Report No. 28231-AF Transitional Islamic State of Afghanistan Mining as a Source of Growth March 2004 South Asia Region Document of the World Bank Currency Equivalents US Dollars are used throughout the report (except as otherwise indicated) Weights and Measures Metric System Fiscal Year January 1-December 3 1 Report Manaprement South Asia Region Vice President: Praful Pate1 Afghanistan Country Director: Alastair McKechnie SectorManger: Peter van der Veen Task Team Leader: Craig Andrews, Principal Mining Specialist Task Team Members: Leo Maraboli, Principal Mining Specialist Michael Stanley, Senior Mining Specialist Tony Greenish, Economic Geology and Geoscience Henri Maire, Mining Policy and Artisanal Mining Ernest Chung, Mining Attorney Bob Parsons, Mining Taxation and Fiscal Regime The Task Team expresses its appreciation to the government and, in particular, to the counterpartsin the Ministry of Mines and Industries, for their invaluable contributions to the preparation of this report. 11 Abbreviatioiis and Acronyms ADB Asian Development Bank AGS Afghanistan Geological Survey BGS BritishGeological Survey cow Contract o fWork EIA Environmental Impact Assessment EIS Environmental Impact Statement EMP Environmental Management Plan ESCAP Economic and Social Commission Asia Pacific ESIA Environmental and Social Impact Assessment IRR Internal Rate o f Return IBRD InternationalBank for Reconstructionand Development IDA InternationalDevelopment Association LOM L i f e o f Mine MMI Ministry of Mines and Industries NPV Net Present Value NSR Net Smelter Return PDAC Prospectors and Developers Association o f Canada TISA Islamic Transitional State of Afghanistan UNDP UnitedNations Development Programme uxo Unexploded Ordinance VAT Value Added Tax ... 111 TABLE OF CONTENTS Table of Contents. 1. SUMMARY CTOR STRATEGY...................... Background and Recent Developments ............................ Miningas a SourceofGrowth.................. ........................................... 3 Reforms to the Legal, Taxation and Institutional Regimes........................................... 7 Specific Action Steps for the nexttwo years................................................................ 7 Time Frame................................................................................................................. 8 Additional World Bank RecommendedAction Steps for the Next Two Years 2. MININGASA SOURCE OF ECONOMIC GROWTH.......... Projected Mining Development and............... Economic Contribution (next five years) ......................................... What Investors Want andthe Lessons of Mining Sector Reform ............................... 18 Geological Explorationand the Role of Geo-Science ................................................ 20 Why I s Geo-ScienceImporta ....................................................................... 23 4. LEGISLATIVE AND REG RYENVIRONMENT Successful legal and regulatory regimes inMining 5. MININGTAXATION AND FISCAL CONDIT Current status of tax and royalty laws..................... Designinga mining tax regimethat will attract inv International Standards And Best Practices.,.............................................................. 36 Tax Administration And Collection............... 6. INSTITUTIONAL ARRANGEMENTS ......... Background........................................................ A ProposedNew Structure for MMI.......................................................................... 44 ADDITIONAL ACTION STEPS FOR SECTOR RECOVERY OVER THE NEXT TWO Y E A R S ........................................................................................................... 53 ANNEX 3 ... IMMEDIATEASSISTANCE STRATEGY TO THE COAL. SECTOR............ ANNEX 4 ..................................................................................................................... 60 ASSISTANCE TO THE CONSTRUCTION MATERIALS SECTOROVER THE NEXT TWO YEARS .... ............................................................... 60 ANNEX 5 .................... ............................................................................... 62 ASSISTANCE TO THE GEMAND ORNAMENTAL STONE INDUSTRY OVER THE NEXT TWO Y E A R S........................................................................................ 62 ANNEX 6:.......................................................................... 64 A STRATEGY TO IMPROVEUNDERSTANDING OF RESOURCE POTENTIAL .............................................. 64 ANNEX 7..................................................................................................................... 71 TERMS OF REFERENCEFORTASKS AND PROFESSIONALSNEEDEDTO SUPPORT SECTORRECOVERY (SUPPLEMENT TO ANNEX 5).. .................. APPENDIX A : MINERALPOLICY SPECIALIST ............................................. APPENDIX B:INTERIMTECHNICAL ASSISTANCE TO COAL MINES............75 APPENDIX C: FEASIBILITY STUDY FORAN ARTISAN CRAFTS FACILITY AND ARTISAN CRAFTS EXCHANGE.................................................................. 78 APPENDIX D:DEVELOPMENT OF A QUARRY EXTENSION SERVICE IN AFGHANISTA APPENDIX E:D EXTENSION SERVICE................................................ APPENDIX F:PRE-TENDERPROGRAM, AYNAK COPPERDEPOSIT,. APPENDIX G:ESTABLISHMENT OF A MINESCADASTRE OFFICE.. . , , APPENDIX H:A CORPORATIZATION PROGRAMFORMININGASSETS ......94 ANNEX 8 .................................................................. 96 CURRENT MINERALPRODUCTION ...... .......................... 96 PotentialMineralDeposits ...................... ......................................... 103 ANNEX 9:.......................................................................................... TENDERING OF MINERALPROPERTIES................................ ANNEX 1 ............................................................ IMPRO L i s t of publications on the geology and Quality o f Geo-Information and "Gaps" ..................................................... 114 Promoting Mineral Resources....................................................... ANNEX 11: MINERALSPRODUCTIONAND PRICES .. . . . . .. , , , , , , ,. , ANNEX 12:ESTIMATES OF ECONOMIC CONTRIBUTION NEXT FIVEY E A R S .............................................................. Notesto Table onEconomic Contribution .............................. 123 ANNEX 13:Maps............................................ ...................125 1. SUMMARYAND MININGSECTOR STRATEGY This Note examines the mining sector as a potential source o f growth for the Afghanistan economy. It assesses the existing minerals production and potential for development in terms of actual or possible benefits streams for the economy. It addresses the challenges the government faces to put into place an enabling environment which will regularize existing production and stimulate new investment. Finally, assuming that conditions in the sector do improve, theNote askswhat would bethe possible economic impacts over a five year time horizon and, more speculatively, 10 - 12 years into future. BACKGROUND RECENT DEVELOPMENTS AND Historically, Afghanistan's solid minerals production was about 1% o f GDP, consisting primarily o f coal, quarry materials, marble and dimension stone, industrial minerals, some metals, and semi-precious stones. The existing production facilities have suffered dramatically during the political difficulties and (officially declared) production has fallen. At present, while minerals - coal, quarry materials, gemstones - are produced, the production i s largely outside of the direct knowledge or control o f the central government. Reliable statistics on minerals production and activities are virtually non- existent. The government does not receive any royalties or other taxes on this exploitation of non-renewable resources. However, there has been a marked increase in demand for minerals and quarry materials to supply the needs o f the road building program and booming general construction industry. There i s thus considerable scope in the immediate term to improve the existing production and, over the longer term, to stimulate new investment inthe sector. MLNING A SOURCEOFGROWTH AS Mining represents a source o f economic growth in Afghanistan, offering employment, taxes in the form of royalties and taxes, materials to re-build the nation, and strong foreign exchange earnings and/or savings. If reform measures described herein are undertaken, this Note estimates that the gross annual market value o f solid minerals produced could increase from the estimated US$60 million currently to US$ 253 million per annum by 2008 (four-five year time horizon). For this to occur, public sector investment o f U$100 million and private sector investment o f US$360 million will be required. The sector could generate: 0 value added o fUS$ 108 million yearly 0 royalties and other taxes o fU S $ 18 million yearly Summary andMiningSector Strategy Page 1 nearly 7,500 new jobs e a positive export balance o f U S $ 66 million Source: World Bank staff estimates This five-year growth scenario will be achieved by emphasizing two critical paths. First, the formalization o f existing quarry materials and gemstone production, together with immediate assistance to existing coal mines. Much economic value added and tax revenues can be captured from these operations if they are brought under government hegemony. Modest investment in up-grading some o f the coal mines could not only improve production but also working and safety conditions in the mines. Second, it should be possible, if appropriate policy measures are adopted, to attract new investment to the mining sector. In particular, good potential exists for new private sector investment in a salt mine, privately fbnded exploration programs, gemstone cutting and polishing, and stone handicrafts production. As well, a world class copper deposit at Aynak could attract global investor interest through a competitive tender process. The timing on this tender, and the overall sector strategy, is good as many commodity prices continue to strengthen. A longer term growth scenario - ten to twelve years into fbture - could see the development of very large iron ore deposits, industrial scale coal mines for power generation, one or two gold mines and other industrial minerals production facilities. OBSTACLES SECTOR GROWTH To Despite its excellent geological potential, Afghanistan must overcome a number o f obstacles inorder to develop its mineralresources. These include: Reaulatoyv and Fiscal Deficiencies: Modern minerals legislation, regulations, and fiscal measures for the miningsector do not exist at present, though the government i s making some progress to puttheminto place. Institutional Deficiencies: The public sector institutions responsible for mineral resources are not appropriately organized, staffed and equipped to supervise activities. Several key offices, for instance to administer mineral titles and audit Includes crushed stone, gravels and other quarried materials for road and general construction. Summary andMiningSector Strategy Page 2 production, do not exist. Inaddition, the organizational structure does not reflect the new emphasis o f the role o f State as regulator o f the sector instead o f as operator o f mines. Lack of central government control: local strongmen or warlords effectively ignore central government directives and control access to, and exploitation of, the mineral resources. Some prospective areas, principally in the south along the border with Pakistan, are threatened by the Taliban and other rogue forces. Lack of Infrastructure: the national infrastructure - roads, energy and water systems remain weakly developed. Significant efforts are underway to improve the road links with the benefit of various donor funding. Nevertheless, lack o f infrastructure will remain a practical (and financial concern) for miningdevelopers. Shortage of ti$ainedworkforce: as in many other developing countries, development and operation o f mines in Afghanistan i s hindered by a shortage o f skilled technical and managerial workers. The result i s a highreliance on foreign labor and relatively long time frame for project planning and implementation. Lack of local capital: the local capital market, at least in the formal institutional sense, i s weakly developed and not scaled to mining investment requirements. Much o f the required capital for the immediate hture development o f the sector will come from sources outside o f Afghanistan, with perhaps remittances from Afghan expatriates. Unexplodedordnance (UXO,: anti-personnel and anti-vehicle land-mines are located in and around mineral producing and prospective areas. Despite considerable efforts to clear land-mines, Afghanistan has the highest concentration o f unexploded ordinances inthe world. Investor Perception: the international perception o f Afghanistan i s o f a high political and security risk country. This makes it difficult to mobilize hnding for exploration and development on international markets. However, modest successes coupled with large unexplored, prospective terranes, could significantly change this perception. ATTRACTING PRIVATESECTORINVESTMENT Mining is a high-risk and capital intensive industry. The Afghanistan government does not currently have the funds to invest in minerals development and, even if it did, such investment could not bejustified due to other priorities and the risks inherent in mining. It will be necessary to attract private investment, from both domestic and international sources. Foreign investors, in particular, may be interested in Afghanistan not only because o f its excellent geological potential but also because the country has missed a generation o f modern prospecting methods that look for deposit buried below the ground's surface. Cleary, Afghanistan offers early entrants into the sector highly favorable ground. Summary andMiningSector Strategy Page 3 The international miningindustry is two-tiered, with (i) venture-capitalized small companies performing high-riskexploration and (ii) large, multinational mininghouses developing mines. The industry is highly integrated with strong connectivity betweenthe smaller exploration companies who vend significant discoveries to the larger mining houses. All companies compete to attract ongoing investmentcapital, requiringthat returns to their shareholders are highand commensurate with the risks entailed in minerals investment. Allowing these companies to take the risk o f minerals investment i s essential for governments. However, governments must be vigilant to ensure that mining companies, local and foreign, comply with obligations and legal requirements. Governments which have over the past thirty years implemented reforms o f their mining sectors have realized marked increases in exploration, mineral development, and increased production. The international investment community will evaluate investment opportunities according to: (i)clear mining rights and title (mining legislation), (ii) attractive and competitive fiscal conditions (tax legislation), (iii)ownership and control of operations (mining legislation), (iv) political stability and transparency of governance (government institutions), and (v) availability o f infrastructure. Thus, the mining policy and strategy o f Afghanistan should emphasize improving the regulatory and fiscal regime as the basis to stabilize existing production and to attract much needed new investment. Estimatedpublic and private-sector investment requirements,with corresponding economic contribution,for the next five years. Value Amounts inUS$ million. Commodity Investment Investment Royalties Value Jobs Public Private Added persons (Total %) (Total %) (Year) (Year) (Year) Coal 25.0 50.0 0.800 8.0 1,500 Quarries, road const. 0.4 10.0 0.480 10.0 1,000 Quarries, genrl. const. 0.720 14.0 1,000 Sand 0.60 12.0 2,000 Salt 0.2 1.o 0.360 6.0 300 Gemstones 1.o 5.0 0.100 2.5 500 Copper metal 50.0 240.0 15.000 56.0 600 Handicrafts 0.5 2.0 NA NA NA Exploration 20.0 50.0 NA NA 500 Totals 97.0 358.0 17.5 108.5 5,900 SummaryandMiningSector Strategy Page 4 A STRATEGIC PLANFOR SECTORGROWTH Given the obstacles to sector growth and the requirements to attract new investment, a sector policy and strategy for mining i s being prepared by the government which may include the following strategic objectives and components. Strategic Objectives The mining sector policy and strategy defines a comprehensive set o f objectives to: 1. exert central government sovereignty and hegemony over non-renewable mineral resources located throughout the national territory; 2. stimulate and mobilize local and international private investment in minerals exploration, development and production; 3. ensure that mining operations are conducted in an environmentally and socially sustainable manner; 4. create job opportunities for Afghans and stimulate the development o f spin-off and related industries; 5. increase tax revenues accruing to the government from mining operations and to provide for their equitable allocation and transparent management thereof; 6. promote scientific and geological investigation into the nature and extent o f Afghanistan mineral resources and to make such information available to the public and potential investors; 7. strengthen government supervisory institutions to distinguish clearly the functions o f regulator from the hnctions o f owner/operator o f State mining enterprises; 8. regularize small-scale mining and provide for adequate institutional and technical support o fthese activities; 9. apply internationally accepted standards and "safeguard policies" to questions o f environmental protection, indigenous peoples, involuntary resettlement, and other aspects; 10 promote the transition to operate on a commercial basis o f mineral producing enterprises which are currently state owned or reliant on the government. Strategic Components Inorder to achieve these strategic objectives, the governmentwill pursue a strategy which emphasizes several strategic components: 0 Creation o f a Modern Legal and Regulatory Framework: the Ministry o f Mines and Industries i s preparing a minerals law and regulations. The new minerals law will reflect international standards o f quality, applies to all investors local and foreign, and contains special provisions for small and artisanal miners that are currently operating in Afghanistan. It will provide the basis for transparent allocation o f miningtitles to private entities. 0 Adoption o f an Internationally Competitive Fiscal and Mining Taxation Package: some good progress i s being made to propose a fiscal and taxation package which will, on the one hand, ensure a reasonable fiscal burden on the enterprise while, on the other, ensure that government receive tax benefits commensurate with the SummaryandMiningSector Strategy Page 5 value o f its non-renewable resource. Consistent with international best practice, the fiscal regime under consideration for the mining sector applies the general taxation system (Tax Law o f 1964 as amended) with the provision for certain royalties to be collected on the value o f extracted minerals. All tax and royalty payments are made to the central treasury. Strengthening o f the Institutions Responsible for Management o f Mineral - Resources: the government institutions and departments responsible for the miningsector need to be strengthened inorder to fulfill the new mandate given to them to oversee sector operations rather than intervene directly in minerals production. This will entail some re-deployment, training and re-skilling o f staff. Emphasis should be given to training in negotiations with investors as well as how to monitor compliance with various regulations. While some initiatives in this respect have been undertaken, much more needs to be done to re-structure and strengthen government oversight institutions, particularly the Ministry o f Mines and Industries. 0 Filling Information Gaps With New Geoscience Programs: although significant quantities o f information were saved by personnel o f the Afghanistan Geological Survey during the civil war, information gaps still exist. In addition, there i s a need to apply modern geological thinking to areas having a known mineral resource potential, but lacking in an understanding o f how large that potential may be. Geologic mapping and resource assessment programs are needed, for withthe governmentwill receive some foreign assistance. 0 Regularize and Maintain Existing Production: as noted above, coal, quarry and gemstones are presently produced. These existing operations, if brought under government hegemony through the new legislation and regulations, represents the best opportunity for realizing mid-term economic gains. This will entail special programs to re-habilitate inthe short term certain coal mines, formalize operations o f quarries, improve productivity through modest technical extension services, creation o f special units for small scale mining, and other activities. 0 Environmental and Social Safeguards: the global mining industry increasingly adheres to standards for acceptable performance on social and environmental issues. The mineral policy and development strategy reflects these standards by proposing reporting requirements that ensure compliance. SummaryandMiningSector Strategy Page 6 REFORMSTO THE LEGAL, TAXATIONAND INSTITUTIONALREGIMES Legal & Regulatory Fiscal & Mining Taxation Institutional (Chapter 4) (Chapter 5) Strengthening (Chapter 6) Mineral Ownership: State Legislation: Tax legislation Mines Cadastre: for the ownership of all mineral that is simple, clear, and effective issuance o f mining resources existing intheir stable; designing a tax law rights andassert government natural state; a clear that will attract investment by control; identification andmandate o f providing a fair participation MiningInspectorateUnit: the government institution by government andinvestors, monitor and control o f mining with the power to grant stability over time, sector activities, as well as the private access to mineral transparency and a level transparent anduniform rights; playing field, easy to enforcement o f laws and RemlatoryAuthority: The understandand administer, regulations; state acting as regulator of andi s internationally Geological Survey: for private sector mining, rather competitive. acquiring and organizing thanas explorer, operator, or Competitive Taxation: geoscience information; equity-owner; Royalties that reflect modernizing the geoscience MineralRights: Basic terms, international standards and database, developing, andthe procedures and best practices; use maintaining information and criteria for granting such accelerated depreciation mineral sector activities using rights - made available to the insteado ftax exemptions; GIS; private sector; recognize the capital-intensive 0One-Stop Shop: for investor Security o f tenure: nature o f the industry. in inquiries, providingnecessary transferability of title, other assessingcustom duties. data and infornution, investor rights; Effective Administration: assisting private sector Disposition o f State Assets: Ensure that the Ministryo f companies incontacting Successfultendering o fkey Finance andthe Ministryo f official government assets. Mines and Industries share departments. Environmental Protection: their knowledge where tax Develop environmental and create effective provisions affect the mining social management capacity: environmental law and sector; effective with emphasis on safeguard regulations. administration and collection; policies for vulnerable groups. Special considerations: Setting Priorities: Focus on Sinall Scale Mining: Special regulation o f near temi production and extension services to improve construction materials and royalties from industrial the productivity andliving/ small scale mining. minerals, coal, andbase working conditions o f small metals. scale miners. SPECIFICACTIONSTEPSFORTHE NEXTTWO YEARS As the Afghanistan minerals and mining sector moves towards recovery and growth, several specific actions and/or programs are recommended. These combine those proposed for hnding in the national development budget by the Ministry o f Mines and Industries as well as recommendations o fthe World Bank for additional actions proposed inthe present Note. Summary andMiningSector Strategy Page 7 Action StemAs Presented in Current NationalDeveloDment Budget: 1381- 1384 v Action Outcome stHtus2 Time TORS Frame 2 MMI=Ministry ofMinesandIndustries; MOF=Ministry ofFiiimce: WB =WorldBa&: IMF= International Monetary Fund:BGS = British Geological Survey; USGS = United States Geological Suniey; FSF = Feasibility Studies Fund Summary andMiningSector Strategr Page 8 ADDITIONAL WORLDBANKREC0MMENI)EDACTIONSTEPSFORTHENEXT TWO YEARS on QU Sta Complete Minerals Law Transparentmechanismto Inprogress ApriVMay, and Regulations grmand monitormineral MMI,WB, 2004 rights MOF, MOJ Mineral Policy -4ssistMMIstrategic plan MMI,WJ3. June 2004 Annex 7 Specialist andprograms inmining consultants (A) sector; policy and lapus lazuli andother facility for semi-precious consultants high-qualityartisan stones andartisan crafts. crafts and export of gemstones Establish small scale Improveproductivity, MMI, WB, Annex 7 mining extension environment, and safety at consultants (E) service small scaIe mines MMI=MinistryofMinesandIndustries; MOF=IMmstryofFinance;WB=WorldBank;IMF= InternationalMonetaryFund; BGS=BritishGeologicalSurvey; USGS=UnitedStates GeologicalSurvey; FSF=FeasibilityStudiesFund SummaryandMiningSector Strategy Page9 2. MININGASA SOURCE OFECONOMIC GROWTH This Note examines the potential o f the mining sector to be a source o f growth for the Afghanistan economy. Inorder to address this fundamental and strategic issue, this Note will ask and provide answers to three principal questions. First, what i s the potential in Afghanistan for large and small scale minerals development? Second, given the potential, what are the constraints for development o f the sector in terms o f the enabling environment (policy, regulatory, taxation) for private investment, institutional capacities, infrastructure and other constraints? And, third, what would be a reasonable sector development scenario over the next five years and what could be the benefit streams (production value, taxes, jobs, value added, etc.) generated under such a scenario? It is intended that the Note serve as a baseline document to help the government reflect on sector policies and strategies and to provide a "roadmap" for development o f the sector. The roadmap will help the government to know where it wishes to go, how it intendsto get there, what obstacles and impediments it may face along the way, and what it can reasonably expect to receive in terms o f economic and social impacts. This, in turn, will serve as the basis for the development of enabling legislation and fiscal mechanisms for the sector as well as for institutional strengthening required to stimulate investment. BACKGROUND Mining can, and does, contribute to economic development and human well-being. If conducted in an environmentally sustainable manner, exploitation o f mineral resources can provide substantial tax revenues to central and local governments, create direct and indirect jobs, and stimulate spin-off industries in and around the mining operations. These beneficial effects and the development o f a vibrant mining sector have so far eluded Afghanistan. While the country has excellent geological potential the mining sector i s little developed. Three difficulties currently hinder development o fthe sector, 1. Difficult transition from a centrally planned to a market economy. Taking inspiration from the practices in the Soviet Union, previous government policies fostered the use o f State institutions to find and develop mineral resources. This burdened the central government with subsidies for inefficient production at state owned mines as well as high risk investment in new exploration. The mining legislation and taxation arrangements (to the extent that they exist at all) for the sector, do not reflect modern best practices and are not conducive to new private sector investment Additionally, the mandates, functions, organization and staffing of government institutions responsible for the sector are not responsive to modern requirements. Miningasa Source ofEconomic Growth Page 10 2. Problems of apost conflict counlry. For the past 25 years the security situation in the country has limited the ability of the central government to establish national sovereignty over mineral resources and to promote exploration and development o f them. This security situation remains a pre-occupation at the present time and constitutes a hindrance, though not complete blockage, for sector development. 3. Isolationfrom intemationa2 trends and practices. Since the early 1980s, there has been little contact with the international mining industry or scientific developments. While the basic training o f many government officials i s good, it i s nonetheless dated and staff have not been able to work in the field nor benefit from international contacts. Over the past 30 years there has been a considerable amount o fresearch on Afghanistan's mineral resources and potential conducted by the government, sometimes with the assistance o f international donors. To date, attempts to develop the iron ore and copper deposits as well as others have not proven successful, though some interest in these deposits is now being manifested by potential investors. Exploration has identified occurrences o f gold, barite, talc, chromites, and other minerals. There i s a considerable semi-precious stone industry undertaken mainly by artisans, which production i s not declared to the central government. Finally, the country has reasonably good quality coal resources and some of this i s mined for domestic and industrial purposes as well as fkel for electricity generation. The existing small industrial sized coal mines are marginal due to antiquated machinery and lack o f new investment. However, there i s considerable small scale production. Moreover, coal demand and prices in urban centers has risen rapidly due not only to domestic energy needs during the winter months but also to increasing industrial demand to fire construction bricks. Afghanistan has excellent geological potential and there has been a considerable amount of exploration and deposit identification conducted over the past 30 years. Historically, however, mining has only contributed about 1% o f GDP and large scale mining development has not taken place. The stagnation o f the mining sector has been exacerbated by the political difficulties o f the past 20 years. The government i s aware that development of mineral resources will require investments in excess o f government abilities and thus seeks to establish conditions and an enabling environment which i s conducive to attracting and retaining investment by both private local and international groups. At the same time, the central government i s conscious o f the need to exert its hegemony through appropriate legislation over valuable non-renewable mineral resources which are, at present, being exploited and the revenues captured by factional groups operating in the country. The privatization and/or leasing to private groups o f existing state owned mining enterprises is, at present, held up by the lack of adequate mining legislation. Enabling legislation and a proper mineral concession system i s needed to establish order in the quarry and construction materials sector. The demands o f reconstruction of physical infrastructure i s requiring vast quantities o f locally sourced quarry minerals, the exploitation o f which carries the additional benefits o f absorbing large quantities o f labor and spawning ancillary industries. Finally, the small scale miningsector is, at present, wholly unregulated and occupies large numberso fpersons in Miningas a Source ofEconomic Growth Page 11 difficult security, hygienic, and environmental conditions. To achieve these objectives internationally competitive mining legislation and fiscal measures are necessary. This Note examines the potential for the mining sector to be a source o f growth for the national economy. It assesses the constraints to such development and makes recommendations to help overcome these constraints. The Note also estimates the possible economic benefits streams which could come about if the mining sector were to grow and compares the possible five and longer term scenarios to the current situation. Above all, this Note seeks to establish a baseline from which the government and donors may refer when considering measuresto stimulate development o f the sector. CURRENT PRODUCTIONAND ESTIMATED GROSS MARKET VALUES At the present time, reliable statistics on officially declared production of mineral commodities are virtually non-existent. There is a disconnect betweenwhat the Ministry of Mines and Industries plans for production and the actual amounts produced, even from State owned enterprises. The situation i s krther complicated by supposedly large, but undeclared, production from small scale non-registered miners. Research was conducted amongst producers and consumers o f mineral products and local market prices as o f November, 2003 for selected mineral products (see annex). It is estimated that the total value o f coal production, at the official and real market prices, i s US$ 10 million per year. Important quantities o f quarried sand and gravel are used for general re-building as well as construction o f 3,000 kilometers of new highways currently under construction or planned over the next few years. It i s estimated that the annual value o f sand and gravel production i s US$56 million. Gemstones, which are clandestinely exported, are estimated to value US$2.8 million per year. In addition, large quantities of salt are consumed, which i s mostly imported. Salt is estimated to carry a market value of US$22 million per year. Thus, the total value of minerals produced is just under US$70 million. The estimated total value o f minerals consumed isjust under US$ 100million. Estimated Annual Current Procluction of SelectedMineral Products Commodity Estimated Market Estimated Comments Production Price Value US$/unit US$ mln Coal, metric tonnes 140,000 44 - 70 10.1 Official and free market price Crushed stone, M3 2,702,840 10- 19 32.0 Sand, M3 500,000 30 15.0 Gemstones 2.8 Totals 59.9 These figures should be taken with an extreme measure o f caution as they represent very rough estimates. However, they are significantly higher than those reported in the few official government statistics available and are, in themselves, probably underestimates. Miningas a Sourceof Economic Growth Page 12 The government does not collect any form o froyalties or taxes onthe production o fthese non-renewable resources, though relatively small service fees may be paid to the Ministry o f Mines and Industries for certain operations. No information is available on employment, number o f households dependent, value added, production costs, or other information for the mining sector nationally. Most mines production takes place in rural areas, some ofwhich are not firmly incontrol o fthe central government. PROJECTED MININGDEVELOPMENTAND ECONOMIC CONTRIBUTION(NEXT FIVEYEARS) Given the resource base, the existing conditions, possible investor perceptions and international context, one may hypothesize on a short (5 years) and mediumterm (10-15 years) mininggrowth scenarios. Over the next five years, if the government can establish its hegemony over the mineral resources, Afghanistan could increase declared mineral production and the benefits streams that it could produce. To accomplish this, the government should focus on two aspects: first, regularizing existing small scale production and, second, attracting and retaining new private sector investment. The key to doing so i s the adoption o f appropriate government policies and programs to stimulate private sector investment, rather than direct government investment inoperations. AfghanistanMining Sector: GrowthScenario ProjectedFive Year InvestmentRequirementsandAnnual EconomicContribution 1Commodity I Public 1 In $US million Private I Projected I Annual Royalties 1 I Jobs I Source: Bank staff estimates Estimates o fthe economic impacts over the next five years are necessarily conjecture, but reasonable assumptions have beenused. Ifthe government were to adopt and implement the reform measures necessary and ifthe security and other political considerations inthe country were to permit development, the value of minerals produced in Afghanistan could more than double from existing levels, to US$253 million per annum. The possible public and private sector investment necessary over the five year period would be US$lOO million and US$360 million, respectively. The annual economic benefits Miningasa Source ofEconomic Growth Page 13 streams would include USSlOS million in value added, U$18 million in taxes and royalties, and the creation o f nearly 7,400 jobs. These figures per mineral commodity are summarized inthe following table. It i s emphasized once again that these are very rough estimates and should in no case be considered as definitive projections. It i s also worth noting that these figures take no account o f the multiplier effect o f secondary industries that result from the development o f new mining. These will further add to job opportunities in both the local, rural communities around new mining developments and more widely as service industries develop to meet primary needs. The total economic impact o f such developments i s difficult to estimate but could be very substantial, The first phase o f the five year growth scenario i s based on regularizing existing production. 