VZCZCXRO0185
PP RUEHIK RUEHPOD RUEHPW RUEHYG
DE RUEHBUL #2810/01 2950615
ZNR UUUUU ZZH
P 210615Z OCT 08
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 5905
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0673
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEKJCS/OSD WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUEABND/DEA HQS WASHINGTON DC
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
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 4431
RUEHNT/AMEMBASSY TASHKENT 6921
RUEHTA/AMEMBASSY ASTANA 0060

UNCLAS SECTION 01 OF 07 KABUL 002810 
 
DEPT FOR SCA/FO, SCA/RA, SCA/A, and EEB/TPP 
DEPT PASS AID/ANE 
DEPT PASS USTR FOR DELANEY, DE ANGELIS AND GRYNIEWICZ 
DEPT PASS OPIC FOR ZAHNISER 
DEPT PASS TDA FOR STEIN AND GREENIP 
CENTCOM FOR CG CFC-A 
NSC FOR JWOOD AND CSKERRY 
TREASURY FOR LMCDONALD, ABAUKOL, BDAHL, AND MNUGENT 
OSD FOR MISTRETTA and SHIVERS 
COMMERCE FOR DROKER, HAMROCK, AND FONOVICH 
 
SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION. 
 
SIPDIS 
 
E.O. 12958 N/A 
TAGS: ETRD ECON EINV EAID AF PK
SUBJECT: 3RD AFGHANISTAN TIFA TALKS POSITIVE 
 
REF: A) KABUL 02709 
 B) STATE 105426 
 C) ISLAMABAD 3010 
 
¶1. (SBU) SUMMARY: On October 8, U.S. and Government of the Islamic 
Republic of Afghanistan (GIRoA) delegations led by USTR Assistant 
Secretary for South Asia Michael Delaney and Minister of Commerce 
and Industry (MOCI) Mohammed Amin Farhang met in Kabul for the third 
round of Trade and Investment Framework Agreement (TIFA) talks. 
Afghan and USG officials agreed that the GIRoA needs to aggressively 
combat the corrosive effects of corruption as a key step to improve 
the Afghan investment climate, revenue collection, and public 
confidence in the government.  The delegates discussed ways to 
increase job creation, strengthen security, and expand access to 
credit for small and medium enterprises.  Delegates agreed on a 
number of measures the GIRoA can take to improve the business 
climate, including passing commercial and financial legislation; 
establishing and implementing fair and transparent regulations; and 
building governmental capacity to enforce standards for goods 
exported to and from Afghanistan.  Embassy Kabul is engaged on a 
number of fronts, especially via USAID-funded programs, to support 
Afghan efforts in these and other areas related to private sector 
development (see para 18). 
 
¶2. (SBU) Afghans welcomed the announcement that Embassy Kabul will 
offer business and tourist visa services to Afghans beginning in 
February 2009.  Afghans described the steps they are taking to 
prepare for Reconstruction Opportunity Zones (ROZs), and outlined a 
proposal for Afghan Trade Facilitation Zones (TFZs) to increase the 
value-added in textile and agriculture industries especially.  GIRoA 
reiterated its commitment to seek eventual WTO accession but noted 
some opposition in parliament, the business community and the public 
at large.  The USG agreed to aid the GIRoA in a public education 
campaign.  Finally, the USG offered support to Afghanistan's efforts 
to negotiate a new Transit Trade Agreement with Pakistan.  END 
SUMMARY. 
 
