Final Report MSA SME Altai Cons July 14th 2005

Market Sector Assessments
SME Development

March 2005

Prepared by
2
Project Managers Introductory Remarks:

This series of market sector assessments has been commissioned under the UNDP/Ministry
of Commerce Partnerships for Private Sector Development (PPSD) project.

The PPSD project is designed to encourage sustainable growth of the Afghan private sector
by providing information and business development services (BDS) to support Afghan
businesses and entrepreneurs. Through the Afghan Business Centre, UNDP is already
delivering BDS to agro-processing businesses under the USAID RAMP project. Later this year,
we plan to broaden our service offering to non-agricultural sectors.

UNDP is also working with the Afghan Investment Support Agency (AISA) and with business
associations, principally the Afghan International Chamber of Commerce and the Afghan
Chamber of Commerce and Industry, to promote investment opportunities and business
development in Afghanistan.

The sectors covered in this report were selected because they offer particular opportunities
for domestic small and medium sized enterprise development. This report fills an information
gap, complementing work already done by UNDP and other development agencies on other
sectors. This report, together with the series of sector investment fact sheets and brochures
that AISA has prepared with the support of UNDP and GTZ, is intended to be a useful
investment promotion resource for Afghanistan.

Further information can be obtained from the respective websites of UNDP PPSD
(www.afghanbusinesscentre.com) and our partner organisations. Full contact details are
given at the end of this report.

James Blewett
Project Manager
PPSD
Kabul, Afghanistan
March 2005
3
Authors:

Justine Rubira Team Leader
Hakara Tea Senior Consultant
Charles Clinton Weaver Carter Consultant
Najibullah Ziar National Consultant
Mohammed Farhad Naimzada National Consultant
Abdul Satar Haydari National Consultant
Rodolphe Baudeau Partner Altai Consulting

The authors of this study would like to express their gratitude to all the many individuals and
organisations that provided assistance and support for this project. Gathering, analysing, and
processing the information herein would have been impossible without the help of countless
Afghan and international businessmen, civil servants, aid workers, and regular citizens, who
contributed to our efforts by freely sharing valuable information, expertise, and time.

Kabul, Afghanistan
March 2005

4
TABLE OF CONTENTS

I. INTRODUCTION...........................................................................................10
A. Objectives ....................................................................................................10
B. Definition .....................................................................................................10
C. Approach and Selection of Sectors ..............................................................11
1. Approach and Criteria ..........................................................................................11
2. Selection of Sectors .............................................................................................12
3. Methodology .......................................................................................................14
4. Work Plan ...........................................................................................................15
II. POULTRY......................................................................................................16
A. Main Facts and Figures ................................................................................16
B. Key Findings.................................................................................................16
C. Introduction.................................................................................................17
D. Chicken Meat ...............................................................................................18
1. Market Overview .................................................................................................18
2. Current Chicken Meat Supply................................................................................23
3. Overview by Type of Meat....................................................................................27
4. Production Analysis..............................................................................................30
5. Summary: Key Success Factors ............................................................................32
E. Table Eggs....................................................................................................34
1. Market Overview .................................................................................................34
2. Current Egg Supply and Distribution Channels .......................................................35
3. Case Study of a Local Layer Farm.........................................................................36
4. Summary ............................................................................................................38
F. Peripheral Activities.....................................................................................39
1. Hatcheries...........................................................................................................39
2. Feed Milling.........................................................................................................39
3. By-Products.........................................................................................................40
G. Players .........................................................................................................41
1. Existing Projects that could be Leveraged .............................................................41
2. New Players that could be Invited.........................................................................42
III. CUMIN AND SAFFRON..................................................................................43
B. Key Findings.................................................................................................43
5
C. Cumin...........................................................................................................46
1. Afghan Cumin .....................................................................................................46
2. Global Market Overview.......................................................................................48
3. Export Channels of Afghan Cumin.........................................................................50
4. Summary - Opportunities .....................................................................................56
D. Saffron .........................................................................................................58
1. Introduction ........................................................................................................58
2. Global Market Overview.......................................................................................61
3. Afghan Production ...............................................................................................63
4. Opportunities ......................................................................................................64
IV. WHEAT-BASED PRODUCTS ..........................................................................66
B. Key Findings.................................................................................................66
C. Introduction.................................................................................................68
D. Flour .............................................................................................................68
1. Context...............................................................................................................68
2. Current Flour Supply............................................................................................71
3. Business Opportunities in Flour Milling ..................................................................75
4. Key Success Factors.............................................................................................75
5. Main Projects that could be Leveraged..................................................................76
E. Industrial Bread...........................................................................................78
1. Sector Overview..................................................................................................78
2. Demand: Business Opportunities ..........................................................................79
3. Main Projects that could be Leveraged..................................................................81
F. Cookies and Snack Cakes.............................................................................82
1. Sector Overview..................................................................................................82
2. Market ................................................................................................................84
3. Current Cookie and Snack Cake Supply Channels...................................................89
4. Production Analysis..............................................................................................91
5. Key Success Factors.............................................................................................93
6. Main Existing and Potential Projects......................................................................94
V. CASHMERE ...................................................................................................95
B. Key Findings.................................................................................................95
C. Cashmere Sector Overview..........................................................................97
1. Definition of Cashmere.........................................................................................97
2. World Market Overview........................................................................................99
D. Production and Export Sector Overview....................................................103
1. Current Dynamics of the Afghan Cashmere Industry............................................ 103
2. Potential Improvement / Value-Added Options .................................................... 111
6
3. Obstacles .......................................................................................................... 114
4. Key Success Factors........................................................................................... 114
5. Opportunities and Existing Players ...................................................................... 115
VI. SERVICES RELATED TO CONSTRUCTION AND SMALL CONSTRUCTION
MATERIALS...........................................................................................................116
A. Main Facts and Figures ..............................................................................116
B. Key Findings...............................................................................................117
C. Introduction...............................................................................................120
D. The Market .................................................................................................122
1. Sector Overview................................................................................................ 122
2. Main Markets for Construction............................................................................ 124
E. The Construction Process ..........................................................................127
1. International Standards Construction Practices .................................................... 127
2. Large Constructions in Afghanistan..................................................................... 128
3. Private Housing Unit Construction in Afghanistan................................................. 128
F. Supply ........................................................................................................130
1. Construction Professionals.................................................................................. 130
2. Supply of Plumbers and Electricians.................................................................... 134
3. Supply of Windows and Doors ............................................................................ 138
4. Supply of Tiles................................................................................................... 141
5. Opportunities in Supply...................................................................................... 142
G. Demand......................................................................................................143
1. Demand for Construction ................................................................................... 143
2. Demand for Plumbers and Electricians ................................................................ 146
3. Demand for Windows and Doors ........................................................................ 147
4. Demand for Tiles ............................................................................................... 149
5. Opportunities in Demand ................................................................................... 149
H. Vocational Training....................................................................................150
1. The Government ............................................................................................... 150
2. NGOs and International Organisations ................................................................ 151
3. Private Players................................................................................................... 152
4. Main Issues with Vocational Training .................................................................. 153
5. Opportunities in Vocational Training ................................................................... 154
I. Environment...............................................................................................155
1. Construction Standards ...................................................................................... 155
2. Property Rights.................................................................................................. 156
3. Tax Regulation and Investment Procedures......................................................... 156
4. Financial Environment........................................................................................ 157
J. Key Success Factors...................................................................................157
K. Players that could be Leveraged................................................................158
1. Windows and Doors........................................................................................... 158
7
2. Tiles ................................................................................................................. 158
3. Vocational Training for Plumbers and Electricians ................................................ 159
VII. SOAP, SHAMPOO AND LAUNDRY DETERGENTS.........................................160
B. Key Findings...............................................................................................161
C. Introduction...............................................................................................163
1. Definition of Sector ............................................................................................ 163
2. Sector Overview and Distribution Dynamics......................................................... 163
D. Body Soap ..................................................................................................164
1. Sector Overview................................................................................................ 165
2. The Market ....................................................................................................... 167
3. Supply and Distribution Channels........................................................................ 173
4. Opportunities .................................................................................................... 177
6. Main Existing and Potential Players ..................................................................... 178
E. Shampoo ....................................................................................................180
1. Sector Overview................................................................................................ 180
2. The Market ....................................................................................................... 182
3. Distribution Channels ......................................................................................... 188
4. Afghan Production ............................................................................................. 190
5. Opportunities .................................................................................................... 191
F. Laundry Soap and Laundry Detergent.......................................................195
1. Sector Overview................................................................................................ 195
2. Demand Consumption Habits........................................................................... 196
3. The Market ....................................................................................................... 197
4. Production Analysis............................................................................................ 201
5. Opportunities .................................................................................................... 204
VIII. PRECIOUS AND SEMI-PRECIOUS STONES ................................................206
B. Key Findings...............................................................................................206
C. Introduction...............................................................................................208
1. Definition of Sector ............................................................................................ 208
2. Sector Overview................................................................................................ 208
3. Context............................................................................................................. 209
4. Market .............................................................................................................. 210
5. Supply .............................................................................................................. 212
6. The Myanmar and Thailand Examples................................................................. 220
8
7. Environment...................................................................................................... 223
8. Reforms and International Support ..................................................................... 224
9. Industry Transformation .................................................................................... 226
D. Afghan Gem Mining, Cutting and Polishing Opportunities........................228
1. Mining Ventures ................................................................................................ 228
2. Mining Support Services..................................................................................... 229
3. Cutting and Polishing Centres............................................................................. 230
4. Branding and Marketing Opportunities ................................................................ 234
6. Existing Players ................................................................................................. 235
IX. SUMMARY OF FINANCIAL SUPPORT FOR SMES IN AFGHANISTAN..........236
A. Key Findings...............................................................................................236
B. Introduction...............................................................................................236
C. Existing and Potential Financial Support for SMEs....................................239
D. Micro Finance.............................................................................................240
E. Private Banks .............................................................................................240
F. Leasing Companies, Development Investment Funds, and Grants...........241
G. State-Owned Development Banks.............................................................242
H. Informal Finance and Islamic Lending Considerations .............................242
I. Legal Environment .....................................................................................243
J. Pakistan Parallel ........................................................................................243
X. LEGAL AND REGULATORY ENVIRONMENT ................................................245
A. Overview....................................................................................................245
B. Laws and Regulations affecting SMEs .......................................................246
1. Current and Future Laws and Regulations ........................................................... 246
2. Sector Specific Regulations................................................................................. 247
3. Law and Regulation Progress Table .................................................................... 248
XI. BIBLIOGRAPHY..........................................................................................250
A. Poultry........................................................................................................250
1. Market .............................................................................................................. 250
2. Farming ............................................................................................................ 250
B. Cumin and Saffron .....................................................................................250
1. Global Spice Markets.......................................................................................... 250
2. Cumin............................................................................................................... 250
3. Saffron.............................................................................................................. 251
9
C. Wheat-Based Products ..............................................................................251
1. Wheat............................................................................................................... 251
2. Flour................................................................................................................. 251
3. Biscuits and Bakery............................................................................................ 251
D. Cashmere ...................................................................................................251
E. Services Related to Construction and Small Construction Material ..........252
F. Gems ..........................................................................................................252
G. Financial Overview.....................................................................................253
H. Discarded Sectors ......................................................................................253
1. Dairy ................................................................................................................ 253
2. Pharmaceutical Industry..................................................................................... 253
3. Plants and Cut Flowers....................................................................................... 253
4. Cotton .............................................................................................................. 254
5. Carpets and Handicraft ...................................................................................... 254
6. Leather ............................................................................................................. 254
XII. TABLE OF FIGURES ....................................................................................255

10

I. Introduction

A. Objectives

March 2005, an Afghan company near Kabul is bottling mineral water locally to compete with
the big brand-name imports trucked over the mountains from Pakistan. In Jalalabad, a fruit
tree nursery established with NGO support has become a dynamic commercial enterprise.
Also in Jalalabad, a start-up will soon begin processing essential oils from Afghanistans
abundant and high value flowers and fruits, linking Afghanistans comparative advantage in
the production of certain flowers and fruits with European luxury markets.

Small and Medium Enterprises (SME) like these Afghan companies are major employment
generators.
1
Their development plays a strong role in local and regional economic
development. SME growth is a strong factor in poverty alleviation, and can help promote
democracy and civil society as it stimulates participation by entrepreneurs in the economic,
political, social dimensions of their country's life.

Though the Afghan economy recorded meteoric growth in real gross domestic product (GDP)
following the removal of the Taliban government, this growth is starting to slow down.
2
Less
encouraging is the fact that much of this growth is directly linked to temporary relief and
recovery spending. Infrastructure projects, imports of basic consumer goods, and
construction account for a disproportionate percentage of the Afghan GDP growth. The
international development community recognizes the need for sustainable private sector
growth that will outlast the construction boom and current influx of foreign aid. To this end,
SME sector support and facilitation is considered a key component of any private sector
development strategy.

This report identifies sectors of particular interest for potential investors, Afghan or foreign,
and serves as a useful and exhaustive resource for entrepreneurs. The 7 chosen sectors are
drawn from agricultural, manufacturing, and service industries. Special attention is given to
analysis of potential sources of finance for SMEs, and obstacles affecting SMEs and start-ups
in each sector.

B. Definition

Most definitions of Small and Medium Enterprises (SME) include ranges of assets or turnover
per year, and number of employees. There are inherent disadvantages to this approach.
What constitutes a small to medium size enterprise is subjective and will vary across
economies. What is considered a small business in India might be considered a major player
in Afghanistan. By the standards applied to SMEs by the European Commission, measured in

1
Strategy Document to Enhance the Contribution of an Efficient and Competitive SME Sector to Industrial and
Economic Development in the Islamic Republic of Iran, UNIDO, February 2003
2
Real GDP growth is now projected at 8 % in 2004/05, compared with 16 % in 2003/04, and 29 % in 2002/03.
IMF, January 27, 2005. http://www.imf.org/external/np/sec/pn/2005/pn0509.htm
11
terms of Euro value of assets or turnover, only two or three private companies in
Afghanistan would not be considered SMEs.
3

Micro-enterprises up to 10 employees and total assets or total annual revenues of up to US
$100,000; small enterprises up to 50 employees and total assets or total revenues of up to
US $3 million, and medium enterprises up to 300 employees and total assets or total annual
revenues of up to US $15 million

The above definition of Small and Medium Enterprises, from the IFCs Small and Medium
Business Development Department, incorporates a notion of scale more appropriate to
developing nations. This project uses the IFC definition as a basic parameter, and should be
considered a guideline and not an absolute measure.

C. Approach and Selection of Sectors

1. Approach and Criteria

The objective of this project is to identify SME opportunities within specific sectors of the
Afghan economy, as well as to understand the associated market dynamics and limitations.
The selection of sectors is of fundamental importance to the success of the study. Sectors
were examined and considered with the expectation that many sectors would prove
unsuitable for development in Afghanistan due to constraints such as high technology
requirements or lack of locally available resources. Beyond this, the sectors chosen all
needed to demonstrate clear SME development potential, which eliminated sectors
traditionally dominated by large industrial concerns.
Cross sectors, including finance, transportation, and trade, are deliberately excluded as
sectors for analysis. Though crucial to private sector development, these cross sectors are
examined as part of the analysed value chains, but not as sectors in their own right. Any
findings regarding cross sectors, in relation to the selected sectors, are duly noted in the
individual sector analyses. Finance is discussed in a separate overview section that examines
what financing options are available for Afghan SMEs, and how they typically access capital.

In order to avoid duplication and redundancy, we did not select sectors that have already
been or will be reviewed in depth by other teams. The horticulture
4
, raisins, carpets and
marble sectors
5
were all excluded for this reason.

The following measures were applied to gauge suitability for further analysis:

Primary criteria:
Current size of internal market
Current production capacity: an already existing, even if small, market and capacity
for production which will allow SMEs to best leverage early investment and "take off"
in the short- to medium- term

3
According to the European Commissions European Economic Area SME definition, a non-SME large business
must turnover more than Euro 50 Mn per year.
http://europa.eu.int/comm/enterprise/enterprise_policy/sme_definition/index_en.htm
4
Market Sector Assessment on Horticulture conducted by Altai Consulting for UNDP (Sept. 2004)
5
OTF, Competitiveness project (2004-2006)
12
A demand-driven sector with significant potential for future growth.
Potential for SME and start-up business development
Businesses directed at poorest people: bottom of the pyramid initiatives

Secondary criteria:
Labour intensiveness
Potential social dimensions (employment, etc.)
Potential to benefit from current Afghan resources
Low required capital investment
Relatively low need for access to technology
Access to markets
Cost of transportation
International demand
Leverage potential of the Made in Afghanistan brand
Environmental impact factors
Scarce existing market data or information

2. Selection of Sectors

Agriculture is by far the most important sector in the Afghan economy, both in terms of GDP
(73% of total GDP)
6
and in terms of employment. Afghan agriculture benefits from a variety
of climates and soils and once had a solid international reputation that could be re-gained.
Today, Afghan agriculture is largely subsistence-oriented but it could be leveraged in such a
way as to facilitate both significant economic growth and SME development.
Because of the latent potential of the agricultural sector, the following sectors have been
selected:
Poultry:
Despite existing local demand, the poultry sector in Afghanistan remains under-
developed when compared to neighbouring countries. Start-up costs are relatively
small, and facilities can be established quickly, making the sector appealing for
businessmen of more limited financial resources.

Cumin and Saffron:
Due to its specific climatic and physical conditions, Afghanistan produces a large
range of plants and spices that are found in few other locations. In particular,
Afghanistan is particularly appropriate for the cultivation of cumin, caraway (often
called black cumin), and saffron. This comparative advantage could be leveraged to
capture a larger share of the global market for these goods. The world export values
of saffron, cumin, and caraway are around US $ 200 Mn per year.
7

Wheat-Based Products:
Wheat is the primary staple in Afghanistan. While Afghanistan has yet to reach the
self-sufficiency, numerous business initiatives are currently underway to expand
production and improve processing. The emergence of an Afghan wheat-based food
sector providing more sophisticated products to the public at large could play an
important role in the development of SMEs.

6
Afghanistan State Building, Sustaining Growth, and Reducing Poverty, World Bank, September 2004
7
Trade statistics from the ITC, based on COMTRADE data, 2003
13
Cashmere:
Cashmere is produced in considerable quantities in Afghanistan. This existing
production is under utilized and can be expanded, and quality can be improved. This
sector holds opportunities for new SMEs as well as increased profitability for existing
players, including large numbers of rural goat herders.

The continued need for building construction is apparent across Afghanistan. The current
boom is primarily due to the massive infusion of donor money to rebuild physical
infrastructure, but the sectors growth is not confined to government or donor sponsored
projects. Afghans from all economic and social strata are building new homes or expanding
existing tenements. Private businesses are constructing warehouses, processing facilities,
and offices. The technical capacity of Afghan construction companies is stretched thin by the
industries growth, and related sectors such as plumbing, electricity, carpentry all lag in
quality and standardisation. SMEs may not be able to compete with large construction
consortia on major infrastructure projects, but the sector is in need of supporting industries
that can offer services such as plumbing and finishing materials.

Services Related to Construction and Small Construction Material:
Most finishing materials, including tiles, doors, and windows, are imported. There is a
high demand for these materials and for related services such as wiring and plumbing
that require flexible structures and relatively limited capital investment.

Manufacturing, in particular light industry, is a traditional target for SME development, as it
requires lower capital investments, making ventures more accessible for SME. Soaps,
shampoos, and laundry detergents are not complex products to manufacture, and most raw
materials can be sourced with little difficulty. These products have a proven market in
Afghanistan, and opportunities exist for foreign players wishing to produce their brands in
Afghanistan, and for Afghan brands to emerge.

Soap, Shampoo, and Laundry Detergents:
Afghanistan imports almost all of these consumer goods. Soap, shampoo, and
laundry detergents share the common characteristic of transportation representing a
disproportionately high share of their total cost. This cost structure indicates a market
opportunity for soaps, shampoos, and detergents manufactured in Afghanistan.

Afghanistan holds significant reserves of precious and semi-precious stones. Most of the
value of this resource is untapped, as mining is informal, and the gems are dealt, cut, and
polished outside of Afghanistan. This sector was selected because of the underlying value of
the gem resources, and the likelihood that the industry will undergo significant revisions in
the next few years, creating openings for greater value added SME activity.

Precious and Semi-Precious Stones:
Afghanistan possesses large deposits of emeralds, rubies, sapphires, lapis lazuli,
tourmaline and other gems. The current system of extraction is rudimentary, and
almost all gems are transported over the border and sold in Pakistan. The expectation
is that the Afghan government will introduce measures to legitimise the industry, and
gem trading, and cutting and polishing activity will grow in the country. These
changes present business opportunities not just for individuals, but also for the entire
sector to move up the value chain and to establish Afghanistan as a player in the
gem industry.

14

3. Methodology

Each sectors major stages are identified and examined. The key players are recognized and
their roles analysed to better understand the sectors dynamics. Special attention is paid to
market irregularities, barriers to entry, and business environment. Access to finance,
distribution networks, and transportation are all scrutinised to seek out opportunities for
leveraging or improvement.

This initial analysis forms the basis for an overview of the current state of the sector, from
which market trends and shifts can be forecast. This knowledge is crucial to understanding
how each sectors potential can be optimised. The following analyses are then performed to
synthesise the findings and form a comprehensive picture of the sectors and the
opportunities they present.

1. Market Study: For each sector, the market potential is determined by looking at the
national market, and where relevant, the international market. Given the scarcity of
existing data on the Afghan market, interviews and market surveys are used to establish
consumption patterns, estimate market sizes, and identify opportunities. The
regional/international market potential is established primarily through secondary
research.

2. Mapping of Value Chains: Each sector's value chain is defined and described along with
its main components, mainly through interviews with key stakeholders at all levels of the
value chain. Where appropriate, interviews are conducted in a variety of provinces, to
ensure that regional differences across Afghanistan are taken into consideration. These
interviews allow us to understand the main components of each sector's value chain, the
types of players in each component, distribution of value along the value chain, synergies
between different levels, main drivers of cost and quality in the sectors, international
comparisons of cost, and quality and variety of products.

3. Detailed Sector Analysis and SWOT Analysis: The detailed sector study and SWOT
analysis synthesise the demand-side (market study) and supply-side (value chain
mapping) studies. Key support activities that may act as either enhancers of growth or
bottlenecks in the value chain are incorporated into the SWOT analysis.

4. Overview of Financial Support: Access to financial support is addressed in detail. The aim
is to understand what financial support is available to Afghan entrepreneurs, what
variations exist across sectors, and how the existing structures can be leveraged or
improved. The main issues addressed concern what financial support exists in
Afghanistan, which channels entrepreneurs and SMEs go to for financing, and if certain
sectors or certain types of players are more affected by the lack of access to finance.
This overview is based on a series of interviews and secondary data.
15

4. Work Plan

The fieldwork and subsequent analysis for this market sector assessment was conducted
between mid-November 2004 and the end of February 2005. In the process of the sector
assessments, more than 350 key stakeholders were identified and met. Over 600 actors
along each sector's value chain, ranging from farmers and herders to manufacturers,
consumers, retailers, wholesalers, and exporters were interviewed.

Data was also gathered through interviews and meetings with contractors, foreign
companies, owners and managers of Afghan SMEs, international agencies, and relevant
governmental bodies. The majority of the analysis was done in Kabul, but the projects scope
involved trips to more than 15 provinces. The team also conducted research in Pakistan,
Iran, and Turkey.

In addition to the above data collection process, two different quantitative surveys were
carried out in Mazar-e-Sharif and Kabul. 250 interviews of consumers of soap, wheat based
products, poultry, and construction services were conducted to establish market sizes,
preferences, and assess opportunities.
16
II. Poultry

A. Main Facts and Figures

Estimated flock of 12 Mn chickens
Mostly backyard farming solely for subsistence at family levels
No industrial feed mill
No fully active hatchery
In the cities, most poultry products are imported
Meat Imports per year (US $ 60 Mn):
- Approx. 41,000 MT of frozen chicken
- Approx. 10,000 MT of live chicken
Egg Imports per year (US $ 16 Mn):
- 243 Mn eggs
27 Mn local eggs commercialised per year

B. Key Findings

With an estimated flock of 12 million chickens
8
in 2003 (i.e. about 0.5 chicken per capita vs.
2 in Pakistan
9
), and an estimated per capita chicken meat consumption of 4-6 kg per year
(as opposed to 15.2 kg in Iran and 11.2 kg worldwide
10
), the poultry sector offers substantial
opportunities for development.

After the fall of the Taliban, the Afghan market for frozen chicken opened to international
trade, mainly in urban areas. This sub-sector, largely comprised of leg quarters imported
from Brazil and the USA, totalled about 41,000 MT in 2004, with an import value of US $ 47
Mn
11
, making chicken meat more accessible than any other meat in terms of price and
availability.

Afghan consumers, however, clearly differentiate fresh chicken from frozen chicken. They
claim to dislike the latter, and buy it mainly because of its very low price. They are interested
in healthy and locally produced chicken meat and would be willing to pay a premium for it.

Today, almost all the chickens produced in Afghanistan are raised in backyards, in family
settings, solely for subsistence. Only a few commercial initiatives have been implemented,
with some degree of success, all near major urban centres. Yet broiler breeding can be re-
developed quickly at small and medium levels, as raising broilers to maturity only takes 45
days and requires investments in the range of $1,000 for a 5,000 bird farm
12
.

8
FAO National Livestock Census, 2003
9
http://www.pakissan.com/english/agri.overview/history.development.poultry.industry.pakistan.shtml,
10
IRNA, November 2004, http://www.payvand.com/news/04/nov/1060.html
11
Altai Consultings estimate, Dec 2004 Jan 2005. NB: quite close to RAMP estimates of 50,000 MT for US $ 70
Mn in RAMPs Afghanistan Poultry Sub-Sector Assessment, April 2004.
12
Interviews with owners of chicken farms, January 2005
17
The table eggs market is dominated - although to a lesser extent than the meat market - by
Pakistani and Iranian eggs, with an estimated import value of more than US $ 16 Mn
13
.
Afghan consumers also differentiate between imported eggs (which they call mashini, i.e.
eggs made by machines) and Afghan eggs (which they call watani, i.e. national eggs).
In this sub-sector too, there is an opportunity to develop commercial farming systems for the
production of Afghan eggs to leverage the freshness of local production, the strong
preference of the consumers for this product, and its scarcity on markets.

Attractive opportunities were identified in live chicken, chicken breasts, butchered whole
chickens, and brown eggs. For all of these sub sectors, better planning and marketing-
related thinking are key to successfully catering to the domestic market.

SWOT Afghan Poultry Sector
Strengths
Sizeable market for poultry products with
potential for development
Willingness of consumers to pay reasonable
premium for local products
Proximity of the markets is a major asset to
guarantee healthiness of the products
Weaknesses
Hard climatic conditions and high heating
costs limit the activity in the cold season
Need to import feed
High hatchling cost
Limited access to veterinary services
Sensitivity to disease
Opportunities
Implement semi-commercial or commercial
systems
Market an Afghan brand and guarantee origin
and freshness of eggs and chicken meat
Address unfilled demand for chicken breasts
Address increasing market of restaurants and
catering with freshly butchered whole chicken
Develop promising brown egg market
Threats
Products from neighbouring countries can
become even more price-aggressive
Current distributors of imported products can
try to block development initiatives

C. Introduction

Poultry production in Afghanistan today consists mainly of backyard farming: women raise
less than a dozen birds per family, primarily for their eggs. The hens scavenge whatever
they can in the backyard and rarely have regular access to feed; hence their egg production
rates are 3 to 4 times lower than those of commercially grown layer hens.

Various institutions, including major development programs in Afghanistan, are now engaged
in projects to develop the poultry sector in Afghanistan. FAO and RAMP in particular, are
supporting semi-scavenger and semi-commercial farming systems (500 2,000 chicks) with
training in commercial practices and follow-up of poultry farm associations.

13
RAMP Afghanistan Poultry Sub-Sector Assessment, April 2004. Altai Consulting, February 2005
18

Several private actors have also started to implement semi-commercial and commercial
farms in 2004. Case studies are described later in this section.
Unlike cattle and sheep breeding, which present greater technical difficulties and require
larger and longer term investments, poultry operations can be implemented at small and
medium levels in short timeframes, since growing broiler chicks takes only 45 days with an
appropriate feed and growing environment. It can be done in confined locations without the
need for a prolonged and complex variety improvement program.

To best assess the preferences of consumers, a survey was conducted in February 2005 with
more than 150 interviewees in Kabul and Mazar-e-Sharif. It will be referred to frequently in
this report.

D. Chicken Meat

1. Market Overview

a. Market Size

Except for Jalalabad, the chicken meat markets in the major
cities (Kabul, Herat, Kandahar, Mazar-e-Sharif) are dominated
by imported frozen chicken: about 41,000 MT per year,
representing an import value of US $ 47 Mn. The imported
frozen chicken consists of 80-90% of leg quarters coming
mainly from Brazil and the USA and of around 10-20% of
Brazilian whole chickens
14
.

About 10,000 MT
15
of live chicken (about 4.4 Mn birds) per
year are sold for their meat in the main cities (i.e. this figure
does not include hens purchased for egg production), with a
commercial value of US $ 13 Mn. These live chickens mainly
come from Pakistan, except in Herat, where they are imported
from Iran. Local supply of chicken barely exists in the main
cities.

Figure II-1: Frozen
Chicken Retailer,
Kandahar,
December 2004

Breeder Chickens

In most definitions, parent breeder stock are male and female chickens that produce fertile
eggs to be set in incubators for hatching, while in Afghanistan and in Pakistan, the term of
breeders is commonly used by the traders to name spent hens. This is the definition that
will be used in this report.

In total, about US $ 60 Mn worth of chicken meat is imported into Afghanistan every year,
representing almost all the chicken meat that can be found in urban markets.

14
RAMP data, April 2004. Altai Consulting, January 2005
15
Altai Consulting estimates, February 2005
19

Figure II-2: Import Shares by Type of Chicken Meat (MT), 2003-2004
16

b. Consumption Habits

Chicken is commonly used in Afghan cuisine. It is often served during big dinners and special
occasions such as weddings or engagement parties. People usually prefer buying a live bird
and kill it themselves at home
17
. The main reason for this is that they think it is healthier
18
:

The meat is fresh.
In the hot season in particular, frozen chicken can spoil before reaching the retailer
due to the many interruptions in the cold storage chain.

According to the survey, rooster is the meat of choice for the interviewees. White chicken (as
opposed to brown chicken) ranks second, with twice as many responses as frozen whole
chicken or leg quarters.

The Halal aspect appears to be more important in some regions (see Jalalabads case in
Section 2. e. Current Chicken Meat Supply - Jalalabad):

Consumers are aware that local chickens are bred and killed following the Islamic
rites.
Despite the Halal label on the packaging of imported meat, consumers have doubts
about the way imported chicken are bred and slaughtered.

Various factors explain why frozen chicken, and leg quarters in particular, is consumed more
frequently than live chicken in the bigger cities:

70%
19
of the interviewees who prefer live chicken do not buy it more often because it is
more expensive than frozen chicken. Indeed, frozen chicken is about 50% cheaper than local
backyard live chicken at the retail level (see Figure II-3).

