VZCZCXRO5609
PP RUEHDBU RUEHIK RUEHPW RUEHYG
DE RUEHBUL #1746/01 1441409
ZNR UUUUU ZZH
P 241409Z MAY 07
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 8312
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEHDE/AMCONSUL DUBAI 5132
RUEHAD/AMEMBASSY ABU DHABI 1839
RUEKJCS/OSD WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUCNDT/USMISSION USUN NEW YORK 4115

UNCLAS SECTION 01 OF 03 KABUL 001746 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR SCA/FO (Deutsch), SCA/RA, AND SCA/A 
CENTCOM FOR CG CFC-A 
DEPT PASS AID/ANE, OPIC, AND TDA 
NSC FOR AHARRIMAN 
TREASURY PASS TO ABAUKOL, AND JCIORCIARI 
COMMERCE FOR DEES, CHOPPIN 
 
E.O. 12958 N/A 
TAGS: EINV ETRD EFIN BEXP ECON AF
SUBJECT: AFGHANISTAN - COCA COLA PLANS LARGE EXPANSION 
 
KABUL 00001746  001.2 OF 003 
 
 
(U) This message contains SENSITIVE BUT UNCLASSIFIED information. 
Please protect accordingly. 
 
SUMMARY 
------- 
 
1.(SBU) Kabul's Coca-Cola bottling plant, the flagship U.S. brand 
name investment in Afghanistan, is moving forward on an $8 - 10 
million expansion.  The expansion will better position the facility 
to compete for contracts to supply bottled and canned beverages to 
U.S. and NATO forces.  Coke's growth will be an important symbol of 
success for both Afghanistan and the United States.  Coca-Cola's 
successful petition to President Karzai yielded a presidential order 
to raise the tariff on imported beverages from 20 to 40 percent. 
The GOA also cut tariff rates on inputs to the bottling process from 
the 10 percent assessed to finished products to 1 percent, based on 
an importer's written petition claiming the imports are for 
industrial use.  However, the Afghanistan Investment Support Agency 
makes this determination, not the Afghan Customs Directorate. 
Because the tariff increase is likely to increase smuggling and 
decrease revenue, the IMF is insisting that the tariff hike be 
temporary.  The Fund is also insisting that the GOA eliminate the 
discretionary element to the tariff cut for industrial inputs, 
because it is likely to increase corruption.  END SUMMARY. 
 
COKE - FINDING ITS WAY 
---------------------- 
 
2.(U) Kabul's Coca-Cola bottling facility (owned by Habib Gulzar 
Non-Alcoholic Ltd.), which had its grand opening last September, is 
poised for an $8 - 10 million expansion. The plan is to expand three 
key parts of the factory's output by Q1 2008: type of product, size 
and type of packaging, and quantity of output.  After the expansion, 
the facility will be able to produce bottled water under the brand 
name Kinley and soft drinks under the brand names of Coca Cola, 
Fanta, and Sprite in a larger variety of containers (including - 250 
ml glass bottles, 330 ml cans, and up to 1.5 L plastic bottles). 
After this investment, Coca Cola Afghanistan expects to increase 
total output as well.  Currently, the facility is operating two out 
of a possible three shifts, six days per week, and it is looking at 
the feasibility of adding a third shift.  Coca Cola Afghanistan 
employs 250 people - a number that could increase to over 300 once 
the expansion is complete. 
 
CHALLENGES 
---------- 
 
3.(SBU) Demand for bottled water and soft drinks is highly seasonal 
in Afghanistan, and this winter's unusually cold weather, dampened 
local demand for soft drinks well below the norm.  The company also 
expected to tap into the U.S. military and NATO markets more 
quickly.  According to plant management, Coca Cola Afghanistan 
recently passed health inspections conducted by U.S. forces. 
Managers claimed that contracts with both U.S. and NATO forces would 
be signed upon the successful completion of the expansion. 
 
LOCAL BEVERAGE MANUFACTURERS BAND TOGETHER 
------------------------------------------ 
 
4.(U) Reportedly, several companies have recently organized and 
registered under the name Afghan Beverage Manufacturers Association. 
 Coca-Cola, along with other domestic bottlers, is a founding 
member.  Of the $65 million in total investment in the beverage 
sector (which includes five major producers of soft drinks and 
bottled water), Coke licensee Habib Gulzar Non-Alcoholic Ltd. has 
invested a total of $25 million in production capacity and other 
investments.  Coke's production capacity is nearly 40 per cent (17 
million cases) of the sector total. The Afghan Beverage 
Manufacturer's Association estimates that the total demand is 
approximately 25 million cases (including bottled water) and there 
are approximately 2000 direct employees in the sector. 
 
