Green shoots in Mazar

Certified rootstock nursery project

Seeing our investment projects actually happening up close has to be one of the most rewarding professional experiences imaginable. A few days spent in the field, meeting grantees on their own territory, seeing their business plans come to life and having a chance to talk with the people we hope will ultimately benefit from the investment project, makes all of the months of design, the endless hours of meetings and the inevitable project administration worthwhile. This is what it is all about.

I have just come back from a short trip to Mazar i Sharif, where we have two live projects from round 1 - an apple orchard/nursery producing certified rootstock and an edible oils factory processing cotton, flax and sesame seeds.

Edible oil production

This short trip was an excellent opportunity to see how these two projects are getting on. The good news is that both are making excellent progress; the land for the nursery is identified, the rootstock is ordered and the first customers are already appearing. This is a business that looks as if it will take off quite quickly. The new rootstock, together with the trellising and drip irrigation technology will lead to a dramatic improvement in yields for thousands of apple and fruit growers around Afghanistan.

Meanwhile, the oil seed factory is taking shape. Most of the production line is now in place and the grantee has identified the bottling plant, which is the last piece to be purchased and installed. Two engineers from the Indian company that supplied the refinery equipment are currently in Mazar overseeing the installation of all of the equipment.

Both projects are on schedule and both grantees are satisfied with progress.

At the same time as visiting the grantees, this was also a valuable opportunity to get out into the countryside and meet some of what we call "target beneficiaries". It is always good to be reminded that this rather impersonal term is actually about real people who are struggling to eke out a living, mostly from the land.

Cotton picking

Driving between Mazar and Shebergan, we had the chance to stop and talk with families who were harvesting cotton and with a group of young men who were beating the seeds out of piles of sesame plants that had been drying in the sun. Typically these people are working the land on behalf of the owner, taking a share of the crop that they manage to grow and sell.

We met a whole family (it seemed that there were three generations working together) who were out in the cotton field bending over the knee-high plants to pick the cotton. The father was complaining about the low prices they received for their work and it is obvious just from watching them that there was a real sense of urgency to fill the bags for sale.

Sesame seeds

Further along the road, the cotton fields gave way to sesame, and every so often there were stacks of plants drying in the sun. Again we stopped and had a chance to talk with a group of three young men who were gradually working their way through the rows of dried plants.

Having never seen a sesame plant before, it was a fascinating experience to watch them beat each bundle on the ground to extract the seeds. The next step is to sieve everything that falls to the ground to separate the seeds which can then be sold.

Mazar city and the area around is probably one of the most prosperous parts of Afghanistan. The land is flat and relatively fertile, we drove past miles of fields, and where there was no cultivation, there were often shepherds with large flocks of grazing sheep and goats.

One of the highlights of the trip was to meet with the "oil seed representatives". As a part of the edible oil project, the factory owner is encouraging the farmers to form groups. One of the first groups is coming together in the town of Balkh.

Meeting farmers' representatives

The representatives plan to organise the purchase of hybrid seeds, fertilisers and other inputs, provide some basic cultivation training and then collect the product for sale to the factory. There is talk of providing some kind of credit facility to help farmers to invest in the higher yielding but more expensive seeds, but this may be a bit ambitious at this stage.

One of the issues we discussed with the representatives was the role of the provincial Department of Agriculture... "Don't they provide extension services?" I asked rather naively. The answer was pretty straightforward, "We haven't seen anyone from the department since Daoud Khan was in charge." Thank goodness for the private sector!

Good argument, good conclusions, wrong pratical solution

The west has squandered time and money in Afghanistan trying to impose high-minded governance and social preferences rather than addressing real needs. Now, with time running out, we need a new private sector investment led model for economic growth focusing on preparing Afghans for a post-donor world. This is the main argument put forward in a Financial Times article that caught my eye, Aid will not sustain Afghanistan’s economy by Ahmed Rashid and Alexis Crow, published on 30 July. I was delighted to see this kind of argument being put forward with such clarity.

The authors make a point that I have been banging on about for some time; that this predilection for focusing on social preferences has been a distraction from the higher priority (at least in the short to medium-term) task of promoting sustainable economic development. They contrast the western approach to peddling liberal democracy with the way that large Chinese and Indian corporations have got on with investing in Afghanistan. In other words, while we push values on Afghans, others extract value from Afghanistan. I agree with Rashid and Crow that this approach has not only lost valuable time, it has also contributed to antagonising significant sections of the local population.  

Where I part company with the article is when it comes to the practical solution prescribed by the authors, "the US should now encourage bold private equity groups with a long-term, high risk investment strategy".

There are three main reasons why I think that this is not the right way forward:

First, the future success of the large Chinese and Indian investments mentioned in the article (the Aynak copper and Hajigak iron projects respectively) rests to a large extent on governance reforms that will bring Afghan mining legislation and regulation more into line with international norms. So while these corporations have got their foot in the door by securing the deals, real investment will only happen when the Afghans have achieved significant improvements in the investment climate.  Investment, even by large Chinese state-owned enterprises relies on the kind of reform programme that the article implicitly de-prioritises. And this need for reform is not restricted to the mining sector. No amount of external support to investors or willingness to take risk can overcome archaic and anti-business regulation that runs through many economic sectors in Afghanistan. If doing something is unlawful, however out of date the regulation may be, it is not a high risk that can be priced, it is plain stupid (or at least it is for a western private equity group). By all means forget some of the irrelevant/outlandish social preferences of the west, but there is some very practical and boring reform work that has been/needs to be done before investment in Afghanistan will really take off. So the "either mess around with reforms/or get on with investing" choice is overly simplistic, the relationship is much more complex than that and we should be working on demand led reform as a high priority.

