Cablegate: Reconstructing Afghanistan - Usg Procurement As Demand

VZCZCXRO7170
PP RUEHDBU RUEHIK RUEHPW RUEHYG
DE RUEHBUL #2071/01 1781246
ZNR UUUUU ZZH
P 271246Z JUN 07
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 8852
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0509
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
RHMFIUU/HQ US TRANSCOM SCOTT AFB IL
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 4177

UNCLAS SECTION 01 OF 05 KABUL 002071

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E.O. 12958: N/A
TAGS: ECON EAGR EIND ETRD EINV EAID MOPS AF

SUBJECT: RECONSTRUCTING AFGHANISTAN - USG PROCUREMENT AS DEMAND
CENTER FOR GENERATING LICIT ECONOMIC GROWTH

Ref: Kabul 1746

(U) This message contains SENSITIVE BUT UNCLASSIFIED information.
Please protect accordingly.

SUMMARY
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1. (SBU) Beginning with Combined Forces Command-Afghanistan's
(CFC-A) landmark Afghan First initiative, local procurement of goods
and services by the U.S. and NATO military establishments and the
international community is growing. It needs to grow more. An
April 2007 study estimates that of the $1.36 billion spent in Afghan
year 1384 (April 2005-March 2006) by all major donors, the local
impact of the money was 31.2% or $424 million. Local procurement
has four major benefits: cost savings, quick economic impact,
national economy building, and winning Afghan hearts and minds.
Significant steps have been taken within the U.S. government and
international community towards procuring local goods and services,
including an estimated $10 million contract to local mineral water
company Crystal Water (an OPIC $14 million investment) which
supplies the International Security Assistance Force (ISAF) and
Combined Security Transition Command-Afghanistan (CSTC-A). On May
14, NATO ISAF issued a Standard Operating Procedure providing
overarching guidance to all ISAF forces on how they can increase
local procurement efforts.

2. (SBU) Key opportunities exist for U.S. local procurement efforts
in the areas of agriculture, construction/engineering, and textiles.
A concerted effort to raise agricultural production to meet U.S.
military health standards could help change the nature of the rural
economy away from subsistence and illegal crops to higher value
commercial crops that can be consumed by U.S., NATO, and Afghan
military and police forces. This will require a team effort by U.S.
military food safety inspectors, Food and Drug Administration (FDA),
USAID, and Department of Agriculture (USDA) personnel. In
particular, more USDA experts will likely be needed in Afghanistan
to make this concept a reality.

IMPORTANCE OF LOCAL PROCUREMENT
-------------------------------

3. (SBU) Under the Afghanistan Compact in January 2006, donors
agreed to increase the local impact of external assistance through
using national partners rather than international partners to
implement projects; increasing procurement within Afghanistan; and
using Afghan goods and services, wherever possible, rather than
imported goods and services. The USG has made significant progress
since March 2006 toward achieving these goals. Expanding USG
procurement of local goods and services will require increased U.S.
attention and commitment at the highest civilian and military
levels.

4. (SBU) The case of Crystal Water has demonstrated the four major
benefits of local procurement: cost savings, quick economic impact,
national economy building, and winning hearts and minds. Procuring
Crystal Water locally has generated estimated savings of 30-60% from
reduced freight and labor costs. The U.S. military estimates that
if it procured all bottled water locally, it would save
approximately $30 million per year in freight costs alone. CSTC-A
estimates that local procurement of Crystal Water will inject close
to $8 million into the Afghan economy this year, generating much
needed employment and tax revenue. Afghan Beverage Industries'

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(ABI) factory in Kabul, which produces Crystal Water, employs over
200 Afghans, generating over 5,000 indirect jobs through the
industry's multiplier effect. This is a promising first step given
that total water purchases for Coalition forces have reached as high
as $58 million per year.

5. (SBU) This kind of potential revenue stream attracts investment
in new plants and equipment. There are now a total of 12 bottling
facilities in Afghanistan competing to secure major contracts due,
in part, to the success of ABI's contract with the U.S. military on
Crystal Water. One of the twelve companies is Kabul's Coca-Cola
bottling plant (see reftel).

