Afghan Extractive Industry: Are Abundant Natural Resources a Blessing or a Curse?

It it a question that is asked in developing nations worldwide.  In some nations, mineral and hydrocarbon reserves have proven to be of enormous benefit to local, regional and even national populations.  In many though, the presence of such resources has proven to be a curse that exacerbates conflict.  Afghanistan has immense reserves of copper, iron, gold, hydrocarbons and rare earth metals.  The nation currently lacks the proper infrastructure and regulatory capacity to extract, process and ship these valuable assets.  Despite the structural shortcomings and ongoing security concerns, many foreign investors have shown significant interest in developing Afghanistan’s mining industry.  The potential development of this sector offers an opportunity to build peace and prosperity in Afghanistan.  Unfortunately, due to several factors including corruption and warlord activity, the extractive industry in Afghanistan is currently on the path to increase conflict rather than foster peace.  While the ‘resource curse’ is currently forming in Afghanistan this does not mean the country is condemned to missing out on a golden opportunity to benefit from its resources.  It simply means that the task of using resources to the benefit of the Afghan people will be difficult.  Civil society in Afghanistan is on the rise, and while it remains in its infancy it is full of dedicated individuals and organizations, such as Integrity Watch Afghanistan, that have every chance of turning Afghanistan’s ‘resource curse’ into a blessing.

Among the plethora of rich untapped natural resources in Afghanistan, the Aynak copper deposits in Logar Province and Hajigak iron deposits in Bamiyan and Maidan Wardak Provinces stand out in terms of economic potential.  The China Metallurgical Group Corporation (CMGC) won the contract to develop the Aynak copper mine in 2008.  Aynak is the second largest unexploited copper deposit in the world and its production alone would make Afghanistan one of the world’s 15 largest copper producers.  The global demand for copper has increased steadily for decades and its value has remained stable at a high level.  Afghanistan, with its deposits in Aynak and elsewhere, is positioned to be an important copper supplier for the global market.  Aynak alone could produce annual gross revenue 1.7 times the Afghan government’s 2006 budget.  This means that the State tax revenue from Aynak could account for almost half of the national budget.  The mine could also directly create thousands of jobs and indirectly support thousands more.  The contract with CMGC required the company to invest in infrastructure and capacity building projects.  CMGC committed to building schools, improving transportation and building a 400MW power plant near the mine.  This kind of local and regional investment highlights the potential for social spillover benefits that developing Afghan resources can have.

Five years later, the CMGC has not met its contractual obligation to develop the area surrounding the mine.  It has improved residential and drilling facilities on site, but while these are important steps to activating production, they do not benefit the Afghan population directly.  The CMGC has recently requested that its contract with the Afghan government be reviewed.  They have stated that the initial contract’s development requirements were conditional.  The CMGC is trying to back out of its commitment to build a railway and the power plant.  It also wants to decrease its payments to the Afghan government.  If the contract is revised in the manner the CMGC is pursuing the Aynak copper mine would not benefit Afghanistan.

The Afghan Ministry of Mines (MoM) does not interpret the development obligations in the original contract as being conditional.  The MoM currently does not plan to renegotiate the contract and will hold the CMGC to its commitments to build the railway to transport the copper and the power plant that will fuel the mine and surrounding countryside.  Talks between the MoM and CMGC are happening though and behind closed doors.  The lack of transparency is worrying in such an important case.  As it stands, the Aynak project is at a standstill and, indeed, never really got off the ground to begin with.

Among the other obstacles to realizing social benefits from mines in Afghanistan are the current attempts to redraft the country’s Mineral Law of 2010.  The current Law has good social and environmental provisions.  The MoM though, is considering redrafting the Law in order to please foreign investors such as the CMGC.  If the proposed revisions pass, they may strip the Law of these important social and environmental considerations.  The Law, as it stands today, addresses issues including: the relocation of landholders, local employment, and pollution.

