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2013 Investment Climate Statement - Afghanistan


2013 Investment Climate Statement
Bureau of Economic and Business Affairs
February 2013
Report
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The Government of the Islamic Republic of Afghanistan (GIRoA) recognizes that the development of a vibrant private sector is crucial to the reconstruction of an economy ravaged by decades of conflict and mismanagement. GIRoA has taken concrete steps toward fostering a business-friendly environment for both domestic and foreign investment. Security threats limit investors’ opportunities to develop businesses in some provinces, and certain sectors (such as mining and hydrocarbons) still lack a regulatory environment that fully supports investment. Domestic and foreign investors also rank endemic corruption high on the list of impediments. Despite these challenges, Afghanistan’s investment climate presents opportunities in all sectors of the economy. The following chart summarizes well-regarded indexes and rankings (MCC refers to the Millennium Challenge Corporation):

Measure

Year

Index or Rank

TI Corruption Index

2012

174/176 (Tied for last place with Somalia and North Korea)

Heritage Economic Freedom

2012

N/A (not ranked)

World Bank Doing Business

2013

168/185

MCC Government Effectiveness

2013

-0.58 (13%)

MCC Rule of Law

2013

-1.03 (2%)

MCC Control of Corruption

2013

-0.68 (5%)

MCC Fiscal Policy

2013

-0.4 (85%)

MCC Trade Policy

2013

N/A

MCC Regulatory Quality

2013

-0.78 (13%)

MCC Business Start Up

2013

0.956 (78%)

MCC Land Rights and Access

2013

0.40 (2%)

MCC Natural Resource Protection

2013

16.6 (24%)

Openness to, and Restrictions Upon, Foreign Investment

GIRoA reaffirmed its commitment to foster a business-enabling environment at the Tokyo Conference in July 2012 with pledges to take steps to achieve World Trade Organization (WTO) accession by 2014 and to improve its World Bank Doing Business rankings. GIRoA’s openness to foreign investment is underscored in both the Afghan Constitution and the 2005 Private Investment Law (PIL), which specifically prohibit discrimination against foreign investors. The PIL permits investments in nearly all sectors of the economy (exceptions are nuclear power, gambling establishments and production of narcotics and intoxicants) and designates the High Commission on Investment (HCI) as the focal point for investment policy making. The Minister of Commerce and Industries chairs the HCI; members include the Ministers of Agriculture, Economy, Finance, Foreign Affairs, Mines and Industries, the Governor of the Central Bank (Da Afghanistan Bank), and the Chief Executive Officer of the quasi-governmental Afghan Investment Support Agency (AISA). The newly established High Economic Council, chaired by the president and including ministers as well as representatives from academia and the private sector may play an increasing role in investment policy development.

The PIL requires investors to register with AISA, which operates a streamlined business registration process and conducts business and investment promotion and facilitation activities. According to AISA, the majority of investment in Afghanistan is short term and concentrated in the construction and service sectors.

Investment in certain sectors, such as production and sales of weapons and explosives, 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 HCI, in consultation with relevant government ministries. The HCI may choose to apply specific requirements for investments in restricted sectors.

In general, investments may be 100 percent foreign-owned and there is no requirement for foreigners to secure an Afghan partner. However, the Afghan Constitution and the PIL 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 businesses have negotiated leases with an automatic renewal clause for terms of up to 99 years. Many 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 off-shore loan debt service.

Afghanistan’s legal and regulatory frameworks and enforcement mechanisms are nascent. Much of the framework necessary for encouraging and protecting private investment is not in place, and the existence of three overlapping systems (Sharia (Islamic Law), Shura (traditional law and practice), and the formal legal system instituted under the 2004 Constitution) can be confusing to both investors and legal professionals. Moreover, corruption in the judiciary affects the consistency of the application of the laws. Important commercial laws technically in force cover partnerships, corporations and limited liability companies, competition, arbitration, mediation, copyrights, trademarks, patents, secured transactions, and mortgages. As part of its World Trade Organization (WTO) accession process, GIRoA is modifying existing legislation and drafting new laws and regulations to bring its policy framework into accordance with international standards. In March 2011, President Karzai signed a Telecommunications Law that replaced the previous law enacted by decree. A related Information Communication Technology Law, which will lay the groundwork for a new industry in electronic commerce and cyber security, is under revision with the Ministry of Communication and Information Technology and is expected to be submitted to Parliament in mid-2013. USAID and the World Bank are working with GIRoA to establish formal accounting standards in accordance with international norms.

