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Cablegate: 3rd Afghanistan Tifa Talks Positive

VZCZCXRO0185
PP RUEHIK RUEHPOD RUEHPW RUEHYG
DE RUEHBUL #2810/01 2950615
ZNR UUUUU ZZH
P 210615Z OCT 08
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 5905
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0673
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEKJCS/OSD WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUEABND/DEA HQS WASHINGTON DC
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUCNDT/USMISSION USUN NEW YORK 4431
RUEHNT/AMEMBASSY TASHKENT 6921
RUEHTA/AMEMBASSY ASTANA 0060

UNCLAS SECTION 01 OF 07 KABUL 002810

DEPT FOR SCA/FO, SCA/RA, SCA/A, and EEB/TPP
DEPT PASS AID/ANE
DEPT PASS USTR FOR DELANEY, DE ANGELIS AND GRYNIEWICZ
DEPT PASS OPIC FOR ZAHNISER
DEPT PASS TDA FOR STEIN AND GREENIP
CENTCOM FOR CG CFC-A
NSC FOR JWOOD AND CSKERRY
TREASURY FOR LMCDONALD, ABAUKOL, BDAHL, AND MNUGENT
OSD FOR MISTRETTA and SHIVERS
COMMERCE FOR DROKER, HAMROCK, AND FONOVICH

SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION.

SIPDIS

E.O. 12958 N/A
TAGS: ETRD ECON EINV EAID AF PK
SUBJECT: 3RD AFGHANISTAN TIFA TALKS POSITIVE

REF: A) KABUL 02709
B) STATE 105426
C) ISLAMABAD 3010

1. (SBU) SUMMARY: On October 8, U.S. and Government of the Islamic
Republic of Afghanistan (GIRoA) delegations led by USTR Assistant
Secretary for South Asia Michael Delaney and Minister of Commerce
and Industry (MOCI) Mohammed Amin Farhang met in Kabul for the third
round of Trade and Investment Framework Agreement (TIFA) talks.
Afghan and USG officials agreed that the GIRoA needs to aggressively
combat the corrosive effects of corruption as a key step to improve
the Afghan investment climate, revenue collection, and public
confidence in the government. The delegates discussed ways to
increase job creation, strengthen security, and expand access to
credit for small and medium enterprises. Delegates agreed on a
number of measures the GIRoA can take to improve the business
climate, including passing commercial and financial legislation;
establishing and implementing fair and transparent regulations; and
building governmental capacity to enforce standards for goods
exported to and from Afghanistan. Embassy Kabul is engaged on a
number of fronts, especially via USAID-funded programs, to support
Afghan efforts in these and other areas related to private sector
development (see para 18).

2. (SBU) Afghans welcomed the announcement that Embassy Kabul will
offer business and tourist visa services to Afghans beginning in
February 2009. Afghans described the steps they are taking to
prepare for Reconstruction Opportunity Zones (ROZs), and outlined a
proposal for Afghan Trade Facilitation Zones (TFZs) to increase the
value-added in textile and agriculture industries especially. GIRoA
reiterated its commitment to seek eventual WTO accession but noted
some opposition in parliament, the business community and the public
at large. The USG agreed to aid the GIRoA in a public education
campaign. Finally, the USG offered support to Afghanistan's efforts
to negotiate a new Transit Trade Agreement with Pakistan. END
SUMMARY.

********************************
Improving the Investment Climate
********************************

3. (SBU) Afghan officials highlighted the dramatic growth in trade
during the 2001-2007 period, with exports growing from $100 million
to $450 million (of which $4 million were exports to the U.S.), and
imports increasing from $2.5 billion to $3 billion. According to
the GIRoA, however, these official figures constituted only half of
actual trade in Afghanistan. Including "unofficial" black market
goods, they estimated that Afghan exports totaled $883 million and
imports reached $6 billion in 2007. EPAA has set ambitious export
growth targets in key sectors, hoping for exports of dried fruit to
grow from $100 million in 2008 to $1 billion in 2015, marble from
$40 million to $240 million, and carpets to $370 million during the
same period. Minister Farhang opened the meeting by noting that
total investment in Afghanistan during 2003 - August 2008 was $4.5
billion, of which $196 million was from U.S. investors. In contrast
to this optimistic figure, the Afghan Investment Support Agency
(AISA) reported a significant decline in total private investment,
from $1.2 billion in 2006 to $630 million in 2007.