The potential for these paramount concerns to be sidelined is highlighted in the Aynak case.  The CMGC has, to date, not conducted the environmental impact studies that the Mineral Law requires.  This sets a precedent for corporations to ignore pollution issues when it suits them.  The negative effect of such negligence is the pollution of Afghanistan’s already limited and poor water and air quality.  The soil at the Aynak mine is very porous and located near the Logar River, which drains into the Kabul river a few miles from the city.  If the Law is stripped of its environmental requirements, then the Aynak mines will undoubtedly pollute the water supplies of Logar and perhaps Kabul as well with the acids that are inherent waste products of copper mining.

The social demands that the MoM has shown a history of pursuing in its international contracts are of great importance to the peaceful development of Afghanistan.  The creation of better transportation, such as the railway needed to move copper from Aynak, will benefit the development of other business and better facilitate the movement of Afghans through the countryside.  Schools that mining corporations commit to building will help the next generation of Afghans, men and women included, learn the skills they will need to continue operating and regulating their valuable natural resource deposits.  The education of women in particular will go a long way towards increasing stability in the more remote regions of Afghanistan where mines are located.  The power plants that foreign investors are expected to build will make communications connectivity in Afghanistan more reliable and increase the overall standard of living in mining regions.  While these benefits are certainly possible, as they are the goals of the MoM and civil society organizations, resistance from powerful international corporations is a very real challenge, as can be seen in the case of the Aynak mines.

Civil society in Afghanistan is learning from its early involvement with the government and international corporations.  The Aynak contract has provided many crucial lessons and civil society will continue to adapt as its role in Afghanistan’s development grows.  While civil society organizations may be a bother to the upper echelons of the Afghan government, they have earned the respect of the middle and lower levels of government in Afghanistan.  The efforts of groups, such as Integrity Watch Afghanistan (IWA) and the Afghan Anti-Corruption Network (AACN), have been recognized by all levels of government and their persistence has led to officials at all levels considering their input.  While IWA and other groups do not currently have the capacity to be active and effective across all of Afghanistan, they have the experience necessary to involve the Afghan people in decisions about the extractive industry and they are working to build the capacity of civil society.  The political will in in MoM has also grown, from the ministerial level down, but like civil society it lacks capacity.  It is carrying out a number of training programs to increase its ability to regulate and enforce the policies mandated by law, but currently has to outsource many responsibilities.  It is also not capable of the remote monitoring needed to detect illegal mining operations and regulate large-scale operations like Hajigak.  This general lack of capacity therefore brings into question the wisdom of pursuing large foreign investment at this time.

IWA’s efforts have been instrumental in engaging local populations in areas where major mines may be developed.  Historically, local Afghans have simply been removed from land that could be developed by the State or foreign corporations without compensation.  Legal mechanisms such as the current Mineral Law and the outreach efforts of civil society organizations such as IWA have begun to change this trend.  IWA has gone to communities surrounding Aynak and more recently Hajigak to inform locals of their rights concerning the land.  As a result, local people are now enthusiastically standing up for their rights; rights that they previously did not know they had.  If IWA and other’s had not informed them of their rights, these people would have walked away and allowed developers to rob them of their resources.  Equipped with this new view of their role in the mining landscape, local people in Aynak, Hajigak and elsewhere are hopeful that mining will be a blessing to their communities.  State and civil society institutions have their work cut out for them to ensure that these hopes are realized in the face of widespread corruption.

While the development of Aynak has met a dead end and work on the Hajigak iron deposits has yet to begin, there are positive developments in the extractive industry beyond the growth of civil society.  With the CMGC stalling on its commitment to build a railway to support the Aynak copper mine, the Afghan government and World Bank have begun to develop this important resource corridor on their own.  This rail system will stretch north westward from Aynak, connecting mining operations along the way.  The development of more resources and strong, enforceable considerations for Afghanistan’s people and environment in the Hajigak contract would be further positive developments.  Hajigak may contain as much as 1.8 billion tons of iron ore at a concentration of 62 percent, which could provide the Afghan government  regular revenues for the next century.  The use of such revenues on social investment will increase the conversation between the Afghan government and its people.  This may strengthen the rule of law by increasing citizens’ understanding of the government’s obligations to them and vice versa.  As the government follows through on these obligations it will build social capital and potentially increase security in the remote areas where Afghanistan’s rich natural resources are found.