0 Coal mines re-habilitation. An interim emergency re-habilitation program may be necessary to remedy some o fthe more severe health and safety problems at the existing mines. Thereafter, the coal mines should be put on a commercial basis so they may attract private capital investment. It will be necessary to distinguish the regulatory from operator hnctions within the ministry departments Miningas a SourceofEconomic Growth Page 14 responsible for coal. Finally, appropriate pricing policies need to be applied and the coal price inthe markets liberated. Ifthese measures are taken, then the value of coal production could increase from the current U S $ 10 million to U S $ 40 million. 0 Quarry and construction materials (sand and crushed stone) are tied to the reconstructioneffort, principally the building o f 3,000 kilometers o f highways and also general construction and rehabilitation. Ifthe quarry, sand and crushed stone operations are brought under government hegemony the annual value o f production could increase from the present US$55 million to over US$90 million. It may also be possible to generate US$1.8 million per year inroyalties from this production (assuming a 2% royalty), though caution should be exercised with respect to existing contractual or other arrangements with the producers. 0 Small scale mining of gemstones. Through a coherent program o f regularization, licensing, marketing and technical support to these activities, it should be possible to increase the production value from the existing US$2.8 million to US$5 million. It i s acknowledged, however, it may take some time for the local interests inthe principal producing areas o f the Panshjer Valley to accept central government authority. A key element for the stimulation o f the small scale gemstone sector could be the establishment o f a cutting and polishing training center in Kabul. Ifsensible policies in respect o f pricing and declaration to the government of cut and uncut stones were put into place, a portion o f the currently smuggled gemstones as well as additional value added could be accounted. Over the second phase o f the five year time period, new investments inthe sector could be envisaged. Some possible candidates for investmentand development include: 0 Salt mine development, given the high consumption o f salt in Afghanistan (around 2 kilograms per person), could present a viable opportunity for a private sector investor. Exploitation o f local salt would not only displace the current imported salt but could also result in significant health benefits to the population as a whole if iodine were to be added. It i s estimated that 54,000 tonnes of salt, worth an estimated US$ 21.6 million, i s consumed inAfghanistan yearly. New exploration investment and promotion. Afghanistan, given its size and resource base, could conservatively attract US$lO - 20 million per year in exploration. This would require stable security conditions inrural areas as well as a modern and attractive enabling environment. Additionally, some deposits for which the government possesses adequate exploration data and information could be promoted for private sector investment, if a program to do so were put into operation. Miningasa SourceofEconomic Growth Page 15 0 Aynak copper mine tender and development. A number o f parties have expressed interest in developing this copper deposit. The Aynak deposit i s o f exceptional quality and there i s a growing demand in Asia for copper (especially inChina). InvestmentinAynak could be attractedthrough an internationaltender operation. Studies would be conducted on the best method to proceed. A first phase of the project could involve substantial investment in development o f the oxide ore reserves and produce copper metal (carthode) through solvent extraction electro- winning. This would alleviate requirements for heavy transportation infrastructure associated with the production of concentrates. The first phase o f Aynak could produce copper at an annual value o f US$lOO million, with a value added o f US$ 56 million, and US$ 15 million in taxes and royalties. Longer term, it should be noted that the geological belt beginning in Iran and moving east through Baluchistan in Pakistan and through Afghanistan i s highly prospective for copper mineralization. It is possible to conceive of a regional approach to planning for the construction o f a regional copper smelter, perhaps making use of Iran's ample energy resources or Afghanistan's natural gas. 0 development o f a handicrafts and dimension stone industry, based on good quality deposits o f lapis lazuli, onxy and marble. Demand from the construction industry i s growing for dimension stone. Also, a handicrafts industry based on lapis lazuli and other ornamental stones could absorb large amounts of labor, if properly trained. Insufficient data exists at the present time to estimate productionvalues and other economic benefits streams. SpeculativeScenario Beyond the five year development scenario it i s possible to speculate on several other miningdevelopments. These could be: 0 Development o f a small-medium sized gold mine, to produce 4 metric tonnes o f gold per year (yearly market value: US$ 40 million) and requiring an investment of US$ 50 million, and mine live o f 10 years. Mininga5a Source ofEcononiic Growth Page 16 0 Development o f the Hajigak iron ore deposits as well as other deposits in Baghlan and Bamiyan provinces could be envisaged. Giventhe existence o f good quality coal resources around these deposits it i s possible to conceive o f an integrated ferrous metals industry, direct reduction of iron to produce steel products for local consumption, and/or (depending on transportation developments) export iron ore to middle east markets. 0 Development o f large scale coal mines for production of electricity. The government i s currently planning to conduct, through funding o f foreign partners, assessments o f coal resources in the country. This i s with a view to identifying the best coal deposits in terms of reserves and quality in order to site a possible power plant. A water resource assessment should be conducted in tandem with the coal assessment to identify water resources for the power plant. Using coal for power production could be a quicker option for the country than developing gas reserves. Miningas aSource ofEconomic Growth Page 17 3. ATTRACTINGNEWINVESTMENT WHAT WESTORS WANT AND THE LESSONS OFMINING SECTOR REFORM Countries have become acutely aware over the past fifteen years o f the necessity o f attracting domestic and international capital since the amounts o f investment required to develop mineral deposits and the risks o f failure are too large to be possible or justifiable from a public expenditure point o f view. A survey o f major international mining companies was conducted in 1991 under the auspices of the United Nations and the World Bank to determine the relative importance o f certain criteria used by the companies to evaluate potential investment projects inemerging economies. It should be noted that these factors are o f critical importance to domestic investors, too. In order o f importance, these criteria are: 1. Good geological prospectivity, miningtradition and potential 2. Clear miningrights and title (mining legislation) 3. Attractive and competitive fiscal conditions (tax legislation) 4. Ownership and control o f operations (mininglegislation) 5 , Political stability and transparency o f governance (government institutions) 6. Availability o f infrastructure Experience duringthe period 1987 to 2000 has demonstrated that ifgovernments address these issues they can and do attract significant amounts o f investment. Chile, Peru, Mexico, Argentina, Ghana, Mali, Mongolia, and Tanzania, to namejust a few countries - have undertaken measures to strengthen their mining sectors. These measures generally AttractingNew Investment Page 18 have involved up-dating the mineral policy and strategy, re-writingthe mininglegislation (particularly in respect o f mining rights), up-dating the mining taxation regime, reinforcing government supervisory institutions, building greater capacity (including good governance) within the institutions to effectively carry out their tasks, and developing a reliable and comprehensive scientific database o f the earth system. Though time frames vary by country, in general once the sector has been strengthened investor interest can pick up quickly. Exploration for mineral deposits takes time, as does the development phase o f a project. However, in some cases, such as Argentina (see box) minerals production increased by five times during the period 1992 and 2001. Afghanistan has favorable geology for a number o f minerals which could be developed by the private sector. Ifthe overall enabling environment for investment (criteria 2 - 5 above) could be strengthened thenthere i s every likelihood that the country could benefit, as other countries have, from increased investmentand benefits from the sector. Examples o f H o w Mining Sector Reform Works inOther Countries roduction Value Source: World Bank staff estimates ROLEOFINTERNATIONALRISKCAPITAL The miningindustry i s one of the most complex and competitive industrial sectors inthe world.4Depending on the commodity, the production chain usually consists o f extraction o f the raw mineral commodity, beneficiation and concentration o f ores, smelting and refining o f product, marketing and brokerage of commodities, and fabrication into end- use products. The industry, at all stages o f the production chain, but especially at the exploration, extraction and processing stage, is highly competitive and growing more so every year. O f particular interest i s the division o f labor between the large "major" mining companies and the smaller, so-called "junior", mining companies. Each have essential, but distinct roles, to play in finding developing mineral resources. A excellent baselinedocument onthe international miningindustry is "FindingCommon Ground", MiningandMetals and Sustainable Developmentproject, IIED,2002. Attracting New Investment Page 19 Small companies explore, larger companies develop and operate mines. This has clear implications for the mining legislation in Afghanistan (security o f tenure, mining title registry, "first-come, first-served" principle, work commitments, rapid and transparent transfer o f the mining title) as discussed later inthis chapter. There also i s the necessity for the government departments responsible for the mining sector to be able to respond rapidly to applications for exploration licenses. There is keen competition among companies to raise equity and risk finance. The availability o f fbnding for exploration i s highly sensitive to international commodity prices, competition from other industries, perceptions o f the country where the investment will take place, and the track record o f the company soliciting the funding. The funds are also "time-bound", that is, once having received funding the companies must use it for exploration reasonably quickly otherwise new fundingwill be difficult to mobilize. Higher gold prices has stimulated renewed interest in mining venture capital, thus Afghanistan could benefit from this renewed interest. Increasingpressuresfor greater social and environmentalconsciousness. Companies are attempting to do better in this respect, though there i s often a wide divergence between the expectations o f the local community in terms o f support for social infrastructure and the economic realities o f what the company can afford to spend. In Afghanistan, it is important that the government prepare umbrella laws on environmental and social protection. Inaddition, sector and industry specific environmental regulations will need to be developed. Also, government departments responsible for enforcing the regulations need to have sufficient trained personnel and logistical means to ensure compliance. Government must be vigilant to ensure that companies comply with obligations. Governments in other developing countries have sometimes been disappointed if private companies simply speculate with mining titles and do not honor their pledges to invest in exploration. In Afghanistan it i s important that appropriate legislation and government monitoring capabilities be put into place to prevent such speculation inminingtitles. GEOLOGICAL EXPLORATION THEROLEOFGEO-SCIENCE AND The previous section o f this Note addressed the issue o f mining reform and how this i s necessary to attract and retain investment in the sector. The other essential element for investment is, of course, the basic geological prospectivity. Inthis respect, Afghanistan's geology i s highly prospective and the potential to discover new mineral deposits i s excellent. The country sits astride the collision zone o f the Indo-Pakistan and Asian crustal plates which has givenrise to the Himalayas. Systematic mineral exploration in Afghanistan by Soviet and Afghan geologists began inthe 1960s and intensified inthe 1970s. According to reports, these efforts have led to the identification o f 21 metallogenetic zones containing 1,428 mineral deposits, occurrences and showings. These comprise a wide Attracting N e w Investment Page 20 range of substances including coal, oil, gas, copper, iron, lead, zinc, gold, salt, industrial minerals, and gemstones. O f particular note are the Aynak copper and Hajigak iron deposits which were extensively explored by the Russian and Afghan geologists and for which reservelresource evaluation reports have been prepared. The Hajigak deposit, is reportedly the largest undevelopediron ore deposit inthe Middle East. The Aynak copper deposit, located just south of Kabul in Loghar Province, is part of a long belt of stratabound copper occurrences that have been compared to the Zambian copper belt deposits because o fthe age and the lithologies ofthe host rocks. According to the metallogenetic zoning model defined by the Soviet and Afghan geologists, mineral distribution in Afghanistan shows: i)energy (coal, oil, gas) and evaporite minerals (salt, gypsum) occurring in the northern-central area; ii)base metals, consisting mainly of copper and lead, along with gem stones occurring in the eastern area; and iii)ferrous minerals such as iron, tin and tungsten occurring inthe central area. AttractingNew Iiivvestnient Page21 Minor amounts o f other minerals such as lithium, boron, beryllium have been found associated with pegmatite zones inthe gem stones zones inthe eastern areas. Geological mapping o f Afghanistan was carried out between 1967 and 1971 by groups o f German, Italian and mainly Soviet and Afghan geologists. The mappingwas conducted at various scales and compiled into a map covering the whole country at a scale o f 1:500,000. The value o f this work could be greatly enhanced by the application o f modern mapping techniques such as the use o f satellite imagery to better define outcrop location, structure and eventually any mineral alteration features. Mineral evaluation studies involving resource definition has been conducted by the Soviet and Afghan geologists on 110 deposits throughout Afghanistan. Work at these sites involved detailed geological mapping, geophysical and geo-chemical surveying along with direct resource evaluation by pitting, trenching and drilling where applicable. The results o f this work can be found in individual reports accompanied by the necessary maps and listings at the AGS. While very detailed and complete the work requires a new evaluation using modern mineral resource evaluation technology. Once an initial prioritisation o f the different sites according to various criteria has been made, the mineral evaluation studies would be greatly enhanced by applying mineral resource technology such as digital spatial analysis modelling o f the geological, geophysical, geo- chemical and bore hole data. One o f the principal problems in Afghanistan i s the probable loss o f valuable data and maps over the years and, especially, during the civil war when the geological survey building was utterly destroyed. The staff o f the geological survey have done a great service to the nation by salvaging and protecting much o f the information and data in their homes. These have been returned and are presently being catalogued and put into proper cabinet storage. Once this done it will be possible to evaluate how much data i s actually missing. The other problem i s that most o f the maps and reports are available only as single copies. To be able available for planning and for promotional purposes, the maps and reports should be brought to a format that will allow them to be reproduced and disseminated. For the maps the easiest solution i s to capture them digitally so they can be used in modern GIS software programs. The reports, for the most part are in Russian and should, as a first step, be summarized and translated from Russian into English. Both the British Geological Survey and the United States Geological Survey have approached their respective governments to fund basic geological cartography, geo- spatial mapping, and other rehabilitation work with the Afghanistan Geological Survey. A good start may be made on the organizational aspects of the data through the use o f limited trust funds with appropriate expertise. This could, for example, on the one hand allow the initiation o f a small scale program to train a limited number Afghan geologists in GIs data capture by digitizing the country-wide 1:500,000 geologic map and on the other initiate a project to summarize and translate the evaluation reports on the major mineral occurrences produced by the Russian and Afghan geologists. The importance of an extensive and accurate geological information database, in a format which i s modern AttractingNew Investment Page 22 and can be used with advanced technologies, cannot be overstated. This i s explained in the next section. WHYI s GEO-SCIENCE IMPORTANT? Why do governments spend scarce public funds on geological cartography and earth science mapping? Are such activities really essential to overall economic development? I s geological mapping an activity which i s better undertaken at less risk by the private sector? The answer in most countries i s that an understanding o f the geology and mineral potential in the national territory i s indeed an essential pre-requisite for the rational development o f these resources and economic development. But, there i s an optimum division o f responsibilities for conducting such research. The public sector concentrates on regional or thematic mapping while private mining companies concentrate on detailed exploration and evaluation o f ore-bodies. The main objective for geological mapping fknded by the government i s to achieve an understanding for the geology and resources of a region. This understanding i s useful for a number o f applications. Geological maps are an essential set o f data which, when integrated into a GIS system (geographical information system), can be an essential tool for land use planning and for communities to decide on the rational use o f valuable resources. The maps are also used to identify environmentally sensitive and bio-diversity zones, for investigation o f water resources, and for detection o f areas susceptible to seismic events. They are useful to identify industrial and construction materials important to society, such as clay for bricks, limestone for cement, salt for domestic and industrial consumption. And, of course, the regional and thematic geological maps produced by the government help orient the detailed exploration by private companies for metallic and non-metallic minerals and thereby lessen the risk and cost o fthis exploration to the company. Geological maps prepared with government funds present in a visual form different types o f scientific data. Maps made from satellite photography and images allow not only coverage o f large areas but also real-time analysis o f data. Geophysical information collected by aircraft flown at low altitude with sophisticated sensing instruments show main tectonic and structural features which information i s important to find deposits under the surface. Thematic maps depict regional geology and the distribution o f elements which are important for prospecting for mineral deposits. Geology, like any science, i s a rapidly evolving discipline. Geology maps tend to reflect the geological thinkingand the theories inuse at the time whenthey were produced. Itis thus important that the government fimded geological surveys make use o f the appropriate technologies and methodologies. The quality standards and coverage o f geological maps varies from one country to the next depending on the resources and time allocated to the task. Developed countries are often mapped in great detail and quality, at a scale o f 1:50,000 or 1:25,000 covering the whole country. This level o f detailed coverage i s neither feasible nor cost effective in most developing countries. In these countries regional geological maps are produced in Attracting New Investment Page 23 1:100,000 or 1:200,000 scale and then compiled into larger scale maps covering whole country. It has become more frequent that governments fund thematic regional surveys in order to attract the interest of international mining companies. In Australia, for instance, the government o f New South Wales undertook a large scale geophysical survey which resulted inthe discovery and development by private companies o f at least two new mineral deposits. An important factor in the government's ability to attract private sector investment i s to make the maps available to interested parties at nominal cost5. The maps should be available in digital form, on CD-ROM or available through the internet. Inmany countries the geological maps are mostly available inpaper copies only, which greatly reduce their accessibility and utility to the companies. Also, promotion o f the geological knowledge at international conferences and industry meetings (PDAC in Canada, Mining2003 inAustralia) is important. Inthis context it i s important that the future users of the geological date can obtain them easily and for a comparatively low price. A normal practice inmany countries isto sell CD-ROMswiththe relevant data for anominalprice. The price for the CD-ROM only covers the shipment andnot the collection o f data, digitization and production o f the CD-ROM. Attracting New Investment Page 24 4. LEGISLATIVEAND REGULATORYENVIRONMENT The government has stated as a policy matter that it intends to promote private investment inthe mining sector as a means o f achieving sustainable growth. Experience in other countries demonstrates that attracting and retaining private investment in the miningsector dependsnot only onthe geological prospectivity o fthe country, but also on the laws, regulations, and taxation (enabling environment) that pertain to such investments. The Ministry o fMines and Industries i s currently preparing a new Minerals Law and Regulations. While each country's mining law will have unique features, the experience o f many other countries provides evidence that certain common practices and principles can stimulate new investment and help ensure that investment in the mining sector achieves the maximum development impact. SUCCESSFUL LEGALAND REGULATORYREGIMESW MINING This experience suggests that key elements o f a successful mining legal and regulatory regime for Afghanistan include the following. State ownershipof all minerals resources existing in their natural state Prior to the adoption of the new constitution, it was unclear who owns minerals existing intheir natural state. However, the new constitutionremoves this uncertainty by clearly indicating that minerals in their natural state are the property o f the State, and that the Government i s the custodian o f these resources on behalf o f current and fUture generations. A clear legalbasisfor private access to mineral rights Inthe absence of a proper minerals law, it is unclear whether a private party may legally explore for and exploit minerals and whether a private party may sell the minerals it produces. This uncertainty, together with the overall difficulties o f the central government to establish its authority, has led to an increase of "unofficial" private mineral activity. The new minerals law will clearly establish that private parties may undertake minerals exploration and exploitation inAfghanistan. Inalmost every country, the Mining Law establishes that all private investors may obtain the right to conduct exploration and exploitation o f minerals (including the right to own and sell extracted minerals). In Afghanistan, the Constitution and Minerals Law will confirm: 1) the right o f private parties to obtain mineral rights from the State; 2) that mineral rights obtained from the State are property rights protected under the Constitution from expropriation without fair compensation; and 3) provide the authority for the State to enter into commercial contracts with private parties with respect to miningrights. LegislativeandRegulatoq Environment Page 25 Clear identification and mandate of the Government institution with the power to grant private access to mineral rights Existing State Owned Enterprises as well as private mine operators will need to know which government agency has the power to grant mineral rights. The MiningLaw should clearly designate the government agency with the power to regulate the mining sector, and the power to grant private parties with access to mineral rights. At the present time, the appropriate government agency would appear to be the Ministry o f Mines and Industries. Ifthere are any other ministries that may share regulatory authority over some aspects o f mining activity (such as the Ministry o f Finance (tax), Ministry o f Environmental Protection (environmental protection), Ministry o f Work and Social Affairs (employee health and safety) or Ministry o f Commerce (foreign investment, sales and exports)), then their respective responsibilities should be clearly defined in the MiningLaw. The State should act as regulator of private sector mining activity rather than as explorer, operator or equity-owner Currently, the mining sector o f Afghanistan i s characterized by State ownership and operation o f mines. It i s acknowledged, however, that efficient operation o f these State mining enterprises as well as fiture growth in the mining sector in Afghanistan will depend primarily on the mobilization o f investment from the private sector (both domestic and foreign). Internationally, over the past 20 years there has been a distinct trend for the State to divest its equity ownership o f mining operations, desist from operating mines, and to clearly distinguish regulatory from operating functions. Substantial evidence suggests that private operators are, on the whole, more efficient than traditional state operators in the exploration or exploitation o f mines. When the State participates in mining activities as both an owner/operator o f mines and a regulator o f private mining activity, conflicts of interest arise which can both discourage private investors (who may be concerned about preferential treatment for competing state enterprises), and prevent the State from properly exercising its regulatory functions. The Mining Law should reflect a general policy orientation favoring private operation o f mining activities (for example, it should not contain mandatory requirements o f government participation inownership). It must be recognized, however, that a significant portion of mining activity within Afghanistan i s (and on the date of enactment of the MiningLaw, will be) conducted by the State. When the Mining Law i s enacted, these state mining enterprises will also need to be regulated (presumably by the Ministry o f Mines and Industries). To the extent possible, the Mining Law should: (a) ensure that the State enterprises be subject to the same rules as private investors, and (b) provide means to enable the transfer o f such State enterprises to private ownership and operation inthe fiture. Legislative and Regulatory Environment Page 26 MiningCadastre Establishment o f a Mining Cadastre and other necessary institutions within (or outside) the Ministry o f Mines and Industries i s necessary for promoting, implementing and regulating private sector mining development. The current organizational structure o fthe Ministry o f Mines and Industries does not include certain departments or institutions needed to promote, implement and regulate private investmentsinthe mining sector, such as a modern Mining Cadastre responsible for the recording, granting and cancellation o f mineral rights and for making such records available to the public. Inaddition, other institutions that may or will be needed include a MiningInspectorate, capable o f monitoring and enforcing obligations o f mineral rights-holders. A legal department within the Ministry i s also required to provide legal advice and to assist in negotiations, if applicable, with potential investors. Also, it may be necessary to establish one or more State holding companies to hold the State's portfolio o f shares in any mining enterprises or miningjoint venture interests, if any. In many other countries, these State portfolio holding companies are domiciled in the Ministry o f Finance. The Mining Law should create these institutions, clearly authorize them to perform their respective functions, and determine how they will be hnded. Granting of Mineral Rights Clear identification o f the form and nature of mineral rights must be made available to the private sector, including their basic terms, and the procedures and criteria for granting such rights. Prospective private investors require a clear understanding o f both the substantive rights and obligations that attach to a mineral right, and the procedural requirements for obtaining a mineral right. A mining law that effectively sets out the rules, terms and conditions regarding mining rights can encourage private investment by making these issues clear. Inthe absence of a mining law which sets out the basic terms and procedures applicable to mineral rights a prospective investment would have to be negotiated on a case-by-case basis. Experience in other countries has shown that case-by-case negotiation of the terms and conditions o f individual mining investments presents an enormous administrative burden to the State, and it also