16
Frozen leg quarters and frozen whole chickens represent 41,200 MT of frozen chicken. Live broilers and live
breeders represent 9,800 MT of live chickens.
17
78% of the interviewees say their favorite type of chicken meat is live chicken. Altai Consulting / UNDP
consumer survey, February 2005
18
79% of the interviewees think that live chicken is healthier. Altai Consulting / UNDP consumer survey, Feb.
2005
19
Altai Consulting / UNDP consumer survey, February 2005
20

Figure II-3: Retail Price Comparison between Various Types of
Chicken Meat (Afs per kg)
20
, February 2005

Frozen chicken is more readily available on the market: it represents 80% of the
imports in volume. 23%
21
of the consumers who prefer live chicken do not buy it
more often because it is not easy to find.

It is more convenient to cook on average days, as there is no need for slaughtering
and gutting. Moreover, leg quarters cook more quickly.

Retailers also find frozen chicken more convenient than live chicken, which need to
be fed and might die or fall ill before being sold.

c. Opportunities on the Demand Side

There is a strong potential for local live chicken, chicken cuts, and butchered chickens in
Afghanistan. Better planning and marketing-related thinking is key to addressing the
domestic market.

Chicken Breasts: Leg quarters are the favourite cuts of the surveys interviewees. As in most
countries, however, chicken breasts are highly appreciated in Afghanistan, ranking second
with 32% of the responses.

20
Retail prices in Kabul, February 2005. Prices indicated for live chicken price were recomputed to have the
butchered chicken equivalent, i.e. once headed, gutted and emptied: a 1.4 kg Afghan commercial chicken sold for
63 Afs per kg only weights 0.9 kg once butchered, hence an equivalent of 97 Afs per kg.
21
60 60
80
93
218
97
0
50
100
150
200
250
US Leg
Quarters
Brazil Leg
Quarters
Brazil Whole
Chickens
Pakistani Live
Breeder
Chicken
Local
Backyard
Chicken
Afghan
Commercial
Chicken
(Korean farm)
21
50%
32%
11%
6%
0%
10%
20%
30%
40%
50%
60%
Quarters Breast No Preference Other

Figure II-4: Favourite Chicken Part of Interviewees
22
, February 2005

Chicken breasts are not widely available on the market today. Yet in some places,
they can be found for 160 Afs per kg
23
(compared to 60 Afs for leg quarters).

This might indicate the possibility to replicate at the Afghan level what is done in the
US for instance, i.e. capturing value from the chicken breasts (selling them at a
higher price per kg) and addressing less sophisticated markets with the other,
cheaper cuts such as leg quarters.

Afghan Live Chicken: Afghan chicken is preferred to foreign products: 51% of the
respondents to the consumer survey say they would accept to pay more for live
chicken bred in Afghanistan if it were available.
51%
17%
32%
0%
10%
20%
30%
40%
50%
60%
Yes No No Answer

Figure II-5: Readiness to Pay More for Afghan Chicken
24
, February 2005

The premium, however, should be reasonable: only 30% of the consumers would
accept to pay over 10 Afs more per kg.

Afghan Butchered Chicken: Afghan butchered chicken could become a substitute for
imported frozen whole chickens: 45% of the respondents declare they would be
ready to pay more for Afghan frozen chicken. This product would also be of interest
to hotels and restaurants, which would find it a healthier option for their customers.

22
Ibid
23
Retail price in Butcher Street, Shahr-e-Now, Kabul. February 2005
24
22

45%
20%
35%
0%
10%
20%
30%
40%
50%
60%
Yes No No Answer

Figure II-6: Readiness to Pay More for Frozen Chicken Produced
in Afghanistan
25
, February 2005

The willingness to pay more for frozen Afghan chicken is lower than the willingness
to pay a premium for live Afghan chicken: Only 23% of the interviewees would
accept to pay over 10 Afs more per kg.

Healthy Chicken: Healthiness of chicken meat ranks high in the choice criteria of
Afghan consumers.

Figure II-7: Readiness to Pay More for Frozen Chicken
26
, February 2005

Unfortunate experiences in Kandahar (see page 25) or even in Pakistan are recent
reminders of the disastrous consequences that avian diseases can have on poultry
production, and that hygiene is not only to be controlled in the farms but also in the
distribution facilities, the cleanliness of which can be a major asset for the consumer.

25
Ibid
26
23

Case Study #1: an Unsuccessful Project in North Kabul

This farms unfortunate experience particularly illustrates price sensitivity. This farm had a
production line capacity of 40,000 chickens per period of 45 months, targeting primarily the
live chicken market rather than hotels, restaurants or catering services. Fertile eggs were
imported by air from Iran in early summer and hatched locally by a subcontractor.

Due to lack of focus on marketing and distribution, the farm found itself with mature
chickens after 45 days of breeding and it was unable to sell them. Neither retailers nor
hotels and restaurants were willing to pay a 15 Afs per kg premium (i.e. about 27%), even
for these high quality chickens and, as no marketing activities had been conducted, they
had no incentive to do so.

High summer temperatures prevented the farm from keeping the chickens in cold storage
after they were killed. Most of the production was donated for free to needy people.

2. Current Chicken Meat Supply
West
South-West
North
South
North-East
East
West-Central
Trade between wholesale centers and provinces
Frozen chickens
KABUL
~ 12 importers of frozen chicken
22,000 MT of frozen chicken
MAZAR-E SHARIF
~ 3 importers of frozen chicken
HERAT
~ 20 Importers of frozen chicken
KANDAHAR
~ 6 wholesalers of frozen chicken
Live chickens
JALALABAD
Almost no import of
frozen chicken
7,000 MT of live chicken
4,000 MT
2,000 MT
13,000 MT
7,000 MT
5,000 MT
1,000 MT
1,100 MT
7,000 MT
500 MT
1,000 MT
200 MT

Figure II-8: Import Channels of Chicken Meat, Estimated Yearly Volumes
(in MT), 2004
27
,
28

As shown above, imports of frozen chicken mainly come from Iran through Herat while live
chicken flows in each of the main cities come through the nearest border crossing. Hence
each of these cities has a different profile in terms of supply channels. Except for Jalalabad,

27
RAMP data, April 2004. Altai Consulting, January 2005
28
In total: 41,200 MT of imported frozen chicken and 9,800 MT of imported live chicken
24
the frozen chicken market represents 90-95% of the imports of chicken meat in the major
cities.
-
5 000
10 000
15 000
20 000
25 000
Kabul Mazar Kandahar Herat Jalalabad
Live chicken MT
Frozen chicken MT

Figure II-9: Quantities of Chicken Meat Commercialised in Major Cities (in MT), 2004

a. Kabul

- Frozen Chicken

The Kabul chicken meat market is dominated by imported frozen chicken transported via
Iran (entering Afghanistan through Heart), and Pakistan (entering through Torkham).

Twelve importers of fairly equal size based in the Aryana Bazaar order refrigerated
containers from agents in Dubai and Turkey. The chicken is then kept either in cold storage
facilities outside Kabul or in freezer containers.

Retailers then come to the importers, buy chicken by the carton and take them to their
shops.

- Live Chicken

There is no major live poultry market in Kabul. Only about 20
retailers sell live chicken in Mondy Bazaar, in the street, while
chicken cages are scarce in the other small bazaars of the city.
Imported live chickens come mainly from Punjab, one of the
main producing regions in Pakistan, and to a lesser extent,
from the Peshawar region. Most of these chickens are 4-6 kg
breeder type, brought by 4 main importers.
Figure II-10: Live Chicken
Retailer, Kabul, November
2004

- Local Producers

A few commercial and semi-commercial farms started in 2004, producing broiler type
chickens.

25
The largest one is a commercial farm based in Badam Bagh. A smaller one started producing
broilers in September 2004 with chicks imported from Pakistan (see Case Study Korean
Farm below).

b. Mazar-e-Sharif

- Frozen Chicken

Three importers bring frozen chickens across the Uzbek and Turkmen borders. National, a
private company covering 70% of the imports to Mazar-e-Sharif, owns a logistics centre in
Tashkent and brings the chicken by train to the border at Heratan, north of Mazar. Importers
have developed their own distribution channels, delivering directly to shops.

- Live Chicken

There is one live bird market in the centre of the city, near Mandawi Street. 22 shops are
aligned in the street, each selling 100-140 live chicken per week. Mainly broilers are available
(about 70% of the sales). Pashtu traders bring them from Pakistan via Kabul.

Due to the long distance to be covered, the supply is lower and less regular than in other
parts of the country. At the time of our investigation, in December 2004, the market was
almost empty due to snow obstructing the Salang tunnel. In summer, hot weather increases
losses during transportation.

c. Kandahar

- Frozen Chicken

There are 6 wholesalers of equal size in Kandahar. They partner two by two to bring a
refrigerated container every week from Herat. Retailers come to pick up their orders in cold
storage units outside the city.

- Live Chicken

There is no live chicken market in Kandahar. 5 stores sell broilers imported from Pakistan via
Quetta.

- Local Players

One broiler farm in the industrial zone used to produce 15,000 Pakistani-type broilers.
Disease killed 85% of the chicks in 2004 but the owner is still looking for support to restart
his activity. A cooperative for poultry and dairy products is also currently reactivating its
operations.

d. Herat

- Frozen Chicken

About 70% of the Afghan imports of frozen chickens transit through Herat, where 20
importers are based. There are at least 5 cold storage facilities around the city, benefiting
from its privileged situation in terms of power supply.

26
- Live Chicken

There are about 15 live chicken shops in Herat, selling 2-3 kg broilers imported from Iran.

- Local Producers

There are at least 4 middle-size broiler farms around the city. They bring one-day old chicks
from Iran and breed them for the local market.

e. Jalalabad

- Live Chicken

With its unusually high demand for live chicken, Jalalabad is an exception among the major
cities. Several factors contribute to the dominance of live chicken in Jalalabad:
Transport to Jalalabad is shorter: the city is only a 5 hour drive from Peshawar, and
about 11 hours from Punjab.
Jalalabads live poultry market is well developed, with around 100 retailers.
There are 20 importers, each of them bringing one 1 MT truck (i.e. 600 to 700
chickens) per day to the city. These importers purchase live chickens directly from
farms or from agents in Punjab or in Peshawar where they have good local
connections. As their business generates solid margins, they are particularly
protective of the trade.

- Frozen Chicken

Almost no frozen chicken can be found in the city, even in the cold season. One importer of
frozen chicken was identified during our investigations. He started his business one year ago.
When asked about the surprisingly low volumes for such a large city, he explained with some
regret:
Importers and retailers of live chickens complained to the Mullahs, who finally declared that
frozen chicken was neither Halal nor healthy. Now I only sell 700 kg a week

- Local Players

Despite the fact that the Eastern provinces of Afghanistan have the highest number of local
chicken per capita (1.19 vs. a national average of 0.59)
29
, little local chicken is available in
Jalalabads live chicken market (5-10% market share).

29
Analysis from FAO National Livestock Census 2003 and CSO Population estimates 2003-2004
27
3. Overview by Type of Meat

a. Frozen Chicken

The frozen chicken global market has become a price-sensitive commodity market, as
transportation and preservation are very easy when using appropriate facilities.

- Global Market

Figure II-11: Overview of the World Trade of Frozen Chicken
30

Global exports of frozen chicken represented about 6.7 Million MT in 2003. US and Brazil are
the main exporters, accounting for about 68% of the world trade.

The USA mainly exports leg quarters at highly competitive prices as most of the value of
their chicken is captured by the internal consumption of chicken breasts.

Brazils avian industry has become highly competitive, due to vertically integrated programs.
Brazilian chicken exports, representing 25% of the national production, go to about 90
countries. Due to diseases in Asia, and to a lesser extent in the US, Brazil has considerably
increased its market shares in Asian and Middle-Eastern markets and should become the
worlds largest poultry exporter in the coming years.

30
USDA, 2003. Cyclope, 2004
28
- Players

Afghan importers deal with agents based in Dubai and in Turkey. They have been working
extensively with Dubai brokers, but Turkish brokers are reported to have recently optimised
their distribution channels by establishing cold storage facilities near Herat, on the Iranian
side, and by placing agents in Herat.

The number of players in the value chain is optimised in the major cities of Afghanistan (see
example of Kabul in Figure II-12), except for Kandahar where there is no importer dealing
directly with Dubai or Turkey.
1 275
70
35
3
17
100
200
850
0
200
400
600
800
1000
1200
1400
US Export
Price
Wholesaler
Dubai
Transport Tax Iran Tax
Afghanistan
Importer
Kabul
Retailer
Kabul
Retail Price
in Kabul

Figure II-12: Value Chain of Frozen Leg Quarters in Kabul (US $ per MT),
February 2005
31

b. Live Chicken

Except for Herat, where imports come from Iran, most of the live chickens in Afghanistan are
brought from Pakistan.

Breeders are spent hens purchased directly from layer farms located mainly in
Punjab. Due to the high level of production of broilers in Pakistan, they have
almost no market locally and both Pakistani egg farmers and Afghan importers
seize the opportunity to find a market for them in Afghanistan, in Jalalabad and in
Kabul mainly. Most of the value is captured by a limited number of importers (see
Figure II-13).

31
Interviews with importers in Aryana bazaar, Kabul, February 2005
29
1270
120
215
20
125
30
760
0
200
400
600
800
1000
1200
1400
Farmgate
Price Punjab
Taxes
Pakistan
Transport to
Kabul
Taxes
Jalalabad and
Puli Charqi
Importer
Kabul
Retailer Kabul Retail Price in
Kabul

Figure II-13: Value Chain of Pakistani Breeders in Kabul (US $ per MT)
32
,
February 2005

Jalalabad is by far the largest market for live broilers, with about 67% of the
imports into the country. The broilers are purchased in Peshawar and in Punjab.
Punjab is about 6 hours further than Peshawar, yet the marginally higher
transportation cost is compensated by the price difference (about US $ 0.07 per
kg between the 2 regions) and the large value captured by the Afghan importers
(see Figure II-14).

The transportation cost for broilers is quite high compared to breeders. The
reason for this is that broilers are transported in small 1 MT pick-up trucks to
Jalalabad, while breeders are transported in 5 MT trucks to Kabul.

32
Interviews with importers of live chickens in Kabul, February 2005
30
1370
60
300
10
70
30
900
0
200
400
600
800
1000
1200
1400
Farmgate
price
Peshawar
Taxes
Pakistan
Transport to
Jalalabad
Taxes
Jalalabad
Importer
Jalalabad
Retailer
Jalalabad
Retail price in
Jalalabad

Figure II-14: Value chain of Pakistani Broilers in Jalalabad (US $ per MT

)
33
,
January 2005

The commercial margin for a 1 MT truck is about US $ 300 for broilers brought from
Peshawar to Jalalabad, indicating a highly profitable business. Moreover, chickens are often
sold before the end of the day.

4. Production Analysis

Case Study #2: Korean Farm, Kabul

One highly interesting semi-commercial initiative was started in
Kabul in September 2004. Apparently, it is the only broiler farm
that has entered a producing phase in the region. The project was
initiated by an Afghan farmer and mainly financed by a Korean
businessman, hence the nickname of the farm among Kabulis.

The farm has a capacity of 4,000 chickens but it started producing only 2,000 chicks for
training purposes.

One-day chicks were imported from Pakistan for US $ 0.42 per unit.
6,000 kg of feed were imported from Pakistan for US $ 0.33 per kg.
No heating was needed for this experimental phase.
3 employees were trained. They receive a salary of US $ 100 per month.
The farm was built one year ago on a piece of land rented for US $ 120 per

33
Interviews with importers of live chickens in Jalalabad and farmers in Peshawar, February 2005
31
month.
About 20% of the chickens were lost during the whole process (as opposed to
5% in Pakistani farms
34
).
Produced chickens weighed 1.5 kg after one and a half month and were sold
within 2 weeks for US $ 1.33 per kg (63 Afs), mainly through an agent who
brought them regularly to the live chicken retailers of Mondy Bazar, in the centre
of Kabul.
The agent owns a container 200 m away from the live chicken market, where he
regularly brings and stores chickens, waiting for retailers to come and purchase
them from him.
The farm has purchased hatchery equipment and a feed mill that it plans to use
in the near future.

Despite an initial production cost of US $ 1.40 per kg, the results are promising, as fixed
costs (rent and labour cost), today accounting for US $ 0.38 per kg, could be scaled down
to US $ 0.20 if the facility were to function at full capacity, making it more competitive at a
cost of US $ 1.22 per kg.

Figure II-15 compares the cost structure of this farm with similar-size farms in Iran (Zavie,
near Tehran) and in Pakistan (Peshawar). Figures for the Korean farm were recomputed
assuming that the farm is running at full capacity, but for only 6 months a year, as heating
costs become prohibitive in the cold season (up to US $ 0.4 per kg
35
).

$-
$0,20
$0,40
$0,60
$0,80
$1,00
$1,20
$1,40
Korean Farm,
Kabul
Iranian Farm,
Zavie
Pakistani Farm,
Peshawar
Other
Labor cost
Power
Feeding
Cost of the chick
US $ 1.22
US $ 0.91
US $ 0.86

Figure II-15: Cost Comparison between Afghan,
Iranian and Pakistani Broiler Farms (US $ per kg of Broiler Chicken)
36

34
Broiler farm pre-feasibility study, SMEDA, April 2002
35
Estimate from interview with the managers of Badam Baghs farm, January 2005
36
Interviews in Kabul, Peshawar, Zavie and Tehran, December 2004 - February 2005
32
The low temperatures in the cold season and the high heating costs are a major barrier for
poultry meat production in Afghanistan. These are not an issue either in Pakistan, where
heating is barely necessary in winter, or in Iran, where fuel is very cheap. The high cost of
the chick (the second largest cost of the poultry farms after feed) is a direct consequence of
the previous point, as both hatching and young chick growing processes necessitate high
temperatures for optimal efficiency. Indeed, if an Afghan farm buys day-old chicks in winter
and is not adequately heated, the loss rate will be high, driving the cost per chick up.

Feed represents 60% of the production costs. Feed costs could be reduced with an efficient
sourcing strategy. (see page 39)

Another barrier is the lack of veterinary services, in contrast to Peshawar, where they are
paid by the government and well organized. Medicines are not a major issue, as they can be
brought from Pakistan and represent only 1-3% of the production costs.

5. Summary: Key Success Factors

Semi-commercial and commercial broiler producing systems definitely demonstrate strong
potential in Afghanistan. Local market particularities around the country and the price
sensitivity of the consumers show that cost reduction, marketing and distribution are key for
this activity to be successful.

a. Production Optimisation

As was seen above, there are two key ways of optimising costs of production:

Concentrating the production in the warmest months of the year, thus avoiding
the high power and heating costs and the higher chick loss rates.
Designing an efficient sourcing strategy for feed, possibly through the
diversification of sourcing or a change in the recipe used for feed.

In addition, sanitary measures have to be put in place to ensure lowest possible losses.

b. Sales and Distribution

Sales and distribution are crucial in the broiler industry: mature chickens have to be sold and
distributed as quickly as possible so as to not generate extra-feeding or cold storage costs. A
mature chicken consumes 150g of feed per day, accounting for about US $ 0.05 and
increasing production costs by about 3% per extra-pending day.
37

c. Marketing

Marketing is key to make consumers and retailers accept to buy more sophisticated and
expensive products. Communication strategies should particularly emphasize
38
:

Healthiness of chicken meat, which is important to Afghan consumers:

37
Figures taken from the Korean Farms case study: US $ 0.33 per kg of feed. Production cost of US $ 1.22 for
1.4 kg broilers
38
Figures drawn from Altai Consulting / UNDP consumer survey. February 2005
33
o When asked about what criteria would make them accept to pay more for
chicken meat both in frozen and live form, the interviewees insist on
healthiness, with 55% of them accepting to pay a premium. Only 12%
would not.
o 79% of the interviewees think that non-frozen chicken is healthier than
frozen chicken.
o Since Afghan chickens are grown locally, they do not suffer from long
transportation, unlike live imported chicken and they do not suffer from
breaks in the cold chain, unlike imported frozen meat.

Local origin, leveraging the preference for local products:
o 60% of the interviewees declare they care about the origin of the chicken
they buy. This applies for both frozen and live chicken. Yet, only 17% of
the interviewees know that frozen chicken comes from the US or Brazil.
o About 50% of the interviewees say they would accept paying more for
chicken bred in Afghanistan, both for frozen and live chicken. Only 20%
say they would not.

Other criteria are less important, as demonstrated in Kabul:

37% of the interviewees would be willing to pay more for better taste. 20%
would not.
30% would accept to pay more for frozen chicken if they were sure it is Halal, but
on the other hand 28% also declare this is not important enough to make them
pay more.

d. Price Positioning

Price positioning is important. Indeed, even if most consumers claim they would be ready to
pay more for healthier or local products, the premium they are ready to accept is limited:

Only 30% of the interviewees who say they would accept paying more for the
above criteria would accept a premium higher than 15%. (10 Afs or US $ 0.21 per
kg).
In general, 10% of the interviewees would accept to pay up to 5 Afs per kg more
for the above criteria.
About 25% would accept to pay up to 6-10 Afs per kg.

In an encouraging result, Figure II-3 shows that local products like the Korean farms can fit
in the range of what consumers will accept to pay, although the farm is still in its
experimental phase and sourcing costs could be further reduced.

More precise studies should be undertaken in each local market to best assess preferences
and influencers. The case of Jalalabad for instance (see page 26) highlights the key-role the
mullahs can play in promoting or maligning a product.

34

E. Table Eggs

1. Market Overview

a. Market Size

It is estimated that 270 million eggs
39
are commercialised each year in the major cities of
Afghanistan (Kabul, Kandahar, Herat, Mazar-e-Sharif, Jalalabad), amounting to a retail value
of about US $ 20 million. About 90% of these eggs (243 million) are imported eggs: from
Pakistan for the southern part of the country and Iran for Herat and Mazar-e-Sharif.
Importers indicate that the volume of imported table eggs increases as the market continues
to expand (est. +10% in 2003).

b. Consumer Habits

Consumers make a clear distinction between various kinds of eggs:

White eggs are commonly called Tukhum-e-mashini, i.e. eggs from the
machines, as most consumers know that these eggs come from Pakistani or
Iranian industrial farms and are produced by white layer hens.

Brown eggs called Tukhum-e-Watani, i.e. national eggs, as they used to be
brought exclusively from small and medium-scale farms in the countryside.
Today, however, they are starting to be imported from Iran and Pakistan.

Afghan consumers usually have eggs in the morning, boiled, fried or
in omelettes. Consumers also have boiled eggs as snacks on the
road or in the bazaars. Boiled eggs are easy to recognise, as they
are dyed red. They are also used in Kefta, one of the traditional
dishes.

In rural areas, most women raise brown hens in their backyard. As
an example of the importance of the eggs in family-scale economy,
in some parts of the country there is still a tradition that when a
fianc visits his future family-in-law during Eid, the mother of the
fiance offers him a basket full of boiled brown eggs.

Figure II-16: Picking
the right egg, Jabal-
e-Saraj, November
2004
c. Opportunities on the Demand Side

Consumers prefer brown eggs by a wide margin (87% in Kabul
40
), as they contain more yolk
and are considered to be healthier. They are twice as expensive as the white ones (about 6
Afs vs 3 Afs per unit) and can be easily found in most of the shops, but in much smaller
quantities (about 10% market share) than white eegs.

39
RAMP Afghanistan Poultry Sub-Sector Assessment, April 2004. Altai Consulting, February 2005
40
Altai Consulting / UNDP consumer survey. February 2005
35
Brown eggs are traditionally brought from the countryside by local gatherers. They are,
however, increasingly imported from Pakistan and Iran. Some people call the latest ones
zaraati, i.e. from agriculture. Distinctions are drawn between these products in the stores,
the watani eggs being sold for 6-7 Afs per unit, while the zaraati eggs are sold for 5-6
Afs.

Consumers, however, can rarely distinguish between these two varieties, and some retailers
take advantage of this confusion by selling zaraati at watani price.

2. Current Egg Supply and Distribution Channels

West
South-West
North
South
North-East
East
West-Central
Trade between Wholesale Centers and Provinces
Imported eggs
KABUL
~ 91 Million imported eggs
4 importers
MAZAR-E SHARIF
4 importers
HERAT
4 importers
KANDAHAR
3 importers
Source: RAMP, april 2004. Altai Consulting, February 2005
DUBAI
JALALABAD
4 importers

Figure II-17: Egg Import Channels, Estimated Yearly Volumes, (in Mn Eggs), 2004
41

Only about 19 importers cover most of the imports of eggs into the major cities. Imported
products are brought through the closest border. Kandahar used to be an exception, as
Iranian eggs were brought to the city via Herat. However, at the time of our visit, only
Pakistani eggs could be found on the market; the price of Iranian eggs evidently had
increased too much for them to remain competitive.

41
RAMP, April 2004. Altai Consulting, February 2005
36
$-
$5,00
$10,00
$15,00
$20,00
$25,00
White Eggs Brown Eggs
Retailer
Distribution agent
Importer
Transport
Farmgate
US $ 15.32
US $ 21.06
P
r
i
c
e

p
e
r

C
a
r
t
o
n

(
1
8
0

e
g
g
s
)

Figure II-18: Value Chain Comparisons between Imported White and Brown Eggs
(US $ per carton)
42
, February 2005

The value chain analysis shows that most of the value is captured by the retailers. The main
reasons are:

The retailers sort the eggs at the end of the chain and set their prices according
to the losses (which can range from 2 to 15%).
Due to sales in small quantities (less than 10 eggs at a time), retailers round up
the unit prices.

Apparently, the only reason for which retailers make a higher profit on brown eggs is that
consumers are willing to pay a premium price for the better taste of the product. They
already do so for locally produced ones. This perceived better taste of local eggs is likely due
to their freshness.

3. Case Study of a Local Layer Farm

About 10 semi-commercial private farms, with up to 4,000 layer production lines, began
production in the 2
nd
semester of 2004 in Kabul and in the Shamali plain. Chicks are brought
from Pakistan and raised locally. Most of these farms grow dual-purpose breeds, i.e.
chickens reared for meat as well as hens bred to lay table eggs. Thus, they combine a year-
long activity (the rearing of layers) with a quick return-on-investment activity (chickens that
are sold for meat and have a 45-55 day grow-out period). These farms joined existing ones
in a Poultry Farms Association supported by FAO, which provides veterinary services and
farm management training to the owners.

42
Interviews with Pakistani eggs importers in Kabul, February 2005
37

Case Study #3: Amiri Farm, Kabul

Amiri farm currently rears 1,600 layer hens in Kart-e-
Now, in Kabul. Most of them are brown hens producing
brown eggs, with a small mix of black hens producing
white eggs.

500 chicks were purchased in May 2004,
when one day old, from a local hatchery for
US $ 0.18 each (8.5 Afs).
1,100 chicks were purchased in October 2004
from Pakistan for 120 Rs each. They were 2
months old and could be kept at ambient temperature.
No heating is needed.
The feed is purchased from the Farmers association for US $ 0.23 per kg (11
Afs). As in other countries, 3 types of feed are used, depending on the growth
stage of the chicks.
Medication is brought from Peshawar. Orders are grouped with the other farmers
of the association, and cost US $ 0.02-0.04 (1-2 Afs) per chick.
500 hens produce 300 eggs per day. A selling agent purchases them for 4 Afs per
unit and distributes them in Kabul.
Rearing period is about 6 months.
Laying period is also 6 months
43
after which the hens should be sold for 150 to
200 Afs per unit.
The farm also produces fertile eggs occasionally, bringing roosters into the farm,
in summer time mainly.
44

$-
$2,00
$4,00
$6,00
$8,00
$10,00
$12,00
Start in cold
season
Start in warm
season
Labor cost
Laying period
Rearing period
Chick
US $ 11.26
US $ 10.27

Figure II-19: Production Cost Comparison between of Layer Hens
Started in Warm and Cold Season
(US $ per Layer Hen)
45,46

43
Duration given by the owner of the farm while optimal period is usually 12 months
44
According to experts, this practice conveys strong risks of contamination
45
Interview and cost analysis from input by the owner of the farm, Kabul, January 2005
46
Total cost per layer hen includes cost over growing and laying period, in total an average of 12 months
38
Analysis indicates that profit per hen could range between US $ 1.6 for hens purchased in
the cold season and US $ 2.6 for those purchased in the warm season. The difference is
mainly due to the cost of the 2-month-old chick, which impacts the production costs by 10%.
(see Figure II-19.)

The owner declared that there was a good market for his brown eggs, which made him
decide to increase his production capacity in October 2004, despite higher costs due to the
colder temperatures.

4. Summary

Brown egg production benefits from a highly favourable commercial environment:

Preference of consumers:
o Consumers vastly prefer them to white eggs and already accept a price
premium (watani eggs are twice as expensive as white ones in retail
shops).
o Consumers prefer real watani eggs to imported brown eggs.

Significant interest for retailers:
o Retailers make a better profit on brown eggs, hence are interested in
distributing them.
o Losses at the retail level are lower than for imported eggs.

Limited competition:
o Egg markets in neighbouring countries are largely dominated by white
eggs as they are more profitable to produce than brown eggs, hence
competition in the brown egg market is more limited than in the white
eggs market.
o Proximity to the consumer market is a major asset for such a perishable
product.

Prices must be optimised: About 75% of the consumers who buy white eggs more often
declare it is because they are cheaper. Only 5% say it is because they cannot easily find
brown ones in the markets
47
. Thus, although consumers are willing to pay a premium for
brown eggs, this premium must remain accessible for them.

47
Altai Consulting / UNDP consumer survey. February 2005
39

F. Peripheral Activities

Non-core activities can be developed either within the poultry production systems or
externally to decrease the sourcing costs or find extra-revenues for by-products.

1. Hatcheries

The mechanized hatcheries that were visited seem to offer little in the way of sustainable
business opportunities today:

Hatching activity in Afghanistan would be highly seasonal since low temperatures
in winter increase the heating costs considerably.

During the cold season, farmers are discouraged from
buying hatchlings from local hatcheries, not only
because of the prohibitive price, but also because of
the high heating costs of the post-hatching process,
as chicks need to be kept in a particularly warm
environment during their first 2 months. As a
consequence, layer farms in Kabul usually prefer
purchasing 2-month-old chicks in winter.

The size of the business-to-business market is limited,
although semi-commercial and commercial farms are
starting to develop near the main urban centres.
Figure II-20: Internal
View of an Electric
Hatchery,
Kabul, January 2004

Other technologies, however, can be implemented and might be economically attractive. In
terms of location, Jalalabad might offer appealing opportunities due to higher temperatures,
and potential exports to the farms of Peshawar region that currently source most of their
chicks from Punjab.

2. Feed Milling

As seen on Figure II-15, chicken feed represents about 60% of the production costs in a
semi-commercial production system. Currently, most of the commercial farms use expensive
feed produced in Pakistan. However, some farms started their own feed mills to try to
reduce this cost.

Two farms that were visited were producing their own feed
(the one in Badam Bagh and one in Herat). Both of them were
broiler producing farms. They were both growing white Iranian
varieties and had feed production costs of about US $ 0.34 per
kg.

Prices in Peshawar (US $ 10.83 for 50 kg bags brought from
Punjab) suggest that more efficient sourcing from Pakistan
would lead to purchasing prices as low as US $ 0.25 US $
0.28 per kg.
Figure II-21: Feed Mill,
Badam Bagh Farm, Kabul,
November 2004
40

Figure II-22: Cost Structure of Locally Produced Broiler Feed
48

Hence, poultry feed remains expensive. Imports are costly but local production of feed might
not be more cost effective, although prices can vary greatly depending on the chosen recipe;
indeed, a farm owner in Peshawar claimed that could produce feed costing as low as US $
0.15 per kg in Afghanistan.

