69021 SDN ESW Results Story July 2008 Afghanistan: Mining as a Source of Growth Afghanistan's rich mineral resources offer significant potential for development, but severe constraints hinder private investment in the sector. This ESW highlighted the need for an enabling legislative and regulatory framework and for accurate geologic and mining information. Follow-on technical assistance has contributed to an improved enabling environment and to minerals development through private investment. For instance, the government has already awarded the tender of the Aynak copper reserves to a Chinese firm. The project, valued at over $2 billion, is the largest international investment in Afghanistan to date and is expected to contribute significantly to the Afghanistan economy through tax revenues, infrastructure development, and generation of employment. 1. Challenge any royalties or taxes on this exploitation of nonrenewable resources. Although Afghanistan has excellent geologic Soon after the new government assumed potential, the mining and hydrocarbons sectors itsfunctions, World Bank specialists conducted remain undeveloped and the country's mineral a mission to determine how the Bank might best resources are underexplored. Years of conflict assist with the reconstruction and development devastated production facilities and basic of the country. In discussions with government infrastructure, and minerals output fell sharply. officials, the mission determined that the minerals Isolation from the international mining industry and hydrocarbons sectors offer promise for further hindered development of the sector. The development. Recognizing the huge needs of the Afghan government that took office in January country and the particular conditions present in 2002 did not have funds to invest in minerals conflict states, the Bank conducted an ESW in development, and such investment could not be 2004 to examine the mining sector as a potential justified in any case given other urgent priorities source of growth for the Afghanistan economy. and the risks inherent in mining. It was necessary to attract private investment. However, inadequate mining legislation and negative investor perceptions made it difficult to mobilize 2. Findings and Dissemination large-scale private sector investment for minerals exploration and development on an industrial The ESW determined that minerals development scale. Reliable statistics on the existing mining could help jump-start the Afghan economy. It production, primarily small-scale quarrying and estimated that over a five-year time horizon, that gemstone mining, was virtually nonexistent. is, by 2008, some $250 million in annual Moreover, the central government did not receive production value could be generated from the sector. To achieve this, however, severe in significant transactions with private investors. constraints would have to be overcome. The Bank is also helping the government improve its geologic database. The lack of appropriate legislation, regulations, and fiscal measures for the mining sector was a key obstacle to private sector investment in minerals exploration and development. 4. Key Results Moreover,the institutional structure did not reflect the role of the state as a regulator, focusing The ESW has contributed to early results in instead on its role as an operator of mines. several areas: Several key offices-for instance, an office to administer mineral titles and audit production-did Improved enabling environment. A new mining law not exist. The ESW proposed the adoption of a was passed in 2005, and regulations are being legislative and regulatory framework consistent developed to provide a legal framework for with international standards that would provide minerals exploration and mining and to encourage the basis for transparent allocation of mining titles investment in the sector. The regulations aim to to private entities. It also called for an help the government transition from the internationally competitive fiscal and taxation "command and control" thinking of the past to an package that would impose a reasonable fiscal emphasis on its function as a regulator. The law burden on enterprise while ensuring that the provides for a licensing system that allows private government receives tax benefits commensurate sector companies to obtain mine titles for with the value of its mineral resources. The ESW exploration. It establishes the key government recommended strengthening government institutions that will supervise the sector and oversight institutions to distinguish clearly provides for stability of tenure for holders of between the government's functions as regulator mineral rights. The law also provides for the and its functions as owner/operator of state mining government to tender certain mineral deposits for which it has ample geologic data. enterprises. Improving the regulatory and fiscal regime would help attract new investment, and Mineral development through private sector strengthening government institutions would investment. The TA project has supported the improve monitoring of existing production. tender of the huge copper deposit at Aynak, which the ESW identified as one of the principal mineral Many of the mining operations were under the assets for development. Aynak is one of the control of warlords and various factions. No data largest copper deposits in the world, with in situ were available on their operations, and none could reserves worth an estimated $54 billion (at $3.50/ be conveniently or safely collected. The facilities lb.). The project tender, awarded to a Chinese firm of the Afghanistan Geological Survey, which used in May 2008, is valued at over $2 billion and is the to have an excellent library and database, had largest international investment in Afghanistan to been completely destroyed. The ESW empha- date. The Aynak development will contribute sized the need to address information gaps by significantly to the Afghanistan economy through updating and strengthening basic geologic and tax revenues and employment opportunities for mining information through mapping and surveys. more than 6,000 people. It will also have This information could be used to promote pri- substantial spin-off effects. For instance, the coal- vate investment for exploration and mine devel- fired generators at the mine are expected to opment, along with sustainable social and eco- generate 400 megawatts of electricity: 200 nomic development. megawatts to operate the project and the remaining 200 megawatts to distribute to consumers. Significant amounts of electricity will be supplied to Kabul, located 50 kilometers from 3. Subsequent Role for the Bank the deposit. As a result of the ESW, the Bank provided Strengthened geologic database. In response to assistance to the government through a $30 the ESW's emphasis on the critical role of million technical assistance grant approved in accurate information, the government is taking 2006 and presently under implementation. The TA steps to update and strengthen basic geologic and aims to support the development of mining mining data. The compilation of maps using regulations, strengthen government supervisory existing and Soviet data is a significant step services, support tender operations for mineral forward in providing potential investors the geo- prospective areas, and support the government scientific information they need to make decisions. 2 5. Lessons Learned significant involvement from large Western firms. However, there are numerous smaller firms The Afghanistan experience, while still preliminary, with less aversion to risk. In addition, Chinese suggests the value of encouraging nontraditional companies are actively searching for new investors in countries affected by or emerging from sources of minerals. These nontraditional conflict. Mainline international mining companies players in the minerals sector may offer the have somewhat negative perceptions of best possibilities in the near term for Afghanistan, principally because of the security Afghanistan to mobilize private sector investment. situation. Effective and safe mine development However, the government will be challenged to requires the central government to exert put into place effective monitoring mechanisms effective control over the mining areas; in the to ensure that these companies comply with their absence of such control, it will be difficult to attract contractual obligations. Key Contacts Craig Andrews, COCPO, Task Manager, ESW Michael Stanley, COCPO, Task Member, ESW "Afghanistan: Mining as a Source of Growth," "Afghanistan: Mining as a Source of Growth," candrews@worldbank.org mstanley@worldbank.org 3