results in uncertainty and unfairness, because each deal i s different. These problems can be reduced through the Mining Law and related regulations which clearly set out the procedural rules, and general terms and conditions o f mineral rights applicable to all mining investors, whether domestic or foreign, and whether a private entity or a state entity. Examples o f uniform terms and conditions o f mining rights that are widely adopted in other countries include: (i)"first-come, first-served" priority right to exploration rights; (ii)submission by the prospective investor of a work program and expenditure obligations; (iii)relinquishment o f surface area after a certain time or upon abandonment o f the mining title; (iv) time limits imposed on the Mining Cadastre to process mining Legislative andRegulatory Environment Page 27 title applications; and (v) clear, consistent, and transparent rules o f procedure miningtitle issuance. There may be an extremely small number o f special mining projects (for example projects o f national political significance), for which exceptions to the general rules may be justified or necessary. In such cases, the Mining Law may include a provision authorizing the Cabinet o f Ministers to enact special exemptions to the general provisions of the MiningLaw by decree inhighly unusual circumstances. Transparent Fiscal and Tax Packages From the investor's perspective, the fiscal and taxation terms applicable to the mineral activity are among the most important terms and conditions. In general, mining operations should be subject to overall taxation and regulations, as for any commercial activity. However, there may be special circumstances where mining activities could be eligible for different tax treatment than activities in other sectors, particularly with respect to mineral royalties, accelerated depreciation allowances, loss carry-forwards and exemptions from customs duties on imported equipment. However, for the same reasons discussed in paragraph (0 above, the tax treatment o f mineral investors should be clearly stated in law (whether in the Mining Law or in the general tax law) and consistently applied, so that the tax treatment o f mining investors can be readily ascertained by an investor, and that case-by-case negotiations o ftax rates for individual mininginvestments are discouraged. To the extent that the Mining Law includes special taxes or charges (such as royalties), or exceptions to general tax laws, for mining activities or mining investors, the Mining Law should clearly state the relationship o f such provisions to the general tax laws, and authorize the Ministry o f Mines and Industries and/or the Ministry o f Finance to implement such taxes or charges. Security of Tenure Security of tenure, which refers to the assurance that an exploration license-holder may obtain an exploitation license ifit makes a discovery, consistently ranks as one o fthe most important investment considerations insurveys o f mining investors. Legal regimes which provide for an automatic right to develop a deposit inthe event o f a commercial discovery tend to attract more private investment (and particularly more exploration investment)inthe miningsector than those which do not provide for security o ftenure. The MiningLaw should provide holders of an exploration right with a highdegree o f assurance that they will be entitled automatically to exploit any discoveries, subject to the implementation of appropriate environmental safeguards. Transferability of title Because o f the high up-front costs involved in mining activity, mining investors in particular are concerned with whether the mining right can be easily transferred or pledged/mortgaged to a third party. This i s especially important since many times a small company will begin investment or exploration and later seek to transfer the mining Legislative and Regulatory Environment Page 28 title to a larger company with the financial strength to develop the deposit. Also, mining investors will often seek to borrow from third parties to finance exploration and development, and it will be essential to the investor to know that the mining right can be pledged or mortgaged to third-parties as security for exploration or development financing. The legal regime can promote mininginvestment by allowing miningrights to be easily transferred, pledged and/or mortgaged, either without the consent o f the State, or upon the satisfaction o f clearly stated and objective conditions that do not require the exercise o f ministerial discretion. Other Investor Rights The legal system can further promote private investment in the mineral sector by providing for other assurances typically sought by private investors generally, such as: 1) guarantees o f "stability" o f economic terms o f the miningright (including taxes and other payments to the State); 2) guarantees o fthe right to compensation for expropriation o fthe investment (or for breach by the government o f the terms o f the mineral right); 3) the right to sell production abroad; 4) the right to keep and repatriate earnings and profits (after payment o f taxes); 5) the right to acquire foreign exchange or to maintain hard currency bank accounts domiciled within Afghanistan or, with approval o f the Ministry o f Finance, outside o f the country; 6) the possibility o f entering into investment agreements with the State governed by the laws o f a neutral jurisdiction (e.g., in another country; and, 7) the availability of international arbitration (or some other acceptable method o f dispute resolution) to resolve disputes between the investor and the State. Since miningactivities are excluded from the scope o f the Law o f Afghanistan on Private Investment (the general law regarding incentives for private investment), it could be appropriate for the Mining Law to include some or all o f these rights within the terms o f the Mining Law itself. Appropriate environmental,healthand safety requirements Clarity in regulation of environmental protection and worker health and safety are o f great importance inthe mining sphere, not only for Afghanistan to maintain its ecological heritage and social tranquility, but also to provide security and guidance to potential investors. We have been unable to determine whether Afghanistan has an umbrella environmental law, but we understand that existing environmental, health and safety laws adequate for the specific requirements o f the mining sector do not currently exist in Afghanistan. Additionally, the government agencies currently responsible for implementing and monitoring compliance with environmental and worker health and safety laws lack the trained manpower and practical means to adequately implement and enforce these laws for the mining sector. The Mining Law can address these concerns both by including the relevant requirements for environmental protection and worker health and safety within the terms o f the Mining Law itself, and by establishing an environmental, health and safety unit o f the Ministry o f Mines and Industries, which would be responsible for regulating and monitoring compliance specifically for the miningsector. Legislative and Regulatory Environment Page 29 Regulation of ConstructionMaterials Many countries provide simple regulation for the extraction o f ordinary construction materials such as sand and gravel. In Afghanistan, much o f this activity occurs on a small scale or on an "unofficial" basis, and some o f the general requirements o f the Mining Law (such as the submission of feasibility studies and work plans) may be too burdensome. Itmay therefore be appropriate for the MiningLaw to permit the possibility of simpler regulation for the extraction o f ordinary construction materials. Special regulation of small-scale mining Small-scale mining constitutes an important portion of Afghanistan's mining sector, which presents a host of legal, fiscal, environmental and social issues that are unique to small scale mining. Small scale mining appears to occupy a significant portion o f the workforce employed inthe mining sector, but much o f the sector operates "unofficially" or even illegally. Special treatment o f small-scale activity may be appropriate in the Mining Law, in order to provide the Ministry o f Mines and Industries the flexibility to address issues unique to the regulation of the small-scale mining sphere (which may, for example, require technical, financial and marketing assistance), to provide relief from general requirements of the Mining Law that may be too burdensome and to otherwise encourage the incorporation of small-scale mininginto the "official" economy. Legislative andRegulatory Environment Page 30 5. MININGTAXATIONAND FISCAL CONDITIONS CURRENTSTATUSOFTAX AND ROYALTYLAWS A discussion on mining taxation should distinguish between generally applicable taxes for all sectors and those taxes which may be particular for the mining sector. This i s all the more pertinent inthe case o f Afghanistan, where the general tax laws are in a state o f development. Concerning general taxation, the Ministry o f Finance has embarked on a methodical reform o f tax legislation with a view to enact tax laws that will provide a fast and meaningful return to the government. Consequently, the Ministry has enacted a new customs law which provides for three or four rate categories (including a zero rate category), and provisions for duty exemption for temporary importation and duty remission for capital equipment on a case-by-case basis. In addition, the Ministry i s preparing legislation that may focus on impose income tax on large taxpayers (namely, expatriate individuals) and on the introduction o f a withholding tax on rental payments. The Ministry proposes to introduce new taxes in stages. For example, the introduction of value added tax (VAT) legislation i s not a priority, and i s considered to be about five years away from implementation. Many of these taxes will be packaged as reforms to the existing basic tax law o f 1964. While far from an ideal solution, amending the 1964 law does have the advantage o f quickly establishing certain key taxes. Based on discussions with Ministry o f Finance officials and their external advisors, it i s understood that the Ministry i s considering corporate profits tax legislation that would include: a 20% tax rate; accelerated depreciation; and unlimited carry over of losses. The legislation would not include tax holidays. It i s important that the Ministry o f Finance move quickly to establish the basic taxation regime for industrial and other activities in Afghanistan. Not only i s this required to tap into potential revenue sources but also because potential investors will need to know beforehand the tax treatment to be applied to their investments. MiningTaxationandFiscalConditions ~ Page 31 The draft Minerals Law defers to the generally applicable tax legislation and does not define a specific or separate taxation regime for mining. This i s consistent with international best practice which i s to avoid special treatment for specific sectors. However, the Minerals Law does make reference to certain allowances and adjustments to the general taxation regime, as may be agreed to by the Ministry o f Finance upon suggestion of the Ministry o f Mines and Industries. In addition, in accordance with practices in nearly every country, it i s proposed that a schedule o f royalties and fees be annexed to the Minerals Law and an integral part o f it. Royalties and fees in respect o f mining titles are generally part of the minerals legislation and administered by the government agency directly responsible for the mining sector. This i s because o f the technical nature of the assessments and the requirements for trained personnel with proper scientific equipment to verify the quality, quantity, and purity o f the mineral commodities subject to royalty calculations. The Ministry o f Mines and Industries and the Ministry of Finance are currently discussing arrangements for responsibility for royalties. The proposed Minerals Law clearly specifies that all taxes and royalties should be paid directly to the central government treasury. Because Afghanistan's basic taxation system i s currently being developed, we include below an explanation of internationalbest practice and standards for minerals taxation. DESIGNINGA MININGTAXREGIMETHATWILL ATTRACT INVESTMENT A typical mineinmost miningcountries is subject to awide range oftaxes, including: Corporate profits (income) tax; Royalty; Customs duty; Turnover tax (for example, VAT or Goods and Services Tax (GST)); Payroll taxes (for example, social insurance and pension premiums); Licensing and permitting fees; Land taxes; Water taxes; and Business taxes. It is important that all taxes be taken into account in designing an attractive mining tax regime. In assessing the effect o f the taxation regime on a potential investment, the prospective investor will consider the total tax burden and its impact on the profitability o f the project. For example, Table 1 shows four different tax regimes that allow the investor to realize the same rate o f return6.Changing just one o f the three taxes shown in the Table can have a significant effect on the attractiveness o f the project. For example, if "Rate o f return" is the most commonly used measurement o f the econoniic feasibility o f a nliningproject. Generally, aninvestor ina miningproject would demand a mininiumrate o f return inthe 15% to 20% range, depending o n a number o f factors including country risk. Afghanistan's country risk i s suchthat an investor inthe miningsector would insist o n a rate o f return at the upper end of this range. MiningTaxationandFiscalConditions Page 32 the customs duty in Case A was increased from 5% to 15%, the project's rate o f return would drop to 15.8%, and the investor may decide not to invest inthe project. A moderntax regime should seek to meet the following objectives: e Provide for a fair participation by government and investors; e Be stable over time; 0 B e transparent, and provide a level playing field for all investors; e B e easy to understand; e Be easy to administer; and e Be internationally competitive. The provisions o f an attractive miningtax regime should recognize the unique features o f the mining sector. The following characteristics o f the mining sector distinguish this sector from other industrial sectors. High Risk Relative to most other industries, the mining industry i s characterised by highrisk. This risk is present at all stages o f the project's life cycle, including the exploration, development, and production stages. Capital Intensive The mining industry is capital intensive. Substantial amounts must be spent annually on exploration to discover sufficient ore to replace the ore that is currently consumed. Today, a world class base metal mine can typically cost in the range o f US$2 billion to bringinto production. Price-Taker The prices of most mineral products are established by the interaction o f supply and demand in the global marketplace. The mining enterprise does not set the price for its product - the enterprise i s a "price-taker". Because the mining enterprise i s a price-taker, MiningTaxationandFiscalConditions Page 33 the enterprise's tax burden cannot be passed onto the enterprise's customer - the mining enterprise must bear the burdeno f taxes imposed on its activities and products. MiningProfitsAre Cyclical Most metal prices show wide swings over the years, and the typical mining enterprise's profits will reflect these price cycles. It i s common for even the largest mining companies to record losses for a number o f consecutive years as a result o f soft metal prices. Remote Locations Invariably, ore bodies are found inremote locations. Consequently, in most instances the miningproject involves substantial infrastructurecosts. Finite Life Unlike a manufacturing plant or a service business, a mining project has a finite life, because its mineral reserves are finite. This means that the enterprise has a limited number o f years over which to realise a competitive rate o f returnon its investment. The feasibility study, on which the project investment decision i s made, takes into account the entire life o f the project, and must assume that the tax regime will not change significantly during the project's life. A change to the tax rules part way through the life o f the project couldjeopardise the viability o f the project and result init being shut down. Restoration and Reclamation There i s a trend in the regulatory climate to charge the mining enterprise with stricter responsibilities for site restoration and reclamation, and mine closure. State Ownership Of The Mineral Resource In many jurisdictions, the mining enterprise is obligated to make some form o f royalty payment to the government as a consequence o f the government's ownership o f the resource. This royalty can represent a significant component o f the enterprise's total tax burden. Afghanistan's mining tax regime should also reflect the characteristics o f the country's mining sector -namely: 0 Gem stone production and export represents a potential source of tax revenues that will require particular administrative and collection procedures; 0 Industrial minerals are sold largely into the domestic market; and 0 There is geological potential for world class base metal projects, but no such projects exist at present. MiningTaxationandFiscalConditions Page 34 Royalties Basically, four different kinds of royalty are found inthe global mining sector: 1. Gross production royalty; 2. Gross revenueroyalty; 3. Net smelter return(NSR) royalty; and 4. Net profits royalty. A gross production royalty is calculatedby multiplyingthe number ofunitsof production (for example, tonnes, grammes, etc.) by the royalty rate. (See Table 2.) This kind of royalty i s frequently used in the industrial minerals sector, and sometimes in the coal sector. Tonnes produced 100,000 Royalty rate per tonne $35 Royalty payable $3,500,000 A gross revenue royalty is expressed as a percentage of the gross value of prod~ction.~ (See Table 3.) This kind of royalty i s probably the most common type o f royalty, and i s commonly applied to precious stone production, precious metal production, base metal production, and coal production. 1 Table 3 - Gross RevenueRoyalty (Illustration) Tonnes produced I100,000 Priceper tonne $2,000 Gross revenue $200,000,000 Royalty rate Royalty payable $4,000,000 The term "net smelter return" i s a term that is commonly used inthe global miningsector to mean the gross value of production, minus realization costs (refining and smelting costs, transportation costs, and marketing costs). (See Table 4.) NSR royalties are less common than gross royalties. Gross revenue $200,000,000 Realization costs 50,000,000 Net smelter return $150,000,000 Royalty rate 3yo Royalty payable $4,500,000 A gross revenue royaltyis sometimes called anad valorem royalty MiningTaxationandFiscalConditions Page 35 A net profit royalty is expressed as a percentage of the net profit derived from the mine. (See Table 5.) Net profit royalties are probably the least common kind o f royalties, although most o f Canada's provinces impose net profit royalties. Net smelter return $150,000,000 Operating costs 100,000,000 Net profit $50,000,000 Royalty rate 10% Royalty payable $5,000,000 Itis important to note that the government's risk is different inthe case of each ofthese four different kinds of royalties. The government has the lowest risk in the case o f the gross productionroyalty, becausethe government will collect the same amount o froyalty regardless o f fluctuations inproduct prices, operating and capital costs, and profitability. The government's risk i s highest in the case o f a net profits royalty, because changes to all o f these variables will impact the amount o f royalty collected by the government. Royalty rates reflect these varying risks, with gross royalty rates beingrelatively low, and net profit royalty rates beingrelatively high. INTERNATIONAL STANDAFWS AND BESTPRACTICES To ensure that Afghanistan's mining sector realizes its potential as a source o f growth for the country, the mining tax regime should incorporate international standards and best practices. Table 6 summarizes important tax provisions in eleven countries. The first eight countries are developing countries that are actively trying to encourage investment in their respective miningsectors. The last three countries have mature, robust mining sectors. ' ICountry liicome tax I Royalty Customs I LOSS carr!. I Rate ' Depreciarion I fonvard Rate Rate I MiningTaxation andFiscalConditions Page 36 , Australia 30% 10% Indefinite Various 5yo Canada 40% 100% 7 yearsX 10% net 0.5% profits U.S.A. 35% 15% 20 years' 2.25% gross Various Table 7 sets out inmore detail the royalty rates inPakistan. Table 7 - Selected Royalty Rates - Pakistan Mineral R o alt Precious stones 10%gross Semi-urecious stones 2% gross IIPrecious metals I 2% gross I Base metals I 2% gross Coal $l/tonne Gravel $.1O/tonne Inthe context of seeking to attract both domestic and foreign investment to its mining sector, Afghanistan's key tax rates should be at the more generous end o f the range o f rates in Table 6. For example, the collective set o f rates shown in Case A in Table 1 would represent a good starting point for consideration. TAXADMINISTRATION ANDCOLLECTION The administration and collection o f taxes, other than royalties, mineral license fees and similar payments, will fall under the umbrella o f the Ministry o f Finance. It i s understood that the Ministry o f Finance i s being advised by internal and external consultants with respect to this matter. The administration and collection o f royalties, mineral license fees, and similar mineral- related payments should be the responsibility o f the Ministry o f Mines and Industries. This Ministry's priority should be to establish a system that will focus on the collection o f royalties on industrial mineral production, and base metal and precious metal production. Gem stone production i s deeply entrenched in the informal sector, and needs significant institution building before the collection o f royalties can be seriously considered. All finds collected from taxes and royalties should be deposited to the central treasury. The Minerals Law contains specific clauses to this effect. X 'Lossescanalso can also be carried back to the three preceding years. Losses be carried back to the three preceding years. MiningTaxationandFiscalConditions Page 37 Stability As indicated above, it is important that a mining tax regime be stable. The investor's decision to proceed with a project i s largely based on a bankable feasibility study. The feasibility study i s based on some important assumptions regarding metal prices, production levels and ore grade, operating costs, taxes, and other important variables. Once the project i s up and running, the continued viability o f the project is a function o f these variables. If the variation oftaxes over project life canbe minimized - that is, ifthe tax regime i s stable - thenthere i s one less variable or risk to threaten the enterprise. One risk factor is either reduced or eliminated. A number o f countries have adopted tax stabilization mechanisms, including Argentina, Chile, Indonesia, Kazakhstan, Laos, Mongolia, Peru, and Uzbekistan. By reducing the risk of the miningproject, a tax stability agreement can help to reduce the financing cost of the project, thereby making the project more economically viable. Tax stabilization mechanisms are particularly helphl in the case o f a country that does not have a track record o f legislative stability, such as Afghanistan. Stability can be delivered ina number o fways, but the most common means o f providing stability i s through a bi-lateral agreement between the government and the mining enterprise. This agreement should have a foundation in law, and should not violate any existing laws. IThe coverage o f stability agreements varies among countries. For example, a stability agreement can: 1. Freezetax rates only. but not the basis (rules) for taxation. For example, Mongolia's standard stability agreement fixes the corporate income tax rate at 40%, but does not hold constant the rules for determining taxable income; or 2. Freeze both the tax rates and the basis for taxation (as in Indonesia`s Contract o f Work); andor 3 . Protect the taxpayer from new taxes that are introduced after entering into the stability agreement; andor 4. Allow the taxpayer to avail itself o f beneficial tax changes that occur subsequent to the effective date o f the agreement. There is stronger support for Altematives 2 and 3 as compared to Alternative 1, o n the basis that the main purpose o f a stability agreement is to prevent the taxpayer's tax burden from increasing as a result o f future changes to the law. An argument infavour o f Alternative 4 i s that a beneficial tax change maybe necessary in order to keep the country's tax regime internationally competitive, and that existing taxpayers with stability agreements may need to benefit from such changes in order to remain competitive. Argunients against Alternative 4 include: The investment decision to bringa mine into production is based on the tax regime that is fixed by the stability agreement. If a taxpayer benefited from a favourable change to a tax law, that benefit could be viewed as anunnecessary "windfall"; and Being denied the benefits o f future favourable tax changes is part o f the "price" paid bythe taxpayer for beingable to enjoy the benefits o fthe stability-agreement. I I MiningTaxationandFiscalConditions Page 38 Government Equity Participation Historically, a number o f countries have mandated government participation in a mining project, either directly through a joint venture or indirectly through a shareholding in a mining company. In some cases, the government does not pay for its equity interest, while inother casesthe government pays for its interest. Inthe global miningarena, there is atrend away from government participationinmining enterprises. There are various reasons for this trend, including: Where the government does not pay fair value for its interest, the mining company's returnon investmentis adversely affected; Where the company pays fair value for its interest, it i s usually using scarce financial resources that can be better used in more traditional government functions such as education, healthcare, and so forth; Government equity participation in a mining project i s a relatively high risk way o f participating in the project, as compared to the collection o f royalty or profit tax; Experience shows that, where the government subsequently decides to divest itself o f its interest, the process o f divestment can be complex, time consuming, and costly; Investorstend to prefer to invest inminingprojects where the government is not a co-participant. Investors find that government participation slows down the decision-making process at the enterprise level, and discourages other investors from investing inthe project; and There are few, ifany, good reasons for government to participate inthis way in a miningproject. There are better ways whereby the government can participate in, and have input to, a mining project - namely, through miningregulations and tax legislation. For these reasons, the Government o f Afghanistan should avoid the temptation to take equity interests inminingprojects throughjoint ventures or shareholdings. Tax Exemptions Over the years, other countries have included "exempt periods" in their tax legislation, The advantages of such exempt periods include: The exempt period can compensate for relatively hightax rates; and Providing for an exempt period can send a strong signal to the investment community that the host country i s "pro mining". MiningTaxation andFiscalConditions Page 39 The disadvantages of an exempt period include: a The mining company may be tempted to "high grade" its operations - i.e. mine it's high grade ore during the exempt period, so as to maximize the amount o f profit realized duringthe exempt period instead o f duringtaxable periods; and a The existence of an exempt period in legislation complicates the administration of, and compliance with, the legislation. Taxpayers are known to take aggressive tax filing positions inorder to maximize taxable profits during the exempt period. A tax regime that provides for a relatively hightax rate, together with an exempt period, i s sometimes referred to as a "take-it-away, give-it-back" regime. The current global trend in tax policy i s away from such regimes, and towards a tax regime that i s simpler and has lower tax rates. In 1972, Canada replaced its three-year exempt period with accelerated depreciation. Under Canada's accelerated depreciation rules, all capital expenditures incurred prior to the start o f commercial production are 100% deductible in any year incomputing taxable profits. Accelerated depreciation can serve the same purpose as an exempt period - namely, to allow the taxpayer to achieve fast payback" of capital invested. loOne o f the important criteria consideredby lenders and other investors i s "payback'. A lender, for example, will want to nunimize its exposure to project riskby being repaid as quickly as possible. MiningTaxationandFiscalConditions Page 40 6. INSTITUTIONALARRANGEMENTS BACKGROUND With the political events of the past 20 years and the difficulties of the civil war, it is understandable that the Ministry o f Mines and Industries (MI)i s facing severe difficulties to re-establish its authority over the mining sector. A number of problems most, hopehlly, o f a transitory nature, are noted in this respect. The buildings o f the MMIhave been thoroughly looted ofmost equipment and there is little left for staff to work with. Presently, a few offices are being rehabilitated to accommodate senior officials and some staff. Selected rooms have also been reconditioned for specific use such as computer and language training. But, most staff still lack the proper implements and equipment to do their jobs. The MMI also has little capability, either physical or financial, to collect data on minerals production, imports, exports, marketing conditions, and producers. There i s sometimes a dis-connect between the "plan" and the "actual" figures reported. The MMI faces even more severe difficulties at the provincial level. Finally, while MMI staff are dedicated and, for the most part, well trained, they have been isolated for scientific and other developments in the international industry for over 20 years. Two examples of this isolation: the last geological expedition took place inthe mid-1980s and no new investment has been made in the coal production mines at Pul-i- Kumir since 1988. Inspite of these handicaps, giventime and sufficient hnding, these logistical and staff problems can be overcome. A more kndamental problem relates to the mandate and organization o f the Ministry. The MMIand the Afghanistan Geological Survey (AGS) are still organized to follow the "command-and-control" model o f the former Soviet Union. This model i s out-of-date and fundamentally incompatible with the new emphasis on private sector investment. There are a number o f difficulties observed in the present mandates and organization o f the Ministry. First, it is still organized into production units and departments which are directly involved inthe exploitation of natural resources. For instance, the AGS explores for deposits and, once proven, turns them over to a production unit within the MI. In future, the central government will not have the funds available to provide these production departments with investments required to develop and operate mines. Second, attracting private sector for solid mineral developments will be difficult if the new private companies were required to compete or enter into associations with the Ministry's own production units. There will always be the presumption o f preference given by the Ministry to its own production units, to the detriment o f the private sector. Third, consistent with the overall policy objective o f fostering private sector investment, there i s an intention to create proper regulatory function within the Ministry. However, this will automatically pose a conflict o f interest since the Ministry will, on the one hand Institutional Arrangements Page41 be an owner/producer o f minerals and, on the other, a regulator o f private companies in the sector. The Ministry may also face an issue o f credibility when called upon to adjudicate disputes between, for instance surface and subsurface land owners, local communities and private companies, or private companies and state owned enterprises. The current organization o fthe MIand the AGS are presented schematically below. llinistry of Rlinesand Industries 1 Minister of Mines 1 Research insmute D e p u t y Minister of Mines I I I President of Mines President of Hydrocarbons I I Geological Survey Extraction Engineering 8 Research Jabalosaiaj C e m e n t Janoalak i Afghanistan GeologicalSurvey L I ~ I S O ~ omce Thematic Dept Museum Technical Services Laboratones Mineral Suweys Dept Planning Dept. I I Anaiyticai Mineralogy ' Hydrogeology Metallurgy Paleontology copper Mercury lndustnai Minerals Other countries have faced similar challenges to Afghanistan to organize and mandate their central ministries responsible for mining. While each country organizes the institutions differently, most are organized for the regulatory knction, not to own or operate mines, as i s presently the case in Afghanistan. These countries have a central Ministry or Agency responsible for the sector. By legislation it is designated to serve as the Government's principal contact for all mineral sector related activities. It provides policy advice to the Government, and coordinates with all other governmental institutions and political structures. In Afghanistan, the Ministry o f Mines and Industries i s the central Agency responsible for mines but, as outlined above, combines the regulatory functions with ownership