This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 KABUL 000623 
 
SIPDIS 
 
DEPARTMENT FOR SA/FO, SA/A, EB 
TREASURY FOR PARAMESWARAN 
NSC FOR AHARRIMAN, KAMEND 
CJTF-76 FOR POLAD, CENTCOM FOR CG CFC-A 
COMMERCE FOR AADLER 
 
E.O.12958: N/A 
TAGS: ECON ETRD EFIN PREL EAID PGOV AF OPIC
SUBJECT: NEW INVESTMENT LAW DRAWS BOTH PRAISE AND CONCERN 
 
REF: KABUL 000497 
 
------- 
Summary 
------- 
 
¶1. (SBU) A new investment law, quietly signed by the 
President just before the new Parliament convened, has 
elicited both praise and concern among the international 
and Afghan business community.  The new law, while offering 
more favorable conditions in areas such as the leasing of 
real estate and duty-free export of goods manufactured in 
Afghanistan, also excludes permanent private sector 
representation on the High Commission for Investment, 
leaves open the possibility of the establishment of a 
minimum threshold value for investment, and includes 
language that may foster corruption in the consideration of 
proposals in sensitive sectors such as mining and 
hydrocarbons.  End summary. 
 
¶2. (U) The Government of Afghanistan passed a new 
investment law in early December, squeezing it in just 
before the new Parliament sat on December 19, after which 
laws could no longer be passed by decree.  This law 
replaces the 2003 Law on Domestic and Private Investment, 
which was considered emergency legislation. 
 
¶3. (SBU) Donors and GOA officials have long agreed that a 
more comprehensive law was needed.  In the last year, 
multiple drafts have circulated for comment among the 
donors.  The GOA had been under pressure to pass several 
l 
pieces of key economic and commercial legislation before 
Parliament convened and the legislative process slowed as 
members got their bearings.  Minister of Commerce Arsalas 
announcement of the laws passage during the December 4 
Trade and Investment Framework Agreement talks took us by 
surprise, as the lead-up to passage was unusually quiet. 
(Note: In the past, a hurried circulation of a final or 
near-final draft of a key piece of legislation provided 
donors a final opportunity to comment. End note.)  The law 
was passed in Dari and Pashto only and an official English 
translation is still not available. 
 
-------------- 
Similarities 
-------------- 
 
¶4. (U) As in the old law, the new legislation allows both 
foreign and domestic investors to make investments, 
establish joint ventures or sole ownership enterprises, 
freely transfer profits abroad and freely sell or divest 
their enterprise. It also continues to allow for the 
expropriation of the assets of an enterprise by the State 
e 
for the purpose of public interest and on a non- 
discriminatory basis. 
 
----------------- 
And Differences 
----------------- 
 
¶5. (U) Differences are as follows: 
 
--The composition of the High Commission on Investment has 
been altered.  It now includes the Governor of the Da 
Afghanistan (Central) Bank (DAB,) as well as the Minister 
of Agriculture.  Previously, representatives of the private 
sector were allocated two seats; the new law does not allow 
for permanent representation, specifying that the 
Commission is authorized to invite representation from the 
private sector to provide consultation and commentwhen and 
if desired. 
 
--More detailed rights and responsibilities have been 
allocated to the Commission, including the right to 
establish a threshold value for initial capital investment 
(for both foreign and domestic investors) and the ability 
to authorize the Afghan Investment Support Agency (AISA) to 
register businesses that fall below this threshold value. 
. 
While the text in the old law refers to the Commission as 
the focal point for policymaking, the new law identifies 
it as the highest governing authority in policy-making on 
investment. 
 
--Areas in which foreign investment can be limited by the 
GOA or restricted by special legislation have been 
expanded.  These areas now include: non-banking finance 
activities, insurance activities, infrastructure (defined 
as power generation or transmission, water delivery or 
treatment, sewage, waste-treatment, airport, 
telecommunications, health and education facilities) and 
natural resources (oil, gas, minerals, metals and forests.) 
 
--Individuals or companies interested in investing in the 
above sectors may, however, submit a proposal for 
consideration on a case-by-case basis by the Commission and 
relevant Ministries.  Such investment may be subject to 
conditions that are more restrictive than outlined in the 
Law.  This provision does not apply to existing investment. 
 