In conclusion, a more efficient sourcing of feed may involve either finding alternate sources
for importing feed or developing a feed production programme in Afghanistan.

Further analysis must be conducted in order to find the cheapest and most efficient sources
of feed in and out of Afghanistan.

3. By-Products

Poultry farming systems in Afghanistan could leverage additional sources of income in a way
similar to what is done in neighbouring countries.

In Peshawar, wholesalers butcher their chickens before selling them to stores and
restaurants. Some people come and collect the waste to sell
49
:

Feet are used to make soups: 4 feet sell for 1 Rs (US $ 0.017).
Rears are used for kebabs: 4 rears sell for 1 Rs (US $ 0.017).
Entrails are used in poultry feed and sell for 50 Rs per kg (US $ 0.83).
Ends of wings are used for kebabs: 15 pieces sell for 1 Rs (US $ 0.017).

In Iran, where the poultry industry has been strongly supported and monitored by the
government for 20 years, by-products are also reused
50
:

Feathers are sold to pillow-makers
Legs and heads are re-used in poultry feed and sell for 35 IRR per kg (US $
0.004)
Soiled litter is sold as fertilizer for US $ 0.1 per kg (500 kg are used to grow 5,000
chicks)

If implemented, these by-products could generate 1-2% extra-revenue.

48
Interview of Zuri farm, Herat, February 2005
49
Figures from wholesalers in Peshawar, December 2004
50
Figures from farms in Tehran and Mashad. February 2005
41
G. Players

1. Existing Projects that could be Leveraged

Various poultry development programs in Afghanistan target backyard farming. However, an
increasing number of commercial and semi-commercial projects are starting in various parts
of the country.

a. Farmers Associations

Farmers associations have been created in the major cities. They collectivise semi-
commercial farms to share supplies, practices or distribution systems.

Poultry Farmers Associations (PFA), Kabul and Nangahar
FAO supports 2 PFAs by supplying vaccines, feed and veterinary assistance. There
is one PFA in Kabul and one in Jalalabad.

Ariana Development Poultry Association, Balkh
This group includes 80 farms in Balkh. They have set up a common collection
system that brings their eggs to Mazar-e-Sharif.

BALCO - Bakhtar Agriculture & Livestock Cooperative, Kandahar
This cooperative was founded in 1997 by 13 shareholders. They assist the
farmers in increasing their production and developing their distribution networks.
They had programs both in poultry and dairy products and are looking for support
to reactivate them.

b. Individual Commercial Initiatives

Abdul Baqis farm, Kandahar
500 brown layer chickens are grown in this farm that is run by Mr Baqi, a
veterinarian who also works in Pakistan. The farm had hatchery and broiler
production activities that are waiting to be reactivated.

Akbar poultry farm, Kabul
An Afghan agronomist who used to work for the FAO initiated this project. He
owns 12 farms in Peshawar that produce about 60,000 broilers in total every 2
months. He has 13 jeribs of land in Kabul province where he plans to start 4
broiler and 2 layer farms as soon as he can raise funds.

Salim hatchery, Kabul
This hatchery started in 2004, led by 2 brothers who used to work in poultry
farms in Pakistan. It is located in Puli Charqi. They hatched eggs for the Badam
Bagh farm but interrupted their activity in the cold season. They are also
interested in starting broiler and layer production.

Badam Bagh farm, Kabul
This farm has a 40,000 broilers production capacity. Apparently it has interrupted
its activities but might restart as more complete infrastructure becomes available.

42
Zuri chicken farm, Herat
This farm is one of the 4 semi-commercial farms that can be found in the region
of Herat. It started producing 19,000 chickens last year.

Afghan-Holland Company, Kabul
This company, which is owned by Afghan and Dutch partners, plans to start a
farming system that could produce up to 3 million chicks per year. This project
would be one part of a larger program co-developed with the Agricultural
University of Wageningen, in Holland, called ADINA, and would be a platform for
agribusiness projects.

2. New Players that could be Invited

Afghan farmers, Peshawar
Numerous Afghans have developed their own farms in the Peshawar region. They
now have know-how and experience and some of them are tempted to start new
projects in Afghanistan.

Arian Co, Iran
The managers of this leading government-owned company showed high interest
in sharing their experience in poultry sector development and mentioned that
numerous Afghan returnees previously worked in poultry farms in Iran. 20 years
of efforts to rebuild the national poultry park are about to make Iran reach self-
sufficiency, with national consumption rates comparable to those of western
countries.

43

III. Cumin and Saffron


Cumin:

World trade volumes: approx. 83,000 MT
11,000 MT for caraway (black cumin)
Top 4 exporters capture 90% of the volume: Syria (37%), Iran (20%),
Turkey (17%), Afghanistan (15%)
3 varieties of cumin exported from Afghanistan:
- White Cumin: 11,200 MT (US $ 8 Mn) to the UAE and Pakistan mainly
- Green Cumin: 2,100 MT (US $ 11 Mn) to India mainly
- Black Cumin (caraway): 1,600 MT (US $ 7 Mn) to Pakistan and India
Afghan green and black cumin very specific and highly priced varieties
Afghanistan exports to 3 countries that represent 27% of the worlds
imports
Established Afghan cumin brand in India and Pakistan

Saffron:

Most expensive spice in the world (US $ 400 per kg on export markets, US
$ 1,200 per kg at retail level in western countries)
World trades ~ 170 MT
No increase of the exported volumes in the past 5 years
Iran alone captures 80-90% of the volumes of exports and production
Major re-exports from Spain and Dubai
Market locked by a limited number of exporters and packagers
Ideal growing conditions in some regions of Afghanistan, around Herat in
particular
Scarce existing Afghan production: About 430 kg in 2004
Competitive price due to Afghan labour costs being half the labour costs in
Iran

B. Key Findings

Due to its specific climatic and physical conditions, Afghanistan offers a large range of plants
and spices. Two of them are particularly worthy of study: cumin, since Afghan production is
already sizeable and reveals high potential for development, and saffron, the most expensive
spice in the world, in the production of which Afghanistan could become a major player.

44
Cumin

Afghanistan produces white, green and black cumin. Cumin is the main aromatic plant export
of Afghanistan (40% of total volumes of exported plants
51
), with about 14,900 MT exported
in 2003, accounting for US $ 26 Mn.

Most Afghan white cumin is planted around Kandahar and Herat. About 11,200 MT reached
India, Pakistan and the UAE in 2003, with an export value of around US $ 8 Mn. Due to poor
processing, the quality of the Afghan white cumin barely competes with Iranian and Syrian
products, yet projects are appearing to increase the value of this commodity product.

Afghan green cumin is a very specific product that grows in the mountains around Kandahar
and in Badakhshan. It is different from what is commonly called green cumin on the global
market. Its strong scent makes it a highly-valued product. It is currently exported exclusively
to India where it is used both in the food and the medicine industry. With only about 2,100
MT of exports in 2003, its export value (US $ 11 Mn) is higher than white cumins.

Afghan black cumin grows in the wild in various parts of Afghanistan, in Badakhshan in
particular. It is often referred to as caraway
52
. About 1,600 MT were exported in 2003, to
Pakistan and India mostly, accounting for about US $ 7 Mn.

Afghanistan is a major player in the global cumin and caraway trade: Afghan products
accounted for about 15% of the world exchanges of cumin and caraway in 2003
53
.

Exports to Dubai are well organized, with a limited number of Afghan exporters who control
the commercial chain to the UAE while the trade with India and Pakistan is almost
completely in the hands of Indian and Pakistani importers who capture most of the value of
the products.

Cumin is subject to high variations in price and demand (Afghan exports dropped by 50% in
2004 because of local price increases) but could offer interesting development opportunities
with appropriate marketing and distribution.

Saffron

Saffron is currently produced in very small quantities in Afghanistan (estimated 430 kg in
2004). Saffron, however, is especially suited to the climates around Herat. Saffron is an
extremely lucrative plant: 1 kg can fetch as much as US $ 200 for a farmer.

Only 170 MT are exported yearly in the world, 80% of which come from Iran, from areas
near the border with Afghanistan, with a climate very similar to that of Herat. The
international market seems to have stabilised in the past years, but Afghanistan might be
able to gain a significant market share by leveraging low local labour costs, a major element
in the cost structure of the product.

51
Data from Afghan Plant &Co, Spices and Plants export department of Afghan Ministry of Commerce, January
2005
52
See ITCs trade records and Natural Ingredients for Pharmaceuticals, Cosmetics and Food in Afghanistan,
Novib, AKF, CHA and Swisspeace, June 2004
53
Analysis based on interviews with exporters and figures from ITC, 2003
45
There is an opportunity for SMEs in the development of both cumin and saffron, especially if
Afghan producers manage to keep more of the value by cleaning, processing and if possible,
packaging the spices in Afghanistan. Green cumin could be further developed for the Indian
market. Another opportunity would be to aim at the very exclusive spice markets in Europe
and in the US. These niche markets do not so much revolve around large quantities and
regular supply as much as quality and exoticism for which they are willing to pay very high
prices. However, to establish a position in a high quality niche, the quality of cleaning and
processing will have to be very much improved.

46

C. Cumin
SWOT Cumin
Strengths
Valued local varieties
Lower labour cost than in main producing
countries
Existing sizeable production and exports
Established brand in India and in Pakistan
Weaknesses
Strong competition with Turkey, Syrian and
Iranian products on the world market
Poor processing practice
High bargaining power of Indian importers
No presence in major global markets
Opportunities
Marketing and distribution optimisation in
Pakistan and India
Vertical integration for best quality control
Develop cleaning and processing facilities
Addressing exclusive niche markets in
Europe and in the US
Threats
High price volatility can strongly affect sales
Global players can take Afghanistans shares
in South Asian markets
Poppy cultivation and droughts can heavily
impact production and harvesting

1. Afghan Cumin

Three main types of cumin can be found in Afghanistan. Each
of them has several sub-varieties and are named differently
in some regions.

Figure III-1: White Cumin
Flower, Balkh, May 2003
54

a. White Cumin

White cumin is by far the most widely available in Afghanistan. It is planted by farmers in
their fields (hence the name of Zira-e-zaraati, i.e. cultivated cumin, in some regions) with
yields of about 350 kg per hectare.

It is given various names throughout Afghanistan, since it grows in most of the regions.
Some correspond to subtle differences in the varieties while others are simply due to local
usages:

54
Picture taken by Raphy Favre
47

o Zira-e-safid (white cumin in Dari) is the most
commonly used all around the country.
o Zira-e-zaraati (cultivated cumin in Dari) is
particularly used in Balkh and the northern regions.
o Karabia is mostly used in the western regions and
in Herat in particular.
o Spin zira (white cumin in Pashtu) is the term used
around Kandahar.

Afghan white cumin is more yellow than what can be commonly found on global markets. It
is traded for US $ 0.7-1.50 per kg
55
, and its value depends more on its taste than on its
scent.

b. Afghan Green Cumin

Afghan green cumin is a very specific plant that is mainly used in India for cooking and in
the pharmaceutical industry. It is a resilient crop that can be found at high altitudes with
yields of about 500 kg per hectare.

It grows mainly around Kandahar and in Badakhshan and is known under the following
names:
o Zira-e-sabz (green cumin in Dari) is commonly
used around the country
o Zira-e-asel (original cumin in Dari) is
commonly used by the traders in Kabul.
o Zira-e-buidar (smelling cumin in Dari) is used
in Badakhshan and Takhar.
o Asel-e-Buidar (original with smell in Dari).
o Shina zira (green cumin in Pashtu) is the most
common name in Kandahar region.

Green cumin is the most expensive variety, as it is traded for US $ 5-7 per kg
56
, due to its
very strong scent. In the local market, retailers sometimes mix some seeds of green cumin
with white cumin to draw a better price from their products.

c. Black Cumin

Black cumin is used in cooking but is also renowned in Muslim countries for its medicinal
virtues (Prophet Muhammad said that Black cumin heals every disease except death). It
grows in the wild in high mountains in the northern parts of Afghanistan mainly. Its seeds
are thinner and smaller than white or green cumins.

Afghans know it under various names:
o Zira-e-xia (black cumin in Dari) is commonly used
by the consumers of Dari-speaking regions.
o Kajak is used in the northern and eastern regions and
by the exporters in Kabul.

55
Field interviews, December 2004 February 2005
56
Ibid
48
o Kohi zira (cumin from the mountains in Pashtu) is used by farmers and
traders in Kandahars wholesale market.
o Tor zira (black cumin in Pashtu) is commonly used by consumers in
southern regions.

Its trading value goes from US $ 1.5 to US $ 5 per kg
57
. Afghan black cumin is often referred
to as caraway in international records and in available studies
58
.

Black cumin is commonly used in south Asian cuisine. The main markets for Afghan cumin
are India and Pakistan.

d. Processing

Most Afghan cumin is generally exported unprocessed. When it is processed, sorting and
cleaning is done by hand or with plain fans. This leads to poor quality output, preventing
Afghan cumin from reaching most international markets. According to Afghan exporters,
simple cleaning machines cost about US $ 10,000 and could help Afghan cumin reach the
quality of Syrian and Iranian products.

2. Global Market Overview

a. Global Cumin Market

White cumin is commonly used in most
cuisines around the world, from
Mexican chili to Arab tajines or Indian
curry. About 83,000 MT of cumin were
traded in 2003 worldwide, accounting
for a little more than US $ 100 Mn.
Black cumin is often recorded as
caraway while Afghan-type green
cumin is virtually unknown in the
global market, yet it is recorded
together with white cumin in Indian
imports.

The global supply of cumin is mostly
concentrated in the hands of three
large exporters, all located in the
Middle East (Syria, Iran and Turkey) who accounted for 74% of the market in 2003.

57
Field interviews, December 2004 February 2005
58
See ITCs trade records and Natural Ingredients for Pharmaceuticals, Cosmetics and Food in Afghanistan,
Novib, AKF, CHA and Swisspeace, June 2004
59
Analysis based on interviews with Afghan exporters and figures from ITC
60
These figures generally include white and green cumin.
Global Export Sharesby Exporting Country (83,000 MT)
Syria
37%
Iran
20%
Turkey
17%
India
7%
Afghanistan
15%
Other
4%
Figure III-2: Global Export Shares of Cumin
by Exporting Country in Volume
(Total: 83,000 MT), 2003
59,60

49

The world imports are relatively fragmented but the UAE, the EU, the USA and Pakistan put
together represent about 46% of the trade.

Afghanistan ranked 4th in 2003 with about
13,000 MT exported, or 15% of the world
trade
62
. These exports however are
concentrated exclusively towards Pakistan,
India and the UAE, the latter being used
mostly as a re-export centre for Middle-
Eastern and North-African countries.

It is worth noticing that the destination
countries of Afghan cumin represent only
27% of the global imports. Contrary to the
other leading countries, each of which
export to about 25 countries, Afghanistan is
not yet a global player.

b. Black Cumin / Caraway World Market

Afghan black cumin is aggregated with caraway in most records. The market for this plant is
distinct and much smaller than the cumin market, with 11,000 MT traded in 2003,
accounting for about US $ 13 Mn.
63

Figure III-4: Global Export Shares of
Caraway by Exporting Country in Volume
(Total: 11,000 MT), 2003
64

Figure III-5: Global Import Shares of
Caraway by Importing Country in Volume
(Total: 11,000 MT), 2003
65

Afghanistan was the 4
th
exporter in 2003 with about 1,600 MT, representing 14% of the
world trade in volume. Exports exclusively go to Pakistan and India in fairly equal quantities:
Afghan caraway is quite specific and is particularly desired in South Asian cuisine. It fetches
a higher price than the average caraway.

61
Ibid
62
ITC recorded 7,300 MT exported from Afghanistan in 2003. Yet their figures were only covering exports to
India and Pakistan, not taking into account 5,000 6,000 MT exported to UAE. NB: Only 1,880 MT were recorded
at the Export Department of the Afghan Ministry of Commerce in 2003: 950 MT of black cumin, 75 MT of green
cumin and 855 MT of white cumin
63
ITC based on COMTRADEs data, 2003
64
Analysis based on interviews with Afghan exporters and figures from ITC
65
Ibid

Figure III-3: Global Import Shares of Cumin
by Importing Country in Volume
(Total: 83,000 MT), 2003
61

EU- 15
11%
Singapore
8%
Egypt
4%
Other
21%
Morocco
4%
USA
11%
Pakistan
9%
Brazil
5%
Saudi Arabia
5%
Mexico
4%
UAE
15%
India
3%
Egypt
25%
Canada
18%
Finland
15%
Netherlands
7%
Lithuania
7%
Poland
6%
Other
8%
Afghanistan
14%
USA
29%
EU-15
22%
Algeria
8%
Russian
Federation
3%
Other
12%
Pakistan
5%
India
13%
Tunisia
8%
50
3. Export Channels of Afghan Cumin

Cumin is produced in various places in Afghanistan. Most of the production is gathered and
brought to major cities before being exported to the UAE, India and Pakistan. Figure III-7
indicates the main transportation channels with estimated quantities for 2003
66
:

11,200 MT of white cumin
exported to the UAE via Herat
and Pakistan via Spin Boldak.

1,600 MT of black cumin shipped
to India and Pakistan, mainly via
Torkham.

2,100 MT of green cumin goes to
India.

Figure III-6: Exports Volumes of
Various Types of Afghan Cumin
(US $ Mn, MT), 2003
67

2004 may not be considered as a representative year because of various factors:

The harvested volumes considerably
decreased due to the drought and the
record production of poppy.

Farm-gate prices of white cumin rose to
levels close to the average trading price
in Dubai in many production regions
(e.g. US $ 0.85 per kg in Herat vs. US $
0.86 per kg in Dubai). This represents an
increase of 25 % in one year. Most
traders did not export cumin in 2004.

In Badakhshan, there is plenty of cumin
plants along the road. Nobody takes the
time to harvest them anymore since it is so
much more interesting to work with poppy.

- Exporter in Kabul sourcing cumin from
Badakhshan, February 2004.

66
Estimate based on interviews and consolidation of data
67
Ibid
51

Figure III-7: Afghan Cumins Export Channels, Estimated Yearly Volumes, (in MT), 2003
68

Kandahar

All 3 sorts of cumin are exported from Kandahar:
o White cumin is collected from major producing regions nearby.
o Green cumin is cultivated in fields at high altitude around Kandahar. Locals
say it is one of the only places in the world where green cumin can be
found.
o Black cumin is brought from the northern regions.

Kandahar is the main shipping point to South-Asia:
o Exports to Pakistan go to Quetta before being redistributed in various
parts of the country.
o Exports to India cross Pakistan before going to Delhi via Wagas border or
to Mumbai via Karachi.

Farmers harvest the cumin in their fields before bringing it individually to the city in
10 kg bags.

There is a cumin wholesale market with about 200 players in the centre of the city of
Kandahar, also dealing in almonds and dried apricots for the whole region. The
gathering agents package the cumin brought by the farmers in bags of 60-70 kg
before selling it to commission agents.

68
Estimates based on interviews and consolidation of data
52
About 20 commission agents deal directly with
Indian importers. Their role is to:
o Gather enough quantities to fill up a
truck,
o Bring the cumin to the Spin Boldak
border,
o Hire Pakistani traders to bring the
cumin to the Indian border (in Waga,
between Lahore and Delhi) and
release all payments linked with the
transactions.

Figure III-8: Lunch Break in
Kandahars Cumin Wholesale
Market, December 2004

The business is locked by Indian importers and by commission agents, who decide
the terms of payment and know the value of cumin in the end markets.

Herat

Herat is the main gate for exports to the UAE. White cumin, locally called Karabia, is
brought to the city from various parts of the country: from Herat and Badghis mainly,
since production is significant in those provinces, but also from Kandahar and Mazar-
e-Sharif.

Trade is done by 5-10 import/export companies from the region. Most of these
companies were dealing with dried fruits and nuts originally, but many of them,
mostly the biggest ones, have diversified their activities.

These companies buy cumin directly from farmers who come to them or from
shopkeepers who gather larger quantities. The biggest companies also use a network
of regional offices that ship the goods to the headquarters in Herat, from where they
get exported.

Cumin is shipped by truck to Bander Abbas before being shipped to Dubai, where
most of these companies have selling offices and warehousing facilities.

Takhar and Badakhshan

The north-eastern provinces of Takhar and, most of all, Badakhshan are major areas
of production for high quality herbs. Black (kajak) and green (buidar) cumin varieties
grow wild in Badakhshan. They are more fragrant than the south-western varieties.

Farmers bring the harvested cumin to gathering agents located in villages of
Badakhshan and Faizabad in particular. These gathering agents then bring their
cumin to other agents in Taloqan, who sell it to traders based in Kabul. Some
gathering agents from Badakhshan also go directly to the traders in Kabul. There are
about 50 agents in Badakhshan and 100 in Takhar.

53
The Indian Market

In India, cumin is one of the key ingredients for curries and masala recipes. India is a major
producer of cumin, with about 80,000 MT produced each year, less than 10% of which is
actually exported
69
, since most of it is consumed domestically.

India, however, does import cumin,
respectively 3% and 13% of the world
imports of standard cumin and caraway (see
Figure III-3 and Figure III-5). Afghanistan
has one of the largest shares in Indian
imports:

It ranks 3
rd
in quantity, with only 23% of
imported volumes but it is the 1
st
in import
value, with a 31% market share: contrary to
the other suppliers, Afghanistan exports
mainly green cumin to India, which is much
costlier than other varieties (US $ 5-7 per kg
vs. US $ 0.7-5 for white and black cumin).

Figure III-9: Indian Imports of Cumin in
Volume (Total : 2,600 MT), 2003
70

Afghanistan is Indias major supplier of black cumin (caraway), covering 53% of the
1,470 MT imported in 2003.
71

Afghan traders indicated that their contacts in India are mainly based in New Delhi and
Vashi, near Mumbai. They said they had limited knowledge of the Indian market, the Indian
importers being the ones who distribute Afghan products (not only cumin, but also dried
fruits and nuts) in the country. Apparently, Afghan cumin, the green variety in particular,
has specific uses in the Indian pharmaceutical industry.

Afghan cumin is a highly valued product: black cumin purchased for US $ 5.22 per kg in
Kabul is sold for US $ 7 per kg in India
72
with no extra-processing and some Indian traders
do not hesitate to ask their Afghan suppliers to send cumin by plane to New Delhi, despite a
transportation price (US $ 0.50 per kg) 2-5 times more expensive than by road.

69
Spice Buyers Journal, Unjha Seed Market Report, Mc Cormick & Co. Inc, March 2004
70
ITC based on COMTRADEs data, 2003
71
Ibid
72
Horticultural Market Survey, UC Davis, December 2003
Turkey
27%
Pakistan
9%
Other
5%
Iran
25%
Syria
11%
Afghanistan
23%
54

Kabul

Kabul is a major trading place for cumin from the
north-eastern provinces of Badakhshan and Takhar.
Some black cumin is also brought from various
regions (Mazar-e-Sharif mainly, but also Herat,
Jalalabad and Sari Pul occasionally). Only black and
green cumin is traded by exporters in Kabul.

10-20 exporters have offices in the city. In addition,
they all deal with dried fruits that they mainly export
to India, with small quantities shipped to Pakistan and
to the UAE.

Exporters usually wait for orders from Indian
importers before shipping the products:
Figure III-10: 11 AM in the
Internal Courtyard of a
Major Exporter,
Kabul, January 2005

o By truck mainly through Peshawar and the Waga border. Shipping to India
costs about US $ 0.27 per kg
73
.
o By plane. Transport to Amritsar with Ariana Afghan Airlines costs US $
0.50 per kg. 240 MT of black cumin were transported to Amritsar in
2004.
74

2 Afghan exporters, both of them Sikh, have sales forces in India. They now have
major shares of the export market.

Mazar-e-Sharif

There are about 20 wholesalers in the city, most of them are located in Sayed Khwaja
Saray market, a small courtyard in the centre of town where almonds are also traded.

White (zaraati) and black cumin (kajak) is brought from Balkh, Faryab and Samangan
provinces districts by local gathering agents who purchase it from the farmers. The
wholesalers buy the cumin from these agents before selling it to exporters who ship
black cumin to India and white cumin mainly to Pakistan and eventually to the UAE,
via Bander Abbas or Karachi.

Representatives of export companies based in Herat also purchase cumin to ship it to
their headquarters.

73
Interviews with Afghan exporters, February 2005
74
Records of Ariana Afghan Airlines, February 2005
55

The Pakistani Market

Pakistan is the worlds 4
th
largest importer of cumin, with
9% of the world imports (see Figure III-3). White cumin
is brought mainly from Kandahar and from Iran before
being traded in Quetta, Balutchistan.

Afghan white cumin had major shares in Pakistani
imports in 2003
75
, with 86% of its volumes of white
cumin (6,600 MT). The main competitor is Iranian white
cumin, which is 10% more expensive at retail level and
much cleaner. Indian cumin is also available in small
quantities on the market. Its price and quality are comparable to the Afghans.

People prefer buying Afghan cumin because it is cheaper. This year, Afghan cumin was very
expensive, but the arrival of Iranian and Indian products in October decreased its price.
Wholesaler in Faisalabad, Punjab, December 2004.

Pakistan imports black cumin exclusively from Afghanistan (770 MT)
76
. It is the 6
th
largest
importer in the world, with 5% of global import share (see Figure III-5). Afghan cumin is
widely distributed in the region of Peshawar in particular.
2 000
250
85
45
50
50
40
75
1 405
0
500
1000
1500
2000
2500
Farmer
Price
Kandahar
Gathering
Agent
Kandahar
Transport to
Quetta
Importer
Quetta
Transport
Peshawar
Middleman
Peshawar
Wholesaler
Peshawar
Retailer
Peshawar
Retail Price
in Peshawar
30% of the added commercial value

Figure III-11: Value Chain of Afghan White Cumin in Peshawar (US $ /MT)
December 2004
77

The value chain of Afghan cumin is highly fragmented and most of the value is captured by
Pakistani players who do not add any real value to the product (see Figure III-11). This
indicates strong opportunities in distribution optimisation.

75
ITC based on COMTRADE, 2003
76
ITC based on COMTRADE, 2003
77
Interviews in Kandahar and Peshawar, December 2004
56
4. Summary - Opportunities

a. Key Success Factors

Afghanistan is already a major player on the world cumin market, yet it currently addresses
only three destination markets (India, the UAE and Pakistan), contrary to the other main
exporters, who are global players.

Distribution and marketing are key to capturing the value from sizeable South-
Asian markets: the current lack of connections with Indian and Pakistani end-
markets significantly affects the Afghan producers and exporters bargaining
power.

Quality and regularity of supplies is the
major concern when addressing the western
markets. In particular, strong focus has to be
put on processing, which barely exists in
Afghanistan today and could significantly
increase the volumes available for sale.

Due to high price volatility on local and
international markets, sourcing and stock
strategy can help to have more control over
prices and traded quantities.

For cumin, the origin is not very
important. We focus more on
cleanliness and quality
specifications.

- Marketing manager of a leading
distributor of spices in Europe,
December 2004

Vertical integration, with development of distribution and sales forces in importing
countries, is a major asset to guarantee quality and quantity of the product.

b. Main Players that could be Leveraged

Sampex project, Kunduz
This project is being initiated by an overseas Afghan businessman from Switzerland
and his brother, an agronomist with extensive experience in the northern regions.
They plan to start a processing plant for white cumin in the region of Kunduz to ship
to European clients with whom they have already discussed the project.

Ismail Zade Trading Co, Herat
This leading export company for dried fruits and nuts based in Herat and with offices
in Iran and in Dubai is highly interested in cumin processing and agricultural
extension to the farmers that currently supply them.

Gulestan, Jalalabad
This company was established in 2004 by local and international partners. Their core
activity is the production of essential oils for the cosmetics industry, targeting major
players of the industry based in Europe. They are interested in the processing of
cumin oil from green cumin mainly.

CRS Agribusiness Support Program, Herat
This NGO focuses on the development of saffron and cumin around Herat. Potential
overseas buyers for cumin have been identified and the program focuses on
improving both technical and commercial aspects.

57
Novib, AKF, CHA, Swisspeace
These NGOs are interested in the development of natural ingredients in Afghanistan,
focusing not only on cumin and caraway, but also on asafetida, liquorice, jujube and
artemisia.
58

D. Saffron
SWOT Saffron
Strengths
Favorable climatic and soil conditions
Proximity to major processors and
distribution channels
Low labour cost
Interest of local producers for profitable crops
Weaknesses
Current production is extremely fragmented
Initial investment high for Afghan farmers
Commercial production still experimental
5 years maturation period
Limited experience
Risk averse international buyers
Market locked by limited number of players
Opportunities
Produce price-competitive products
Leverage support from various institutions
Target the exoticism seeking and price
insensitive niche markets
Leverage interest of Iranian processors and
packagers for Afghan production
Develop Afghan branding
Threats
Climatic accidents can strongly affect
production yields and quality
Fulfillment of international requirements are
far from being achieved

1. Introduction

Saffron is the name of the yellow-orange stigmas from a small
purple crocus named Crocus Sativus. It is famous for being the
worlds most expensive spice due to its scarcity and its highly
labor-intensive process. It is commonly estimated that 90% of
worlds saffron (i.e. about 170 230 MT per year) is produced in
Iran
78
.

Saffron is widely used as a condiment for its flavour and colour
properties in various parts of the world: Indian dishes, rice, coffee
or desserts in the Middle East, Spanish Paella, and Italian Risotto,
among others.

Its cultivation requires a very specific environment:

Hot and dry climate in summer and cold in winter,
Flat land without trees.

Hence, various regions in Afghanistan offer promising conditions for saffron cultivation.

78
Interviews in Iran. February 2005
59
a. Saffrons Quality

The quality of saffron mainly depends
on three factors
79
:

Aroma, must not be musty.
Color, the redder the better.
Dryness, the stigma has to
be brittle.

Only the stigma is valuable, the style of
the plant does not bring any aroma,
flavour, or colour. When dry, the style
curls, becomes hardly visible and just
adds dead weight to the product
(30-50%), decreasing its value
consequently.

Figure III-12: Grades of Iranian saffron
(www.saffron.com)

Various quality tests are expected or required to enter the global market
80
:

Microbiological tests (ISO 7251 and 6579),
Spectrophotometry to determine the colouring power,
Detection of additives or colours (TLC and HPLC),
Measurement of aroma (HPLC),
Tests on moisture and cleanliness specific to saffron (ISO 3632), classifying
saffron into 4 quality categories, Sargol being the best one.

b. Production Process

Saffron processing consists in 3 main steps. All of them are
done almost entirely manually:

Harvesting: flowers are hand-picked between
September and December early in the morning (the
best is to work until dawn) as excessive exposition
to the sun would make them lose their colour and
flavour. Harvesting is done by women in general.

Stigmas extraction and drying: the stigmas are
pulled out and dried in the shade for a couple of
days. This phase is the most technical one as
improper drying can affect the chemical properties
of the saffron.

Sorting and cleaning: the dust is removed; the
stigmas then get sorted by various levels of quality.
Few factories prefer using machines for this phase.
Labour Requirements

It takes about 50
minutes for one person
to pick 1,000 flowers
81
.

It takes 2 hours to
remove the stigmas of
1,000 flowers
82
.