and production o f mineral commodities. The lack o f Institutional Arrangements Page 42 distinction of these functions will be a severe hindrance to development o f the mining sector. Under the "Ministry as Regulator" model, most countries have developed some important commonalities interms o f functions. The centralMinistry generally: 1- Formulates policy and provides advice to political leadership; 2- Administers mineral rights and concessions; 3- Assists in environmentalpermittingo f operations; 4- Develops infrastructurefor geology and miningdevelopment; 5- Controls and regulates enforcement capability. Withinthe Ministry, the following departments areusually found: Mining Cadastre Unit, responsible for the granting, the registration and the cancellation o f miningrights. Environmental Permitting Unit, responsible for the evaluation o f environmental impact statements, issuance o f operating permits and the coordination o f sector activities with other environmentalprotection agencies. Mining Inspectorate Unit i s responsible for monitoring and control o f mining sector activities as well as for the transparent and uniform enforcement o f laws and regulations. Geological Survey i s responsible for acquiring and organizing geo-science information over the country, as well as developing, maintaining, and providing access to all geological and associated mineral sector related. One-stop shop for investor enquires, (e.g., the planning department), would provide necessary geological and investment data to potential investors and private sector companies and, in addition, coordinate contacts with other official government departments. Institutional Arrangements Page 43 A PROPOSEDNEWSTRUCTURE FORMMI A possible new structure which could be considered for MMIis presently schematically as follows. MINISTER DEPUTY MINISTER FOR MINES Resonsible for Government Palticipation in Production - I Environmental unit j 1Mines Inspectorate 1 One-stop shop Procurement The new mining legislation under preparation will help to clarify the mandates and the organizational structure o f the MMI. Inparticular, with the emphasis on the regulatory functions, a proper mine cadastre office should be established to handle mine title registration and supervision. Also, the MMI needs a proper legal department in-house since it may have occasion to negotiate with private parties. A "one-stop shop" should also be established to provide direct links to private sector investors. It i s also important that an environmental unit be set-up within the Ministry. There usedto be such a unit at the Ministry but there has beenvirtually no activity inthe environmental area since 1993. Finally, the new proposed organization includes a Deputy Minister in charge o f State participation in production operations. This post i s proposed as a transitory measure, taking into account the need to clearly distinguishwithin the Ministry the regulatory from the production functions. Inmost countries where the State has an equity or other direct fiduciary interest in production operations, a unit within the Ministry o f Finance i s responsible for supervision o f the portfolio investment. The Afghanistan Geological Survey The Afghanistan Geological Survey i s a separate institution dependent on the Ministry, an organizational set-up not unlike that found in other countries. AGS can, and should, be a critical link in developing the sector. However, there are two critical hindrances in this respect. First, AGS will need to re-orient its mandate and fundamentally change the way it has approached its work. Inthe past, the AGS surveyed mineral deposits, proved up reserves, and then turned the deposit over to a State agency (generally a department or enterprise Institutional Arrangements Page 44 within the ministry) for development and exploitation operations. This function is not consistent with the new model o f "ministry as regulator". In most other countries, the role of the geological survey i s to provide basic scientific and geo-science information to the private sector. This information includes, predominantly, regional geological maps (1:200,000 scale i s frequently used) and Geographic Information Systems applications. This information is held by the government and used for a number o f purposes in addition to minerals development, such as land use planning, environmental protection, seismic research, agricultural production, and others. It is important that the information be made available to the public at nominal cost. Also, private companies which conduct exploration are generally required to turn over the data and reports to the Ministry on a periodic basis. Once the permit i s relinquished by the company, the data reverts to the government which then integrates it into the national database. The second problem is that the present physical and logistical conditions at AGS are very poor. The existing facilities are simply not functional: no water, sanitary facilities, office equipment or supplies, electricity, dangerous and unhealthy working conditions. Very little work has been done to rehabilitate the facilities, though some improvements have been noted over the past several months. The staff o f AGS, some 700 persons, continue to diligently report for work. They have shown good initiative to manage to save and salvage much o f the geo-science information collected over the past 50 years, yet there remain significant missing elements. Some progress has been made with German technical assistance funding (GTZ) to organize and catalogue around 1,500 reports and books. There i s also significant interest with the government o f the United Kingdom and the United States to fund work at the AGS. Amounts o f US$ 5 million for the United Kingdom and around U S $ 15 million for the United States have been mentioned. The work proposed would be to re-establish the geological database and infrastructure o f the country, provide assistanceto the ministry for the regulatory functions, and provide some assistance inthe rehabilitation o f the facilities. Institutional Arrangements Page 45 ANNEX 1 POSSIBLE ELEMENTS OF A MININGSECTORPOLICY AND STRATEGY The government o fthe Transitional Islamic State ofAfghanistan is considering adoption of a mining sector strategy and policy. Provided below are some elements, consistent with international best practice, which may be considered inthe preparationo fthis sector policy and strategy. Introduction and Background Mining can, and does, contribute to economic development and human well-being. If conducted in an environmentally sustainable manner, exploitation o f mineral resources can provide substantial tax revenues to central and local governments, create direct and indirect jobs, and stimulate spin-off industries in and around the mining operations, These beneficial effects and the development of a vibrant mining sector have so far eluded Afghanistan. While the country has excellent geological potential the mining sector i s little developed. This i s because o f the lack appropriate policies and legislation in respect of the sector, the security situation in some parts of the country, and the destitution ofthe public institutions responsible for the sector. Over the past 30 years there has been a considerable amount o fresearch on Afghanistan's mineral resources and potential conducted by the government, sometimes with the assistance o f international donors. To date, attempts to develop the iron ore and copper deposits as well as others have not proven successful, though some interest in these deposits is now being manifested by potential investors. Exploration has identified occurrences of gold, barite, talc, chromites, and other minerals. A large and high grade deposit o f copper (Aynak) has been thoroughly studied and a large iron ore deposit exists in Bamiyan province. There is a considerable semi-precious stone industry undertaken mainly by artisans, which production i s not declared to the central government. Finally, the country has reasonably good quality coal resources and some of this i s mined for domestic and industrial purposes. The existing small industrial sized coal mines are marginal due to antiquated machinery and lack of new investment. However, there i s considerable small scale production. Moreover, coal demand and prices inurban centers has risen rapidly due not only to domestic household energy needs during the winter months but also to increasing industrial demand to fire construction bricks. The government i s aware that development o f mineral resources will require investments in excess of government abilities and thus seeks to establish conditions and an enabling environment which i s conducive to attracting and retaining investment by both private local and international groups. At the same time, the central government i s conscious o f Annex lMining Sector Policy and Strategy Page46 the need to exert its hegemony through appropriate legislation over valuable non- renewable mineral resources which are, at present, being exploited and the revenues captured by factional groups operating inthe country. The privatization and/or leasing to private groups o f existing state owned mining enterprises is, at present, held up by the lack o f adequate mining legislation. Enabling legislation and a proper mineral concession system i s needed to establish order in the quarry and construction materials sector. The demands of reconstruction o f physical infrastructure i s requiring vast quantities o f locally sourced quarry minerals, the exploitation o f which carries the additional benefits o f absorbing large quantities o f labor and spawning ancillary industries. Finally, the small scale mining sector is, at present, wholly unregulated and occupies large numbers o f persons in difficult security, hygienic, and environmental conditions. To achieve these objectives the government is establishing the present miningsector policy and strategy. Outlined below are the main policy orientations o fthe government in respect of the sector and proposals for a strategy and action plan to implementthese policies. Policy Objectives The ten principal objectives o fthe mineral and miningpolicy are to: 1. exert central government sovereignty and hegemony over non-renewable mineral resources locatedthroughout the national territory; 2. stimulate and mobilize local and international private investment in minerals exploration, development and production; 3. ensure that mining operations are conducted in an environmentally and socially sustainable manner; 4. create job opportunities for local residents and stimulate the development o f spin- off and related industries; 5. increase tax revenues accruing to the central government from mining operations and to provide for their equitable allocation and transparent management thereof; 6. promote scientific and geological investigation into the nature and extent o f Afghanistan mineral resources and to make such information available to the public and potential investors; 7. strengthen government supervisory institutions to distinguish clearly the functions of regulator from the functions of owner/operator o f State mining enterprises; 8. regularize small scale and mining and provide for adequate institutional and technical support of these activities; 9. apply internationally accepted standards and "safeguard policies" to questions of environmental protection, indigenous peoples, involuntary resettlement, and other aspects; 10 promote the transition to operate on a commercial basis o f mineral producing enterprises which are currently state owned or reliant on the government. Annex lMining Sector Policy and Strategy Page 47 Policies and Actions to Achieve the Objectives In fbrtherance of the objectives, the government declares the following policies and actions. Creation of a Modern and Internationally CompetitiveLegal and Regulatoy Framework The government will create a modern and internationally competitive legal and regulatory framework. This framework will include a basic mining law, regulations, and model investment agreement. The main principles o f the legislationwill include, but not be limited to: e All mineral resources are the property ofthe State and that the Government is the custodian o fthese resources on behalf o f current and fbture generations; e The role o f the State is to regulate the sector, enforce the legislative instruments which pertain to it, promote private sector investment inexploration, development and operation o f mines; e The transition o f State mining enterprises to operate on a commercial basis and according to the provisions o fthe mininglaw, regulations and tax regime; e Government institutions will be given clear mandates and guidelines to apply the legislation and to regulate the sector ina transparent and efficient manner; e The ministry responsible for mines will contain separate units for the regulatory function and the transition period for the minerals production fbnction; e State enterprises operating mines will make the transition to operate on a commercial basis; e Simple, clear and non-discriminatory procedures will be adopted to provide for equal opportunity of access to mineral resources and liberalized free market trade thereof; e Mineral rights and mining titles (exploration, development and exploitation) shall be registered in a central registry or cadastre system; the obligations o f the mine title holder and o fthe State will be clear, explicit and fully disclosed to the public; e Special provisions will be established for small scale miningoperations as well as exploitation o f quarry and constructionmaterials; e Procedures will be put into place for environmental protection, studies o f environmental impact o f mining operations, the preparation and application o f environmental protection plans and monitoring systems, and the issuance o f adequate guarantees for closure, de-commissioning and rehabilitation o f mines; e Private companies which have been duly authorized to explore for minerals shall have exclusivity for their permit area and the automatic right to exploit any minerals found, subject to satisfactory arrangements in respect o f environmental protection; e Distinction shall be made between surface owners and sub-surface rights, the latter having precedence but with the obligation for consultation and compensation o fthe surface holder; Annex lMining Sector Policy and Strategy Page 48 The mining taxation regime will be internationally competitive, consistent with the overall taxation policies and regulations and take into account specific sector considerations, practices and protocols; All taxes and royalties from mining operations shall be paid directly to the central treasury. The mininglaw will include provisions relative to consultation with communities, protection o f indigenous peoples, and procedures for involuntary resettlement; Dispute resolution mechanisms will be established, either through the judicial system o f Afghanistan or, in the case o f foreign investors, through international arbitration. Institutional Strengtheningfor theManagement of Mineral Resources For the efficient management o f mineral resources and to provide adequate support for the private sector, the public institutions responsible for the mining sector will be modernized and strengthened. The institutions will include principally the Ministry o f Mines and Industries (or successor institution) and the Afghanistan Geological Survey. Inaddition, other government institutions such as the Ministry o fFinance, the Ministry o f Interior, the ministry in charge o fthe environment, and other ministries may be mandated with certain specific aspects of administration o f the sector. Finally, supporting institutions such as universities, polytechnics and other educational institutions, community associations and groupings, and non-governmental institutions will be involved with the sector on an as needed basis. The following elements will pertain to these institutions: The national budgetwill provide for adequate logistical, infrastructure, equipment and financial support for the public institutions; Emphasis will be placed on professional development o f personnel through training and exposure to new and best international practices in the mining industry; Public sector institutions will be given clear and consistent mandates and procedures will be established to enhance communication and coordination between them; Regional offices o f the central departments and ministries will be strengthened in order to reinforce links betweenthe center and the outlying areas; Public institutions will place the emphasis on transparency and good governance and specific procedures will be established inthis respect; The central ministry responsible for mines will establish and, if necessary re- organize, departments to handle policy and administration, cadastre services, mines inspection, health and safety issues, environmental matters, commodity certification and quality control, and geological survey and laboratory services; The government departments will develop programs for promotion o f the mining sector to potential local and foreign investors; Annex lMining Sector Policy and Strategy Page 49 e A tendering program will be developed for mineral deposits for which the government has detailed and complete geological information o f a nature compatible with "pre-feasibility" stage; e Plans will be developed and implemented for the rehabilitation and eventual privatization o f state owned enterprises; e Public institutions will strive to integrate mining activity into community level development plans, including resolution o f conflicts and examination o f alternative economic options; e Special departments will be established to support small scale mining. Establishment of an Internationally Competitive Taxation Regime One of the principle benefits o f mining o f mineral resources i s to provide tax revenues to the government. The government policy i s to put into place a taxation system which i s on the one hand internationally competitive interms o f rates and methods o f taxation and, on the other, provides the maximum amount o f revenues to the State commensurate with exploitation o f non-renewable mineral resources. The taxation system also requires adequate procedures o f the government for distribution o f the revenues to central and local jurisdictions as well as the management o f the revenues once distributed. In general, the taxation regime for the mining sector should follow closely the overall system o f taxation in Afghanistan, but also make specific provision for mining related taxes and conventions. Accordingly, government policy i s to: Assess royalties on production o f mineral commodities; Apply without exception or exoneration existing taxation on profits o f enterprises; Assess land use and surface rental fees; Collect property and other taxes due to local municipalities, provided that these are not incontradiction to national taxes; e Desist from taking an equity participation in mining ventures in the place o f assessing and collecting taxes; e Provide certain exemptions from customs and value added taxes, to the extent that these could impede or otherwise hinder minerals exploration and exploitation; e Apply internationally recognized accounting principles to mining operations; e Publicly disclose taxes and other payments made by mineral producers and investors. Reinforcement of Geologicaland Geo-science Database The aim o f the Government'spolicy is to update and strengthen the basic geological and mining information This information i s necessary for the promotion o f private investmentfor exploration and mine development as well as for the sustainable social and economic development o f Afghanistan. It involves the development o f baseline geological infrastructure, which i s an important public service performed by the state in all countries, and which benefits different activities such as mining, infrastructure Annex lMiningSector Policy and Strategy Page 50 construction, water resources management, land-use and planning, and environmental planning. Inparticular, with the assistance o f the national budget and possibly foreign donors, the following elements will apply: Personnel o f the survey will be trained in modern geo-science methods and re- skilled interms o f regional mapping and GIs requirements; The laboratories at the AGS will support the new emphasis on providing geological information to the private sector and to provide support to government institutions to carry out their mandates; Resource assessments will be conducted and priorities for development established; Project promotion datasets and materials will be created for promoting investment inknown or prospective areas; a special unit within AGS will be created for this purpose; A new reserve classificationsystemwill be put into place whichwill be consistent with international standards; The AGS will conduct geologic mapping and resource assessment on a regional scale for the account o f the government and, possibly, as sub-contractor to private firms, provided there are no conflicts o finterest; Documents, maps, reports and other materials prepared by the AGS will made available to the public at nominal charge. Improvement of Small-scaleMining Small-scale mining activities represent an important source o f income for a growing number o f rural population in Afghanistan. At present, small scale mining contributes fairly large amounts o f quarry, construction and coal materials to the market. There i s also substantial production o f gems and semi-precious stones. However, this activity takes place without formal authorization and State institutions have difficulty in regulating the activities. Additionally, small scale mining often has significant environmental, health, and safety problems as well as potentially conflicts with surface land owners. Therefore, the Government's policy i s to regularize and improve small- scale miningin order to realize its benefits and avoid its adverse impacts. To implement this policy, the following measureswill be taken: adoption and enforcement o f regulations and guidelines for small-scale mining; a provision of extension services to the miners, provided by government centers and also possibly local and national mining associations, to provide training and guidance to improve technical and environmental aspects; provision o f information on available production and marketing options to facilitate the commercialization o f mineral products; establishment of a training center for cutting and polishing gem and semi precious stones as well as objects o f art, handicrafts andjewelry from minerals; Annex lMining Sector Policy and Strategy Page5 1 0 promotion o f awareness o f miningrelated social, health and environmental issues; 0 raising awareness o f small scale miners on regulatory matters and mineral rights, and promotion o f organizations o f such minersinsmall groups or cooperatives; 0 provision o f guidance through government departments on technical aspects (mining methodology, mineral reserves, appropriate processing technology), development o f pilot training centers for small-scale mining, and marketing mechanisms. Establishment of environmentaland social managementcczpacity The aim o f Government's policy i s to minimize and mitigate the social and environmental impacts o f mineral exploitation and to promote sustainable development. This will require development of satisfactory environmental and social capacity for the mineral sector at the Ministry of Mines and Industries as well as at other government agencies dealing with environment and social matters. This requires: Establishment o f modern environmental legislation, guidelines and procedures; Development o f capacity for environmental and social management at respective government institutions both at the central and regional offices; Preparation o f environmental and socio-economic baseline studies and audits o f selected miningareas; Strengthening the capacity o f communities affected by mining, on principles o f environmental and social management, on development o f procedures for participatory consultation; Development of regulatory and enforcement mechanisms to ensure protected zones against illegal mining. Annex lMining Sector Policy and Strategy Page 52 ANNEX 2 ADDITIONAL ACTION STEPS FOR SECTOR RECOVERY OVER THE NEXT TWO YEARS The Afghanistan Ministry o f Mines & Industries has previously put forward several action steps to recover the mining sector (see Proposed Development Projects, for the Years 2004, 2005, 2006). This report proposes additional action steps that complement those defined by the MMI. These additional actions place emphasis on smaller tasks that will have immediate results - strengthening and sustaining current sources of mineral supply. Action steps that warrant immediate implementation are hrther elaborated upon in Annexes 3 to 6; with pertinent supplemental material, Terms of Reference, in Annex 7. Background information regarding current mineral production and information gaps in the understanding o f mineral resource potential i s included in Annexes 8 and 10 respectively. O f particular interest will be the information regarding the tending o f mineral deposits, included in Annex 9. This provides the reader a comprehensive overview o f issues associated with international property offerings such as the Aynak copper deposit. Often associated as a longer-term strategy, this is one task that might bring meaningful investment inthe metals sub-sector earlier inthe program. The following action steps, if started immediately, could sustain current mineral supply and provide meaningful sector recovery usinghome-grown enterprises. 0 Mineral Policy Specialist- There is an immediate need for an interimmineral policy specialist to provide (i)strategic planning and coordination o f several donor-lead activities within the sector, (ii)development and implementation o f programs targeted towards sector growth, (iii)building stronger links between programs o f the MMI and those in other ministries including Infrastructure and Energy, and (iv) assist in strengthening o f professional capacity. For additional information see TORinAnnex 7 - Appendix A. 0 Interim CoalAssistance Program- Providing immediate technical I financial assistance to existing coal operations in order to sustain supply pending longer-range development activities. For additional information see {i) Annex 3 : Immediate Assistance Strategy To The Coal Sector and (ii) inAnnex 7 - Appendix B). TOR Annex 2 Immediate Assistance Programs for Sector Recovery Page 53 Artisan Crafts Facility and Crajls Exchange - A strategy to develop an (i) artisan craft facility (using Afghan lapus lazuli, onyx, and other ornamental stones), and (ii)Exchange for the sale and export o f high-value finished products. The strategy makes use o f natural market forces using incentives to attract producers o f ornamental stones (originally) and gemstones at a latter point in time. Both the crafts facility and crafts exchange provide a secure environment for a sector that i s currently a principal contributor to smuggling. For additional information see (i) 5: Assistance To The Gem And Annex Ornamental Stone Industry, and (ii) inAnnex 7 - Appendix C), TOR Water Resource Assessment - A preliminary assessment o f water resources, in support of coal assessment activities and requirements for power generation. Coal mining and power generation issues are inseparable from water issues. For additional information see Annex 6: A Strategy to Improve Understanding; o fthe Mineral Resource Potential. Quary Extension Service -- Development o f an extension service for quarry operators that are currently unlicensed, informal businesses. An extension service would serve to develop small-to-medium enterprises that contribute significantly to economic growth. For additional Information see TOR in Annex 7 - Appendix B. Small ScaleMiner Extension Service - to provide ongoing expertise relating to safety, productivity, and business development at the micro-business level. For additional information see TORinAnnex 7 - Appendix E. Tender of Aynnk - a task to prepare the Aynak copper deposit for public tender. This program will require the expertise o f a (i)mining engineering firm to prepare the geological / ore reserve package and (ii)a private investment bank to advise the government on the tender process. additional information see TORinAnnex 7 - Appendix F. For Mining Cadastre Office -to administer mining licenses, titles, and land holdings and associated assessment requirements. For additional information see TORinAnnex 7 - Appendix G. Corporatization - A task targeted towards improving existing mining operations by changing business practices to a commercial basis. Targeted towards improving financial performance, this program increases productivity within the sector. For additional information see TORinAnnex 7 - Appendix B. Annex 2 ImmediateAssistance Programs for Sector Recovery Page 54 Expenditures (Annual $mil) TASK 2004 MineralPolicy Specialist 0.2 0.2 Immediate Assistance to ExistingCoal Operations 3 3 Proposed BGS Human Resources Development o f 1 1 AGS Proposed USGS Geospatial Infrastructure 1 1 Development Proposed USGS Mineral Resource Assessment: 3 1.5 7.5 Phase I- Coal Proposed USGS Mineral Resource Assessment: 2 Phase I1-Base andPrecious Metals Proposed USGS Water Resource Assessment (in support o f (i) and (ii) & gas assessments) coal oil Establish an Artisan Crafts Facility using lapus.40 lazuli, oynx, and other high-value semi-precious stones that can be branded in the international market. Proposed BGS Mines Administration Office, AGS 1 Laboratory Facilities, MMI IAGS website, Remote Sensing Capabilities, Museumand Library Facilities Development of a Quany Extension Service 0.2 Development of a Small Scale Miners Extension0.2 0.45 Service I Tender o f Aynak 0.250 0.55 MiningCadastre Office 0.3 Feasibility plan for corporatization of Existing0.2 Operations $11.o i8.55 $5.30 $26.6 Annex 2 Immediate Assistance Programs for Sector Recovery Page 55 ANNEX 3 IMMEDIATEASSISTANCE STRATEGY TO THE COAL SECTOR Afghanistan appears to have extensive coal resources, though geological information i s outdated and respective assessment needs to be undertakento determine the country's full production potential. The coal mining production i s in several different provinces, o f which three have been reviewed in the field by Bank missions, that visited 6 coal mines in Baghlon, Bamyan, and Nengerhar (Jalalabad), out of 11 main coal mines in the country. The thermal quality o f the coal at mines visited was low with calorific values between 5,200-5,500, and an ash content in excess o f 12%.These mines have a small but capable technical stafc trained in Russia, Czechoslovakia, and at the Technological InstituteinKabul, under Russianassistance programs. Current annual production i s low, below 60,000 tons at the Baghlon and Bamyan mines. According to the Ministry o f Mines and Industry, about 4000,000 tons o f coal are produced annually in Afghanistan by Government operated mines and artisanal private miners.However, overall coal production inthe country is declining, and represents only 20-25% o f levels reached duringthe 1970s. This is because virtually all the equipment o f the mineshas worn out, reducing the operations to rudimentary manual mining activities. Coal i s used locally for cooking and heating purposes as well as for textile, sugar, bread, brick kilns and cement industries located nearby the mines, and inthe Kabul region; there has been limited use o f coal to date in power generation. Simple replacement o f dilapidated mining, transportation, maintenance and office equipment would enable productionto return to levels reached duringthe 1970s. In evaluating the coal sector, there is a need for an approach that provides (i)Interim Actions to sustain current levels o f coal supply and improve working conditions, safety, and the environment for thousands o f workers at existing operations, and (ii)Longer- Term Actions to meet future energy needs o fAfghanistan: InterimActions Withrelatively modest expenditures, interim assistance has two elements; (i) Emergency Rehabilitation Investment ($3 million). The objective i s to have an immediate impact on existing supplies o f coal for household and industrial uses. The program would improve current levels o f production and maintain employment to some 15,000 direct and indirect dependents inthe Baghlon and Bamyan provinces. Mines requiring assistance include the principal coal fields at Sabzak and Norght (Karkar, Dudkash, Nahrin, Dareh Soof, and Ashpista & Annex 3 ImmediateAssistance to the Coal Sector Page 56 Duaab).The financing would be used primarily for (a) atwo-phase program to initially assess immediate equipment needs, health and safety issues, and later to provide training on new mining equipment ($0.3 million); and (b) replace essential mining equipment in those coal mines where production can be improved, and improve health and safety conditions ($2.7 million). (ii) Mine Planning at Currently Producing Sites ($0.5 - $0.75 million). Consultants would be contracted to assess currently producing sites, seeking to provide (i) targeted-inventory o f reserve potential, with recommendations a for hrther exploration; and (ii)rudimentary mine planning to artisan operations. The targeted-inventory o f reserve potential would be based upon compilation o f historical resource / reserve data, together with new field observations on surface and from underground workings. Areas warranting further resource evaluation would be selected based on a minimum, threshold of inferred tonnes of coal. This threshold serves as a geological filter, passing a limited number o f candidate areas forward for further evaluation in a hture program. The consultant would provide for each candidate area: a. exploration targets for testing by drilling or subsurface exploration, b. costs and an implementationplan for an exploration program. The future exploration program would be funded separately, either as part o f the country-wide resource assessment program discussed below, or in conjunction with that program. This effort i s targeted towards sustaining and improving current coal supply during which coal resources countrywide can be assessed (see bullet below). This interim strategy may sustain current production levels for the next 3-5 years. Longer-Term Actions Beyond currently producing sites, little i s known about additional coal resources within the country. The current suite o f coal mines were located using a command-control economy whose objectives are no longer relevant. Alternative coal resources may provide larger economic, environmental, and social benefit to the country - subject to proposed infrastructure development and / or regional energy market considerations. (i)Coal Resource Assessment ($7 million). An international geologic survey would be contracted to assess the quantity and quality o f coal resources country-wide. Concurrent with this program would be a hrther evaluation o f candidate exploration targets carried forward from the interim mine-planning program discussed above. This program i s expected to require 3 years. (ii)Long-Range Development Planning($0.5 million). An energy consultant would be contracted to integrate the (a) assessed coal reserves at existing operations with (b) country-wide coal assessments and exploration results. The consultant will define an Annex 3 Immediate Assistance to the Coal Sector Page 57 integrated coal development plan (road map). This planwould consider (a) the economic impact o f existing and proposed infrastructure development (road, rail, and transmission), (b) proposed power generation projects, (c) the availability of water and other inputs to coal-fired power production, and (d) alternative energy resources within the region, This program i s expected to require 9 months. 