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Business in Afghanistan, Connections Matter Most

Doing business in Afghanistan, connections matter most

 

By Jonathan S. Landay | McClatchy Newspapers

 

By Jonathan S. Landay | McClatchy Newspapers

KARKAR COAL MINE, Afghanistan — Shovel-wielding miners in rags and plastic shoes, some with the protruding ribs and work-ravaged pallor of labor camp prisoners, toil deep inside this remote northern mountain, harvesting coal for some of the country's most powerful businessmen.

Outside, other workers tip coal-filled trolleys down a hill, cloths tied about their faces against choking black dust. On the heap below, a barefoot boy separates large lumps by hand while colleagues toss shovelfuls of chips into a truck. Goats nose for weeds in tangles of moldering steel cables and rails.

The coal dug here fires Afghanistan's only working cement factory, a strategic industrial asset 150 miles north of Kabul that should be supplying building material for much of the country, generating cash and jobs and improving the lives of some of the world's poorest people.

Instead, the Ghori Cement Factory and the nearby Karkar Coal Mine have become symbols of the corruption, nepotism and mismanagement that pervade President Hamid Karzai's government, hobble the U.S. effort to rebuild Afghanistan, and fuel the Taliban-led insurgency that now threatens both sites.

"The factory was handed over to people who are a mafia," Baghlan Governor Abdul Majid, a Karzai appointee, told McClatchy in an interview in Pul-I-Khumri, the provincial capital, last month.

The powerful businessmen who control the cement plant, Karkar and three nearby mines, never had the financing to run the venture, but their close relatives are two of the country's most powerful men.

Mahmoud Karzai, the CEO of the Afghan Investment Company, which runs the enterprises, is the brother of the president, and Abdul Hussain Fahim, the AIC vice-chairman, is the brother of the former defense minister, Mohammad Qasim Fahim, now the first vice president.

Until January 2009, when he was ousted in a failed takeover bid, their senior partner was Sherkhan Farnood, the head of Kabul Bank, which was taken over by the government in September following allegations of insider loans and real estate speculation in Dubai.

A U.S.-funded study estimated the cost of modernizing the Soviet-era cement plant at more than half a billion dollars, but the trio raised only $22.25 million in cash. Stockholders borrowed as much again from the Kabul Bank, in which Mahmoud Karzai and Abdul Hussain Fahim are partners. Even so, President Karzai's cabinet approved 49-year leases on the state-owned plant and mines in 2006.

Nearly five years later, Ghori is churning out less than 1/25 the cement that AIC pledged to produce. Karkar is a devastated sprawl of dust-blown wreckage and neglect where workers fear that their next shift could be their last.

"All they gave us were oily promises," said Gul, 35, who asked that his last name be withheld, after emerging from Karkar's fetid tunnel, his face, torn pants and bare, concave chest encrusted with coal dust. "We are never sure if we will come out alive. It is our choice to go in, but it's up to Allah if we come out."

How Mahmoud Karzai, a U.S. citizen, and Abdul Hussain Fahim gained the leases is a tale involving cronyism, alleged regulatory violations, boxes of cash and intervention at the highest level of the Kabul government.

The squandering of an Afghan national resource has allowed Pakistani cement giants to corner a market with a demand estimated this year at nearly 4 million tons, driven in large part by U.S. military construction projects.

This is also a tale of how two of the most influential members of the Afghan elite who live in palatial villas in Kabul and Dubai reneged on promises of better conditions for fellow countrymen struggling to feed their families on salaries of about $3 a day.

"Before this group took control of the factory, they told us they would change our lives and would make our lives better," said Mohammad, a veteran Ghori employee who asked that his last name be withheld. "These people who have spent their entire lives at this factory, what has been given to these people?"

A McClatchy investigation revealed a dubious process of awarding the leases and multiple failures by the firm to fulfill its written commitments. The leases, moreover, contained no provisions to nullify the deal for non-performance.

A parliamentary committee looking into the deal amid allegations that the U.S.-backed privatization of state enterprises was steering state assets to the friends and relatives of top officials ended in bloodshed. A mysterious November 2007 bomb blast in Baghlan killed those six parliamentarians and more than 60 other people.

Mahmoud Karzai said he won the leases fairly and blamed the debacle on the denial of financing by international lenders. He told McClatchy that "ridiculous" Afghan ministers also undermined the project by supporting "ridiculous taxation" and "ridiculous laws" that discourage international investment, while giving preference to Pakistani cement makers.

"If we were really doing the right thing, we'd shut this down. Shutting this down means that 400 to 500 people would be without a job," he said. "We don't have the money."

He said AIC would sell its leases to any company that gives "us our money back. They could take it or make us their minority partner for the money we have spent."