SUCCESS OF LOCAL PROCUREMENT EFFORTS
------------------------------------

6. (SBU) In 2006, Canadian NGO Peace Dividend Trust (PDT) began a
pilot project in Afghanistan to increase local procurement, helping
facilitate $40 million in local sales to international community
buyers. This includes a $23 million contract for NATO/ISAF to
locally procure heavy equipment, an internet service provider (ISP),
copy equipment, printing, vehicle maintenance, and construction
needs. ISAF estimates that its local procurement efforts have
jumped to 53% from 30% out of a $100 million budget. CSTC-A
recently awarded a contract to the Millie Factory to provide locally
produced military boots for $900,000. One factory was restarted by
the company in Afghanistan to fulfill the terms of the contract.

7. (SBU) U.S. Army Lieutenant General Eikenberry, former commanding
general of the Combined Forces Command-Afghanistan (CFC-A),
initiated the "Afghan First" campaign starting in March 2006 to
reorient the military's procurement efforts towards local suppliers
of goods and services. On May 14, 2007, NATO ISAF issued a Standard
Operating Procedure (SOP) to provide overarching guidance to all
ISAF forces on how they can contribute to the Afghan First policy.
The SOP states that within the bounds of existing national and NATO
quality control, food standards, and legal and regulatory
frameworks, ISAF should aim to utilize Afghan services, purchase
Afghan goods, purchase Afghan food and beverages, develop Afghan
skills, support the local currency, and encourage competition.

8. (SBU) In addition to the military, Embassy Kabul and USAID
Afghanistan have made significant strides regarding local
procurement. For the current fiscal year, Embassy Kabul estimates
it will spend approximately $5.85 million on local procurement, an
increase of 216% from the previous fiscal year. This includes
packing and shipping, diesel fuel, computers and other electronics,
vehicles and vehicle parts, furniture and office supplies, personal
services (including the foreign service national (FSN) cafeteria,
dry cleaners, and barber and hair dressers), generators, and
construction projects. The construction projects, in particular,
are the first the Embassy has contracted for directly without
off-shore middlemen to manage the project. As such, local vendors
will receive 100% of the payment for several projects in the range
of $5,000 - $25,000 each.

9. (SBU) Between 2002 and 2006, USAID Afghanistan awarded more than
$300 million in reconstruction contracts to Afghan firms. When
Afghan-American firms were included, this figure rose to $450
million. More than $1.39 million was spent in fiscal year 2005 and
$1.1 million in fiscal year 2006 on the purchase of local goods and
services.

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CHALLENGES
----------

10. (SBU) This positive trend in procurement patterns reveals that a
growing proportion of external assistance is spent locally and has
local impact. The Afghanistan Compact Procurement Monitoring
Project estimates that around 31% of the official development
assistance (ODA) provided to Afghanistan has a direct impact on the
local economy. Within the different ways donors spend their funds,
funding to Afghanistan through trust fund arrangements has a
significantly higher impact on the local economy (around 85%)
compared to funds provided to local contracts (around 35-50%), to
international companies or international NGOs (around 15%), or to
contracts for technical assistance (around 10%). Peace Dividend
Trust's (PDT) April 2007 study confirmed that of the $1.36 billion
spent in Afghan year 1384 by all major donors, the local impact was
31.2% or $424 million.

11. (SBU) Some important obstacles are likely to impede efforts to
expand local procurement efforts. International buyers often lack
information on the local marketplace; trust in the capacity of
Afghan businesses to deliver quality products; and direct access to
the Afghan marketplace. Strict safety and quality regulations often
set standards that Afghan firms are currently unable to meet.
Afghan suppliers often lack good practices; have limited exposure to
international markets; have difficulty accessing opportunities; lack
capacity to competitively bid on contracts; and do not have the
experience to gain access to capital.

OPPORTUNITIES FOR LOCAL INVESTMENT
----------------------------------

12. (SBU) Nonetheless, key opportunities exist for American local
procurement efforts in the areas of agriculture,
construction/engineering, and textiles. The U.S. military
additionally has a window of opportunity to shape procurement
practices for the Afghan National Army (ANA), Afghan National Police
(ANP), local jails, the Afghan air force, and the Afghan Border
Police (ABP).