4. Afghan and USG officials recognized the need to aggressively
combat the corrosive effects of corruption on Afghanistan's
investment climate, revenue collection, and public confidence in the
government. Representatives from MOCI, AISA and the Export
Promotion Agency of Afghanistan (EPAA) identified poor

KABUL 00002810 002 OF 007


infrastructure (particularly electricity), bureaucracy, capricious
fees and taxes on businesses, and a largely uneducated and unskilled
workforce as impediments to investment. Afghan and U.S. delegates
agreed that access to land also remains a major issue affecting
foreign investors in Afghanistan. The U.S. delegation noted that
lack of transparency and industry-specific information and potential
Afghan partnerships are major impediments for U.S. investors.
Additionally, both delegations agreed that corruption at police and
customs checkpoints impedes business development and commerce. EPAA
said it plans to launch a 24-hour hotline in the coming months to
assist truckers who are victims of police and customs corruption.
EPAA's objective is to ensure that mobile response units are
deployed to the scene within 20 minutes of receiving a call from a
trucker. In a telling example, USAID posited that eliminating
corrupton could quadruple Afghanistan's pomegranate exports.

5. (SBU) Delegates also discussed the relationship between the
unemployment of young men and insecurity, noting that young,
unemployed men in rural areas are vulnerable to Taliban recruitment
efforts. MOCI wants to tackle this issue by boosting economic
development and creating jobs. A USAID representative suggested
that the Afghan government first seek to cultivate current Afghan
importers as potential investors, particularly those in
agribusiness, rather than looking to foreign investors who are
unfamiliar with the environment. The Ministry of Labor (MOL) said
it wants to institute a nationwide skills development program to
address human capital concerns, but has not launhed the program
owing to lack of funding from the government and international
partners. The Afghan delegation noted that a lack of skilled Afghan
workers has necessitated the import of labor from Iran and Pakistan.
To address his need, MOL has identified 250 trades for which it
would like to provide workers with trining and equipment, but the
proposed program remains unfunded.

*********************************************
Status of Commerce and Investment Legislation
*********************************************

6. (SBU) Minister of Commerce Farhang said that since 2003, seven of
the country's proposed ten commercial bills had become law, several
by Presidential decree. Currently, the Ministry of Justice (MOJ)
plans to send the Contracts Law to Parliament by the end of March
2009. MOCI also indicated that it was working on three additional
commercial/ financial laws, but did not provide specifics. In
addition to these laws, th GIRoA indicated that it had also drafted
witout outside assistance anti-hoarding, anti-monopoly,
transportation, and Afghan Chamber of ommerce laws. Legal
amendments to enable Afgan implementation of Reconstruction
Opportunity Zones (ROZ) have been drafted, which the GIRoA has sent
to Embassy Kabul for information. The USG delegation urged a more
vigorous and unified effort to pass these commercial laws and other
laws affecting economic activity such as laws on mortgages, secure
transaction of moveable property, and negotiated instruments, even
if these laws are not under the purview of MOCI. MOCI officials
said they have an excellent working relationship with MOJ and that
Parliament has asked MOJ to make the commercial laws a priority.
MOCI also reported that the Contracts Law has been held up at MOJ
for a year because of problems with the English translation. USAID
asked MOCI to better coordinate with international partners on the
laws. MoCI said that it would welcome additional capacity-building
assistance to strengthen its abilities to draft and implement
commercial law. (Note: GIRoA had previously committed to passing
the ten commercial laws by the end of 2007. End Note) While passing
all of these laws would be a positive step, enforcement capacity

KABUL 00002810 003 OF 007


remains a concern.

****************************************
Strengthening the Regulatory Environment
****************************************

7. (SBU) Afghan and U.S. delegations agreed on the imperative of
building Afghan capacity in establishing quality standards. A
representative from the Afghan National Standards Authority (ANSA),
a small, newly independent regulatory enforcement agency, explained
that, although in existence since 2004, ANSA's lack of buget,
staff, and equipment -- and the lack of commercial laws and
regulations -- impair the agency's effectiveness in enforcing
regulations. Both delegations agreed that ANSA must be supported to
enhance the competitiveness of Afghan exports, build nationwide
quality control, and protect against poor-quality and potentially
hazardous imported goods. GIRoA asked for USAID support in helping
ANSA reach its key objectives, namely the enactment of key
regulatory laws; procurement of additional fuel testing labs; and
agency expansion to vital provinces and border points. GIRoA also
requested help in implementing "Normandy Standards" for its exports.
The Afghan delegation also noted that the Cabinet is reviewing
whether to create an independent committee to streamline the
approximately 250-day process to obtain land titles.

