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Afghanistan

2007 Investment Climate Statement - Afghanistan

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Openness To Foreign Investment

The Government of Afghanistan recognizes that the development of a vibrant private sector is crucial to the reconstruction of an economy ravaged by decades of conflict. As such, it has taken significant steps towards fostering a business-friendly environment for both foreign and domestic investment.

The Law on Private Investment of Afghanistan of 2005 specifically prohibits discrimination against foreign investors. Investment in certain sectors, such as infrastructure (defined to include power, water, sewage, waste-treatment, airports, telecommunications and health and education facilities) or natural resources, are subject to limitation and/or special terms. Foreign investment in these sectors, while not prohibited, is subject to special consideration by the High Commission on Investment, in consultation with relevant government Ministries. Investments can be 100% foreign owned; foreign investors are not required to secure an Afghan partner. Private investors have the right to transfer their capital and profits out of Afghanistan as well as debt service off-shore loans. Foreign and domestic investors enjoy equal treatment, including under ongoing privatization programs, except as noted in the sectors above. Foreigners may not own real estate; but they may lease it for periods up to fifty years. The Income Tax Law allows accelerated depreciation for capital assets and deduction of most business losses.

Four major commercial laws are currently in effect by Presidential decree, and will remain law if Parliament takes no action on them. The Parliamentary process could result in changes to the laws. The four commercial laws cover partnerships, corporations, arbitration and mediation. Six additional laws on contracts, standards, copyrights, patents, trademarks and agencies are in the drafting process. The government intends to see them enacted into law by the end of calendar year 2007. In addition, the government hopes to enact financial laws on negotiable instruments, secured transactions, and mortgages by the end of 2007. The next step for the government will be the drafting of regulations and procedures to implement the laws.

The Government has adopted progressive policies to foster trade and investment, including currency reform, rationalized customs tariffs and a simplified tax code. It has also set up structures to help promote investment and investment-friendly policies. The High Commission on Investment, comprised of the Ministers of Commerce, Agriculture, Mines and Industries, Foreign Affairs, Finance, and Economy, and Da Afghanistan (Central) Bank, coordinates policymaking. The Afghan Investment Support Agency (AISA), a quasi government agency under the Ministry of Commerce, operates a streamlined business registration process and conducts a host of business and investment promotion and facilitation activities.

While private sector development and attracting foreign investment is an official priority, the government remains significantly involved in commercial activities. There are 64 state-owned enterprises (SOE). The government has committed to divest 56 SOEs by the end of 2009. In 2007, eleven SOEs are scheduled to be liquidated, and nine will be candidates for “corporatization” or possibly reorganization into Public Private Partnerships. Nearly half of these SOEs are in the transportation, mining, and industry sectors. SOEs own large amounts of land and property around the country, and delays in the rationalization and liquidation of some SOE holdings inhibit competition and investments in some sectors.

Two chambers of commerce operate in Afghanistan, the Afghanistan Chamber of Commerce and Industry, which dates from the Soviet occupation, and the Afghanistan International Chamber of Commerce, which is run by a board of directors elected on a one member, one vote basis. The Afghanistan International Chamber of Commerce engages actively in the process of establishing a legal framework for private business in Afghanistan, represents the business community to leading government officials, and provides services to members.

Although top officials embrace the market economy and foreign investment, many businesses maintain that this attitude has not trickled down to the staff level in some ministries. Some government officials, who reportedly demand bribes, levy unofficial taxes and inflict bureaucratic delays, appear not to be in step with official government policy.

Conversion And Transfer Policies There are no restrictions on converting or transferring funds associated with investment into a freely usable currency and at a legal market clearing rate. The Private Investment Law states that an investor may freely transfer investment dividends or proceeds from a sale of an approved enterprise abroad. Furthermore, Afghanistan does not maintain a dual exchange rate regime, currency controls, capital controls, or any other restrictions on the free flow of funds abroad.

Access to foreign exchange for investment remittances is not restricted by any law or regulation. However, in practice, particularly in the provinces, many banks may not have the capacity to deal with foreign exchange. The previous large, informal foreign exchange markets in major cities and provinces such as Kabul, Mazar-e-Sharif, Jalalabad, Kandahar and Herat where U.S. Dollars, Sterling Pounds, and Euros are readily available are slowly starting to become formal markets. Da Afghanistan (Central) Bank has issued more than one hundred licenses (for foreign exchange only) to money exchangers in Kabul. While more licenses are expected to be issued in the near future, there are thousands of others who are not licensed and yet continue to practice their business without penalty. Money service providers (i.e. hawaladars, many of whom also often perform currency exchange) continually cite the lack of enforcement in the currency exchange area and the resulting competitive disadvantage to licensed exchangers as a reason not to get money service provider licenses. U.S. investors that use hawaladar services should only use licensed money service providers.