In addition to the conglomerate of seven Indian companies and one Canadian company that lead the way in its bid to develop the Hajigak iron and chromite deposits there is also significant additional interest in Afghan resources from foreign sources, both above board and illicit.  There is British interest in developing gold resources, Chinese and Indian corporations are interested in developing additional sites, and Iran and Pakistan are hoping to secure contracts as well.  While some forms of Chinese and Indian investment has been welcomed, Afghanistan has proven wary of Iranian and Pakistani interest, as their bids for the Hajigak mines failed.  When choosing future investors Afghanistan should pick medium sized corporations as partners.  These companies have the financial muscle to meet the development needs of the Afghan extractive industry, but they will be less likely to successfully bully the Afghan government the way large corporations may; as the CMGC is currently attempting.

IWA has learned from its involvement in the creation of the Aynak contract and subsequent monitoring and is currently applying those lessons to the Hajigak case.  Locals in both regions are more empowered as a result of civil society’s outreach efforts.  With their support and opinions, groups including IWA are pushing for improved social and environmental provisions in the Hajigak and future contracts.  As we have seen, the CMGC never followed through on their commitment to front loaded local development near Aynak and are now trying to shirk these responsibilities altogether.  IWA hopes to ensure that all contracts from now on require not only initial, but continuous investment in local and regional development.  Even a small percentage of mining profits funneled into infrastructure and education projects could have a huge positive impact on Afghan communities.  Payments to the national government, which CMGC is trying to decrease, would benefit all of Afghanistan’s provinces as there is political will in the MoM to use these payments to establish a sovereign wealth fund that will benefit future Afghan populations.

In addition to the large mineral reserves found in places like Aynak and Hajigak, there are numerous medium and small sized mining operations at various stages of development.  These mines are largely managed by Afghans.  While this may seem positive at first glance, in reality it is a problem.  Nearly all of these mines are controlled by warlords who use profits to support and legitimize their power.  The value of the resources coming out of these smaller mines does not benefit the local population the way large scale mines have the potential to with properly allocated foreign investment.  Not only that, but they also support the activities of these warlords, increasing security concerns.

In Kabul alone there are 710 illegal operations that are publicly acknowledged by the government.  Despite their proximity to the international community, government, police and army no action has been taken against any of these operations.  Part of the problem is that even the most respected public officials, men and women, have a hand in these illegal operations.

It is not just bona fide warlords that are a concern in terms of the exploitation of rural, unregulated mines.  In Kunar Province, chromite deposits in Khas Kunar have been developed by the area’s Afghan Local Police (ALP) commander and his deputy, with the support of The Task Force for Business Stability Operations (TFBSO), which is a unit of the U.S. Department of Defense.  The TFBSO provided the ALP commander and his deputy training and equipment including: a crusher, assembly belt, storage, and transportation.  The deputy owns the mining company, Afghan Wafadar, that the TFBSO helped register.  This assistance was clearly given with good intentions, but in actuality may be destabilizing to the area and disregards Afghan sovereignty.

Khas Kunar is near the border with Pakistan and these chromite deposits have traditionally been mined by locals who sell the ore illegally to smugglers to support their livelihoods.  These activities were long dominated by the Mommand tribe, Khas Kunar’s largest group.  As much as 60-70 tons of chromite were smuggled into Pakistan daily.  The traditional Wand system of sharing the benefits of mining in the area throughout the community has long worked, despite fetching unfair prices and being illegal in nature.  This Wand system of sharing has been helped create social order in an area with several different tribal groups occupying the same space.  Now, with one minority group, the Akhonzadas, in control of a chromite crusher and ALP affiliation, tribal tension is growing.  With one side clearly aligned with the armed ALP the conditions are ripe for other tribes, like the Mommand, to align with the Taliban presence in conflict over chromite deposit control.

