AFGHANISTAN INVESTMENT COMPANY CLOSING IN ON FIRST

UNCLAS SECTION 01 OF 02 KABUL 000745

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
USTDA FOR DSTEIN, SGREENIP

SENSITIVE
SIPDIS

E.O.12958: N/A
TAGS: ECON ETRD EFIN PREL OPIC EAID PGOV AF
SUBJECT: AFGHANISTAN INVESTMENT COMPANY CLOSING IN ON FIRST
PROJECT

REF: KABUL 006232


1. (SBU) Summary: The Afghanistan Investment Company (AIC,)
founded in October 2005 by 50 of Afghanistans and the
Afghan Diasporas wealthiest businessmen, is closing in on
its first venture: a Greenfield cement plant in Puli
i
Khumri, Baghlan province. According to Mahmood Karzai, the
GOA Presidents older brother and lead negotiator for the
AIC, discussions with the GOA on this project has been a
nightmare, as procedures for investment in this sector
(restricted by the Private Investment Law) are ill-defined.
The AICs experience bodes poorly for other investors. End
Summary.


2. (U) The AIC was founded in October 2005 by a group of
businessmen from both Afghanistan and the Afghan Diaspora.
The company, headquartered in Dubai, announced its
formation and intent to invest in major infrastructure
projects in Afghanistan during the U.S. Afghan Business
Matchmaking Conference, organized by the Afghan American
Chamber of Commerce (AACC) October 2-4 in Washington, D.C.


3. (SBU) Econoff recently met with Mahmood Karzai, brother
of GOA President Hamid Karzai, owner of a string of
Helmand restaurants in the U.S., Chairman of the AACC and
one of the AICs founding members. Karzai reported that
d that
the AIC now has 50 members, each of whom has invested equal
USD 500,000 shares in the company, bringing the total value
of the fund to USD 25 million. While a complete list of
the investors is not publicly available, Karzai stated that
the group includes prominent businessmen such as Habib
Gulzar, owner of the bottling facility licensed by Coca-
Cola, Farid Maqsudi of the Afghanistan Reconstruction
Company, Farnood Sherkhan of Kabul Bank and Rahim Safi of
Safi Industries. At least ten AIC investors are U.S.
citizens.


4. (SBU) Karzai reported that the AICs first project will
be a USD 250 million investment in a Greenfield cement
plant at Puli Khumri in Baghlan province. (Note: Two
moribund state-owned cement manufacturing plants are
located at this site. End note.) The AIC has already
formed and registered a local company called the
Afghanistan Cement Company for the purposes of this
project. A site has been identified which the AIC plans to
lease from the GOA for a 49-year term. Negotiations on
other aspects of the deal are still underway. The price at
which the AIC will purchase raw materials from nearby
state-owned limestone quarries is particularly contentious.
The GOA has reportedly asked for USD 8 per metric ton of
limestone. Karzai called this price crazy, claiming that
Pakistani plants purchase limestone at just 5 rupees
(approx. 8 US cents) per metric ton. Karzai stated that
the AIC was attempting to negotiate contract language
stating that the GOA will set prices for raw materials
commensurate with those of neighboring countries.


5. (SBU) Karzai stated that the AIC has already found a
potential financier for this project, the ExIm Bank of
China. According to Karzai, China ExIm will finance up to
85 percent of the project if the Afghan Cement Company
purchases Chinese equipment. However, the bank is seeking
a GOA loan guarantee for the transaction. Karzai has been
en
unsuccessful in convincing the GOA to provide such a
guarantee. (Comment: We seriously doubt that one will be

KABUL 00000745 002 OF 002


forthcoming as the GOA is constrained by its own zero
overdraft budget policy and by IMF oversight. End
comment.) The AIC is seeking additional investors for the
remaining USD 37.5 million. According to Karzai, both the
Asian Development Bank and the Afghan International Bank
have expressed interest in supporting this project.


6. (U) The plant will be capable of producing three million
metric tons of cement per year. According to Karzai, this
is enough to satisfy all of domestic consumption. The AIC
hopes to begin production in 2009. (Note: A USTDA-funded
feasibility study conducted by Box International Consulting
has found that a Greenfield plant in the Puli Khumri area
would be competitive, but only for the North-Central
Afghanistan market where imports from Iran, Pakistan and
Turkmenistan incur higher transportation costs. End note.)




7. (U) Karzai clearly has great expectations for the AIC,
making reference to possible plans for the company to go
public in the future. He stated that the AIC is
simultaneously pursuing a USD 8 million investment in a GOA
owned coal mine, but was hesitant to discuss the details.
A fertilizer plant project is also under consideration.


8. (SBU) COMMENT: While the formation of the AIC is a
promising step for the development of private sector
investment in Afghanistan, the process through which the
company is negotiating its contract with and permits from
the GoA is worrisome. Under the recently passed Private
Investment Law (reftel),investment in sectors such as
cement, coal and fertilizer are considered on a case-by-
case basis by a sub-cabinet committee of economic
ministers. Karzai has taken the lead in negotiating the
AICs project and, while his status has undoubtedly proved
useful in cutting a deal with the GOA, he characterized the
process as a nightmare. The absence of clearly
ly
established procedures for obtaining approval for this type
of investment has necessitated scores of signatures and
meetings with recalcitrant GOA officials to convince them
of the merits of the project. While Karzai claims to have
steered clear of corruption, other investors without his
family connections would likely not be as successful. This
bodes poorly for the future of private investment in
sectors covered by these special procedures under the
Private Investment Law. Post will press the GOA to
establish clear rules of the game for investment in these
sectors as soon as possible. End comment.

NEUMANN
N