VZCZCXRO3815
PP RUEHDBU RUEHIK RUEHYG
DE RUEHBUL #0195/01 0211010
ZNR UUUUU ZZH
P 211010Z JAN 07
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 5582
INFO RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEHFR/AMEMBASSY PARIS 2961
RUEHRC/DEPT OF AGRICULTURE WASHDC 0083
RUEKJCS/JOINT STAFF WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUCNDT/USMISSION USUN NEW YORK 3550
RUEATRS/DEPT OF TREASURY WASH DC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUEKJCS/OSD WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHMFIUU/HQ USCENTCOM MACDILL AFB FL

UNCLAS SECTION 01 OF 03 KABUL 000195 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR SCA/FO, SCA/A, S/CR, S/CT, SCA/PAB, EUR/RPM 
STATE PASS TO USAID FOR AID/ANE 
NSC FOR AHARRIMAN 
OSD FOR KIMMITT 
TREASURY FOR ABAUKOL 
CENTCOM FOR CG CFC-A, CG CJTF-76, AND POLAD 
RELEASABLE TO NATO/ISAF/AUS/NZ 
 
E.O. 12958: N/A 
TAGS: ECON EAGR PGOV PREL SNAR AF
SUBJECT: PRT/KUNDUZ: FRENCH COMPANY TRIES TO REVIVE COTTON 
INDUSTRY 
 
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SUMMARY 
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¶1. (SBU) The New Afghan Project for Cotton and Oil 
Development (NAPCOD), a joint venture between the Afghan 
Government and a French company, continues to struggle to 
re-establish the successful cotton processing industry of the 
pre-war North.  It currently produces cotton lint, cottonseed 
oil, cakes, and hulls.  Many of NAPCOD's efforts in the 
region are constructive and admirable.  It has improved seed 
and quality control, launched credit arrangements for 
farmers, and hired extension agents who train farmers in 
better techniques.  But the company remains unprofitable. 
One of the main obstacles to profitability is competition 
from private cotton gins, to which farmers sell the cotton 
they have grown with NAPCOD's subsidized inputs.  Part of the 
deal at NAPCOD,s creation was an agreement that the GOA 
would suppress competition by not granting any licenses to 
private ginning.  The establishment of a government-sponsored 
monopoly in an industry such as cotton processing distorts 
the market and is probably unworkable in the foreseeable 
future.  We note that in Helmand the state-owned gin has been 
buying cotton at below market prices, turning many cotton 
farmers to poppy.  NAPCOD may still be able to survive, 
however, by adjusting its business model -- it must work with 
cotton farmers and provide them with appropriate incentives 
so that they honor their contracts and sell their crop to 
NAPCOD.  END SUMMARY. 
 
-------------------------------------------- 
Company Aims to Re-establish Cotton Industry 
-------------------------------------------- 
 
¶2. (SBU) PRTOff recently met with Bertrand Ricard, the 
Kunduz-based Agriculture Manager for the New Afghan Project 
for Cotton and Oil Development (NAPCOD) in Kunduz.  NAPCOD, 
which began operations in Afghanistan in late 2004, is a 
joint venture between French cotton and textile company 
Dagris S.A. (60 percent) -- itself majority-owned by the 
French Development Agency -- and the Afghan Government (40 
percent).  The company operates as a private firm and aims to 
become profitable as soon as possible.  According to Ricard, 
NAPCOD is currently operating in seven provinces of northern 
Afghanistan and is headquartered in Mazar-e Sharif. 
 
--------------------------------------------- ----------- 
Founded on the Spinzar Cotton Empire...But not a Rebirth 
--------------------------------------------- ----------- 
 
¶3. (U) The French investors are taking advantage of the 
legacy of the successful pre-war Spinzar cotton empire, which 
was one of the largest industrial operations in Afghanistan 
and made Kunduz Province one of the richest in the country. 
Reportedly founded by Sher Khan Nasher, an Afghan 
entrepreneur with a German wife and a westernized outlook, 
Spinzar (meaning "white gold" in Pashto) produced cotton for 
the international market and had numerous spin-off processing 
facilities making cottonseed oil, soap, animal feed, and 
other products.  Spinzar facilities are dotted across the 
landscape in Kunduz, Baghlan, and other provinces, but only 
the factories in Kunduz and Mazar-e Sharif escaped total 
destruction during the decades of war and neglect in 
Afghanistan.  Spinzar was largely responsible for the 
modernization of the city of Kunduz.  Most of the facilities 
it built remain visible, though many no longer function, or 
only at a much reduced level. 
 
KABUL 00000195  002 OF 003 
 
 
 
¶4. (SBU) The current French-Afghan joint venture, however, is 
not a rebirth of the Spinzar Company and has no direct 
connection to the old company.  It rents a portion of the 
Spinzar factory facilities from the company, which appears to 
be entirely in the hands of the Afghan Ministry of Mines and 
Industry. 
 