. 
 
--The responsibilities of AISA have been spelled out 
clearly.  According to the Law, AISA has the responsibility 
to establish procedures for the submission, review and 
registration of applications for foreign and domestic 
investment, to review the applications, to register the 
enterprises and monitor them, to promote and attract 
foreign investment in Afghanistan and to ensure compliance 
with the Law. 
 
--An ad-hoc reporting requirement, previously only 
sporadically enforced by AISA, is now required. Registered 
enterprises must immediately notify AISA if there have been 
any changes in ownership or capital structure and file an 
Annual Update (a form which currently includes capital 
invested, number of employees, profits and losses, etc.) 
Enterprises that do not comply risk losing their licenses. 
 
--Income tax concessions for loss carry forward and an 
accelerated deduction for deprecation on capital assets, as 
allowed for in the Income Tax Law, have been included. 
Exemption from export duties for goods manufactured in 
Afghanistan has been expanded indefinitely; under the 
previous law, this exemption covered companies for only 
four years from the date of first manufacture. 
 
--A foreign enterprise may lease real estate up for to 50 
years, instead of the 30 allowed under the previous law. 
 
--Investors are entitled to expanded options for dispute 
resolution.  The previous law allowed for dispute 
resolution in accordance with the United Nations Commission 
on International Trade and Laws rules or through the 
International Center for Settlement of Investment Disputes. 
The new law also permits an investor to specify a 
particular arbitration or dispute resolution procedure in a 
contract or agreement, including specifying that 
arbitration may take place outside of Afghanistan and that 
a law of jurisdiction other than Afghanistans may apply. 
 
--The law allows for expropriation only for the purposes of 
public interest, as in the previous law, but expands upon 
n 
compensation provided for such appropriation, as well as 
methods of disputing the expropriation. 
 
------- 
COMMENT 
------- 
 
¶6. (SBU) The new legislation has been met with mixed 
reactions from both foreign and Afghan businesses and is 
viewed by some as seriously flawed in several key areas. 
The language on threshold value for investment is open- 
ended, allowing the Commission to decide at a later date 
whether or not it wishes to establish such a value, as well 
as the mechanism for approval of investment both above and 
below the value.  Several donors had recommended that this 
language be excised from earlier drafts.  The exclusion of 
the private sector from permanent representation on the 
High Commission for Investment is troubling; previously, 
representatives enjoyed two rotating seats.  The private 
sector has few formalized avenues of communication with the 
government on matters that impact its development and its 
exclusion from the Commission will exacerbate this problem. 
The inclusion of the DAB on the Commission is unusual; the 
participation of Governor of an independent central bank 
could create a conflict of interest. 
 
¶7. (SBU) The formalization of AISAs duties is a positive 
milestone in the development of a very effective 
organization.  The language regarding the duties and 
responsibilities of the Commission, meanwhile, is vague. 
Offering expanded options for dispute resolution is a 
progressive step.  However, it is likely that only 
investors seeking very large damages would exercise the 
option to seek dispute resolution outside of the country. 
This mechanism does not mitigate the urgent need to reform 
the largely-defunct commercial court system.  The 
reaffirmation of certain income tax concessions has been 
received positively, as have been the expanded terms for 
the lease of real estate and export duties on goods 
manufactured in Afghanistan.  The new law, however, fails 
to clarify language allowing for expropriation of assets by 
the State for the purposes of the public interest, which 
could serve as a significant deterrent to investors, both 
foreign and domestic. Additionally it does not address how 
fair-market value will be determined in the case of such 
an expropriation. 
 
¶8. (SBU) Perhaps of most concern is the language regarding 
restricted areas of investment.  This language is not in 
accordance with WTO investment guidelines and will 
ultimately need to be revised as part of the GOAs 
accession bid.  It is also very broad and could create a 
high degree of uncertainty for potential investors.  Some 
experts warn that the process of vetting these proposals 
through a mini-cabinet, under guidelines that are vaguely 
defined, opens to the door for corruption.  Reftel reports 
that this may already be occurring.  Post has and will 
continue to advocate for transparent regulations and 
processes for investment in all areas that will be 
consistent with international best practices. 
 
NEUMANN 
 
 
 
N