Secondly, the same Chinese and Indian corporations are strategic, not financial investors. The idea that Afghanistan could be a playground for swashbuckling private equity groups ignores some fundamental realities of the local society and local ways of doing business. The last 10 years of western engagement are littered with well-intentioned ideas for private equity projects, some of which have even managed to attract funding, but none have ever made an investment. Those with long memories will remember the US$20 (or so) million Afghan Renewal Fund managed by ACAP Partners (now dissolved) and financed largely by USAID which was operational between 2004-06 (or thereabouts). The project report, which can be found online, runs through the deal pipeline from the hundreds of initial contacts to the zero deals done in the several years of the fund's existence. Other donor agencies have tried and failed with similar ideas. Why don't these financial investment projects work? The fundamental problem is that Afghan businesses work differently to the west; first most are family businesses that simply don't want outside investors, and secondly most are totally/partially informal - very few would withstand the kind of due diligence and scrutiny that any responsible equity fund manager would require. Then you have a problem with shared management, in a run-off between a remote fund manager and a local owner with different views on business strategy, my money is on the local owner any day of the week. And finally, you have a small issue of exit - what viable exit strategies are available to equity investors? The same family issues would come up again, there is no room for any kind of secondary market in today's Afghanistan. So, it is probably worthwhile looking at how the Chinese and Indians are investing and learn from their example of setting up at scale with their own companies, their own managers and probably significant amounts of their own workers.

Thirdly, the Chinese investor is a state owned enterprise and the Indian investor consortium includes state owned enterprises. These are not private companies willing to take high risks and a long-term view, there is a great deal of very high level political engagement going on in the background. This is a whole lot different to a private equity group trying to manage a portfolio of private investments in Afghanistan.

So what is the immediate and practical solution? Putting the Aynaks and Hajigaks to one side where there are scale considerations that require a different approach, I would propose the following new model for broad economic development in Afghanistan:

• Focus on incentivising Afghan, rather than foreign, investment. Foreign investment is welcome of course, but the faster, easier route is to get Afghans to invest in their own country.
• Forget private equity, use government investment incentives to get Afghans to invest their cash (and there is plenty of it) today not tomorrow, and to invest in productive assets in Afghanistan, rather than real estate in places like Dubai.
• Go for investments that will provide an anchor for wider economic development - for example, agri-processing factories that will buy Afghan produce from thousands of farmers, or mining service enterprises that will make a viable business out of working with small scale quarries, securing thousands of jobs in the process.

I say "new model", but this is pretty much exactly what DFID (and now AusAID, who have come in as a co-donor) are doing through ABIF. We have some fantastic real life investment projects that are now beginning to get off the ground and which promise to deliver tangible benefits to hundreds of thousands of Afghans. So far, we have committed US$2.5m of donor money contributing to US$13.3m of private investment, and we estimate that some 500,000 Afghans will be better off in one way or another as a result. Give us more money, and there is plenty more opportunity where that came from!

Grants awarded

With the Round 1 grantees and colleagues at the
signing ceremony.

In July, ABIF signed its first grant agreements, the Fund has now committed around US$2.6m as a contribution to total private sector investment of US$13.3m across seven projects.

This means that from the first round alone, we have already exceeded the target total investment set for the entire project... and we still have more than 2/3 of our grant fund to distribute. This fantastic achievement is down to the hard work and the patient perseverance of the applicants and the whole ABIF team, who have worked together over the past months to develop some truly innovative and exciting investment projects.

The projects we are supporting from the first round are:

• A chain of branded pharmacies, bringing a new retail business model to Afghanistan and promising an approach built on reputation and trust. We estimate that poor people are spending something like US$10-20m per year on counterfeit medicines in Kabul alone. The introduction of a brand that guarantees that the medicines being sold in its name are genuine represents a major market change.
• Two new cashmere investment projects in Herat, one Afghan and the other international. These projects will significantly expand Afghanistan's cashmere processing capacity creating manufacturing jobs and increasing export earnings. Significantly, both will also dramatically improve market access for small farmers through the construction of a network of collection centres in western Afghanistan.
• A young business that has been running a pilot project for the last 8 months will step up its production of computer assisted design and machine produced furniture components to a commercial scale thanks to a relatively small grant. This innovation will allow Afghan carpenters to purchase the decorative pieces they need to make their furniture more competitive against imports.
• In the north of Afghanistan, we are supporting a new edible oils production and bottling plant. The investor will secure supplies through contract farming arrangements with thousands of local producers, providing small scale credit facilities as well as cultivation training and access to improved inputs.
• An established business based in Kabul will be setting up a carton producing factory. The company will purchase agricultural waste, convert it to pulp and manufacture cartons for use in the horticulture sector. This will open up a new income stream for small farmers supplying the waste to collection centres and the cartons will make a significant contribution to reducing post-harvest losses for farmers.
• An Afghan company with connections to Turkish suppliers has been piloting the introduction of certified rootstock and new orchard technology in Balkh province over the last few years. They are now ready to step up their production and distribution of high yield trees. With ABIF support, the company will be setting up a new nursery near Kabul and will be selling hundreds of thousands of trees and the associated technical equipment throughout Afghanistan.

It is so pleasing to see the work of the past months come to fruition in this way. Of course, signing the grant agreement is only the start... we now have to see these projects implemented and achieving the impact that we think is possible. Watch this space for news as the projects mature.