The Ministry of Mines wouldn't answer McClatchy's questions, either in person or by telephone. The ministry has begun an investigation into the affair, according to a person with direct knowledge, who asked not to be further identified to avoid retaliation.

Four people with direct knowledge said that AIC won the leases because of its top officers' political connections. Their aim, these people said, was to secure control of one of Afghanistan's key national assets and either sell the leases for a profit or entice a major multinational into a joint venture.

"It was such a bad deal," said a Ministry of Mines adviser who requested anonymity to avoid retaliation. "It was just wrong, wrong, wrong. Everyone was complicit. It's tragic. It was a sham."

"They are just thieves. They got this mine and cement factory through deception," charged Rasoul Khan, chairman of Baghlan's provincial council and an AIC critic. "They are doing the same with the coal mine and the cement factory as they did with Kabul Bank."

Mahmoud Karzai launched his quest for Ghori and Karkar on Sept. 26, 2005, in a meeting in Dubai at which he and more than 80 other Afghan businessmen agreed to kick in $500,000 each to capitalize AIC. The goal, the Afghan Embassy in Washington said in a press release, was to help "resurrect the Afghan economy" and create jobs by stimulating the investment of more than $100 million in coal mining and cement.

They acted three months before experts of Box International Consulting, of Richardson, Texas, had even visited the site to determine the feasibility and costs of modernizing the cement plant, under a study financed by the U.S. Trade and Development Agency.

By February 2006, when AIC was formally established in Kabul's diplomatic enclave of Wazir Akbar Khan, many of the original investors had bailed out, Mahmoud Karzai said. The 34 who remained included Farnood, Mahmoud Karzai and Abdul Qasim Fahim.

The ministry adviser and the first person with direct knowledge said that Karzai and other AIC shareholders began lobbying senior Ministry of Mines officials for the Ghori and Karkar leases. Then-minister Mir Mohammad Sediq rebuffed their overtures.

"We didn't know, because Box hadn't finished the report, what was in the best interests of the government of Afghanistan and the people of Afghanistan," said the person with direct knowledge. "They (AIC) knew it (Ghori) was a relatively important asset. They simply wanted to get their hands on it."

In March, "an emissary" from President Karzai arrived at the ministry and told Sediq that he was being fired, this person said.

In April, President Karzai named Sediq's deputy, Mohammad Ibrahim Adel, a Soviet-trained mining engineer, as his replacement.

Within days, Adel decided to award the leases for Ghori and Karkar to AIC in response to what the Box report called "an unsolicited proposal." It was approved after an hour's review, not the 15 days required, according to a witness, who asked to remain anonymous to avoid retaliation.

The proposal mirrored Box's recommendations, three knowledgeable people said, because someone apparently was leaking to AIC the details of Box's periodic interim reports. But there was one crucial difference with the AIC plan: the financing.

AIC was capitalized for $45 million: $22.25 million in cash and $22.25 million in Bank loans, Mahmoud Karzai said.

But the final Box report in August 2006 estimated the Ghori project's costs at around $570 million. It recommended the renovation of two kilns at Ghori I, completion of a two-kiln unit at Ghori II and construction of a modern Ghori III unit and a new coal-fired 25-megawatt generating plant.

The successful bidder, the study said, would have to "invest a minimum of 50 percent of the costs of the project" and secure the rest of the funds from the World Bank or another international lender.

As soon as it became known that Mahmoud Karzai would get the nod, interest from the other possible investors "evaporated considerably" and further talks began to look "pointless," the Box study said.

The Box study, which examined the AIC proposal and those of four other companies, warned that Mahmoud Karzai had "declined to provide specifics evidencing the financial capacity of the individual members of AIC."

AIC met a requirement for a $25 million bond with boxes of cash, unloaded from a truck at the ministry's headquarters, the anonymous witness said.

The day after winning the leases, the ministry adviser said, AIC sought a World Bank loan for $140 million — the precise amount AIC's lease pledged as investment in the cement plant. The loan request was turned down.

Adel, the mines minister, was fired last year amid charges that he accepted some $30 million in bribes in return for awarding a $3 billion copper mining contract to a state-run Chinese firm, which he denied.

When McClatchy visited last month, only one of Ghori I's kilns was working, producing about 200 metric tons of cement daily, far less than the 5,000 that AIC planned. Ghori II is complete, but it isn't operating because the mines aren't producing enough coal, Mahmoud Karzai said, adding that he expects the plant to begin operating early next year.

Construction of Ghori III and the power plant hasn't begun.

"The investors didn't know anything," said Abdul Karim Farokh, the plant's engineer, in an interview. "The should have first asked me."

