Policy Framework for Industrial Organization

DAIMG’s Suggestions on Guidelines for Developing a Mining Policy for the Islamic Emirate: Extractivism and mining policy: The mining sector development is crucially important for building a self-reliant Islamic non-capitalist economy in Afghanistan. Afghanistan possesses a wide range of minerals in abundant supplies which can be developed to lay the basis of self-sustained, self-reliant development provided we carefully develop a mineral policy framework which is geared to serve our national Islamic interests. This is especially important because the global mining industry has been thoroughly structured along imperialist lines. Global mining companies serve imperialists through articulating a policy of extractivism. Extractiveism has been integrated within the capitalist order of production. Extractiveism is a core characteristic of modern day capitalist imperialism. Mineral resource extraction from poor countries is transferred for processing in the imperialist bloc. This trend has risen sharply since 2000. Moreover, extraction efficiency (use of extracted minerals per unit of GDP) has stagnated also since 2000 implying continuous increased demand for extracted minerals from poor countries. In many poor countries (especially in Africa and Latin America) extracted minerals form a large part of the export of poor countries. In Latin America in particular, there has been a switch from light manufacturing to mineral export in recent decades (including oil and natural gas). The development of new technologies has led to a new search for rare earth minerals especially lithium. Financialization of the management of the mineral extraction on a global level is increasing. Mineral resource depletion is taking place on a fast pace especially in poor countries. Ultimately extractiveism represents capitalism’s drive to commodify all aspects of being. The Uruguayan economist Edward Gudynas writes “there is no such thing as extractivist development. Extractivesm accounts for the structure and function of an international economy which includes many sectors. Mining is the quintessential extractive industry. Extraction of mineral resources eliminates their replacement for ever - once extracted minerals cannot be replicated or replenished - so that extraction is appropriation without equivalent replacement.

The appropriation of mineral resources, if undertaken by global mining companies benifits mainly foreign capital. The models of appropriation adopted by global mining multinationals violate conditions of natural and social reproduction in host countries. Extractivism of (both agricultural and mineral industries) is intrinsically related to imperialism. The raw material extracted from the mines is usually exported in the form of primary commodities to the imperialist countries. Primary commodity exports fetch low prices and a major proportion of the value gained from mineral production is transferred to imperialist markets and countries. Facilitating mineral raw material extraction and export by multinationals is the means of subordinating the national economy to global capitalist markets and increasing dependency on imperialist countries. Global extractive monopolies lower their costs of production by neglecting such crucial environmental features as soil and water conservation. Moreover the space occupied by a mining company is damaged forever - in the sense that it cannot be used for any other activity (for example agriculture). Whatever gain is obtained from mining has to be set against the loss of national wealth associated with natural resource depletion. Mining sector development strategy requires a careful consideration of several related issues. Mining exports can be an important foreign exchange earner which is needed to address the problem of the large current account deficit. Mining output can also provide key inputs from the national manufacturing sector. Foreign investment in the mining industry can also be an important source of technology transfer. The employment effect of mining sector investment is limited but it can provide some scope for community based mining sector projects. However, mining sector policy must be carefully designed to avoid what is described as “the Latin American trap” – i.e. being locked into the lower end of mineral sector value chains increasing the crucial vulnerability of the national economy to change in mineral prices and being systematically deprived from the major proportion of value generated in the mineral process.

The following suggestions for developing a mineral policy perspective have been made with these considerations in mind. Suggested mineral policy guidelines: 1. Mineral development policy must be fully integrated with national economic and social policy. It must not stand alone. There is an urgent need to develop a national medium term planning framework outlining a strategy for linking the development of the different sectors of the economy (manufacturing, mining, agriculture and services) to each other supportively. Without integrating mining within a national economic policy framework it will become an isolated enclave linked to and driven by the momentum of global capitalist markets, rather than by national economy needs and preferences. This is what has happened in several Latin American and Africans countries (especially Peru, Ecuador , Brazil and Zembra) and has accentuated these countries’ vulnerability to global price shocks. We must recognize that mining is a component of national industry and its development must complement the development of other industrial sectors - especially manufacturing and construction. We must try to embed mining sector development within the national development strategy. The Mining Development plan must be a sub-component of the National Development plan. 2. The key to embedding mineral sector development in the national development strategy is by promoting the national domestic processing of an increasing proportion of mineral raw materials. Thus we must prioritize the development of those mineral branches (iron ore, copper, lead and zinc) the output of which can be currently domestically processed rather than those such as lithium and rare earth metals the processing technology for which currently does not exist and is difficult to develop. Hazrat Amirul mominin’s decision to delay rare earth prospecting reflects this insight and is very welcoming. However we must continuously strive to develop processing capacity in minerals which are abundant but processing capacity of which is currently limited (chromite and gem sector). Processing technology upgrade must be a component of the medium term mineral sector development sub-plan.

