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.

Strike in Kabul

Farhad shows how it should be done!

Yesterday evening we enjoyed a team evening out at Kabul's Strikers bowling alley. I had heard mention of this place a few times since it opened last year, but yesterday I finally had the chance to go and see what it is all about for the first time.

After getting (sort of) used to a city of largely deserted streets after nightfall, it was a slightly surreal experience to walk through a rather unassuming gate, passed the bloke with the machine gun and into the buzzing, happy atmosphere that has been created at Strikers.

The staff were well trained, the hall spotlessly clean, the equipment working perfectly. This was an evening out for the team after a fairly intense few weeks, and we had the most fantastic time (apart from the fact that I didn't win...).

And it seems to be popular with the locals. Three or four of the lanes were busy, people were arriving all the time, and even young Zubair (maybe 8 or 9 years old) at the next door lane to us was getting into the swing of things and giving his father a good run for his money!

Co-incidentally, when reading through a recent edition of the Afghan Scene magazine, I came across a profile of Meena Rahmani, the lady behind this amazing venture. The article gives a bit of a profile of Meena, tells the history of investment and some of the problems that she has faced running a business in Kabul such as the poor electricity supply (which explained the huge generator just by the entrance). Reassuringly, Meena appears to have overcome all of these problems and has a plan for pretty much any situation, she tells the interviewer, "If there is a suicide bombing... I send everyone home".

Perhaps not a typical customer service issue for bowling alley owners, but sounds sensible to me.

My only strike of the evening!

But seriously, I take my hat off to Ms Rahmani and the people like her who, despite everything, are investing and are making their personal contributions to the development of the country one painful step at a time.

Well thankfully there were  no suicide bombers yesterday evening, and we managed to fit a couple of games in before heading home for a barbeque.

But the important thing I took away from this fun evening out with the guys from the office is that Kabul always retains the right to surprise, and sometimes those surprises can be of the most pleasant variety!

Opening a bank account

Colleagues going through the process

My congratulations to the Afghanistan International Bank and in particular to Mr Yama Naseri, the manager of our local branch.

The other day we visited AIB to open a bank account. Not only was the process relatively painless, but we were also served a very pleasant cup of tea... certainly some of the banks back in the UK could learn a thing or two about customer service from these guys!

It is these small but significant interactions with professional people doing a good job that continues to give me hope for Afghanistan.

Investing in Afghanistan

Climbing out of poverty, collecting

garbage in Kabul

A few weeks ago, I read a fairly gloomy article in the Financial Times about the end of the economic boom (what economic boom?), saying that investment is drying up in Afghanistan. My feeling when I read that article (as it is now) runs counter to the author's main observations and conclusions.

It seems to me that against all of the odds, there is a growing group of investors who are slowly building a serious financial stake in the future of the country. My view is that with the kind of incentive that ABIF is offering, this process can be accelerated - with all of the wider benefits that flow from private sector investment.

After spending something like 6 years out of the last 10 in the country, I would never underestimate the obstacles to economic development in Afghanistan. However I do genuinely believe that with the right interventions, such as investment incentives, we will be surprised at how much can be achieved in a relatively short space of time.

DFID's investment in ABIF, which was set up as an independent competitive challenge fund with a very clear market development strategy (an essential combination of factors in this kind of environment), will pay back many times over. Those people responsible for making ABIF happen deserve a lot of credit, and DFID should be commended for taking the risk of financing such a project in such a problematic environment.

So here we are today, reaching the end of the first competitive round. We have just completed the evaluation of the detailed business plans we received from the 11 applicants who made it onto our final shortlist. The great news is that we think we could support well over half of these potential investment projects, an excellent interim result (after less than 6 months) for a private sector challenge fund operating in a place like Afghanistan.

This week we have our Investment Panel meeting at which the business plans and our evaluation will be subjected to external scrutiny. The Panel will review the business plans and our opinion, meet the applicants and provide their advice on the projects we are recommending for funding. It will be a long day!

We have evaluated all of the business plans against three sequential criteria:

1. Project viability;
2. Expected development outcome; and
3. Quality of the applicant.

Spring in Kabul, apple blossom in our garden

This evaluation process has been extremely rigorous. We have always said that we will refuse to compromise on the quality of application that we will fund; better to fund nothing than fund the wrong thing. ABIF has a limited budget and we want to make it go as far as possible. So the UK taxpayer can rest assured that their money will be applied as effectively as possible, to incentivise genuine investment in projects that will benefit tens, possibly hundreds, of thousands of poor Afghans.

