Reform and Realism in Afghanistan's Minerals Sector

Amid a continuing conflict and a debate over policy approaches in Afghanistan, another less visible but equally critical struggle is underway: the effort by Afghan authorities to create proper governance for the lucrative mining sector expected to emerge, eventually, from a more stable country. Afghanistan's extractive sector, rich in copper, lithium and gold as well as oil, gas, coal and various gemstones, also has a legacy of corruption and inefficiency. The current mining minister Wahidullah Shahrani is taking a range of steps that seek to reform management of the sector. The vicissitudes of Afghan politics can overshadow even the best efforts of political reformers. Mr. Shahrani himself has struggled to maintain a reputation for reform in an increasingly toxic climate. Nonetheless his plans are encouraging. Key elements of his reform program include:

  • Afghanistan's implementation of the Extractive Industries Transparency Initiative as of February, 2010. The EITI is a voluntary process based on good disclosure practices and collaboration between government, industry and citizen groups. Shahrani co-chairs the Afghan EITI together with the equally reform-minded minister of finance Dr. Omar Zakhilwal. (For full disclosure, the Revenue Watch Institute is helping Afghanistan in its EITI implementation process.)
  • A reorganization of the mining ministry from the ground up, which the minister says will transform the office into a regulatory and licensing body and end its direct role in mining operations.
  • The shut-down of independent ministry bank accounts that for years were used to collect and hold mining revenues, and a handoff of this function to the finance ministry. This move toward best practice in fiscal management is a noteworthy step -- it is highly unusual for a ministry in any country to voluntarily give up its own private revenue stream.

Transparency means more than just following the money. In recognition of this, Afghanistan is joining a growing number of countries that open up their bidding processes for oil and mineral concessions, and follow through by publishing the contracts between energy companies and the government. Mr. Shahrani has told Revenue Watch that the ministry's contracts overhaul will also include a more open bidding process, with public explanations provided on why each successful bidder was awarded a license or contract. This would set a good example for other mining countries.

However, the largest mineral investment to date, the country's deal with China Metallurgical Group Corporation (MCC) for copper mining in the Aynak region, has not been published. It pre-dates the current reform effort and reportedly contains a confidentiality clause. The ministry has published a detailed summary of the agreement, but full release of the contract terms will apparently depend on permission from MCC. Even in a best case scenario, where conflict subsides and government institutions grow in efficiency and accountability, Afghanistan will not see abundant wealth from its mineral resources for many years. Small to mid-size deposits hold the promise of shorter timeframes for exploitation, but developing the country's large deposits requires a massive investment in infrastructure. For example, although officials expect to complete tender on the Hajigak iron ore development next year, in order to haul the ore out from mines in the mountain regions Afghanistan needs an entirely new rail system. The larger oil and gas deposits in the country's north will only be viable if power stations and transmission lines are added. Various development banks have put forth plans to develop such "resource corridor" projects, but it is unclear how much investor interest they will attract. The financing cost for such investments is another hurdle. MCC's plans for a railway associated with the Aynak copper mine has an estimated price tag of 6-7 billion dollars.

The Aynak project faces another more fascinating delay, due to the discovery at Mes Aynak of an ancient Buddhist monastery and a trove of related sculptures and artifacts dating back to at least the third century B.C. The dramatic encounter between historic preservation and economic progress has already drawn in the United Nations, archeologists from France and the U.S., and leaders in Afghanistan and China (all against the backdrop of an ongoing insurgency and the planned U.S. military withdrawal). The archeological site, which has been explored on and off since 1922, sits along the ancient Silk Road and dates back to the Kushan Empire, which played an influential role in the spread of Buddhism from India into Central Asia. Perhaps most ironically, the society being unearthed appears to have also supported copper mining. (The word "mes" in the area's name actually means "copper" in Dari. See here and here for some remarkable photos and more information about the Mes Aynak discoveries.) Experts have estimated it could take as long as 10 years to fully explore the find. The Government of Afghanistan, MCC and the archeological team were said to have informally agreed to a three-year delay while the dig continued, but MCC is reportedly already pressing to accelerate this timeframe. Even under optimal conditions, the timeline from natural resource discovery to resource revenues is lengthy and unpredictable. Afghanistan faces a storm of challenges, not the least of which is the natural resistance of major multinationals to investing while security remains a serious concern. Afghanistan's mineral wealth is now a key factor in the debate over how and when international forces can draw down their operations. With continued pressures from within and without the country, it is all the more crucial that reforms like those proposed by the mining ministry have the chance to take root, generate stronger Afghan institutions, and ultimately foster a mining and oil sector that fulfills its promise of development and financial sovereignty for the people of Afghanistan.