******************************** 
Improving the Investment Climate 
******************************** 
 
¶3. (SBU) Afghan officials highlighted the dramatic growth in trade 
during the 2001-2007 period, with exports growing from $100 million 
to $450 million (of which $4 million were exports to the U.S.), and 
imports increasing from $2.5 billion to $3 billion.  According to 
the GIRoA, however, these official figures constituted only half of 
actual trade in Afghanistan.  Including "unofficial" black market 
goods, they estimated that Afghan exports totaled $883 million and 
imports reached $6 billion in 2007.  EPAA has set ambitious export 
growth targets in key sectors, hoping for exports of dried fruit to 
grow from $100 million in 2008 to $1 billion in 2015, marble from 
$40 million to $240 million, and carpets to $370 million during the 
same period.  Minister Farhang opened the meeting by noting that 
total investment in Afghanistan during 2003 - August 2008 was $4.5 
billion, of which $196 million was from U.S. investors.  In contrast 
to this optimistic figure, the Afghan Investment Support Agency 
(AISA) reported a significant decline in total private investment, 
from $1.2 billion in 2006 to $630 million in 2007. 
 
¶4. Afghan and USG officials recognized the need to aggressively 
combat the corrosive effects of corruption on Afghanistan's 
investment climate, revenue collection, and public confidence in the 
government.  Representatives from MOCI, AISA and the Export 
Promotion Agency of Afghanistan (EPAA) identified poor 
 
KABUL 00002810  002 OF 007 
 
 
infrastructure (particularly electricity), bureaucracy, capricious 
fees and taxes on businesses, and a largely uneducated and unskilled 
workforce as impediments to investment.  Afghan and U.S. delegates 
agreed that access to land also remains a major issue affecting 
foreign investors in Afghanistan.  The U.S. delegation noted that 
lack of transparency and industry-specific information and potential 
Afghan partnerships are major impediments for U.S. investors. 
Additionally, both delegations agreed that corruption at police and 
customs checkpoints impedes business development and commerce.  EPAA 
said it plans to launch a 24-hour hotline in the coming months to 
assist truckers who are victims of police and customs corruption. 
EPAA's objective is to ensure that mobile response units are 
deployed to the scene within 20 minutes of receiving a call from a 
trucker. In a telling example, USAID posited that eliminating 
corrupton could quadruple Afghanistan's pomegranate exports. 
 
¶5. (SBU) Delegates also discussed the relationship between the 
unemployment of young men and insecurity, noting that young, 
unemployed men in rural areas are vulnerable to Taliban recruitment 
efforts.  MOCI wants to tackle this issue by boosting economic 
development and creating jobs.  A USAID representative suggested 
that the Afghan government first seek to cultivate current Afghan 
importers as potential investors, particularly those in 
agribusiness, rather than looking to foreign investors who are 
unfamiliar with the environment.  The Ministry of Labor (MOL) said 
it wants to institute a nationwide skills development program to 
address human capital concerns, but has not launhed the program 
owing to lack of funding from the government and international 
partners.  The Afghan delegation noted that a lack of skilled Afghan 
workers has necessitated the import of labor from Iran and Pakistan. 
 To address his need, MOL has identified 250 trades for which it 
would like to provide workers with trining and equipment, but the 
proposed program remains unfunded. 
 
********************************************* 
Status of Commerce and Investment Legislation 
********************************************* 
 
¶6. (SBU) Minister of Commerce Farhang said that since 2003, seven of 
the country's proposed ten commercial bills had become law, several 
by Presidential decree.  Currently, the Ministry of Justice (MOJ) 
plans to send the Contracts Law to Parliament by the end of March 
¶2009.  MOCI also indicated that it was working on three additional 
commercial/ financial laws, but did not provide specifics.  In 
addition to these laws, th GIRoA indicated that it had also drafted 
witout outside assistance anti-hoarding, anti-monopoly, 
transportation, and Afghan Chamber of ommerce laws.  Legal 
amendments to enable Afgan implementation of Reconstruction 
Opportunity Zones (ROZ) have been drafted, which the GIRoA has sent 
to Embassy Kabul for information.  The USG delegation urged a more 
vigorous and unified effort to pass these commercial laws and other 
laws affecting economic activity such as laws on mortgages, secure 
transaction of moveable property, and negotiated instruments, even 
if these laws are not under the purview of MOCI.  MOCI officials 
said they have an excellent working relationship with MOJ and that 
Parliament has asked MOJ to make the commercial laws a priority. 
MOCI also reported that the Contracts Law has been held up at MOJ 
for a year because of problems with the English translation.  USAID 
asked MOCI to better coordinate with international partners on the 
laws.  MoCI said that it would welcome additional capacity-building 
assistance to strengthen its abilities to draft and implement 
commercial law.  (Note:  GIRoA had previously committed to passing 
the ten commercial laws by the end of 2007. End Note)  While passing 
all of these laws would be a positive step, enforcement capacity 
 