**********************************
Sector-Specific Trade Barriers and
Investment Challenges
**********************************

8. (SBU) AGRICULTURE: The delegations agreed that the agriculture
sector has great potential for economic growth if challenges to its
development can be overcome. Poor infrastructure, including a lack
of cold storage facilities and associated power supply, contributes
to an estimated 60 percent of Afghan agricultural products never
reaching domestic or international markets. The delegations agreed
that corruption, lack of infrastructure (transportation,
electricity, and irrigation), cultural constraints surrounding the
employment of women, and poor access to credit are the main
constraints to investment and cross-border trade in this sector.
The Ministry of Agriculture, Irrigation and Livestock (MAIL) said it
is looking to institute safeguards for food and seeks USG assistance
in agribusiness production and access to credit, food packaging, and
cold storage. At the close of the discussion, Ministry of
Agriculture official Abdul Wadood Ghorbandhi promised to provide an
agriculture paper.

9. (SBU) MINING: The Ministry of Mines (MOM) reported that while
there has been considerable progress in the mining sector, major
challenges to the sector's growth remain, including security
arrangements, particularly in precious gemstone mining. Officials
reported progress in the areas of energy and security in the main
memoranda of agreement between the GIRoA and China Metallurgical
Group Corporation (MCC) on the Aynak copper project. GIRoA
officials revealed that they had been able to secure agreement from
Chinese operator MCC to expand capacity of a proposed coal-fired
electrical plant from 400 MW to 800 MW output; an 800 MW plant would
provide 200 MW for copper plant operations and 600 MW to the
electricity grid. The Ministry of Interior (MOI) is hiring 1,500
security guards to demine and secure the project site. MOM noted
that demining and general insecurity in precious stone mines are
endemic constraints on the sector and that only small-scale mining
is possible in the current environment. MOM also relayed that in
the next six months it planned to issue tenders for two blocks of

KABUL 00002810 004 OF 007


gas development and two blocks for iron mines, with other tenders to
follow.

10. (SBU) ENERGY: Delegates stressed the importance of the energy
sector to Afghanistan's future and emphasized the need to urgently
address the fuel shortage for the nation's generators. The Ministry
of Energy and Water (MEW) said that the drain of skilled labor from
Afghanistan during the country's tumultuous last 30 years has left a
dearth of qualified Afghan technicians and managers and severely
hampered the power sector's growth potential and ability to reform.
MEW outlined efforts to reform the power sector, including: a)
encouraging independent power provider investment in Afghanistan; b)
developing a comprehensive electricity law; and c) developing a
five-year plan to restructure MEW with a focus on privatizing public
utilities, increasing MEW staffing and building capacity within the
ministry, and developing domestic long-term energy sources. MEW
asked for strong donor participation in the hydroelectric sector,
including the building of dams and transmission lines across
Afghanistan. MEW also noted planned imports of power from
neighboring countries, including through the U.S.-supported CASA
1000 plan to bring surplus electricity from Kyrgyzstan and
Tajikistan, and German and Chinese interest in an assessment of
solar and wind potential.

*******************************************
Improving Access to Credit and Contact with
U.S. Markets for Afghan Business
*******************************************

11. (SBU) ACCESS TO CREDIT: Both sides agreed on the need to
bolster efforts at expanding access to credit to enable
Afghanistan's entrepreneurs to succeed in opening and running
private businesses, whose tax payments should play an increasingly
important role in funding the national government. To improve access
to credit, USG officials urged GIRoA to pass proposed laws on
Mortgages and Secured Transactions and urged GIRoA to improve
financial reporting standards. MOCI officials noted that the
financial sector, in general, has been successful. However, small
and medium sized enterprises (SMEs) have trouble obtaining loans
and, at an interest rate of 18 percent, their cost of borrowing is
too high. MAIL requested assistance in establishing a credit
program for farmers and other agricultural workers.