12004 12005 12006 12007 12008 IInterim Strategv Sustain current levels o f coal I I II III II I supplyandassess reserves at existing onerations Longer-termStrategy Large-scale coal development Specific Interim Action Steps In the Interim assistance, some specific actions are needed immediately for both (i) Emergency Rehabilitation Investment, and (ii) Planning at Currently Producing Mine Sites (see Terms of Reference: Annex 7, Appendix B Interim Technical Assistance to - Coal Mines). Key steps withinthe Emergency RehabilitationInvestment assistancewould include: 0 assess equipment needs, as per the MMI lists, equipment specifications, and sources o f supply; 0 estimate interim capital-cost improvements and identify suitable procurement sources; 0 identify principal health and safety issues o f concern, ranking them according to impacts on the well-being o fworkers; 0 assess what actions are being taken by the broader donor community on these issues; develop an easy-to-understand training standard to improve the overall level o f safety and working environment at the mines; 0 develop an implementation plan for both training and capital investments needed at the mines. Key steps within the Mine Planning assistance would include: 0 Assess the quantity and quality o f coal reserves, including a consideration o f mininghazards at the mineslisted above. Annex 3 Immediate Assistance to the Coal Sector Page 58 0 Prepare development plans, in consideration o f equipment and training improvements noted above. This plan may include consolidation, closure, and expansion o f operations within an overall objective to sustain or improve current production levels and maintain full employment. 0 Develop a program for implementation o f new mining schedules at each operation, with corresponding technology transfer to ensure production schedules can be sustained. Annex 3 Immediate Assistance to the Coal Sector Page59 ANNEX 4 ASSISTANCETO THE CONSTRUCTIONMATERIALS SECTOROVER THE NEXT TWO YEARS ConstructionMaterials Construction materials (aggregate, cement, asphalt) and industrial minerals will be essential to support planned infrastructure reconstruction programs in Afghanistan. However, the construction materials / industrial minerals sector i s perhaps the least understood with respect to the location, quality, and quantity o f available resources and whether these resources can be produced at a price that can be supported by end-use markets. Generally dominated by small to medium enterprises (SME's), the Afghan construction materials / industrial minerals sector i s largely informal and without the professional capacity needed to meet the upcoming infrastructure reconstruction challenge. If this sub-sector i s not formalized, the end-result i s expected to be: 0 continued unlicensed production in which MMI has no resource hegemony in controlling the location or magnitude o f production, nor enforce or collect royalty payments; 0 inferior product being supplied to major highway and construction markets, leading to higher maintenance costs, inferior performance o f infrastructure, and inefficient use o f donor aide; 0 ongoing disregard for worker well-being in which unregulated production does not permit worker health and safety provisions, nor the introduction o f technological innovations that improve industrial efficiency. 0 shortage or disruption o f supply. Although Afghanistan will need to reconstruct 3,200 km's o f road, and commercial, residential, and public buildings - there i s no coherent plan to supply the millions o f tonnes o f crushed and other materials that are needed. continued conflict betweenpits and quarries and competing land-uses inthe urban interface. If formalized, these resources could be harvested in advance o f urban development, allowing for reclamation and alternative land-use. 0 continued environmental degradation from unlicensed operations in environmentally sensitive areas. A reliance on alluvial aggregate will continue to impart severe environmental damage to fragile river systems around the major urban centers. There must be market incentives to facilitate the development of larger scale quarries. Annex 4 Assistance to Construction Materials and Industrial Minerals Page 60 ConstructionMaterials Objectives Assistance to the construction materials sector will need to: 0 create an extension service for quarry operations in order to provide technical assistance on issues o f production, processing, and material sales; 0 provide economic incentives that encourage compliance with regulatory and fiscal obligations; 0 provide mechanisms that reduce reliance on unlicensed operations and shift market focus onto licensed operations providing higher-quality material; 0 define programs that enable growth o f SME's in quarry operations through implementation o f technical standards on larger infrastructure projects, while also providing opportunities for licensed artisan operators in less rigorous residential applications. Over the longer-term, there i s a need to assess construction materials with a focus on ensuring sufficient supply for major infrastructuredevelopment projects: 0 define geologic resources by location, quality, and quantity; giving consideration to (i) application in various end-use construction markets, and (ii) type o f the material demanded. e Define demand scenarios, by location and across time for (i) transportation and other infrastructure development, (ii)commercial and residential construction, and (iii)schools, airports, hospitals, and other public buildings. Demand scenarios must be harmonized with planned reconstruction activities by the donor community. 0 Resolve which production locations are most appropriate in light o f (i)planned urban development, (ii) projected market demand across time, (iii)economies o f scale in production costs, and (iv) quality o f construction material in geologic sources. This assistance to the construction materials sector should begin immediately and will have meaningfbl results by (i) quickly formalizing a small-to-medium enterprise sector, (ii)increasing mineral royalties and taxes paid from resource development; and (iii) improve the quality o f product entering the market, especially in large, donor-supported highway construction projects. Annex 4 Assistance to ConstructionMaterials and Industrial Minerals Page 61 ANNEX 5 ASSISTANCE TO THE GEMAND ORNAMENTAL STONE INDUSTRYOVER THE NEXTTWO YEARS With one of the richest endowments o f gems and ornamental stone, Afghanistan i s realizing little economic benefit from current production that is largely smuggled to Pakistan for sale. After twenty-five years o f war, the full potential o f the Afghan ornamental stone and gem industry remains to be realized. The economic potential i s significant, with current production estimated at $2.5 million and imparting significant economic benefits in the producing districts o f the Panjsher valley northeast of Kabul and at Jegdalek, to its Southeast. Ornamental stone that includes lapis lazuli, onyx, and marble; and quality gems that include emeralds, aquamarines, rubies, spinels, tourmaline, are known to occur within Afghanistan. To realize the potential offered by these resources, the Afghan Ministry o f Mines and Industry ("the MMI") has proposed a multi-phase program to: introduce a new mining law offering competitive royalty rates for the sale o f gemstones within Afghanistan; - perform a geologic resource assessment for ornamental stone and gems, in a cooperative agreement with international geologic surveys in order to: a. describe by location, the quantity and quality o f known ornamental stone and gem deposits b. define the potential for additional ornamental stone and gem resources through additional geologic mapping, prospecting, and application o f sensing technologies develop, in partnership with a non-governmental organization, an artisan facility inKabul, offering high-quality artisan crafts made from ornamentalstone withina one-stop shop for buyers seeking to purchase and export these goods; provide training to hrther develop the artisan community inKabul; develop an exchange that facilitates for buyers the export o f these crafts within a safe and secure environment, and by offering international banking services to this end. To this end, the Afghanistan Ministry o f Mines and Industry ("the MI")f the Islamic o Transitional Government o f Afghanistan ("the Government"), has requested the assistance o f one or more suitably qualified specialist(s) to study the feasibility o f a: (i) Artisan Crafts Facility - to determine the technical requirements and economic viability of a proposed Artisan Crafts Facility in Kabul, usingornamental stone, and (ii) Artisan Crafts Exchange - to develop a business plan for an international sales center buyers ease o f export, international exchange services, and other support banking functions. Annex 4 Assistance to ConstructionMaterials and Industrial Minerals Page 62 UniqueAspects Relatingto the Productionof Gems The Artisan Crafts Exchange i s viewed as a catalyst to eventually attract gem suppliers into the convenience o f selling directly to international buyers within a formal exchange facility in Kabul. The benefits o f selling gems through this facility include (i) removing intermediary handling charges associated with smuggled gems and (ii)offering buyers the comfort and safety o f exporting stones under an official program sponsored by the government. Afghan gems pose unique considerations in that these are family-run operations across many generations and spanning the Afghan / Pakistan border. This sector cannot (easily) be regulated into compliance by the Government inAfghanistan and therefore economic incentives are preferred to attract gem producers to the convenience o f doing business in Kabul. By assembling buyers in a central location, increasing the level o f comfort and safety in which gems might be sold, and facilitating export paperwork -the sector might slowly be formalized usingnatural market forces. Additional economic incentives might include: e Facilitating the export o f raw gems to Thailand and other locations for cutting; and thenreturningthem to Kabul for sale; e Increasing the level o f artisan participation by establishing gemstone-mounting and jewelry industries within the artisan crafts facility working with ornamental stone; An international advertising campaign that "brands" officially exported high- quality stones, thus increasing international interest and prices. This strategy of working the problem from the buyers side has been successfully employed insimilar programs inTanzania and Zambia. Annex 4 Assistance to ConstructionMaterials and IndustrialMinerals Page63 ANNEX 6: A STRATEGYTO IMPROVEUNDERSTANDINGOF THE MINERAL RESOURCEPOTENTIAL Background Historically, Afghanistan has a long tradition o f geologic mapping, with many foreign agencies executing large mapping programs over the past century. During the 1990's, civil war lead to the scattering o fthe geologic information repository. Whereas much has been recovered, information gaps remain. Furthermore, there i s a need to reevaluate historic geologic data using new sensing technologies and geologic models developed over the past thirty years. A joint data collection and mineral resource assessment strategy is proposed to (i) improve current understanding o f the mineral resource inventory, and (ii)allow long range planning based on the potential economic contributions by these resources. O f particular importance i s the impact o f proposed infrastructure improvements on resource potential. Large infrastructure costs can prevent otherwise attractive deposits from realizing commercial production. This linkage between mineral resource assessment and infrastructure i s paramount in the evaluation o f long-range, economic development and land-use planning alternatives. GeologicalData Collection The AGS headquarters in the east-central section o f Kabul was visited by the mission team on several occasions to assess the coverage, extent and quality o f existing geological and mining project information in Afghanistan. The maps and reports saved from the war represent reportedly 90% o f the pre-war documents. These are stored inthe new documentation centre on the fourth floor o f the AGS headquarters in Kabul. The documentation consists o f a set o f four rooms recently restored with funds provided by the German GTZ aid agency. GTZ also provided two computers and printers be used to produce a registry o f all the recovered reports once power is restored. At the time o fmissionteam's visit, AGS personnel were busy registering the reports into a hardcopy notebook. This involved assigning a catalogue number to the report along withits title, the year of its publicationand name ofthe author. The main objective o fthis work was to produce a catalogue o f the reports available at the AGS. O f note is the fact the titles o f the reports entered into the notebook are in three different scripts (Arabic, Cyrillic and Western) and inat least four different languages. Further, the registration did not include assigning a subject name or acronym for the different Annex 6: A Programto Improvethe Understanding of MineralResource Potential Page 64 categories (e.g. general geology, mine assessment, pre- or feasibility report etc...) or keywords. The fact the entries are in different scripts will cause a problem when the digital capture o f the reports begins, and the absence o f subject names and keywords will serious impede later searches for relevant reports. To date, no mapping has been undertaken to fill information gaps and a new geological data collection program will be needed. This information will support mineral resource assessment activities and be used to demonstrate geological favorability mineral exploration companies. Mineral ResourceAssessment A mineral resource assessmentprogramis needed to support longer-term economic, land- use, and infrastructure development planning. A mineral resource assessment program generally consists o f two parts (i)geologicresourceassessmentthatgenerates: a the location, quality, and quantity o fknown mineral resources. 0 quantitative estimates (reflecting uncertainty) o f the undiscovered resource potential inareas prospective for select commodities. (ii) economicassessmentusing: an engineering capital and operating costs (using currently available technologies), and infrastructure analysis, and market analysis (using current prices) to assess commercial viability For some commodity groups, including coal and construction materials, resource estimates are an inventory o fthe total quantity and quality o fthe resource knownto exist. For other commodity groups, including precious and base metals, resource estimates include both (i)inventories o f known deposits @e. the Aynak copper deposit), and (ii) estimates o f the undiscovered resource potential. The total estimated mineral inventory i s referred to as the "endowment", a stock quantity from which some portion i s available for production now and some portion might only be available through additional exploration or improved infrastructure that increases economic viability. The inclusion o fundiscoveredresource potential inendowment estimates is necessary for long-range land-use and infrastructure development decision making. But, it also requires that resource estimates (being imprecise) be described using uncertainty measures. Land-use decisions predicated upon resource estimates rely on expectations, recognizing that outcome i s not certain. Principal tasks required to assess coal resources: (i)compile historic geological information and combine new field mapping in an GIS data warehouse, (ii) estimate the geologic endowment, (iii) apply engineeringcosts relationships to define the "economic" resources using current prices and technology, and (iv) pass this information forward to long-range planning. Annex 6: A Progranito Improve the Understanding of MineralResource Potential Page 65 /TIe.- Dynamic Supply: Geospatial Allocation of resource Infrastructure . development across planning horizon e ..' Current Potential production production Geolonic Endowment: Economic Filter: Resource estimates by Engineering analysis using Y S TECHNOLOGY TRANSFERAND THE AGS Both the United States Geologic Survey (USGS) and British Geologic Survey (BGS) have defined comprehensive programs to assess the mineral resources o f Afghanistan and improve technical capacity within the Afghanistan Geological Survey. The suite o f candidate commodities for assessment include (i) coal, (ii) and precious metals, and base (iii) construction materials and industrial minerals. To prioritize tasks, each commodity group was evaluated in terms o f contribution towards essential social, economic, and reconstruction needs. Resource assessment i s information-intensive, imposing increased information demand on the Afghanistan Geologic Survey (AGS) and Ministry o f Mines and Industry (MMI). Information "gaps" in geologic, geochemical, geophysical, and water resource data will need to be addressed via additional mapping and new field surveys. Likewise, capacity inmineral deposit modeling, explorationtechnologies, and engineeringanalysis will need to be increased. Much of the information, data management tools, and scientific capacity that will be needed must be developed withinAGS and M M I . This obligates the donor community to cast the mineral resource assessment program as principally a technology transfer program. Capacity development will form the foundation o f each phase o f the assessment program. To this end, both the USGS and AGS have defined resource assessment proposals based on technology transfer. These proposals have been integrated into one comprehensive program in which the allocation of training within Afghanistan will be maximized. Within the unified proposal, the USGS and BGS have been assigned tasks in accordance withbudgets and core competencies. ~~ ~ Annex 6: A Program to Improve the Understanding of MineralResource Potential Page 66 Integration of the USGS and BGSproposals into ci technology transfer program AGS I MMI BGS As presented in3.1.2 ofthe BGS proposal Professional Development Geospatial USGS According to tasks associated with Section 2. o f [nfrastructure the USGS proposal Development I USGS 0 As presented inSection2. ofthe USGS proposal ment USGS As presented inSection3. o fthe USGS proposal Coal USGS Clari@ amount o f drilling and reserve calculation to be done, if any. Water USGS As presentedinSection6. ofthe USGS proposal Base and Precious USGS Specify USGS Three-Step Quantitative Resource Metals Assessment Methodology, with application o f economic cost filters for undiscovered deDosits IndustrialMinerals BGS For Aggregate: Gemstones specify use o f GIs-based transportation model Construction Materials working in conjunction with projections o f supply and den~and by end-use (road construction versus residential / commercial) by area (urban sLtbdivisions). specify that quany aggregate i s assessed separately from alluvial aggregate. For IndustrialMinerals specifi that economic filters are based on market analysis that considers projections o f supply and demand, market loss from potential imports and technical substitutions, new end-use markets that could be created from the creation o f small-to-niediuni enterprises for down-stream value-added processing For Gemstones harmonize the geologic assessnient with an initiative to study the commercial viability for a cutting andpolishing facility inKabul. BGS specify a feasibility o f end-rise markets, both domestic and export, together with an economic cost analvsis, otherwise as presented in Section 1BGS as presentedinSection 3.4 inthe BGS proposal I BGS as presentedinSection 3.7 o f the BGS proposal IBGS as presentedinSection 3.8 inthe BGS proposal Annex 6: A Programto Improve the Understanding o f MineralResource Potential Page 67 2004 - 2008 Assistance Strategy The resource assessment strategy has been organized according to a common five-year schedule inwhich many tasks are executed concurrently. World Bank ' ' '' ' USGS BGS . a . a . m a o . Working Group m m m m w w w w w m w w m w m Industrial Minerals & Gemstones, a 0 0 a 0 0 0 0 0 0 0 0 0 Construction . . ... Materials Mines Administration Office National Mining ,,,,, , Castre Mineral Economics m m m m e a m m m e a Capability MMI / AGS/ Promotion & m a m o o ~ ~ a a m ~ Website Laboratory Facilities 0 . . ~ m m m m m m 0 0 0 a m I Museum & LibraryFacilities ............. a o . o m m . m m o o m . I Museum & LibraryFacilities Annex 6: A Programto Improve the UnderstandingofMineralResource Potential Page 68 USGSProposed Tasks Task 1 2004 1 2005 I 2006 12007 I2008 Geospatial Infrastructure Development GIS NSDI MineralResource Assessment Oil & Gas I I I I I I Water (insupport ofcoal) Base and Precious Metals USGS Capacity Development programs 2004 Assistance Strategy 0 World Bank - develop a multi-agency working group to complete the final draft and submit the law for Presidential Decree 0 USGS -resource assessment strategy beginningwith o Geospatial InfrastructureDevelopment, and o The coal resource assessmentprogram (see Appendix A) 0 BGS-institutional strengthening strategy, beginningwith o Professional capacity development at AGS / MMI o The establishment o f a National Cadastre System o The construction materials, industrial minerals, gemstones resource assessment program. (see Appendix B) Whereas the BGS will lead on institutional strengthening at the MMIand AGS, there i s a need for a highdegree o f coordinationwith the USGS resource assessment program: BGS provides technology transfer on human skills strengthening, management, organizational structures, business acumen, geoscience learning, construction and industrial minerals resource assessment methodologies, mines administration, and laboratory / library sciences; 0 The USGSprovides technology transfer on geospatial infrastructure development, geophysical and geological field surveys, coal and metallic minerals resource assessment methodologies, and water resource assessment. Both agencies will need to provide concurrent technology transfer on resource economics, specifically in the economic analysis o f geologic resource estimates and the integration forward into land-use planning, infrastructure analysis, regional power analysis (coal), and long-term economic planning. Annex 6: A Progranito Iniprove the Understanding of MineralResource Potential Page 69 The World Bank will continue to coordinate this effort, seeking to ensure maximum donor efficiency and net benefits to MMIand AGS. Annex 6: A Programto Improve the Understanding of MineralResource Potential Page 70 ANNEX 7 TERMS OF REFERENCE FOR TASKSAND PROFESSIONALSNEEDEDTO . SUPPORT SECTORRECOVERY (SUPPLEMENT TO ANNEX 5) APPENDIX A : MINERALPOLICY SPECIALIST . APPENDIX B:INTERIMTECHNICAL ASSISTANCE TO COAL MINES APPENDIX C: FEASIBILITY STUDY FOR AN ARTISAN CRAFTS FACILITY AND ARTISAN CRAFTS EXCHANGE APPENDIX D: DEVELOPMENT OF A QUARRY EXTENSION SERVICE IN . AFGHANISTAN APPENDIX E: DEVELOPMENT OF A SMALL-SCALE MINEREXTENSION SERVICE . 9 APPENDIX F: PRE-TENDER PROGRAM, AWAK COPPERDEPOSIT APPENDIX G:ESTABLISHMENT OF A MINES CADASTRE OFFICE APPENDIX H:A CORPORATIZATION PROGRAM FORMININGASSETS Annex 7: Terms ofReference for Annex 2 Strategies Page 71 APPENDIX A :MINERAL POLICY SPECIALIST Project Title: Mineral Policv Specialist for the Ministrv o f Mines and Industry 1. Ref: 2. Introduction The Islamic Transitional Government o f Afghanistan ("the Government") has undertaken, with assistance from the international donor community, a comprehensive analysis o f the miningand minerals sector to: implement a mining law that allows Afghanistan to compete in the international arena for private sector investment inthe minerals industry; assess short-term ("interim") financial and technical needs at existing mining operations, inorder to sustain current levels o f mineral supplies; fillgapsinthegeologicinformationbasewithnewgeological, geochemical, and geophysical mapping and field survey programs; develop an integrated geographic information system framework to manage and archive geodata, and establish a national spatial data infrastructure; undertake a comprehensive, quantitative resource assessment program to describe, by location, the quality and quantity o f coal, precious and base metals, industrial minerals, construction materials, and gemstones ("a geologic assessment"); apply an economic assessment to the results o f the geologic assessment in order to define mineralresource potential invalue terms; use the results o f the economic assessment in broader economic, infrastructure, and land-use planning strategies; undertake a comprehensive human resources development program at the MMI and AGS to increase business, technical, scientific, and professional capacity through technology transfer programs with international geologic surveys. implement leading IT solutions for the management of digital data, cadastre functions, and industry promotion; reconstruct physical assets o f the MMI and AGS, including laboratories, library, and representative mineral specimens for study; Involve the private sector in the above activities and development o f the mineral resources o f Afghanistan. To this end, the Afghanistan Ministry o f Mines and Industry ("the MI") has requested the assistance o f a suitably qualified mineral policy specialist to assist inthis undertaking. These Terms o f Reference (TOR) concern the provision o f a short-term, international specialist having broad experience in the mining and minerals industry to provide high- level policy advice, guidance on strategic issues, and to hrther develop an integrated vision for growth within the sector. Given the breadth o f programs, the individual must be available at short notice to provide structured, rapid assessments across a core o f disciplines including: 0 Technical skills relating to mineral development; 0 Consultation and stakeholder assessment; 0 Institutional assessments; Annex 7: Terms o fReference for Annex 2 Strategies Page 72 0 Human resource skills; a Financial and economic skills; 0 Project design and supervision skills; 0 Project cost / benefit analysis skills. 3. ScoDe of Work ?he scope o fwork of the minerals policy specialist to the MMIi s to: accept a short term (six month) assignment based inKabul City, Afghanistan; meet with the Minster o f Mines and Industryand his nominated staff and advisors for a briefing on the assignment; review relevant documents and projects in connection with the above, as directed by the Minister; prioritize issues and develop a six month strategy to provide guidance on key issues across the activities mentioned inSection 3 above; be available on a daily (five-day work week) basis to supervise programs, consult with the Minister o f Mines and Industry and his nominated staff on issues o f concern, act as an advocate for MMI in multi-agency dialogue related to mineral planning and / or development; summarize strategies, management programs, and other guidance effectively in reports on a regular basis; debrief the Minister and his nominated staff, and other agencies at close o f the assignment. 4. Expected Outcomes and Deliverables The MMImineral policy specialist will: 0 contribute towards an increased level of understanding on complex mineral resource issues; ensure that the Minister o f Mines and Industry and his nominated staff have a better understanding o f the issues and critical actions necessary to develop the sector; 0 increased private sector interest inthe sector; 0 a final report recommending follow-on strategies for MMIand AGS. Before departure the mineral policy specialist will present their findings to MMI and invited participants to ensure that the final report represents the views o f the Islamic Transitional Government o f Afghanistan (ITGA). 5. Competency and ExpertiseRequirements The mineral policy specialist should have the following skills and experience in: 0 +20 years experience in mining, mineral policy development, and international project development; 0 a minimum o f a Masters in Mining, Business Administration, or Mineral Economics; a experience inmineral policy development in developing countries; designing and developing project and programmes inpost-conflict situations; Annex 7:Terms of Reference for Annex 2 Strategies Page 73 0 understanding o f institutional development; 0 working knowledge of donor / government interactions, donors practices, procedures, and technical assistance protocols; 0 stakeholder consultation and analysis; 0 project management; 0 a knowledge o fFarsior Dariwould be an advantage. 6. Conduct of the Work The mineral policy specialist will work in the MMI, in regular contact with the AGS for a period of six months in country. The mineral policy specialist will adopt the highest professional and ethical standards duringthis assignment. A per diem for work in Afghanistan will be provided. 7. Management and ReportingRequirements All reports, spreadsheetsand other documentation inthe report should be made available to the MMIinelectronic format before departure. ~~ _ _ _ Annex 7: Terms o fReference for Annex 2 Strategies Page 74 APPENDIX B: INTERIMTECHNICAL ASSISTANCE TO COAL MINES 1. Project Title:InterimStratenv, CoalMine Assistance 2. Ref: 3. Introduction The Afghan coal industry i s presently operating at low production rates, less than 200,000 tonnes annually. Despite this modest output, the supply o f coal is essential for domestic energy / heating and industrial uses. After thirty years o f war and chronic neglect, Afghanistan's coal mines struggle to sustain current levels o f production, a situation that requires immediate attention. Longer-term strategies for growth in the Afghanistan coal sector remain several years away. The quantity and quality o f coal resources remains relatively unknown and programs to assess alternatives could take up to three years. As such, there will be a continuing reliance on smaller mines at Darrah-I-Suf and Sabjak through 2006. Inaddressing thisproblem, the AfghanistanMinistryofMines and Industry ("the MMI"), together with the broader international donor community, have defined a two-tiered program to provide: (iii) InterimTechnicalAssistance-aprogramintendedtohaveimmediateimpact on existing supplies o f coal for household and industrial uses. The program would improve current levels o f production and maintain employment to some 15,000 direct and indirect dependents inthe Baghlon and Bamyan provinces. The assistance program would (a) assess immediate equipment needs and health and safety issues, and replace essential mining equipment inthose coal mines where production can be improved, and improve health and safety conditions. (i4 Mine Planning at Currently Producing Sites - a program to assess (a) coal reserves, placing emphasis on artisan surface mining methods; (b) mining conditions and development options, in consideration of health and safety issues, and (c) the market potential for absorbing scheduled increases in coal production from current operations. To this end, the Afghanistan Ministry o f Mines and Industry ("the MMI") o f the Islamic Transitional Government o f Afghanistan ("the Government"), has requested the assistance o f a suitably qualified mining engineer to assist in the Interim Technical Assistance Strategy. These Terms of Reference (TOR)concern the provision o f a short- term contract for a mining engineer to assess the condition o f currently producing mines, and define operational and capital improvements that will sustain coal supply through the interim period. 