Economy & Development

Lack of Capacity and Capital: Is Afghanistan Under-Selling the Ainak Copper?


Containing 240 million metric tons of ore at 2.3 per cent copper content, the Ainak mine is considered one of the largest deposits of this metal in the world. It is located in Muhammad Agha district of Logar province, about 30 kilometres south-east of the Afghan capital, and was contracted to a Chinese consortium in May 2008. Though expected income from the extraction of its copper is mentioned among the key revenue sources for the Afghan government as part of its 2014-24 self-reliance agenda presented recently at the Tokyo conference, there are concerns. They include the cheap selling of the deposit, the insufficient transparency of the contract and lack of security. Researcher Gran Hewad travelled to Muhammad Agha for AAN on one hot day in Ramadan to speak to locals and officials and bring you this report.

In 2008, Metallurgical Construction Company (MCC), a consortium of two Chinese companies (1) won the contract for the gigantic Ainak mine in Logar province. Although – or because – the contract with the Afghan government has already been signed, but not fully publicised, a public discussion has developed in Afghanistan over whether the government in Kabul is capable of ensuring that the Ainak riches can be used in a way that Afghans’ interests and needs are served in a meaningful way.

The main concern raised by domestic experts in the mining sector and by politicians is the lack of local capacity and capital on the Afghan side. They see it as the key internal weakness that increases the chances that Afghanistan might be selling its deposits at too low a price. Qurban Kohestani, a member of the Mineral and Natural Resources Committee of the Wolesi Jirga, said in the committee meeting on 7 August: ‘The royalty (3 – 9.5 per cent) declared in the not yet published contract with MCC is insufficient. The contract should be changed and it should be a 51-49 per cent share contract between the Afghan government and the MCC.’ Kohestani’s suggestion would be difficult to implement in the present economic situation, though. It is also legally problematic because it would require the contract to be altered with retroactive effect. Moreover, it looks unlikely that Kohestani will be able to create a consensus about this among parliamentarians. His arguments, however, reflect what is a very common perception, and demand, among the Afghan public.

Underlying many of these questions are issues of transparency. Four years after it was signed, the contract is yet not public. This makes it difficult for independent monitoring organisations and for parliament to carry out any sort of oversight. ‘I am a member of the budget committee of the parliament,’ said Stanakzai. ‘I asked the Ministry of Mines to send me a copy of the contract, said Mohammad Akbar Stanakzai Logar MP but they did not.’ AAN tried to contact the Ministry of Mines several times via telephone and email to obtain an interview about Ainak, but our queries were unanswered. On 7 August, the Minister of Mines, Wahidullah Shahrani, told the Mines and Natural Resources Committee of the Wolesi Jirga that the contract had been published and would be distributed soon, and that they could contact the ministry staff member, Eng. Rahimi of the Cadastre Department, to obtain a copy. AAN also tried to contact Eng. Rahimi to request a copy of the contract but could not reach him either.

The Ainak case is important as a precedent. Revenues from the minerals and extractive industries are a key source of government finances in a number of countries around the globe. For Afghanistan, this is the first time that it has entered into a big contract with large external entrepreneurs in this field under the rules of the market economy. Therefore, it is extremely important to ensure that best practices in this field are followed. A poor economy like Afghanistan should try its best to secure external investments for such projects to be started. In order to make sure there are enough incentives to make up for the security risks involved (not only in the Ainak project), a profit margin has to be guaranteed that keeps investors attracted. On the other hand, the contracts should make sure that national interests, including those of local people, are fairly taken into consideration. This is the bigger concern – as international experience shows, often enough the profit margins for the investors were realised while local populations are kept at the margins or even have to suffer grave consequences, socially, environmental and else.

To make sure this is not repeated in Afghanistan, the first priority has to be making contracts publicly accessible and properly consulting local people and their representatives. Around Ainak, land issues and resettlement problems have already emerged (read an earlier AAN blog about this here). Moreover, a recent report by Revenue Watch which has analysed the first reconciliation report of extractive industry revenue of the Afghan Extractive Industry Transparency Initiative(2) highlights that its agencies has not accounted for the sum of US$ 5.7 million which it has already received from the Ainak project. This points to accountability problems in the Afghan government even in the early stages of the mine’s development.

Security problems have also deteriorated in the Ainak area since the contract was concluded. The province, Logar, had already seen the presence of insurgents, but the insurgency has deepened in recent years (although whether this is related to the mining project is another question). It is not just that Logar is considered a strategic gateway for attacks directed at Kabul, but that the province itself is unsafe. During the last five years, Logar has consistently figured among the top eight insecure provinces of Afghanistan. And according to Pentagon figures, the district around the provincial capital, Pul-e Alam, is amongst the ten most violent districts countrywide.

