Afghanistan Analysts Network – English

Economy, Development, Environment

The Great Hindukush Gold Rush (1): Another Silver Bullet

Thomas Ruttig 7 min

When last year the not-so-new news hit the headlines that Afghanistan possesses enormous mineral resources, a lot of eyes started to shine with joy. Some Afghan and foreign officials believe that they finally have found the Holy Grail for post-2014 Afghanistan: a resource from which the country can pay its own security and development costs, currently incurred by Western donors mainly. But resources can also be a curse, as examples from other Third World countries – and current practice in Afghan mining – show. The hazards are manifold: social, ecological and in the political economy. The Kabul government is busy auctioning the deposits off already, making the right noises about ‘prudent’ and ‘responsible’ use of the resources, but before proper legislation exists to guarantee this. Thomas Ruttig, a Senior Analyst at AAN, starts looking at a few questions related to this Great Hindukush Gold Rush.

One of the crucial and unresolved questions of the so-called transition process in Afghanistan is the country’s post-2014 fiscal sustainability. Particularly with the ANSF growing substantially in numbers, the costs rise in parallel. According to the Wall Street Journal on 4 July this year, the US-led coalition is spending US$11.6 billion ‘in training, equipping and providing the salaries for Afghanistan’s police and army’ and next year this amount ‘will grow to $12.8 billion, with the U.S. paying for 92% and European and other partners footing the rest.  Afghanistan’s gross domestic product for 2011 is estimated at $18.3 billion, according to the International Monetary Fund’ (read full article here). And this is only the military side of it.

How will the Afghan government pay for functioning civilian sectors – from health services and schools to non-fraudulent elections and a functioning parliament? After some years of nominal economic growth (with a visibly growing gap between the rich neo-oligarchy and the majority of the people and an official rural poverty rate of 36 per cent), it seems as if Afghan revenues now stagnate. On 7 June, a Ministry of Finance official was quoted by Tolo TV that it is has difficulties in collecting taxes outside of Kabul (read the piece here). With the financial burden rising and, reportedly, Western pressure on Kabul to take over a bigger part of the ANSF costs (i.e. increase the defence budget), this might actually result in cutting expenses for already underserved social sectors.

But East and West believe they have spotted a magic remedy now: the three trillion treasure of mineral resources that has been surveyed but lies unextracted under Afghan soil: copper, gold and iron ore, coal, oil and gas, even rare earths like lithium for our laptops – ‘the exploitation of which can propel our region to become an important economic centre of the globe’, as President Karzai said in his speech at the Shanghai Cooperation Organisation’s Astana summit on 15 June (find the full speech here). Afghanistan’s Ambassador to Germany, Prof. Abdul Rahman Ashraf, a geologist himself, called his country’s mineral wealth a ‘gift of God’ in a recent interview in Berlin-based magazine Business & Diplomacy (2/2011, not online).

The ‘discovery’ of Afghanistan’s mineral wealth (which was known since decades, from surveys done in pre-Soviet and Soviet occupation times) caused big waves in the international media last year – and amongst Western Afghanistan planners. NATO’s hopes in this regard were expressed by its, then, Senior Civilian Representative Mark Sedwill: ‘The IMF estimated that the Afghan government would not be able to sustain its own security forces until about 2023 on current rates of projections of growth and of growth of revenues. But that was before they had identified the mineral deposits’ – although he added rather cautiously that ‚it is possible that date will come forward’ (find the quote here). Paul Brinkley, head of a – now scaled-down* – Pentagon Task Force for Business Stability Operations told NPR this June that ‘Afghanistan, with certainty I can say, in 20 years is going to be a mining country’ (5 June 2011, see full article here). (One wondered why on earth the Pentagon was in charge of Afghan minerals although the security-resources link described above should suffice to explain.)

The Afghan government, meanwhile, has already started to auction off some of the most promising sites: Ainak, one of the world biggest copper mines, situated in Logar province, a US$ 3 billion project, has been awarded to a Chinese consortium last year, much to the distaste of some in the US who apparently believe that it should be primarily US companies that are rewarded with such contracts.**

The iron ore deposits on the Bamian side of the Hajigak pass, described by the Afghan government as Asia’s largest un-mined iron deposit which they say is to generate US$ 1 billion before 2017, are being tendered currently. According to the current Minister for Mines and Industries (MoMI), Wahidullah Shahrani, this is done in a package with the nearby coalmines of Dara-ye Suf in Samangan (the even nearer operational mines of Karkar, at least until recently, belong to the Afghan Investment Company, with Kabul Bank participation) and chromite deposits in Logar province. The Dara-ye Suf high-grade coking coal is supposed to fire a steel production plant that the Afghan government wants to build. It also has been announced that ‘job creation in Afghanistan; infrastructure development, including railroads and power; and the evacuation [i.e. export] of ore and steel to neighbouring countries for the entire duration of engagement, which should be 35-40 years’ is part of the tender (Business Standard, 13 June 2011).

Up to now, mainly Indian companies are bidding, like Tata Steel. Shahrani is missing the big Western companies: ‘[British-Australian] Rio Tinto did not show up […] We strongly urge Western companies not to lose the opportunities’ (see the Financial Times ‘beyond bricks’ blog, 7 July 2011 here).