KABUL 00002810  003 OF 007 
 
 
remains a concern. 
 
**************************************** 
Strengthening the Regulatory Environment 
**************************************** 
 
¶7. (SBU) Afghan and U.S. delegations agreed on the imperative of 
building Afghan capacity in establishing quality standards.  A 
representative from the Afghan National Standards Authority (ANSA), 
a small, newly independent regulatory enforcement agency, explained 
that, although in existence since 2004, ANSA's lack of buget, 
staff, and equipment -- and the lack of commercial laws and 
regulations -- impair the agency's effectiveness in enforcing 
regulations.  Both delegations agreed that ANSA must be supported to 
enhance the competitiveness of Afghan exports, build nationwide 
quality control, and protect against poor-quality and potentially 
hazardous imported goods.  GIRoA asked for USAID support in helping 
ANSA reach its key objectives, namely the enactment of key 
regulatory laws; procurement of additional fuel testing labs; and 
agency expansion to vital provinces and border points.  GIRoA also 
requested help in implementing "Normandy Standards" for its exports. 
 The Afghan delegation also noted that the Cabinet is reviewing 
whether to create an independent committee to streamline the 
approximately 250-day process to obtain land titles. 
 
********************************** 
Sector-Specific Trade Barriers and 
Investment Challenges 
********************************** 
 
¶8. (SBU) AGRICULTURE:  The delegations agreed that the agriculture 
sector has great potential for economic growth if challenges to its 
development can be overcome.  Poor infrastructure, including a lack 
of cold storage facilities and associated power supply, contributes 
to an estimated 60 percent of Afghan agricultural products never 
reaching domestic or international markets.  The delegations agreed 
that corruption, lack of infrastructure (transportation, 
electricity, and irrigation), cultural constraints surrounding the 
employment of women, and poor access to credit are the main 
constraints to investment and cross-border trade in this sector. 
The Ministry of Agriculture, Irrigation and Livestock (MAIL) said it 
is looking to institute safeguards for food and seeks USG assistance 
in agribusiness production and access to credit, food packaging, and 
cold storage.  At the close of the discussion, Ministry of 
Agriculture official Abdul Wadood Ghorbandhi promised to provide an 
agriculture paper. 
 
¶9. (SBU) MINING:  The Ministry of Mines (MOM) reported that while 
there has been considerable progress in the mining sector, major 
challenges to the sector's growth remain, including security 
arrangements, particularly in precious gemstone mining.  Officials 
reported progress in the areas of energy and security in the main 
memoranda of agreement between the GIRoA and China Metallurgical 
Group Corporation (MCC) on the Aynak copper project.  GIRoA 
officials revealed that they had been able to secure agreement from 
Chinese operator MCC to expand capacity of a proposed coal-fired 
electrical plant from 400 MW to 800 MW output; an 800 MW plant would 
provide 200 MW for copper plant operations and 600 MW to the 
electricity grid.  The Ministry of Interior (MOI) is hiring 1,500 
security guards to demine and secure the project site.  MOM noted 
that demining and general insecurity in precious stone mines are 
endemic constraints on the sector and that only small-scale mining 
is possible in the current environment.  MOM also relayed that in 
the next six months it planned to issue tenders for two blocks of 
 
KABUL 00002810  004 OF 007 
 
 
gas development and two blocks for iron mines, with other tenders to 
follow. 
 