Despite the Financial Times' somewhat negative take on investor sentiment, it is striking that in all of the projects that we are recommending for funding, the applicant is ready to put a significant amount of their own money into the project. There are clearly some people (and our 350 plus applicants were from all over Afghanistan) who believe that now is the time to invest.

I sincerely hope that the projects we are proposing to recommend for funding will survive the Panel's external scrutiny and that we will move very rapidly to negotiating and then signing Grant Implementation Agreements, and finally to disbursing money to some excellent projects. Watch this space!

Offering a prize is not the same as picking the winner

Offering a prize to encourage innovation has an impressive track record of success. Think back to the Daily Mail flying prizes at the beginning of the 20th century that rewarded Bleriot for crossing the English Channel or Alcock and Brown for crossing the Atlantic. More recently we have seen the effect of prizes to encourage the private development of space rockets... One way or another, there is plenty of evidence to suggest that the incentive of a prize can have an impact well beyond the value of the prize itself.

While our ambitions at ABIF might be slightly more down-to-earth, this broadly speaking, is the approach we have taken towards incentivising investment in innovation. The prize we are offering, in the form of a grant, is intended to encourage business owners to develop commercially viable investment projects that will have a wider impact on the markets in which they operate. Afghanistan desperately needs private sector investment to create economic growth and reduce poverty, our view is that ABIF grants can make a contribution to this process not by designing or implementing grand development plans, but by offering an incentive to Afghan investors to encourage them to do the thinking and the hard work and then take some of the risk.

For too long the debate on state/donor intervention has been too polarised. At one extreme we have the failed central planning dogma, and at the other we have the failed neoclassical free-market dogma. Unfortunately this polarisation has prevented a pragmatic and rational exploration of development approaches that lie somewhere along a spectrum of options between these two extremes.

The soviet style centrally planned economies have been swept away and now it would seem that the stultifying Washington Consensus may have had its day. So finally we have the opportunity to explore ways in which the state (whether the recipient or provider of development assistance) can implement a form of industrial policy that recognises both the potential and limitations of intervention.

Industrial policy has been characterised by its many detractors as "picking winners" and creating opportunities for vanity driven waste and corruption, it has been argued that such interventions will inevitably fail, and where they have been part of a success story, this is only because there were some over-riding special conditions. However, this view ignores the consistent developmental successes of those states that have used various forms of industrial policy to promote investment and economic growth.

Good examples of such states include the unashamedly interventionist economic giants of Great Britain (in the pre-free trade days of growth) and USA (pretty much throughout its history of economic growth and domination), to the new kids on the block Asian developmental states who largely ignored what they were told to do in the 1950's and 1960's, to China and India that today are pursuing very non-World Bank style development policies. The fact is that state intervention, used wisely (and it can be used wisely), is an essential ingredient of economic development.

So for the context of ABIF, it is not so much a question of whether industrial policy is right of wrong per se, as to what kind of industrial policy is likely to be most successful in Afghanistan. The matrix shown here is an attempt to describe a range of options to promote economic innovation according to two key policy dimensions - the scale of the intervention (firm or sector level) and the depth of the intervention (leading or following the market).

If we discard the negative connotations associated with the "picking winners" characterisation of industrial policy (actually, what is wrong with picking winners?) and instead look at how the developmental states achieved their gains (including picking winners), we see that a mechanism such as the ABIF grant is consistent with the main characteristics of successful industrial policy. For example:

1. We operate at a relatively small, firm-level scale, we are not about grand centrally planned schemes to manage or change large chunks of the national economy.
2. We offer grants, not loans, so we have to constantly renew our mandate by demonstrating success, we do not seek to be sustainable or self-funding in ourselves.
3. We identify problems (our challenge themes) that we want private sector investors to address, rather than designing and implementing solutions.
4. We support investments that will have a wider but incremental impact on the market that will benefit our target beneficiaries. 
5. We separate the original intervention from potential subsequent (process rather than end-game) scaling up interventions, which could involve entirely different players.

Looking at the matrix above, today ABIF, while very much in the tradition of industrial policy interventions, is firmly positioned in the bottom left corner. With time, and as individual investment projects mature and the potential for sector level scaling up emerges, it may be that we start to work in the bottom right corner. However, even when working to incentivise broader systemic change, we should support initiatives in a way that recognises the limitations as well as the potential of our interventions. By staying in the lower two quadrants, we use competitive forces to identify potential winners and avoid either defining specific innovations or creating specific entities to deliver those innovations.