VZCZCXRO3995
PP RUEHIK RUEHPOD RUEHPW RUEHYG
DE RUEHBUL #2827/01 2960850
ZNR UUUUU ZZH
P 220850Z OCT 08
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 5930
INFO 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

UNCLAS SECTION 01 OF 04 KABUL 002827 
 
DEPT FOR SCA/RA, SCA/A, EEB, EEB/ESC/IEC (GRIFFIN) 
DEPT PASS AID/MARK WARD, AID/ANE, OPIC 
DEPT PASS USTR FOR LILIENFELD AND KLEIN 
DEPT PASS OPIC FOR ZAHNISER 
DEPT PASS TDA FOR STEIN AND GREENIP 
CENTCOM FOR CG CFC-A, CG CJTF-76, POLAD, JICENT 
NSC FOR JWOOD 
TREASURY FOR ABAUKOL, BDAHL, JCASAL, AND MNUGENT 
MANILA PLEASE PASS ADB/USED 
PARIS FOR USOECD/ENERGY ATTACHE 
OSD FOR SHIVERS, SHINN 
COMMERCE FOR DEES, HAMROCK, AND FONOVICH 
 
SIPDIS 
 
E.O. 12958 N/A 
TAGS: ENRG EFIN ETRD KPWR EAID EINV PGOV AF
SUBJECT: MINERALS ABOUND IN AFGHANISTAN, AN UPDATE ON THE SECTOR 
 
KABUL 00002827  001.2 OF 004 
 
 
¶1. (SBU) Summary.  A viable engine of economic growth, the mineral 
sector in Afghanistan is striving for advancement step by step.  At 
times, Afghanistan's steps are firm, promoting modernization, other 
times they are wobbly or haphazard, resulting in retraction.  In 
recent months, Afghanistan received its first major mineral-derived 
payment, and the World Bank reaffirmed its commitment and goal of 
transforming Afghanistan into the mineral equivalent of Argentina in 
South Asia.  A first step in this transformation, the implementation 
of a mining cadastre is underway.  Progress in transparency and 
accountability is being pushed, and large tenders in the iron-ore, 
oil and gas sectors beckon.  Nevertheless, the lack of cohesion and 
delays in the revision and passage of laws and regulations governing 
the hydrocarbon and gemstone sectors frustrate and retard the 
supreme goals of creating employment and increasing government 
revenues.  A proposed "road show" by the Ministry of Mines will no 
doubt showcase the exasperating yet alluring dichotomy that is 
Afghanistan's mineral sector. End Summary. 
 
 
AYNAK COPPER PROJECT - RECENT NEWS 
---------------------------------- 
 
¶2. (SBU) The winning contractor, China Metallurgical Group Corp. 
(MCC), a Chinese state-owned company, has made its first payment in 
the amount of USD 81 million to the Government of the Islamic 
Republic of Afghanistan (GIRoA). This payment represents 10% of the 
total USD 810 million the company will pay the GIRoA in order to 
develop the world-class mine deposit.  An additional 20% is due upon 
the completion of a feasibility study (approximately 12-18 months 
from now), and the final 70% is due when MCC begins copper ore 
extraction (approximately 5 to 6 years). 
 
¶3. (SBU) According to sources at the Ministry of Mines (MOM), the 
Ministry of Interior has begun recruiting up to 1500 security 
personnel to de-mine, clear, and guard the Aynak Copper Project 
site.  Furthermore, the World Bank's Project Management Unit (PMU) 
embedded within the MOM has indicated that templates for Memoranda 
of Agreement (MoA) for Water and Security are being drawn up by the 
tendering transaction advisor, Gustavson and Associates of Boulder, 
CO.  MoA's regarding construction of a 700 km railroad and an 800 MW 
(formerly 400 MW) coal-fired power plant have yet to be addressed. 
According to Minister of Economy Shams, a group from MCC will brief 
the Inter-ministerial Committee on Energy (ICE) during its November 
meeting. 
 