12. (SBU) BUSINESS TRAVEL TO U.S.: Afghan officials noted strongly
that the difficulty of Afghan businessmen to obtain U.S. visas is a
major impediment to U.S-Afghan trade. Afghan officials warmly
greeted the announcement that the U.S. Embassy in Kabul will begin
accepting applications for U.S. business and tourist visas by
Afghans in February 2009. USG officials were careful to underline
that the clearance process could still take 8 to 10 weeks for
Afghans and that walk-ins would not be accepted. They said an
appointment system will be instituted to ensure security. The head
of EPAA noted the predicament of security concerns preventing many
foreign buyers, including U.S. buyers, from visiting Afghanistan,
while difficulties in obtaining U.S. and European visas kept many
Afghan business representatives from building and expanding business
ties.

13. (SBU) AFGHAN-PROPOSED TRADE FACILITATION ZONES: MOCI discussed
its proposal to set up Trade Facilitation Zones (TFZ) in nine
provinces. The idea is to better link provincial producers to world
markets. Under the program, SMEs would have access to government
warehouses, cold storage facilities, business centers, processing
plants, and telecommunications, banking, freight forwarding,

KABUL 00002810 005 OF 007


insurance and other export services in regional centers. GIRoA
would focus on agribusiness -- both fresh and dried produce and
nuts, carpets, handicrafts, marble, semi-precious and precious
stones, and leather production. Using the TFZs, GIRoA aims to
increase Afghanistan's value-added contribution for such traditional
exports, rather than shipping them to Pakistan for processing and
re-export. Additionally, MOCI believes the TFZs will aid in efforts
to overcome unemployment, rampant corruption, stifling bureaucracy,
fragmented production, and poor security. TFZs would also develop
road, power, and water infrastructure in the provinces. GIRoA
estimates that the development of nine centers would cost $30
million each with an initial $1 million per TFZ for feasibility
studies of 6 to 9 months. GIRoA seeks USG assistance in funding the
program.

****************************
Preparing for ROZs and
GSP Videoconference Outreach
****************************

14. (SBU) Afghan and USG delegates recognized the critical role that
the duty-free trade benefits for goods produced in Reconstruction
Opportunity Zones (ROZs) can play in creating jobs and sustainable
development, especially in impoverished areas along the
Afghanistan-Pakistan border. GIRoA officials described preparations
they were making to to take advantage of ROZs, including creating
three inter-ministerial committees covering legal, economic
analysis, and logistical issues, once U.S. legislation is passed.
They were unable to forecast the number of jobs the ROZs would
create; instead they countered that the GIRoA would need USG
guidance on ROZ implementation before such predictions could be
formulated. The U.S. delegation updated the Afghans on the ROZ
legislative status and encouraged the Afghans to be prepared to
implement ROZs quickly since we are continuing to engage Congress in
hopes that the law passes soon. While continuing to work on the ROZ
legislation, USTR also offered to host a videoconference with
relevant Afghan officials and private sector representatives to
further disseminate information on how Afghan businesses can better
take advantage of duty-free entry of exports to the United States
under the U.S. Generalized System of Preferences (GSP) program.

****************************
Commitment to WTO Accession;
Public Education Needed
****************************

15. (SBU) Afghan officials reaffirmed the GIRoA's commitment to
pursue eventual WTO accession but said this process would require
time and effort to raise public awareness of the benefits of
membership. There were concerns -- and in some cases ignorance --
about WTO membership in Parliament, the business community, and the
general public. The Finance Ministry has also expressed concerns
about lower tariffs, which some officials worried could reduce
revenues and cause the GIRoA to miss IMF financial targets. The
GIRoA was reaching out to key constituencies to build national
support for its policy and aimed to deliver its Memorandum of
Foreign Trade Regime to Geneva by the end of 2008. (Note: At the
last TIFA meeting in July 2007, the GIRoA had indicated that it
would deliver the MFTR to Geneva by September 2007. End Note)
USdel stated that WTO membership would increase Afghanistan's world
standing and give the nation a voice in global economic affairs.
USdel applauded Afghanistan's national dialogue on WTO accession as
illustrative of transparency and the development of democracy.
USdel agreed to assist the GIRoA with a public education campaign

KABUL 00002810 006 OF 007


about the benefits of membership and to help fast-track its
membership application once it reached the world body. GIRoA
officials welcomed the offer.

