OPIC Delegation Visits Afghanistan

UNCLAS SECTION 01 OF 03 KABUL 003184

SENSITIVE
SIPDIS

DEPT FOR SRAP, SCA/FO, SCA/RA, AND SCA/A, NEA
DEPT PASS USAID FOR AID/ANE
DEPT PASS USTR FOR DELANEY AND DEANGELIS
DEPT PASS OPIC FOR ALDONAS AND STRASSER
DEPT PASS TDA FOR STEIN AND GREENIP
USOECD FOR ENERGY ATTACHE
TREASURY FOR JCASAL, ABAUKOL, AWELLER, AND MNUGENT
COMMERCE FOR HAMROCK-MANN, DEES, AND FONOVICH

E.O. 12958: N/A
TAGS: BEXP EINV EMIN PREL AF
SUBJECT: OPIC Delegation Visits Afghanistan

SUMMARY
--------------


1. (U) An Overseas Private Investment Corporation (OPIC) delegation
-- led by Vice President of Structured Finance Robert Drumheller --
visited Kabul and Herat September 26 to October 2, 2009. While the
delegation identified potential partners in several sectors,
including mining and agri-business, they also pinpointed weaknesses
in Afghanistan's tax and commercial law, infrastructure, and the
banking sector that pose serious impediments to new investment. To
help address these issues, the delegation reviewed ongoing
OPIC-funded projects and explored new possibilities of addressing
these issues, including the expansion of small- and medium-sized
enterprise lending windows. End Summary.

AFGHAN PRIVATE SECTOR INTERESTS AND CONCERNS
--------------


2. (U) OPIC Delegation to Afghanistan:
Robert Drumheller, Vice President of Structured Finance;
Jacqueline Strasser, Deputy Chief of Staff and Acting Vice Prsident
and Chief Financial Officer;
John Aldonas, Managing Director; and
Maria Goravanchi, Special Assistant


3. (U) Afghan business leaders, in a roundtable organized and hosted
by Minister of Commerce Wahidullah, cited three major obstacles to
progress and economic growth: access to credit, access to land, and
access to energy. Minister Shahrani listed advances in addressing
each of these obsticles: an increase in the number of banks and
lending institutions, the draft secure transactions law, the
development of industrial parks, a new Afghan government initiative
to facilitate public land sales to the private sector, and the
Ministry of Water and Energy's work to develop domestic energy
sources under the Afghan National Development Strategy.


4. (U) While noting the country's reform measures and relatively
good economic performance in 2009, Minister Shahrani admitted that
serious problems exist. Despite the expanded banking sector, access
to credit is still a challenge due to the lack of credible
information about clients. Acknowledging affordable land and power
are difficult to obtain, he said the Industrial Park Authority,
operating as a corporate entity, should help alleviate some of the
problems by providing secure parcels of land with reliable
utilities.


5. (U) The focus on the private sector continued in a dinner the
Ambassador hosted, which gathered together Afghan and U.S.
businessmen from numerous sectors, including mining, food and
beverage, finance, construction, and communications. The dinner was
an opportunity for OPIC to meet with current loan recipients as well
as to make connections for potential investments and team members
reported the dinner resulted in several new contacts. One example
of those results is the possibility of negotiations with an
Afghan-American company interested in building a large cold storage
and refrigeration repair training facility in Kabul. Such a
facility would provide key infrastructure needed to expand
Afghanistan's agricultural sales and exports.


6. (U) In Afghanistan, OPIC has developed an innovative way to
invest directly in wholly-owned Afghan small and medium enterprises
(SMEs). By providing loans to finance institutions with American
shareholders who make long-term SME and agricultural loans to
Afghans, OPIC has expanded badly needed SME credit facilities. Vice
President Drumheller reported OPIC has provided a $25 million loan
to Afghan Growth Finance, LLC (AGF) for long-term loans to SMEs and
agriculture ventures and has another $30 million for AGF in the
pipeline, pending a State/USAID decision on providing $10 million of
this capital infusion. The first tranche of AGF funds has been
disbursed to Afghan clients in the food processing, construction,
information technology, and alternative energy sources sectors.
OPIC is also working with Relief International on a similar
agreement to provide financing in support of rural small businesses
just above the microfinance level, again pending a $10 million
contribution from State/USAID funding sources. In addition to these
non-traditional funding structures, OPIC has financed
infrastructure, agricultural support, and manufacturing projects,
most notably a $60 million loan for a Marriott Hotel in Kabul.