 
 
MINISTRY OF MINES CADASTRE PROGRAM - 
TRANSPARENCY COMING 
---------------------------------- 
 
¶4. (U) In modern mining, the term cadastre refers to a comprehensive 
computerized geo-scientific database that registers land titles, 
includes advanced geographic information, administrative boundaries, 
and integrates environmentally sensitive areas which can be fully 
visualized, queried and printed in the form of maps. The 
establishment of a Mining Cadastre aims to improve governance in the 
mining sector, ensuring that proper surface rents, fees, and 
royalties are administered and collected as well introducing a 
transparent system to grant, manage and cancel permits. 
 
¶5. (SBU) The efficient and reliable management of mining titles 
forms the basis of any effort to increase private investment and 
growth in the mining sector.  It will address the current lack of 
transparency at MOM, which could impede future private investment. 
The Mining Cadastre is part of the World Bank's International 
Development Association (IDA) $30 million grant program that funds 
the PMU, and will be executed by GAF AG of Germany.  GAF AG has 
completed similar Mining Cadastre projects in many other developing 
 
KABUL 00002827  002.2 OF 004 
 
 
countries with significant mineral potential, some of which have 
subsequently and successfully attracted substantial foreign direct 
investment in their mining industries.  Typical project timelines 
are 24-36 months, with the latter portion concentrating on training 
and capacity building within the host country's regulatory 
ministry. 
 
 
WORLD BANK REAFFIRMS COMMITMENT 
TO MOM AND AFGHANISTAN 
------------------------------- 
 
¶6.  (SBU) In a recent meeting with the World Bank's Senior Regional 
Oil, Gas, & Mining Specialist, ECON OFF learned of the ongoing 
commitment of the World Bank to development of Afghanistan's natural 
resource sector. A second World Bank IDA package is being drawn up 
now and will continue initiatives begun in creating a modern legal 
and regulatory framework, improving sector governance and 
transparency, adoption of an internationally competitive fiscal and 
mining taxation package, capacity building, and improvement of 
Afghan geo-science. 
 
¶7. (SBU) The new IDA package will also introduce schemes primarily 
aimed at environmental, social, and contractual monitoring of the 
mineral sector.  Besides helping to fund an environmental and social 
group within the MOM and the National Environmental Protection 
Authority, the second IDA package will also require Afghanistan to 
join the Extractive Industries Transparency Initiative (EITI), a 
coalition of governments, companies, civil society groups, and 
investors that aim at improving transparency and accountability in 
this sector.  Its main pillar is verification and full publication 
of company payments and government revenues from oil, gas, and 
mining. 
 
 
GEMSTONES - MOM LACKS COHERENT 
POLICY TO ADVANCE INDUSTRY 
------------------------------ 
 
¶8. (U) Gemstone mining began in Afghanistan 7000 years ago.  The 
British Crown Jewels, Royal Crown Jewels in Russia and the Taj Mahal 
all contain examples of Afghan emeralds, rubies, and sapphires.  The 
rubies and emeralds mined in Afghanistan are among the highest 
quality in the world, and the lack of a cohesive, fair and 
executable gemstone mining policy represents a significant lost 
opportunity in nationwide revenue collection. 
 
¶9. (SBU) The "13th Century" mining techniques currently employed in 
Afghanistan use very antiquated tools and equipment with little or 
no health, safety, or environmental considerations. Currently, the 
Afghan gem industry operates in a legal and regulatory vacuum. 
Although a Minerals Law was enacted in 2005, the lack of capacity 
and understanding among both government officials and mine operators 
contributes to an ineffectual and inconsistent application of legal 
terms.  Fiscal arrangements with respect to actual license and 
authorization amounts as well as ranges for royalty amounts are not 
addressed, leaving room for back-room and hand-shake deals. 
Furthermore, the lack of processing operations in Afghanistan and 
the unpredictable and excessive fees and royalty schemes (from 24 to 
40%) presently implemented result in 95% of gemstone production 
being transported raw to Pakistan and sold at drastically below 
market prices.  Thus, little or no social infrastructure, 
employment, or revenues are derived from gemstones. 
 