Azra, a mountainous district located in the east of Logar (read an AAN blog here), is another problem spot. Although not sharing a direct border with Pakistan, it lies only a dozen kilometres away from the Pakistani Tribal Agency of Kurram and has been used as a safe passage corridor for anti-government fighters crossing the border in the direction of Kabul, at least since the anti-Soviet jihad era of the 1980s. At that time, Logar was a stronghold of Hekmatyar’s Hezb-e Islami and Chahrasyab, a Kabul district located on the outskirts of Kabul on the way to Logar, remained the key base of Hezb during the civil war.

Already, late last year, provincial officials and residents had reported a growing Taleban influence in Logar. The governor’s spokesman, Din Mohammad Darwesh, said the Taleban were more active in Kharwar, Baraki Barak, Azra, Charkh districts, and in parts of the urban centres of Muhammad Agha and Pul-e Alam. A tribal elder told the Pajhwok news agency that, ‘Taleban fighters have influence in 80 per cent of Logar’, adding that they travel on motorcycles without any fear. A member of the provincial council, Nafisa Hijran, was quoted as saying that public representatives could not travel to remote areas due to insecurity. Just recently Afghan journalists have reported that it is Taleban justice, not the government’s, which is ‘dominant’ in the province. In the first half of 2012, Taleban continued to regularly attack ISAF bases, plant mines and organise ambushes along the main Kabul-Logar-Paktia road.

The area has proven a tough one to extract minerals from before. The Soviets tried – unsuccessfully – in the 1980s. After the fall of the Taleban, work for foreign companies, even for those from nations with a perceived ‘neutral’ stance, has proven similarly difficult. ‘In 2007, a Turkish company that was then asphalting the Kabul-Logar road suffered casualties during their operations, while MCC has had no casualties yet,’ said Akbar Stanakzai, a member of parliament from Logar. Stanakzai is correct, but MCC’s experts, who number in the dozens, live in a highly secured camp and work in shifts at the mine site. While they have not experienced any serious security incident,  as provincial governor, Taher Khan Saberi, told AAN in late July that only a few days earlier, ‘the sound of shooting was heard in an area close to the mine’s site.’ Following this incident, he said he had, ‘invited local tribal elders to share their concerns and asked them to support the security forces deployed there’. He added that they had increased the number of security forces to 1750 police guards. Muhammad Agha district’s governor, Haji Abdul Hamid, defended their security efforts:

‘[Recently], there was a group of three or four rebels [only] in the mountainous area around the Ainak mine who were creating disturbances and firing toward the mine. They were killed in an operation a few days ago. We are having bi-weekly security meetings to evaluate and analyse any incident or issue concerning the security of mine. This is one of the biggest projects in the country; we will not spare any effort to make the project a success.

The killing of four insurgents, however, is far from what will be needed to uproot the insurgency around the mine.  There are also some, such as local MP, Stanakzai, who are suspicious about why the mine’s development is taking so long: ‘Insecurity cannot be the pretext for delays in installing the expected machinery, building the infrastructure and implementing the other phases of the project’.

Of course, most foreign companies investing in Afghanistan have to deal with an insecure environment. It can cause delays and increase the costs, both for mining companies and the Afghan government – although surely insecurity should have been a factor in both timetables and decisions about royalties.  Delays also create dangerous cleavages between the expectations of locals and the benefits which might be delivered in the end.

The Ainak project is not without its hazards and potential losses. This blog has not gone into water usage – processing copper uses enormous amounts of water –, pollution – copper mining is among the worst polluters in the ‘mining world’ — and the destruction of globally significant Buddhist treasures – as MP Stanakzai pointed out: ‘Of course the archaeological site right beside the mine at Ainak is as valuable as the mine itself, and should be explored in a proper way.’ A previous blog (3) looked into the question of the Buddhist remains and a future one hopes to look into the environmental impact of the mine.  It is clear that, until the government and MCC are more transparent and make efforts to reassure locals – and indeed Afghans nationally – that they will materially benefit from the Ainak mine, uneasiness among locals about how this project is developing seems entirely reasonable.

Moreover, the company is also facing a bad moment financially, with the announcement of a fall of 20 to 30 per cent in its net profit in 2011. This income deficit can affect one of the company’s biggest external investments, Ainak. And Ainak’s future and its success – or the lack of it – can in turn become the example for other companies interested in investing big capitals in Afghanistan’s mines.

(1) The state-owned China Metallurgical Construction Company (MCC) has a 75 per cent and Jiangxi Copper Company Limited (JCCL) a 25 per cent share in the consortium for the Ainak mine project.

(2) The ‘Extractive Industries Transparency Initiative’ (EITI) has been started in October 2002 at the World Summit for Sustainable Development in Johannesburg and aims at developing a ‘global standard for transparency in oil, gas and mining’. It can be joined voluntarily by governments, exporters and importers of minerals, companies and NGOs. Of the latter, Global Witness, Oxfam, the Open Society Institute and Transparency International have already joined. Afghanistan is in the process of joining which requires regular reporting already.

(3) A rich complex of Buddhist monasteries and other ancient settlements lies atop the Ainak mine. Archaeological excavations are under way, and they have been delaying the mining operations (read also our previous blog here).

Tagged with: , ,
Thematic Category: Economy & Development