AFGHAN INVESTMENT SUPPORT AGENCY
--------------

KABUL 00003184 002 OF 003




7. (U) The delegation also met with the CEO of the Afghan Investment
Support Agency (AISA) Nooruallah Delawari. Delawari said he
appreciated OPIC's efforts to make financing available to the Afghan
business community, but he lamented local banks' high interest rates
and lack of available funds. The OPIC delegation pointed out
Afghanistan's high interest rates are partially a result of high
taxes levied on institutions' interest revenue, as opposed to gross
profits of lending. Lending institutions pass that expense onto
their customers in the form of higher interest rates. Delawari said
he would address the issue with the Central Bank. As the meeting
ended, Delawari requested OPIC train an AISA member to process OPIC
loan applications. The AISA now has people able to help complete
loan applications for other financing/donor organizations. OPIC
team members expressed interest in the idea and agreed to consider
it.

PROPOSED INVESTMENTS IN THE ENERGY SECTOR
--------------


8. (U) Over $135 million in potential Afghan energy sector
investments are in the pipeline at OPIC. The delegation visited
their smallest energy project, a renewable energy service company
requesting $2 million in working capital financing to support the
implementation of wind, solar, and hydro-power projects. OPIC has
also tentatively agreed to work with USAID to provide up to $124
million in financing for the Sheberghan Independent Power Project, a
$250 million 150 megawatt gas-fired power-plant southwest of Mazar-e
Sharif. Meeting with Deputy Minister of Water and Energy Ghulas
Farooq, Drumheller said the Sheberghan project could be structured
to appeal to the private sector and serve as a pilot project to
attract future investors. According to the Deputy Minister, the
country needs more than ten times the current energy capacity; the
need is here to support many future projects.

HERAT INVESTMENT OPPORTUNITIES
--------------


9. (U) During a three day visit to Herat, the OPIC delegation
focused on the growing marble and cashmere sectors. OPIC has an
investment in Afghanistan's largest marble quarry located outside of
Herat city and is considering a second loan for equipment upgrades.
According to the company's owner, the quarry currently employs
100-120 workers and provides indirect employment for nearly 1000
people in the area. With modern cutting equipment the mine has
increased its yield of useable extracted material from five percent
to 40-60 percent in fewer than three years. The owner also reported
Afghanistan's marble mining industry, unlike other sectors, has not
been affected by the global economic crisis. He claimed that with a
new road and bridge to the quarry site the area could support dozens
of new quarries and still not meet world demand for the high quality
product. The company is working with USAID-funded Afghanistan Small
and Medium Enterprise Development (ASMED),the Indian Embassy, and
local officials to support the road and bridge construction project.



10. (U) The OPIC delegation also looked at Herat's cashmere sector.
A $20 million loan is under review for a prominent Afghan-American
cashmere buyer to construct a vertically integrated cashmere wool
processing facility. The enterprise would build on USAID's project
to help farmers improve goat and cashmere production. The OPIC team
visited a number of cashmere hand-dehairing facilities employing
hundreds of unskilled laborers. All local cashmere suppliers
claimed the industry in Herat supports more than one hundred
thousand people and could grow exponentially were there a processing
facility in place to build the value-added supply chain: collecting,
dehairing, washing, and disinfecting the cashmere before exporting
for spinning and weaving.

GOVERNOR AND CHAMBER OF COMMERCE SPEAK OUT
--------------


11. (U) Herat Governor Yusuf Nuristani stressed the region's
potential for developing its extractive industry, agri-business, and
manufacturing sector. He claimed while there were still many
imports from Iran, Herat's industrial park, with more than 350
factories, was squeezing out Iranian trade. (Note: The Governor's
upbeat assessment differs from the Commerce Minister's view that the
Iranians unfairly disadvantage local Afghan manufacturers through
predatory pricing and alleged dumping. End note.) While security
is better in Herat than in some other provinces, Nuristani said he

KABUL 00003184 003 OF 003


had recently adopted stricter measures in the city and near the
Industrial Park. The Governor stated his support of OPIC's proposed
investments in the marble and cashmere sectors and urged the
delegation to look at other sectors such as dairy and petroleum
products. Members of the Herat Chamber of Commerce, many of whom
have interests in the cashmere sector, asked for investment and
security support from the international community. They were
adamant that such support would exponentially spur Herat's trade
growth, reducing its reliance on Iranian goods. Local state TV gave
good coverage to the OPIC visit in Herat.

OPIC'S OBSERVATIONS AND TAKEAWAYS
--------------


12. (SBU) The OPIC delegation was enthusiastic throughout their trip
as they visited projects underway and gathered information on
potential future investments. Members of the team said they
envisioned strong potential partnerships with the private sector and
USAID, but they were clear obstacles will continue to hamper
progress. Among the most noteworthy issues identified were: opaque
tax and commercial laws, banking institutions reluctant to fund
commercial loans, basic infrastructure weaknesses, and security
problems. The delegation was clear these issues must be more
effectively addressed.


13. (U) This cable was prepared subsequent to the OPIC delegation's
departure from Afghanistan.

EIKENBERRY