Issue 08/10 AFGHANISTAN

17 November 2010

The Re-Tendering of Hajigak Mining Rights

Consolidating Lessons Learnt in Pursuit of Transparent Growth
Economic Development Knowledge Manager
steve.zyck@cimicweb.org www.cimicweb.org Steven A. Zyck

This document discusses the tendering of mining rights to one of Afghanistans largest mineral deposits, the Hajigak iron ore mine. Additional information is available at www.cimicweb.org.1 Hyperlinks to source material are highlighted in blue and underlined in the text.
TO RATE OR COMMENT ON THIS PUBLICATION, CLICK HERE Introduction: The Re-Tendering Process On 29 September 2010, Afghanistans Ministry of Mines (MoM) relaunched the tendering process for the rights to one of the countrys largest mineral concentrations, the Hajigak iron ore deposit. Once extraction begins, the Afghan government expects to receive up to USD 300 million per year in revenues from the mining operation. The launch of the tender has been celebrated in editorials published by several Afghan newspapers, which have uniformly expressed their hope that corruption will not jeopardise the potential rewards from the Hajigak deposits. The previous tender for mining rights to Hajigak which is also spelled as Hajji Gak and Haji Gak had been cancelled in February 2010 by then-newly-appointed Minister of Mines, Wahidullah Shahrani. A number of factors played a role in the cancellation of the previous tender, including the onset of the global economic crisis and the associated decline in Reuters, 2009, with modifications by the author
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commodity prices, particularly for iron ore. Business Week notes that the MoM cancelled the process given the limited interest expressed by major mining companies. Seven bidders were involved, only one of which, the China Metallurgical Group Corporation (known as MCC), visited the site in Bamian province where the mine is located (see images, below).2 Earlier reports by Business Week had provided a different explanation, linking the previous cancellation with accusations that the former Minister of Mines, Mohammad Ibrahim Adel, had accepted a multi-million-dollar bribe from China in connection with another mining contract. Replacing Minister Adel and cancelling the earlier tender for the rights to Hajigak was seen as an important step not only in combating corruption but also in ensuring that Afghanistan received the highest-possible financial offers from the most highly-qualified bidders. While promising steps have thus far been taken by the MoM, it remains important for the Afghan government and international community to learn how to better manage and oversee tender processes for Afghanistans reportedly vast mineral resources, the value of which has loosely been estimated at USD 1 trillion according to United States Geological Survey (USGS) reports summarised in the New York Times.

MoM officials and a delegation from China (left) visits Haijgak mine (right) in 2009. Ministry of Mines, 2009

A Legacy of Problematic Mining Tender Processes The countrys first significant tender, which was for the rights to the Aynak copper deposit, has been widely regarded as problematic. In a briefing paper which examines the Aynak tender and bidding process, Raymond Gilpin and Ashley Pandya of the United States Institute of Peace (USIP) noted that the Afghan government, in addition to facing deep-seated corruption, had neither the capacity nor the institutional or regulatory framework to oversee the process effectively. The USIP publication further identifies the following weaknesses in the process:

While overseen by an independent firm, the tender was considered highly opaque and centralised, thus raising suspicions that individuals involved, particularly Minister Adel, were engaged in corruption or other inappropriate activities in connection with the tender.

The other six bidders were Essar Minerals Ltd. (India), Ispat Industies Ltd. (India), JSW Steel Ltd. (India), Rashtriya Ispat Nigam Ltd. (India), Sesa Goa Ltd. (India) and Tuwairqi Steel Mills Ltd. (Pakistan/Saudi Arabia).

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Regulations governing the bidding process were difficult to access and unclear. As a result, bidders were not operating on a level playing field. Chinas state-owned MCC, which won the mining rights, was criticised for building offers of official development assistance (ODA) from the Chinese government into its bid, an unusual move which was neither authorised nor specifically prohibited by the MoMs regulations.3 The Afghan government lacked the capability to appropriately assess the qualifications and performance records of the bidders, and selection committee members had little relevant experience and were unaware of what factors to consider in selecting a firm.