4. Scope of Work The scope o fwork o f the miningengineer, for each o fthe producing sites, i s to: Mine Rehabilitation Annex 7: Terms o fReference for Annex 2 Strategies Page 75 0 assess equipment needs, as per the MMI lists, equipment specifications, and sources o f equipment supply; 0 estimate interim capital-cost improvements and identify suitable procurement sources; 0 assess maintenance needs and estimate annual maintenance costs; 0 develop a regular maintenance program; 0 develop an implementation plan for capital investments needed at the mines. assess what actions are being taken by the broader donor community on these issues, and coordinate with the Ministry o f Mines and Industry, Office o f the President o fMines. Mine Planning 0 assess coal reserves - inferred geological reserves using surface and underground observation only; 0 perform some rudimentary mine planning with respect to improving overall production efficiency by (i) state mining enterprises, and (ii) workers; and artisan develop some local capacity for mine planning; 0 identify principal health and safety issues o f concern, ranking them according to impacts on the well-being o fworkers; 0 develop an easy-to-understand training standard to improve the overall level o f safety and working environment at the mines; 0 develop a reasonable production schedule -- reflecting improved equipment suites, improvedworker safety, and other efforts to increase efficiency; 0 coordinate with officials at the Ministry o f Mines and Industry, Office o f the President o fMines. 5. Expected Outcomes and Deliverables The deliverable product will be a report that provides: 0 cost estimates o f suggested capital improvements, plans for training, equipment specifications, and procurement documents; 0 rank-ordered lists o f principal health and safety issues with consideration o f other donor assistance; 0 an easy-to-understand mine safety training program(s); 0 implementation plan(s) for equipment procurement; 0 regular maintenance plan(s); 0 reasonable mine production schedules for each operation. Before departure the mining engineer will present their findings to MMI and invited participants to ensure that the final report represents the views o f the Islamic Transitional Government o f Afghanistan (ITGA). 6. Competency and ExpertiseRequirements The miningengineer should have the following skills and experience: 0 +15 years experience in coal mine planning, coal mine development, and international project development; Annex 7: Terms o fReference for Annex 2 Strategies Page 76 0 a minimum o f a Bachelor o f Mining Engineering degree, or equivalent; experience in small scale mining; 0 experience inequipment specifications and procurement; 0 project management; 0 a knowledge o fFarsi or Dariwould be an advantage 7. Conduct of the Work The mining engineer will work under supervision of the MMI, in regular contact with the coal mine operating divisions. The mining engineer will adopt the highest professional and ethical standards during this assignment. A per diem for work in Afghanistan will be provided. 8. Managementand ReportingRequirements All reports, spreadsheets and other documentation inthe report should be made available to the MMIinelectronic format before departure. Annex 7: Terms ofReference for Annex 2 Strategies Page 77 APPENDIX C: FEASIBILITY STUDY FOR AN ARTISAN CRAFTS FACILITY AND ARTISAN CRAFTSEXCHANGE 1. Project Title: Feasibilitv Studv for an Artisan Crafts Facility and Artisan Crafts Exchange inKabul Citv. Afghanistan 2. Ref: 3. Introduction With one o f the richest endowments o f gems and ornamental stone, Afghanistan is realizing little economic benefit from current production that i s largely smuggled to Pakistan for sale. After twenty-five years o f war, the full potential o f the Afghan ornamental stone and gem industry remains to be realized. The economic potential i s significant, with current production estimated at $2.5 million and imparting significant economic benefits in the producing districts o f the Panjsher valley northeast o f Kabul and at Jegdalek, to its Southeast. Ornamental stone that includes lapis lazuli, onyx, and marble; and quality gems that include emeralds, aquamarines, rubies, spinels, tourmaline, are known to occur within Afghanistan. To realize the potential offered by these resources, the Afghan Ministry o f Mines and Industry("the MMI") has proposed a multi-phase programto: (vi) introduce a new mining law offering competitive royalty rates for the sale o f gemstones within Afghanistan; (vii) perform a geologic resource assessment for ornamental stone and gems, in a cooperative agreement with the Britishand / or U.S. Geologic Surveys, in order to: a. describe by location, the quantity and quality o f known ornamental stone and gem deposits b. define the potential for additional ornamental stone and gem resources through additional geologic mapping, prospecting, and application o f sensing technologies (viii) develop, in partnership with a non-governmental organization, an artisan facility inKabul, offering high-quality artisan crafts made from ornamental stone withina one-stop shop for buyers seeking to purchase and export these goods; (ix) provide training to krther develop the artisan community inKabul; (x) develop an exchange that facilitates for buyers the export o f these crafts within a safe and secure environment, and by offering international banking services to this end. To this end, the Afghanistan Ministry o f Mines and Industry ("the MI")f the Islamic o Transitional Government of Afghanistan ("the Government"), has requested the assistance o f one or more suitably qualified specialist(s) to study the feasibility o f a: (i) Artisan Crafts Facility - to determine the technical requirements and economic viability o f a proposed Artisan Crafts Facility in Kabul, usingornamental stone, and (ii) Artisan Crafts Exchange - to develop a business plan for an international sales center buyers ease o f export, international exchange services, and other support banking functions. Annex 7: Terms o fReference for Annex 2 Strategies Page 78 The Artisan Crafts Exchange i s seen as a catalyst to eventually attract gem suppliers into the convenience o f selling directly to international buyers within a formal exchange facility in Kabul. This removes intermediary handling charges associated with smuggled gems and offers buyers the comfort and safety of exporting stones under an official program sponsored by the government. The program will have as a cornerstone an international marketing campaignthat "brands" higher-value Afghan products. These Terms o f Reference (TOR) concern the provision o f a short-term contract for one or more specialist(s) to perform the feasibility study for the Artisan Crafts Facility and Artisan Crafts Exchange. 4. Scope of Work TheArtisan CrapsFacility A feasibility study is neededto determine: 0 the economic feasibility o f establishing an artisan crafts facility in Kabul, for the manufacture o f high-quality lapus lazuli, onyx, and other high-value ornamental stone products. 0 a business plan including organizational, staffing and facility plans for a non- governmental organizationto manage the artisan crafts facility; 0 estimated capital costs and annual budget requirements; 0 training requirements for artisan labor; The Crafts Exchange A feasibility study i s neededto determine: 0 training requirements for business management o fthe crafts exchange 0 considerations relating to export documentation, international banking services, and other financial / logistical considerations; 0 a forward-looking analysis o f how gems might be attracted to the facility, including considerations relating to tribal and local leaders in the Panjsher, Badakhshan, Nuristan and Jegdalek regions; 0 issues relating to the international promotion ("branding") o f high-quality Afghan artisan crafts and gems; 5. Expected Outcomes and Deliverables The deliverable product will be a report that provides: 0 a determination as to whether the proposed Artisan Crafts Facility and Artisan Crafts Exchange merit additional consideration; 0 a proposed management structure for a non-governmental organization to manage boththe Artisan Crafts Facility and Artisan Crafts Exchange; 0 capital costs and annual budget requirements for boththe Artisan Crafts Facility 0 current capacity for both manufacture o f the crafts and management o f the exchange, and an easy to implement training program; Annex 7: Terms o fReference for Annex 2 Strategies Page 79 e points-of-contact and protocol for dialogue with existing artisan craftsmen; e an implementation plan. Before departure the specialist(s) will present their findings to MMI and invited participants to ensure that the final report represents the views o f the Islamic Transitional Government of Afghanistan (ITGA). 6. Competency and ExpertiseRequirements The specialist(s) should have the following skills and experience: +15 years experience in artisan crafts production (using ornamental stone) and sales. Experience with lapis lazuli and onyx (and to a lesser degree emeralds, aquamarines, rubies, spinels, tourmaline) would be an advantage; capabilities in economic analysis o f the artisan crafts industry using ornamental stone; experience indevelopment and management o f small business; A minimumBachelor o f Science degree inearth sciences, miningengineering, or business management; or certification by the American Gemological Institute or equivalent; A knowledge ofFarsi or Dariwould be considered an advantage 7. Conduct of the Work The specialist(s) will work under supervision o f the MMI, inregular contact with (i)the Afghanistan Geologic Survey, (ii)theU.S. Geologic Survey and / or British Geologic Survey on resource assessment issues, (ii)current gemstone producers and buyers. The specialist(s) will adopt the highest professional and ethical standards during this assignment. A per diem for work inAfghanistan will be provided. 8. Management and Reporting Requirements All reports, spreadsheetsand other documentation inthe report should be made available to the MMIinelectronic format before departure. Annex 7: Terms o fReference for Annex 2 Strategies Page 80 APPENDIX D: DEVELOPMENT OF A QUARRY EXTENSION SERVICE IN AFGHANISTAN 1. ProjectTitle: Development ofa Quarry Extension Service inAfghanistan 2. Ref 3. Introduction Construction materials (aggregate, cement, asphalt) will be essential to support planned reconstruction programs in Afghanistan. However, this sub-sector remains informal, with production statistics not reported and royalties not paid. Generally dominated by small-to-medium enterprises (SME' s) - absent technical assistance provided to this sector, Afghanistan i s likely to see continued: 0 unlicensed production inwhich the location and magnitude o f production i s not controlled, nor royalty payments made; 0 inferior product being supplied to major highway and construction markets; 0 disregard for worker health and safety issues; a absence o ftechnological innovations to improve industrial efficiency; 0 uncertainty o f supply inkey regions; 0 conflict between pits and quarries and competing land-uses in the urban interface; 0 environmental degradation from unlicensed operations in environmentally sensitive areas. Formalizing the sector requires development of an extension service to provide much- needed technical assistance and allow economic incentives to take hold. To this end, the Afghanistan Ministry o f Mines and Industry ("the MI") o f the Islamic Transitional Government o f Afghanistan ("the Government"), will undertake, with assistance from the international donor community, a comprehensive analysis o f the construction materials sector: (i) implement a mining law that allows the Afghanistan construction material sector to compete in the international arena by attracting private investment capital; (ii) fillgapsinthegeologicinformationbasewithnewgeologicalmappingof construction material sources. (iii) develop, by location, an inventory of the quality and quantity of construction material production. These Terms o f Reference (TOR) concern the provision o f a short-term contract for development o f a construction materials extension service. 4. Scope of Work The scope o fwork will be to: develop a business plan for an extension service that can (i)provide technical assistance on production, health and safety, and (ii) enforce environmental and regulatory compliance; Annex 7: Terms o fReference for Annex 2 Strategies Page 81 0 inventory immediate needs with respect to training and equipment, and prepare an associated cost estimate, specifications, and list o f procurement sources; 0 identify meaningful economic incentives that will assist in formalizing the sector; 0 develop a plan for a producers trade association and define avenues by which the industry can present issues o f concern to the MMI; 5. ExpectedOutcomesand Deliverables The deliverable product will be a report that provides: a business plan and strategy to formalize the sector through an extension service; 0 identifies issues constrainingregulatory compliance and sector growth; 0 a mine safety training program; 0 a cost estimate o f suggested capital improvements, a plan for training, equipment specifications, and procurement documents; 0 an implementationplan. Before departure the dimensional stone will present their findings to MMI and invited participants to ensure that the final report represents the views o f the Islamic Transitional Government o f Afghanistan (ITGA). 6. Competencyand Expertise Requirements The construction materials specialist should have the following skills and experience: 0 +15 years experience in high-level management within the construction materials industry (i)at the production and sales level, and (ii)in providing technical assistance; capabilities ineconomic analysis o f the construction materials industry; 0 experience in development and management o f small businesses; 0 A degree in earth sciences, mining engineering, business management, or equivalent; 0 A knowledge ofFarsi or Dariwould be considered an advantage 7. Conduct of the Work The construction materials specialist will work under supervision o f the MMI, inregular contact with (i) the Afghanistan Geologic Survey, (ii) U.S.Geologic Survey and / or the BritishGeologic Survey on resource assessment issues, (ii) producers and buyers. current The construction materials specialist will adopt the highest professional and ethical standards duringthis assignment. A per diem for work inAfghanistan will be provided. 8. Management and Reporting Requirements All reports, spreadsheets and other documentation inthe report should be made available to the MMIinelectronic format before departure. Annex 7: Terms ofReference for Annex 2 Strategies Page 82 APPENDIX E:DEVELOPMENTOFA SMALL-SCALEMINEREXTENSION SERVICE 1. Project Title:Development o fa Small-scale MinerExtension Service inAfghanistan 2. Ref: 3. Introduction Afghanistan's mining industry (largely coal) i s producing at relatively modest levels after nearly thirty years of war. Most mineral production i s concentrated in small-scale operations around coal, construction materials, gemstones, and dimension stone. Recovery o f the sector i s partially predicated on developing increased technical capacity within existing small-scale operations. If well organized, this sector could be used to attract private sector investment, The Islamic Transitional Government o f Afghanistan ("the Government") has undertaken, with assistance from the international donor community, a comprehensive analysis o fthe mining and minerals sector to stimulate growth by: implementing a mining law that allows Afghanistan to compete in the international arena for private sector investment inthe minerals industry; assessing short-term ("interim") financial and technical needs at existing miningoperations, inorder to sustain current levels of mineral supplies ; filling gaps in the geologic information base with new geological, geochemical, and geophysical mapping and field survey programs; undertaking a comprehensive, quantitative resource assessment program to describe, by location, the quality and quantity of coal, precious and base metals, industrial minerals, construction materials, and gemstones; involving the private sector inthe above activities and development of the mineralresources o f Afghanistan; the objectives o f the program are spilt between (i)enhancing the productivity o f existing small-scale operators, and (ii) establishing larger operations based on significant private sector investment. An extension service is needed to provide ongoing technical assistance to small-scale miners, principally those providing much needed coal for home-heating and light industrial use. Thus, this program shares common interest with the InterimAssistance to be provided to coal minerson a one-time basis. To this end, the Afghanistan Ministry o f Mines and Industry ("the MMI") requires the development of a small-scale miners extension service to assist in formalizing current operations in the coal, metals, ornamental stone, dimensional stone, industrial minerals, and gemstone industries.l1 These Terms o f Reference (TOR) concern the provision of a short-term contract for development o f a small-scale miners extension service. A separate Construction MaterialsExtension Service is to be created. Annex 7: Terms o fReference for Annex 2 Strategies Page 83 4. Scope of Work The scope o f work is to: 0 develop a business plan for a small-scale miners extension service that can (i) provide technical assistance on production, health and safety, and (ii) enforce environmental and regulatory compliance; 0 develop a capital and operating budget; 0 inventory immediate needs with respect to training and equipment, and prepare an associated cost estimate, specifications, and list o f procurement sources; 0 identify meaningful economic incentives that will assist in formalizing the sector; 0 develop a plan for a producers trade association and define avenues by which the industry canpresent issues of concernto the MMI; 5. ExpectedOutcomes and Deliverables The deliverable product will be a report that provides: 0 a business plan and strategy to formalize the mining sector through an extension service; 0 a capital and operating budget; identifies issues constraining regulatory compliance and growth inthe small-scale miningsector; 0 a small-scale mine safety training program; a cost estimate o f suggested capital improvements, a plan for training, equipment specifications, and procurement documents; 0 an implementationplan for the extension service. Before departure the consultant will present their findings to MMI and invited participants to ensure that the final report represents the views o f the Islamic Transitional Government o f Afghanistan (ITGA). 6. Competency and ExpertiseRequirements The selected consultant should have the following skills and experience: 0 1 1 5 years experience in small-scale mining (i)at the production level, and (ii) in providing technical assistance; experience indevelopment and management o f small businesses; 0 a degree inminingengineering, business management, or comparable equivalent; a knowledge o fFarsi or Dariwould be considered an advantage 7. Conduct of the Work The consultant will work under supervision o f the MMI, in regular contact with current producers. The construction materials specialist will adopt the highest professional and ethical standards during this assignment. A per diem for work in Afghanistan will be provided. 8. Management and Reporting Requirements All reports, spreadsheets and other documentation inthe report should be made available to the MMIinelectronic format before departure. Annex 7: Terms ofReference for Annex 2 Strategies Page 84 APPENDIX F: PRE-TENDERPROGRAM,AYNAK COPPERDEPOSIT 1. ProjectTitle:Pre-Tender Program, Avnak Copper Deposit, Afghanistan 2. Ref: 3. Introduction The Aynak copper deposit, located in Logar province o f central Afghanistan, i s a sedimentary-hosted (Zambian-style) ore body. Discovered in 1973, the Aynak deposit consists o f two main ore zones at 150 m depth (Central & Western zones), with an addition three poorly defined bodies along strike to the east and south. Surface outcroppings o f copper occur around the deposits and as prospects and occurrences along a copper belt extending 25 kmlong by 15 kmwide within Upper Proterozoic sediments. Embroiled in civil war for nearly thirty years, this world-class copper deposit is a key undeveloped resource within the Afghan mining sector. Development o f this deposit by the international mining community will serve to open the broader minerals and metals sector to additional exploration and development. To this end, the Islamic Transitional Government o f Afghanistan ("the Government") has undertaken, with assistance from the international donor community, a comprehensive analysis o f the mining and minerals sector to stimulate growth by: (i) implementing a mining law that allows Afghanistan to compete in the international arena for private sector investment in the metal mining industry; (ii) filling gaps in the geologic information base with new geological, geochemical, and geophysical mapping and field survey programs targeted towards metallic mineral deposits; (iii) undertaking a comprehensive, quantitative resource assessmentprogram to describe, by location, the quality and quantity o f known copper resources, together with geologic estimates o fundiscovered copper resource potential with the Logar copper belt; (iv) involving the private sector in the above activities and development o f metallic mineral resources o fAfghanistan. The Aynak Deposit The Aynak copper deposit i s accessible by paved road from Kabul City (3 5km northeast), and dirt track to Aynak (15km). No power or other development i s present on site. Proven reserves from previously drilling are (based on 1978 reporting): Central Zone: 4.301 M T o f copper* Category: Drilled Grade: 2.37 % Cu (cut off 0.7% Cu) Ore Body Dimensions: 2000m along strike length, 60-150m thick, depth - from near surface) Mineralization i s vertically zoned: from 0 to 10-20m oxide (5% total); from 20 to 80-100m mixed (<7%); from lOOm sulphides(87%). * Reservefigure providedby AfghanistanGeologicalSurveyfromAynak Copper feasibilitystudy Annex 7: Terms o fReference for Annex 2 Strategies Page 85 Western Zone: 1.407 MT o f copper* Category: Drilled Grade: 1.61% Cu (cut off grade 0.4% Cu) Ore Body Dimensions: 2000m strike length, 4 - 94m thick (the ore body i s open to the north) The mineralization i s comfortably inter-bedded in sedimentary units o f Vendian (Upper Proterozoic?) age and overlain by Upper Proterozoic volcanic and metamorphic rocks. Up to 150 m o f sands and gravels overlie the deposit. The metallic mineral suite includes: sulphides: bornite - chalcopyrite (sphalerite, pentlandite, violarite, smaltite, linaeite); and oxides: tenorite, brochantite, chalcanthite, chrysocolla, malachite, azurite, cuprite, native copper At this time, the Afghanistan Ministry o fMines and Industry ("the MMI") of the Islamic Transitional Government o f Afghanistan ("the Government"), will undertake, with assistance from qualified (i) and (ii) mining private banking experts, a tendering o f the Aynak copper deposit. 4. Scope of Work The scope o fwork is divided into three principal disciplines: 0 Supervision and Interfaceto MMI 0 Geologic compilation and preparationo f data package 0 Private banking assistance onthe tendering process. The tender programwill execute ina series of staged activities: field program including geologic data compilation, check mapping, check assays, preparation o f a data package [by miningconsultant]; concurrent technical assistance to the Ministry o f Mines and Industry, and other relevant ministries on pre-tendering considerations [by investment banker]; preparation o fterms and conditions for tender [by investment banker]; solicitation o f expressions o f interest from the international mining community [by investment banker]; management o f a data room for a one- month period for interested investors [by miningconsultant and investment banker]; orientation field trip for pre-qualified mining companies [by miningconsultant]; execution o f a six-month due diligence period for pre-qualified mining companies [MMIwith on-call ofminingconsultant and investmentbanker]; Submission o f Tenders [to MMI]; Evaluation o f tenders [by investmentbanker with MMI]; Mineral Development Agreement negotiations [by investment banker with MMI]; Award o f Concession to wining tender [MMI] The tender schedule i s to be determined. * Reserve figure providedby Afghanistan Geological Survey from Ayiak Copper feasibility study Annex 7: Terms o fReference for Annex 2 Strategies Page 86 Supervision and Interface to MMI 0 Coordinate tasks outlined below; 0 Liaise with investors and provide the interface to the MMI; 0 Provide guidance within MMI and other relevant agencies (MoF, MoJ) on issues relating to privatization and tendering; 0 Ensure ratification o fthe final tender contract. Mining,Consultant -Geologic ComailationandDataPackage 0 compilation o f historic geologic information and drilling results (note: drill logs are available for all holes, although core has since been destroyed); 0 limited regional, reconnaissance mapping (approx. 7 - 10 days) to confirm geology and distribution / extent o f known copper prospects. All surface prospects should be located using geographic coordinates or UTM's, provided by a global positioning system. All geologic maps are to be captured digitally within MapInfo or ArcView GIs; 0 limited confirmation o f previous surface sampling through check assays (approx. 100geochemical samples); 0 translation o frelevant historic information into Englishfrom Russian and possibly Dari; 0 creation o f poster boards, printed colored cross-sections and plan sections from drilling, geologic maps, drill logs, and other summary documents, inEnglish, for use ina data room; 0 creation o f a distribution data set on CD; 0 provide one qualified expert to conduct field tours to interested parties; 0 staff one qualified expert in a data-room, inDubai, for a period up to one month, and remain on-call to answer geology-related inquiriesfor a period o f six months. Investment Banker - Tendering Process provide a summary workshop and background documentation (in English and Dari) to the Ministry o f Mines and Industry, and Ministry o f Finance on tendering o f mines and deposits; work with the Ministry o f Mines and Industry, and Ministry o f Finance, to define terms and conditions for tender ofAynak; 0 prepare Terms and Conditions for tender o f Aynak inEnglishand Dari; 0 define a tender schedule; 0 solicit expressions of interest from the international mining community 0 pre-qualify companies submitting expressions o f interest; 0 schedule / Manage Data Room activities 0 schedule six-month due diligence programs for pre-qualified companies; 0 work with the MMIto review tender submissions 0 negotiate Mineral Development Agreement 5. Expected Outcomes and Deliverables Supervisor and Interface to MMI Annex 7: Terms o fReference for Annex 2 Strategies Page 87 0 A clear understanding across all key government Ministries o f the tendering process, management expectations, and ratification o f final contractual agreements; 0 Effective communicationwith interested investors on issues o f concern; 0 Accomplishment o f all tasks on time and on budget. MiningConsultant-Geologic Compilation andDataPackage 0 a dataset confirming geologic mapping, assaying, and regional extent o f surface mineralization as reported by the 1973 - 1979 program; 0 ground coordinates, in geographic coordinates or UTMs, for drill holes and surface prospects; 0 a summary report o fthe field program; 0 paper and digital cross sections and plan sections, and geologic maps incolor; 0 poster boards, summary documents, and digital datasets for distribution to interested parties; 0 geological expertise available through (i)an orientation field trip to interested investors and (ii) on-call duringthe due diligence period. InvestmentBanker - TenderingProcess 0 improved understanding o f the tendering process at the MI and associated Ministries; a set o f Terms and Conditions for the tendering o f Aynak; a list o fpre-qualified companies having an expressed interest inAynak; successful execution o f a data room and due diligence period; 0 successful negotiation o f a Mineral Development Agreememt. Before departure the mining consultant will present their findings to MMI and invited participants to ensure that the final report represents the views o f the Islamic Transitional Government o f Afghanistan (ITGA). 6. Competency and ExpertiseRequirements Supervisor The selected supervisor should have the following skills and experience: +15 years experience in international mineral resource development and / or other major projects involving tendering processes; 0 Strong liaison skills across governmental agencies in developing nations; 0 A commanding presence with international investors, able to effectively answer inquiries and convey the intent and desires o fthe government; 0 Good supervisory skills for data compilation and tendering processes 0 Served as supervisor or team leader on at least two previous international tendering processes. 0 Strong written and oral communication skills on tendering issues; Annex 7 : Terms o fReference for Annex 2 Strategies Page 88 MiningConsultant The selected miningconsultant should have the following skills and experience: 0 +15 years experience in mineral property evaluation, including compilation o f drilling results, deposit block modeling, engineering cost analysis, and geologic mapping / geochemical sampling; 0 demonstrated skills inpresentinglarge datasets inlogical, well-organized formats; 0 strong written and oral communication skills on technical miningissues; 0 international miningexperience incopper or other metallic mineral deposits; 0 execution o f field programs indeveloping nations; 0 a minimum M s in geoscience or M.Eng. in mining engineering, or equivalent. Certification as a professional geologist or mining engineer, and certified as a qualified person for reporting on mineral projects inCanada or Australia. a knowledge o fFarsi or Dariwould be considered an advantage InvestmentBanker - TenderingProcess 0 +15 years experience in investment banking, with a minimum o f +5 years on miningprojects; 0 a demonstrated track-record intenderingo f projects inthe international arena; 0 a demonstrated track-record innegotiating mineral development agreements; 0 demonstrated contacts inthe international miningcommunity; 0 strong written and oral communication skills; 0 A knowledge ofFarsior Dariwould beconsidered an advantage 7. Conduct of the Work All consultants assigned to the programwill work under supervision o f the MI, inregular contact with the Ministry ofFinance. They will adopt the highestprofessional and ethical standards during this assignment. A per diem for work in Afghanistan and Dubai will be provided. 8. Management and ReportingRequirements All reports, spreadsheets, and digital datasets should be made available to the MIin electronic format before departure. Annex 7: Terms o fReference for Annex 2 Strategies Page 89 APPENDIX G:ESTABLISHMENTOF A MINES CADASTREOFFICE 1. Project Title:Establishment ofaMines Cadastre Office. Afghanistan 2. Ref: 3. Introduction The Islamic Transitional Government o f Afghanistan ("the Government") i s taking meaningful steps to exert hegemony over the mineral resources o f Afghanistan; through a multi-phase program of regulatory and legal reform. As part of this program, the government i s effecting institutional changes that will increase administrative efficiency and transparency, making Afghanistan a competitive member o f the international mining community. An essential step inthis administrative reform is the establishment o f a MiningCadastre and associated support institutions, either within or apart from the Ministry o f Mines and Industry ("the MMI"). These institutions will be charged with promoting, implementing and regulating private sector mining development. This is a significant step for the government, inthat the current organizational structure o f the MMIdoes not include such departments and full institutional capacity will have to be developed. Currently envisioned needs include: 0 A Mining Cadastre - responsible for the recording, granting and cancellation of mineral rights and for making such records available to the public. A Mining Inspectorate - capable o f monitoring and enforcing obligations o f mineral rights-holders, will be established concurrently. The Inspectorate would also be responsible for auditing annual production at various locations, in support o f royalty assessments. 0 A Legal Department - established withinthe MMIto provide legal advice and to assist innegotiations, if applicable, with potential investors. 0 Holding Companies - to increase the separation between the role o f the state as "regulator" and its portfolio o f shares in mining enterprises or mining joint venture interests. International best-practice often domiciles these holding companies within the Ministry o f Finance. The cornerstone of this reform i s a new mininglaw that creates these institutions, clearly authorizes them to perform their respective functions, and determines how they will be funded. This provides for clear identification o f the form and nature o f mineral rights available to the private sector, and basic terms, procedures, and criteria for granting such rights. The end-result will be a competitive business environment that enables the government o f Afghanistan to attract muchneeded private investment to grow the mining sector. These Terms o f Reference (TOR) concern the provision o f a short-term contract for development o f a Mining Cadastre, Minerals Audit Group, Legal Department and other hnction as deemed necessary. The program is principally centered on capacity development and technology transfer, with the institutions naturally evolving out o f this process. Annex 7:Terms ofReference for Annex 2 Strategies Page 90 4. Scope of Work The scope o fwork i s logically divided according to institutions to be created: Mining;Cadastre 0 provide capacity development, within the MMI, on Mining Cadastre issues. Key topics may include (i) enforcement o f the terms and conditions o f exploration and mining rights, (ii) transparent administration o f the granting o f mineral licenses and concessions, (iii)developing schedules for progressive relinquishment o f surface areas or upon abandonment o f the mining title; (iv) ensuring timely processing o f mining title applications; (v) clear, consistent, and transparent rules regarding miningtitle, and (vi) encouraging private sector investment; 0 formal training o f Mining Cadastre staff including standard operating procedures, reporting, and budgetingprocesses; 0 establishment o f the Mining Cadastre office, including sources o f funding, development o f physical property, supporting information technology, projected annual budget for three years and preparation o f associated budget request documents; 0 follow-up and on-call technical assistance. MiningInspectorate 0 provide capacity development, within the MMI, on Mining Inspectorate issues. Key topics may include (i) procedures for monitoring and enforcing obligations o f mineral rights-holders, (ii)performing regular audits o f mineral production, by major commodity type, working with the Ministry o f Finance on the period resolution o f the production base to which royalties are assessed, (iii)coordination with the proposed Small-MinersExtension Service, and Quarry Extension Service on issues o f mutual concern. 