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 reported to have close familial or tribal ties with provincial leaders and government officials dominate the trading market in many areas. These individuals enjoy excessive advantages that result in a non-competitive environment in several fields due to their wealth and insider access to land, credit and contacts, and their ability to manipulate prices. 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 Bank’s 2013 “Doing Business Report” ranks Afghanistan 168th out of 185 economies for the ease of doing business. USAID has focused assistance on improving the business-enabling environment in Afghanistan for the past several years and is working with the World Bank’s International Finance Corporation and key government ministries led by the Ministry of Commerce and Industries (MoCI) to encourage appropriate policy changes that would result in a better investment climate. USAID’s project focuses on four indicators: starting a business, obtaining construction permits, access to credit, and protecting investors. Current activities include advocating for a reduction in the cost of business licenses and renewals, streamlining the process to receive construction permits, establishing credit registries, and reforming company laws to increase protections for minority shareholders.

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 at a legal market clearing rate. The PIL 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 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 might 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 December 2012, Da Afghanistan Bank had issued 204 licenses for money service providers (MSPs), commonly referred to as “hawaladars.” However, thousands of unlicensed money changers continue to practice their trade. Non-official money service providers often cite the lack of enforcement in the currency exchange sector, and the resulting competitive disadvantage to licensed exchangers, as a disincentive to becoming licensed. U.S. investors should only use licensed money service providers, which are listed on the website of Da Afghanistan Bank’s Financial Transactions and Reports Analysis Center of Afghanistan (FinTRACA). In 2012, President Karazi issued an executive order making it illegal to transport more than AFS 1,000,000 (approximately USD 20,000) or the foreign currency equivalent out of Afghanistan via land or air. GIRoA is in the process of developing a new regulation to mandate declaration of cash exports greater than AFS 500,000 (approximately USD 10,000).

Expropriation and Compensation

The PIL allows for expropriation of investments or assets by the government on a non-discriminatory basis and “only for the purposes of public interest.” The law stipulates that the government “shall provide prompt, adequate and effective compensation in conformity with the principles of international law, equivalent to the fair market value.” In cases of investment in a foreign currency, the law requires compensation to be made in that currency. The government may also confiscate private property to settle bad commercial debts. According to the PIL, investors with an ownership share of more than 25 percent may challenge the expropriation. There have been no reports of government expropriation of foreign assets, “creeping” or otherwise.

Dispute Settlement

While a commercial court system exists, a shortage of qualified legal practitioners and endemic corruption in the judicial system are significant impediments to commercial arbitration. 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 PIL provides for dispute resolution under these mechanisms, or under the 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 legal system plays a limited role in adjudicating commercial disputes; most businesses use informal mechanisms to resolve disputes and enforce property rights. The Afghanistan Chamber of Commerce and Industries (ACCI) provides commercial arbitration and mediation services to Afghan businesses. Since 2011, the U.S. Department of Commerce’s Commercial Law Development Program (CLDP), with USAID support, has been working with ACCI to bring its dispute resolution mechanism into accordance with international standards.

Performance Requirements and Incentives

Afghanistan has no formal regulations or laws governing performance requirements. Currently, there are no separate investment incentives or special treatment accorded to foreign investors. In late 2012, the Minister of Finance (MoF) announced plans to develop a tax incentive package to promote foreign investment. There are no existing 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 of visas can be time-consuming and there have been reports of the solicitation of bribes for faster processing. There are no discriminatory or preferential export and import policies affecting foreign investors.

Right to Private Ownership and Establishment

Under the PIL, 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 of 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. Land laws in Afghanistan are inconsistent, overlapping, incomplete, or silent with regard to details of effective land management. Judges and attorneys are generally without expertise in land matters. An estimated 80 percent of land is held and transferred informally, without legally recognized deeds, titles, or a simple means to prove ownership. USAID is collaborating with the Afghan government’s land authority Arazi (part of the Ministry of Agriculture, Irrigation and Livestock) to develop a new archive system to consolidate existing electronic records and paper documents.