13. (SBU) U.S. government food safety regulations make it especially
difficult to locally procure "class one consumables" such as
produce, dairy, and meat products. Afghan farmers and ranchers face
significant challenges in meeting these strict standards at all
stages including production, harvest, cleaning, processing,
cold-storage facilities, transportation, marketing, and
certification. However, the heart of USG reconstruction policy is
the transformation of Afghanistan's rural economy from its current
anemic traditional base, susceptible to temptations to grow illegal
drugs, to a modern, integrated, commercial agricultural economy
growing licit high value crops, raising high value livestock, and
exporting to high-priced demand centers. Eighty percent of
Afghanistan's workforce works in the agricultural sector. U.S.
military and NATO/ISAF procurement of Afghan agricultural products
can provide an important demand stimulus to rural reconstruction.
Proactive interventions by military health experts can elevate
product standards to levels acceptable for consumption by U.S. and
NATO military personnel.

14. (SBU) Construction/engineering is the one sector in which Afghan
firms are showing a growing competitiveness. There are a large
number of Afghan construction companies, and with the proper
training, such as that provided by the Army Corps of Engineers,

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local firms have been able to meet international standards at a
fraction of the cost of international contractors. Additionally,
CSTC-A Commanding Major General Durbin's procurement program in
support of the ANA and ANP has a large procurement budget, and the
process allows in some cases for local contractors to bid without
performance guarantees that had previously excluded them from
participation in some types of tenders.

15. (SBU) Opportunities are growing for the development of an Afghan
garment industry. The domestic market currently depends on small
tailoring shops for custom work and vast quantities of imports for
readymade items. The U.S. military's Afghan First policy has
created demand for domestically produced apparel goods for the ANA
and ANP. Until very recently, most of this multi-million dollar
procurement process was vetted out to companies who sourced in China
and Pakistan. This is starting to change. For instance, Afghan
company Tarsian & Blinkely won a contract to produce ANA and ANP
products, ranging from battle dress uniforms, field jackets, police
uniforms, and tactical dress uniforms. Additional military items
could be procured locally if the industry was further developed. An
Afghan-American joint-venture, Safi Apparel, is expected to enter
this market soon.

16. (SBU) Currently, the U.S. military is handling procurement for
the ANA, ANP, Afghan jails, Afghan air force, and the ABP. Ishaq
Nadiri, the GOA's Senior Economic Advisor to the President, is
looking at the issue of local procurement for Afghan security
forces. A window of opportunity exists to help shape procurement
standards and suppliers for these Afghan services in favor of local
Afghan producers.

COMMENT
-------

17.(SBU) In the short term, the U.S. and NATO military budgets will
be the largest single source of demand for goods and services in
Afghanistan. Thus, the U.S. government has a real opportunity to
boost the Afghan economy and the development of the Afghan private
sector through increasing local procurement. This can include
contracts for companies that will train Afghans and build local
capacity; companies with Afghans in their management chain; or
companies that sub-contract to Afghan firms, as the U.S. military is
currently doing. Creating jobs is one of the keys to success in
Afghanistan, and expanding USG and international community demand
for local products and services is one method that can attain this
objective.

18.(SBU) With 80% of Afghanistan's workforce employed in tQrural
economy and illicit poppy production in many parts of the country,
the agriculture sector needs special attention. In the absence of
reliable land transportation links to international markets, local
purchase of meat and produce to feed U.S., NATO, and Afghan soldiers
and policemen could increase demand for licit agricultural
production and begin enticing farmers to shift cropping patterns
from subsistence and illicit crops to licit commercial crops.
However, Afghan agricultural products must meet strict food safety
standards before they can be consumed by military and police
personnel. To achieve this objective, U.S. military and FDA health
inspectors should work with USAID and USDA personnel to raise the
sanitary and phytosanitary standards on model farms around
Afghanistan to meet U.S. military food safety standards. (NOTE: We
will need more USDA experts in Afghanistan to make this concept a
reality. END NOTE.) Once model farms are supplying foodstuffs to

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the military, the model farms can serve as magnets to train
neighboring farms in proper sanitary and phytosanitary methods. As
these practices spread, farmers will not only be able to supply the
military here, but also export to higher value markets, assuming
that transportation bottlenecks can be removed. In this way, we can
sustain the pace of economic growth and create the jobs needed to
absorb Afghanistan's unemployed and returning refugees.

WOOD

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