There is no legally mandated delay period for remitting investment returns such as dividends, return of capital, interest and principal on private foreign debt, lease payments, royalties and management fees through normal, legal channels, as there are no restrictions on such remittances.

The government does not limit the inflow and outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property or imported inputs, provided that applicable taxes have been paid. The only requirements placed on the outflow of funds are procedural, for the purposes of anti-money laundering. For example, any transfer abroad that equals or exceeds AFS one million (slightly over $20,000) or equivalent must be carried out through a duly authorized or permitted banking organization or licensed money service provider. The transport of more than AFS one million or equivalent in cash across the border of Afghanistan into another country must be reported in advance to the Financial Intelligence Unit of the Da Afghanistan (Central) Bank.

Expropriation And Compensation

The Private Investment Law states, "The State can expropriate an investment or assets…only for the purposes of public interest and on a non-discriminatory basis.” It further states that the “State shall provide prompt, adequate and effective compensation in conformity with the principles of international law, equivalent to the fair market value.” The State may confiscate private property in order to settle bad commercial debts. However, the law allows an investor to challenge the expropriation but this right does not accrue to “minority shareholders”. Both the Afghan Constitution and the Private Investment Law prohibit foreigners from owning real estate. There have been no reports of State expropriation of foreign assets, “creeping,” or otherwise.

Dispute Settlement

Afghanistan’s legal system is only just beginning to rebuild. Much of the framework necessary for encouraging and protecting private investment is not yet in place, and the existence of three overlapping systems (the Sharia, the Shura and the formal legal system instituted under the 2004 Constitution) can be confusing to both investors and legal professionals. While a commercial court system exists, the lack of a contracts law and a commercial code, drafts of which are still under consideration, is a significant impediment to the arbitration of commercial matters. In addition, there is a shortage of qualified legal practitioners, and corruption in the judicial system is endemic.

The enactment in January 2007 of arbitration and mediation laws established the foundation for a viable alternative dispute settlement system. Afghanistan is a party to the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. The Private Investment Law provides for dispute resolution under these mechanisms, under United Nations Commission on International Trade Law (UNCITRAL) rules, or under any mechanism that the investor has specified in a contract with another investor.

Under these conditions, the legal system plays a limited role in adjudicating commercial disputes and most businesses use informal mechanisms to resolve disputes and enforce property rights. The Afghan Investment Support Agency, for example, has a limited capability to assist investors in the mediation of some disputes.

Investment disputes are common in the areas of land titling and contracts. The lack of a comprehensive titling database means that several individuals may hold deeds to the same property. Real estate agents are not reliable. Those investors seeking to purchase property are advised to conduct painstaking due diligence. The Embassy maintains a list of legal advisors that businesses may consult.

Performance Requirements And Incentives

Afghanistan has no formal regulations or laws governing performance requirements.

The private investment law prohibits discrimination against foreign investors, except in certain sectors, as noted above. Afghanistan’s constitution restricts foreigners from owning real estate. There are no separate investment incentives or special treatment accorded to foreign investors. There are no government-imposed conditions on permission to invest, beyond the procedures described for acquiring a business license in Chapter 3.

The government does not impose offset requirements on its procurements, and foreign firms are accorded equal treatment with national firms.

The government does not apply discriminatory or excessively onerous visa, residence or work permit requirements for foreigners. There are no discriminatory or preferential export and import policies affecting foreign investors. The Investment Commission under the private investment law may choose to review and apply terms that are different from those generally applied to investments pursuant to this law for certain restricted sectors such as:

  • non-banking finance activities;
  • insurance activities; and
  • investments in natural resources and infrastructure (energy related, airports etc.)

Right To Private Ownership And Establishment

Under the private investment law, foreign and domestic private entities have equal standing and may establish and own business enterprises, engage in all forms of remunerative activity and freely acquire and dispose of interests in business enterprises. The only exception is in real estate; foreigners may not own land but they may lease it for periods of up to fifty years. Some leases have been negotiated for terms of up to 99 years.

In principal, government policies and regulations apply the standard of competitive equality to private enterprises in competition with public enterprises with respect to access to markets, credit and other business operations. However, the government has in some instances exhibited anti-competitive and protectionist bias in some sectors in which SOEs are active.

While not sanctioned by law or official policy, small groups of businessmen, many of whom are alleged to have connections with former warlords and militias, dominate the trading market in many areas. These individuals, because of their wealth and insider access to land, credit and contacts and ability to manipulate prices, wield an excessive advantage that results in a non-competitive environment in some fields, notably fuel and construction. In addition, some industries, including money changing and carpet production, have well-organized guilds which protect existing firms and act to prevent newcomers from establishing themselves.