Presently, 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 2013 “Doing Business Report” that it takes an average of 250 days and entails legal fees of five percent of the property value to register property. Investment disputes are common in the areas of land titling and contracts. Many documents evidencing land ownership are not archived in any official registry. Frequently, multiple “owners” claim the same piece of land, each asserting rights from a different source. These disputes hinder the development of commercial and agricultural enterprises. Real estate agents are not reliable. Foreign investors seeking to work with Afghan citizens to purchase property should conduct thorough due diligence to identify reliable partners.

CLDP has been working with MoCI to develop a draft law on insolvency. President Karzai signed legislation on mortgage and secured transactions in 2009.

GIRoA is working to bring its legislation on patents, trademarks and copyrights into compliance with World Trade Organization (WTO) standards. Afghanistan will become a party to the WTO Trade Related Intellectual Property Rights (TRIPS) Agreement when it accedes to the WTO. Afghanistan seeks to accede to the WTO by 2014. GIRoA is not a party to the World Intellectual Property Organization (WIPO) Internet Treaties. Currently, there is no serious enforcement of intellectual property rights. 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 foreign investment. Parliament must approve all legislation. However, when Parliament is in recess, the president may issue decrees that have the force of law. In these cases, Parliament then has the right to review and reject the decrees. However, consistent implementation and enforcement of applicable law and regulation remain a challenge. The inadequacy of the regulatory system and corruption at every level of government create significant obstacles to investment. Procedures for obtaining a business license were streamlined in 2003 with the establishment of AISA. AISA serves as a “one-stop shop” for investors to facilitate the process of establishing a business. According to the World Bank’s 2013 “Doing Business Report,” Afghanistan ranks 28th out of 185 economies in the ease of starting a business.

Efficient Capital Markets and Portfolio Investment

Finance is Afghanistan’s second largest service industry (behind telecommunications) and is potentially an important driver of private investment and economic growth. The sector has grown rapidly since the end of Taliban rule. Seventeen commercial banks operate in Afghanistan, with total assets of approximately $4.4 billion as of July 2012 (compared to less than $300 million in 2004). There are three state banks, Bank-e Millie Afghan (Afghan National Bank), Pashtany Bank and New Kabul Bank. The latter is expected to be privatized by May 2013. There are also branch offices of foreign banks, including Alfalah Bank (Pakistan), National Bank of Pakistan, Habib Bank of Pakistan, Punjab National Bank (India) and Arian Bank (Iran). However, most Afghans remain “unbanked,” with only a small minority currently holding deposits. In addition, many Afghans continue to rely on hawaladars to access finance and transfer money, due in part to unfamiliarity with a functional banking system and limited access to banks in rural areas. Two of the four mobile network operators – Etisalat and Roshan – offer money mobile services, with MTN and AWCC expected to roll out their mobile money products in 2013. Banking remains highly centralized, with a considerable majority 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. The aggregate loan-to-deposit ratio for the banking sector is 22 percent and most banks concentrate on short-term 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 2010 exposure of massive fraud at Kabul Bank revealed the underlying weaknesses in banking regulation and supervision. Despite receiving significant technical assistance, Da Afghanistan Bank (DAB – the Afghan central bank) has been unable to match the pace of the banking sector’s 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 10 percent of GDP, significantly lower than other countries in the region. Afghanistan ranks 154th out of 185 countries for ease of obtaining credit in the World Bank’s 2013 “Doing Business Report.” 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. USAID is working with GIRoA and the banking sector to promote improved access to finance and the expansion of mobile money for financial inclusion. New IMF-mandated banking legislation to improve banking sector oversight is expected to reach Parliament early in 2013.

