Afghanistan is sitting on mineral resources worth an estimated $900bn. It also constitutes one of the world’s largest unexplored copper and iron reserves. Tapping into Afghanistan’s vast extractives potential is a huge opportunity for economic self-sufficiency and employment generation. So far, Afghanistan’s extractives sector has achieved neither.
For Afghanistan to capture the benefits of its mineral wealth, while managing social and environmental risks, two core areas must be tackled: the sector’s attractiveness as an investment destination and the ability of the government of the Islamic Republic of Afghanistan (Giroa) to govern the sector. The latest minerals law makes an important step forward in both of these areas.
The new minerals law
Legislation governing the minerals sector in Afghanistan has previously been ineffective in ensuring investment. Investors showed little interest in the minerals sector as the law contained vague and problematic provisions relating to security of tenure and an uncertain contract-by-contract fiscal regime.
Adam Smith International has been helping the Ministry of Mines and Petroleum to draft a new minerals law and in August 2014 this was signed by the president. Its implementation will see a shift towards improved sector governance and greater investor confidence. Large mineral contracts, such as Hajigak (iron ore), Balkhab (copper), Badakhashan (gold), Shaida (copper) and Zarkashan (copper-gold), which have been waiting for the new law, are a step closer to being signed. The new legislation will encourage business and, most importantly, support domestic growth.
Key improvements that have been legislated include:
• Clarity on the types of mineral licenses, authorisations and what can be tendered
• The provision for joint bidding of Exploration and Exploitation (extraction) licenses
• Inclusion of a new provision for Community Development Agreements to be signed between the investor and the local community around sites of mining operation
• Clearer provisions on health, safety and environmental protection
• Increased transparency, with the requirement for non-confidential information on awarded contracts to be published
Although the law is a substantial improvement on previous legislation, limitations remain. One of the barriers to the development of Afghanistan’s natural resources is the prohibition of sale, transfer or mortgage of mineral rights. This presents a strong disincentive to risk tolerant exploration companies who would normally prove a resource through exploration activities and then sell part or the entire asset to a larger company who would then develop the mine site and manage the extraction process.
Despite this, the law marks a major step forward in the responsible development of Afghanistan’s extractive industries and in the Giroa’s transformation from an owner-operator of state-owned assets to a policymaker, regulator and investment facilitator.
The size and concentration of Afghanistan’s natural resources and its position as one of the world’s last unexplored frontiers could be a huge opportunity for domestic revenue and self-sustainability. The enactment of the new minerals law is an important step towards this, but the next challenge is to ensure timely and vigorous implementation.
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