DAIMG recommendations-Report on General Assesement of SOEs

DAIMG's Recommendations regarding the Report on the General Assessment of Emirate Companies 1. A company’s act detailing the governance structures, rights and obligations and functional procedures of the Company should be enacted. This should cover both enterprises & Emirate companies (DAIMG can assist in preparing a legal draft). 2. Broad guidelines and statutes should be developed regarding compensatory structures of Emirate companies 3. Broad guidelines outlining complaint procedures should be developed. 4. International accounting procedures should be modified to relate to traditional practices. The Emirate must develop its own accounting standards. (DAIMG can assist in this). 5. Asset valuation of Emirate companies should be undertaken. 6. Policies should be developed to promote private investment in the Emirate companies. A Joint Venture Law needs to be enacted as well as mudarba/musharka schemes should be initiated to promote corporate investment in the Emirate companies. 7. Composition, authority and functioning of the General Directorate Emirate Companies should be clearly defined and appropriate statutes should be developed. 8. The company law and other legislative instruments must clearly specify the nature of the relationship between the individual Emirate companies, the General Directorate and other state authorities. These legislative acts must also specify the relationship of the Emirate companies to that of the private sector. 9. Audit of financial accounts of Emirate companies should be mandatory, audit must be carried out exclusively by Afghanistan audit firm, No foreign capitalist audit firm should be allowed to audit accounts of Emirate companies or any other companies in the private sector. (DAIMG can identify Islamic auditors in Pakistan who can be used for auditing Emirate companies by Afghani audit companies. 10. Sector wise marketing strategies should be developed by the General Directorate of Emirate Companies. Standard procurement procedures should also be developed by the General Directorate. 11. A Dawah Majlis must be established in each Emirate Company (and in all large private sector companies including foreign companies). Its role should be (a) to promote Islamic religious consciousness among managers and employees of the company (b) propagate and explain policies of the Islamic government to company managers and employers (c) administer the provision of health and social welfare facilities to the employees and (d) Represent the employees in disputes and mitigate their grievances. 12. The 17 companies that have recently been evaluated to determine asset value should be selected for rehabilitation depending on (a) core activities income (b) state of operating fixed assets and need for capital investment (c) operating profit (d) net non-core income

(e) Relatively low level of external debt and (f) placement in prioritized sectors (agricultural processing, telecommunication, chemicals, fertilizers, pharmaceuticals, energy, arms production (an Emirate company specializing in anti-aircraft/drone production should urgently be established. 13. The company law that has been sent to the Ministry of Justice is requested to be shared with DAIMG if DAIMG is to be used to finalize legislation and statutes for company management/operations of Emirate Companies 14. The proposed company law must ensure that the Emirate Companies not become capitalist enterprises dedicated solely to capital accumulation. Independence of company management must be subordinated to the guidance of the religious and political leadership of the Islamic state. This means that the general Directorate retains a strong supervisory role over company management. 15. Ulema must play a central role in company supervision and legal regulation of company offices to ensure that company functioning and policies remain within the ambit of the Sharia. 16. The proposed independent Experts committee to formulate operational procedures should develop these procedures independent of capitalist practices (described as “modern in the report). The Expert committee should work under the supervision of an aalim and should formulate management policies in accordance with the Islamic knowledges. Human rights ideology should be firmly rejected as a rationale for organizing employer/management rights and obligations. 17. Salary/compensation structure in the Emirate’s Companies should not be market driven. This salary/compensation structure should serve as a benchmark basis of market driven salary structures in relevant sectors. 18. NTA and contract payments should be structured into the main salary structure of the company. 19. Religious and spiritual commitment should be taken into account in recruitment and promotion policies of the companies and in the allocation of executive responsibilities. 20. Rewards and punishment policies should be devised in strict accordance with Sharia law provision. 21. All round ability development should emphasize progress made by individual employees and managers in articulating the virtues of Sabr, tawakkul, isaar and infaq. 22. The development of pension services for retirees of Emirate Companies is recommended. 23. DAIMG strongly supports the recommendation of the Report for the sectoral consolidation of Emirate Companies as described in the mergers table. We recommend that consolidation be linked to our proposed rehabilitation program. The numbers of individual companies should be reduced to take account of state of capital equipment, operational