Protection Of Property Rights

Property right protection is weak due to a lack of property registries or a land titling database, disputed titles, incapacity of commercial courts, and widespread corruption.

The acquisition of a clear land title to purchase real estate or a registered leasehold interest is complicated and cumbersome. It takes an average of six months and entails legal fees of almost 10% of the value to register property. Many businesses cite access to land as one of the biggest impediments to investment in Afghanistan.

The Da Afghanistan (Central) Bank has prepared a draft mortgage law that is now under review.

The country’s bankruptcy law dates to the 1960s and is not effective. A new bankruptcy law is currently in draft form and under consideration.

Afghanistan currently has no legislation that addresses intellectual property rights. It is not a member of the WTO Trade Related Intellectual Property Rights Agreement or the World Intellectual Property Organization Internet Treaties. Pirated DVDs and software are sold throughout the country. Counterfeit pharmaceuticals and building materials are common.

Transparency Of Regulatory System

In general, the Government of Afghanistan promotes transparent policies and effective laws to foster competition, establish “clear rules of the game” and promote, rather than hinder, foreign investment. The inadequacy of the regulatory system, and corruption among those who administer it, is more of an obstacle to investors than the transparency of the regulations.

Procedures for obtaining a business license were streamlined in 2003 with the establishment of the Afghanistan Investment Support Agency (AISA) which serves as a one-stop shop for investors, and which has greatly facilitated the process of establishing a business in country (see Chapter 3 for further details.) Afghanistan now ranks an impressive 17 out of 175 countries in ease of registering a business, according to the World Bank’s 2007” Doing Business Report.” While registering a business is a relatively quick process -- eight days and three procedures -- the same report ranks the ease of doing business as 162 out of 175. The October 2006 Adam Smith International “Initiative for Regulatory Reform to Enhance Private Sector Development in Afghanistan: An Investor Roadmap” details the cumbersome process of actually starting a business after the initial license is received. There are numerous steps, most of which are not publicly available. Due to existing information gaps, many investors utilize the services of expeditors to facilitate the processing of the necessary documents.

There are no informal regulatory processes managed by nongovernmental organizations or private sector associations.

Prior to December 2005, proposed laws and regulations were passed by presidential decree. Drafts were not published for public comment; however, relevant ministries occasionally forwarded draft legislation to interested bodies for informal comment. This process was criticized by the private sector as insufficient. A new parliament, which convened on December 19, 2005, now must approve all legislation

Legal, regulatory and accounting systems are inconsistent with international norms. The legal framework for investment is inadequate, accounting and standards regimes have yet to be set up, and regulatory bodies are often understaffed, weak and corrupt. Reform programs, however, are in progress and rely heavily on foreign experts who base their initiatives on international best practices.

Efficient Capital Markets And Portfolio Investment

Credit markets are fragmented and under-developed in Afghanistan. Bank credit is available, on limited “market” terms, to domestic and foreign investors in major urban centers. The variety of credit facilities and instruments is limited. Most bank credit is short-term (i.e., less than one year) and unsecured. Lending is underdeveloped because of a lack of adequate legislation and regulatory infrastructure to allow lending institutions to perfect security interests in pledged collateral. Public debt (and equity) markets are not available in Afghanistan. Most local firms rely on family and friends and the informal hawala system to obtain necessary funds (see Chapter 7 of this report for more information.)

Access to credit has been identified as one of the largest obstacles to investment in Afghanistan. In the World Bank’s 2007 “Doing Business Report,” Afghanistan ranks 174 out of 175 countries for getting credit, a measure of credit information sharing and legal rights of borrowers and lenders. In response to this situation, investment funds, leasing, and micro-financing, and SME-financing companies have begun to enter the market.

As of November 30, 2006, the total assets of the banking system of Afghanistan (14 duly-licensed banking organizations) were AFS 42.5 billion or about USD 850 million.

The banking system can be described as sound, with no bank exhibiting deficiencies in either capital or liquidity. Deposits and loans are growing rapidly, and the Central Bank is exercising close supervision of all 14 organizations from both an on-site and off-site perspective. Non-performing loans are about 3.5% of the total loan portfolio of AFS 17.7 billion, which is considered healthy.

Political Violence

Afghanistan is making strides towards political stability. Peaceful, transparent presidential elections in October 2004 and parliamentary elections in 2005 were notable achievements. The government is taking steps to extend its reach into the provinces and to date more than 31,000 members of the Afghan National Army and nearly 61,000 Afghan National Police officers have been trained and equipped. However, risk of violence is high, and security remains a primary concern and an obstacle to foreign investment. Foreign firms operating in country report spending a significant percentage of their revenues on security infrastructure and operating expenses.