0 formal training o f Mining Inspectorate staff including standard operating procedures, reporting, and budgetingprocesses; 0 establishment o f the Mining Inspectorate office, including sources o f fbnding, development o f physical property, supporting information technology, projected annual budget for three years and preparation o f associated budget request documents; 0 follow-up and on-call technical assistance. MiningLegalDepartment 0 provide capacity development, within the MMI, on legal issues within the mining industry. Key topics may include: (i)ramifications and impacts o f broader government laws to mineral tenure; (ii) ongoing monitoring o f international best- practices on mineral development agreements; (iii) obligations o f investors on environmental and social legacy issues, (iv) developing non-arbitrary, clear, and transparent enforcement o f regulations; (v) reforms to sustain a competitive business environment. Annex 7:Terms o fReference for Annex 2 Strategies Page 91 e formal training o f the Mining Legal Department staff including mining case-law, fair and just courts o f law, protecting investor rights, standard operating procedures, reporting, and budgeting processes; e establishment o f the Mining Legal Department, including sources o f funding, development o f physical property, supporting information technology, projected annual budget for three years and preparation o f associated budget request documents; e follow-up and on-call technical assistance. 5. Expected Outcomes and Deliverables Mining;Cadastre e A clear understanding ofthe role o fthe state as regulator of mineral title; e improved technical capacity within MMI on administrative issues relating to the administration o f mineral title; e workbooks and other training documentation; e a clear, transparent, and non-arbitrary set o f administrative protocols e the physical assets o f a Mine Cadastre office; e a fully fknctional Mine Cadastre staff; e a three-year budget plan; MiningInspectorate e a clear understanding o fthe role o f the state as regulator o f mineral production; e a set o f clear and transparent protocols for the monitoring and enforcement o f mineral regulations and mineral audit procedures e workbooks and other training documentation; e a strong working relationship with the Ministry o f Finance on royalty assessment and payment issues e a strong working relationship with the proposed Small-Miners and Quarry extension services; e the physical assets o f a MiningInspectorate Office; e a hlly functional Mines Inspectorate staff; e a three-year budgetplan MiningLegalDepartment e a clear understanding o f the role o f the state as regulator with respect to legal obligations o f all parties; e improved technical capacity within MMI on the legal administration o f mineral resources, including measures for the periodic assessment o f the performance o f the mining law and other legal statues, and protocols for revision o f laws; e workbooks and other training documentation; e the physical assets o f a MiningLegal Department office; e a fully fknctional MiningLegal staff; e a three-year budget plan. Annex 7: Terms o fReference for Annex 2 Strategies Page 92 6. Competencyand ExpertiseRequirements MiningCadastre e a minimumo f 10 years inthe administration o f a recognized mining cadastre unit; e a demonstrated understanding o fthe role o fthe state as regulator; e strong written and oral communication skills; e capacity inlong-range budgeting; e a knowledge o fFarsi or Dariwould be considered an advantage MiningInspectorate e a minimum o f 10 years as a mining inspector within a recognized mining inspector unit; e a demonstrated understanding o fthe role of the state as inspector; e strong written and oral communication skills; e capacity inlong-range budgeting; e a knowledge of Farsi or Dariwould be considered an advantage MiningLegalDepartment e a minimum o f 10 years as legal counsel on mining issues with recognized Ministries o fMines or other mineral regulatory bodies; e a demonstrated understanding o f international mineral law; e strong written and oral communication skills; e capacity inlong-range budgeting; e a knowledge o fFarsi or Dari would be considered an advantage 7. Conduct of the Work All consultants assigned to the program will work under supervision o f the MMI, in regular contact with the Ministry o f Finance. They will adopt the highest professional and ethical standards during this assignment. A per diem for work in Afghanistan and Dubai will be provided. 8. Managementand ReportingRequirements All reports, spreadsheets, and digital datasets should be made available to the MMI in electronic format before departure. Annex 7: Terms o fReference for Annex 2 Strategies Page 93 APPENDIX H:A CORPORATIZATIONPROGRAM FORMININGASSETS 1. Project Title: A CorporatizationProgramfor MiningAssets inAfghanistan 2. Ref: 3. Introduction The Islamic Transitional Government of Afghanistan ("the Government") has undertaken, with assistance from the international donor community, a comprehensive analysis o fthe mining and minerals sector to: 0 Implement new laws and regulations that exert hegemony over the mineral resources o f Afghanistan and create a competitive investment climate for foreign direct investment; 0 Institute a series o f capacity development programs leading towards a clear, transparent, and non-arbitrary administration o f mineral resources; 0 Rebuild the physical assets and intellectual capacity o f the Ministry o f Mines and Industry and Afghanistan Geological Survey; 0 Develop new institutions to improve regulatory capacity; 0 Invite the international mining community to participate in the development o f Afghanistan's mineral resources; 0 Involve the private sector inthe above activities and development o f the mineral resources o f Afghanistan. As a final step in this process, the Afghanistan Ministry o f Mines and Industry ("the MI") undertakeareformofstate-ownedenterprisestomovethemoutfromunder will direct command-and-control o f the government. These Terms o f Reference (TOR) concern the provision o f a short-term, international specialist having experience in the translation o f state-owned enterprises into commercial entities operating on a cash-flow basis. 4. Scope of Work The scope o fwork is to: 0 Assess current state-owned mining enterprises under the MMI, making a determination o f financial performance and accounting practices; 0 Work with various agencies o f the government to determine institutional requirements, ifany, for financial performance o fthese enterprises; 0 Assess productivity, giving special attentionto labor efficiencies and redundancies; 0 Work with the Ministry o f labor to define cohorts for retraining and/or redeployment to other sectors, including the cost o f programs for retraining, redeployment, and / or early retirement packages; 0 Work with enterprise managers to define a non-disruptive program o f corporatization, including time lines and benchmarks; 0 Create a corporatizationplan. 5. ExpectedOutcomes and Deliverables 0 A report assessing the financial performance and accounting practices o f state- owned mining enterprises under the MMI; Annex 7: Terms o fReference for Annex 2 Strategies Page 94 0 A summary o f MMI, or other agency, institutional requirements for financial performance o fthese enterprises; 0 An assessmentofproductivity, including labor efficiencies and redundancies; 0 A definition of cohorts for retraining and / or redeployment to other sectors, including the estimated cost o f programs for retraining, redeployment, and / or early retirement packages. 0 A proposed programfor corporatization, including time-lines and budgets. 6. Competency and ExpertiseRequirements 0 a minimumo f 10 years experience infinancial analysis o f state-owned companies indeveloping nations; 0 a demonstrated understanding o f the unique problems associated with corporatization of state-owned companies, either in extractive industries or more broadly in other sectors; 0 strong written and oral communication skills; 0 a knowledge o fFarsi or Dari would be considered an advantage 7. Conduct of the Work The consultant assigned to the program will work under supervision o f the MMI, in regular contact with the Ministry o f Finance. They will adopt the highest professional and ethical standards during this assignment. A per diem for work in Afghanistan and Dubaiwill be provided. 8. Management and ReportingRequirements All reports, spreadsheets, and digital datasets should be made available to the MMI in electronic format before departure. Annex 7: Terms o fReference for Annex 2 Strategies Page 95 ANNEX 8 CURRENT MINERALPRODUCTION CoalProduction Production and Value Very rough estimates of production and value exist for the coal sector. At present, it i s estimated that about 110,000 - 140,000 metric tonnes are produced yearly: 1) from the state owned Karkak-Dudash mines inBaghlan province (30,0000 tonnes) and the Sabzac mine in Herat province (10,000 tonnes); and, 2) 80,000 - 110,000 metric tonnes from informal artisanal producers at perhaps 10 mines inthe country. The market value o fthis production is about US$10 million in2002. The current production is slightly more than half of the levels reached inthe 1980s when about 200,000 tonnes where produced at state owned mines. These mines employed 2,500 persons; at present employment in the coal sector i s estimated at 1,000 persons, though the true number of small scale miners i s not known. During the hostilities coal production never reached the level o f 1978 of 213,000 tons. The production between 1980 and 1987 increased, however, quite steadily, from about 111,000 tons to 167,000 tons (Karkar Doodkush being the only mine in activity). B y 1992 the production had dropped to 70,000 tons. The Ministry o f Mines and Industries estimates that the country has minimum requirements o f 500,000 tonnes per year which could increase to over 1 million tonnes. Additionally, 1-2 million tonnes could be used inthe cement industry and an additional 3-4 million in the thermal power sector - ifthese two sub-sectors are developed. Coal i s used extensively in Afghanistan for domestic energy/heating (during the winter months) and industrial uses. The MMI sets a price o f US$44/tonne for sale o f coal to government employees, which would apply to around 30,000 tonnes o f coal supplied by government run operations (Kar Kar Dash). Kar Kar Dash coal ex-mine price i s US$40/tonne (Afg 2000) and transportation charges o f private contractors i s US$l7/tonne (Afg 850) or more, depending on the distance. This would imply an implicit subsidy to government employees of around US$lO/tonne, though this cannot be estimated precisely since proper cost accounting data are not kept. The free market price on the Kabul market is US$ 60-80, which has increased dramatically in the past two years, from about the equivalent o f US$12/tonne, principally because o f industrial demand to fire bricks used inreconstruction. Annex 8: Current Mineral Production Page 96 Based on field research, market surveys, and MMI information, the gross volume and value o f coal production i s estimated: Estimated gross value (2002) o f coal production: 30,000 tonnes x US$44/tonne - - US$1,320,000 110,000 tonnes x US$80/tonne - - US$8,800,000 Reserves Afghanistan is estimated to have over 70 million tons o f reserves, most o f which located inthe regionbetweenHerat and Badashkan, inthe northernpart ofthe country The most prospective areas occupy some 35000 sqkm along a discontinuous belt extending over 700 km from Darra-I-Farkar river in the East, to Kotal-I-Sabsak, in the West. The potentially economic coal deposits are found in the Lower and Middle Jurassic formations, They are generally complex in structure, have a variable thickness and discontinuous seams. The coal basins have been divided into districts, each with distinct technical characteristics. Most o f the reserves belong to the hard coals category (anthracite and bituminous coal). Mountainous terrain, long distances, infrastructure deficiencies and unfavorable logistics hinder the economic development o f these reserves. However small-scale operations have been successfbl. The two most important districts are: Darrah-I-Suf and Sabjak. Reserves (indicated) have been estimated at over 100 milliontons. The coal i s o f highcalorific value (7340 to 8250 cal/kg) and has a low ash content. At DarWaza, Shabashak, Dahane Tor, the deposits yield may be used for blast furnace. The other districts have resources in the order o f 14 million tons o f generally sub-economic quality and are structurally too complex. Sabiak Coal District (Herat Province) 0 Majit-I-Chubi deposit (Lower to Middle Jurassic Formations) 99.51 Mt - 175 meters total thickness - high in sulphur up to 38.6 % ash content Darrah-I-Suf Coal District (Samangan Province) 0 Shabashak deposit (Lower-Middle Jurassic Formations) 54 Mt - 40 meters total thickness - up to 32% ash content 0 Danvaza deposit (Lower-Middle Jurassic Formations) 20 Mt (?)- 16 bedd3.6 in. thick each - 38.5 % ash content 0 Dahane Tor deposit (Lower-Middle Jurassic Formations) 10 Mt(?)- 2 beds up to 13.5 mthick -up to 18% ash content 0 Lela deposit (Lower-Middle Jurassic Formations) 15 beds up to 2.8 m. thick 0 Sary-Asya deposit (Lower-Middle Jurassic Formations) 6 Mt 14 beds up to 1.5 - meters thick - Annex 8: Current Mineral Production Page 97 0 Aspushta deposit (Baghlan Province) (Lower-Middle Jurassic Formations) 2.5 Mt(?)-5 bedsupto 3.8 mthick - Kur Kar DodDash CoalEnterprise(BughlanProvince) This coal enterprise comprises four coal deposits, all underground operations, at KarKar, Dukash, Ahimdarat, and Khurdara. The mines are located in central Baghlan province. The KarKar coal deposit was first developed in 1939 and has, over the years, received assistance from Czech, Indian, and Russian experts. At its prime, in the 1970s, the KarKar mine employed some 1,600 persons and produced 600-700 tonnes o f coal per day. The four mines o f the enterprise currently produce around 100 tonnes a day. Virtually no new capital investment has been made in the mines since 1988 and the equipment i s in very dilapidated state. Presently, Kar Kar has 318 staff, most o f whom live inthe town o f Pul-I-Kumyr. The enterprise produces around 30,000 tonnes per year, sold to cement and textile plants, bakeries, and the market in Kabul. The selling price o f coal at the mine for large industrialusers i s set by the ministry at Afg 1,150 per tonne; for other uses Afg 2,000 per tonne. The official price o f the coal delivered in Kabul i s Afg 2,850 per tonne. The unofficial price in the bazaar i s Afg 3.500 - 4,000 per tonne. It i s thought that there could be good potential to identify additional reserves, since the area i s only partially explored. The coals, in powdered form, have a calorific value o f 4,500 Kg/Cal, ash 17-36%, and moisture o f 2%. Seamthickness i s between 2 and 14 meters. Rehabilitation Plans Government i s planning to develop or rehabilitate several coal mines and has requested budget authorization to do so. These requests are now insearch o f donor fimds. The Sabzak mine (Heart Province) where Czech experts have carried out reconnaissance and production studies in the 1980's. The mine would supply coal to the western and Southern regions, as well as to the Heart cement factory (almost completed). The Government also recommends (with the concurrence o f UNIDO in its 1993 study) the rehabilitation o f three mines in a first phase: (1) Karkar Doodkash, (2) Ashpushta, (3) Dara - I-Suf. The main argument beingthat all three mines could be rehabilitated or brought into production inthe shortest time and the lowest investment. That would ensure a quick impact onthe regional economy. Preliminay CoalAssessment Main producers at Baghlon and Bamyan. On one the hand, Afghanistan appears to have extensive coal resources. On the other hand, little i s known specifically o f such resources, on which geological information i s outdated. Respective surveys and assessment have not been conducted in several decades, and need to be undertaken urgently in order to determine the country's hll production potential. However, Afghanistan has good operational technical staff for the existing mines, with some trained in Russia and Czechoslovakia, and most graduated from the Poli-Technical Institute of Kabul, under previous Russianassistance programs. Annex 8: Current Mineral Production Page 98 Coal i s produced in various provinces. Six mines have been reviewed by Bank mining missions in three provinces (Baghlon, Bamyan and Nengerhar - Jalalabad), out o f eleven main producers inthe country, to examine their respective situations and issues. Several seams are being mined: with a thickness o f 1-3 meter, relatively low calorific values o f 5,200 - 5,500 calories, and ash contents inexcess o f 12 percent. There i s concern because inBaghlon, at the deeper Karkar seams, methane gas hasbeenidentified. Infact, in 1962 and 1980, explosions occurred with totals loss o f 220 miners. Some deposits are being minedas smallunderground minesby the Ministry ofMines, and some as artisanal mines by private entrepreneurs. So far these mines are providing coal for cooking and heating, and for textile, sugar and cement industries in Baghlon, Bamyan and the Kabul region. The coal production i s also important because it enables to substitute for wood, and thus provide a tool to alleviate the progressively increasing desertification. It i s worth noting that support timber i s imported from Uzbekistan at US$7.5 per unit. Additionally, coal from Uzbekistan can be found inthe local market. Baghlon. As summarized in table below, the main coal mines in Baghlon near Polkhumry had a total daily output o f 410 tons during the 1970s. At present they are producing 104 tons daily at a cost o f about 2,000 Afghans per ton, with 320 miners and a total workforce o f 775. Total provincial annual coal production exceeded 200,000 tons, but now is down to about 40,000 tons. The reduction of production is because all mechanized equipment has worn out and was discontinued. The mines are presently manual pick and shovels operations, with the exception o f old rails, railcars pushed by hand, and winzes which continue to hoist output along accessing inclines which range 120-320 meters with inclination o f about 8-18 degrees. These mines have the clear potential to increase easily their production to the levels achieved during the 1970s, simply by replacing the equipment that was discontinued. They also have the potential to duplicate relatively easily such production levels, but would require previous geological surveys and assessments to update information on existinggeological reserves. They also benefit from being interconnected to the power grid. It i s also worth noting that previously a briquetting plant provided by French bilateral assistance was operating near Karkar and Dutkash. Annex 8: Current Mineral Production Page 99 At Polkhumry coal is supplied to industries including cement with 850 workers, textile with 600 workers, breadwith 200 workers, sugar with 150workers and power with 1,250 workers on coal based units. These amount to about 3,000 persons, which including dependents would amount to 15,000 people. Coal i s also supplied to Kabul with transport costs of about 500 Afghans per ton. Its market price in Kabul is about Afgh 4,000. The combined reserves along the Karkar-Dukashseams are estimatedat 7.5 million tons. Bamyan. As summarized in table below, the main coal mines in Bamyan near Oshprushda include the Klish and Doab operationas. Mining is conducted privately in very rudimentary manner, and with difficult working conditions. Output could be increased significantly with the introduction o f basic mining equipment and improved mining methods. At Klish daily output is down to 40 tons with 100 workers, but can easily be increased to 100 tons daily. The cost structure is similar to the mines at Baghlon. At Doab, daily production i s about 30 tons. However, coal production i s likely to be significantly under-reported, interms of loaded trucks, and amount of load in each truck, with consequentialreduced effect infiscal payments, which i s paid at Afgh 550 per ton. The mines are presently manual pick and shovels operations, with coal transport to the surface done by hand and only some isolated cases ofhoisting withwinzes. Nevertheless, it i s worth noting that the Klishp-Doab seams extend for some 18 kilometers along the river, and about 5 kilometers along the cross-section of the river. Additionally, they appear to be relatively shallow at a depth o f 30-40 meters. These deposits have the clear potential to increase production to significant levels on basis of surface mining. However, such a course should be preceded by reserve and quality assessments, and market surveys to ensure levels of production that can be absorbed locally and regionally. In this context, by including the anticipated expansion of the cement industry, the annual domestic and regional market for coal i s likely to be about 7- 8 million tons. Annex 8: Current MineralProduction Page 100 Salt Production Afghanistan presently imports salt from Pakistan and Iran. Yet, good deposits o f salt exist in Heart and Balakh provinces. Historically, production of salt in Heart i s reportedly 13,000 metric tonnes per year, though current production i s not known. Some evidence exists that a government agency i s in cooperation with an NGO to produce unspecified quantities of salt but Ministry o f Mines officials have no fbrther information. Additionally, there are unconfirmed reports of a private sector operator having opened a small salt mine. Afghans consume, on average, two kilograms of salt per person per year. With a population base o f 27 million people this would give a gross yearly consumption of 54,000,000 kilograms or 54,000 tonnes. The Kabul bazaar market price for unprocessed salt i s Afg 8 - 20 per kilogram, giving a gross yearly market value o f between Afg 432 - 1,080 million, or the equivalent o f US$8.6 - 21.6 million. Gravel, Construction and Industrial Materials Production Building and construction material deposits in Afghanistan consist mainly o f limestone, marble, sand and gravel and clay. Quarrying o f limestone and marble for construction and cement has, and i s currently occurring, in several areas notably in the Province o f Badakshan, and deposits exist in the north-eastern area, in the east-central area around Kabul, in the central area north o f Kandahar and in the far south. Sand and gravel deposits are quarried mainly inthe far north and locally around Kabul. Clay deposits are located mainly inthe central and western areas. With the active reconstruction effort currently underway the construction materials sub- sector i s booming. Fired bricks and hence the production of clays and coal to fire them has increased significantly. A number o f quarries for sand, gravel and other construction materials have opened up. This sector has also attracted foreign companies, mainly Turkish, Iranian and Indian entrepreneurs. Major demand for sand and gravel i s being driven by the planned construction o f 3,000 kilometers of highway: Kabul-Kandahar, Kandahar-Heart, Kabul-Pakistan border. Around 3,600 m3 of gravel and sand i s usedper Annex 8: Current Mineral Production Page 101 kilometer which, we calculate, costs around US$40,000 per kilometer12. Thus, a total o f nearly US120 million i s being spent on these construction materials. It is unknown what, if any, royalty the government receives on the value of sand and gravel extracted. Most countries assess either a gross revenues or a units of production royalty on sand and gravel operations. Gems and Ornamental Stone Production Afghanistan is one of the richest countries inthe world for gem and semi-precious stones, including aquamarines, emeralds, kunzite, lapis lazuli, rubies, tourmaline, and spinels (balas rubies). Gemstones are exploited by artisanal and small scale miners, principally in the Panjsher valley to the northeast o f the capital Kabul and at Jegdalek, to its Southeast. The major exploitation areas are: a) The Panjsher valley where emeralds have been mined since approximately 1985. The deposits are exploited by the villagers o f Khenj inmining areas known as Darkhenj, Mikeni, Butak, Buzmal, Bakhi and Darun. The mines are at high altitude (sometimes 4,000+ meters), using dangerous exploitation techniques, and hampered by presence o f landmines frequently scattered in the areas. The quality o f the emeralds is high, comparable to the best production o f the Muzo mine in Columbia. Individual mines or pits are owned and operated by teams o f five to seven men . Agreements are made on sharingthe proceeds and paying taxes. b) Jegdalek ruby mines, located about 100 km east of Kabul near the Jalalabad. The ruby crystals range from a light purple-red to a deep `pigeon's blood' red; good quality stones are about five carats. The deposits could be large; ownership and political control i s similar to the Panjsher emerald mines. c) Nuristan, very inaccessible, but having pegmatite hosted deposits o f tourmaline, kunzite, aquamarine, spodumene and beryl. The gem bearing areas of the pegmatite are usually encountered 10 to 20 meters below the surface. The Nuristan miners work all year round despite the harsh winter conditions. The known villages are Mawi, Suraj (the two which seem to be the most productive), Nilaw, and Korgal. d) Sar-e-Sang lapis lazuli mines located in Badakhshan in Northeast Afghanistan. Exploitation o f lapis lazuli dates back to at least 5,000 B C making these mines arguably the oldest mines in the world. Production i s still good and there i s inventory available. One possibility of increasing value added from the lapis lazuli trade i s to establish a cutting operation in Afghanistan to cut and polish the stones into objects o f art. This could not only add value to the mineral resource but also provide employment for many persons. Of the total of 6,120 M3 of sand andgravel consumedper line kilometer, about 60% is for newly purchased material (the remainder is re-cycled old material). Of the 3,672 newly purchased material, 80% costs US$10 per M3, 20s an average of US$ 17.50. This yields a n average cost or US$40,000 per line kilometer inpurchases of new sand and gravel supplied from quarries established along the route. ~Annex 8: Current MineralProduction Page 102 As with the case o f other mineral resources, exploitation ofgemstones has beenhindered by continued political turbulence. Nonetheless, some sources estimates that before the Taliban war the annual production o f emeralds in the Panjsher valley alone was worth $10 million and that some 5,000 villagers were engaged in emerald mining. The vast majority o f the gems are exported to Pakistan where they are cut, polished, and sold to foreign markets. Afghanistan thus fails to capture the value added o f this activity. Estimated current value o f production for each producing area i s as follows: Value o f Afghanistan Gemstone Production Estimate 2002 *Production has decreased inPanjsher since 1995 due lack of nianpower, inappropriate miningtechniques, and dangerous conditions. POTENTIAL MINERAL DEPOSITS Copper Potential The main concentrations o f copper mineralisation occur along a 600 km belt located in the Kabul-Loghar province. The copper mineralisation i s associated with Vendian (Upper Proterozoic) age inshore marine carbonates and fine detrital sediments. The mineralisation i s considered synsedimentary and closely related to the similar aged deposits in southern Congo and Zambia and consists primarily o f bornite and chalcopyrite along with trace amounts o f other base metals. Mineral evaluation work conducted by Afghan and Soviet geologists has defined three main deposits with the belt: Aynak, Jawkhar and Darband. The Aynak copper deposit, located inthe Loghar Province, constitutes the largest deposit with a declaredI3 estimated reserve o f 240 million tons grading 2.3% Cu. The mineralisation i s contained in arkosic sandstone horizons interbedded in dolomitic beds overlying the crystalline basement. The mineralisation occurs as disseminations, small lenses and veinlets o fbornite and chalcopyrite. l3Economic and Social Commission for Asia andthe Pacific (ESCAP), 1995; Geology andmineral resources of Afghanistan:New York, UnitedNations, Atlas o f MineralResources o f the ESCAP Region, v. 12, 85 p. Annex 8: Current MineralProduction Page 103 With it's declared reserves, the Aynak deposit constitutes a world class resource which should attract the interest of major miningcompanies. The Darland copper deposit is located in the Kabul province. Mineralisation has been traced for 7 km in silicified micaceous marblized limestone with intercalated biotite- amphibolite schist. A estimated resource of 1 million tonnes of copper has been assigned to the deposit. The Jawkhar copper deposit is located in the Kabul Province along the same belt as the Aynak deposit. Copper mineralisation i s found in metamorphosed carbonate rich sediments. Further concentrations of copper mineralisation have been evaluated inthe Provinces of Herat (Shaida deposit - 4.8 million tonnes @ 1.1% Cu) and Zabul (Kundalyan copper - gold deposits). A further 143 showings of copper mineralisation have been recorded in depositstypes ranging from veins, skarns, massive sulfides and porphyries. Iron Potential The major iron ore deposits in Afghanistan are associated with Proterozoic sedimentary and volcanic formations and form a semi-continuous belt over 700 km long extending from Herat in the west to the Panjsher River in the east. They lie conformably within these formations where they occur as pods and lenticular bodies o f hematite, magnetite, siderite and minor amounts of sulphide. The Hajigak deposit, located in Baghlan Province i s the largest and best evaluated ofthe group. It reportedly contains an indicated reserve of 110 million tonnes at an average grade of 61.3 % Fe, making it the largest in the Middle East. Further iron ore resources have beendefined inthe Bamyan(Khaish 117M T @ 48.62% Fe), Badakhsham (Furmarah 35 M T @ +/-55% Fe )and Kapisa (Nukra-Khana) Provinces. These are of interest but do not have the same potential as the Hajigak deposit. The composition of the iron ore and the fact it lies conformably with Proterozoic age sediments and volcanics would indicate that these deposits belong to the Banded Iron Formation group and are therefore similar to major iron ore deposits found elsewhere in the world. Gold Potential The majority of the gold occurrences and deposits in Afghanistan are located in the Takhar, Badakshan and Ghasni Provinces in the north of the country. These comprise approximately 95 lode and five alluvial deposits. The lode deposits are relatively small and associated with intrusive bodies. The Samty deposit located in the Takhar Province i s the most important alluvial gold placer. It reportedly represents an estimated contained gold content of 20 to 25 tonnes. Annex 8: Current MineralProduction Page 104 The presence o f thick overburden (>20m) over the gold bearing horizons however represents a strong disincentive to economic development. Cement and DimensionStone Potential Because o f its geologic history, Afghanistan i s richly endowed in limestone, which locally has been transformed into marble by the intense tectonic processes that accompanied the creation o f the Himalayan mountain chain in the eastern part o f the country. Limestone is quarried in several locations for cement and building stone. The larger deposits are in Badakhshan Province, notably the Jamarchi-Bolo, Sabz and Bakunvij quarries. The estimated limestone reserves for these quarries i s reportedly in the several hundred million cubic metres. Marble i s quarried as dimension stone and as cement factory feed. The largest reported quarries are the Bini-Kama marble deposit in the Province o f Badakshan where marble outcrops over an area o f 2 km2and to which a speculative reserve14o f 500,000,000 m3 has been given, the Mayden in Mayden Province deposit which has been under exploitation for over 30 years and the Kariz-Amir deposit inKabul Province. Industrial MineralsPotential The systematic geological mapping and mineral exploration programmes conducted by the Afghan and Soviet geologists defined 187 occurrences of non-metallic industrial minerals used inthe chemical, fertilizer, refractory, glass, ceramic, construction and other industries. The main minerals involved are sulphur, fluorite, barite, celestite, apatite and phosphorite. Other relevant materials such as kaolin, silica sand, refractory clays, talc, magnesite and graphite are known to occur locally in significant quantities. Building and construction material deposits in Afghanistan consist mainly o f limestone, marble, sand and gravel and clay. Quarrying o f limestone and marble for construction and cement has, and i s currently occurring, in several areas notably in the Province o f Badakshan, and deposits exist where marble outcrops over an area of 2 km2. A speculative reserve15o f 500,000,000 m3has been given for this deposit. Known deposits o f limestone and marble exist in the north-eastern area, in the east- central area around Kabul, in the central area north o f Kandahar and in the far south. 