ability and presence in prioritized sectors. 24. Afghanistan should develop its own accounting standards and should modify application of capitalist modern accounting standards. 25. DAIMG agrees with all other recommendations regarding finance in the Report. 26. DAIMG recommends that Da Bank Afghanistan launch a Mudarba Certificate for investment in the Emirate Company sector for the general public with the following features: a) receipts from the sales of these certificates to be lodged with the General Directorate of Emirate Companies b) the General Directorate to allocate receipts to individual Emirate Companies in accordance with their present performance and future profit expectation, c) rate of return on the certificates to be determined on the basis of the tax and average rate of profit of the entire Emirate Companies sector d) the Certificates be non-tradable generally (to prevent the appearance of a capital market) but may be sold at a fixed time interval, e) the size of the certificate to be related to the valuation of the operating assets of the Emirate Company portfolio, f) alternatively the certificates may be treated as a loan from the public to the Emirate company sector to be redeemed at face value at maturity and re-issued if necessary. 27. Revaluation of assets should be the responsibility of the Directorate of Emirate Companies in consultation with individual companies. 28. Use of assets should not be dedicated solely to profit maximization. While losses are to be avoided investment policy must be guided by a wide set of objectives including a) meeting the basic needs of the population, b) enhancing technological development and productivity growth in the economy, c) promoting national economic self-reliance, d) contributing to the growth of jihaid capability e) enhancement of sabr, tawakkul, qana’at and infaq among managers and employees etc. Both core and non-core investments should be determined by these objectives. 29. Attracting private investment may be promoted by launch of non-tradable modarba certificates as described in point 26 above. 30. In prioritized sectors (telecommunication, mining, oil and gas, pharmaceuticals) initiatives should be taken by the Directorate to attract joint venture investment from friendly countries (Iran, Turkey, Pakistan, Russia, Mexico, Venezuela, Cuba) but portfolio investment by foreigners should be avoided as a capital market should not be established in the Emirate. 31. Emirate companies, private companies and the government should not borrow from international money and capital markets. Neither Emirate companies nor the government should float sukuks/bonds on international capital markets nor take loans from commercial banks, international financial institutions (Islamic Development Bank, Asian Development Bank, World Bank affiliates, the IMF) or any foreign government. This is necessary to prevent Afghanistan from being caught in the imperialist global debt trap. 32. The Directorate of Emirate Companies should serve as the apex coordinating head of the Emirate Companies Sector. It should report to the Ministry of Finance. It should be a dependent of the Ministry of Finance and should not be a “stand alone” body.

33. As noted above the Directorate should be headed by an aalim. Its officers should include ulema. Legal transactional authentication should be the exclusive responsibility of the ulema. 34. The use of “new and modern” management methodologies should not be taken verbatim from the capitalist management literature but should be adapted to the national ground realities and reflect upon Islamic norms and practices. 35. As noted above audit of Emirate Companies should be undertaken by Afghan audit firms which may hire foreign experts (DAIMG can suggest suitable audit experts from Pakistan) but Afghan audit firms should not affiliate with international firms (KPMG, Pwc, Deloitte, etc.) 36. A comprehensive plan for machinery rehabilitation and retooling should be drawn up by the Directorate Companies selected for rehabilitation and should be provided funds from machinery retooling and upgrade. Considerable funds should be allocated for this purpose in the context of medium term annual national development plan. 37. As noted above, the responsibility for the provision of health and welfare services should be that of the Dawah Majlis established in each Emirate Company and also in each large scale private company. 38. The proposal to set up an “independent” organization of Emirate Company needs elaboration. No policy making and policy implementation macro level agency can be politically independent of the leadership of the ulema. Therefore DAIMG recommends that the proposed organization: a) be established as a technical subcommittee of the General Directorate and report through it to the Ministry of Finance, b) be headed by an aalim and include senior ulema among its execution to provide continuous guidance to the professionals and assess their work in the light of the Islamic knowledges (fiqh and kalam), c) the function of the Technical Committee be providing technical guidance to the companies, evaluating their performance and preparing an Annual Performance Report, and making policy recommendations for approval by the General Directorate. 39. The second proposal (on the establishment of an independent agency for emirate companies) also mentions an objective of company macro management to be preventing emergence of monopoly in the market. This seems to rule out nationalization. DAIMG recommends that consideration be given to the possibility of nationalization of the following sectors a) mining b) energy especially electricity c) anti-aircraft (drone) production and d) steel. Sector wise consolidation of the Emirate Companies may also lead to the growth of price formation leadership of this group in specified markets. We recommend that the consolidated Emirate Companies be price settlers rather than price takers and national planning prices policy play a rule in price determination of goods and services produced by the Emirate Companies. Conclusion As an Islamic political economy is mainly committed to the evolution of a non-capitalist property form – a property form focused on the creation of wealth as a means for the promotion of the virtues of Sabr, tawakkul, infaq and jihad throughout society – attainment of economic efficiency (realization of surplus) is thus one necessary but not sufficient determinant of management (both macro and micro). Emirate companies provide a rare

opportunity for gradually building the Islamic property form in Afghanistan. They should serve as models of management and operations for the private sector. Capitalist management and economic literature provides some guidelines for the promotion of economic efficiency. It has no relevance for wealth creation as a means for the promotion of Islamic virtues of Sabr, Tawakkul and Infaq. Therefore, policymakers in the Islamic Emirate face the unique challenge of adapting modern management practices, techniques and policies to serve the objectives of the promotion of sabr, tawakkul and infaq through wealth creation in Afghanistan.