¶10. (SBU) ECON OFF has met with a variety of actors who aim to 
improve the "playing field" for the gemstone industry.  The World 
Bank's PMU embedded within the MOM is trying to formulate specific 
regulations and/or ministerial policies that would clarify the 
Minerals Law as directed towards small and mid-size gemstone mining. 
 
KABUL 00002827  003.2 OF 004 
 
 
 In addition, individuals within the NGO sector have established a 
gem cutting, polishing and jewelry setting program that aims at 
building capacity and laying the foundation for value-added 
operations in Afghanistan.  Post will continue to engage with a 
variety of actors, including those interested in export promotion 
and investment, such as the Export Promotion Agency of Afghanistan 
(EPAA) and the Afghanistan Investment Support Agency (AISA), with 
the goal of incremental regulatory and commercial advancement 
simultaneously. 
 
 
HYDROCARBON LAW STILL IN DEVELOPMENT 
------------------------------------ 
 
¶11. (SBU) According to the World Bank PMU Mining Advisor, the yet to 
be finalized Hydrocarbon Law is a source of contention between the 
MOM hierarchy and external advisors.  The World Bank's PMU Oil and 
Gas Advisors contract will not be renewed.  Apparently revisions the 
PMU advisor proposed to the law were not popular with Minister Adel 
and personalities clashed.  Rather than exacerbate tensions, the 
World Bank has allowed the Norwegian Agency for Development 
Cooperation (NORAD) advisors assigned to the MOM to take the lead in 
reviewing and revising the law. Their suggestions/modifications are 
currently being considered by the lower house of parliament and have 
stalled Minister Adel's plan to ram the law through the approval 
process. 
 
¶12. (SBU) The World Bank and others maintain that the law should be 
modeled on other hydrocarbon laws passed in the Middle East that 
take into account Islamic/Sharia law, in which surface rights belong 
to land owners, while underground rights belong to the state. 
Furthermore, the revisions aim to address vague language, and the 
ability for landowners to become party to a contract for hydrocarbon 
operations without going through the formal tendering process.  The 
latter loophole is tailor made for payoffs and other substantial 
graft. 
 
 
HAJI-GAK IRON ORE PROJECT - 
EVEN BIGGER THAN AYNAK 
------------------------- 
 
¶13. (SBU) Our World Bank PMU source indicates Gustavson and 
Associates of Boulder, CO has been retained to develop and issue 
tender documents for this project.  World Bank PMU was initially 
reluctant to retain Gustavson for tendering, instead preferring an 
open bid process. However, Minister of Mines Adel strongly pushed 
for their hiring based on their experience/knowledge of Afghanistan 
and the positive results obtained from previous tendering with 
Aynak.  World Bank PMU eventually acquiesced and reports tendering 
documents will be released by the end of this year.  Among the 
companies rumored to be interested are Anglo-Australian producers 
BHP Billiton and Rio Tinto, the Brazilian company Vale, and Chinese 
MCC (winner of Aynak Copper Tender).  Post is not aware of any 
interest to date by American firms. 
 
 
MINISTRY OF MINES ROAD SHOW - 
PROMOTE NORTHERN PROSPECTS 
--------------------------- 
 
¶14. (SBU) Minister Adel plans to embark on an Afghanistan 
Hydrocarbon "road show" in the coming months (probably in January) 
to promote the country's untapped potential in the natural gas and 
oil sectors.  The proposed road show is being organized by NORAD and 
would include stops in London, Singapore, Dubai, Oslo, Calgary, and 
Houston.  Up for discussion are three oil and gas blocks in northern 
Afghanistan (Kashkari, Jangalikolon and Juma-Bashikurd), adjacent to 
a USAID-funded gas field exploration and testing project 
 
KABUL 00002827  004.2 OF 004 
 
 
(Sheberghan), across from the Turkmenistan border.  The oil and gas 
blocks lie within the same basin that straddles both countries and 
which produce capably on the Turkmenistan side of the border.  For 
this reason, the Minister is confident these blocks will be 
successful and will draw interest from international companies. 
 
WOOD