Recommendation for Rehabilitation-(ATC) Afhgan Textile Corporation

Recommendation Regarding Rehabilitation of Afghan Textile Corporation This recommendation is based solely on a 2005 Valuation Report by USAID. Our findings are therefore very tentative and subject to major revisions. ATC in 2005 In 2005 ATC had factories in Kabul, Pul-e-Khamari, Gul Bahar and Jabl-e-Siray. Only the Pul-e-Khumari factory was producing output with an installed annual production capacity of 3.5 million meters of cotton output. All other factories had ceased production since several decades ago. At its peak ATC supplied about 40 percent of cotton yarn sold in Afghanistan. At its peak ATC employed about 12000 people and supplied 12 million meters of cotton. In 2005 ATC was a public private partnership. 82% of its shares were held by the public sector and 18 percent by private individuals. ATC also invested in joint venture with Afghan national industrialists. The Kabul factory ceased production in 1992 and machinery and equipment at this factory is currently over 70 years old and non-operational. ATC has extensive property holdings in Kabul which in 2005 yielded a monthly rental income of over AFN 5 million. The Pul-i-Khumari factory was operational in 2005. Its capacity utilization rate was about 9 percent according to the USAID Report. It had extensive property holdings including leasing and agricultural land. Almost all machinery is currently 80 years old and only about 45 percent of machinery was operational in 2005. Spare parts were locally/nationally supplied in that year. It produced low cost yarn cotton cloth which was mainly sold to government organizations including army and hospitals. In 2005 it employed about 300 workers. It made a net loss of about AFN 8.3 million in 2005. Total income exceeded AFN 33 million that year. Rental and other (non-cotton sale) income yielded about AFN 8 million. The factory in Gul Bahar has been out of production since 1987. A major problem of the factory during the 1980s was shortage of supply of raw cotton. At its peak it employed about 9000 people. It has extensive land holdings and buildings. Machinery dates before the 1970s but some of it was operational in 2005. Rents accounted for over 55 percent of its income during the first half of 2005 when it almost broke even (expenditure exceeding revenue by only 1 percent.) The Jabl-i-Siraj factory was destroyed in 1997 however ATC still holds land in Jabl-i-Siraj. It also owns a metal workshop in the factory. Rent income is low but it constituted about 80 percent of the revenue in 2005. USAID’s Asset Valuation USAID has calculated the net asset value at 2005 market prices of all ATC possessions (except ATC’s human resources). The valuation is based on very sparse data sources. They are therefore very speculative and subject to large margins of error. The valuation excludes estimates of disputed landholdings of ATC which may add significantly to NVA. Estimates of land value in market prices are tentative and no justification is provided for the assumptions underlying base calculations of land value. Assessment of market value of buildings is extremely speculative scrap value has been assigned to all machinery and equipment assets which is unrealistic. Estimates of liabilities are extremely tentative.

The “base case” estimates of NAV of ATC in 2005 have been about AFN 5 billion. The main physical asset of ATC in 2005 was its 2373 buildings. NAV generated by buildings comprises 67 percent of aggregate NAV. 32 percent of aggregate NAV is assessed to be contributed by the about 10 million square meters of land owned by ATC in 2005. Only one percent of aggregate NAV is attributed to machinery and equipment. Liabilities are said to consist solely of debt to government and accounts payable. There is a very large discrepancy between book value and “base case” estimation of NVA. The base case estimation of NVA amounts to over AFN 5 billion whereas book value NVA is negative AFN 35 million. Probably liabilities are underestimated. Arbitrary book values in dollars have been attributed to fixed assets. Recommendation Rehabilitation of enterprises should be contextualized by a comprehensive system wide rehabilitation policy which should specify a. The sectors to be included in the national rehabilitation program b. The time period over which the rehabilitation process is to be completed and mechanisms for monitoring rehabilitation implementation c. Annual budgetary allocations for the rehabilitation program and its annual distribution among enterprises selected for rehabilitation in a given year d. Selection of at most 15 enterprises for inclusion in the rehabilitation program during 2023-36. DAIMG recommends that textile and clothing be selected among the rehabilitation sectors although textile and clothing enterprises should not be accorded rehabilitation priority. DAIMG recommends that ATC be rehabilitated. ATC rehabilitation should be initiated as follows a. A new valuation exercise should be undertaken to approximately correctly value ATC assets. b. During 2023-26 only one factory should be rehabilitated. The Pul Khumari factory at least at 2005 was operational. If Pul Khumari is no longer producing output investigations must be made to ascertain which ATC factory can be brought into production in a nine month period and the rehabilitation program must target and consolidate one such factory. c. Those factories which cannot be brought into production within a nine month period should be disinvested – though provision may be made for some reopenings in the second phase (2026-2029) of the national rehabilitation program d. Disinvestment must take the form of sale of almost all land and most buildings of those factories that are to be closed. Assuming that Pul-Khamari is the only factory to be rehabilitated most of its 1 million square meter land should also be sold of – though not its power plant. Similarly most of the 2200 buildings in Pul-e-Khmari can also be sold of. e. The most major constraint on the rehabilitation of ATC is the obsolence of its equipment and machinery. Even in Pul-e-Khumari only a small proportion of machines remained operational in 2005. The USAID view however that all ATC machinery is scrap is unjustified and there exists room for identifying machinery which can be reactivated. The rehabilitation program must include a scheme for salvaging operationable machines and equipment and for shifting them from closed factory sitesr to factory sites that are undertaking production. A significant proportion of machinery at Gul Bahar was “well preserved” according to the USAID report in 2005 and much remained in unopened shipment boxes. Similarly in the destroyed Jabl Siraj factory some metal processing machines remained operational in 2005. For the Pul-e-Khumari factory machine spare parts were locally produced in 2005. There is a need for a technical assessment of existing machine capacity of ATC which can be deployed immediately for production. Expertise in this regard can be requested from Pakistan, Iran, Turkey and Russia.

f. Nevertheless financing equipment upgrade well constitute a major component of the national rehabilitation program. In the case of ATC technical upgrade can be financed by 1. Receipts from sales of land and buildings of ATC factories. 2. Issuance of non-tradeable fixed tamveli certificates to the general public. Return on such certificates may be linked to (a) the general rate of profit as reflected in GNP growth (b) rate of return in the entire rehabilitation program (c) rate of return in ATC. 3. Investment by the national private sector and by investors from countries such as Pakistan, Iran, Turkey, UAE, Qatar and Malaysia. ATC may be developed as a joint venture (PPP) enterprise. g. ATC’s rehabilitation program must also include a scheme for continuation of technical and managerial training of the workforce. The upgrading of human skills must be a major objective of rehabilitation. Special attention must be paid to the development of human skills for the maintenance and production of textile machinery in Afghanistan. This is necessary for the development of a nationally sourced domestic supply chain in the textile sector and for the reduction of dependence on imperialist technical production expertise. h. ATC rehabilitation must not be undertaken as a stand-alone project. It must be integrated into a well-thought out comprehensive national rehabilitation program. DAIMG is in the process of developing a discussion paper on undertaking rehabilitation strategy in Afghanistan.