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Tapping the Private Sector
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Installing a mobile phone network in Afghanistan is no small matter. Planners face high mountains, deserts, land mines, a shortage of power, and villages that have few buildings left fully intact on which engineers can stand their transmission towers.
Even where buildings still stand, cultural issues can scuttle painstaking effort if not well handled. In one village, tempers flared and angry men reached for their guns after townspeople agreed to install a tower but grew suspicious that, during maintenance, it would be used to look into their compounds at their female family members. A deal was hastily brokered allowing for more discreet timing of tower inspections, respecting village sensitivities.
Despite the difficulties, however, a mobile phone network is rising quickly, just one of several high-profile projects under way in Afghanistan with support from the Asian Development Bank (ADB)’s private-sector arm.
ADB investments in a new commercial bank, an investment fund to help small- and medium-sized enterprises, and an investment guarantee facility attest to the growing, although embryonic, importance of the private sector in the overall effort to rebuild and establish the basic infrastructure needed for Afghanistan’s economic recovery.
Work on the mobile phone network well illustrates the point. The country’s main private telecommunications provider, Roshan, is scrambling to meet huge demand from Afghans eager for effective and essential telecommunications services. Before the mobile phone network came along, this country of nearly 24 million had to make do with just 25,000 fixed telephone lines left after the war, most of which were malfunctioning. Those who could afford them resorted to horribly expensive satellite phones, while others would travel to Pakistan just to make a phone call.
ADB signed an agreement with the company in April 2005 for a loan of $35 million. So spectacular has been the demand for Roshan’s services, however, that it has already drawn the full loan, says Michael Barrow, an ADB principal struc- tured finance specialist. The company is rushing to keep up by expanding its network into ever more remote parts of the country. Every one of its own subscriber forecasts, planned for months ahead, is met well ahead of target.
“Our agreement with Roshan is one of the first and probably the largest of its kind to be made to a privately owned enterprise in Afghanistan in almost 30 years. It will strongly support the reconstruction effort and economic development,” says Mr. Barrow.
Roshan is owned by the Aga Khan Fund for Economic Development and Monaco Telecom International, which is majority owned by Cable and Wireless PLC of the UK, and by US-based MCT Corporation. It started operations in July 2003, and in slightly more than 2 years has already signed up more than 600,000 subscribers. It began in just six cities, and then focused on expansion along Afghanistan’s ring road, the backbone of its road network.
The mobile phone network is filling a communications void created by a quarter century of war and misrule that tore up Afghanistan’s road system, left it with no functioning postal system, and literacy rates among the lowest in the world. Scattered around the world by war, Afghanistan’s huge diaspora population adds to the need for effective telecommunications as it looks to keep in touch with distant relatives.
Indeed, because so many Afghans can neither read nor write, voice telephony accounts for the bulk of Roshan services, with little demand for texting. For the same reason, the company has put together a customer support center that can serve the huge volume of calls from customers unable to read their manuals.
Mr. Barrow points out that this is the second major intervention ADB has made in the Asian telecoms sector. The first was with Grameen Phone where, with financial assistance from ADB, a hugely popular system of “village telephones” was set up to help bring modern telecommunications to poor Bangladeshis.
Under the program, Grameen Telecom leases a mobile telephone to a villager, who is trained in its operation, especially the timing, charging, and recording of calls. Grameen Telecom collects weekly lease payments and call charges, while a margin is allowed on each call to provide the operator with his/her profit.
The program heralded a revolution in telecommunications for the rural poor, lauded around the globe for its simple approach to improving lives and reducing poverty.
Roshan is looking at similar initiatives in Afghanistan, including a wide network of public call offices, bringing phone services to those unable to afford their own handsets.
ADB is also investing in efforts to revive Afghanistan’s moribund financial sector, perhaps most prominently through a project to create one of the country’s first local private financial institutions. The Afghanistan International Bank (AIB) was established in October 2003 with committed capital of $10 million, and officially inaugurated in July 2004 ( see story, p. 27).
AIB operates primarily as a wholesale commercial bank and targets local and foreign companies as its main clients as well as international organizations, embassies, foreign military organizations, and Afghan government institutions. It is also one of the most active small- and medium-sized enterprise lenders in the market.
“It was critical to establish this bank— it lays one of the building blocks for a functioning and diversified financial sector. A vibrant and active private sector is needed to generate jobs and support long-term economic growth,” says Veronica John, a senior structured finance specialist in ADB’s private sector division. A solid financial sector must be in place early on in a country’s rebirth if its economy and private sector are to thrive.
To this day, and for lack of trust of what has survived of the old banking system, Afghans rely heavily on Hawala networks for many of their financial needs. Hawala is an ancient system for money transfer and other financial transactions once common on trade routes along the Silk Road, in the Middle East, and in Africa. It relies on an honor system of payment, and commissions for profit. It is paperless and cash-based, and does not comply with modern banking and accounting practices. Hawala can function where legal institutions are defunct or rudimentary. Even now in Afghanistan, it competes with efforts at establishing the banking system, says Ms. John.