¶10. (SBU) ENERGY:  Delegates stressed the importance of the energy 
sector to Afghanistan's future and emphasized the need to urgently 
address the fuel shortage for the nation's generators.  The Ministry 
of Energy and Water (MEW) said that the drain of skilled labor from 
Afghanistan during the country's tumultuous last 30 years has left a 
dearth of qualified Afghan technicians and managers and severely 
hampered the power sector's growth potential and ability to reform. 
MEW outlined efforts to reform the power sector, including:  a) 
encouraging independent power provider investment in Afghanistan; b) 
developing a comprehensive electricity law; and c) developing a 
five-year plan to restructure MEW with a focus on privatizing public 
utilities, increasing MEW staffing and building capacity within the 
ministry, and developing domestic long-term energy sources.  MEW 
asked for strong donor participation in the hydroelectric sector, 
including the building of dams and transmission lines across 
Afghanistan.  MEW also noted planned imports of power from 
neighboring countries, including through the U.S.-supported CASA 
1000 plan to bring surplus electricity from Kyrgyzstan and 
Tajikistan, and German and Chinese interest in an assessment of 
solar and wind potential. 
 
******************************************* 
Improving Access to Credit and Contact with 
U.S. Markets for Afghan Business 
******************************************* 
 
¶11. (SBU) ACCESS TO CREDIT:  Both sides agreed on the need to 
bolster efforts at expanding access to credit to enable 
Afghanistan's entrepreneurs to succeed in opening and running 
private businesses, whose tax payments should play an increasingly 
important role in funding the national government. To improve access 
to credit, USG officials urged GIRoA to pass proposed laws on 
Mortgages and Secured Transactions and urged GIRoA to improve 
financial reporting standards.  MOCI officials noted that the 
financial sector, in general, has been successful.  However, small 
and medium sized enterprises (SMEs) have trouble obtaining loans 
and, at an interest rate of 18 percent, their cost of borrowing is 
too high.  MAIL requested assistance in establishing a credit 
program for farmers and other agricultural workers. 
 
¶12. (SBU) BUSINESS TRAVEL TO U.S.:  Afghan officials noted strongly 
that the difficulty of Afghan businessmen to obtain U.S. visas is a 
major impediment to U.S-Afghan trade.  Afghan officials warmly 
greeted the announcement that the U.S. Embassy in Kabul will begin 
accepting applications for U.S. business and tourist visas by 
Afghans in February 2009.  USG officials were careful to underline 
that the clearance process could still take 8 to 10 weeks for 
Afghans and that walk-ins would not be accepted.  They said an 
appointment system will be instituted to ensure security. The head 
of EPAA noted the predicament of security concerns preventing many 
foreign buyers, including U.S. buyers, from visiting Afghanistan, 
while difficulties in obtaining U.S. and European visas kept many 
Afghan business representatives from building and expanding business 
ties. 
 
¶13. (SBU) AFGHAN-PROPOSED TRADE FACILITATION ZONES:  MOCI discussed 
its proposal to set up Trade Facilitation Zones (TFZ) in nine 
provinces.  The idea is to better link provincial producers to world 
markets.  Under the program, SMEs would have access to government 
warehouses, cold storage facilities, business centers, processing 
plants, and telecommunications, banking, freight forwarding, 
 
KABUL 00002810  005 OF 007 
 
 
insurance and other export services in regional centers.  GIRoA 
would focus on agribusiness -- both fresh and dried produce and 
nuts, carpets, handicrafts, marble, semi-precious and precious 
stones, and leather production.  Using the TFZs, GIRoA aims to 
increase Afghanistan's value-added contribution for such traditional 
exports, rather than shipping them to Pakistan for processing and 
re-export.  Additionally, MOCI believes the TFZs will aid in efforts 
to overcome unemployment, rampant corruption, stifling bureaucracy, 
fragmented production, and poor security.  TFZs would also develop 
road, power, and water infrastructure in the provinces.  GIRoA 
estimates that the development of nine centers would cost $30 
million each with an initial $1 million per TFZ for feasibility 
studies of 6 to 9 months.  GIRoA seeks USG assistance in funding the 
program. 
 