1 man sorts 1 kg in one
day
83
.

79
Interviews with Iranian companies, February 2005 and www.saffron.com
80
Interviews with major producers in Iran, February 2005
81
New Zealand Institute for Crop & Food Research Institute, 1993
82
Ibid
60

In total, saffron processing is highly labour intensive, requiring about 430 man-hours of
manual processing to get 1 kg of dry saffron. In Iran, it is almost exclusively done by
women.

c. Value Chain

The value of saffron highly depends on its quality. Hence, great variations can be observed
from one producing field or one factory to another.

Labour, with 430 man-hours needed for 1 kg,
has a major impact on the cost structure of
saffron and accounts in theory for 50-80% of
its FOB export price (see Figure III-13).
Farmers families, therefore, prefer to harvest
and process saffron themselves rather than to
use external labour.

This explains why the world production
progressively moved from more industrialised
countries like Spain, to Iran, where the women
who work in the saffron fields are paid only US
$ 4 to 8 per day.

Production Yields
84

Yields per hectare can vary from
150,000 to 3,000,000 crocus flowers, at
the peak of the production cycle
(around year 5).

150,000 flowers yield about 5 kg of
fresh stigma.

It takes about 5 kg of fresh stigma to
get 1 kg of fresh saffron.

1,200
780
115
5
45
170
70
15
0
500
1000
1500
Saffron Bulb
Cost
Harvesting Stigma
Extraction
Farmer Margin
and Other
Costs
Sorting Factory
Packing and
Testing
Trading and
Retailing
Retail Price in
Western
Countries
Farm gate price
US $ 250-350
Export price
US $ 350-500

Figure III-13: Example of Value Chain of Exported Iranian Saffron (US $ /kg),
February 2005
85

83
Interviews with Iranian processors
84
Average figures based on interviews and productivity studies
61

Most of the Iranian exporters have their own processing factory. Some of them have their
own farms, but they outsource a large part of their production (about 90% of their supplies
of raw material) to farms of various sizes. The number of suppliers one company deals with
can vary from 25 to 1000.

Exporters tend to concentrate their expertise on cleaning and quality control, the tests to
fulfil international standards requiring increasingly advanced technology.

2. Global Market Overview

About 230 MT of saffron are produced every year around the world, accounting for a
commercial value of US $ 70 - 100 Mn
86
, 170 MT of which are exported. About 90 % is
produced in Iran, 90% of which is from Khorasan province in the Northeast of the country.
Like production, exports are almost exclusively from Iran, with 147 MT recorded from March
2004 to January 2005
87
.

There are only 10-15 main exporters in Iran, each of them trading 10-25 MT per year.
Saffron is exported mainly to Spain and Dubai, where it gets frequently re-packaged and re-
exported to other countries.

Figure III-14: Iranian Exports of Saffron by Destination Country (MT), 2003
88

85
Estimation from interviews with processors in Tehran sourcing their saffron in Mashad and Ghaenat regions,
February 2005
86
Estimation based on official data and interviews with Iranian trading companies, February 2005
87
Persian Journal, February 2005. http://www.iranian.ws
88
ITC figures based on COMTRADE records, 2003
62

Some sources claim that Spain is still the main producer
of saffron, since the La Mancha province used to be the
major production region in the world (with its famous
Azafran de La Mancha). In fact, today, Spanish trade
consists mostly of re-exports of Iranian saffron
imported from Dubai or directly from Iran. Saffron is
then mainly shipped to other European countries and to
the US. Numerous buyers still purchase saffron from
Spain only, to be sure of the quality and the sanitary
requirements.

Poor packaging is the main
reason why Iranian saffron is re-
exported by other countries. Only
20 percent of Iran's saffron
exports are packaged within the
country.() Marketing activities
have not progressed as much as
saffron production has in recent
years.,

- Iran Daily, Saffron in Crisis,
December 2004.

Most of the value is captured in destination and re-exporting countries, Spain being the main
gateway to the Western markets.

Other producing countries are Greece, India (Kashmir region) and Morocco, yet their current
production is still less than a few MT per year. China also started producing some small
quantities.

Duties on saffron are very limited: there is no export tax in Iran and no import tax either in
the US
89
or in the EU (except an 8.5% import tax on its crushed and ground form,
representing about 20% of the trade)
90
.

Retail in Western Countries

Saffron is known as the most expensive spice
all around the world. In western countries, in
can be found both as stigmas and powder,
with retail prices ranging from US $ 1,200 to
US $ 20,000 per kg!

Exoticism seeking and price insensitive
consumption is developing, for which origin
is the key commercial selling point.

Packages are diversified, with sizes as small as 0.1g per pack to several grams: saffron is a
product that is always used in limited quantity.

Quality also varies a lot, since dye and other products are sometimes added illegally.

89
Harmonized Tariff Schedule of the United States, 2004
90
Official Journal of the European Union, October 2003
63
Export prices of saffron have decreased drastically in the past 10 years (down by 50%
91
)
while traded volumes saturated and production increased, raising concern among the Iranian
authorities. Saffron companies are currently trying to overcome the crisis in 4 main ways:

Creating an Iranian brand for saffron.
Increasing efforts in packaging and marketing of their products.
Developing local consumption: the Iranian market now represents about 30% of the
sales for major Iranian companies, who sell saffron at prices 5% lower to wholesalers
than for export
92
, and thereby have found a way to commercialise their extra
production. Retail prices range from US $ 350 to US $ 700 per kg due to the lack of
quality standards on the national market.
Developing saffron-based products such as jellies, batter mixtures, cakes, dressings,
or puddings.

3. Afghan Production

Existing production was reported as scarce in Kandahar province (Maiwand) and Ghor
(Shahrak), but the main focus today is in Herat (Ghoryan, Enjil, Guzeram, Zendajan and
Pashton Zarghoon districts in particular), where organized production and trade already
exist: the production has been initiated by migrant farmers who were repatriated in 1991
after the fall of President Najibullahs government.
93

Recently, following successful preliminary experiments
94
, the Agricultural Department of
Herat province and some international NGOs
95
have distributed bulbs and started
development programs for the farmers in 2003, partly to offer opportunities for substitution
to poppy production in this region that is particularly adapted to saffrons cultivation. The
programs now cover 450 farmers in the area.

Production units are very small in Herat province. Most of them cover less than one jerib,
96

usually with production of less than a couple of hundred grams at most
97
. Hence the
difficulty for the farmers to sell their saffron in wholesale markets, since the value of their
production rarely exceeds US $ 100.

Afghan production of saffron shows promising development potential, yet major issues have
to be overcome:

First attempts at cultivation bring low revenue to the farmers. Saffron is a perennial
crop with no well-known intercropping possibilities and its yields in the first years of
production hardly exceed a couple of kilograms per hectare.
Access to bulbs is not easy since Iranian authorities strongly limit the export of
saffron bulbs.

91
Interviews with Iranian Saffron companies, February 2005
92
Ibid
93
DACAAR internal newsletter, February 2003
94
DACAARs IAD project, 1998, in particular
95
CRS, Worldvision, Green leaf.
96
DACAAR, January 2004
97
Ibid
64
Training for farmers is needed. Compliance with HACCP (Hazard Analysis and Critical
Control Point) norms in particular could be an asset, as microbial analysis has
revealed that some Afghan saffron might have E. coli contamination.
98

About 430 kg of saffron were estimated to have been traded in 2004
99
for prices up to US $
400 per kg. Production is brought to traders in Herat city or sold to wholesalers in Iran in
small quantities (less than 5 kg) at Islam Qalas border or even in Mashad.

One trader has been buying saffron since 1994 and is by far the largest dealer in Herat with
about 350 kg purchased in 2004 from farmers in Zendajan and Goryan districts. He
purchased saffron for US $ 170-185 per kg in 2004 and sold it for US $ 210 per kg on
average:

50 kg to retailers,
300 kg to Indian businessmen based in Kabul.

4. Opportunities

a. Key Factors

Various factors encourage the development of saffron production in Afghanistan:

Low labour costs are a major asset to be
leveraged.

Half of the Iranian companies that were
interviewed are interested in buying Afghan
saffron if the quality fulfils their requirement
and the price is interesting.

Afghanistan is emerging as a
potential rival given that it has a low-
paid workforce and good climatic
conditions for growing saffron.

- Iran Daily, November 2004

Tela-e-Sulkh consumption (red gold in Farsi) is booming in Iran and high-end market
is developing in Afghanistan.

International organisations are willing to support development of professional
activities for women (who play a strong role in harvesting of processing) and
cultivation of substitution crops to poppy in the areas that are suitable for saffron
production.

An Afghan brand could have a strong potential in niche markets.

b. Players that could be Leveraged

DACAARs IAD program (Integrated Agricultural Development), Herat
This NGO started saffron cultivation experiments in 1998. The project started with
distribution of bulbs and agricultural extension for 9 farmers. This successful
operation convinced administrations and other NGOs to leverage their technical
know-how and to develop the activity further.

98
Interviews with CRS Herat, February 2005
99
Interviews with traders in Herat, January-February 2005. Some existing figures are slightly more conservative
with an estimate of 200-300 MT in 2004.
65

CRS (Catholic Relief Services), Herat
CRS is currently leading projects on saffron production starting with demonstration
plots and distribution of planting materials. The program started in 2003 with 20
farmers. The yield for the first year is of 1kg per ha but the coordinators of the
project are confident about increasing yields in the next years and study intercropping
possibilities to bring extra-revenue to the farmers during the first years of production.
CRS is also working on identifying appropriate marketing and distribution channels.

Other NGOs, Herat
Other NGOs started saffron development programs in Herat and Badghis provinces.
They generally focus more on the technical aspects than on the commercial channels.

Anjoman Saffron, Tehran, Iran
This company works with about 1,000 small Iranian farms and is interested in testing
Afghan saffron as long as it is of good quality.

Shahri Saffron Co, Mashad, Iran
Shahri Saffron addresses both local and international markets. They are interested in
purchasing Afghan saffron if it meets their quality requirements. They are also willing
to test and package Afghan products on a commission basis, as they already do for
some local players.

66

IV. Wheat-Based Products


Flour:

Wheat flour is used to make bread
Wheat is the primary staple of Afghanistan
4.4 Mn MT of wheat flour produced in 2003
417,000 MT flour imported (US $ 108 Mn), mainly from Pakistan
Auto-sufficiency in northern provinces
Strong deficit in southern regions
5 functioning industrial mills in Afghanistan

Industrial Bread:

Bread mostly home-made, especially in rural areas
In major cities, about 50% of families buy bread from bakeries
3 main industrial bakeries
High-end consumers desiring better quality (cleaner) and healthier bread

Cookies and Snack Cakes:

20,000 50,000 MT imported mainly from Iran (US $ 23 60 Mn)
Mainly consumed by children in individual packages
Large outreach of current distribution channels
2 brands have more than 70% of the market
High seasonality: snack cakes preferred in cold season and biscuits
consumed more in warm season
Increasing sophistication of the market

B. Key Findings

Wheat is a key agricultural product in Afghanistan. It is used in some of the most consumed
food products in the country, including bread. However, Afghanistan is not self-sufficient in
wheat and it imports a significant quantity of flour and wheat-based products.

Flour: About 417,000 MT
100
of flour were imported in 2004, mainly from Pakistan and
Kazakhstan, amounting to US $ 108 Mn. Large flour mills are being rehabilitated and
many key players and donors are aware of the importance of increasing Afghanistans
flour milling capacity. Only 5 mills are functional today, with a total maximal
production capacity of about 500 MT per day. Efforts are focusing mainly on the

100
Analysis, January 2005
67
northern regions, were wheat production level is satisfactory. Promising private
initiatives currently under way indicate that flour production can be further developed
and can be highly profitable with appropriate sourcing and a quality control strategy.

Industrial Bread: Bread is one of the main Afghan staple foods. It is generally made
at home and less frequently bought in small traditional bakeries. Recently, there has
been a growth in the number of larger-scale, western-style bakeries that produce
varied breads and that aim at higher income customers who are willing to pay more
for different, healthier breads. In Kabul and in the main cities, given the size of the
growing Afghan middle-class and the presence of the international community, there
is potential for developing such ventures further, targeting the quality-driven
markets.

Proper branding and optimized distribution systems are key assets for this business
and can be developed quickly.

Cookies and Snack Cakes: They represent an important market, with 20,000 to
50,000 MT
101
brought to Afghanistan in 2004, an import value of US $ 23-60 Mn.
These products are mostly consumed and bought by children, who favour individual
packs, since they can purchase them for just a couple of Afghanis.

Iranian cookies are by far the most imported and the most appreciated: they are
seen as cheaper and of good quality. 4 main products, produced by 2 companies,
comprise about 70% of the market in 2004. The market, however, is moving towards
greater sophistication with new brands and types of biscuits progressively appearing.

Distribution is key for the business, and promotional activities can be developed to
penetrate the market. Local factories have started appearing in Herat, Mazar-e-Sharif
and Kabul, and Iranian cookie producers openly voice their interest in investing in
production facilities in Afghanistan to best address the promising Afghan market.

101
Altai Consulting analysis, January 2005
68
C. Introduction

Wheat is the primary staple in Afghanistan. 4.4 Mn MT were estimated to have been
produced in 2003
102
for a commercial value of US $ 528 Mn.

Similarly to most consumer goods, various types and qualities of breads and cookies are now
appearing in urban areas. With estimated 417,000 MT imports of flour
103
and 20,000 to
50,000 MT
104
of imported cookies and cakes, imports of wheat-based products in Afghanistan
now account for about US $ 131 - 168 Mn, making this sector promising for import
substitution.

D. Flour
SWOT Flour
Strengths
Sufficient quantities of wheat available in
northern parts of the country
Increasing price of flour imported from
Pakistan
Growing consumption
Weaknesses
Power intensive industry
Large investments needed
Strong competition with imported flour from
Pakistan, Kazakhstan and Uzbekistan
mainly
Opportunities
Develop local industrial production of flour
Develop links with increasing number of
biscuits factories and industrial bakeries
Develop quality control to best respond to the
growing sophistication of the market
Liaise with international organisations to
produce enriched flour.
Threats
Iran production is increasing and Iranian
producers might start exporting to
Afghanistan at competitive prices
Wheat prices in Afghanistan can vary greatly
during the year

1. Context

Afghanistan is still not self-sufficient in wheat. Although the north-eastern regions (around
Kunduz mainly) have reached sufficient levels of production, the rest of the country still has
to import significant amounts of flour.

102
FAOs National Crop Output Assessment, July 2003
103
Altai Consulting estimate, following interviews and consolidation of data, December 2004 January 2005. NB:
ITC recorded 330,000 MT of flour imports to Afghanistan in 2003
104
69

Flour in Rural Areas

Most of the Afghans, especially in rural areas, make their own bread from flour that they mill
themselves in small mills or at home. There are around 30,000 small traditional mills in
Afghanistan. They can process up to 1 MT of wheat per day
105
. These mills operate with poor
hygienic conditions: the same machine is used for varied kinds of grinding, from wheat to
small stones. In poorer areas, bread with tea is the only meal Afghans have three times a
day.

Imports come from CIS countries for the northern and north-western regions, and from
Pakistan in the south of the country. No flour has been imported from Iran until now, as this
country has barely reached flour self-sufficiency.

Since the war, flour imports from the NWFP (North-West Frontier Province) region in
Pakistan have been helping fill the needs of the country. NWFP flour millers then started to
increase production of Special quality flour (see Flour Processing in Pakistan) to satisfy
the tastes of Afghans instead of producing Punjabi quality flour, the variety that is
consumed locally but is less profitable for the miller. This led to increases in flour prices in
Pakistan. To solve this issue, Pakistani authorities decided to ban the transportation of
Punjabi wheat (Punjab is a major wheat producing region in Pakistan) to other parts of the
country and NWFP in particular. As expected, mills in the NWFP region reduced their activity
considerably. Yet, this only led to an increase in exports from Punjab to Afghanistan.

105
UNICEF and CSO 2004
70

Flour Processing in Pakistan

Flour is derived from wheat. Consumers usually consider white flour as better quality,
although it usually has less nutritional value than browner types.

In most countries, unlike Afghanistan, wheat is usually processed in industrial flour mills
whose capacity can go from 20 to about 400 MT per day. Depending on the demand, the
miller can decide which kinds of flour to produce. In Pakistan in particular, there are two
main modes of production.

The first method produces:
A very white and fine flour called
Tarmaida used for cookies and
special breads such as the Uzbek
bread that is commonly consumed in
Mazar-e-Sharif,
A browner flour called Punjabi
quality, the most commonly used in
Pakistan,
Brown flour used as animal feed.

The second method produces:
A whiter flour than the Punjabi that is
very appreciated by the Afghans and
called Special quality by the
Pakistanis,
Brown flour used as animal feed.

Figure IV-1: Income Analysis for Flour
Production in Pakistan
(US $ for 1 MT of Wheat),
December 2004
106

These two methods are of equal cost to the miller. However, because of the market prices of
the products, Pakistani millers can make 5% more profit with the second method than with
the first one. Hence they prefer producing Special quality for Afghanistan whenever they find
buyers for this product.

Finally, the Pakistani Central Board of Revenue increased the export taxes on flour with a
15% regulatory duty
107
. The immediate consequences were that exports to Afghanistan were
reduced to 6 times less quantity in the following days
108
. The longer-term consequences are
still to be evaluated but this could well result in price increases in Afghanistan in 2005.

In order to cope with the needs of the Afghan population, it is important to increase not only
the wheat production in Afghanistan but also the industrial milling capacity, an issue on
which major institutions and private entrepreneurs are now focusing: only 5 industrial flour
mills are functional today in Afghanistan, with a total maximal production capacity of about
500 MT per day. 4 of them are active, and the fifth one recently interrupted its production.

106
Interviews with mill owners in Peshawar, December 2004
107
Notification of the Pakistani Central Board of Revenue, December 17
th
2004
108
http://www.dawn.com/2004/12/23/nat24.htm
Brown flour
Brown flour
Fine
quality
Punjabi
quality
Special
quality
$-
$50
$100
$150
$200
$250
1st method 2nd method
71
In urban areas mostly, volumes of imported industrial flour reached about 417,000 MT in
2004, with an import value of about US $ 108 Mn
109
. Consumers usually buy flour in 50 or 98
kg bags in the market and carry it home by car or by taxi to bake their own bread.

Afghan consumers prefer Special quality by far and may not be aware of its reduced
nutritional value. When they purchase Punjabi quality, they often mix it with Tarmaida to
obtain whiter flour.

2. Current Flour Supply

Figure IV-2: Flour and Wheat Supplies in Afghanistan, Estimated Yearly Volumes,
(in MT), 2004
110

In each of the main cities in Afghanistan (Mazar-e-Sharif, Herat, Kandahar, Jalalabad and
Kabul) most imports of flour come from the nearest border.

109
Estimates, based on interviews with wholesalers in major cities and custom officers at Torkhams border,
December 2004 February 2005
110
Interviews with traders in Herat, Kandahar, Mazar-e-Sharif, Ghazni, Kabul and Peshawar and authorities at
Torkhams border. NB: ITCs records for 2003 indicate 276,000 MT imported from Pakistan and 54,000 MT from
Kazakhstan
72

The Peshawar-Kabul axis is the main hub
for the imports of flour to the south-east
of Afghanistan. The flour then goes to
the Central, Eastern, and some parts of
the Southern provinces. Flour imported
to these regions mainly comes by truck
from the NWFP and Punjab, in Pakistan.
Some Kazakh flour is also brought to
Kabul from Mazar-e-Sharif. It is, however
less valued than the Pakistani one.
Figure IV-3: Truck Loading Bags of Flour
for Afghanistan, Peshawar, December
2004

Wholesalers in Mazar-e-Sharif and Herat claim that their flour is imported from
Uzbekistan, Kazakhstan and Turkmenistan. After examining the packaging of the
latter, however, it seems that the so-called Turkmen flour originates in Kazakhstan:
confusion might come from the fact that Kazakh is also a Turkish language. For the
two cities, the flour arrives to the Afghan border by train, before being transported to
the cities by trucks.

In Mazar-e-Sharif, Kazakh flour is 10% more expensive than Uzbek flour, and
accounts for 20% of total sales.

Some Pakistani flour is brought to Herat from Quetta.

In Kandahar, flour mainly comes from Punjab and Baluchistan, entering the country
through Spin Boldak. The same entry point is used to supply other southern regions
(such as Ghazni, an important urban area), thanks to the new rehabilitated
Kandahar-Kabul road.

Kunduz is an exception in Afghanistan, as the flour consumed in the city is almost
exclusively locally produced.

Mainly Special quality is imported in Afghanistan while fine flour (Tarmaida) represents 5-
15% of the imports
111
. Thanks to well-established connections, numerous traders import
flour from Pakistan (about 40 in Kabul and 20 in Kandahar) while the number of importers
from Kazakhstan or Uzbekistan is lower (3 main importers in Mazar-e-Sharif, 5-10 in Herat).

111
Interviews with traders on the wholesale markets, December 2004 February 2005
73
298
5
4
7
6
30
25
221
0
100
200
300
Export price
Peshawar
Taxes
Pakistan
Transport to
Kabul
Taxes
Afghanistan
Importer
Kabul
Wholesaler
Kabul
Retailer
Kabul
Retail price
in Kabul

Figure IV-4: Value Chain of Special quality Flour in Kabul (US $ per MT), February 2005
112

Distribution channels are very similar in each major city: importers bring their trucks to the
wholesale market, store the flour in their warehouses or sell it to wholesalers. Retailers (and
even sometimes individuals) then purchase the flour from the wholesalers. Hence, the
margins of the various actors in the value chain are quite limited (see Figure IV-4), the most
significant value is captured by the importer who takes the risk of losing his large overloaded
trucks on the winding roads to Afghanistan (one truck carries 32 to 44 MT of flour on
average).

112
Interviews with traders in Kabul and Peshawar, February 2005
74

Figure IV-5: Impact of the Pakistani Export Tax Increase on the Value Chain of
Flour Imported to Kabul (US $ per MT), December 2004 - February 2005
113

The raise of the Pakistani export tax has already impacted the retail prices in Kabul by about
10% (see Figure IV-5), the difference being partially shouldered by the importers, but mostly
by the consumers. Interestingly, due to this tax increase, Pakistani flour has become more
expensive than Kazakh flour in Kabul (US $ 298 versus US $ 250 per MT). Yet, supplies of
Kazakh flour have not increased. This is the way it is with the Afghans: once they like a
product, they will stick to it, even if the price increases said a wholesaler when asked why
the supplies of Kazakh flour did not increase.

113
Interviews with traders in Kabul and Peshawars flour wholesale markets, December 2004 February 2005
$2
$25
$-
$50
$100
$150
$200
$250
$300
$350
December
2004
February 2005
Retailer margin
Wholesaler margin
Importer margin
Afghan import tax
Transport price
Pakistani export tax
Purchasing price
Peshawar
US $ 270
US $ 298
75
3. Business Opportunities in Flour Milling

Case study #1: Kabul Flour Mill (KFM), Kabul
114
:

This privately-owned flour mill is located near the industrial zone of Puli Charqi. The mill
started in 2004, with an estimated investment of US $ 4 Mn and has a production capacity
of 240 MT for 24 hours.
The flour-mill has 60 on-site employees.
It processes 50 MT of wheat a day.
It uses city power supplies at 5 Afs/ kWh. A generator is occasionally used when
there is not enough power.
Wheat is purchased from Northern regions, Maimana in particular. The mill
occasionally imports wheat from Uzbekistan.
The mill produces Special quality flour and was selling it for US $ 271 per MT in
December 2004 (i.e. at the same price as imported flour). The rise of the price of
Pakistani flour must have allowed the company to increase its margin since.
The company has deployed a sourcing network of no less than 5 commissioners in
the North of the country.
Two sales offices have been opened in Kabul and Ghazni, with exclusive distributors.
One quality control manager ensures the quality of the product.

When interviewed, various traders of Kabuls wholesale market knew about the products of
the flour mill. Apparently, the production of the flour has gained an excellent reputation,
comparable or even better than that of the Pakistani flour. The wholesalers were willing to
distribute the flour mills products but apparently, one wholesaler has the exclusivity in the
whole market. The owners of a local biscuit factory that was visited were also thinking of
purchasing flour from Kabul Flour Mill. Their concern, however, was that it would not
produce enough Tarmaida type, as it rather focuses on Special quality type.

The owner claims that the flour mill is profitable and he would like to increase its production
capacity to 400 MT per day. He has also started constructing a second flour mill in Mazar-e-
Sharif. In January 2005, half of the building had already been constructed.

4. Key Success Factors

Flour mills can be highly profitable: one flour mill can break even on the initial investment in
3 years, despite the high required investments (US $ 1 - 4 Mn)
115
. Break even can be
reached sooner with production of Special quality flour than with Punjabi quality.

The implementation, however, should particularly focus on:

Optimal Sourcing Strategy: the price of wheat in Afghanistan can vary highly, not
only according to different seasons of the year, but also according to the location
(see Figure IV-6). Hence there is a need to implement an efficient sourcing strategy

114
Interviews with flour mill managers, December 2004
115
Interviews with owners of 200 MT flour mills in Pakistani NWFP region, December 2004. Also see example in
Kunduz Flour Mill Business Plan, CNFA, September 2004, assessing the feasibility of a 60 MT flour mill in Kunduz
region.
76
to optimize the purchasing costs of wheat (accounting for about 80-90% of the
production costs
116
) and to ensure regularity of supply in terms of quantity and
quality. This lack of supply caused the closure of about 100 mills (out of 260) in
Pakistans NWFP region in the last years.
117

Figure IV-6: Wheat Retail Prices for Selected Origins (US $ per MT),
January - October 2004
118

Regular Quality Control:
Regularity in cleanliness and taste is key
to gain the trust of consumers. Industrial
clients, such as baking factories, make it
the main criteria for the selection of their
suppliers.
The quality of the flour produced in this
mill was varying too much. I do not want
to distribute it anymore,

- Leading wholesaler in Saray-e-brenj
market, Mazar-e-Sharif, January 2005.

5. Main Projects that could be Leveraged

Kabul Flour Mill (KFM), Kabul and soon
Mazar-e-Sharif

This flour mill is currently the largest in
the country and is gaining a good
reputation in Kabuls wholesale market.
The mill under construction in Mazar-e-
Sharif could offer even more interesting
developing opportunities since it will be
located next to major wheat production
regions in Afghanistan.

Figure IV-7: Flour Mill under
Construction, Mazar-e-Sharif,
February 2005

116
Interviews with flour mill owners in Afghanistan and in Pakistan, December 2004
117
http://www.dawn.com/2004/09/20/local18.htm, September 2004
118
IF Hope Commodity price records, January October 2004
$-
$50
$100
$150
$200
$250
$300
$350
J
a
n
u
a
r
y
F
e
b
r
u
a
r
y
M
a
r
c
h
A
p
r
i
l
M
a
y
J
u
n
e
J
u
ly
A
u
g
u
s
t
S
e
p
t
e
m
b
e
r
O
c
t
o
b
e
r
Mazar-e-Sharif
Peshawar
Maimana
Kunduz
77

Silo Flour Mills, Kabul
These two governmental flour mills used to supply major quantities of flour to Kabul.
They were destroyed during the wars and renovating programs have already started.
One mill has restarted its production, supplying flour to the Afghan National Army.

Ard wa Nan Arya Company, Herat
Ard wa Nan means Flour and bread. The company has a 50 MT capacity flour mill,
yet they only produce 20 MT per day. They sell their flour in 3 selling points in Herat.
The company has also started producing quality bread.

Seyed Jamal Silo Factory, Mazar-e-Sharif
This 60 MT flour mill started in 2004 and had to interrupt its activity when Uzbekistan
temporarily stopped supplying the region with electricity in December 2004. Yet, the
mill usually runs 24/7 and its owner is considering starting a second mill in the region.

Ishan Kamal Flour Mill, Mazar-e-Sharif
This flour mill interrupted its activity in December 2004. Apparently, its flour did not
meet the expectations of the market in terms of quality and price. Production might
restart with a more appropriate production and commercial strategy, since
infrastructure is already available.

Enriched flour project, UNICEF
UNICEF is interested in supporting production and distribution of enriched flour to
best respond to the absence of some essential nutritive elements in the Afghan
populations diet. Their main concern is to reach the poorest populations, since these
do not usually purchase industrial flour. UNICEF, however, is also thinking about
industrial flour enrichment to address other segments of the population.

Kandahar Flour Mill, Kandahar
A former flour mill located in the industrial area has recently been bought by a local
entrepreneur who wants to restart it.

Kunduz Flour Mill, Kunduz
Studies have been made by CNFA to assess the feasibility of constructing the first
industrial mill of Kunduz, one of the main wheat-producing provinces in Afghanistan.
This project could be coordinated with UNICEF enriched flour projects.
78

E. Industrial Bread
SWOT Industrial Bread
Strengths
No competition from imported products as
freshness is key for the product
Industrially produced breads can guarantee
better cleanliness than traditional ones,
which is a major asset to attract Afghan
consumers
Growing high-end market
Weaknesses
Most consumers prefer home-made bread
Afghan consumers are not familiar with new
types of breads
Short shelf-life of the product
Opportunities
Produce quality bread, targeting higher end
of the market
Leverage willingness of consumers to pay
more for healthy, high-quality bread
Existing labels from Ministry of Health
Enhance branding
Threats
Fluctuations in the price of flour

1. Sector Overview

Bread is the main wheat-based product consumed in Afghanistan. Most houses and
chaikhanas have their own small oven to bake bread. There are different kinds of breads in
the country, made of various kinds of flours. In Kabul, round and long breads are the most
widely found in bakeries. In Kandahar, breads are much more highly regarded when they are
thicker. In Mazar-e-Sharif, Uzbek bread with a golden crunchy crust is the most popular.
Attempts to introduce new kinds of breads (Turkish and western ones mainly) have started
recently in major cities.

To best assess consumers tastes, a survey was conducted in February 2005 and more than
100 men and 50 women were interviewed in Kabul and in Mazar-e-Sharif. It will be referred
to frequently in this section.

79
2. Demand: Business Opportunities

a. Consumption Habits

Figure IV-8: Number of Households Baking their Own Bread / Satisfied with the Bread
they Buy (Income in US $ per Month and per Person),
Kabul and Mazar-e-Sharif, February 2005
119
.

Almost half of the consumers that were interviewed live in a household where bread is not
made at home (see Figure IV-8). It is worth noticing that their income is 30% higher than
the income of those who bake bread themselves (US $ 28 per person and per month).

The main reasons for baking bread at home are that:
It is cleaner
It is warmer and tastier
It is cheaper

Further analysis shows that the consumers who are not satisfied with the quality of the
bread they buy have on average a 50% higher revenue than the others (see Figure IV-8).
They account for 35% of the consumers who do not make their own bread and 17% of the
interviewees.

80% of these unsatisfied customers would be ready to pay more for healthier bread: about 2
Afs per piece. Bread usually weights 300g and costs about 6 Afs (US $ 0.13).

Among all the interviewees, 48% would accept to pay more for healthier bread and 22% for
fancy breads (about 1-2 Afs for both).

119
Altai Consulting / UNDP consumer survey, Kabul and Mazar-e-Sharif, February 2005
80
Case Study #2: Anadolum Bakery, Kabul:

Anadolum is a company producing Turkish quality bread in
Kabul. It was started by Afghan entrepreneurs in
association with a major Turkish company who provided
most of the investment and technical expertise. The
bakery is located in Puli Charqi.