3. While a rising proportion of mineral output should be dedicated for domestic processing and use, export targets should be specified for specific minerals. These export targets should be derived from estimates of foreign exchange requirements stipulated in the medium term National Development plan. Caps should be imposed in specific mineral sector exports and targets for domestic mineral output processing should be specified for each prospective firm. The Domestic processing target (as a proportion of total mining output) must gradually increase over time. Costs must be imposed on firm failing to meet the domestic processing targets and on firms that exceed stipulated export caps) 4. Direct foreign investment (DFI) must be encouraged in mining sector projects but portfolio investment in mining must be avoided (as they may lead to external sector indebtedness).Mining prospective companies do not normally undertake processing activities. Therefore every mining sector FDI contract must include agreement with an associated processing company to meet the processing obligation of the contract (unless the prospecting company is able to meet the processing commitment on its own). Contracts with American conglomerates - and those with substantial American shareholdings - should be avoided because of their links with the American war industry. 5. FDI contracts should be of a joint venture nature with the Islamic government being a partner through a holding company. Contracts should also be of a Buy-Own-Transfer (BOT) nature envisaging transfer of ownership and management to the Islamic government over (maximum) a 10-year period. A national mining madrasa must be set up to facilitate upgrade of technical skills to an Islamic workforce. DFI partners must be encouraged to participate in manpower skill upgrade. 6. A Tamveeli debt investment related to mining sector projects may be floated (on musharka/ modaarba bases) to allow domestic private investment participation. This should be part of the National Credit plan. Tax concessions may be provided for investing in such Tamveeli instruments. 7. Small scale mining projects in the countryside maybe encouraged. They may be linked to processing activities in the local economy and to

community development in general. Limited scope also exists for their participation in large scale mining projects. 8. Environmental effects of mining projects must be carefully considered on a realistic basis and initiatives should be launched to asses the full environmental costs of mining sector projects - this is especially important in the case of non-renewable mineral resources. Mining projects should normally not cancel out agriculture and increase the disaster proneness of local environment. 9. The impact of mining sector development on local community life must be carefully evaluated. Displacement without compensations must be avoided at all costs. Local community must be involved in the management process of mining projects related to their area. Attempts must be made to ensure that local communities appreciate the need for and benefit from local mining development. 10.A holding company must be established representing the ministry of mining and working in close collaboration within Afghan Industrial Development Office (see appendix). It should be responsible for: a) participation in management and ownership of joint ventures in the mining sector; b) maintaining and supervision of all mining sector projects; and appointment of public sector management official in each joint venture project. c) Utilization of funds raised through domestic private borrowing; d) Support and facilitation of national mining sector projects; e) environmental evaluation of mining sector projects f) organizing local community affected by the implementation of mining sector projects; g) compliance with instructions received from the ministry of mining and AIDO. Prioritization strategy: The Islamic Republic has high quality deposits of iron core, copper, gold and rare earth minerals besides there are substantial deposits of aluminum, lead, zinc, gemstone sulphur, talc, gypsum and chromite. Petroleum and natural gas resource potential is also substantial.

The Islamic government must be a major investor and organizer within the mining sector strategizing mineral sector investment (linking it with public sector investment in manufacturing in particular) must be seen as the Islamic government’s responsibility. This requires careful prioritization and time sequencing of mineral sector projects in line with the policy orientation outlined in section 1 of this paper. There is an urgent need to redraft the existing mineral and hydrocarbon laws promulgated by the ghaddar government since these laws were dictated by imperialist interests and were instruments for subordinating the Afghan mining sector to global mining value chains on the Latin American model. The fundamental difference in the policy suggested above and the mining policy of the ghaddar government is that DAIMG advocates linking mining sector investment to investment in manufacturing and service sectors to achieve value chain upgrade and gradually increase the appropriation of mineral resources for domestic value addition. The ghaddar government’s mining policy sought the development of mining as the creation of a standalone enclave separate from the rest of the domestic economy and a primary source of export earning. Increasing public sector control of management and ownership (through BOT and other technology transfer arrangements) was no part of mining sector strategy of ghaddar government. DAIMG stands ready for offering suggestions for the redfrafting of mineral and hydrocarbon laws provided that the existing laws are sent to us. On the basis of the mining investment policy perspective outlined above the following mineral sector prioritization strategy is outlined. Priority 1 2 3 4 5 6 7 8 9 10 Mineral Iron ore Fluorspar Oil and gas services Lead and zinc Copper Limestone Gemstone Chromite Marble Lithium