**************************** 
Preparing for ROZs and 
GSP Videoconference Outreach 
**************************** 
 
¶14. (SBU) Afghan and USG delegates recognized the critical role that 
the duty-free trade benefits for goods produced in Reconstruction 
Opportunity Zones (ROZs) can play in creating jobs and sustainable 
development, especially in impoverished areas along the 
Afghanistan-Pakistan border.  GIRoA officials described preparations 
they were making to to take advantage of ROZs, including creating 
three inter-ministerial committees covering legal, economic 
analysis, and logistical issues, once U.S. legislation is passed. 
They were unable to forecast the number of jobs the ROZs would 
create; instead they countered that the GIRoA would need USG 
guidance on ROZ implementation before such predictions could be 
formulated.  The U.S. delegation updated the Afghans on the ROZ 
legislative status and encouraged the Afghans to be prepared to 
implement ROZs quickly since we are continuing to engage Congress in 
hopes that the law passes soon.  While continuing to work on the ROZ 
legislation, USTR also offered to host a videoconference with 
relevant Afghan officials and private sector representatives to 
further disseminate information on how Afghan businesses can better 
take advantage of duty-free entry of exports to the United States 
under the U.S. Generalized System of Preferences (GSP) program. 
 
**************************** 
Commitment to WTO Accession; 
Public Education Needed 
**************************** 
 
¶15. (SBU) Afghan officials reaffirmed the GIRoA's commitment to 
pursue eventual WTO accession but said this process would require 
time and effort to raise public awareness of the benefits of 
membership.  There were concerns -- and in some cases ignorance -- 
about WTO membership in Parliament, the business community, and the 
general public.  The Finance Ministry has also expressed concerns 
about lower tariffs, which some officials worried could reduce 
revenues and cause the GIRoA to miss IMF financial targets.  The 
GIRoA was reaching out to key constituencies to build national 
support for its policy and aimed to deliver its Memorandum of 
Foreign Trade Regime to Geneva by the end of 2008.  (Note: At the 
last TIFA meeting in July 2007, the GIRoA had indicated that it 
would deliver the MFTR to Geneva by September 2007.  End Note) 
USdel stated that WTO membership would increase Afghanistan's world 
standing and give the nation a voice in global economic affairs. 
USdel applauded Afghanistan's national dialogue on WTO accession as 
illustrative of transparency and the development of democracy. 
USdel agreed to assist the GIRoA with a public education campaign 
 
KABUL 00002810  006 OF 007 
 
 
about the benefits of membership and to help fast-track its 
membership application once it reached the world body.  GIRoA 
officials welcomed the offer. 
 
*************************************** 
Jumpstarting A New Afghanistan-Pakistan 
Transit Trade Agreement 
*************************************** 
 