Investments accounted for US $ 320,000 including
US $ 100,000 for machineries.
There are now 35 employees, including 6 Turkish, mainly working on production.
The bakery produces 15,000 breads and runs 15 hours per day. It sells:
o 3.6 MT of 300g-round breads, sold for US $ 0.21 (10 Afs) per piece at retail
level.
o 1.8 MT of 600g-miche breads, sold for US $ 0.53 (25 Afs) per piece at retail
level.
The company first targeted the Turkish and the international community but their
sales seem to prove that their products have a high potential with local consumers.

Aware of the difficulty of launching these high-quality and expensive new products (their
bread cost US $ 0.7-0.9 per kg versus US $ 0.42 for traditional breads), the company
focused on quality and developed an innovative distribution strategy:

Various regional flours are tested in laboratories in Turkey.
Glass shelves are provided to retailers to store the bread and to keep it fresh. An
incentive was given to the retailers to make them use the shelves. The bakery also
plans to provide them with more sophisticated communication tools.
Retail prices are decided and controlled by the company, as stated in the contract
signed with the retailers.

If consumers adopt the products at large, the project could pay for itself within 2-3 years. It
targets, however, the high-end markets. Results from the consumer survey show that the
prices of Anadolums bread might be a little beyond what most Afghan consumers are ready
to accept.

81
b. Key Success Factors

There are opportunities for quality bread in urban areas of Afghanistan:

The main commercial differentiator is
the healthiness and the cleanliness of
the bread.
Marketing is key to advertise the
quality of the product to the
consumers.
Distribution optimization is all the
more important that bread has a
short shelf-life.
In Kabul in particular, quality retailers
or distributors can address over
100,000 consumers with medium to
high incomes, not to mention
business to business services. (See
Figure IV-9)

Business
to
Business
Service
Quality
Retailers
Size of Segment Market Segment Service
Restaurants
Hotels
Catering and dining
Wedding halls
Armies and
International
organizations
> 100,000
People
35,000 People
More than 3,000
meals per day
Growing Afghan
middle/ high income
population
Expatriates
Figure IV-9: Breakdown of Quality-Driven
Market in Kabul, August 2004
120

3. Main Projects that could be Leveraged

Various private initiatives have started, mainly in Kabul, targeting primarily the international
community, (French Bakery, German Bakery in Kabul) but a couple of actors decided to
concentrate more on local consumers.

Ord wa Nan Arya factory, Herat (see section D-5: Flour Main Projects that could be
Leveraged)
This flour mill has been producing special German breads for one year. They have
deployed 15 selling points in Herat and have started gaining some medium size
clients, such as the city hospital.

Naseeb Bakery, Kabul
The company started in 2004. It produces 5 kinds of breads and 7 kinds of cakes.
They deployed a network of hand-painted selling booths in various parts of the city
and developed partnerships with the Ministry of Health and WFP to get labels
guaranteeing the healthiness of their products.

Anadolum Bakery, Kabul (see above)

120
Market Sector Assessment in Horticulture, Altai Consulting for UNDP and the Afghan Ministry of Commerce,
August 2004
82
F. Cookies and Snack Cakes

1. Sector Overview

a. Definition of Scope

The cookies and snack cakes sector in Afghanistan consists of 3 sub-sectors:

Traditional cookies: in Afghanistan, they are produced in small bakeries, mainly in
cities. A bakery can employ from 5 to 15 persons and produce up to 300 kg of
cookies per day. About 30 types of cookies can be found in the stores. They vary
more in shape, sweetness and texture than in flavour. People buy them from the
stores and bring them home in plastic bags. They are usually sold for 45-50 Afs
per kg (around US $ 1 per kg).

Industrial cookies: various kinds can be found in Afghanistan.
o Wheat biscuits: French Petit Beurre type of various sizes,
o Cream-filled cookies,
o Wafers,
o Digestive biscuits.
Packages vary from the 20-35g individual packages to the 90-130g big packs:
individual packages are sold for 2-3 Afs while big packs are sold for 10-12 Afs. An
intermediary size format (60-80g) has also appeared with selling prices ranging
from 5 to 8 Afs.
Snack cakes: they can be widely found in Afghanistan, generally in individual
pocket-size packs of about 35g that are sold for 3-4 Afs.

83
Industrial cookies and snack cakes will be the most focused on, as they offer great
opportunities for substitution to import.


Cookies and snack cakes are commonly consumed in Afghanistan, especially in urban areas,
where bakeries and imported products are the most available. There is no strong correlation
between cookie consumption and revenue, indicating that cookies can be considered a
commodity, at least in the cities where the survey took place.
121

Buyers of various types of cookies
0%
10%
20%
30%
40%
Parents Children
Traditional biscuits Big packets of cookies (90-139g) Individual packets of cookies (20-50g)
Consumers of various types of cookies
0%
10%
20%
30%
40%
Parents Children Guests

Figure IV-10: Consumers and Buyers of Various Types of Cookies in Kabul and Mazar-e-
Sharif (Number of Answers in the Survey), February 2005
122

Traditional cookies are mostly consumed by parents and served to guests while receiving at
home (see Figure IV-10), while industrial cookies are mainly consumed by children, who like
buying them themselves, preferably in small individual packs, for a couple of Afghanis.
Afghan adults have cookies mainly with tea, especially in the morning.

Traditional cookies are fresher than
industrial cookies (see Figure IV-11).
Apparently this explains why parents
buy them: Children do not know how
to choose the freshest ones! several
interviewees declared. It is even more
true during Eid days, when sales are
at their peak (The stores are so
crowded: the children would get
squashed).

Reasons for buying traditional cookies
18%
1% 3%
8%
18%
54%
0%
20%
40%
60%
80%
100%
They are
fresher
They are
cheaper
They have
a better
taste
They are
healthier
They do
not exist in
packets
No
answer

Figure IV-11: Reasons for Buying Traditional
Cookies, Kabul and Mazar-e-Sharif,
February 2005
123

121
122
Ibid. NB: Multiple answers were possible.
123
Ibid
84
43%
3%
5%
27%
10%
12%
0%
20%
40%
60%
80%
100%
Cream
filled
cookies
Wheat
biscuits
Wafers Snack
cakes
Other No answer

Figure IV-12: Favourite Cookie Types, Kabul and Mazar-e-Sharif, February 2005
124

3%
2% 2%
1%
3%
36%
7%
13%
33%
0%
10%
20%
30%
40%
Chocolate Banana No flavor Vanilla Strawberry Coconut Orange Other No answer
N
B

o
f

a
n
s
w
e

Figure IV-13: Favourite Cookie Flavours, Kabul and Mazar-e-Sharif, February 2005
125

Adult consumers
126
have a clear preference for cream-filled cookies and their favourite
flavours are, by far, chocolate and banana (see Figure IV-12 and Figure IV-13).

Consumption varies greatly according to the season: cookies are mainly consumed in warm
season while snack cakes peak in winter.

2. Market

It is estimated that 20,000-50,000 MT of cookies and snack cakes were imported in
Afghanistan in 2004. About 90% of them were from Iran, with an import value of US $ 23-60
Mn
127
.

a. Main Products

4 main products, all from Iran, can be found in most shops through the country (3 of them
are made by the same company):

124
Ibid
125
Ibid
126
Children were not surveyed.
127
Estimates based on interviews with importers and wholesalers, November 2004 February 2005
85

Minoo Petit Beurre: they are little rectangular
wheat biscuits in small 38g packages sold for 3
Afs. They are best sellers among children mainly.
Most consumers do not know their real name and
call them Gandumi, i.e. made out of wheat
because of the wheat picture on the package.

Minoo Pam Pam: these snack cakes currently
have an almost complete monopoly on the snack
cakes segment. They weight 35g and are sold for
3 Afs a piece.

Minoo Petit Mange: they are a bigger version of
Minoo Petit Beurre. They are sold in 130g packs
for 10 Afs a piece. Usually, parents buy them for
children. Imported volumes are in line with Minoo
Petit Beurre volumes.

Anata cookies: these rectangular cream-filled
cookies are sold in 130g packs for 10 Afs. They
exist in various flavours: cocoa, orange,
strawberry, banana, among others.

Minoo and Anata are the brands that have been in Afghanistan for the longest time (Minoo
for more than 25 years and Anata for about 10 years). Numerous other products are
available on the market but in scarcer quantities. 3 of them are worth noticing, since they
are gaining market share. They are all from Iran:

Sina cookies: they are round cream-filled biscuits
sold in small 85g-rolls, available in various
flavours.

Shirin Asal: they are the main wafers found on
the market. Other products of the same company
are starting to appear on the market with
growing success among children.

86
Saghe Talaie: Another Minoo product, these
round cream-filled cookies have an important
market share in Iran and are starting to be
imported in Afghanistan.

4
10 10
4
10
5
3
0
2
4
6
8
10
12
Petit Beurre
38g
Pam Pam
35g
Petit Mange
130g
Anata 130g Sina 85g Shirin Asal
42g
Saghe Talaie
192g
R
e
t
a
i
l

p
r
i
c
e

i
n

A
f
s

Figure IV-14: Retail Prices in Kabul for Selected Products, February 2005
128

b. Market Shares
40-50 brands
9%
5 brands
10%
Shirin
Asal
7%
Sina
14%
Anata
18%
Minoo -
Petit Mange
14%
Other
43%
Minoo -
Petit Beurre
5%
Minoo -
Pam Pam
23%

Figure IV-15: Cookie and Snack Cake Market Shares, Kabul
(Total: US $ 10 25 Mn)
129
, 2004

The market is highly volatile in terms of volumes but market shares are quite comparable in
the major cities, with Minoo products and Anata holding about 70-90% of the market (see
example of Kabul in Figure IV-15). Regional variations explain differences in the remaining
10-30%:

128
Interviews with retailers, February 2005
129
Interviews with importers, wholesalers and retailers in Kabul, November 2004-February 2005
87

Pakistani biscuits in Jalalabad represent
about 25% of the market, due to the
proximity of the border. They are
manufactured by major international
companies who have factories in Pakistan:
LU (Danone group, producing Prince and
Candi), Peak Freans (Sooper, Rio) and Swiss.
They dominate the cookie market despite
the emergence of me-too products selling
at half the price.

Figure IV-16: Panel of Pakistani
Biscuits, Peshawar,
December 2004

For equivalent weights, Pakistani biscuits are about 60% more expensive than
Iranian ones. They are packaged in carton boxes while Iranian ones are wrapped
in thin plastic film.

In Mazar-e-Sharif, Ramooz Petit Beurre cookies, also produced in Iran, have
gained a significant market share (about 15% of the market) since they started
being distributed by one of the major importers in the region.

In Kandahar, surprisingly, almost no Pakistani biscuit could be found on the
market despite Spin Boldaks border nearby. Pakistani biscuits are not very tasty
and they are too expensive. Some cartons you can see here have been waiting to
be sold for six months , a wholesaler explained.

Seasonality is a major factor: Minoo Petit Beurre volumes double during the warm season
while Minoo Pam Pam volumes are almost divided by three
130
during the same periods, due
to difficulties in keeping them fresh.

130
Interview with FKA Minoos distribution managers
88

c. Brand Awareness

Figure IV-17: Kabul and Mazar-e-Sharif, February 2005
131

About 50 products can be found in the market but only 4 have a brand awareness of more
than 20%. The case of Kat Kat Tat, Prince and Candi (all with about 5% brand recognition)
are particularly interesting. They are expensive Pakistani biscuits (made by LU food
company) that can scarcely be found on the market. Consumers, however, often mentioned
them as high quality cookies that they buy for special occasions.

d. Market Trends

Market Distorting Activities

Distorting activities regularly affect the market. Although they are often invisible for the
consumer, they have direct impacts at the wholesale and retail levels:

Dumping is commonly used to introduce new products on the market. Afghan
consumers are not reluctant to pay more for a product, once they have adopted it.

Products close to their expiration date are often brought to Afghanistan. They are
sold to wholesalers or retailers 10 to 20% cheaper than good products.

Money laundering: traffickers sometimes purchase containers of consumer goods in
Iran to launder money from illegal activities. They sell their products in Afghanistan
at prices below the ones fixed by the producers, making a very small profit.

These activities seriously affect our sales: they destroy not only the market but also
our brand.
- Head executive of a major cookie company in Iran, February 2005

131
Altai Consulting / UNDP consumer survey, Kabul and Mazar-e-Sharif, February 2005. Answers were not
prompted. 140 out of 153 interviewees gave brand names. NB: Minoo Petit Beurre was often cited as Gandumi.
52%
13%
6%
5%
3% 3%
7% 7%
22%
46% 46%
0%
10%
20%
30%
40%
50%
60%
Petit
Beurre
Anata Pam
Pam
Petit
Mange
Shirin
Asal
Sina Kat Kat
Tat
Candi Prince Wenge Other
Pakistani cookies
Iranian cookies
89

The market is currently moving towards increased sophistication: the figures in Figure IV-15
are derived from volume data given by importers and wholesalers for the year 2004. Yet, in
February 2005, the instant picture of the cookie and cake supply looks considerably different
due to:

Seasonality boosting the sales of Minoos Pam Pam cakes.
The launch of new products (such as Saghe Talaie, cream-filled whole-wheat biscuits
in 192g packs sold for 10 Afs) by FKA Minoo, the distribution branch of Minoo group,
to replace Minoo Petit Mange. Minoos objective is to introduce more and more
sophisticated products to Afghan consumers.
Sinas increasing market share due to a new positioning (medium 85g-packages of
cream-filled biscuits).
Shirin Asals launch of individual chocolate-covered cream-filled cookies at the
beginning of February 2005, a major hit among children.

2005s entire picture should look even more different, as other major Iranian players are
about to start optimizing their marketing and distribution strategy. Anata for instance
currently distributes only about 10 of its products in Afghanistan, while 350 are available in
Iran
132
.

3. Current Cookie and Snack Cake Supply Channels

Figure IV-18: Cookie and Snack Cake Supply Channels in Afghanistan, Estimated Yearly
Volumes, (in MT), 2004
133

132
See complete presentation of the products at http://www.anataco.com/
133
Interviews with Afghan distributors, wholesalers, retailers and Iranian exporters, November 2004-February
2005
90

Almost all the cookies and cakes consumed in Afghanistan are imported from Iran, and
transit through Herat.

Minoo was an exception in 2004, as the only company to have developed a corporate
distribution system: FKA Minoo, the distribution branch of the group, started its activity in
May 2004, opening one office in Kabul where wholesalers from the capital and various
provinces come and take orders. Before this, the company had worked with local trading
agents for more than 25 years.

Anatas products were distributed by various traders (at least 8 in Kabul). One of them deals
directly with the company, covering about half of the distribution in Afghanistan, with 5-6
offices in provinces, while the others purchase them directly from commercial offices in Iran
or importers based in Herat.

Most other products are imported irregularly to Herat by local importers who sell them to
wholesalers coming from various parts of the country.

Figure IV-19: Value Chain Comparisons between Biscuits and Snack Cakes,
Kabul, February 2005
134

Analysis of the value chain shows that most of the value is captured by the retailer who
rounds up his retail price (3 Afs instead of 2 or 4 Afs instead of 3) without consumers
(children most of the time) noticing the difference or shifting their purchase patterns
accordingly.

Transportation cost has a major impact on snack cakes, since they are less compact than
biscuits: the same truck can transport about 30 MT of wheat biscuits and only 7 MT of snack
cakes
135
. This explains how locally produced snack cakes can reach competitive prices. (see
case study #4)

134
Interviews with distributors, wholesalers and retailers, Iran, Kabul, February 2005
135
Interviews with distributors and exporters, February 2005
53%
45%
7%
30%
7%
8%
33%
17%
0%
20%
40%
60%
80%
100%
Biscuits Cakes
Retail
Wholesaler
Transportation
Distributor
91


Case Study #3: Ittefaq Cookie Factory, Kabul

This factory is based in Puli Charqis industrial area, near
Kabul. It used to produce pasta before being destroyed 10
years ago. The plant was rebuilt in 2004 and started
producing wafers and round cream cookies.

The plant has two production lines:
o One for wafers, with a capacity of 500 kg per day
o One for biscuits, producing up to 400 kg per hour
The factory works in two shifts, each of them employing about 80 workers, half of
which are women.
They purchase only fine flour (they currently use subsidized French flour, the
cheapest available on the market, but they will turn back to Kazakh flour once
reserves of French flour are finished).
Ovens function with gas, at a cost of US $ 750 per MT.
The production lines were designed by Pakistani engineers who trained the
employees during 3 months before operating the plant. They claim that the
machinery costs three times less than Turkish or Iranian machinery for the same
quality.
Ittefaq sells its wafers at a wholesale price of 2 Afs for a 15g-pack and its biscuits
for 4 Afs per 55g-pack.

The factory distributes its products in Kabul, Mazar-e-Sharif and Jalalabad. Some customers
might even bring them to Pakistan.

The company is facing issues with the supply of
electricity to run the machines. It is definitely
our main problem: we cannot use the states
electricity so much because frequent outages
and fluctuations in intensity not only interrupt
the production lines but can also damage the
machines, the chief engineer said. The
company currently uses a 50 kW-generator,
which is too weak to run both the biscuit and
the wafer production lines at the same time.
They are about to purchase a 250 kW-
generator.

Another concern is maintenance. Today, it is
provided by Pakistani engineers, but they will
finish their assignment by May 2005 with
apparently no clear succession.

136
Interviews with engineers of Ittefaq group, December 2004
Packaging
20%
Gas
7%
Labor cost
7%
Electricity
7%
Flour and
Filling
59%

Figure IV-20: Production Costs for
Afghan Snack Cakes (% of US $)
(est. US $ 600 per MT), February 2005
136

92

Case Study #4: Shirin Kam Factory, Mazar-e-Sharif

The Shirin Kam factory started in the fall of 2004. It
produces snack cakes for the Northern region, selling 20%
of its production in Mazar-e-Sharif and the rest in other
districts. The product is very similar to Sharia Kam, an
Iranian snack cake that can be commonly found in Mazar-
e-Sharif.

The factory runs 6 days a week, 3-6 hours per day.
30 men are employed, with salaries varying
between US $ 32 and US $ 74 per month.
The plant has a production capacity of 2 MT per day. Average daily production was
estimated at 400 kg at the time of the visit.
The factory only uses imported ingredients, in particular:
o Eggs are imported in powder form in summer but can be purchased locally in
winter, when keeping is not an issue.
o Flour is Tarmaida-type imported from Uzbekistan. Pakistani flour is of better
quality but it is much more expensive, and the locally produced flours quality
varies too much to be used at industrial level.
o Flavour oils (orange and banana) are imported from Iran.

Figure IV-21: Production Costs for Afghan Snack Cakes, (% of US $),
(US $ 960-990 per MT), January 2005
137

At the time of the visit, production had been interrupted for one month because of the
general electricity outage in Mazar-e-Sharif. The owners complained that power was their
major concern since it represents their main production cost after ingredients. In addition,
the voltage fluctuations can severely damage the machines. Production restarted in February
2005.

137
Interview with the owners of Shirin Kam, January 2005
Labor cost
14%
Power
18%
Other
ingredients
11%
Ghee
10%
Flour
15%
Eggs
19%
Packaging
13%
Ingredients
55%
93

a. Production and Proximity to Market

Producing snack cakes and cookies in Afghanistan is highly challenging:

Most ingredients have to be imported. They represent up to 59% of the production
costs (see Figure IV-20and Figure IV-21).

Power supply, both electricity for machinery and gas for heating, is crucial in the
production process. Its impact on the cost structure is of 10 to 20% but its regular
availability is the main issue. Hence, the choice of a proper location for the factory
(e.g. in industrial parks) is key.

Locally produced snack cakes can compete more easily with imports than cookies, due to a
high transportation cost for imported cakes.

b. Product Positioning

Consumers are clearly interested in healthiness and taste of cookies and cakes. These
products should be positioned in such a way as to leverage these factors. The positioning
should be supported by a communication campaign that will highlight these features.

Healthiness: 77% of the interviewees would be ready to pay more for healthier
cookies
138
.
Taste: 75% are willing to pay the premium for better taste.
Flavours: consumers prefer chocolate (33% of responses) and banana-flavoured
biscuits (13% of responses).

An acceptable premium would be 1 to 2 Afs for individual packs and 3 to 5 Afs for large
packs.

c. Marketing and Distribution

Distribution of consumer goods in Afghanistan is currently held
by 5-10 players. Hence, it is key to establish partnerships with
large distributors or to develop ones own distribution channels.

Until now, almost no promotional activity has been made for
cookies in Afghanistan. This would be a major asset to create
or strengthen a brand.

We have not developed
any promotional activity
because our distributors
did not ask for it.

- Commercial executive of
a cookie company in Iran

In addition, a communication campaign could be developed that would help launch the
brand and establish its positioning. Such a campaign would benefit from a first-mover
advantage, as there is little media advertising done in Afghanistan currently, especially for
cookies or cakes.

138
94
6. Main Existing and Potential Projects

Interesting industrial projects were identified in Herat, Mazar-e-Sharif and Kabul.

Ittefaq group, Kabul (see Case Study #3)
The company would like to increase its production capacity. It started installing
another biscuit production line with a 600 kg per hour capacity, brought from
Pakistan.

Shirin Kam, Mazar-e-Sharif (see Case Study #4)
The company is planning to buy an expensive new generator to optimize its
power capacity.

Kamal Nabi Zada, Mazar-e-Sharif
This company is a division of a multi-activity group based in Tashkent. This
factory produces 1 MT of banana and chocolate snack cakes per day under the
name of Mazza. They have a selling agency in Kabul, where they sell 50% of their
production. Efforts are made to develop the brand and to insist on the Made in
Afghanistan label using local media.

Heray factory, Herat
This company belongs to a family of local entrepreneurs. The factory started in
2001 and is located in the centre of the city and currently produces about 5 MT of
cookies per day (wheat biscuits and cream-filled cookies). They have got 6
product-lines, and 6 different brands of cookies. The owners would like to move
the plant outside of the city to increase its production. They also plan to develop
distribution channels in Kabul.

Delpazir cookies and cakes factory, Herat
The factory started in spring 2004, employing 20 men and 20 women and wants
to develop business in Kabul. They have a well established business in Herat,
where they concentrated efforts on communication via local media. They also
insert small gifts into their cartons.

Other factories, Herat
Two other factories were reported to produce biscuits and snack cakes in Herat:
National Co and Sadaf. They apparently cooperate with Delpazir company.

Minoo Group, Iran
The leaders of the sector have been in Afghanistan for about 20 years. They are
definitely interested by the Afghan market. They started developing their
distribution in Kabul in June 2004, through FKA Minoo, their logistic branch and
they plan to continue developing their presence in Herat and Mazar-e-Sharif.
95

V. Cashmere


Afghanistan has up to 10% of the world production of unprocessed
cashmere
- China 65%, Mongolia 16%, Iran and others 9%
- Afghan production between 1000 1500 MT, an export value of
around US $ 23 Mn
25% of the rural population of north western Afghan provinces potentially
affected by the cashmere trade
Afghanistan currently exports to Belgium and China almost exclusively
- Exporters concentrated in Herat
Afghanistan relies heavily on Belgian facilities to process its cashmere
Poor reputation of Afghan cashmere a hindrance on the international
market
- Concerns over anthrax block Afghan cashmere from some markets
Afghan cashmere generally 20% less expensive than Mongolian, 40% less
expensive than Chinese
- Afghan herders received around US $16 per kg of raw cashmere in
2004
- Quality and quantity can be improved through cross-breeding of
goats and introduction of combing in place of shearing

B. Key Findings

Afghanistan produces well over 1,000 MT of raw cashmere per year for export. At current
world prices of US $ 23 per kg of Afghan cashmere at the export stage, this represents
export revenue of around US $ 23 Mn over the past year. The production, concentrated in
the northwest of the country, near Herat, makes Afghanistan the worlds third largest
producer of raw cashmere, with a market share of up to 10%, behind China (around 65% of
the market) and Mongolia (16%). Afghan cashmere is of a slightly inferior quality to Chinese
and Mongolian cashmere, and tends to be thicker, darker, and shorter, and thus fetches a
lower price on the international market.

Afghan cashmere production is extremely fragmented, originating from herders and villagers
in the hills of north western Afghanistan. Each herding family may only own between 5 and
100 goats. The herders often do not see the true commercial value of cashmere, as they
have traditionally produced it as a by-product of their existing goat stock. The current
production is generally sent to Belgium, a long-standing centre for the processing of
cashmere and textile fibres, and increasingly to China, after minimal processing.

Virtually no player in the cashmere supply chain is exclusively involved in cashmere. Herders
have other products and income sources, traders deal in a variety of goods, processors
96
process cashmere in the same facilities as they process wool and other fibres, and retailers
sell cashmere shawls and sweaters alongside many other garments.

Despite significant production, Afghan cashmere is virtually unheard of on the retail end of
the world market. This is partly due to the fact that Afghan cashmere is often exported via
Iran and branded as Iranian. Likewise, China imports a large quantity of Afghan cashmere,
which is then mixed with Chinese production for re-export or directly re-exported as Chinese.

There are significant opportunities for SMEs in this sector. To drive demand, Afghan
cashmere could benefit from elevating its profile on the global market, and distinguishing
itself from the Iranian production. Given the lower relative price of Afghan cashmere, it could
position itself in a niche for slightly more mainstream, cheaper cashmere for more accessible
garments. A communications campaign and quality certification could improve Afghan
cashmeres reputation and appeal.

Afghanistan could aim at capturing more of the products value instead of selling the
cashmere at its lowest stage of processing. In the short run, it may be unrealistic to establish
scouring and dehairing facilities within the country, but exporters could source this service
from Iranian processors who are cheaper than their European counterparts. Regional
cooperation with Iranian players could be mutually beneficial, as the Afghans would gain
from selling a higher value added good, and the Iranians could operate their factories at a
higher capacity.

The production of Afghan cashmere can be increased in quality and quantity through
improved cross breeding of goats and the training of herders in combing and basic fibre
analysis. Forming producer associations to combine, transport, and export the improved
cashmere could cut out local intermediaries and help producers capture a greater percentage
of the value of the final product. Producers could squeeze out the middlemen who add no
value, thus managing to keep more of the value in their hands.

97
SWOT Afghan Cashmere Sector
Strengths
Global demand for cashmere exceeds supply
Cashmere is an expensive raw material
Traditional activity with existing production,
Afghanistan has optimal cashmere climate
Quantity and quality of cashmere can be
increased with combing and cross-breeding
Weaknesses
Production is spread over a wide and remote
area of Afghanistan, transportation is difficult
Import barriers due to disease, and export
barriers at borders encourage smuggling
Low recognition of Afghan cashmere in the
world market, confused with Iranian,
perceptions of low quality
No experience in value added cashmere
activities
Opportunities
Introduce combing in the place of shearing
Specialize in mainstream cashmere for more
accessible garments
Create an Afghan origin label to capitalize on
international interest in Afghan products
Leverage Chinese demand for new
cashmere sources
Contract scouring and dehairing in Iran
Threats
Continued drought could undermine efforts to
boost production
Dependence on Belgian disinfecting plant for
sales in Europe
Volatile global prices
Erratic Chinese sourcing methods could
disrupt existing supply chains

Developing the existing Afghan cashmere industry would help bolster incomes for herders
and rural residents, who are often among the poorest people in Afghanistan. Villagers do not
consider cashmere commercialisation a chief economic activity, but as much as 25% of the
rural population in the north western provinces could be affected by the industry.

C. Cashmere Sector Overview

1. Definition of Cashmere

Because of its unique characteristics and association with extreme luxury, cashmere wool
commands some of the highest prices of any natural fibre in the world. The allure and
mystique of cashmere comes from the scarcity of its supply, and the exotic, remote nature of
the regions in which it is produced. Cashmere garments are known for their soft, warm
feel,
139
and the finest cashmere shawls are supple enough to be passed through a mans
wedding ring.
140
Demand for cashmere has almost always exceeded supply in the world
market.
141
For the purpose of this report, cashmere is defined as the fine under down of
goats, as well as the spun and woven textile products that are made from this down.

139
Cashmere wool is calculated to be eight times warmer than sheep wool: Scotland and China and Cashmere
Trade http://www.american.edu/projects/mandala/TED/cashmere.htm
140
Ibid
141
Harvesting of Animal Textile Fibres, A. J. Petrie, Rome, 1995
http://www.fao.org/docrep/v9384e/v9384e00.htm#con

98
Cashmere must meet strict technical specifications, and is produced in extremely arid and
harsh climates, traditionally the mountains of Asia.

a. Cashmere Goats

The term cashmere goat refers not to a specific
breed of goat, but to a type of goat capable of
producing a very fine down. Most goat breeds
can produce cashmere under the proper
breeding and climatic conditions. Over the span
of generations, the goats will produce the fine
down as natural insulation for extremely dry and
cold conditions. The fleece, or coat, of the goat
includes both a soft down and protective hairs on
the outside of the coat. The cashmere fibres are
separated either through combing of the goats,
or by hand after all the wool has been shorn
from the goat. The cashmere growing season
corresponds with days of decreasing daylight in
the late summer and fall, and the coat is
traditionally combed or shorn in the late spring,
when the goat would naturally shed its winter
coat.

Fine goat down is a response to climatic
conditions, but some goats are genetically
predisposed to producing finer down, in greater
quantities, than others. Cross breeding these
goats increases the yield and quality of the
herds cashmere. The main determinant of quality for cashmere is the diameter of the
individual hairs of down. To qualify as cashmere, the fibre must measure less than 19
microns in diameter. The accepted range is usually from 16-19 microns, though some goats
can produce fibres as thin as 14 microns. The length of the cashmere fibre is also important,
but buyers differentiate more by width than by length.

b. Cashmere End Uses

Almost all of the worlds cashmere production ends up as a luxury garment in mail-order
catalogues or high-end department stores in Europe, North America, and Japan. Sweaters,
scarves, shawls, and coats made of high quality cashmere normally cost hundreds of dollars
per item.

Figure V-1: Cashmere Goat Herder,
Korukh Region, Herat Province,
January 2005
99
2. World Market Overview

a. Production

Because of the strict climatic
conditions needed to grow cashmere
quality goat wool, few geographic
regions are capable of producing
cashmere. Presently only China,
Mongolia, Iran, and Afghanistan are
major suppliers of raw cashmere wool
to the world market. Pakistan, India,
New Zealand, and Australia all have
limited production, and do not export
in large quantities. Some central Asian
states, including Kazakhstan and
Kyrgyzstan,
142
have small cashmere
production programs.

