How great is the investment opportunity in Afghanistan?

Posted on 30 November 2010 with 1 comment from readers

Today the UAE and Afghan governments jointly hosted a conference in Dubai to promote international investment in Afghanistan. Some $7 billion of foreign direct investment has been made into the war-torn country since 2003 and that figure will grow substantially over the coming few years.

Indeed, GDP growth this year is expected to top 22 per cent, among the highest in the world. There is 100 per cent foreign ownership of companies and property and full profit repatriation rights. Listen to the Afghan government and this sounds like paradise.

Unsafe and corrupt

Then of course you have to consider the reality of terrorism, massive ongoing military operations, kidnapping and violence. This can hardly be called a safe or secure country. Finance Minister Dr. Hazrat Omar Zakhilwal actually had the cheek to blame this on the media, and said too many negatives stories were damaging investor perceptions!

Now it is true that companies like the UAE telecoms giant Etisalat have successfully established operations. Etisalat started four years ago and today has three million subscribers in Afghanistan. It is also true as Dr. Zakhilwal claimed that very few foreign investors have pulled out.

But the perception of high risk is still not a false one. Anywhere as militarized as Afghanistan means that you are just as likely to be shot by your own side as anybody else. This is not a place where a salesman can turn up with a product and look for a buyer.

Success stories

That the legal framework has improved beyond measure is evidenced by the $4.9 billion land mark iron ore project being led by the Metallurgical Corporation of China. This is a world-class mining, concentration and smelting plant that will be completed within five years on a greenfield site in the middle of nowhere.

The coalition of developed countries that has spent tens of billions of dollars occupying Afghanistan over the past decade must find a sad irony in the first large project going to the commercial advantage of China but that is what has happened.

One US contractor at the conference complained bitterly to speakers about how public contracts were being awarded in Afghanistan and then sold on by the winners, and sometimes again and again. This reselling of public contracts would be illegal and corrupt in any Western country.

Frontier territory

Afghanistan was always a frontier territory even in the British Empire and it remains a difficult place to make a fortune. Perhaps this is really an environment where only inter-governmental deals will be successful as the operator needs to take charge of the full value chain, eliminating the participation of multiple third parties.

That said the $1 trillion, or as much as $10 trillion according to some government speakers, of mineral wealth is a big attraction for very large companies like MMC which is one of the world’s top 500.

Afghanistan has oil and gas, gold, iron ore, lithium and cobalt, and the infrastructure of the nation is being developed to allow its extraction with 10,000 kilometres of upgraded roads and a new railway network.

There are clearly going to be some major investment opportunities for the sovereign wealth funds of the region but for most companies and individuals Afghanistan will stay something of a no-go area.