PROTECTIONISM REARS ITS UGLY HEAD 
 
KABUL 00001746  002.2 OF 003 
 
 
--------------------------------- 
 
5.(SBU)  Coca-Cola management noted that low tariffs on imported 
beverages and relatively high tariffs on imported production inputs 
such as bottle caps, labels, and plastic test tube-like objects 
(which are then heated and formed into bottles) had limited its 
production operations to one shift working less than six days per 
week.  The GoA had treated these as finished products, even though 
the facility was using them merely as inputs.  The company 
petitioned the government to create in the Afghan tariff schedule a 
1 percent duty on these industrial inputs instead of the 10 percent 
paid on finished products.  The GOA agreed and gave the Afghan 
Investment Support Agency, not the Afghan Customs Directorate, the 
authority to determine if an imported good is a finished product or 
an industrial input, based on an application filed by the importer. 
 
6.(SBU) In a meeting with President Karzai on the margins of the 
SAARC Summit in Delhi, Coca-Cola, joined by at least one other local 
bottler, asked the government to raise tariffs on imported beverages 
to protect local manufacturers.  Domestic bottlers, the companies 
warned, would have to scale back or close unless the GoA took action 
to promote the Afghan bottling industry.  Additionally, Gulzar 
reportedly pledged that he was ready to make this new $8-10 million 
investment if the company could be convinced that some of its 
concerns were being met.  After hearing the businesses' complaints, 
President Karzai directed that the GOA raise the import tariff rate 
on beverages from 20 to 40 percent.  This increase, asserted the 
bottlers, is reasonable because neighboring countries like Pakistan 
and Uzbekistan impose tariffs of 57 and 120 percent respectively on 
imported beverages. (NOTE:  The IMF Mission reported before its 
departure that it will require that the GOA set an expiration date 
for the new tariff increase for imported beverages and that it 
eliminate the discretionary aspect of the 1 percent duty valuation 
for imported industrial/manufacturing raw material inputs.  END 
NOTE). 
 
SMUGGLING 
--------- 
 
7.(SBU) Domestic bottlers also complain about illicit competition 
from smuggled bottled water and soft drinks. In addition, Kabul is 
rife with rumors that beverages intended for consumption by U.S. and 
NATO forces are being diverted into private super markets.  (NOTE: 
President Karzai's office approached the Embassy for help in 
controlling these illegal diversions by military suppliers.  END 
NOTE.)  Beverages imported for military use are not assessed duty, 
so they enjoy a considerable cost advantage that seriously hampers 
the competitiveness of local producers. 
 
PEPSI HURT BY TARIFF RISE 
------------------------- 
 
8.(SBU) PepsiCo supplies the Afghan market from bottling plants in 
Pakistan and the United Arab Emirates, and its exports to 
Afghanistan have suffered severely from the tariff spike.  Last 
year, under a tariff schedule that imposed tariffs on imported goods 
at a rate of 20 percent for at least part of the year, PepsiCo paid 
a total of $4.5 million to the GoA. 
 
COMMENT 
------- 
 
9.(SBU)  The success of the Coca-Cola bottling plant, currently the 
largest and most recognizable U.S. brand name investment in 
Afghanistan, is important an symbol of success for Afghanistan and 
the United States.  However, both the tariff changes that 
Afghanistan has implemented and the manner in which they were 
implemented raise serious policy concerns.  Given Afghanistan's long 
and porous border, tariff rates as high as 40 percent are likely to 
induce smuggling and therefore significantly reduce government 
revenue.  Similarly, the discretionary process through which the 
quasi-governmental Afghanistan Investment Support Agency determines 
whether an import is a final product or an industrial raw material 
 
KABUL 00001746  003.2 OF 003 
 
 
input based on an importer's petition opens the door to potential 
abuse and corruption. This also complicates the ability of GoA to 
project its revenues and plan expenditures accordingly.  Finally, 
President Karzai's order to change the tariff rate, reportedly over 
the objections of his Finance Minister and without reference to 
parliament, raises serious questions about future political 
interference in economic policy and Afghanistan's ability to sustain 
revenue growth in the face of domestic protectionist pressures. 
 
WOOD