Though unknown on the retail end,
Afghanistan is a known producer of a
significant volume of raw cashmere,
but as its wool has historically been bought or shipped through Iran, the production of the
two countries is often aggregated or confused in statistics. There is significant data to
suggest that Afghanistans production of raw cashmere is equal or ahead of Irans, or third in
the world behind China and Mongolia.
144

Global production volumes vary widely from year to year but, in 2003 China controlled
roughly 65% of the worlds cashmere production with 9,000 MT, Mongolia had 16%, or
2,500 MT, and Afghanistan produced as much as 10%, between 1,000- 1,500 MT. Iran and
other countries put together contribute close to the same amount as Afghanistan. Because
many cashmere-producing countries are prone to political and environmental upheaval,
sourcing cashmere frequently entails wide shifts from one region to another. For this reason,
the percentages above fluctuate from year to year.

b. Routes Taken by Cashmere after Afghanistan

Historically, the processing of cashmere occurred in three distinct stages, with each stage
taking place in a different geographic location. A simplified representation of the traditional
model is as follows: Raw cashmere was sourced from Iran, China, Afghanistan, and
Mongolia, and shipped (after simple hand sorting) to Europe, usually Belgium or the United
Kingdom. There the cashmere was cleaned (scoured), further sorted (machine dehaired),
and then sold to specialized garment manufacturers in Scotland and Italy, that spun the
cashmere into yarn and wove the sweaters and scarves for retailers in Europe, Japan, and
North America. (Sometimes the processed cashmere was spun into yarn in the same location
as it was scoured and dehaired.) This model has undergone significant revision in the last

142
Interviews with livestock development specialists, Kabul, February 2005
143
Analysis based on interviews and secondary research, February, 2005
144
Cashmere Development Program for Afghanistan, John Napoleoni, 2004. Altai Consulting estimates, February
2005

Figure V-2: World Production of Cashmere,
(in % of MT), 2003
143

China
65%
Mongolia
16%
Iran and
Others
9%
Afghanistan
10%
100
two decades, but Belgium remains a major destination for Afghan raw cashmere, and
Scotland and Italy still produce cashmere garments of the highest quality.

The processors and purchasers of raw cashmere differentiate between the origins of the
wool. The three categorizations are Chinese, Mongolian, and Iranian, and three separate
price indexes are used to measure the prices of each. Due to the width and length of the
individual fibres from each country, Iranian cashmere is the cheapest, with Mongolian
cashmere costing 20% more than the Iranian, and Chinese costing up to 40% more than the
Iranian. On the international market, Afghan cashmere is considered to be of the same
quality as Iranian cashmere, and the two are sometimes mixed together.
145

The dynamics of supply and
demand dictate the leverage
that Afghan cashmere
exporters can apply in their
dealings with international
buyers.

Shortages in other regions
could mean a windfall for
Afghan cashmere dealers and
rural herders. But it can be
assumed that due to the
unreliability of Afghan supply
and the lower quality of the
wool in comparison to Chinese
and Mongolian, Afghan
exporters are disadvantaged in
dictating terms and prices
when compared with other
producing nations.

Afghanistans production is low enough that it is unlikely that withholding stocks of cashmere
would have a noticeable effect on global prices, and most Herat traders lack the financial
resources to try such a strategy. Any attempt to control export in this manner would
probably result in more buyers contracting directly with local middlemen and wholesalers,
further eroding the position of the exporters.

Afghanistan may have little recourse to attempt to influence global demand for cashmere,
but there may be opportunities in specializing in cheaper cashmere destined for more
accessible garments. Additionally, Afghanistan could improve the image of its cashmere by
differentiating it from Iranian cashmere and improving its quality through selective breeding.

c. Trends

The global pattern of cashmere wool consumption is being revised rapidly by the ascendance
of Chinas processing industry. Chinas rapid rise in the cashmere industry mirrors its ascent

145
Iranian processors, however, consider Afghan cashmere to be of a slightly higher quality than standard Iranian
cashmere and in interviews indicated that it could command a higher price than Iranian. They estimated Afghan
cashmere to be around 16 microns diameter, compared to 17-18 microns for Iranian. Mashad, Iran, February
2005.
146
http://www.gschneider.com
Figure V-3: Price Differentiation Between Cleaned,
Dehaired Cashmere of Different Geographic Origin
(Prices in US $ per kg)
= China, = Mongolia, = Iran
146

101
in manufacturing following the economic liberalizations of the 1980s and 1990s. China once
produced raw cashmere as Afghanistan does now, solely for export to European or foreign
weavers. The first wave of economic reforms allowed farmers to sell higher and higher
percentages of their cashmere in the local market, and middlemen and dealers quickly
emerged. Prices climbed quickly as the middlemen learned to extract high prices from
European buyers who were dependent upon cheap Chinese cashmere.
147
By the early 1990s,
Chinese entrepreneurs began to explore ways to move up the manufacturing value chain,
and many scouring, spinning, and dehairing facilities were established with European know-
how and machinery. The Chinese withheld production periodically from the global market,
to instead feed the new domestic processing sector and increase the price for their raw
material.

Today, China is a major processor of raw cashmere. Chinese factories purchase not only
Chinese goat wool, but also Mongolian, Iranian, and Afghan cashmere. The Chinese have an
advantage over the Belgian processors not only in labour costs, but also in physical proximity
to the cashmere producing regions. In the Chineses rush to build processing capacity, they
may have overestimated the available supply of raw cashmere in China,
148
and now are
dependent upon imports to keep factories operating. With capacity and demand exceeding
domestic supply, the Chinese are grabbing higher and higher percentages of Afghan
cashmere exports.
149

The Chinese rise from raw cashmere exporter to a leader in the scouring, and spinning
industry has ended Belgian and European dominance in this sector. Likewise the trend across
other cashmere producing countries is to machine dehair locally, depriving the Europeans of
another step in the value chain.
150
The Europeans, for their part, have adapted to this trend
by shifting their own production to China. Idle machines in Europe are being sent to China
and a major European player in the industry is reported to have helped establish a dehairing
facility in Kerman, Iran.

Furthermore, Chinese businessmen are intent on moving up another rung and weaving
finished cashmere products themselves, threatening the position of the Scottish, Italian, and
other European specialty weavers. China already produces many cashmere and cashmere-
blend garments, albeit of lower quality and cost than the Italians and Scottish. Also in the
Chineses favour is the removal of the international textile quota system, which allows China
to export more and more finished goods to the United States and Europe.
151

Afghanistan lacks the financial resources, market share, and technical capacity to attempt a
Chinese style transformation. But there is no shortage of potential for improvement of the
quantity and quality of Afghan cashmere. The template for the successful improvement and
exploitation of an existing cashmere industry already exists. With support from USAID, the
Mongolian cashmere sector underwent a massive overhaul following the economic disarray
that accompanied the fall of communism. Breeding stock was replenished to improve quality

147
Scotland and China and Cashmere Trade, Theresa Purcell, May 1996
http://www.american.edu/projects/mandala/TED/cashmere.htm
148
Despite this, the Chinese are unlikely to expand their goat park. According to an industry expert, the Chinese
government prefers a smaller domestic herd, as more goats tend to push down the prices of raw cashmere,
which is a major source of income for rural Chinese in many regions. Furthermore, the sheer size of the Chinese
herd has led to desertification in some areas. Some industry insiders suggest that the Chinese government may
have culled as many as several million goats in the late nineties to address this problem.
149
Interviews with Afghan cashmere exporters, Herat, January 2005
150
Combing at Josephine Cachemire's mill in Mazamet, April 2004
http://www.inteletex.com/FeatureDetail.asp?PubId=&NewsId=2805
151
Cashmere traders look forward to the elimination of textile quotas, December2004 http://www.inteletex.com
102
and quantity, farmers and herders were trained in goat care and commercialisation,
cashmere gathering, and trading centres and storage were established in more remote
areas. A Mongolian authentication brand was created to guarantee the origin and quality of
the cashmere.

Later, foreign investors collaborated to renovate or build scouring and dehairing, and
spinning facilities (some even producing finished garments). This processing strategy is not
without its pitfalls, though. During periods of high demand, the Chinese buyers have been
known to push up prices and buy up massive quantities of Mongolian cashmere for their own
processing facilities, leaving their Mongolian competitors with barely enough cashmere to
keep operating.
152
Ill advised export restrictions have led to the illegal smuggling of as much
as 20% of the Mongolian cashmere production.
153

Nevertheless, the Mongolian case has so far proven to be a successful revitalization of a
distressed industry, and could provide a useful model for Afghanistan. Annual Mongolian
cashmere production increased from 1,500 MT to 3,200 MT between 1993 and 2001. The
average annual income from cashmere for individual members of cashmere producing
families doubled from US $ 16 to US $ 32 between 1991 and 1996.
154

Herders Collectors Wholesalers Exporters
Chinese
Importers
Spinning and
Weaving
Firms
Retailers
Belgium
Scouring and
Machine
Dehairing
Firms (China
or Belgium)
Distribution Channel of Afghan Cashmere

Figure V-4: Commercial Distribution of Afghan Cashmere

152
Globalization of the Cashmere Industry in Mongolia, Gretchen Warner, November 2000
http://www.american.edu/TED/mongolia.htm
153
Impact of Institutional and Trade Policy Reforms: Analysis of Mongolias Cashmere Industry, World Bank,
Washington D.C. January 2002. http://poverty.worldbank.org/files/14794_Mon_Csm_Mixed_Rep_Mar03_BBL.pdf
154
Ibid
103
D. Production and Export Sector Overview

1. Current Dynamics of the Afghan Cashmere
Industry

a. Afghan Cashmere Supply

Owing to the arid and frigid climate, western Afghan herders and farmers have traditionally
produced cashmere as a by-product of the existing goat stock. Hearty and adaptable to
extremes of weather, cashmere goats are a natural fit for the climate of western
Afghanistan. Afghanistan has long been a major, if erratic, supplier of cashmere wool to the
world market, with the export sector concentrated in Herat.

Drought and indiscriminate breeding of cashmere producing goats with other goats has
deteriorated the volume and quality of cashmere, and both of these problems have adversely
affected the cashmere sector in Afghanistan. War and civil strife inevitably lowered the
volume of production in Afghanistan, but a major blow to the industry was the difficulty in
accessing international markets for cashmere wool, as almost all Afghan cashmere was
traditionally sent across the border through Iran. With export through Iran difficult because
of customs and transport restrictions, large-scale commercial export dwindled while
production varied due to climate and breeding conditions.

In 1991, Afghanistan and Iran were thought to export around 1,800 MT of cashmere wool
together, with little indication of how much of that production came from Afghanistan.
155
In
1995-1996, a World Bank study estimated the cashmere production of Afghanistan at 250
MT.
156
Based on extensive field interviews and visits, we now estimate the total export of
Afghan wool to be well above 1000 MT per year. Such wide swings in estimated production
of Afghan cashmere likely come from the tendency to substitute export quantity with
production capacity. Because there is virtually no domestic consumption of cashmere in
Afghanistan, export quantities should closely match production quantities. A key
consideration affecting export numbers, however, is the ability to cross Iranian borders,
which were often closed during times of conflict.

While recent droughts and indiscriminate breeding negatively affect the productive capacity
of Afghan goats, farmers do not keep goats only for cashmere production, and goats
produce cashmere regardless of whether or not the international distribution channels are
open to Afghan exporters. Therefore, past production numbers could be misinterpreted as
representative of unutilised production or idle capacity. The cashmere wool was probably
used locally like any other wool product when it could not be exported, or simply not shorn
at all.

Currently, Afghan cashmere is produced in all the north western provinces of Afghanistan,
including Herat, Ghor, Badghis, and Farah. Cashmere goats are raised in rural mountain
villages of sedentary farmers and herders. Individual families may own anywhere from five
to several hundred goats, and rely on them for meat and dairy products, with cashmere wool
as a supplemental income source.

155
World Cashmere Markets, http://www.capcas.com/World_Markets.html
156
Role and Size of the Livestock Sector in Afghanistan, Ulfat-ul-Nabi Khan and Muzzafar Iqbal, World Bank,
1999
104
b. Supply Chain

Because cashmere goat shearing or
combing is not seen as a commercial
enterprise, but rather as an occasional
financial bonus, villagers are rarely aware
of variations in quality and do not cross-
breed goats to improve cashmere volume
and quality. Because global cashmere
prices fluctuate like any other commodity,
it would be difficult for a villager to
estimate what kind of return could be
expected from dedicating extra resources
to cashmere production. Additionally,
cashmere goats are shorn in the late
spring, leading to a reduction in the price
at this time. While most of the highest
quality cashmere wool is available in the
late spring and early summer, second and
third quality wool is available year round
from goats that have been slaughtered, or
otherwise killed, and then shorn. Villagers
do not have the capacity to store or
combine production, and generally do not
transport the wool from the villages
themselves. Nor do they sort or clean the raw wool themselves, though occasionally they sell
some of the course outer hair to the nomads, who use it to make felt for their abodes.

In some areas, a wealthy local villager, perhaps with his own truck, will buy up local
cashmere production from his and neighbouring villages and sell to middlemen and exporters
in Herat. This one local villager cashmere collector may collect from several hundred kgs to a
thousand kgs from local villagers and sell them for a small mark up in Herat. Also,
middlemen and agents of the larger exporters may visit villages to collect production directly.

In Herat, there exists a network of wool, fur, and leather wholesalers, who buy raw
cashmere wool from villages or villagers and then sell their product to large-scale exporters.
Fifteen to twenty of these middlemen cluster around the Nazari Market and surrounding
streets near the Friday Mosque in central Herat, and offer roughly the same prices. These
entrepreneurs typically do not process or directly export any cashmere, and usually deal in
other agricultural or livestock products as well. They have the financial and physical capacity
to store some cashmere until prices become more favourable, and trade between 10 to 20
MT of cashmere per year. The middlemen make a small margin on the production they
gather and sell to the big Herati exporters. Increasingly, these middlemen are also
approached by visiting Chinese businessmen, who buy their cashmere for direct export,
cutting out the larger Afghan exporters.

Abdul Khalekh lives in the Kurukh region of Herat
province with his wife, five children, and extended
family. The area is difficult to cultivate, and most of
his livelihood comes from his livestock. Besides a
few sheep and a donkey, Abdul owns 17 cashmere-
producing goats, which he uses primarily for dairy
and meat products. In the late spring, he and his
neighbors shear the goats with scissors and
straight razors.

Sometimes a man comes to buy my kork for
cash. Some years no one came to buy kork, and
we would try to sell it in Herat. This year the man
paid 3000 Afghanis for 4 kgs. Last year it was less,
but the year before that, it was more. We do not
know the price until the buyer arrives and everyone
gets the same price.

Occasionally, Haji Abdul Rahman, a wealthy man
from a neighboring village, will buy kork in Abdul
Khalekhs village, but does not always pay in cash,
but rather will barter for basic goods such as
cooking oil and flour. When paid in cash, Abdul
Khalek purchases food items, cloth for clothes, and
agricultural supplies.
105
Loss of Weight During Cashmere Processing
The highest value cashmere for
exporters contains the least amount of
protective hairs
1 Kilogram Best Quality Cashmere
Shorn in Afghanistan
The cashmere is hand sorted by employees
of the major cashmere exporters in Herat
Machine dehairing separates and
removes all remaining protective hairs
Scouring facilities remove dirt, vegetable
matter, and grease
750 Grams after Hand Sorting
640 Grams after Scouring
318 Grams
after Machine
Dehairing
After machine dehairing, the cashmere loses
almost no weight during the spinning and
weaving stages of garment manufacture

Figure V-5: Cashmere Weight Reduction during Processing Phases
157

The large-scale exportation of cashmere from Herat is handled by only six to eight family-run
businesses. These exporters each handle anywhere from 150 to 500 MT a year depending on
availability and financial capacity. Most of these businesses also import a variety of goods,
from food staples like cooking oils, to construction supplies. Some also export agricultural
goods such as cumin, watermelon seeds, and pistachios. All the larger exporters employ
workers to sort the wool. Cashmere goat wool is known locally as kork, and must be hand-
sorted through a very labour-intensive process. Depending on the available stock of kork, the
exporters employ between 75 and 200 sorters each, including many women and children.

Raw kork consists of the entire coat of the cashmere goat, with the soft micro-fibre down
protected by long, stiff black fibres on the outside of the goats coat. The sorters manually
separate the soft down from the protective black hairs. For top quality raw Afghan kork
around only 5% of the total may need to be disposed of, whereas with lower qualities, as
much as half may need to be discarded. The black hairs are an unwanted by-product, but
some are sold to nomads at disposal prices.
158
Each sorter can process between 3 to 5 kgs
of raw kork a day, costing the exporter roughly US $ 0.50 per kg. The sorted cashmere wool
is then pressed into 90-kilogram bales of burlap and then exported in containers of roughly
10 MT each.

Traditionally, Belgium has been the main recipient of Afghan cashmere. Belgiums textile
weaving industry buys the bulk of Afghanistans production and cleans, dehairs, and spins it
into cloth and yarn. Belgium has long been a major player in cashmere and specialty fibre
processing and its link with Herat was further solidified by the fact that many other European
nations refused entry to Afghan and Iranian cashmere for fear of anthrax contamination.

157
Interviews with herders and exporters in Herat, and with scouring and dehairing facility owners in Mashad and
Tehran, Iran, February 2005
158
Nomads (kuchi people) use the black goat hairs to make a felt for tent covers and domestic items.
106
Most of the exporters in Herat have long-standing relationships with Belgian cashmere wool
wholesalers, or have an Afghan relative in Belgium who sells directly to scouring and
machine dehairing companies. Sometimes the Herati exporters send containers of cashmere
to their agents in Belgium to be warehoused and sold there, and sometimes the Belgian
wholesalers place orders directly with the Herat exporters.

Though there are several different
purchasers of Afghan raw cashmere in
Belgium, many destinations require
Afghan cashmere to be disinfected
according to approved methods. At
present, the Traitex Corporation of
Verviers in Belgium is one of the only
(perhaps the only) companies that
perform this service in Europe.
159
Traitex
also scours and machine dehairs the
cashmere for its own uses, but will
disinfect Iranian and Afghan cashmere on
a commission basis for other European
companies, or sell cashmere that has
only been disinfected.
160
For this reason,
almost all Afghan cashmere sent to
Europe passes through Verviers, Belgium. Such reliance on one facility represents a threat to
the Afghan cashmere industry. Closure of this plant could entail difficulties for the cashmere
export sector of Afghanistan, or at least create a serious bottleneck for Afghan exports.

After scouring and machine dehairing the Afghan cashmere, the Belgians often sell it to
specialty fabric companies in Italy and Scotland, which manufacture expensive cashmere
garments for the European and North American markets.

Iran has 4 to 6 scouring and machine dehairing facilities with disinfection capabilities, most
of them located in Kerman and Mashad. The Iranian dehairing industry primarily operates
with domestic Iranian cashmere and exports almost all its processed cashmere to Europe.
Recently, big European cashmere processors have helped set up facilities in Iran. Though
most European countries will accept Iranian cashmere that has been disinfected in Iran,
almost every batch will be sampled and tested upon arrival in Europe, slowing down delivery
to buyers. The Iranian scouring and machine dehairing plants can process up to 200 MT
each per year maximum, but most currently operate below capacity. Most of these facilities
process cashmere on a commission basis, and sometimes scour and dehair Afghan cashmere
traded by Iranian businessmen. These facilities are not designed for small scale production,
require significant up-front investment, and have high overhead costs. Water and electricity
are primary inputs, giving Iranian factories an advantage over an Afghan rival.

Iranian processors also report smuggling associated with Afghan cashmere. Smaller
intermediaries reportedly load trucks and camels with bales of cashmere purchased in
western Afghanistan and sell it to processors or wholesalers in Iran, avoiding customs and
immigration difficulties.

159
Textiles Industry Advisory Committee Proposal to Revoke the Anthax Prevention order of 1971, United
Kingdom, 2002 http://www.hse.gov.uk/aboutus/ hsc/iacs/texiac/130503/paper1.pdf
160
Combing at Josephine Cachemire's mill in Mazamet, April 2004
http://www.inteletex.com/FeatureDetail.asp?PubId=&NewsId=2805
Figure V-6: Cashmere Sorters in Herat,
January 2005
107
China has long been a producer of raw kork, but in the last 15 years it has emerged as a
major force in cashmere processing. The Chinese processing plants capacity exceeds
Chinese production, and Afghanistan is emerging as a growing supplier of cashmere wool for
the Chinese processing facilities. Some Chinese buyers order directly from the large-scale
Herati importers, who ship overland to southern China. Some Herati exporters even have
agents in southern China to solicit orders from local buyers and factories. With greater and
greater frequency, Chinese middlemen and factory agents are coming to Herat and Mashad
to buy local kork. These Chinese businessmen stay weeks at a time, buying primarily from
the middlemen. In China, as in Belgium, the wool is cleaned and spun into yarn and then
sold to Europe and Japan for manufacture of the final good, though cheaper cashmere
garments are increasingly being produced in China itself.

c. Value Chain Analysis

From the mountain villages of Afghanistan to the trendy shops of Tokyo or London, little
value of the cashmere garment is retained in Afghanistan.

Cashmere wool prices are
periodically driven to dizzying
heights by fashion crazes,
such as the 1999-2001
pashmina shawl fad,
162

which pushed prices for raw,
sorted cashmere to US $ 90
per kg.
163
Prices can then
come crashing down as
abundant supply and waning
demand sometimes coincide.
Due to this price volatility,
there are virtually no Afghan
entrepreneurs involved in the
cashmere business that are
not also involved with other
products and sectors.
Because no stage of the
supply chain in Afghanistan
adds significant value to the
cashmere wool, most involved
in the trade in Afghanistan make their profit from small margins they earn on passing the
product along on its way to export.

As stated before, villagers do not rely on cashmere wool sales for their livelihood; rather they
see the cashmere goat wool as a supplemental income source. Yet for herders with sizeable
stocks of goats, cashmere can be a significant source of cash. A small village with 20 families
may have around 800 goats, with some families keeping only 5-20 goats, while other
families keep as many as 100. Each adult goat will produce wool for about four or six years,

161
http://www.gschneider.com
162
http://www.gschneider.com/indicators/smi.php?idx=scmi_c
163
Pashmina is simply a marketing name for cashmere, or cashmere mixed with silk. Cashmere is known in
Kashmir and Tibet as Pashmina, the word most likely deriving from the Persian word for wool; pashim.
http://www.capcas.com/World_Markets.html
Figure V-7: Historical Cashmere Price Fluctuations: Price
Index for Cleaned, Dehaired Cashmere.
Prices in US $ per kg
= China, = Mongolia, = Iran
161

108
and if sheared once a year, yields 200 grams of cashmere a year after processing.
164
A
villager with no access to the Herat market can expect to be paid around US $ 16 per kg of
unsorted kork at present prices: a yearly revenue of close to US $ 200 for a family with 20
cashmere producing goats, and US $ 1,000 for a family with 100 cashmere producing goats.

Village cashmere collectors and agents serve essentially the same role: combining production
and facilitating transport from the villages to Herat. They earn either a small commission, or
a slim margin, as they do not have the ability to store cashmere until more favourable prices
can be obtained. The middlemen profit by having greater knowledge of global cashmere
prices, and greater ability to warehouse a higher volume of cashmere until a price can be
negotiated with the exporters. At present prices, middlemen in Herat buy and sell their
cashmere at a mark-up of 3-6%.
165

The Herati exporters must have the capacity to store many tons of kork while it awaits
sorting and transport. Usually one facility is used for sorting, bailing, storage of raw and
processed wool, and the loading of trucks for shipping. The majority of employees associated
with cashmere processing are sorters, who earn from US $ 0.60 to US $ 3 a day. The sorted
and bailed cashmere is then shipped and sold either to Belgium or China, for a margin of an
extra 25-30%. (Sometimes the exporters send unsold cashmere to their agents abroad,
though this means assuming considerable risk due to lack of insurance and price volatility).
The mark-up that the exporters charge reflects not only the sorting and packaging labour
and shipping costs, but also the fact that the volume of goat wool that they have purchased
is now reduced by removing the course black outer hair.

Once cashmere has been scoured and machine dehaired in Belgium or China, it fetches a
much higher price in transactions between the processing factories
166
and the spinners and
garment manufacturers in Italy and Scotland. The cashmere increases in value by roughly
15-20% after scouring, and decreases in volume by 15%. The machine dehairing phase
doubles the value of the product, and reduces volume by 40-60%. A kg of processed Afghan
cashmere at this stage costs US $ 57-65,
167
a price that reflects the further reduction in
weight of the cashmere. At this stage, the garment makers weave the cashmere into yarn
and then into scarves and sweaters for sale to department stores and catalogues.

164
The amount of hair shorn from the goat can be from over 500 grams to 2 kg, but after the dehairing and
scouring, this amount becomes around 200 grams of cashmere. This calculation assumes that the villagers sell
one unsorted coat of goat hair of 630 grams for a price of US $ 16 per kg, or around US $10 per goat.
165
Field interviews in Herat revealed that middlemen, or wholesalers, currently bought kork at $16 per kg and
sold it at US $16.5 to US $17 per kg, January 2005
166
Information from interviews with cashmere processing plant owners in Iran, February 2004
167
Figure for Afghan cashmere processed in Iran, February 2005
109

d. The Chinese Wildcard

The value and distribution chains detailed above describe the status quo for cashmere
production and export in Afghanistan. Belgium is the traditional consumer of sorted Afghan
kork, but Chinas recent transformation from purely a cashmere wool producer to a major
processor and garment maker means that Afghanistan can fill the existing gap between
Chinese production and processing capacity. Over the last few years, export patterns have
shifted dramatically from Belgium towards China.

The primary reason the exporters are
now favouring sales to China is
transportation costs. In some cases the
Chinese actually pay lower prices for the
cashmere, but the exporter is only
responsible for transportation to the
Turkmen border at Turghundi, five hours
to the north of Herat. This costs the
exporter roughly US $ 0.13 per kg. The
Chinese then arrange and pay for
transport north through Kazakhstan,
Uzbekistan, and onwards to China by rail.
The Belgians, in contrast, usually make
the exporter shoulder the logistical and
financial burden of arranging trucking
and sea shipping from Herat to Eslam
Qale at the Iranian border, then to the
port at Bander Abbas, and on to Belgium
via sea freight. This can cost between US $ 0.32 and 0.45 per kg.
168

Indicative of the growing Chinese demand for Afghan cashmere, Chinese businessmen now
appear in Herat to buy directly from the middlemen, rather than from the main exporters.
Many middlemen prefer to deal with the Chinese because they pay in cash on the spot, as
opposed to the large exporters, who often delay payment by 10-20 days. Previously, exports
required international contacts and adequate financing to fund shipment and purchases
while awaiting receivables from the sale of the cashmere. Now low volume middlemen can
sell to the Chinese agents and ship directly to the Turkmen border in quantities of several
tons.

168
Shipping cost calculated from figures obtained from interviews of Afghan cashmere exporters based in Herat,
January 2005
Figure V-8: A Customer Examines Cashmere
Shawls in a European Boutique,
January 2005
110
$2.4
$3.1
$3.1
$1.2
$5.0
$38.0
$30.0
$50.2
$0
$50
$100
$150
Herder Village
Collector or
Agent
Herat
Middleman
Herat
Exporter
Scourer Dehairer Spinners
and
Weavers
Retail

Figure V-9: Value Chain of Afghan Cashmere:
Figure Represents the Cost Structure of a US $ 133 Cashmere Garment
169
, 2004

e. Environment

The Afghan cashmere industry currently operates in a difficult business environment.
Gathering goat wool for export is problematic, as rural infrastructure in Afghanistan still
needs rehabilitation. Some cashmere producing regions, such as Ghor province, are
extremely remote, making transportation of kork more expensive. Goat-rearing villages can
be quite scattered within a region, making wool collection time-consuming as well. Cashmere
goat herders have little to no information about changes in the global price for their
products, and do not negotiate collectively with buyers.

Once in Herat, the majority of the exports are controlled by a small number of wealthy
families that have the capacity to buy large enough quantities to ship internationally. Even
these exporters have little or no access to external financing, and often delay payments to
suppliers until they themselves have sold their stock. Individually, these family businesses do
not have the technical capacity or financial resources to consider opening and operating a
scouring/dehairing/spinning factory without the involvement of outside investors or partners.

Shipping across borders poses many challenges in this landlocked country, and exports from
Afghanistan are viewed with suspicion due to concerns about opium and heroin smuggling.
Transit countries such as Iran and Turkmenistan frequently close borders for security

169
1 kg of cashmere goat wool at the village level equals 318 grams of cashmere at the final stage of processing.
It is significant to note that while much value appears to be captured at the herder level, there are several
hundred thousand Afghan herders occupying this end of the value chain, whereas only about 20 middlemen and
7 exporters operate in all of western Afghanistan.
111
reasons, and Iran is subject to several economic embargoes. Regulatory and tax authority
remains ill defined.

Internationally, the reputation of Afghan cashmere suffers from disruptions in supply,
confusion with Iranian cashmere, concerns over anthrax, and poor quality. All of these issues
need to be addressed before Afghanistan can narrow the gap in the price between its
cashmere and that of other major producers. Though demand for raw cashmere generally
exceeds supply, an expansion in production in Mongolia or Iran could drive down prices for
lower quality wool.

2. Potential Improvement / Value-Added Options

a. The Mongolian Example

Afghanistan is fortunate to have an existing basis of cashmere production on which to build.
Raising cashmere goats is a traditional and natural activity for western Afghan herders and
farmers. Similar to Mongolia 15 years ago, Afghanistan has a solid productive capacity, but
no system to monitor quality and commercialise the wool. Neglect, war, and drought have
led to a decline in the quality of the Afghan cashmere goat park, but this trend can be
reversed.

Following the example of Mongolia, quality initiatives can be enacted to train herders in
combing, breeding, vaccination, fibre analysis, and marketing. Neither cashmere growing,
trading, nor exporting is a core business activity for most Afghans involved in the industry,
so the risk associated with the cashmere trade does not represent a total financial risk for
the players involved. Accordingly, improving the quantity and quality of Afghan cashmere
comes at a low risk to all players, as herders use the goats for other purposes as well, and
the traders deal in a variety of products.

Efforts to monitor and control any potential anthrax contamination could eventually open
new markets for Afghan kork and cut out costly decontamination procedures that European
countries require of Afghan cashmere. Cooperatives can be established in village centres to
combine local production, perhaps with the aid of micro-finance or grant organisations. As in
Mongolia, a quality and origin label can be established for Afghan cashmere, which could
increase the marketing potential of Afghan cashmere as a specialty or niche product. Iranian
traders and processors already consider Afghan cashmere to be of a slightly higher quality
than standard Iranian cashmere, owing to its smaller fibre diameter. Few other buyers in the
industry are aware of this distinction. Samples of Afghan cashmere can be sent to analytical
laboratories in Europe, and favourable results of comparisons with Iranian samples can be
advertised to buyers. With proper marketing and promotion, improved cashmere could
conceivably command a separate price from Iranian cashmere, and be allotted a distinct
quality categorization in-between Mongolian and Iranian varieties.

112
b. Combing

The most immediate improvement to be made in Afghan
cashmere quality is also the cheapest to implement. If
herders are trained to comb the cashmere hairs out of
the goats coats, rather than shearing the entire animal,
the cashmere they collect will fetch a higher price. Small,
basic wooden combs are cheap and easy to use. Made of
wool and steel, these combs could be constructed locally
for no more than one dollar each. They are designed to
lift the cashmere hairs from under the stiff protective
hairs and remove them without cutting them or ripping
them. The advantages over shearing are two-fold: the
cashmere fibres are longer, and less course black hairs
are mixed in with the cashmere fibres.

At this stage, it is unlikely that the major Herati exporters would distinguish or pay a
premium for combed cashmere. The arrival of knowledgeable Chinese buyers, however,
presents an immediate opportunity. Were a village collector or Herat middleman to pay a
small premium for combed cashmere of higher quality, villagers might be induced to switch
to combing instead of shearing. When sufficient production is amassed, the middlemen or
village collector could negotiate a higher price per kg to the more discerning Chinese
buyers.
170

The gradual substitution of shearing with combing would elevate the reputation of Afghan
cashmere on the world market, and help narrow the price gap between Afghan and other
better known fibres.