As Farokh spoke in his office, an aide interrupted to say that a letter had arrived from the Hezb Islami insurgent group demanding 20,000 Afghanis, or $440, a week or it would shut down the nearby quarry that supplies gypsum, a critical ingredient in cement.

"If we can't get gypsum, then we can't produce cement," said Humayan Ali, the plant's technology manager. "If we stop, we can't pay our workers. And then they can't eat."

(McClatchy special correspondent Hashim Shukoor in Kabul, Afghanistan, contributed to this article.)

Read more: http://www.mcclatchydc.com/2010/11/14/103393/afghan-business-model-connections.html#ixzz15ESRXQc0

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Story Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay, coming to you from the McClatchy offices in Washington. Jonathan Landay, award-winning journalist with McClatchy newspapers, has recently returned from Afghanistan with an investigative report on a cement factory and a mine in northern Afghanistan. It’s also a picture of alleged corruption and perhaps an example of why reconstruction in Afghanistan is not going very fast. Here’s an excerpt of what he wrote—and you can see the whole article down here below the player. "Shovel-wielding miners in rags and plastic shoes, some with the protruding ribs and work-ravaged pallor of labor camp prisoners, toil deep inside this remote northern mountain, harvesting coal for some of the country’s most powerful businessmen. . . . [T]he Ghori Cement Factory and the nearby Karkar Coal Mine have become symbols of the corruption, nepotism and mismanagement that pervade President Hamid Karzai’s government, hobble the US effort to rebuild Afghanistan, and fuel the Taliban-led insurgency. . . . Nearly five years later, Ghori is churning out less than 1/25 the cement that AIC [Afghan Investment Company] pledged to produce. Karkar is a devastated sprawl of dust-blown wreckage and neglect where workers fear that their next shift could be their last. ‘All they gave us were oily promises,’ said Gul, 35, who asked that his last name be withheld, after emerging from Karkar’s fetid tunnel, his face, torn pants and bare, concave chest encrusted with coal dust. ‘We are never sure if we will come out alive. It is our choice to go in, but it’s up to Allah if we come out.’" Now joining us to talk about his experience and findings in Afghanistan is Jonathan Landay. Thanks for joining us.

JONATHAN S. LANDAY, JOURNALIST, MCCLATCHY NEWSPAPERS: My pleasure.

JAY: So tell us first of all who owns this mine and the cement factory, and what’s going on there.

LANDAY: Well, this was the reason why I decided to go and look at this cement factory, the Ghori Cement Factory, the only working cement factory in Afghanistan, making it a strategic industrial asset, potentially, in a country where there’s massive reconstruction going on, massive construction projects, a lot of it driven by the American military. And the reason that I looked at it also was because of the owners, or at least the people who operate the mine. One of them, the company that operates the mine, is owned—or led by, I should say, Mahmood Karzai, who is one of the brothers of the president of Afghanistan, Hamid Karzai. And his top partner in what’s known as the Afghan Investment Company is a man by the name of Abdul Hussein Fahim, and his brother is Karzai’s first vice president. These men are partners with another man who used to be part of this company, a man by the name of Sherkhan Farnood, in the Kabul Bank. The Kabul Bank is the country’s largest private financial institution. It was taken over in February by the Afghan central bank because of questionable business deals, including the purchase of high-priced properties in Dubai, in the Gulf. And that’s why I decided to go and take a look at their ownership—or let me say their control of this mine and the cement factory that the coal from the mine is used to power.

JAY: So this used to be owned by the Ministry of Mines.

LANDAY: It still is.

JAY: And they lease it.

LANDAY: They leased it to the Afghan Investment Company.

JAY: And the reason is is private operators are going to bring in private capital, and the private forces are going to create all new productivity. And what happened?

LANDAY: This is one of the main initiatives that was taken under the US-backed privatization effort in Afghanistan that began in something like ’05, ’06. This was one of the main projects. This was supposed to—at least at the time, according to the announcement that was made at the time, supposed to be heralding a new era in private investment in Afghanistan. And the men who organized the Afghan investment company—Mr. Karzai, Mr. Fahim, and Mr. Farnood—were talking about somewhere on the order of $100 million capitalization of their company, that it could go as high as $500 million in capitalization. That never happened.

JAY: And so what did they actually put into this mine and cement factory? The way you describe it in your piece is not much.

LANDAY: Well, the fact is that, as I said, that this is the only working cement factory in all of Afghanistan.

JAY: As you point out in your article, a country that doesn’t have a heck of a lot of trees for building, so cement’s a critical issue.

LANDAY: It is the main component used in construction. And when you consider that they have an estimated need this year for almost 4,000,000 tons of cement, I mean, this is a potential strategic resource. The problem being is that when AIC actually capitalized—.