The decision by the TFBSO to offer this kind of development assistance to an ALP commander also creates a whole other sort of issue.  The ALP is mandated with providing village level security in the remote regions of Afghanistan.  For a security officer to be involved in mineral extraction is morally corrupt.  Furthermore, the ALP has been accused of numerous criminal activities ranging from robbery to extrajudicial detentions.  ALP forces often recruit from local criminal gangs that tend to be split along tribal lines.  The ALP in Khas Kunar predominantly consists of Akhonzadas, making them more powerful than the larger Mommand tribe.  The Akhonzadas are trying to use their increased power to encroach on Mommand spheres of influence.  This tribal tension is eroding the fragile social order maintained by the Wand system.

Regardless of how shady or shiny their backgrounds are, having government officials involved in the extractive industry is simply a conflict of interest.  Article 14 of The Mineral Law of Afghanistan recognizes this and states that, “The following individuals and entities are not eligible to obtain Mineral Rights; : 1‐ High ranking state officials stipulated in Article 151 of the Constitution, members of the parliament, magistrates, attorneys, members of the Ministries of Mines, National Defence, Interior Affairs, Foreign Affairs, and the Security Services above grade three.”  The ALP commander and his deputy are members of the Security Services above grade three.  The TFBSO initially did not consulate the MoM on its involvement with the Khas Kunar ALP.  When they did, they were told that for the ALP deputy commander to operate a mining company would be illegal under Afghan law.  The TFBSO went ahead with their project, ignoring Afghan sovereignty in the process.  The TFBSO also says that it is considering replicating this sort of investment at a chromite mine in Ghazni Province.  This kind of activity severely undermines efforts to strengthen Afghan rule of law, which is so important to increasing nationwide security.

When mines are operated outside of Afghan law all social benefits are lost and environmental protection is threatened.  Whether these mines are run by rogue warlords or U.S. government supported ALP commanders, the effects are the same.  Illegal mining companies do not pay taxes or royalties to the State, that could be used for the benefit of the nation.  When the owners are armed, either warlord led militias or corrupt ALP, the probability of locals being forcibly removed from their land increases.  The Mineral Law also requires environmental impact statements, which are completely ignored by companies like Afghan Wafadar and more illicit operations.

While the case of chromite mining in Kunar reveals glimpses of future resource conflicts and corruption that could ruin attempts to increase security, it has highlighted one positive development in Afghanistan.  IWA is responsible for investigating this case and went to the Afghan government to bring attention to the issue.  After continued monitoring, IWA confirmed that the Afghan government has confiscated the processing equipment provided to the ALP by the TFBSO and explicitly commanded the deputy commander to cease his illegal involvement in mining operations.  This shows the growing influence of civil society in Afghanistan and the Afghan government’s willingness to assert its sovereignty.

The potential positive future for mining in Afghanistan lays in attracting socially responsible foreign investment that is contractually committed to long term development and environmental protection initiatives.  The opportunity is there, the political will in the MoM and elsewhere is there, and the relentless efforts of civil society’s growing organizations like IWA are there as well.  Still, whether or not Afghanistan will take full advantage of these resources is yet to be seen.  Afghanistan’s resources are currently more of a curse than a blessing; with the CMGC working to escape the positive obligations in its Aynak contract, the stalled development of large scale projects, attempts to weaken the Mineral Law, and the financial support small scale mines give dangerous warlords.  Since minimal extraction has yet occurred there is still time for Afghanistan to reverse course and make its resources a blessing.

Afghanistan can avoid following the path of corrupt nations such as the Democratic Republic of the Congo where extraction has increased conflict.  Afghanistan has the opportunity to use its vast natural resource reserves to increase development, education and stability.  While the challenges are large, there are dedicated Afghans spanning the government, groups like IWA and local communities committed to turning these resources into a blessing.

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