Identifier
Created
Classification
Origin
06KABUL623
2006-02-12 13:26:00
UNCLASSIFIED
Embassy Kabul
Cable title:  

NEW INVESTMENT LAW DRAWS BOTH PRAISE AND CONCERN

Tags:  ECON ETRD EFIN PREL EAID PGOV AF OPIC 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 KABUL 000623 

SIPDIS

DEPARTMENT FOR SA/FO, SA/A, EB
TREASURY FOR PARAMESWARAN
NSC FOR AHARRIMAN, KAMEND
CJTF-76 FOR POLAD, CENTCOM FOR CG CFC-A
COMMERCE FOR AADLER

E.O.12958: N/A
TAGS: ECON ETRD EFIN PREL EAID PGOV AF OPIC
SUBJECT: NEW INVESTMENT LAW DRAWS BOTH PRAISE AND CONCERN

REF: KABUL 000497

-------
Summary
-------

UNCLAS SECTION 01 OF 03 KABUL 000623

SIPDIS

DEPARTMENT FOR SA/FO, SA/A, EB
TREASURY FOR PARAMESWARAN
NSC FOR AHARRIMAN, KAMEND
CJTF-76 FOR POLAD, CENTCOM FOR CG CFC-A
COMMERCE FOR AADLER

E.O.12958: N/A
TAGS: ECON ETRD EFIN PREL EAID PGOV AF OPIC
SUBJECT: NEW INVESTMENT LAW DRAWS BOTH PRAISE AND CONCERN

REF: KABUL 000497

--------------
Summary
--------------


1. (SBU) A new investment law, quietly signed by the
President just before the new Parliament convened, has
elicited both praise and concern among the international
and Afghan business community. The new law, while offering
more favorable conditions in areas such as the leasing of
real estate and duty-free export of goods manufactured in
Afghanistan, also excludes permanent private sector
representation on the High Commission for Investment,
leaves open the possibility of the establishment of a
minimum threshold value for investment, and includes
language that may foster corruption in the consideration of
proposals in sensitive sectors such as mining and
hydrocarbons. End summary.


2. (U) The Government of Afghanistan passed a new
investment law in early December, squeezing it in just
before the new Parliament sat on December 19, after which
laws could no longer be passed by decree. This law
replaces the 2003 Law on Domestic and Private Investment,
which was considered emergency legislation.


3. (SBU) Donors and GOA officials have long agreed that a
more comprehensive law was needed. In the last year,
multiple drafts have circulated for comment among the
donors. The GOA had been under pressure to pass several
l
pieces of key economic and commercial legislation before
Parliament convened and the legislative process slowed as
members got their bearings. Minister of Commerce Arsalas
announcement of the laws passage during the December 4
Trade and Investment Framework Agreement talks took us by
surprise, as the lead-up to passage was unusually quiet.
(Note: In the past, a hurried circulation of a final or
near-final draft of a key piece of legislation provided
donors a final opportunity to comment. End note.) The law
was passed in Dari and Pashto only and an official English

translation is still not available.

--------------
Similarities
--------------


4. (U) As in the old law, the new legislation allows both
foreign and domestic investors to make investments,
establish joint ventures or sole ownership enterprises,
freely transfer profits abroad and freely sell or divest
their enterprise. It also continues to allow for the
expropriation of the assets of an enterprise by the State
e
for the purpose of public interest and on a non-
discriminatory basis.

--------------
And Differences
--------------


5. (U) Differences are as follows:

--The composition of the High Commission on Investment has
been altered. It now includes the Governor of the Da
Afghanistan (Central) Bank (DAB,) as well as the Minister
of Agriculture. Previously, representatives of the private
sector were allocated two seats; the new law does not allow
for permanent representation, specifying that the
Commission is authorized to invite representation from the
private sector to provide consultation and commentwhen and
if desired.

--More detailed rights and responsibilities have been
allocated to the Commission, including the right to
establish a threshold value for initial capital investment
(for both foreign and domestic investors) and the ability
to authorize the Afghan Investment Support Agency (AISA) to
register businesses that fall below this threshold value.
.
While the text in the old law refers to the Commission as
the focal point for policymaking, the new law identifies
it as the highest governing authority in policy-making on
investment.