Hazrat Amirul Momineen has prohibited development of rare earth mining as prospects for their domestic processing and incorporation in manufacturing are non-existent at present. This is likely to be considerable pressure especially from Chinese investors for permitting rare earth mining and export. This needs to be skillfully resisted until prospects appear for domestic processing and use of at least a proportion of raw earth extracts in domestic manufacturing. This appears unlikely to happen during a medium term planning period. However, Chinese technical assistance may be solicited for creating a limited domestic capacity for incorporation of rare minerals in some segments of domestic manufacturing. Chinese investment for soft rare earth extraction may be linked to progress in the domestic capacity for rare earth minerals use within the manufacturing sector. This is however a long term perspective. Appendix: Previously submitted paper on Industrial Policy in the Islamic Emirate.

Policy Framework for Industrial Organization in the Islamic Emirate of Afghanistan Rationale The industrial sector in the Islamic Emirate consists of four main segments: a) mining, b) manufacturing c) construction and d) transport. Rapid development of these sectors is essential for the emergence of an increasingly self-reliant non capitalist Islamic economy which is sectorally integrated and technologically advanced. Industrial development must be a state project. It cannot be left to the spontaneous functioning of market forces. This is because an Islamic economic is not a capitalist economy and creating a sustainable Islamic economy (and its industrial component) requires significant departures from capitalist norms, methods and practices. In this paper DAIMG presents some suggestions regarding the state’s role in the industrial development of the Islamic Emirate. The paper is structured as follows. We begin by proposing a vision underlying state participation in industrial development and outlining the scope of state

policy. We then discuss state policy objectives and finally suggest some measures for implementing state policy. Vision State participation in industrial development is concerned to enhance the Islamic Emirate’s resilience to global and national economic shocks, enhance its selfsufficiency, promote inter-sectoral and intra-sectoral integration, stimulate employment growth, promote Islamic values and consciousness and evolve noncapitalist transactional forms. Policy Scope a. Promotion and organization of state investment in the form of state owned enterprises and joint ventures with national and international private sector partners especially in: defense related industries, mining, construction, heavy manufacturing branches (steel, machinery, metallic non minerals, chemicals, fertilizers and the IT sector). b. Rehabilitation of carefully selected Industrial enterprises. c. Promotion of facilities for skilled manpower development. d. Industrial infrastructure development.

e. SME and micro enterprise facilitation. f. Organization of industrial estates and g. Management of industrial aspects of disaster management The policy for state participation in the industrial sector (henceforth called the Policy) will be fully integrated into all other policy frameworks (defense, macroeconomic, dawah, social, foreign) of the Islamic government. It will be implemented as part of a medium term national economic plan and will be periodically reviewed in accordance with federal budgets and annual development plan. Objectives I. To fully integrate the industrial development process with the processes of moral and material development of Afghanistan’s Islamic society and polity. II. Rapid development of national indigenous products, technology and skills. III. Effectively execute a national mineral policy which a. Maximizes the domestic processing and uses of manufacturing sector inputs of mineral resources

b. Minimizes the external transfer of value added generated through the mining process c. Stimulates the rapid transfer of technology and skills to the national workforce through medium term BOT contracts with multinational firms. d. Manages mining sector investment through community based negotiation to avoid displacement conflicts and frictions and to transfer a portion of mining sector benefits to communities. e. To fully integrate mining sector products with defense production (especially with regard to lithium, soft rare earths and iron ore). IV. Create a national mass of higher skilled manpower to improve factor productivity. V. Creation of employment (especially of self-employment) opportunities through encouragement of non-capitalist SMEs and enterprises. Note: a non-capitalist enterprise is one the owner of which is motivated by the virtues of sabr, tawakul and infaq and not by the vices of hirs and hasad. It also has no dealings with riba and gharar based money and capital markets. Since no riba or gharar based money and capital markets can exist in an Islamic Eirate and socio-economic policy explicitly aims at promotion of sabr, tawakul and infaq and discourages the growth of hirs