Creating a sophisticated market that distinguishes between different qualities of cashmere
would have several positive externalities. One advantage of improving the quality of Afghan
cashmere is increased producer protection from price swings. In a down market, buyers who
differentiate between cashmere quality grades and previously who purchased lower quality
material can now buy better quality cashmere at lower prices. The lowest quality cashmere
becomes even more displaced in the market. Likewise, in an upswing in demand, unsold
reserves of higher quality cashmere will be the first to be purchase before there is a price
increase for lesser quality product. Thus, producers of higher quality cashmere are more
buffered from fluctuations in prices and demand. Another externality is that different prices
for different qualities will motivate herders to invest in herd improvement and respond to
price incentives.
171

c. Down-Market Garment Supplier

The advent of the Chinese cashmere garment manufacturing industry has led to a shake-up
in the global market for cashmere products. With China now producing cashmere and
cashmere-blend clothes, consumers now have access to cheaper, lower quality Chinese
products in addition to high-end European garments. As both Chinese and Mongolian raw
cashmere is substantially more expensive than Afghan cashmere, Afghanistan may be able

170
Interviews with cashmere goat experts revealed that a similar, though smaller, combing initiative in
Kazakhstan produced interest from Chinese buyers, who were willing to pay a 10% premium for the combed
cashmere.
171
Impact of Institutional and Trade Policy Reforms: Analysis of Mongolias Cashmere Industry, World Bank,
Washington D.C. January 2002
Figure V-10: A simple
cashmere comb
113
to specialize in lower quality cashmere destined for the cheaper Chinese garments. Factories
that spin cashmere for these garments can be approached to buy Afghan cashmere on
contract, rather than having to blend expensive and less expensive cashmere of different
origins to meet production quotas.

d. Scouring and Dehairing

Another way for Afghanistan to capture more value from its cashmere is to set up scouring
and dehairing facilities in Herat. The advantage of a processing facility in Afghanistan is that
machine dehaired and scoured cashmere fetches a much higher price than raw cashmere
wool, and greatly reduces the volume of the cashmere product to be exported, which equals
large savings in shipping costs. A processing facility would also create employment and
involve the importation of technical know how. The size and investment involved in such a
facility, however, may be beyond the scope of a small to medium enterprise. A scouring
facility will require a supply of at least 200 MT of raw kork, as well as expensive water
treatment machines, involving sophisticated chemicals. For proper scouring, large vats and a
steady supply of water are needed. The scouring machine itself costs around US $ 120,000.
Second-hand machinery can be purchased from Italy, Germany, and China. Such machinery
is almost never used for cashmere alone; most factories use the machines to scour wool and
other fibres such as camel hair as well. Interested investors should consider the inclusion of
these products in business plans. Dehairing plants are large investments that also require
electricity and water resources. Herati businessmen estimated the cost of purchasing,
transporting, installing dehairing machinery in the range of US $ 1 Mn. A factory of this scale
would require a near monopoly on the sourcing of local cashmere.
172
Although the Chinese
could be potential buyers of such processed cashmere, their indiscriminate pattern of
sourcing could prove a threat to an Afghan facility. Increased Chinese interest in raw Afghan
cashmere could drive up prices and leave the factory with little cashmere to process.

It may be some time before Afghanistan has a steady enough supply of raw cashmere to
consider establishing large-scale dehairing and scouring plants. In the meantime, Afghan
businessmen should consider more formal relationships with Iranian cashmere processors.
Interviews with processors indicated that Iranian scourers and dehairers need a wider base
of cashmere suppliers, and that processing plants there are operating below capacity.
Afghan cashmere could be scoured and dehaired in Iran at a lower cost than in Europe,
reducing reliance on Belgian disinfecting facilities.
173

e. Cooperatives as Training Centres and Intermediaries

There is little reason why cooperatives or associations cannot be formed to perform basic
services to benefit producers. Cooperatives can serve as collection stations, provide
transport, spread information about market conditions, and would be an ideal venue for
training sessions in combing, cross-breeding, and fibre analysis. A commercially focused
cooperative could also be instrumental in segmenting the market for different qualities of
cashmere and marketing the improved product. At present, local wholesalers and collectors
add no value to the end product, but profit from market movements. Producers can capture
that margin directly by aggregating their production and selling directly to exporters, or
eventually exporting directly, perhaps by negotiating with Chinese buyers.

172
Cashmere wool and spinning project, June 2003. www.export.gov/afghanistan/ pdf/market_transition_07-
cashmere_wool.pdf
173
Iranian processors indicated that their cost per kg for dehairing and scouring was roughly half of the cost in
Belgium, February 2005
114
3. Obstacles

Significant obstacles stand in the way of the successful exploitation of Afghan cashmere
production. Most pressing in the minds of the herders and farmers is the drought of the last
5-7 years. While cashmere goats are well adapted to withstand dry, cold conditions, their
food is mainly foraged in the high, dry desert. Insufficient precipitation leads to a lack of
grasses and brush on which the goats depend for growth and survival. Drought can thin
existing stocks of goats, causing deterioration in quality and quantity. An erratic supply of
cashmere within Afghanistan results from both civil unrest and drought, and difficulties in
transportation sometimes disrupt international distribution of Afghan cashmere. While
improved political stability should help guarantee a more stable supply network to the
international market, the duration and severity of the drought cannot be anticipated for the
future.

An obstacle to investment in cashmere is the inherent instability of world prices. While this
can create opportunities for entrepreneurs, it implies considerable risk.

Additionally, anthrax fears keep many markets closed to raw Afghan cashmere. More
research needs to be done to ascertain how real a threat anthrax and other livestock
diseases are, and how they can be combated. In the meantime, alternatives to Belgian
disinfecting facilities should be explored.

Afghanistan has produced and exported raw kork for many generations but has no history of
cashmere processing. The technical capacity and know-how for operating and managing
scouring and dehairing machinery must be built up alongside any investment in physical
capital. Furthermore, interviews with Iranian cashmere processors indicated that such
facilities require large initial investments with high overhead costs.


a. Expansion of Production and Quality Enhancement

For Afghanistan to capitalize further on its cashmere production through the methods
proposed in this report, Afghan producers need to expand production capacity and quality
through selective breeding and better animal care. These steps can be communicated
through training, and given the economic incentive of higher prices, herders would be
motivated to continue quality initiatives. Regardless of the price of cashmere on the
international market, goats that produce greater amounts of higher quality kork can benefit
all players in the supply chain.

b. Exploring New Markets

Afghanistan must work to improve the image of its cashmere by reducing fear of anthrax
and distinguishing its products from those of Iran. Higher production in other regions could
affect demand for Afghan cashmere, but Afghanistan can establish itself as a reliable supplier
of cashmere if the production levels stay consistent and borders remain open. While it seeks
to open new European markets to its cashmere, Afghanistan must continue to move away
from its dependence on Belgium and seek new opportunities for export to China. The
creation of an Afghan origin and quality label could open a new niche market for Afghan
cashmere, much as it did in Mongolia. Capitalizing on international interest in development in
115
Afghanistan, western fashion labels may find it advantageous to advertise the use of Afghan
cashmere in their products.

5. Opportunities and Existing Players

Several non-governmental organisations operate in the rural cashmere-producing regions
around Herat. Existing networks of NGOs can be utilized to access the cashmere goat
herders. Programs with veterinary training and livestock expertise include Madera and the
Dutch Committee for Afghanistan.

The cashmere exporters of Herat are accustomed to disruptions in supply and export, and
would be keen to examine methods of improving the supply chain as well as the quality and
quantity of the kork they export. Some exporters have already explored the option of
purchasing scouring and dehairing machinery from Europe, but could not find financing or
partners for their proposals.
174

These exporters may be increasingly interested to learn how they can establish a niche for
their products as they become more aware that Chinese buyers are now purchasing directly
from the middlemen and wholesalers who traditionally sold to their export businesses.
Interviews in Iran suggested that Chinese buyers in Iran and Afghanistan have the tendency
to push up prices in smaller markets, pricing traditional exporters out of the market. If the
Herat cashmere exporters recognize this threat, they may be more inclined to strengthen
relationships with producers, and participate in initiatives in areas like herd revitalization and
combing training. Involving existing players in the export sector with the branding and
quality monitoring of Afghan cashmere could also encourage their interest in assisting
producers in the countryside.

Iranian businessmen are keen to improve commercial links in the area of cashmere, as their
facilities need new sources of raw product. Many Afghan businessmen from the Herat area
live and work in eastern Iran, and can be a useful network for increasing regional
commercial cooperation.

174
Cashmere wool and spinning project, June 2003. www.export.gov/afghanistan/ pdf/market_transition_07-
cashmere_wool.pdf
116

VI. Services Related to
Construction and Small
Construction Materials


Construction in General:

One of the largest and most active sectors in the Afghan economy
At least US $ 235 Mn turnover estimated for 2003, and growing
440 companies signed up at AISA (and an estimated 2,000 in total) as of
2004
Boom led by need for reconstruction, return of refugees and average
income growth
Significant variations in level of quality demanded depending on clients
Issues include unclear property rights, lack of standards, poor access to
financing for smaller companies

Services Related to Construction

Booming need for construction services (such as plumbing and electrical
wiring)
Growing sophistication of the market requires better services
Plumbers and electricians generally trained as apprentices in shops

Small Construction Materials

Most materials either imported or made on very small scale
Doors and windows mostly made of wood on small scale
Growing demand for and supply of new materials (steel, aluminium, PVC)
Assembly of aluminium and PVC doors and windows done locally
Tiles mostly imported, all from Iran
Some tiles (basic, unglazed, stone tiles) made locally
Decorative tiles also produced locally

117

B. Key Findings

The construction sector is one of the largest and most active in the Afghan economy,
representing at least US $ 235 Mn
175
to US $ 280 Mn per year
176
according to conservative
estimates and potentially much more.

In 2004 alone, 440 construction companies registered at AISA (360 Afghan companies and
80 foreign)
177
. According to AISA also, construction outputs are expected to grow by 60%
between 2003/4 and 2004/5, going from US $ 235 Mn to US $ 375 Mn
178
. The construction
boom is largely led by international donors efforts to promote the reconstruction of the
country and by new investments in both private and public sector. This, however, is hindered
by a lack of quality standards, absence of regulation, shortage of construction materials and
lack of access to finance.

Overview of the Construction Sector

The construction sector mainly involves the following players: clients (who can be donors,
NGOs, companies or individuals), construction material providers (the companies that
provide the construction materials) and construction professionals who include the
professionals and companies who put together and build the structures. They consist of
architects, engineers, plumbers, electricians, construction managers and labourers of a
variety of trades such as masonry, carpentry, steel fixing and metal work, electrical work,
plumbing and painting.

In addition, two other main types of actors have an important role to play: the government
in setting standards and legislation, and the financial sector in providing financing.

The construction sector in Afghanistan can be divided into five main sub-sectors that have
different clients, professionals, materials and dynamics:

1. Large infrastructure projects (for example, roads and bridges) financed by
international donors.
2. Large donor-driven housing projects such as, refugee shelters, clinics or hospitals. In
this case, the construction professionals are generally international construction
companies who can operate at the international standards required by their clients
and who generally sub-contract all or part of their work to Afghan companies.
3. Industry, offices and commercial buildings. The clients are often individual investors
and the construction professionals are some of the many Afghan construction
companies.
4. Modern individual housing.
5. Individual houses that are built or repaired without the participation of construction
companies but by hiring individual workers by the day and by using traditional
construction materials such as clay and mud.

175
Investment Opportunities in Construction Materials, AISA Presentation at the Afghanistan Investment
Workshop, 14 15 March 2005
176
Afghanistan State Building, Sustaining Growth, and Reducing Poverty - Country Economic Report, World
Bank, September 2004
177
Interviews with AISA
178
118
The level of sophistication of the demand varies significantly within the sector, especially
between the donors, who are used to international norms and standards, and the Afghan
investors and home-owners who are largely not aware of them. Construction processes tend
to vary also but there are a number of common issues including unclear property rights, a
lack of enabling infrastructures and standards, a lack of skilled labour and finally, poor
access to financing, which is a particularly crippling barrier in the construction sector, given
the large amounts of money that need to be advanced by construction companies.

The Reports Focus

This report aims to look at the construction sector with an SME focus and to highlight
business opportunities that could be leveraged by small and medium-sized ventures.
Although there are many other construction-related areas that have potential for
development in Afghanistan, the study centres on a limited number of them, concentrating
on sub-sectors that are particularly adapted to SME-growth and that are very much in
demand.

Thus, this section focuses on plumbing and electrical installation (as part of Services Related
to Construction) and tiles, doors and windows (as part of Small Construction Materials).

Services Related to Construction: Plumbing and Electrical Installation

The lack of skilled labour is particularly noticeable in services related to construction, such as
plumbing and electricity. Companies that are required to meet international standards have
the most problems in this area and most of them hire foreign workers who have a higher
productivity. Importantly, because of insufficient supply, wages of plumbers and electricians
in Kabul are extremely high, attracting more foreign workers. In addition, there are few
diplomas / certificates that can attest to a plumbers or an electricians level.

There could be an opportunity for private players who would act as training and employment
agencies, offering potential trainees the chance to benefit from training at international
standards, and providing employers with access to a large base of employees all trained
according to the same standards. There is demand for this both on the employee side and
on the employer side, especially among international companies and the Afghan contractors
who work with them.

Construction Materials: Doors and Windows

Door and window-making is affected by the lack of skilled labour, as well as the absence of
local industrial production. Most doors and windows are made of wood but there are no
industrial facilities for their production. Therefore, construction companies generally buy
wood and hire carpenters to make the doors and windows, a practice that can work for
individual houses but that is extremely inefficient and time-consuming for larger buildings. In
these cases, companies tend to import the doors and windows fully made. There is an
evolution in the market with the penetration of aluminium and PVC windows, some of which
are made in Afghanistan from imported material.

There could be an opportunity in the development of industrial wood door and window-
making facilities that would use imported wood. This could cater to the existing demand for
standard wood products. The level of investment required could be borne by a SME-type
structure.

119
Construction Materials: Tiles

The production of glazed tiles is extremely industrialized. They are largely imported from
Iran and their production is very energy-intensive, hence probably not suited to Afghanistan.
On the other hand, stone tiles (made from marble or granite) are produced in Afghanistan.
This production could be leveraged, relying on the quantity of stone available in the country.

Other opportunities lie in the production and assembly of other, new material such as
insulation material and fireproof material. This is driven by the growing sophistication of the
market. Such materials could be mixed and packaged in Afghanistan rather than being fully
imported.

The construction sector is very competitive with a large number of construction companies
and a fragmented demand. It suffers from several gaps that could be opportunities for
development, notably in the procurement of construction material. The procurement of doors
and windows is at present relatively inefficient and could be improved through the creation
of facilities capable of producing large quantities of standard material.

In addition, although the mass-production of tiles seems unlikely, there could be an
opportunity for the production and export of small-scale, artistic tiles that could be exported
and sold at high margins in the European markets.
120
SWOT Services Related to Construction and Small Construction Materials
Strengths
Growing demand
Sophistication of market, driven by
international donors and new products
Proximity to market is key
Weaknesses
Lack of regulation and standards
Poor access to finance
Electricity shortage an issue for energy-
intensive production such as tile production
Fragmented demand often unaware of
minimum standards
Opportunities
Train a specialized workforce
Leverage price-sensitive demand by
producing industrial wood doors and
windows
Import raw material for and produce new,
more modern construction materials locally
Returnees require housing
Threats
Illegal use of expensive and rarefied Kunar
wood
Pakistani workforce willing to travel and live
in poor conditions for much higher wages in
Kabul
Cheap sub-standard construction materials
continuing to be imported from other
countries
Corruption

C. Introduction

The construction sector has expanded greatly since the end of the war in December 2001.
This growth was largely led by international donors efforts to promote the reconstruction of
the country and by new investments in both private and public sector.

A variety of players with specific roles form the construction sectors value chain:

Clients: They can be donors, NGOs, companies, returnees, refugees or just
individuals who desire to build a house.
Construction Material Providers: Companies (and sometimes individuals) that provide
the materials needed for the construction, including materials such as cement, steel,
glass, wood, PVC, aluminium, and even adobe. Currently, most of the construction
material is imported.
Construction Professionals: The professionals and companies who put together and
build the structures. They consist of architects, engineers, plumbers, electricians,
construction managers and labourers of a variety of trades such as masonry,
carpentry, steel fixing and metal work, electrical work, plumbing and painting. They
can also be grouped into different types of construction companies that offer some or
all of these capacities.

121
In addition to these, two main other types of actors have an important role to play:

The Government: It is generally in charge of setting standards, giving permits and
ensuring individuals and companies rights, including property rights.
The Financial Sector: Its key role is to provide an often large part of the financing
required to build a structure.

The purpose of this report is to look at the construction sector with an SME focus. Thus,
although there are many different and important actors in the sector, the study will centre
on a limited number of them, concentrating on sub-sectors that are particularly adapted to
SME-growth and that are very much in demand, be they part of the Construction Material
Providers or of the Construction Professionals.

This section will look at particular trades and materials provided by these two types of
players, focusing on:

Plumbing and electrical installation services (as part of Services Related to
Construction) and,
Tiles, doors and windows (as part of Small Construction Materials)

Plumbing and electrical installation services are traditionally SME activities. This is all the
more so the case in Afghanistan, where these trades are generally dominated by 1-4 people
outfits that are hired by the day or the job by house owners. Issues in these sub-sectors
particularly centre on the absence of standards and the lack of skilled labour that leads to
the extensive hiring of foreign workers.

Other trades such as masonry and painting are purposely not studied in the report as they
are likely to show similar, but less extreme, dynamics and issues than the ones identified in
plumbing and electrical wiring.

Tiles, windows and doors are products that are more likely to be made by SMEs than other
construction material such as cement or steel products, both of which require high capital
investment that is beyond traditional SME level. Issues with these materials are due to poor
distribution and again, lack of standards and low level of industrialisation.

It is important to note that many other key construction materials are imported and could be
produced in Afghanistan. Indeed, there is no glass or steel production in Afghanistan and
little cement. However, none of these are likely to be produced in SME types of structures.

To best understand the demand for housing, the construction process and the level of
satisfaction of house owners, over 150 interviews were conducted with international and
Afghan construction companies, vocational training professionals, tile producers, plumbers
and electricians and new house-owners, including a survey of house-owners that was
performed in January-February 2005 (house owners who recently ordered the building or the
renovation of their house) in Kabul. This survey will be referred to frequently in the report.

122
D. The Market

1. Sector Overview

a. The Construction Sector

Construction has been one of the main sectors driving Afghanistans economic growth and is
booming by all accounts, fuelled by the international donor aid, as well as by private and
public investment and the return of refugees and internally displaced people (IDPs) to their
places of origin and in particular to Kabul.

The construction boom has followed political events, being particularly strong since 2002,
following the end of the war and the reconstruction efforts.

According to AISA, the construction sector represented a total investment (at AISA) of at
least US $ 298 Mn by end of 2004, i.e. 55% of the investment in the top 4 investment
sectors (services, construction, industry and agri-business)
179
.

Although the importance of the construction sector is agreed upon by all, estimates as to the
size of the sector vary a great deal: the World Bank estimates that construction represented
US $ 280 Mn or 4% of Afghanistans GDP in 2003
180
(with a 35% share going to opium
sales), making it the third largest legal sector of the economy after agriculture (38% of the
GDP) and manufacturing (9%). According to AISA, construction output has gone from
approximately US $ 185 Mn in 2002/03 to US $ 235 Mn in 2003/04 and is estimated to grow
to around US $ 375 Mn in 2004/5, thus showing a growth of 26% from 2002/3 to 2003/4
and 60% from 2003/4 to 2004/5
181
.

However, the construction sectors revenues in total are likely to be even higher: for
instance, it is known that 3.5 Mn refugees and Internally Displaced People (IDP) returned
since the beginning of 2002
182
. If only a small proportion
183
of them had built new houses, it
would represent a construction market of approximately US $ 135 Mn per year
184
. This sum,
i.e. 48% of the World Banks estimate for the whole of construction, would account solely for
construction done for refugees, not including other key markets such as private houses,
commercial and industrial buildings, or the even larger infrastructure construction work
such as roads and dams mainly led by international companies.

The construction boom has indeed been an answer to a serious housing shortage that was in
part due to the destruction of a significant amount of houses in urban areas, and to the
return of millions of refugees to the cities. This unprecedented growth in construction

179
Investing in Afghanistan, AISA, 2004
180
Afghanistan State Building, Sustaining Growth, and Reducing Poverty Country Economic Report, World
Bank, September 2004
181
182
Another 1 million Afghan refugees are likely to return home by 2006, UN High Commissioner for Refugees,
17th February 2005
183
These calculations are based on a 3 year period and on assumptions of 70% of returning refugees getting no
new shelter at all, and the remaining 30% being divided in 80% getting shelters at a cost of approximately US
$1,000 per shelter and 20% building average houses at a cost of US $ 9,000 derived from the Altai Consulting /
UNDP new-home owner survey. US $ 1,000 is the approximate price paid by UNHCR for its shelters in 2004 (US $
22 Mn for 20,500 shelters). Hyp: 7 people per household.
184
Altai Consulting analysis, February 2005
123
continues, especially in Kabul and to a lesser extent in the other main cities, also fuelled by
the growing private sector and by money laundering from the drug trade.

However, the sectors growth is hindered by a number of issues:

Property rights are unclear and many properties have multiple owners, making it risky
for owners and construction companies to invest in land that could be taken from
them at any time.

There is a serious lack of infrastructures and regulations that are necessary to build
high-quality buildings: no construction standards, few if any laboratories for
analysis of soil, land conditions and construction material.

There is not enough high-quality construction material. Most construction material
needs to be imported, which can take time and be very expensive. Many of the
imports are of low quality and it is sometimes more costly to buy material produced
in Afghanistan than imported material.

Skilled labour is severely missing (mainly according to international construction
companies
185
), thus many companies need to hire foreign skilled workers and
sometimes they even go as far as hiring foreign unskilled labourers, particularly
Pakistani.

Corruption is named as an important issue by several construction company
managers who declare that, despite tenders and other such means to ensure
impartiality in the bidding process, projects are often not awarded based on merit but
on ability to wine and dine
186
.

Although construction is one of the few sectors that actually have some access to
financing (along with trade and agriculture), this access is still limited to the larger
companies. This is a particularly important issue in an activity where upfront costs
(machinery, material) tend to be high.

b. Construction Services Plumbing and Electrical
Installation

In general, both plumbers and electricians are trained as apprentices in both
plumbing/sanitary material and electrical equipment shops as there is very little formal
training for these professions or for any of the other construction-related professions as it
were
187
. Plumbers and electricians are often hired by the task, and sometimes by the day.
Only one-fourth of the interviewed Afghan companies had a full-time plumber in-house
188
.

There is a relatively large discrepancy between the opinions of international and Afghan
companies on the supply of plumbers and electricians: most of the international (mainly
American, Turkish, Indian and French) companies interviewed complained of the low skill
level of available plumbers and electricians, focusing specially on electricians. On the
contrary, only one-third of the interviewed Afghan companies claimed that it was hard to
find good plumbers in Afghanistan. Responses were similar for electricians.

185
Interviews with international construction companies, November 2004 February 2005
186
Interviews with construction companies, November 2004 February 2005
187
cf. Vocational Training Section
188
Interviews with Afghan construction companies, November 2004 February 2005
124
c. Small Construction Materials

The market for construction material is evolving significantly in Afghanistan. In rural areas,
the main materials used in construction are bricks and mud. In urban areas, there is a
growing use of cement and steel. The main materials in demand, in addition to these, are
wood, glass, aggregate and sand, gravel, and plumbing products
189
. There is a new trend
towards the use and import (as there is currently a limited production capacity in
Afghanistan) of more sophisticated materials, responding to a shifting demand, influenced by
the numerous Afghans who lived abroad
190
. These new materials include an increased
quantity and variety of tiles, more sophisticated plumbing and sanitary products, insulating
material, double-glazing, aluminium and PVC windows and doors as well as PVC tubes for
plumbing.

This growing sophistication has a positive impact in that it drives the market to modernize
itself. It also highlights the shortcomings of Afghan workers who are rarely trained to work
with these materials.

- Doors and Windows
Most of the doors and windows market is still concentrated in wood
191
, since there are few
companies in Afghanistan that are capable of producing large numbers (i.e. more than the
number required for a one-family household) of windows and doors. In addition, there is
little capacity or time dedicated to drying and treating wood in Afghanistan, therefore, it
often swells and cracks, creating problems with the finished product.

There is a trend towards new materials for windows and doors, mostly aluminium and PVC.

Most of the doors and windows are made from imported material as there is no glass, steel,
PVC or aluminium production in Afghanistan.

- Tiles
Tiles glazed or unglazed are increasingly used for floors and walls. They are mainly
imported from Iran.

2. Main Markets for Construction

There are five main types of construction markets in Afghanistan.

a. Large Infrastructure Projects

These projects roads, dams, electric infrastructure, irrigation canals have largely driven
the construction sector in the first post-war years. They are financed by large donors such as
the World Bank, the Asian Development Bank or USAID and are generally managed by large
international construction companies. This type of construction is very particular extremely
high financing requirements, little client input and feedback, different services and
construction materials (such as gravel and asphalt) than in the rest of the construction sector
and will not be looked at in detail in this report.

189
Understanding Markets in Afghanistan: A Case Study of the Market in Construction Materials, AREU, June 2004
190
72% of respondents lived abroad at some point. Altai Consulting / UNDP new home-owners survey, January
February 2005
191
2/3 of the interviewed Afghan construction companies said they used wood for their windows and doors. In
addition, 1/5 mentioned the use of PVC.
125
b. Housing Infrastructure Projects

This market includes large donor and government driven projects built for various forms of
housing purposes such as lots of houses for refugees, compounds, embassies, schools or
even hospitals. The companies that work on these projects are generally chosen through
open tenders. They tend to be international companies who know more about the tender
system and who have the means to build the structures based on the international
standards required by most of the largest donors. These companies sometimes subcontract
parts, or all, of the work to Afghan companies, a practice that is generally encouraged by the
donors as well as the Afghan government in order to build local capacity.

c. Industrialisation Projects and Commercial Buildings

These are largely private-sector led
projects including industrial buildings
such as factories and several storey
high buildings erected in cities to
house either offices or malls
192
. Most of
these projects are managed by a
number of Afghan construction
companies, and in some cases, are
even led by their owners who run the
construction themselves, initially hiring
an engineer to draw up the plans and
then the workers of the different
trades as they deem necessary.
International standards are generally
not known, thus not adopted,
especially in the case of commercial
and office buildings. This ignorance
can have serious consequences,
especially since Afghanistan is located in an earthquake-prone area.

192
Examples of these are the malls that are currently being built in Kabul.
Figure VI-1: Office Building in Kabul,
February 2005
126
d. Large Modern Residential Units

These are the large family houses that
are built or renovated by many of the
wealthier returnees in large urban
centres, especially Kabul. Their
construction is either managed by
Afghan companies, or by the owners
themselves, sometimes with the help
of a construction manager.

e. Smaller Traditional Family Units

These are smaller houses, either built or renovated (often meaning razing the remains of the
existing house and building a new one) by the owners themselves, sometimes with
traditional construction materials, such as bricks and mud, using traditional construction
methods. These represent the majority of houses in Afghanistan, especially in rural areas.
Given their rural location and their traditional type, these houses often do not have any
plumbing or electricity and use basic construction materials like mud. Thus they will not be
covered in this report.

Figure VI-2: Modern House in Kabul,
February 2005
127
E. The Construction Process

The differences between the construction process in Afghanistan and in industrialised
countries lie mainly in the access to finance and in the planning phase of the construction.
International Standards
Planning of
the
Construction
Selling the Building
Securing
Financing
Laying Foundations
Masonry
P
l
u
m
b
i
n
g

&

E
l
e
c
t
r
i
c
i
t
y
Planning of
the
Construction
Selling the building
Securing
Financing
Construction of First
Part/Story
P
l
u
m
b
i
n
g

&

E
l
e
c
t
r
i
c
i
t
y
Selling First Part/Story
Construction of Second
Part etc
In Afghanistan
Planning of
the
Construction
Selling the building
Securing
Financing
Hiring Engineer for
Planning
Hiring Masons /
Foundations and Main
Construction Work
Hiring Carpenters
Large Constructions Individual Constructions
Fittings and Painting
Fittings and Painting
First Part/Story
Hiring Plumbers
Hiring Electricians
Hiring Painters
Procuring the
Construction Material
P
r
o
c
u
r
e
m
e
n
t
P
r
o
c
u
r
e
m
e
n
t
P
r
o
c
u
r
e
m
e
n
t

Figure VI-3: Construction a Fragmented Process
193

1. International Standards Construction Practices

In industrialised countries, the first steps in the construction process generally involve the
securing of financing and the planning of the construction, including testing the site, the soil
and other elements that can have an impact on the construction and its durability. Most of
the times, the building is sold based solely on a blueprint, before it is actually built.

The planning of the construction has major impacts on the financing, the safety of the final
building and the cost-effective procurement of construction material (the amount of needed
material is carefully calculated and it can be bought in large quantities at the best prices).

Finally, the construction itself follows a strict timetable and established standards that guide
the work.

193
Interviews with Afghan and international companies and Altai Consulting / UNDP new home-owners survey,
Kabul, January February 2005
128
2. Large Constructions in Afghanistan

Large constructions, when ordered by international donors and investors, follow a very
similar pattern, given that the construction companies that are selected for these projects
are generally international companies, used to working with these methods and at
international standards. These companies are also hired because of their ability to bear the
cash flows issues that go with construction. The securing of financing is also greatly helped
by the participation of foreign players (donors who agree to pay the first 30% in advance
facilitate the financing).

For industrial and commercial buildings, the process is different and much more difficult:
contracts are smaller and attract lower profile construction companies, who have less access
to financing. The clients are less likely to pay in advance and often do not have the
necessary amount to start with. This leads to the need to build very quickly, to the detriment
of quality, in order to rent or sell parts of the building as soon as possible to solve cash-flow
issues and continue building the rest of the structure.

Several such buildings can be seen in
the various cities of Afghanistan,
especially in the case of commercial
buildings: when the first storey is built,
it is finished superficially and then
rented or sold to shopkeepers while the
construction continues with the second
storey. This process causes significant
waste, and results in lower quality of
construction, especially in plumbing
and electrical systems. Indeed,
plumbers and electricians cannot plan
for the whole building and all its
storeys, thus, when the building is
finally completed (something that can
take years, depending on capacity to
sell existing parts and secure
financing), a number of issues appear.
For instance, providing water to the top floors can sometimes be very difficult.

3. Private Housing Unit Construction in Afghanistan

The main differences between Afghan and modern processes can be seen in the building of
private housing units.

The first step in the construction process is also the securing of financing but, given the lack
of access to formal financing, this generally takes the form of the home owner adding up his
savings and funding from his friends and family (mostly relatives who live abroad) with the
hope that this will suffice. Often, this is not the case and there are more or less lengthy
pauses in the construction while the owner accumulates enough money to re-launch the
process.

