and the prospect of a 20% profit margin. It is these sorts of attractions that are being used to lure investors to the country. The New Baghlan Sugar Company project has come to fruition, and the 20% profit margin is there to be had, but success has demanded hard work.

The $12m project is funded by German seed company KWS SAAT AG, the German government and four Afghan investors, who each invested $2m. It aims to re-establish sugar beet cultivation in the Baghlan area, 250km north of Kabul, and rehabilitate local sugar refining facilities. Part of the deal was the acquisition of the “old” Baghlan Sugar Factory from the government, once the centre of Afghanistan’s small domestic sugar industry.

Advertisement

Local production

No precise data exists, but the best guess is that Afghanistan consumes 350,000–400,000 tons of sugar a year, all of it imported. Historically, some of this demand has been met locally, derived from sugar beet grown mainly in the area around Baghlan.

First the Soviet invasion and then civil war brought production to a halt in 1991, when the Mujahideen forced farmers to give up cultivation of sugar beet. Since then, the old Baghlan Sugar Factory has remained idle.

In 2003, two German friends with links to Afghanistan – one the export director for KWS SAAT AG, a world leader in sugar beet seed, and the other a World Bank staffer – began investigations into rebuilding the domestic sugar industry and recapturing its sugar beet seed market for KWS. After a protracted process, the New Baghlan Sugar Company was registered in February this year.

The problems the investors encountered along the way have been numerous. Before transferring ownership to the new company, the government placed a totally unrealistic valuation of assets on the dilapidated, outdated and fully depreciated buildings and equipment of the old one, including a $260,000 charge for useless stock of spare parts. Conflicts of interest between various ministries negotiating the terms establishing the New Baghlan Sugar Company brought the process close to collapse at times.

Bureaucracy has also slowed progress. The Ministry of Finance demanded local investors submit audited financial statements for the past five years, documentation that few if any Afghan companies maintain. Staffing changes at ministries after the presidential elections also left the project in limbo for weeks.

“Investment in Afghanistan involving the public sector is not meant for the fainthearted,” says Alois Kühn of KWS. “Only those with sufficient stamina and commitment can prevail. But for those who do, an engagement in Afghanistan, where everything is needed, can be rewarding, both professionally and financially.”

The project has benefited from development finance and Mr Kühn admits that without the support of the German government, KWS would probably not have got involved. His attitude reflects the high risks of doing business in Afghanistan – but with the large amount of development finance on offer, investors can find real opportunities.

Trial plantings

Presently, three German sugar technologists, supported by 70 newly recruited local labourers and technicians, are rebuilding the plant. And a small team of international and local agronomists is working with local farmers advising them on growing beet. Encouragingly, trial plantings have produced yields of over 90 tons of sugar beet per hectare (t/ha), compared with minimum yield requirement of 35t/ha for project feasibility.

Even based on modest assumptions, the project’s return on investment will be above 15%, says Mr Kühn. In the near-term, plans are to vertically integrate the New Baghlan Sugar Company’s business activities, by using by-products from the sugar refining process, namely molasses and beet pulp, as feedstock for the production of industrial ethanol and for use in the livestock and dairy industries respectively. If the production of complementary products is added, the rate of return will rise to above 20%, says Mr Kühn.

The company is in it for the long term, he adds, with plans for additional factories once supply is firmly established.