Competition from State-Owned Enterprises

In principle, government policies and regulations apply the standard of competitive equality to private enterprises 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 (MoF) began assessing the economic viability of existing SOEs. The MoF initially 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. To date, the Afghan government has fully privatized two SOEs, changed the governance structure of three, partially privatized four, and transferred assets of 18 SOEs to budgetary units of the government. Additional divestment requires approval of the Cabinet as well as both houses of Parliament. At present, there are no plans to divest or convert the remaining 37 SOEs.

Corporate Social Responsibility

GIRoA works 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 American Chamber of Commerce in Afghanistan has identified CSR as one of its core focus areas. In addition, some Afghan entrepreneurs, such as Ihsanullah Bayat, the Barakat Group, Hotak Azizi and the Alokozay Group, have foundations that provide assistance in the fields of health, education, and the eradication of poverty.

Political Violence

Afghanistan is struggling toward political stability, but anti-government violence and public concerns regarding the security and political transition in 2014 have 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. Security remains a primary concern for most investors. Foreign firms operating in 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 2012, Afghanistan tied with Somalia and North Korea for last place in Transparency International’s Corruption Perception Index. Based on the Afghan 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 these anti-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 or 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 2011 establishment of the Independent Monitoring and Evaluation Committee (MEC) for anti-corruption should assist the Afghan government in assessing its compliance with UNCAC. In November 2012, the MEC released an in-depth public inquiry to examine the events leading to the Kabul Bank crisis. The MEC issued a set of recommendations to improve governance in the financial sector and to help prevent similar events in the future.

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” (sweetness) or “baksheesh” (present). Although official working-level government salaries have risen, many officials at all levels take small bribes for government services.

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. European Union tariffs on Afghan products are also very low. Afghanistan is a member of the South Asian Association for Regional Cooperation (SAARC) and of Central Asian Regional Economic Cooperation (CAREC). Afghanistan and Pakistan signed the Afghanistan Pakistan Transit Trade Agreement (APTTA) in October 2010. Once fully implemented, APTTA should cut down on transportation costs and promote trade within the region. According to MoCI, GIRoA has investment-related agreements with China and Kazakhstan. Afghanistan signed a Trade and Investment Framework Agreement (TIFA) with the United States in 2004. Afghanistan does not have a BIT or a bilateral taxation treaty with the United States.

OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) offers financing (from large structured finance to small business loans), political risk insurance, and support for private-equity investment funds. Since 2003, OPIC has committed more than $295 million in financing and political risk insurance to support 38 projects in Afghanistan. Afghanistan is a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

Labor

There is a critical shortage of skilled labor in Afghanistan. Less than 30 percent of the population over the age of 15 can read and write. Decades of war, a low level of education and a lack of training facilities have resulted in a serious scarcity of skilled technicians, qualified managers and educated professionals. U.S. companies that establish training programs for their employees should expect significant returns in enhanced productivity, but there is a risk of high turnover as skilled employees seek higher paying opportunities.

Labor-management relations are undeveloped. While there are major and smaller trade union organizations in the country, there is little knowledge or practice of collective bargaining. The Afghan Parliament passed a Labor Law in 2008. While the law does not meet International Labor Organization (ILO) standards, the Ministry of Labor is developing a number of regulations to bring implementation into ILO compliance. Afghanistan’s labor law sets terms for working hours, overtime, and leave, and calls for employers to provide a wide array of benefits. The law also bans forced labor and child labor, but the penal code lacks provisions for its effective enforcement. There is little awareness of the law’s provisions in either the government or the private sector. The Ministry of Labor, Social Affairs, Martyrs and Disabled lacks the capacity to enforce the law. A 2005 labor regulation allows for the employment of foreign workers, but requires that priority be given to equally qualified Afghan workers.

Foreign Trade Zones/Free Ports

Afghanistan has no duty-free import zones or ports.

Foreign Direct Investment Statistics

Comprehensive foreign direct investment (FDI) statistics for Afghanistan are unavailable. Available figures are not reliable due to inconsistencies in data collection. The United Nations Conference on Trade and Development (UNCTAD) 2012 World Investment Report estimates FDI flow into Afghanistan in 2011 at USD 83 million and total FDI stocks at USD 1.48 billion, representing 8.1 percent of GDP. According to AISA, the top FDI destination sectors in Afghanistan are construction and services.



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