--------------------------------------------- --- 
Partnership of Company and Cotton Farmers is Key 
--------------------------------------------- --- 
 
¶5. (SBU) The current joint venture grew out of a desire to 
create a sustainable private company to produce jobs, develop 
the international market for an Afghan product, and provide 
needed access to credit.  According to Ricard, NAPCOD is, out 
of necessity, based on a partnership with the farmers who 
grow the cotton, without which an effective business could 
not prosper.  Northern Afghanistan offers good soil, good 
water, and a climate that is conducive to cotton farming, but 
NAPCOD is still struggling to re-establish the industry.  Its 
efforts include introduction and dissemination of improved 
seed, better quality control, credit arrangements for 
farmers, and extension agents who train farmers in better 
techniques. 
 
--------------------------------------------- - 
Problems with Competition from Illegal Gins... 
--------------------------------------------- - 
 
¶6. (SBU) The main obstacle to this partnership at the moment, 
according to Ricard, is the activity of private cotton gins, 
whose owners buy the cotton that NAPCOD needs to build up its 
business.  As part of the creation of NAPCOD, the Government 
of Afghanistan agreed that private ginning would be 
suppressed to ensure that most cotton grown in the area would 
go to the company for ginning and further processing. 
Private gins are required to have licenses, but in fact, 
almost none of them do, and because they have very low 
overhead -- no payments for licenses, no taxes, and very low 
labor or other overhead costs -- they are able to buy cotton 
at a higher price than NAPCOD can afford to pay. 
 
¶7. (SBU) The company tried to get around this problem by 
signing contracts with farmers to provide seed and fertilizer 
at planting time, while the farmers agreed to sell their 
entire cotton crop to the company at a fixed price that is 
named in the contract.  When this did not work very well the 
first year, NAPCOD changed the contract so that only a 
portion of the harvest would be sold to them -- the rest 
could be sold to the private ginners -- and the fixed price 
was raised to be more competitive.  They also provided 
lower-priced access to the company's products, including oil 
seed cake for livestock feed and hulls to burn for household 
heat and cooking. 
 
------------------------------------------ 
...And Farmers' Failure to Honor Contracts 
------------------------------------------ 
 
¶8. (SBU) Unfortunately, many farmers who sign contracts and 
receive seed and fertilizer in return for their agreement to 
sell their harvest to NAPCOD fail to honor the contract and 
sell much of their crop -- or even their entire harvest-- to 
the private ginners.  The cotton produced by private ginners 
is almost entirely sold on the local Afghan market for use as 
stuffing for pillows and mattresses, unlike that sold to 
 
KABUL 00000195  003 OF 003 
 
 
NAPCOD, which adds value by additional processing and by 
marketing at least part of the cotton lint on the world 
market.  Because the amount of cotton grown is still 
relatively small -- less than one tenth of what was grown in 
pre-war times -- the Afghan market has been able to absorb 
most of the current production.  Ricard had heard, however, 
that much of the cotton bought at higher prices in 2006 has 
been sent to Kabul for storage because the price was too low. 
 It was not clear whether the Afghan "investors" would be 
able to sell the raw cotton later for a profit, but Ricard 
was hopeful that this apparent local market saturation -- he 
estimated the market at about 20,000 tons -- would lead to a 
lower price from private ginners and would encourage more 
cotton farmers to sell their crop to NAPCOD. 
 
--------------------------------------------- ----------------- 
NAPCOD Will Continue Efforts, but Wants GOA Support to Succeed 
--------------------------------------------- ----------------- 
 
¶9. (SBU) Whatever the outcome for this year, the company 
intends to continue its program of pre-season inputs and 
extension programs to encourage farmers to grow cotton and to 
sell the harvest to the company, and hope for a better return 
next year.  Ricard was convinced, however, that without GOA 
commitment to enforce existing laws and restrictions on 
private ginners, as well as to at least encourage contract 
fulfillment, NAPCOD will have a difficult time establishing a 
viable and profitable cotton industry in Northern Afghanistan. 
 
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Comment 
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¶10. (SBU) NAPCOD is a joint venture between DAGRIS, S.A., 
which is majority-owned by the French government, and the 
government of Afghanistan. The Agence Francaise de 
Developpement is supporting the investment, and MIGA, the 
World Bank,s investment promotion arm, has provided NAPCOD 
with a $1 million guarantee.  NAPCOD,s activities here 
appear to be based on a flawed business plan: partner with 
the GOA, have the GOA suppress competing buyers and ginners, 
and operate as a government-sponsored monopoly.  However, 
NAPCOD's efforts to reset its terms with farmers are 
encouraging, as are its efforts to get the GOA to help with 
contract enforcement.  In the final analysis, more intensive 
work on the contractual issue may be the key to making the 
business model work in something approaching free market 
conditions.  Given the weak state of governance in 
Afghanistan, criminalizing private ginning is unlikely to be 
enforceable in the foreseeable future, and could be damaging 
to the cotton economy in the longer term.  We also note that 
in Helmand, the State-owned cotton gin has been paying below 
market prices to cotton farmers, many of whom have responded 
by growing poppy instead. 
NEUMANN