and hasad all enterprises (except wholly owned foreign multinational subsidiaries) are gradually being converted into non-capitalist public enterprise. VI. Promotes industrial clustering through the creation of economic zones through infrastructural facilitation and fiscal incentivization. However no relaxation of labor laws and environmental standards should be offered to investors in these special zones. Labor legislation and its implementation throughout the country should be strictly in accordance with the Shariah. VII. Provide and maintain a regulatory framework for all industrial units (both public and private). VIII. Develop, implement, monitor and revise a national rehabilitation plan of carefully selected sick units. The national rehabilitation plan should be developed in light of the production and investment priorities of the national medium term economic plan. IX. Provide extension services to existing industrial units both public and private. Articulate a foreign investment policy which should: a. Prohibit portfolio investment

b. Encourage direct foreign investment in carefully selected sectors (mining, electronics, heavy chemicals, IT, automobiles) especially in the form of joint venture with state enterprise on the basis of BOT contracts. c. Prohibit foreign investment in sectors which can potentially compete with local industries (textile and clothing, leather manufacturing, food and fruit processing, agriculture, investment in land and real estate etc. d. Encourage investment from countries being exiled from the global capitalist system (especially neighboring countries, Russia, Belarus, North Korea , Venezuela and Cuba). Estimate and actively solicit foreign investment from Islamic communities (madaris, Islamic business and trade association, auqaf) from neighboring countries, Qatar, Kuwait, Turkey, , Malaysia and Indonesia. Measures for Implementing the Policy a. Survey of closed units to be rehabilated to be completed within a six-month period b. Selection of a manageable number of sick units for renewal through merger and financial rationalization.

c. Developing domestic supply chains in specific product areas linking industrial, agricultural and service production sectors. d. Restoration of private investor confidence in rehabilitated units – development of incentive packages for the purpose. e. Promotion of negotiation with suppliers of utilities (especially gas, electricity and water) for uninterrupted supply to selected industrial units. f. Establishment of management boards of industrial sectors to enhance unit management and provision of infrastructural facilities. g. Setting agency negotiation time lines for provision of utility services to selected industrial units. h. Establishment of one-window investor facility arrangement at newly established Afghan Industrial Development Office (AIDO). See proposal below: i. Use of digital technology for management. j. Strengthening linkages within industrial units, communities, regulators and academic institutions. k. Establishing functioning clusters of iron and steel, marble and granite, chemical and food processing and storage industries in selected regions and districts.

l. Establishment of industrial estates in at least four provinces and logistics parks related to these industrial estates. m. Promotion of musharka, modarba, ijaara and Islamically legitimated financing for industrial investment. n. Promotion of construction and transportation industries. o. Introduce a policy of land management to avoid speculation in real estate and reduce the price of land for industrial acquisition. p. Establish effective dispute settlement mechanism in accordance with Islamic norms and legal practices. q. Facilitate SME investment in textile and clothing, leather, cutlery, furniture, embroidery, handicrafts, pottery etc. r. Facilitate micro enterprises in textile madeups, carpets, handicrafts, furniture, spices etc. s. A SME/micro enterprise specialization cell be established at the proposed AIDO. t. To promote skills the policy will seek the integration of all technical institutes, colleges, high schools, madaris and universities with selected industrial units.

u. Direct foreign investment and foreign grants will be encouraged in technical training especially from neighboring countries as well as China and Russia v. Vocational training will be made compulsory in all high schools and madaris. Implementation While the execution of the policy will be the primary responsibility of the Ministry of Industries and the Afghan Industrial Development Office every effort will be made to co-ordinate policy implementation with: a. The Ministry of planning b. The Ministry of Amr bil Maruuf wa Nahi anil Munkar c. The Ministry of Defense d. The Energy Department e. The Ministry of Mining f. The Minstry of Finance g. The Ministry of labor h. The Ministry of Education, Science and Technology i. Provincial Administrations