Shahrani is travelling the world and offering more, advised by SRK, a major multinational mining-consulting firm, as CNN reported (CNN Money, 11 May 2011, here). In July, according to the Business Standard article already quoted, he put five more major projects on tender:

‘three copper and two gold deposits in different parts of the country and, in February of 2012, I will put a huge oil basin in the northern city of Mazar-e-Sharif on tender’.

Apart from Ainak and according to Shahrani, there are three more copper deposits: in Zana Khan district of Ghazni province (also gold, with an estimated value of US$ 30 billion), in Herat province (29 bn) and Balkhab district (Balkh province, value undetermined, source: AP, 13 February 2011, read here).

The oil refers to what is called the Afghan-Tajik basin. Only a few oil wells are already operating in this area. One is in Angot, some 20 kilometres from Sarepol’s provincial centre, a field initially discovered in 1959 and probed by Swedish and Russian state-owned companies without much success, as the Washington Post reported on 13 December last year (full article here). ‘A regional commander got the wells pumping in 2002, shortly after the fall of the Taliban’, and meanwhile ’Ghazanfar Neft Gas, which owns gas stations around the country [and a bank and has a family member in parliament]’, won the MoMI tender for Angot which had been ‘drafted with assistance from Brinkley’s team’ (KAM Group lost; about Angot, read also: IWPR, 1 June, here).

The tenders are accompanied by the right noises. Minister Shahrani top selling point is the country’s push to become a member of the ‘Extractive Industries Transparency Initiative’ (EITI) that had been announced in October 2002 by then British Prime Minister Tony Blair at the World Summit for Sustainable Development in Johannesburg. This initiative is supported by governments, both exporters and importers of minerals, companies like Alcoa, BP, Chevron, De Beers, ExxonMobile, Mitsubishi, Petrobras and Total and NGOs like Global Witness, Oxfam, the Open Society Institute and Transparency International. Its ‘Principles & Criteria’ for a ‘global standard for transparency in oil, gas and mining’ include:

–        that the prudent use of natural resource wealth should be an important engine for sustainable economic growth that contributes to sustainable development and poverty reduction;

–        that a public understanding of government revenues and expenditure over time could help public debate and inform choice of appropriate and realistic options for sustainable development;

–        the importance of transparency by governments and companies as well as the principle and practice of accountability by government to all citizens for the stewardship of revenue streams and public expenditure;

–        that this approach is extended to all companies including state-owned enterprises, and

–        civil society is actively engaged as a participant in the design, monitoring and evaluation of this process and contributes towards public debate

(See the full list here)

But even the International Monetary Fund and the World Bank who promote such transparency initiatives (and financial contributions by one of them are used as indicators for ‘un-hazardous’ projects by donor governments) often do that ‘mainly in theory’, as the Bank Information Center and Global Witness, two NGOs that follow such developments worldwide, said in a joint statement in October 2008:

‘The disclosure of contracts is addressed by only 20% of IMF operations and only 10% of World Bank operations in resource-rich countries [… and] the level of reporting varies greatly across projects.[… Also, t]he issue of civil society engagement is addressed in only about a quarter of World Bank country programs, and less than 20% of IMF programs. Furthermore, governments and private sector projects are not held accountable for the adequacy of civil society engagement through any benchmarks.’

(Read the full statement here.)

Minister Shahrani also has vowed to ‘set standards’ on child labour in the government-owned coal mines where, according to Reuters (12 August 2011), ‘some Afghan children as young as 10 work long hours […] for around US$2 a day[…,] with no safety gear and, until now, no government mining policy to protect them’. Current national law ‘allows Afghan children to work up to 35 hours a week from the age of 14, they are not allowed to do hazardous jobs such as mining’. Shahrani wants to raise the age to international standard, 18 years (see here; read also the 25 June 2010 BBC report ‘Inside a crumbling Afghan coal mine ‘ here).

I.e., the best intentions and even garanties on paper may be insufficient, in particular as Afghanistan is not yet a party to the EITI but contracts being awarded.

It is well known that particularly under weak governments and in conflict situations, the promise of wealth can easily turn into a curse – socially, environmentally and in the sphere of the political economy – and even exacerbate conflict, instead of alleviating it. And both descriptions are valid for Afghanistan.

This view is shared by Integrity Watch Afghanistan, a Kabul-based NGO, in the case of the Hajigak (read its full report ‘Hajigak – the jewel of Afghan mines’ here):

‘Hajigak Mine can be a source of revenue, employment and development or a curse […]. The political will [for transparency] at the ministerial level is apparent, but the capacity to implement is not. This lack of capacity, combined with reported endemic corruption in Afghanistan, means that the Afghan government will not be able to ensure that Hajigak is well managed and, ultimately, beneficial for the future of the country.’

More in part 2 of this blog entry soon.

 

(*) Because of a congressional demand that its operations be folded into the USAID, Its director, Deputy Undersecretary of Defense Paul A. Brinkley, has decided to quit on June 30, a move that has prompted several key members of his 100-person team to announce their departures as well (see Washington Post, 24 March 2011, here).

(**) The US adviser to then Minister of Mines and Industries, Adel (who was later dismissed from his post) accused the minister of a‘murky and insufficient tender process’ and an ‘unrelenting […] preference to see this award through with Asian partners’ (Washington Post, 18 November 2009, read the full article here).

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Economy Minerals Commerce

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