Furthermore, in November 2009, the Washington Post cited US government officials as reporting that then-Minister (of Mines) Adel had accepted a cash bribe of approximately USD 30 million in exchange for awarding the Anyak contract to MCC. Minister Adel strongly denied these allegations. While the contract was awarded by a panel of 20 members, on which Minister Adel was a member, an American adviser to the panel reports that the Minister disallowed criticism of the Chinese proposal or discussion of other proposals strengths.4 The Economic Potential of a Transparent Tender for Hajigak The re-tendering of the Hajigak deposit is important to Afghanistan for a number of reasons. Extracting the iron ore would create tens of thousands of jobs for Afghans in Bamian province and elsewhere at a time when livelihoods are viewed as a powerful factor in combating violence, criminality and insurgency, according to a report by the Center for a New American Security. Furthermore, the 2009-2010 Afghan Business Survey suggests a transparent selection process may have positive implications for Afghan citizens and the private sectors confidence in the integrity and capacity of the Afghan government. Most important, however, are the economic benefits. The iron ore industry has been booming for more than a decade, according to a market update produced by the worlds largest mining company, BHP Billiton, as a result of infrastructure growth in China, India, Southeast Asia, Latin America and elsewhere. Construction requires steel, and steel requires iron ore to produce. The BHP Billiton update also indicates the market price of iron ore has consistently been on the rise (though it fell when the construction boom faded during the global economic crisis that began in 2008). Reuters reports that recent economic recovery, particularly in emerging markets, has allowed the price of iron ore to begin regaining value lost during the global economic crisis. According to the article, the Hajigak deposits are worth far more at present than they would have been
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The consideration of such contributions is increasingly questioned given the limited progress thus far made by MCC and the Chinese government in actually delivering the development projects promised in its Aynak bid. For instance, Politics Daily reported a lack of progress on major Chinese-pledged reconstruction projects, including roads, power plants and a major railway which were linked to the countrys successful Aynak mine bid. 4 Minister Adel had already been suspected of misuse of power surrounding his decision to award the state-owned Ghori cement factory to an investment group headed by President Karzais brother, Mahmoud Karzai, according to the Washington Post. This Washington Post article further describes how, during the tender process Minister Adel added an unplanned hurdle whereby bidders were required to deliver USD 25 million in cash to the MoM in order for their proposals to be considered.

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in February 2009, when the request for expression of interest in the Hajigak deposit was first issued. Finally, according to a special report in the Financial Times the mining industry has benefited from the transition in late 2008 and early 2009 from annual, fixed-price contracts for iron ore to quarterly pricing schemes which allow mining firms to adjust prices as the market value of ore fluctuates to maximise profits. This change in pricing procedures led to the recent increases in iron ores market price (see Figure 1). Figure 1. Five-Year Trend in Iron Ore Market Price, 2005-2010

Source: International Monetary Fund (IMF) data, as compiled by Index Mundi, 2010

Towards a Transparent and Profitable Tender Process Following the formal launch of the tender on 29 September, the Minister of Mines and Minister of Finance both travelled to New York in order to present the Hajigak mine to potential investors. In addition, the Minister of Mines has spoken with representatives of relevant companies, including mining giant Rio Tinto and leading steelmaker ArcelorMittal, the latter of which recently announced its intent to invest USD 4 billion in obtaining new sources of iron ore, according to Business Week. Such presentations and meetings have aimed to build the private sectors confidence in the Hajigak tender process and in the MoM. Still, further steps may also be taken. Below are a series of recommendations which have been suggested by leading experts to enhance the contracting of high-value natural resources in Afghanistan.

According to the previously discussed report by Gilpin and Pandya, clear regulations and procedures which address the weaknesses in the Aynak tender process must be developed and made freely available to all interested companies as well as to members of the international community. These regulations must particularly disallow bidders, even stateowned enterprises, from offering governmental foreign aid within their bids. Such a 4/5

prohibition did not come through clearly in recent comments made by Afghanistans Minister of Finance, who told Bloomberg that the Afghan government expected bidders to build infrastructure in order to be considered.

As noted in a recent report by the Chr. Michelsen Institute (CMI), developing Afghan technical expertise is integral in allowing the government in Kabul to develop necessary laws and provide adequate oversight of extractive industries in the country.5 Yet, as the aforementioned report from USIP suggests, it may be necessary for the international community to provide short-term technical assistance from outside of Afghanistan, particularly during the tender process and early stages of implementation, while developing a cadre of qualified and motivated Afghans over the longer term. Social responsibility in a number of forms should be encouraged, according to the USIP and CMI. Gilpin and Pandya note that compensation for seized or affected land should be provided fairly and should be addressed from the very beginning of the tender process. Furthermore, conflicts over land, employment and mining-related revenues should be resolved in a manner which strengthens local governance and social cohesion. As the USIP report notes, the National Solidarity Programme (NSP), which has established elected, development-focused community councils, might provide a ready-made mechanism for the government and mining firms to involve local communities. Finally and on a related point, CMI notes that all future natural resource management in Afghanistan should adhere to the Extractive Industries Transparency Initiative (EITI). The EITI is a coalition which promotes good governance of oil, gas and minerals to ensure that they do not contribute to poverty, conflict or corruption. The Afghan government announced its intent to join the EITI in 2009 and in early 2010 was accepted as a candidate. The countrys mining sector is obligated to become EITI-compliant by 2012, according to the EITI.

These recommendations are expected to help ensure that Afghanistans resources serve as a force for stability, accountable governance and equitable growth rather than a source of division, corruption and inequality.

For more information visit the CFCs Economic Development web portal at www.cimicweb.org.
The Civil Military Fusion Centre (CFC) is an Information and Knowledge Management organisation focused on improving civil-military interaction, facilitating information sharing and enhancing situational awareness through the web portal, CimicWeb. CFC products are developed with open-source information from governmental organisations, non-governmental organisations, international organisations, academic institutions, media sources and military organisations. By design, CFC products or links to open sourced and independently produced articles do not necessarily represent the opinions, views or official positions of any other organisation.

The CMI report, it should be noted, is focused upon hydrocarbons rather than upon metals or other natural resources. However, the reports authors were closely involved with relevant institutions such as the MoM.

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