The policy will be a component of the national medium term development plan – integration of macroeconomic social and moral development initiatives are crucially important for the successful implementation of the Policy. Incentivisation packages may be developed to promote industrial development as a means for the achievement of national defence, moral, economic and social objectives as stipulated in the national medium term development plan. Following initiatives may be considered: a. Exemption from electricity duty b. Tax free import of capital goods for initial installment and Balancing Modernization Replacement (BMR) projects c. Exemption of tax on transfer of land of sick units for industrial purposes d. Concession on land lease charges e. Acquisition of land in installments with low down payments f. Subsidization of transport charges g. Subsidization of land acquisition h. Qard Hasna financing by the Islamic government for selected SMEs and micro enterprises especially in IT and Defense related sectors to be used for purchase of new machinery

Incentives provision will be performance based. Performance assessment will take account of: a. Success in promoting Islamic values (Sabr, tawakkul and infaq) among management, labor and clients. b. Meeting national development objectives in the medium term national development plan. c. Financial performance indicators. d. Serving local community needs. The Afghan Industrial Development Office (AIDO) DAIMG proposes that an office (AIDO ) be created to execute the policy. AIDO will report to the Ministry of industries and seek to execute the following operational mandates: a. In line with the overall strategy of the medium term national development plan prepare a sub-plan for Public and industrial investment of which the rehabilitation of enterprise plan will be a key component. b. Submit the public sector enterprise and investment plan for approval to the ministry of industries and through the ministry of industries to the ministry of planning and the central cabinet.

c. Prepare an operational and functional strategy for the implementation of the public sector enterprise and investment plan. The public sector enterprise and investment plan will have four components: a) Setting up new public enterprises b) Rehabilitation of selected sick units c) Establishment of joint ventures with national private sector d) Establishment of joint venture with foreign firms e) Public sector support to SMEs and micro enterprises. d. AIDO will monitor the process of establishment and operation of public enterprises during the plan period. e. AIDO will develop a national rehabilitation Strategy for the plan period and monitor its implementation. f. It will also oversee the operation of the rehabilitated enterprises. g. AIDO will develop a strategy for promoting joint venture and financing with national private sector firms. It will also oversee the operational performance of such joint ventures. h. AIDO will develop a strategy for promoting joint ventures with foreign direct investors in selected industries and be responsible for negotiation of joint venture, BOT contracts with foreign companies.

i. AIDO will monitor implementation of joint venture contracts with foreign companies. j. AIDO will develop a strategy for public sector support of SME and micro enterprises and oversee implementation of this strategy. k. AIDO will serve as the focal agency coordinating the work of all ministries, departments and units involved in the execution of the public industrial development strategy. Board of Directors AIDO’s Board of Directors will include: 1. Chairman (appointed by the Ministry of Industries 2. CEO 3. Secretary Ministry of Industries 4. Nominee of Ministry of Planning 5. Nominee of Ministry of Amr bil Maruf wa Nahi anil Munkar 6. Nominee of Ministry of Finance 7. Nominee of DAB 8. Nominee of Central Chamber of Commerce and Industries 9. All chairmen of Industrial Estates

10.President National Chamber of trade and industry 11.Nominee of Ministry responsible for Technical training 12.Nominee of Ministry of Defense 13.Nominee of Ministry of Labor 14.And any other member nominated by the Cabinet and Hazrat Amir ul Moumineen (Hifz Allah) The administration structure of AIDO will consist of: 1. The Chief Executive Officer. 2. General Secretary. 3. Directorate of Planning and Strategy. 4. Directorate of Public Enterprises. 5. Directorate of the Rehabilitation Program. 6. Director of Joint Venture with National Investors. 7. Directorate of joint ventures with foreign investors. 8. Sub-directorate for foreign investment Negotiation. 9. Directorate for industrial Estate Management.

10. Directorate for support of SMEs and micro enterprises. 11. Directorate for propagation of Islamic values in the public industrial sector (including joint venture). Overall responsibility for coordination, financial, administration will be that of the Planning and Strategy Directorate which will have the following sub-units. 1. Plan and Strategy units 2. Investment and finance unit 3. Business facilitation unit 4. Projects unit 5. Administration unit 6. Technological upgrade monitoring units 7. Office coordination unit 8. Research and survey units. Services: AIDO will provided the following services. a. Market information b. Assistance with regulatory approvals and implantation

c. One window information facility. A separate National Industrial Estates board under AIDO may be set up to plan , develop and manage industrial cluster zones throughout the country and facilitate infrastructural development and oversee the day to day operations of industrial estates . It will also be responsible for identifying potential industrial estate at the provincial level.