***************************************
Jumpstarting A New Afghanistan-Pakistan
Transit Trade Agreement
***************************************

16. (SBU) Delegates agreed that transit trade problems with Pakistan
severely hamper Afghanistan's trade with its most promising trade
partner, India, and other countries, and that rapid implementation
of an updated Transit Trade Agreement was a high priority. The
obsolete 1965 agreement still governs Afghanistan-Pakistan transit
trade and poorly serves Afghan interests. There was considerable
confusion regarding the status of efforts to negotiate a new
agreement (Refs B and C). MOCI Director of International Trade
Wardak informed the U.S. delegation that Afghanistan has not
delivered draft text to Pakistan. A member of the Ministry of
Commerce drafting committee clarified that Afghanistan completed the
draft in March and was prepared to give it to Pakistan but during a
period of heightened Pak-Afghan tensions, an inter-ministerial
review halted delivery. He said the draft is now with the Ministry
of Foreign Affairs. When asked when Afghanistan would meet with
Pakistan to discuss the way forward, the Afghan delegation replied
that they were "waiting for an order" and "waiting for Pakistan"
despite the agreement by President Karzai and Prime Minister Gilani
at the South Asia Association for Regional Cooperation (SAARC) in
August to resume suspended dialogues including the Joint Economic
Commission (JEC) and Regional Economic Cooperation Conference
(RECC). Finally, at a subsequent Embassy reception, when asked
about the confusion, Minister Farhang (who was not present at the
TIFA meeting during the above exchanges) said that "seven or eight
months ago" he had personally provided a copy of the draft agreement
to Pakistan's Ambassador in Kabul, noting that Afghanistan's
Ministry of Foreign Affairs was aware of this. In addition to the
curious exchanges on this topic, GIRoA officials requested U.S.
assistance in resolving delays and extra charges that Uzbekistan was
imposing on Afghan exports of raisins to Russia and CIS markets.
The same officials also noted that they have proposed a rail route
to China to circumvent delays that Afghan exports experience at the
Kazakh-China border.

17. (SBU) COMMENT: The third round of TIFA talks struck a positive
and collegial tone. USdel welcomed the incremental progress on the
slate of trade and investment issues and the improved bilateral
understanding. The GIRoA clearly understands the importance of
passing legislation related to private sector activity, but MOCI's
ability to push passage through Parliament remains to be seen.
Other impediments to trade and investment, e.g. corruption at
customs posts and onerous fees on traders, appear as intractable as
ever. At times, the GIRoA failed to address the government's own
role in creating a difficult investment climate. For instance, MOM
failed to mention its role in uneven enforcement of regulations and
the imposition of exorbitant fees. On the other hand, GIRoA
reaffirmation of its stance on WTO accession was positive, and
proposed bilateral cooperation on raising public awareness of the
benefits represents a worthwhile joint undertaking. The Afghans are
preparing to take advantage of ROZs and, with their own TFZ concept,
are examining ways to move up the industrial value chain and promote
exports.

18. (U) COMMENT CONTD. The TIFA meeting served as a timely reminder
to Washington agencies of the great and varied needs of Afghanistan

KABUL 00002810 007 OF 007


across the economic spectrum. The U.S. Mission, mainly through
USAID, is engaged on a number of key issues to help the Afghans
strengthen their climate for trade and investment. Some examples:
In the area of land reform, USAID is implementing a pilot program on
land tenure that may be expanded next year to work on improving land
security for investors. For skills development, USAID launched
three Vocational/Trades Training Centers, and will continue to look
for ways to strengthen vocational skills through the Capacity
Development Program. For commercial law reform, USAID has provided
extensive assistance to draft and secure passage of commercial and
financial laws; once passed, USAID is gearing up to support their
implementation with required training and public outreach. In the
area of standards, USAID and other donors are meeting with ANSA to
discuss their strategy and to prioritize specific needs. With
regard to access to credit, USAID recently launched a credit
guarantee program in the agribusiness sector and continues to expand
training of bank loan officers in SME lending. USAID will also
continue to provide support on broader trade issues, such as
building capacity to prepare for and negotiate regional trade
agreements and WTO accession, support for customs modernization and
tariff reform, and assistance on ROZ implementation and public
education activities related to trade liberalization. Continued
Washington support for these and other programs responsive to issues
discussed in the TIFA meeting will be vital -- the more resources
Washington can secure for these important initiatives, the better.

19. (U) This message was cleared by the Washington delegation.

WOOD
1

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