JAY: AIC being the company Afghan Investment Company.

LANDAY: Being the company that got the leases, 49-year leases, on both the cement plant and the mine, they only had $22.25 million in cash. And they also had a similar amount in loans from the bank that these three men were partners in, coming to $45 million. The fact is, however, that there was an American-funded feasibility study looking at how do you recondition this cement factory, because the cement factory is—it’s Soviet era technology. It’s 50 years old. It’s not in very good shape. It needs to be modernized and it needs to be expanded. And this American government-funded study said that in order for them to do that, they needed at least $570 million—more than half a billion dollars. And the study said that whoever it was that got that lease should have at least half that amount ready to go and invest in the cement plant. Well, the Afghan investment company got the lease, even though it had only $22.25 million in cash.

JAY: And some good connections.

LANDAY: Very good connections.

JAY: So are there people in Afghanistan saying this contract should be broken? I mean, clearly they haven’t lived up to their end of it. So are they talking now about that this should be voided and that the government should get the capital and directly do this? I think you point out in your article, with the flooding in Pakistan, so much cement was coming from Pakistan, there’s even more urgent need for this cement factory to actually be producing.

LANDAY: Absolutely. Well, they only have one of the two existing units that have been working in operation. Now, there’s a second unit in this factory that had been semi-completed that Afghan Investment Company completed the construction of, but that’s not working. And then they were supposed to build a third state-of-the-art production unit. They haven’t even begun construction of that. That was supposed to be completed last year. They were also supposed to build a 25 megawatt power plant to run the new units. They haven’t even broken ground for that, either.

JAY: So it’s pretty clear, when you talk to Afghans, that one of the big reasons people are either supporting the Taliban or are ambivalent about who to support is ’cause there’s so much corruption on the side of the government, both in terms of the drug trade and examples of this kind of corruption—I should say alleged corruption. What does this mean for the whole US policy in Afghanistan?

LANDAY: Well, when you have this kind of thing going on, it’s— it naturally undermines what the United States has been trying to do in Afghanistan. Among other things, one of the main pillars of the United States-led counterinsurgency strategy is reconstruction, is rebuilding the country, and in particular, you know, building things like police stations, military barracks. They need places to put all of the new Afghan security forces that they’re training and churning out as part of their policy, but also new roads, new water systems, new hydroelectric facilities. I mean, this is a country that was devastated by more than three decades of war, and they need this basic infrastructure to have a chance to make it, to be able to—for the government to be able to say to its people, look what we are doing; and for the Americans to be able to say, we’re supporting the Afghan people, you need to be on our side, not the side of the Taliban.

JAY: But the other pillar of US policy was bringing back into power all these—many of whom were actually war criminals—warlords who have now become big drug lords. Can there be any solution here as long as the US keeps their alliance with these warlords?

LANDAY: Well, there’s nothing much the Americans can do, because the Americans brought, quote-unquote—the Americans, I should say, and its allies brought, quote-unquote, "democracy", a democratic system, to Afghanistan.

JAY: Quote-unquote.

LANDAY: They’ve had elections. They just had their second parliamentary elections. Unfortunately, most of the people who won—a lot of the people who won are these suspected drug smugglers and war criminals who have been a major problem in Afghanistan. Last year they had a presidential election. Both of these elections, by the way, [were] hugely flawed, hugely rigged, and that is another source of huge discontent among ordinary Afghans. So you now have this power elite that’s entrenched. And this is not a very savory crew, for the most part. And it’s this kind of political system that makes this kind of questionable deal possible in Afghanistan. And it all combines to undermine any chance for the United States counterinsurgency strategy to succeed.

JAY: And perhaps even more importantly, undermines any chance of the Afghan people having some real democracy.

LANDAY: That’s right. And I have to say that in the province where these facilities are located, in Baghlan province, which is a hugely strategic province, a couple of years ago there was virtually no Taliban presence in the north. Last year I went to Baghlan province to begin reporting on this story, and also to begin—to look at the security situation. I was able to drive halfway up the province, and you could drive through the province to other parts of the north, many parts the north. This year, I had to stop in the southern part of the province, because the roads out of the southern part of the province are now very insecure because the Taliban have expanded all the way down to the southern part of Baghlan province. And these two roads, I should say – it’s very important -, the two main roads in the province, are now the two main northern supply routes for the US-led military force in Afghanistan. So it’s a fairly serious situation.

JAY: Thanks very much for joining us.

LANDAY: My pleasure.

JAY: And I urge you to read Jonathan’s piece. It’s called Afghan business model connections matter most ["Factory, coal mine show connections matter most in Afghan business"]. And thank you for joining us on The Real News Network.

End of Transcript

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