The U.S. State Department continues to warn Americans against travel to Afghanistan. U.S. citizens should review the Consular Information Sheet and Travel Warning for Afghanistan for the most up-to-date information on the security situation and possible threats. These documents can be found at: http://travel.state.gov/travel/cis_pa_tw/cis/cis_1765.html

Corruption

Corruption is rife at all levels of the system in Afghanistan. In 2005 the country ranked 117 out of 159 in Transparency International’s Corruption Perception Index, among the highest in the world. (Afghanistan was not included in the 2006 index.) While anti-corruption laws exist, and the practice of giving or taking a bribe is illegal, there is limited enforcement. President Hamid Karzai has created an Anti-Corruption Commission to investigate corruption cases and refer suspects to the appropriate authorities; however, the Commission has not forwarded any significant cases against public officials or private individuals. Afghanistan is not a party to the OECD Convention on Combating Bribery of Foreign Public Officials. It has signed, but has not ratified, the United Nations Convention against Corruption.

U.S. firms identify corruption as one of the biggest obstacles to foreign direct investment and routinely report being asked for a bribe, called sherini or bakshesh. With government salaries ranging from $80-$300 per month, many officials see small bribes for government services as a necessary means of survival. U.S. companies are expected to comply with the Foreign Corrupt Practices Act, which prohibits the bribery of foreign officials.

Bilateral Investment Agreements

Afghanistan has Bilateral Investment Treaties (BITs) with Turkey and Germany and currently is negotiating such an agreement with Pakistan. It has no Free Trade Agreements with any country, although most products originating in Afghanistan can be imported into the U.S. and the E.U. duty free.

Afghanistan signed a Trade and Investment Framework Agreement with the United States in 2004, but a BIT has not been negotiated. There is no Bilateral Taxation Treaty with the United States.

OPIC and Other Investment Insurance Programs

OPIC has an active and expanding portfolio of political risk insurance, loans and equity investment in country. For the purposes of inconvertibility claims, the estimated U.S. annual dollar value of the local currency likely to be used by the U.S. Embassy in the host country economy is AFS 50 to USD 1, the rate at which it purchases local currency. Nominal currency values are anticipated to remain stable in this range for the near future.

Afghanistan is a member of the Multilateral Investment Guarantee Agency.

Labor

There is a critical shortage of skilled labor in Afghanistan. Decades of war, a low level of education and lack of training facilities has resulted in a scarcity of skilled technicians, qualified managers and educated professionals.

U.S. companies who establish training programs for their employees should expect significant returns in enhanced productivity, but there is a risk of high turnover as skilled employees chase higher paying opportunities.

Labor management relations are undeveloped. While there are eight major trade union organizations in the country, there is no knowledge or practice of collective bargaining. Existing employee’s associations function as commercial and trading organizations.

The current Labor Code dates to 1987. A draft of a new code, which purports to be in accordance with ILO standards, has been enacted by presidential decree, but it has not been reviewed by parliament. According to the ILO, the new law incorporated all ILO Conventions to which Afghanistan has acceded.

A recently passed Law on Foreign Workers prohibits employers from hiring foreign workers for a job for which an equivalently qualified Afghan is available.

At present, the Government has little to no capacity to enforce labor requirements.

Foreign-Trade Zones/Free Ports

Afghanistan has no duty-free import zones or ports. Under Afghan law, foreign-owned firms have the same investment opportunities as host country entities.

Foreign Direct Investment Statistics

Comprehensive Foreign Direct Investment Statistics for Afghanistan are unavailable. Available figures are somewhat unreliable due to inconsistencies in data collection. The Afghan Investment Support Agency estimates new FDI in Afghanistan for 2006 at $220 million. Of that figure, $49 million was in the construction sector, $150 million in services, $20 million in industry, and $1 million in the agriculture sector. The largest investor in 2006 was the United States ($25 million) followed by Iran, Turkey, Pakistan, China, and Russia. It is important to note that AISA’s data tracks approved, rather than actual, investment.

The IMF estimates that FDI in Afghanistan represents 38% of GDP.

Web Resources

Afghan Investment Support Agency http://www.aisa.org.af

Afghan Ministry of Commerce http://www.commerce.gov.af

Afghan Ministry of Finance http://www.mof.gov.af

World Bank 2007 Doing Business Report http://www.doingbusiness.org

United Nations Commission on International Trade Law http://www.uncitral.org

U.S. Department of State Travel Websitehttp://travel.state.gov/travel/cis_pa_tw/cis/cis_1765.html

Transparency International http://www.transparency.org/

U.S. Department of Justice, Foreign Corrupt Practices Act http://www.usdoj.gov/criminal/fraud/fcpa.html

Overseas Private Investment Corporation http://www.opic.gov/

Multilateral Investment Guarantee Agency http://www.miga.org

International Monetary Fund http://www.imf.org


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