Afghanistan warned on resource curse

08/10/2010 | Liz Chong

Afghanistan must root out corruption and bolster its institutions or risk falling prey to the resource curse, a top economist has said

Zakhilwal: vigilant

Afghanistan was yesterday urged to avoid repeating the mistakes made by “resource-cursed” countries that have failed to reap wider social benefits from the profits.

“It’s a matter of spending the money transparently on things that benefit ordinary people, in the here and now,” said Paul Collier, professor at Oxford University. He called for natural resources to be viewed “as an opportunity for countries to transform themselves with their own money.”

Collier was speaking at a World Bank seminar about the Natural Resource Charter, a rulebook for governments grappling with natural resource management. It urges transparent tenders, greater accountability and measures to ensure that societies see obvious benefits.

Afghan officials have this year claimed that the country has abundant reserves of metals, minerals and rare earths worth up to $1 trillion. Afghanistan has begun a tender process to foreign companies to submit bids for the extraction of iron-ore deposits in some of the most dangerous parts of the country. After three months a shortlist of candidates will be selected to visit the site and conduct due diligence; a winner would be disclosed in mid 2011.

Omar Zakhilwal, the Afghan finance minister, told Emerging Markets that the government was aware of the need to be alert to mistakes made by other resource-rich countries in the past.

“We certainly want to repeat the success. As for the failures, you have to be vigilant,” Zakhilwal said. A key focus is to build capacity within the government for oversight of contracts and monitoring of corruption, he added.

“Not only is it important to us to negotiate a good deal for Afghanistan, but also we have to make sure that contracts are delivered on,” Zakhilwal said.

The finance ministry had managed to double revenue collection from $60 million to more than $130 million per month within the past year and a half.

The government says it will try to include locals in resource extraction by recruiting them into a security force protecting the mines. The technique would also be employed for a proposed $3.3 billion gas pipeline that could one day run through Taliban heartland, from Turkmenistan through to Pakistan and India.

A big question is how costs, and then revenue, would be split between Afghanistan and foreign investors. One possible approach is a version of the model developed for the oil industry in Iraq, as it emerged from conflict.

The Iraqi approach was unusual because oil remains in the Iraqi state’s hands, in contrast to the US government’s plans for an Oil Law which would have handed reserves to foreign companies. The Baghdad government awarded companies service contracts, and agreed to pay them a fee to pump oil for a set price per barrel.

The Iraqi approach was a “significant achievement”, according to Yahia Said, a senior fiscal expert on the country for the World Bank. The process was transparent and the oil ministry succeeded in negotiating down the sums that it would have to pay oil companies, he said. Oil provides more than four-fifths of the Iraqi government’s revenues.

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