--Areas in which foreign investment can be limited by the
GOA or restricted by special legislation have been
expanded. These areas now include: non-banking finance
activities, insurance activities, infrastructure (defined
as power generation or transmission, water delivery or
treatment, sewage, waste-treatment, airport,
telecommunications, health and education facilities) and
natural resources (oil, gas, minerals, metals and forests.)

--Individuals or companies interested in investing in the
above sectors may, however, submit a proposal for
consideration on a case-by-case basis by the Commission and
relevant Ministries. Such investment may be subject to
conditions that are more restrictive than outlined in the
Law. This provision does not apply to existing investment.

.

--The responsibilities of AISA have been spelled out
clearly. According to the Law, AISA has the responsibility
to establish procedures for the submission, review and
registration of applications for foreign and domestic
investment, to review the applications, to register the
enterprises and monitor them, to promote and attract
foreign investment in Afghanistan and to ensure compliance
with the Law.

--An ad-hoc reporting requirement, previously only
sporadically enforced by AISA, is now required. Registered
enterprises must immediately notify AISA if there have been
any changes in ownership or capital structure and file an
Annual Update (a form which currently includes capital
invested, number of employees, profits and losses, etc.)
Enterprises that do not comply risk losing their licenses.

--Income tax concessions for loss carry forward and an
accelerated deduction for deprecation on capital assets, as
allowed for in the Income Tax Law, have been included.
Exemption from export duties for goods manufactured in
Afghanistan has been expanded indefinitely; under the
previous law, this exemption covered companies for only
four years from the date of first manufacture.

--A foreign enterprise may lease real estate up for to 50
years, instead of the 30 allowed under the previous law.

--Investors are entitled to expanded options for dispute
resolution. The previous law allowed for dispute
resolution in accordance with the United Nations Commission
on International Trade and Laws rules or through the
International Center for Settlement of Investment Disputes.
The new law also permits an investor to specify a
particular arbitration or dispute resolution procedure in a
contract or agreement, including specifying that
arbitration may take place outside of Afghanistan and that
a law of jurisdiction other than Afghanistans may apply.

--The law allows for expropriation only for the purposes of
public interest, as in the previous law, but expands upon
n
compensation provided for such appropriation, as well as
methods of disputing the expropriation.

--------------
COMMENT
--------------


6. (SBU) The new legislation has been met with mixed
reactions from both foreign and Afghan businesses and is
viewed by some as seriously flawed in several key areas.
The language on threshold value for investment is open-
ended, allowing the Commission to decide at a later date
whether or not it wishes to establish such a value, as well
as the mechanism for approval of investment both above and
below the value. Several donors had recommended that this
language be excised from earlier drafts. The exclusion of
the private sector from permanent representation on the
High Commission for Investment is troubling; previously,
representatives enjoyed two rotating seats. The private
sector has few formalized avenues of communication with the
government on matters that impact its development and its
exclusion from the Commission will exacerbate this problem.
The inclusion of the DAB on the Commission is unusual; the
participation of Governor of an independent central bank
could create a conflict of interest.


7. (SBU) The formalization of AISAs duties is a positive
milestone in the development of a very effective
organization. The language regarding the duties and
responsibilities of the Commission, meanwhile, is vague.
Offering expanded options for dispute resolution is a
progressive step. However, it is likely that only
investors seeking very large damages would exercise the
option to seek dispute resolution outside of the country.
This mechanism does not mitigate the urgent need to reform
the largely-defunct commercial court system. The
reaffirmation of certain income tax concessions has been
received positively, as have been the expanded terms for
the lease of real estate and export duties on goods
manufactured in Afghanistan. The new law, however, fails
to clarify language allowing for expropriation of assets by
the State for the purposes of the public interest, which
could serve as a significant deterrent to investors, both
foreign and domestic. Additionally it does not address how
fair-market value will be determined in the case of such
an expropriation.


8. (SBU) Perhaps of most concern is the language regarding
restricted areas of investment. This language is not in
accordance with WTO investment guidelines and will
ultimately need to be revised as part of the GOAs
accession bid. It is also very broad and could create a
high degree of uncertainty for potential investors. Some
experts warn that the process of vetting these proposals
through a mini-cabinet, under guidelines that are vaguely
defined, opens to the door for corruption. Reftel reports
that this may already be occurring. Post has and will
continue to advocate for transparent regulations and
processes for investment in all areas that will be
consistent with international best practices.

NEUMANN



N