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#5145, 4 October 2016
 
Mining in Afghanistan: Scale Down to Reap More
Roshan Iyer
Research Intern, IReS, IPCS
 

The mining industry in Afghanistan holds the potential to completely revolutionise the country’s domestic economy. Afghanistan has around 1400 deposit sites of minerals worth between USD 1 and 3 trillion – according to the 2010 US Geological Survey, confirming previous Soviet reports which discovered that Afghanistan holds some of the largest reserves of iron, copper, cobalt, lapis lazuli and lithium. These resources provide a ready opportunity to set up an industry that can be licensed and taxed, and can provide significant revenue to the Afghan government. Today the mining industry is the most promising driver of growth and industrialisation in Afghanistan.
 
Despite initial enthusiasm after the announcements of the development of the Mes Aynak deposits by China in 2008 and the Hajigak deposits by India in 2011, both projects failed to take off amidst security concerns and the discovery of ancient Buddhist monuments at Mes Aynak. The episode also brought into focus the lack of transparency and corruption in government, in the mining rights allocation process and in the overall economy - factors that discourage high-value, long-term investments by foreign investors. Afghanistan’s unique situation of an economy failing to attract investment despite the vast quantity of existing opportunities requires a unique solution.
 
Mining in Afghanistan is a high-risk and capital-intensive industry. Kabul has repeatedly invited large government-backed consortia that promise billions of dollars purchasing the rights to mine fields while also promising to set up power plants and highway projects. Although this style of mega-projects promises to bring in the much-needed funds to a cash-starved Afghan government, the security threats in the country make investors jittery. Instead, the government should focus on attracting private mid-level investors looking to invest millions rather than billions for medium terms. Interestingly, small to mid-level sized mining operations have been undertaken in Afghanistan by the Taliban, who mined rubies and emeralds, and earned around USD 120 million in 2015.
 
The case of mining in Laos, for instance, shows how mid-level investments can be used to develop a mining industry where none existed. Sepon, a medium-sized copper mine was developed by an Australian company, Oxiana Limited. It produced USD 100 million worth of copper a year with an initial capital investment of USD 240 million. The mine also generated USD 15 million in taxes and created 2800 jobs. By 2008, there were roughly 127 mining companies established in Laos.
 
Locally-owned coal mines in Afghanistan routinely under-produce primarily because of a poor resource extraction technology and lack of safety equipment. To become profitable enterprises, these small-scale projects would actually require minimal investment. If these coal-mines were to be the first sites auctioned to foreign investors, they would profit from better technology and in turn give a fillip to Afghanistan’s mining sector.
 
Currently, the Afghan government does not have adequate funds to invest in mining; the smaller funds could instead be invested in its transmission lines, road networks and power plants needed to support the mining industry. Medium-scale mining projects require lower-capacity support infrastructure, lowering the burden on the Afghan government to provide for them. However, over time, as the mining sector grows in Afghanistan, market forces should bring larger-scale investment in energy, transport, construction, and other support infrastructure.
 
Investments from a multitude of smaller companies could generate revenue for Afghanistan’s economy. However, a strong institutional framework is needed to generate investor confidence.  For this, tax rates would have to be set and frozen through agreements between the government and investors. 
 
The security situation in Afghanistan needs to be addressed to bridge the confidence gap. This will have to be a two-pronged approach of providing physical security as well as a contingency plan in the event of an attack on the investment is needed. A cash-strapped government would find it unfeasible to provide direct insurance. Instead, the contingency model can allocate a percentage (in accordance with commodity prices) of each mine's output to the government. In the event of an attack, this stock can either be sold to raise quick capital (which can then be transferred to the company’s accounts) or physically returned to the mining firm to cushion the effect of any disruption on the company's sales process.
 
A combination of scaling down the mining projects in Afghanistan along with added government protection might also have the additional benefit of escaping the demands of protection payments by the Taliban.
 
When it comes to the allocation process, Afghanistan could take lessons from the privatisation of the Antamina Mine by Peru. While auctioning the mine, the government used a unique bidding process, where an option was provided to the winner of the bid. The mining consortium of Rio Algom, Noranda Inc., and Teck Corp was allowed to carry out site specific exploration for a period of two years and then had the option of investing into the site or walking away. The time factor and the ability to explore the resources before committing to the investment created sufficient confidence in the investor and the mine was successfully sold.
 
Scaling down in the short-run might just be the solution to building Afghanistan’s mining industry into a global giant in the long-run.

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