Alongside the ancient, nonetheless, a modern banking sector has been growing steadily, helped by the establishment of a banking law two years ago. Under it, the central bank, Da Afghanistan Bank, tightened up standards for entry and operation for all financial sector players.
Three of six state-owned banks—Milli Bank, Pashtani Bank, and Export Promotion Bank—have been provisionally relicensed while regulators assess their operability. Among foreign banks, Standard Chartered Bank is perhaps best known in a field that also includes Punjab National Bank of India, National Bank of Pakistan, and Habib Bank Ltd.
The AIB is among the newly minted Afghan banks, a group that also counts First Micro Finance Bank (owned by the Agha Khan Development Network), Kabul Bank, and Aryan Bank.
In May 2004, ADB’s Board of Directors approved an investment of $2.6 million for a 25% stake in AIB. The remaining 75% of AIB is owned by a group of established Afghan business professionals. AIB is being professionally managed by ING Government and Institutional Advisory Services B.V.
The organizers of the telecommunications project and ADB are hopeful that these institutions will begin to assuage potential investors’ fears toward Afghanistan. And investment looks as though it is picking up as these projects combine with steps taken by the government to present a more stable environment—institutionally, legally, and through policy.
Reliable statistics are hard to come by, however, and although the indicators suggest a sharp rise in trade and investment, it is difficult to determine how much of it has followed through. The Afghanistan Investment Support Agency, created in 2003 within the Ministry of Commerce, registered 151 new projects amounting to $435 million in just the first 6 months of its operation.
Political and security risks weigh heavily on investors’ minds, and gaps in private sector support mechanisms and in policy still exist. In answer to those concerns and to stimulate greater foreign direct investment, ADB is supporting the creation of investment risk guarantees through the Afghanistan Investment Guarantee Facility and a supplemental political risk guarantee. The facility will be funded by the Government of Afghanistan with $5 million in loans each from ADB and the International Development Association. Additionally, $10 million from ADB’s ordinary capital resources has also been allocated to support the political risk guarantee.
Investors may choose any combination of four types of risk coverage, including transfer restriction, expropriation, war and civil disturbance, and breach of contract. Political risk guarantee coverage is targeted at investment in small- and medium-sized enterprises.
The World Bank’s Multilateral Investment Guarantee Agency will administer the facility. Its own analysis showed an encouraging potential level of foreign direct investment in Afghanistan, with demand coming from sectors such as energy, telecommunications, internet services, banking, hotels, housing, food and agribusiness, textiles, steel, oil and gas, and mining.
ADB also has board approval to invest up to $5.5 million in the Afghanistan Renewal Fund, which is designed for investing in small- and medium-sized enterprises across a range of industries. The plan is for a fund of $20 million, while the investment manager can increase the amount to $40 million if demand warrants it. The Overseas Private Investment Corporation has approved an investment of $5.0 million in the form of debt financing. CDC Capital Partners, United States Agency for International Development, and a group of US investors from the private sector will invest $5.5 million, $3.8 million, and up to $1.5 million, respectively. The fund is expected to be officially launched in late 2005.
“By investing in businesses poised to capitalize on the growth potential of Afghanistan’s postconflict economy, the fund will seek to generate significant riskadjusted returns for investors,” according to an ADB summary of the fund. This will help the country establish enterprises with a professional business culture and provide much-needed backing for the government’s plans for market-led recovery.
Afghanistan’s economy is expanding rapidly, as is typical of a post-conflict country as aid pours in. Per capita gross domestic product was estimated at $228 in 2004– 2005 (excluding illegal narcotics), up from $199 in 2003–2004. The International Monetary Fund estimated growth at 15.7% in 2004–2005, and at 28.6% in 2002–2003. It expects growth rates at 15% through 2008, and 10% in the 5 years after that.
Outside the huge growth potential in construction and infrastructure, retail trade, car repair, and restaurants are thriving in some areas. Agribusiness continues to expand despite persistent drought, while strong export sectors include wool and cotton production, commercial agriculture, dried fruit, carpets, and semiprecious stones.
Poor access to capital, however, restrains many entrepreneurs. The renewal fund will go some way to addressing that shortage. “If access to capital is nonexistent, then economic growth is nonexistent,” says Ms. John.
Building investor confidence in Afghanistan is a long-term process. Many business leaders have expressed an interest in the country, but are taking a wait-and-see attitude before committing funds. Others will wait for the many infrastructure projects now under way to be completed, including the mobile telephone network, before getting involved. ADB’s support to the country’s nascent private sector, however, is helping build the engine that will drive Afghanistan’s further development.
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