¶16. (SBU) Delegates agreed that transit trade problems with Pakistan 
severely hamper Afghanistan's trade with its most promising trade 
partner, India, and other countries, and that rapid implementation 
of an updated Transit Trade Agreement was a high priority.  The 
obsolete 1965 agreement still governs Afghanistan-Pakistan transit 
trade and poorly serves Afghan interests.  There was considerable 
confusion regarding the status of efforts to negotiate a new 
agreement (Refs B and C).  MOCI Director of International Trade 
Wardak informed the U.S. delegation that Afghanistan has not 
delivered draft text to Pakistan.  A member of the Ministry of 
Commerce drafting committee clarified that Afghanistan completed the 
draft in March and was prepared to give it to Pakistan but during a 
period of heightened Pak-Afghan tensions, an inter-ministerial 
review halted delivery.  He said the draft is now with the Ministry 
of Foreign Affairs.  When asked when Afghanistan would meet with 
Pakistan to discuss the way forward, the Afghan delegation replied 
that they were "waiting for an order" and "waiting for Pakistan" 
despite the agreement by President Karzai and Prime Minister Gilani 
at the South Asia Association for Regional Cooperation (SAARC) in 
August to resume suspended dialogues including the Joint Economic 
Commission (JEC) and Regional Economic Cooperation Conference 
(RECC).  Finally, at a subsequent Embassy reception, when asked 
about the confusion, Minister Farhang (who was not present at the 
TIFA meeting during the above exchanges) said that "seven or eight 
months ago" he had personally provided a copy of the draft agreement 
to Pakistan's Ambassador in Kabul, noting that Afghanistan's 
Ministry of Foreign Affairs was aware of this.  In addition to the 
curious exchanges on this topic, GIRoA officials requested U.S. 
assistance in resolving delays and extra charges that Uzbekistan was 
imposing on Afghan exports of raisins to Russia and CIS markets. 
The same officials also noted that they have proposed a rail route 
to China to circumvent delays that Afghan exports experience at the 
Kazakh-China border. 
 
¶17. (SBU) COMMENT: The third round of TIFA talks struck a positive 
and collegial tone.  USdel welcomed the incremental progress on the 
slate of trade and investment issues and the improved bilateral 
understanding.  The GIRoA clearly understands the importance of 
passing legislation related to private sector activity, but MOCI's 
ability to push passage through Parliament remains to be seen. 
Other impediments to trade and investment, e.g. corruption at 
customs posts and onerous fees on traders, appear as intractable as 
ever.  At times, the GIRoA failed to address the government's own 
role in creating a difficult investment climate.  For instance, MOM 
failed to mention its role in uneven enforcement of regulations and 
the imposition of exorbitant fees.  On the other hand, GIRoA 
reaffirmation of its stance on WTO accession was positive, and 
proposed bilateral cooperation on raising public awareness of the 
benefits represents a worthwhile joint undertaking.  The Afghans are 
preparing to take advantage of ROZs and, with their own TFZ concept, 
are examining ways to move up the industrial value chain and promote 
exports. 
 
¶18. (U) COMMENT CONTD.  The TIFA meeting served as a timely reminder 
to Washington agencies of the great and varied needs of Afghanistan 
 
KABUL 00002810  007 OF 007 
 
 
across the economic spectrum.  The U.S. Mission, mainly through 
USAID, is engaged on a number of key issues to help the Afghans 
strengthen their climate for trade and investment.  Some examples: 
In the area of land reform, USAID is implementing a pilot program on 
land tenure that may be expanded next year to work on improving land 
security for investors.  For skills development, USAID launched 
three Vocational/Trades Training Centers, and will continue to look 
for ways to strengthen vocational skills through the Capacity 
Development Program.  For commercial law reform, USAID has provided 
extensive assistance to draft and secure passage of commercial and 
financial laws; once passed, USAID is gearing up to support their 
implementation with required training and public outreach.  In the 
area of standards, USAID and other donors are meeting with ANSA to 
discuss their strategy and to prioritize specific needs.  With 
regard to access to credit, USAID recently launched a credit 
guarantee program in the agribusiness sector and continues to expand 
training of bank loan officers in SME lending.  USAID will also 
continue to provide support on broader trade issues, such as 
building capacity to prepare for and negotiate regional trade 
agreements and WTO accession, support for customs modernization and 
tariff reform, and assistance on ROZ implementation and public 
education activities related to trade liberalization.  Continued 
Washington support for these and other programs responsive to issues 
discussed in the TIFA meeting will be vital -- the more resources 
Washington can secure for these important initiatives, the better. 
 
¶19. (U) This message was cleared by the Washington delegation. 
 
WOOD 
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