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Could mining bonanza be Afghanistan’s next source of funding?

Afghanistan is weighing new regulations to extract its natural resources worth nearly $1 trillion. As foreign aid declines with the NATO forces withdrawal in 2014, this could bring the Afghan government new sources of income.

An effort to make Afghanistan’s vast reserves of minerals, oil, and gas accessible to foreign investment — a crucial source of income as foreign aid declines — has hit a road block.

A draft law to update regulations governing Afghanistan’s extractives sector was due to be considered by the Afghan parliament earlier this month. But it was put on hold for further review last week when Minister of Justice Habibullah Ghalib called for a number of changes, according to a Ministry of Mines official. 

If passed, the law could provide a new foundation for the country’s economy as foreign governments begin to reduce their levels of foreign assistance after international troops withdraw at the end of 2014. But it’s a prospect that members of civil society say needs to be handled with caution.

“The whole survival of the government depends on getting revenues,” says Sayed Zaman Hashemi, the director of legal services at Afghanistan’s Ministry of Mines. “So if there is a drawdown of international contributions, what are the sources that we’re going to get the money from? The only persistent source is the mining sector.”

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“We have to improve the law,” Mr. Hashemi adds, because the present legislation, which was adopted in 2009, “is not investor friendly.”

Afghanistan’s untapped mineral resources — which include significant deposits of copper, gold, lithium, and iron ore — are worth nearly $1 trillion, according to an analysis conducted by the US Geological Survey and the Pentagon.

But the country must overcome many challenges before those mineral resources start flowing into the Afghan treasury. At the top of the list: improving the governance of the extractives sector, a topic that has caused some unease among potential investors. 

“[Companies’] first concern is about regulatory and legal stability,” says Mr. Hashemi. Questions about security, he adds, are “one of the concerns, but not the main concern” that potential investors have raised.  

For example, companies have complained that the existing law fails to offer sufficient guarantees that firms that invest in exploration will be granted licenses to exploit the resources that they discover in the process.

The Ministry of Mines is hoping to secure new contracts on six major extractives sites across Afghanistan, but any new bids will remain on hold until the new law is passed, several sources said.

“Companies don’t want to sign contracts based on the existing law because they think it’s not [investor-] friendly,” says Javed Noorani, a researcher at Integrity Watch Afghanistan.

The new draft law, versions of which have been under government consideration since at least last summer, would give the Ministry of Mines the option of granting a company both an exploration contract and an exploitation contract in one fell swoop. According to Mr. Noorani, who reviewed the Dari-language version of the draft law, the legislation would also remove the Afghan parliament’s role in authorizing major mining contracts. The parliament is currently required to approve contracts worth more than $50 million. 

The law would also grant the Ministry of Mines authority over environmental and social issues related to mining, Noorani says, noting that mandates on both of those issues rightly lie with other ministries.

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“We have concerns with the law,” says Noorani, adding: “A lot of authority is given to the Ministry of Mines to decide on policy unilaterally.”

Such a concentration of power is a dangerous prospect in Afghanistan, where corruption is already rife, not least in the extractives sector.

The country is in a three-way tie, alongside Somalia and North Korea, for the most corrupt country in the world, according to Transparency International’s most recent Corruption Perceptions Index. Afghanistan’s previous minister of mines, Mohammad Ibrahim Adel, resigned in 2009 amid allegations that he had accepted a $30 million bribe from China Metallurgical Group. The Chinese state-owned company had been granted a 30-year lease to exploit the lucrative Mes Aynak copper site in 2007.

Despite such reports, Afghanistan’s rich reserves of natural resources have still managed to lure a number of investors to the country. At least four, and up to six, major bids for new mining and hydrocarbon projects are in the offing, pending the passage of the new law. The Ministry of Mines is eager to get those contracts signed before the next round of elections, which is scheduled to take place in April 2014.

Getting outside input on parliament’s discussion of the draft law, which could last anywhere from a couple of weeks to a few months, is complicated by the fact that the Ministry of Mines has yet to publish the draft law in English.

Campaigners warn that rushing the process, or limiting public input, could end up hurting the country in the long run.

“[Mining] is not a magic bullet. International examples of what can go wrong are rife,” says Juman Kubba, a campaigner at Global Witness, a London-based campaigning organization. “Without careful management, extractives development can lead to an exacerbation of corruption and conflict.”

“What we don’t want to see is a downward spiral which causes lasting harm to the Afghan people.”