14Economic and Social Commission for Asia and the Pacific (ESCAP), 1995, Geology and mineral resources o f Afghanistan: New York, United Nations, Atlas o fMineral Resources o fthe ESCAP Region, v. 12, 85 p. l5Economic and Social Commission for Asia and the Pacific (ESCAP), 1995, Geology and mineral resources o fAfghanistan: New York, United Nations, Atlas o fMineral Resources o fthe ESCAP Region, v. 12, 85 p. Annex 8: Current MineralProduction Page 105 Sand and gravel deposits are quarried mainly in the far north and locally around Kabul. Clay deposits are located mainly inthe central and westernareas. Furtherlarge deposits o f marble have, or arebeenquarried very close to Kabul and inthe Maydan Province, approximately 40 to the east of the capital. Because of its geologic history, Afghanistan i s richly endowed inlimestone, which locally has been transformed into marble by the intense tectonic processes that accompanied the creation of the Himalayan mountain chain inthe eastern part of the country. Clay i s mined for the production o f bricks in several areas in Afghanistan, notably from the Kamkh and Malumat deposits inthe western Province of Herat, from the Surkhab and Kaukpar deposits in the Province o f Baglan and from the Dahane-Tor and Shabashak deposits in the Province o f Samanghan Province. Both these latter provinces are located inNorth-centralAfghanistan. Annex 8: Current MineralProduction Page 106 Table of major industrial mineral deposits inAfghanistan (ESCAP 1995) Tt = Thousandtomes, Mt= Milliontomes Annex 8: Current MineralProduction Page 107 ANNEX 9: TENDERING OF MINERAL PROPERTIES Background The issue o fwhether or not to tender undeveloped mineral properties has been brought up by various government ministries. The tendering route is thought to provide greater transparency and possibly result in the government obtaining better terms and conditions from the investor. An overall government policy inthis respect is all the more urgent since investors are beginning to show an interest in mineral deposits, in particular the Aynak copper deposit which has been extensively studied. The Chinese have expressed an interest inthis deposit and senior Ministry officials have recently visited China. The present note summarizes some o f the international experience with tendering o f undeveloped mineral properties. Negative International Experiencewith Tendering While tendering for exploration and exploitation is used successfully in the petroleum industry, it has not been used with great success for undeveloped solid mineral deposits. There are a number o f technical and commercial reasons for this, such as the nature o f solid mineral deposits, long gestation and development periods for mines, delayed pay- back o f fbnds invested, and specialized commercial and marketing considerations. During the 1990s several countries o f the former Soviet Union (Russia, Kazakhstan, Uzbekistan, and Turkmenistan, for example) attempted to tender their undeveloped mineral deposits. These efforts did not produce the results desired and many deposits remain either undeveloped or were subsequently given over to investors in one-off negotiations. The tender procedure for granting exploration and development rights has not been successful because it i s more expensive and time consuming for investors, especially because many o f the tenders demanded heavy up-front payments and investment commitments. Other countries, with codified and transparent mining title issuance procedures, were viewed as offering more attractive and expeditious investment conditions than those on offer in FSU countries. Thus, no significant mining country outside o f the FSUhas relied primarily on a tender procedure for granting solid mineral exploration and/or development rights. Positive International Experience with Tendering However, there are a few examples o f countries which have successfully tendered undeveloped mineral properties. Very importantly, these were deposits where the Annex 9: Tendering of MineralProperties Page 108 government had already conducted significant exploration and mineral reserves had been identified and/or proven. InFinland, for instance, the Government promotes exploration and development o f a small number o f carefilly selected mineral properties by having the Geological Survey o f Finland conduct extensive exploration and then putting them up for tender. However, investors can obtain licenses to explore for minerals in most parts o f the country through an application process, without going through a tender. Peru i s another country where undeveloped mineral properties have been successfilly tendered. The key to the success o fthe tenders inboth Finland and Peru i s that they have been done on a highly selective basis as part o f either a privatization program or a promotional program. Neither country has attempted to rely on tenders as the main procedure for granting mineral rights. Tendering: the Case ofAntamina in Peru The Peruvian government in the early 1970s nationalized the operating mines and mineral reserve holdings o f the private companies then operating inPeru. These holdings were given to specific state owned mining enterprises or holding companies such as MineroPeru and Centromin. The Albert0 Fujimori government reversed the previous policies o f nationalism in the early 1990s. Under the new government an ambitious program o f privatization of state owned enterprises was undertaken. MineroPeru and Centromin, with the advice o f international advisors, sold off many mining assets, including a few highly prospective undeveloped or partially developed mineral properties. An example of a successful tender o f an undeveloped mineral property i s the case o f Antamina. The Antamina copper-zinc deposit was first identified by the Cerro de Pasco Corporation in the 1960s. The assets o f the company were nationalized in 1974. In 1995/96 the Peruvian government, in accordance with the national program o f privatization, decided to put out for international tender the Antamina deposit. At that time, a total o f about 150 million tonnes of ore reserves had been identified; but, the government technicians believed that the deposit had considerable potential for greater reserves. Accordingly, an international tender procedure was devised which required a US$ 20 million cash payment and an exploration program o f US$ 13.5 million. The winning bidder would have a two year option during which time the exploration program would take place and the reserves confirmed. At the end o f the two year period the winning bidder could either confirm its bid, at which time the U S $ 20 millionwould be paid to the government, or walk away from the project. The US$13.5 million commitment for new exploration was guaranteed by the company against a letter o f credit. In the event that this amount was not spent in new exploration the remainder would be payable to the government. The property was awarded to the highest bid calculated according to a formula which took into account 100% o f the up-front payment plus 30% o f the investment commitment. The winning company was Rio Algom o f Canada, later acquired by Billiton, which subsequently formed ajoint venture with Noranda, Teck Corporation, and Mitsubishi. The mine has entered production in 2002 with a total investment o f U S $ 2.2 billion. Antamina i s one o f the largest polymetallic mines in the world, producing concentrates with an equivalent metallic content o f 270,000 tonnes o f copper and 220,000 Annex 9: Tendering of MineralProperties Page 109 tonnes o f zinc per year. The principal lesson to be drawn from the Antamina experience i s to provide for a phased approach which will allow the investing company sufficient time to confirm existing reserve estimates and prove up new reserves. It should also be noted that significant reforms to the Peruvian mining law and regulations had beentaken shortly before the privatization program. This provided the investor companies with sufficient security o f tenure to mobilize international financing for the venture. Finally, Peru has an established "track record' inthe miningindustry. Companies, thus, felt more at ease investing in a known mining country than might be the case with a country an unknowntrack record and miningtradition. Possibilitiesof Tendering Mineral PropertiesinAfghanistan We must have realistic expectations. Tendering o f mineral properties has not been remarkably successful in countries new to the international mining scene, as has been the case o f the former Soviet Union. However, in these instances, part o f the problem may have been the heavy up-front commitment and payments demanded by the government, which the investors found excessive. Also, the fundamental legislation and legal environment o f the countries were incomplete and/or inconsistent with international practice. Therefore, assuming that the Afghanistan government can make significant progress to put into place internationally acceptable mining legislation and an attractive overall fiscal package for mining, an attempt could be made to promote and/or tender the Aynak copper deposit. There could be two alternative approaches to such a tender. Both have pluses and minuses. First, the government could attempt to tender Aynak itself, as the Peruvian government did with Antamina. However, there would be some concerns about the lack o f capacity within the Afghanistan government to conduct such a tender, even if significant technical assistance were made available. A second alternative would be to engage the services o f a reputable investment banking house. This would have some advantages o f adding credibility to the tender effort, a significant consideration since Afghanistan is, in effect, unknown on the international mining capital markets. However, this route would be more expensive. Such a firms typically require a significant up-front fee to prepare the tender documents and conduct due diligence and a success fee in the event that the tender i s successful. An initial first step for either alternative would be to prepare terms o f reference to examine the possibilities o f tendering Aynak and to come up with a concrete game plan. The consultancy assistance required for this could perhaps be fimded through the ARTF and/or the design and feasibility studies unit. Annex 9: Tendering of MineralProperties Page 110 ANNEX 10 IMPROVEDGEOSCIENCE (SUPPLEMENTAL TO ANNEX 6) Notes on ExplorationInformationand AfghanistanGeological Survey Coverage, extent and quality of existinggeological information. The AGS headquarters in the east-central section o f Kabul was visited by the mission team on several occasions to assess the coverage, extent and quality o f existing geological and mining project information in Afghanistan. The maps and reports saved from the war represent reportedly 90% of the pre-war documents. These are stored inthe new documentation centre on the fourth floor of the AGS headquarters in Kabul. The documentation consists o f a set o f four rooms recently restored with funds provided by the German GTZ aid agency. GTZ also provided two computers and printers be used to produce a registry o f all the recovered reports once power is restored. At the time o f mission team's visit, AGS personnel were busy registering the reports into a hardcopy notebook. This involved assigning a catalogue number to the report along with its title, the year o fits publicationand name ofthe author. The main objective ofthis work was to produce a catalogue o fthe reports available at the AGS. O f note is the fact the titles o f the reports entered into the notebook are inthree different scripts (Arabic, Cyrillic and Western) and inat least four different languages. Further, the registration did not include assigning a subject name or acronym for the different categories (e.g. general geology, mine assessment, pre- or feasibility report etc.. .) or keywords. The fact the entries are in different scripts will cause a problem when the digital capture of the reports begins, and the absence o f subject names and keywords will serious impede later searches for relevant reports. Inas far as the coverage the coverage, extent and quality ofthe o fexistinggeological and mining project information in Afghanistan, the mission team was able to locate the following inthe AGS documentation centre: 0 the most interesting reports available in the AGS documentation centre, i s the compilation, in English, o f the geology and mineral resources o f all Afghanistan put together by Sh. Abdullah and V.M. Chmyriov in 1980. It consists o f two volumes: a complete compilation o f the geology and tectonic history o f Afghanistan (1 184 pages) and a comprehensive review o f the metallogeny o f Afghanistan complete with summary descriptions o f all the known mineral Annex 10: Improved Geoscience Page 111 occurrences in the country (729 pages). Two binders accompany the reports containing various maps (geologic, metallogenic, tectonic, principal mineral occurrences, etc...) and stratigraphic sections. Only one copy o f the complete report i s however still available at the AGS document centre and therefore cannot be taken from the AGS without special permission from the Minister. 0 prospect and deposit reports on 110 selected sites where the Afghan and Soviet mineral evaluation teams conducted extensive work between 1960 and 1987. These reports contain detailed geological, geophysical and geochemical survey maps, along with the results o f resource evaluation by pitting, trenching and drilling and in some cases adits. Among the geophysical techniques employed were noted: ground magnetics, IP, SP, EM, resistivity and radiometry. The survey i s reported to have also had the capability o f conducting gravimetric and seismic surveys. The prospect and deposit reports which were prepared in Russian are in the process o f being catalogued and could only be partially examined; 0 yearly progress reports on the regional geologic survey conducted by the German Geological Survey team in the years between 1959 and 1967 inthe southern half o f Afghanistan; 0 a number o f foreign publications are also available in the documentation centre including USGS reports. A list o f publications and reports on the geology and mineral resources of Afghanistan can be found hereunder. LISTOFPUBLICATIONSONTHEGEOLOGYANDMINERALRESOURCESOFAFGHANISTAN Mineral resources o f Afghanistan (2nd edition): Kabul, Afghanistan, Republic o f Afghanistan Geological and Mineral Survey, 419 p.Abdullah, Sh., Chmyriov, V.M., Stazhilo-Alekseev, K.F.,Dronov, V.I., Gannan, P.J., Rossovskiy, L.N.,Kafarskiy, A.Kh., and Malyarov, E.P., 1977, Les ressources d'hydrocarbures, de metaux et de substances utiles de 1'Afghanistan: apergu general: Chronique de la Recherche Miniere, no. 460, p. 29-5 1, Afzali, H.,1981 Geology and mineral resources o f the early Quternary Khanneshin carbonatite volcano (southern Afghanistan): International Geology Review, v. 20, no. 3, p. 281-285Alkaloids, V.Yu.,Atakishiyev, Z.M., and Azimi, N.A.,1978. System o f structural and morphologic types o f zones o f rare-metal pegmatite veins and the potential for predicting deposits: Transactions (Doklady) o f the U.S.S.R.Academy o f Sciences: Earth Science Sections, v. 240, no. 1-6, p. 78-80, Bogatskiy, V.V., Rossovskiy, L.N.,andKonovalenko, S.I., 1978, Annex 10: ImprovedGeoscience Page 112 Gemstones o f Afghanistan: Tucson, Arizona, Geoscience Press, 220 p. Bowersox, G.W.,and Chamberlin, B.E.,1995 Mineral resources o f Afghanistan, in Geology and Mineral Resources o f Afghanistan: Kabul, Afghanistan Department o f Geological Survey, p. 44-85, Chmyriov, V.M., Stazhilo-Alekseev, K.F.,Mirzad, S.H., Dronov, V.I., Kazikhani, A.R., Salah, A.S., and Teleshev, G.I., 1973. Geology and mineral resources o f Afghanistan: New York, United Nations, Atlas o f Mineral Resources of the ESCAP Region, v. 12, 85 p. Economic and Social Commission for Asia and the Pacific (ESCAP), 1995. Strata-bound low temperature Pb-Zn-Ba+ or -F deposits in carbonate rocks o f western Asia; geotectonic setting and main metallogenic features, inWauschkuhn, A,, Kluth, C., and Zimmermann, R.A., eds., Syngenesis and epigenesis in the formation o f mineral deposits: Heidelberg, Germany, Springer-Verlag, p. 373-390, Jankovic, S., 1984, The mineral industry o f Afghanistan, inMineral Industries o f Asia and the Pacific, 1990: U.S.BureauofMines Minerals Yearbook-1990, v. 111,p.8-9, Kuo, C.S., 1992. Geological setting o f the emerald deposits, in Kazmi, A.H., and Snee, L.W., eds., Emeralds o f Pakistan; geology, gemology and genesis: New York, Van Nostrand Reinhold Company and Geological Survey of Pakistan, p. 13-38, Lawrence, R.D., Kazmi, A.H., and Snee, L.W., Mines and Mineral Occurrences o f Afghanistan, USGS Open-File Report 02- 110, Orris, G.J. and Bliss, J.D., 2002, Characteristics of the formation o f a kunzite deposit in Afghanistan: Soviet Geology and Geophysics, v. 19, no. 11, p. 82-87, Rossovskii, L.N. (Rossovskiy, L.N.),Makagon, V.M.,and Kuz'mina, T.M., 1978. First find o f pollucite and its crystals in Afghanistan: Transactions (Doklady) o f the U.S.S.R.Academy o f Sciences: Earth Science Sections, v. 236, no. 1-6, p. 157-160, Rossovskiy, L.N.,1977,. Genetic relationship o f aphanitic spodumene dikes to lithium-pegmatite veins: Transactions (Doklady) o f the U.S.S.R.Academy o f Sciences: Earth Science Sections, v. 226, no. 1-6, p. 170-172, Rossovskiy, L.N.,Chmyrev, V.M., and Salakh, A.S., 1976, Vertical range and zoning o f spodumene pegmatite deposits inAfghanistan: Transactions (Doklady) o fthe U.S.S.R.Academy o f Sciences: Earth Science Sections, v., 227, no. 1-6, p. 85-87, Rossovskiy, L.N.,Chmyrev, V.M.,and Salakh, A.S., 1976b, Unique example o f vertical geochemical zoning in pegmatites o f the Hindu Kush, Afghanistan: Transactions (Doklady) o f the U.S.S.R. Academy o f Sciences: Earth Annex 10: Improved Geoscience Page 113 Science Sections, v. 240, no. 1-6, p. 204-206, Rossovskiy, L.N.,and Shmakin, B.M., 1978. Potash and other evaporite resources of Afghanistan: U.S. Geological Survey Open-File Report 75-89, 63 p, Shareq and others, 1977 [See Abdullah and others, 19771 Smith, G.I.,1975, Lapis-lazuli from Sar-e-Sang, Badakhshan, Afghanistan: Gems and Gemology, v. 17, no. 4, p. 184-190, Wyart, Jean, Bariand, Pierre, and Filippi, Jean, 1981, Geologicand metallogenicmaps of Afghanistan Geologic Map o f Afghanistan - Scale 1:2,500,000 - 1977 - Editors-in-Chief, Sh. Abdullah & V.M. Chmyriov. Compiled by V.I. Dronov, A. Kh. Kafarsky, K.F. Stazhilo- Aledseev, V.M.Chmyriov Geologic Map o f Afghanistan - (Scale 1:2,500,000) - 1997 -. Compiled by Wandrey, C.J. and Law, E.L. Mineral Occurrence Map o f Afghanistan - Scale 1:2,500,000 - 2002 Geology and Mineral Occurrences of Afghanistan, 1980, compiled by Sh. Abdullah & V.M.Chmyriov. QUALITY OFGEO- ORM MAT IONAND "GAPS" The "existing database" at the AGS consists o f a room with bookshelves full o f reports, 1500 to 3000 according to differing accounts, one or two sets o f geologic maps at a scale o f 1:500,000 covering the whole country that have been pasted together and hung on walls, and a mineral occurrence and simplified geologic map at a scale o f 1:2,500,000. For all practical purposes this constitutes the existing database at the AGS. To "modernize" this database would require: creating a catalogue o f the reports and maps including a primary and secondary subject, key works and a brief summary/description o f the report along with a listing o f the contained maps and tables. This would allow for future searches of the database search by subject or keyword. the digital capture using GIs software of all relevant maps on the geology and mineral occurrences o f Afghanistan starting with the 1:500,000 maps which constitutes the largest scale, complete coverage o fthe entire country. 0 Initiate site specific and regional geological and mineral resource evaluation studies to update the database. Annex 10:ImprovedGeoscience Page 114 It is important to note that at the present time, the AGS is totally unable at the to initiate any field activities for various reasons including: security considerations the lack o f adequate vehicles, field equipment or standard geologic mapping tools (see annex 1 Preliminary assessment of AGS equipment requirements) the absence o f any chemical, petrographic or mineralogic laboratory capabilities the absence o f a team o f professional and technical personnel trained in geological mapping and sample collection procedures. Itis important to take into consideration the fact that all AGS field operations ceased in the late 1980s and although the survey has approximately 100 professionals, these people need to be re-trained in basic geologic mapping skills. This training should include instruction in modern mapping techniques including the use o f GIS as a mapping and spatial analysis tool. It is also uncertain as to how many o f the professional staff are suitable to such retraining. This does not mean that work could not be performed in the interim between the present and the time when the AGS i s functional again as a geological survey. According to information received, all the original field maps and field notes were destroyed duringthe war. However, some o f this information i s contained in the reports on the evaluation o f existing mineral occurrences and could be extracted from these reports. As the reports are in Russian this would require a translation and re-transcription of this information into site-outcrop description sheets which could be collated into a digital geo-referenced database. Estimated time for this work would be 12 man months. The work could be carried out by a team o f 6 to 12 professionals with the necessary language skills. Once the AGS has been restored to operational status in as far as personnel and equipment are concerned, and the security in all or at least large sections o f the country has been reinstated, regional mapping should be re-initiated to provide an updated geological database for Afghanistan. This would include: mapping at a reasonable scale at which topographic maps are available such as 1:50,000 and compilation o f this mapping into regional maps at agreed to scales (1:100,000 or 1:200,000) collection of a representative number o f stream sediment and pan concentrate samples in the areas mapped (e.g. 2-3 stream sediment and 1-2 pan concentrate samples per km2) producing a compilation o f all digital geo-referenced data including the outcrop description sheets described above, the aerial photography where available, any geophysical or geochemical surveys and all mineral occurrence data. production o f a stratigraphic lexicon o fthe formations creation o f a national collection o f all the rock and mineral specimens found and used to create the stratigraphic lexicon creation of an digital geo-referenced archive o f all geological information collected. Annex 10: Improved Geoscience Page 115 Order of magnitudecostingto restorethe field mappingcapability of the AGS Restoration of the AGS building $500,000 Installing chemistry, mineralogy and petrography laboratory capabilities $2,000,000 Training o fAGS staff inmoderngeologic mapping techniques $500,000 Re-equip the AGS so it can conduct mapping and sampling, though care should be taken to structure the equipment and reconstructionto suit the needs o f private sector led growth, rather than the public sector approach o fprevious years $5,000,000 Notes on Creation of Geo-ScienceInformation Center As mentioned above, the present geo-science documentationand resource capabilities o f the AGS are limited to the four rooms at the AGS headquarters that were rehrbished by GTZ with bookshelves, desks, a computer and a printer. Ten days o f training in GIs was supplied to the AGS professional staff at the time. Two engineers from the AGS received further training in GIs software and computer skills at the AIMS centre and are now being used by the Ministry o f Mines to train staff in mainly Microsoft Office programs such as Word and Excel. The AGS headquarters building, which was on the front line during the war and therefore sustained extensive damage and looting, i s in the process of being rehabilitated. The looting included the stripping o f all electrical wiring and laboratory equipment. The restoration process i s advancing very slowly. Glass has been re-installed in a number o f windows and the pocket holes created by bullets and rockets in outside walls have been re-filled. On the inside o fthe building, the majority o fthe rooms are still ina state o ftotal disrepair and power has still not been re-instated. The creation o f any real geo-science documentation and resource centre within the AGS will have to await the restoration o f power withinthe structure. It is however important that the AGS be given a mission as soon as possible to restore a feeling o f purpose withinthe professionaland technical staff. Plans for the reconstruction and modernisation o f the mining and oil/gas sectors have been proposed by the Britishand the United States geological surveys. While the USGS plans focuses on the assessment and promotion o f Afghanistan oil and gas resources, the BGS plans involve the rehabilitation of the capability o f AGS to hnction as a national geological survey. The BGS plan is very complete and would involve institutional and capacity building at the AGS including the creation o f a geo-information data centre. The BGS has suggested that Oracle@ RDBMS be used to this end and that the principal application development tool be Oracle Application Server (Internet Development Suite / Forms & Reports). Annex 10: ImprovedGeoscience Page 116 The basic premise for the creation of a geo-science documentation and resource centre is the creation of framework which can include geologic and topographic map data, satellite imagery, aerial photography, accompanying databases, database documentation along with an efficient archival, retrievaland distributionmechanisms o fthis data. Inthe case o f data available at the AGS and that should be included into this framework, are: the data included inthe prospect and deposit reports and which contain the results o f detailed geological mapping, geophysical and geochemical surveying along with direct resource evaluationby pitting, trenching and drilling the available geologic maps which include maps at various scales prepared at various periods which comprise mainly the 1:500,000 country-wide geologic map, smaller scale compilations with or without mineral occurrence information and regional maps prepared by various parties including the Italians, the Germans and groups o f Soviet and Afghan geologists. Topographic maps at differing scales produced by various groups at different periods. On the positive side, the AIM organisation in Afghanistan has gone a long way to harmonizing the topographic maps as to Datums and projections so they can be used with the minimal amount o f fuss. Aerial photography at a scale o f 1:30,000 and 1:60,000 Data Capture Methodology To be really useful in a modern sense, the data available at the AGS and in Afghanistan that pertains to mineral resources will have to be captured into digital format. Because the data i s indifferent formats, data capture will involve different procedures. Included in the prospect and deposit reports, along with the tables and the maps, i s descriptive data inRussianthat will have to be transcribed in summarized version into an English version mineral deposit fact sheet to be really useful. Standard mineral occurrence fact sheets have been prepared by a number o f geological surveys. Any fact sheet used should include information about location, available infrastructure, geologic context, ore deposit modelling, ore deposit morphology, structure, ore grade and reserves by category, and metallic and non-metallic mineral associations. The available geologic maps can be scanned, geo-referenced and captured digitally using GIS software such as ArcView or MapInfo. This requires a minimum amount of equipment such as a large scale scanner (AO), image processing software and large scale colour plotters (AO). Work should start with the small scale 1:2,500,000 country-wide maps and continue with larger and larger scale maps before moving to the prospect and deposit maps included inthe prospect and deposit reports. The prospect and deposit reports also contain geophysical and geochemical survey maps. These are in analogue form and will require digital capture to be really u s e h l for spatial Annex 10: ImprovedGeoscience Page 117 analysis studies using modern gridding and image processing software such as Oasis- Geosoft software. Ifthe data is in analogue format on maps, this work generally involves digitisingthe point data along the survey lines withthe positional data. This work can be very tedious and long but can contribute greatly to the geo-science database. Ifthe data i s in table format with positional data, this data can be captured in digital format either using OCR software or by simply typing the results into a digital table using spreadsheet software such as Excel. Aerial photography can be scanned and geo-referenced usingthe positioning information supplied generally with the picture. Data Storage, Viewingand Dissemination Storage, viewing, analysis and dissemination o f the data information will probably require that a software package such as Oracle@ RDBMS be used and that the principal application development tool be Oracle Application Server (Internet Development Suite / Forms & Reports). Oracle i s a very high powered tool which will require quite a bit o f training and hand holding. Forthe projectto be a true success it is vital that the necessary IT skill be transferred over to the Afghan counterparts. On the other hand, Oracle is an extremely powerfbl tool and will allow for almost unlimited amounts o f data to be integrated into the system. Storage, viewing and dissemination o f the spatial data will be done using the ArcView GIs software used to digitise it. Once in digital format it will be possible to use Internet Map Server (IMS) software. This will allow users to access the data using a simple Web browser. It will also allow users to integrate dataset information such a mineral occurrence information into the spatial data without requiringhaving GIS software. PROMOTINGMINERAL RFSOIJRCES Promotion o f mineral.resources generally implies bring to the attention o f potential investors opportunities inthe country. These can vary from advanced prospects on which extensive work has been done to mineral occurrences in particularly interesting geologic and metallogenetic contexts with a minimal amount o f evaluation work. Several tested and proven methods exist to attract investors, these range from: 0 the organisation o f round tables to which investors are invited and at which presentations are made on the miningand investment codes; 0 the presentation o f papers on mineral resource potential at international conventions or symposiums such MIGA conventions, the PDAC and/or SEG/GSAby representatives o fthe Ministry o fMines or the Geological Survey; 0 the organisation o f a country stand at the above mentioned conventions 0 the creation o f a site on the Web with access to geologic and mineral resource data as well as mining and tax legislation;. 0 the purchase o f a Country Supplementinthe Mining Journal. Annex 10: ImprovedGeoscience Page 118 All these methods require that the mineral resource data be in a format that allows for distribution. At present, only a very limited number o f geologic maps and mineral resource reports are available and most of those are inRussian. RequiredHuman and LogisticalResources Setting up a geo-science documentation and resource centre will require substantial amounts o f institutional and capacity building within the AGS. This will involve training of a number o f professionals and technicians in the science o f spatial and information data capture and analysis over a number o f years. It will also necessitate the purchase and installation o f the hardware and software required to capture, analyse and reproduce the geo-spatial and information data. The human resource talent pool should comprise a mix o f at least a dozen professionals and technicians trained in spatial data capture, analysis and dissemination. O n a practical level, this should involve training in word processing , spreadsheet, database, GIS and image processing software. Suggested software would include but not limited to: Word, Excel, Access, Oracle, Arcview, IMS,Erdas and Envi, as appropriate. Hardware requirements for geo-science documentation and resource centres generally involve large storage capacity computers equipped with large screen monitors, inkjet colour and laser printers, large scale plotters (AO), and small scale (A4-A3) scanners and large capacity photocopy machines. Access to a large scale (AO) scanner i s highly desirable. Access to a broadband internet connection i s also highly desirable Preliminaryassessment ofAGS equipmentrequirements Geologic Mapping Equipment 0 Geologic picks 0 Handlenses (1OX) 0 Compasses 0 Notebooks 0 Magnets 0 Colour charts 0 Hardness measurement tools Data Compilation and Map Production Equipment 0 Computers 0 Printers 0 Plotters 0 Scanners Software Annex 10: ImprovedGeoscience Page 119 Petrography Lab 0 Binocular microscopes(6x) 0 Thin section preparation machine, equipment and supplies (slides, glue, polishing dusts, etc...) 0 Polish section equipment (slides, holders, polishing dusts, etc...) 0 Heavy liquids for mineral separation Annex 10: Improved Geoscience Page 120 0 - 9 0 z b 0 u u 0 E C 0 z u 5wrwA 3F rA w .. N rl xw z0 +; o .i 4: Q a & 3 Cr0 sa 5-30 ANNEX 13: MAPS GeneralMap of Afghanistan wb72210 Q:\ApplicationData 2003\Application data2003\WI~WORD\Af~hanistan'~Souri.es ofOro\itli Kate Slarch 19 2004.doc March 19, 2004 8:12 AM Annex 13: Maps Page 125