Figure VI-4: Building Erected Storey by Storey,
129
After securing the financing, the owner organizes the planning of the construction. Few
home-owners deal with construction companies: only 15% of the respondents to the new
home-owner survey declared that they had hired a construction company to do all of the
work
194
. They do not know or trust construction companies and, more importantly, they think
they can save money by managing the construction themselves. 90% of the owners admit to
having done planning of some sort (thus, a relatively elevated percentage of 10% launched
the construction without any form of planning). Of these, 33% did the planning themselves,
21% were helped by a friend or family member who organized the construction and finally,
28% hired an independent engineer solely for the planning.

After the planning phase is complete, the owners generally hire the different skilled and
unskilled labourers as they are needed, often by the day. 80% of the interviewees hired
individual workers for each part of the construction and 5% hired a construction company for
the work and managed the rest themselves.

Workers are found at the bazaar
(32%), through friends who either
recommend them from previous
experience or because they own a
construction company (41%) and in
the street (19%)
195
.

Unskilled labour is found in the street.
Plumbers, on the other hand, are found
in sanitary/plumbing shops where a
client will often ask for the plumbing
installation when buying the
sanitary/plumbing material. Plumbers
are generally not paid by the day but
for each installed bathroom or kitchen.

Electricians are more likely to be found in shops, at the bazaar. They are also not paid by the
day but by the number of electrical sockets and outlets they install in a house, thus giving
them an incentive to work faster.

In these types of constructions, the procurement of construction material is extremely
fragmented, mainly because of the owners financial limitations and because of poor
planning. Since the owners decide to manage the construction, most of them also control the
procurement: 88% of them declare that they buy all of the construction material themselves.
This is mainly because they think that they can get better prices than the construction
company or the workers they hire could get
196
. They also claim to know exactly how much
material is needed and to buy it based on this knowledge. Their general ignorance regarding
construction techniques, however, often leads them to buy too much of certain materials, for
instance, using too much steel in the foundations of a house, thus wasting precious
resources
197
.

194
Altai Consulting / UNDP new home-owners survey, Kabul, January February 2005
195
The street refers to certain areas (often in front of local landmarks like mosques) that are known by most
people to be places where workers can be hired by the day, thus resembling marketplaces where supply
(unemployed labourers) meets the demand (potential employers).
196
49% of interviewees thought this.
197
Interviews with Afghan and international companies
Figure VI-5: Day Construction Workers Waiting
to be Hired, Kabul, February 2005
130
The impact of cash-flow issues can be seen in the fact that most owners (82%) buy
construction material not in bulk, which would help them save money, but little by little.
The main reason for this, according to them, is that they do not have enough money to buy
all of the material at once. Another important reason is that they do not have enough space
to store all of the material. In most cases (88%), the material is bought at the bazaar, where
clients generally create relationships with a limited number of shopkeepers to which they
return regularly.

The process is largely driven first by price and second by quality, both in the management of
the construction and in the procurement of the material. This does not mean that quality is
not important but rather reflects a short-term mindset and an unawareness of standards and
possible security issues linked to the trade-off between quality and price.

Figure VI-6: Construction Definition of Scope

F. Supply

1. Construction Professionals

a. Segmentation

The supply of construction professionals is divided between the five markets described above
(see Section D.2 Main Markets for Construction). Indeed, varying markets are addressed
by different types of construction companies.

Excluding the large infrastructure market, players can be divided into three main categories:
international companies that supply the housing infrastructure market and, to a certain
extent, the growing commercial and industrial building market; Afghan companies and finally
individuals who are hired for both the modern and the traditional private housing.
131

Traditional
Private Housing
Modern Private
Housing
Housing
Infrastructure
Smaller structures,
generally made
with traditional
methods and
materials
Example: average
to lower income
houses
Private houses,
generally urban
Example: larger
than average
modern houses
Housing
infrastructure
constructions
Example: schools,
hospitals, refugee
housing etc.
International
construction
companies: mostly
Turkish and
American
Examples:
- Louis Berger
- TEPE
Description
Type of
Companies /
Supply
Afghan companies
- 165 ABA (Afghan
Builders
Association)
members
- Many others exist
Local labour hired
by the owner
Concentration
of Supply
20 to 100 main
companies
Approx. 360
registered at AISA,
1200 - 2000
according to the
ABA.
Multitude of
individual workers
Multitude of
individual workers
Mostly local day-
workers, hired at
the bazaar or in
the street by the
house owners
Commercial and
Industrial
Buildings
Large
constructions or
series of
constructions
Example: factories,
office buildings,
commercial
centres, hotels
Smaller
international firms
and Afghan
companies:
Examples:
- ARC
- Large Indian and
Turkish firms
100 to 500 main
companies

Figure VI-7: Map of Afghan Construction Market Segments and Supply
198, 199

b. International Construction Companies

The international construction companies mostly respond to the largely donor-driven demand
for all types of infrastructure. To a lesser extent, they also work on a growing sector, which
includes commercial and industrial structures mostly funded by private investment.

According to AISA
200
, there are approximately 80 foreign companies signed up at AISA. 33 of
these are Turkish, 10 are American and 15 are joint ventures between foreign and Afghan
companies. In addition, there are a number of other companies that started working in
Afghanistan between end of 2001 and the creation of AISA in September 2003.

The larger international companies are mostly American, Turkish and Indian. They generally
work in the housing infrastructure market (and the large infrastructure market that is out of
the scope of this report). The projects in this market are very large and the level of client
requirements is high: international standards, financial means, procurement ability, time
management, speed of construction and even capacity to apply for tenders are needed, thus
excluding many national players.

198
199
360 Afghan companies (and 80 foreign companies) had signed up at AISA as of end of 2004. The ABA (Afghan
Builders Association) estimated the number of existing Afghan companies to be between 1,200 and 2,000 in
2004.
200
AISA, December 2004
132
This results in a very concentrated supply of companies who know how to work within the
system and who have the resources to do so. Among other reasons, international companies
have an advantage in that they have access to credit outside Afghanistan and can spread the
risk of their investments over a number of countries.

Given the sizes of the contracts (and some of the clients requirements for local sourcing),
many of these international companies sub-contract at least part of their work to Afghan
companies or to other, smaller international companies.

c. Afghan Construction Companies

There is a plethora of Afghan construction companies of varying sizes, resources and
capacities. Some of them have been created by returnees who have a knowledge of
international building standards and who have the management and educational capacity to
play the tender game.

Other companies are much less sophisticated. Anyone who wants to invest some money
tends to do it in the construction sector, whose boom is evident in every street in the larger
cities. As one construction company owner said: I have a construction company. My brother
has a construction company. My uncle also does. We have at least 4 construction companies
in the family!

At least 360 Afghan companies are registered at AISA
201
and estimations by the Afghan
Builders Association actually place the number of Afghan companies between 1200 and
2000. The Afghan Builders Association (ABA) counts over 160 members.

Most Afghan companies are based in Kabul, where a large part of the construction market
and resources allocated to construction are.

The rest of the construction companies can be found in the other major cities but to a lesser
extent, as the construction market in these cities has evolved very differently from the
market in Kabul, largely because of security concerns. For instance, in Jalalabad, according
to several stakeholders
202
, there are approximately 20 construction companies, all of them
local and with links to Pakistani companies. Many of these are still registered as NGOs and
construction work in the area is still very much conducted by NGOs rather than by private
firms.

According to interviewees in Jalalabad and Mazar-e-Sharif, the markets in these cities tend to
be very regional (except for the donor-led projects that hire the same large international
players across the country) and dominated by local construction firms.

In summary, construction companies that address the building of commercial, industrial or
private buildings are numerous, especially in Kabul, and are difficult to differentiate. No
standards or certification really exist to assess their quality. This fragmentation of the market
leads to intense competition, not based on quality but on prices.

201
AISA, January 2005
202
Interviews with construction companies in Jalalabad, November 2004
133
Portrait of the Average Afghan Construction Company
203
:

There is an extensive variety of construction companies, varying in size, addressed market,
quality standards and investment. As it was previously mentioned, anyone can start a
construction company if they have the financial resources to do so. There are some similar
traits, however, in the companies that are registered at AISA. The following portrait of an
average firm can be established:

The firm was created around the fall of the Taliban or after (the average number of years in
existence is 4 years, with only a small minority of companies being over 10 years old). Its
turnover is US $ 1 Mn per year. The firm works on houses, offices and commercial buildings.
It has approximately 45 permanent employees, including a few specialists in different trades,
but hires many more depending on projects, finding daily workers at the bazaar when
needed. The firm tends to hire foreign workers
204
and has no permanent plumbers
205
on
staff. It prefers to hire plumbers at the bazaar or to subcontract the plumbing parts of the
work to plumbing shops that are paid by the water installation (for instance, by the
bathroom or the kitchen). It tends to sub-contract electricity much less as this is considered
a more technical task.

Although the manager of the firm claims that it is possible to find good specialized labour
(and especially plumbers) in Afghanistan, he would be willing to pay more for skilled labour.

d. Individual Players

As described in the Construction Process section, a large part of construction in
Afghanistan (mostly private housing units, both modern and traditional) is still done in a
traditional way: first, an engineer
206
is hired to design the future construction. Then, the
necessary masons, plumbers, electricians, carpenters and painters are hired, step-by-step.
They can be found either at the bazaar or, for the less skilled labour, at specific places
(generally known landmarks, like Mosques) where they wait every morning for work and can
be hired by the day.

The supply for construction professionals is very fragmented, especially in such trades as
masonry and painting, all the more so because anyone can advertise himself in any of these
trades due to the absence of recognized diplomas and the general lack of knowledge of the
clients. There is, therefore, very little differentiation possible among players, which leads to a
competition based mainly on price: the unique nature of the business (private individuals
generally only get one house built) and the lack of government regulation do not create any
incentive for the workers and companies to focus on quality.

This is a particularly sensitive issue when it comes to trades like plumbing and electrical
wiring that require more technical and theoretical know-how than most of the other trades.

203
From interviews with Afghan companies in Kabul, November 2004 February 2005
204
More than half of the interviewed companies claimed to hire foreign labour.
205
Only one fourth of the interviewed companies had plumbers in their staff.
206
The engineer will advertise himself as an engineer but there is no way for the consumer / home owner to
verify that this is really the case.
134
2. Supply of Plumbers and Electricians

The supply for plumbers and electricians is slightly different than the general supply for
construction workers, because of the more technical nature of both plumbing and electrical
installation. Despite a relatively fragmented supply, prices are very high, mostly because
there are few professionally trained specialists.

Plumbers

In Kabul, the wages of plumbers are particularly high: they range from US $ 10 to US $ 20
per day (equivalent to approximately US $ 200 to US $ 500 per month), with an average of
US $ 14 per day
207
. These prices make the market particularly appealing to foreign workers,
especially Pakistanis who are attracted to Kabul by the abundance of work (at home, they
are not always able to work every day), the high wages, the salaries paid in US dollars cash.
In comparison, daily wages for plumbers in Pakistan range from US $ 2
208
to US $ 8
209
in
Peshawar.
$25
$10
$2
$8
$20
$40
$0
$10
$20
$30
$40
$50
Turkish Plumbers in
Kabul
Afghan Plumbers in
Kabul
Pakistani Plumbers in
Pakistan
Max
Min
$14

Figure VI-8: Daily Wages of Plumbers in Afghanistan and Pakistan (US $ /day),
Kabul and Pakistan, December 2004
210

207
Interviews with plumbers and construction companies, Kabul, November 2004 February 2005
208
Afghanistan: It's Boom Time for Pakistani Construction Workers, Inter Press Service News Agency, December
2004
209
Interviews, Peshawar, Pakistan, December 2004
210
Salaries of Turkish plumbers range from US $ 600 to US $ 1000 per month (with, in addition, costs of food,
accommodation and transportation), translated here into daily wages for comparisons sake.
135
Most plumbers work in shops that sell
sanitary fixings and plumbing material.
There are approximately 80 such shops
in a specialized area in Kabul. Each
shop has from 1 to 7 employees: one
or two plumbers and many apprentices.
When private customers buy plumbing
material, they often also hire the
plumbers in the shop to install it. These
plumbers have no theoretical or formal
training: they most often have been
apprentices in a shop and after several
years of training, they decide to start
their own business. Because of this lack
of formal training, the skills of
plumbers, in general, are very low.

This seems to be an issue mainly for
the foreign companies who repeatedly complain about how impossible it is to find good
plumbers in Afghanistan. The interviewed Afghan companies, however, do not seem to find
the quality of plumbing such an issue. This may be in part due to the fact that they are not
used to working with higher quality standards the way the international companies are and
to what one of the foreign interviewees called the lack of a plumbing culture.

Many of the international companies thus hire
foreign skilled workers, usually from their
countries of origin for the Turkish and the
Indian companies and from other countries for
the French or American companies, who often
hire Filipinos.

Many Pakistani workers are found on
construction sites. They are often unskilled
workers attracted by the higher salaries in
Kabul. In Jalalabad, they tend to be more
skilled workers/specialists.

It must be noted that the very high salaries described above are found only in Kabul.
Indeed, although the average daily wage for a plumber in Kabul seems to be of
approximately US $ 14 per day, in other main cities, it reaches a maximum of US $ 11, thus
confirming that demand is much higher in Kabul.

Figure VI-9: Plumber Shop in Kabul,
February 2005
Even if Turkish workers get higher
wages and we also have to pay for
accommodation, they are cheaper than
Afghans: recently, we built a series of
houses. The bathrooms were installed
by Afghan plumbers. They were so bad
that we had to replace them entirely.
This was very expensive and, in
addition, we lost a lot of prestige.

- Turkish Company Manager in Kabul
136
$10
$9
$3
$5
$6
$9
$11
$5
$20
$0
$10
$20
$30
Kabul Mazar-e-
Sharif
Herat Jalalabad Kandahar
Max
Min
$14

Figure VI-10: Plumbers Wages in 5 Main Cities, (US $ per day), February 2005
211

Even the companies that claim that they can find good plumbers locally generally admit that
it is much harder, not to say impossible, to find plumbers capable of using new materials or
dealing with modern techniques: it is hard to find people capable of installing water heaters
or sanitary systems in multilevel buildings or capable of working with new PVC pipes. Even
for the best plumbers, who were either trained in Pakistan or before the war, there is a
serious need for an upgrade in capacity.

In addition to these problems, there is the issue of lack of certification that could prove to
potential hirers the real level of the workers.

Electricians

The dynamics of the supply of electricians are very similar to the ones of the supply for
plumbers: if anything, the problems are exacerbated in the case of electricians, who need to
have more theoretical knowledge than plumbers, such as reading and writing.

Electricians can generally be found in shops that sell electrical material. Most of them have
learned their trade as apprentices. A minority learned the profession in Pakistan or Iran, or in
some of the few Afghan high-schools and universities that offer electricity courses. Most of
the latter were trained under the communist regime. Thus, the supply of fully trained
electricians is largely exceeded by the demand. The consequence is the extremely high
wages for electricians (by Afghan standards), even higher than the wages commanded by
plumbers: in Kabul, the daily wage of an electrician ranges from US $ 10 to 21 per day, with
an average at US $ 15 per day
212
.

The market for electricians is very different in other cities, reflecting the fact that most of the
construction especially the more sophisticated and demanding one takes place in Kabul:
in Herat, for example, daily wages for electricians at the bazaar are much lower:
approximately 3 US $ per day
213
.

211
Interviews with plumbers and electricians in 5 main cities, November 2004 February 2005
212
Interviews with electricians, Kabul, November 2004 February 2005. NB: all these wages are calculated in
winter, a notoriously low part of the year for construction. In summer, these figures are likely to be even higher.
213
Interviews with electricians in Herat
137
$10
$3
$9
$7
$21
$0
$10
$20
$30
Kabul Herat Jalalabad Kandahar
Max
Min
$15

Figure VI-11: Electricians Wages in Four Main Cities, (US $ per day), February 2005
214

Again, Afghan companies are generally satisfied with the quality they get but most of the
international companies are extremely frustrated with the quality of electric installations,
even more than with the quality of plumbing. Most international companies bring their own
plumbers, many Turkish and Filipinos. Notable gaps in the supply include more complex
forms of electric installations like the ones required in multilevel or industrial buildings (ex.
factories), including elevators.

The industry, and the supply of electricians, however, seems to be evolving, pushed along by
the evolution of related industries and goods, such as electrical material: indeed, new types
of materials such as PVC and methods that include sheathing the electrical wires
215

encourage Afghan electricians to upgrade their skills. In addition, returnees especially
those trained in Iran tend to have a good reputation among construction companies.

Summary: Issues with Qualified Workforce

Regarding both plumbers and electricians, there is an excess demand for qualified workers.
This leads to high prices that attract foreign workers, both qualified and unqualified. The
supply is very fragmented (little shops with 1 to 4 workers) and hard to differentiate due to
the lack of standards and certifications.

The shortage of qualified plumbers and electricians could start to be solved through technical
schools and vocational training centres, both of which exist but in insufficient quantities. This
will be discussed further in Section H Vocational Training.

214
Interviews in 4 main cities, November 2004 February 2005
215
NB: traditional electrical installations in Afghanistan are done on (rather than in) the walls. Sheathing and
including the wires in the walls are considered new techniques.
138

3. Supply of Windows and Doors

The traditional material for windows and doors is wood, but, in the last few years, the
market has quickly evolved, with the arrival of new, often more solid and sometimes cheaper
materials such as steel, aluminium and PVC.

Windows made from any of the four materials can now be found in the Afghan market.
Therefore, few construction companies still import them, except when they need large
numbers, as lack of industrialisation in the production of doors and windows is still a big
issue.

An important and often over-looked issue with any kind of windows and doors is assembly,
i.e. how to put together the windows and doors and the masonry or structure of the
building. Often, the materials needed for this step are hard to find (solid joints, foam or glue)
and the assembly is done with whatever is available and with little long-term vision. Thus,
windows fall off buildings after some time or they become unhinged.

Also regarding the installation of windows and doors, it must be noted that different types of
windows fit with certain construction types: for instance, an aluminium window could hardly
be installed in a mud house.
$19
$24
$72
$80
$14
$19
$70
$67
0
25
50
75
100
Steel Wood Aluminium PVC
Doors
Windows

Figure VI-12: Prices of Doors and Windows, (US $ / sq meter), Kabul, February 2005
216

Wood: Many companies, mostly Afghan, still use wood
217
for windows and doors. It generally
comes from the east of Afghanistan (generally Kunar and Nuristan), Russia or Pakistan
(some Afghan wood is also smuggled to Pakistan, and then re-exported to Afghanistan as
Pakistani
218
). Generally, Russian wood is reported to be of better quality, therefore more
expensive than Pakistani wood. There are large variations in the quality of the wood that can
be found in the bazaar and it is often not dried properly.

Wood is very popular, among other reasons, because it is one of the cheapest materials
available: in Kabul, a wood door costs approximately US $ 24 per square meter and a wood

216
Interviews, Kabul, February 2005
217
Interviews with Afghan construction companies: three-fourths of the companies reported they used wood for
their windows and doors
218
139
window US $ 19 per square meter (compared to US $ 72 per square meter for an aluminium
door or US $ 80 for a PVC door).

Clients have different approaches to
the supply of wood doors and
windows: private customers tend to
buy the wood at the wood market and
to hand it to a carpenter who is paid
solely for his labour. Afghan
construction companies generally also
buy the wood and hire private
carpenters
219
. A minority of companies
have in-house carpenters and
machinery and, manufacture the wood
doors and windows themselves.

For instance, an interviewed
construction company in Jalalabad has
decided to start a factory to
manufacture wood doors, windows and
furniture (i.e. cupboards, closets), benefiting from wood logged in Kunar. The factory will
employ approximately 50 people, with the main carpenters coming from Pakistan.
Interestingly, with this structure, they expect to be able to make the equivalent of only one
8-bedroom house per month (i.e. 12 to 16 doors and 25 to 30 windows)
220
.

There are issues with wood that partly explain the current shift to other materials:

The poor treatment makes for windows
and doors that do not resist humidity and
are not long-lasting;

There is virtually no capacity to produce
on a large scale in Afghanistan;

There are few standards therefore it is
hard not to say impossible to
manufacture doors and windows in
advance, hence everything has to be
tailor-made, and;

There is little qualified labour capable of making windows and doors at international
standards.

Despite these issues, wood remains very popular. The material is a natural isolator for both
sound and heat. Also, aesthetically, it is considered superior to all the other materials.

Steel: Steel is the cheapest material for doors and windows. In Kabul, a steel door costs US
$ 19 per square meter and a window US $ 14 per square meter. Steel is imported from

219
Interviews with Afghan construction companies: more than half of the interviewed companies reported they
buy wood and hire carpenters to make their doors and windows.
220
Interview with a construction company, Jalalabad, December 2004
Figure VI-13: Carpenter Shop in Jalalabad,
December 2004
We had to make 30 houses for the
American army in a district capital. We
could not find any carpenter who was
capable of making really square
windows and doors so we had to
replace them all with aluminium ones.

- American Company Manager in Kabul
140
Russia, Pakistan and increasingly, China. Chinese steel is the cheapest but also has the
lowest quality, as opposed to Russian steel
221
.

Traders import the steel and then make the windows and doors, based on demand. Steel did
not come across in the interviews as a commonly used material thus seeming to have a very
low share of business. This could be explained by the fact that its price is very similar to the
price of wood and it has neither the traditional appeal of wood nor the advantages (quality
and aesthetics) of PVC or aluminium. In addition, steel has another deficiency which is that it
conducts both sound and heat (contrary to wood or PVC).

Aluminium: Aluminium is increasingly used. It is solid, the windows and doors are made with
machines, and are more standardized than most wood windows and doors, more
professional and better suited to the growing number of commercial and office buildings.
Also, aluminium windows come in both single and double-glazing, as opposed to wood
windows.

Aluminium has penetrated the market extremely quickly. One year ago, certain international
construction companies in Kabul were still importing their aluminium windows from Turkey.
Currently, there are approximately 6 to 10 companies in Kabul alone importing aluminium
from the UAE, Pakistan or Turkey and representing between US $ 1 Mn and US $ 4 Mn of
revenue per year. These companies generally import the aluminium and do the assembling
in Afghanistan, needing a basic machine to cut the aluminium and metalworkers to put the
windows together. According to them, a window can be made in one day.

Aluminium products tend to cater to a relatively sophisticated market that can afford to pay
three times the price of wood
222
and that is looking for benefits such as double or triple-
glazing or sound-proof windows. The customers are rarely private owners but rather large
construction companies, who generally work for international donors. Aluminium is also
specially suited to curtain-wall buildings.

Issues with aluminium are mainly its price and the fact that it sweats, i.e. moisture tends
to condensate on the material in cold weather, giving an aesthetically displeasing impression.
In addition, like steel, it conducts heat. Therefore, companies who are in the upper part of
the market and can afford aluminium could be willing to pay a premium for PVC to avoid
this.

PVC: PVC is the most recent arrival in the market. It is also the most expensive: doors cost
approximately US $ 80 per square meter and windows US $ 70 per square meter. Few
companies import it, generally from Turkey or Pakistan but it is growing fast and generally
favoured by the international construction companies. The growth of PVC has been
particularly fuelled by the extended building of USAID-funded clinics where PVC was
required. Indeed, PVC is considered a cleaner material, which is easier to wash and
specially to spray-clean.

Like aluminium, PVC addresses a sophisticated market that looks for superior quality and is
not price-sensitive. However, aesthetically, it is well below wood and it is unlikely to be used
in private houses.

221
222
Per square meter for a door
141
4. Supply of Tiles

There are three main types of tiles: ceramic (glazed) tiles, quarry type tiles (made from a
mixture of clays, porous and irregular in shape, mostly used for floors) and stone tiles (made
of marble or granite). Tiles can also be differentiated by their use (floor tiles vs. wall tiles) or
by the way they are produced (industrial vs. traditional).

In Afghanistan, tiles are generally
differentiated more by origin than by
type. Most tiles in the Afghan market are
from Iran: for instance, in the
construction survey, a vast majority of
the respondents who had bought tiles
(47 out of 57), had bought Iranian tiles.
Most tile and bathroom equipment
shops sell Iranian tiles. Indeed, Iran is a
large exporter of tiles. For instance, in
2003, it was the worlds thirteenth
exporter of glazed ceramic tiles smaller
than 7 cm and Afghanistan was its
fourth largest importer, with 7% of
Irans imports
223
. Iranian exports to
Afghanistan are concentrated among 6
to 7 producers.

Other origins include tiles from Pakistan, the UAE or China, although the latter are
particularly known for their poor quality. Tile producers generally either have exclusive
agents in Afghanistan or sell to a variety of Afghan importers who come and buy the
products at the factory in Iran.

In Kabul, Iranian tiles are found in wholesalers/retailers shops for approximately US $
6,00
224
per square meter, compared to around US $ 5,50 for Chinese tiles and US $ 6,00 to
7,00 for tiles from Pakistan or Dubai. Tiles still tend to be a luxury item, mostly sold and
used in Kabul.

Quality issues with the tiles that can be found in Afghanistan are mostly cited by
international construction companies. They claim that the Iranian tiles that are exported to
Afghanistan are often leftovers or unsold products from Iran, therefore they can only be
found in small quantities and in irregular shipments. This makes planning complicated for
clients and construction companies who have trouble finding large quantities and cannot
expect to find the same model in a store several times in a row.

Tile Production

There is no known Afghan production of glazed tiles. Glazed tiles are made mostly of clay
(around 90% of the raw materials), paint and chemicals, thus mostly materials that can be
found in Afghanistan. However, the production of glazed tiles is extremely power-intensive,
requiring heating (as high as 1000 C) to bake the clay and then to glaze the tiles after they

223
International Trade Centre UNCTAD/WTO, trade data, 2003
224
Including transportation costs of approximately US $ 2 per square meter for Iranian, Chinese and UAE tiles,
and US $1 per square meter for Pakistani tiles
Figure VI-14: Tile Market, Kabul, February 2005
142
have been coloured, thus making it an ideal industry for Iran, where petrol is very low-
priced. In Afghanistan, where electricity supply is irregular and petrol expensive, the
production of glazed tiles is unlikely to be profitable in the short to medium term.

In addition, the machines used in the production of glazed tiles tend to be expensive: a
pressing machine can cost approximately US $ 400,000. A baking machine can cost as much
as US $ 1,300,000
225
.

There is some Afghan production of the other types of tiles described above. In Mazar-e-
Sharif, for instance, there are two main known producers of cement tiles.

One of them, Navin Mosaic, has been active for 13 years. They make tiles for walkways and
floors, from cement, gravel and stone. They buy all the raw material in Afghanistan
(although cement is generally imported) and, with 16 workers, have a production capacity of
1500 tiles per day. The distribution is very simple as all the tiles are sold in front of the
factory. They wish to expand their facilities but they lack the financing to do so.

Tile production (especially marble and granite tiles) used to be important in Afghanistan and
still exists, generally in small ventures, in different parts of the country, basing itself on the
large quantity of stone available.

There is also some production of decorative, small-scale tiles, mostly around Herat and
Kabul.

Case Study #1: Darlaman Decorative Tiles Factory

The Darlaman (Kabul) tile factory produces decorative, hand-made tiles that are sold to
foreign buyers, mostly in Europe and America.

The factory has 70 employees. The tiles are 7 inches x 7 inches. They are made from clay
that is found around Kabul, and coloured with natural and chemical colourings from India
that can be found at the bazaar. The tiles are baked in a gas oven, thus avoiding the usual
electricity problem in Afghanistan. At full capacity, the factory produces 10,000 tiles per
month. Labour represents more than 50% of the factorys costs.

The tiles cost approximately US $ 1 per piece. They are sold abroad, generally to interior
designers for US $ 2 to 3 a piece. The factorys owner also sells furniture and carpets. Tiles
are presented as complements to these products and address a demand in upper class
markets in Europe and America for ethnic, traditional decoration. In the US and Europe,
these types of tiles can be sold for as much as US $ 8-9 or even US $ 20 a piece. It is
estimated that this venture is profitable.

5. Opportunities in Supply

225
Interviews with managers of tile producing companies in Iran, February 2005
143

There are significant deficiencies in the current supply of skilled workers. This supply could
be improved, trained and upgraded in order to better satisfy a growing demand. A method
of achieving this, via standardized vocational training, is further explained in the Vocational
Training section.

Opportunities related to doors and windows are mostly demand-driven and will be discussed
in the Demand section.

Tiles, on the other hand can represent an opportunity on the supply side. Although industrial
production of glazed tiles is unlikely to be feasible in the short- to medium- term in
Afghanistan (unless a way is found to access large amounts of inexpensive and regular
heating). Decorative, traditional tiles could be produced in relatively small structures, with
little energy and little capital investment, as they are mostly hand-made. They could be
exported and sold in Europe or America, where they could target high-end markets, for high
prices, making this a potentially profitable business.

In addition, as mentioned earlier, the construction market in Afghanistan has entered a
virtuous circle of sorts where an increasing sophistication is being driven by supply, i.e. by
the entrance in the market of new, more modern materials and techniques. As both demand
for housing and income rise, demand for more sophisticated products also rises as does the
possibility to produce some of these products in Afghanistan. For instance, some companies
import insulation and fireproof materials. Some of these require the mixing of chemicals. The
mixing and packaging part of the production could be done in Afghanistan, as it is relatively
simple, not very capital intensive and does not require much electricity, in the same way that
aluminium and PVC are imported and the assembling of the windows and doors is done
locally.

G. Demand

1. Demand for Construction

As previously mentioned, demand for construction is varied. In a city like Kabul, where many
houses were destroyed during the war, the demand includes a significant amount of
reconstruction.

Also, given the number of refugees who come back to Kabul (31% of returnees in 2004, or
over 200,000 people
226
), many of the new houses or shelters in many of these cases will
need to cater to them.

A large part of the demand, across the country, comes from the international donor
organisations that pay for all types of infrastructure (shelters for refugees, schools, hospitals,
clinics and military structures).

Finally, it is a positive social sign to buy a house for ones family when one can afford it.
Often, rather than getting an existing house, people will prefer to order the construction of a
new house: for instance, 68% of the respondents in the new home-owner survey declared
that they ordered the building of a new house rather than buying an existing one because

226
Afghan Operation, UNHCR, June 2004
144
they wanted to decide what their house would look like. Other reasons for building a new
house included the impression that it was cheaper to do this than to buy an existing one, the
social signal sent by building a new house and the notion that there are no good houses
available
227
.

a. Profile of the New Home-Owners

The new home-owner survey was led in Kabul. It highlights the difference between two main
types of construction: the construction of new houses and the renovation of existing houses,
although the latter can also include, in some cases, the razing of the remains of an existing
house and the re-building of a house, using the foundations of the previous one.

The average age of the interviewees is 38 years old. They are generally married and have
children. They build a new home to house more than their immediate family, i.e. an average
of 9 people. The average house consists of 5 rooms.

b. Financing of New Houses

The amount spent on the house depends on whether the house is entirely built from scratch
or only renovated: indeed, in the survey, the median amount spent on the construction of a
new house was US $ 19,000
228
(with a minimum spent of US $ 2,000 and a maximum of US
$ 188,000), while the median amount spent on the renovation of an existing house was US $
6,900
229
. It is to be noted that the difference between the amounts paid for construction and
the amounts paid for renovation is not as high as one could expect. This is due to the fact
that some of the renovation projects included razing the house and re-building it from the
initial foundations, thus implying a higher cost than just renovation.

The median monthly income of the interviewed new home-owners was approximately US $
320. When asked where they got the necessary funds, 59% of them responded that they
had them in their possession. This is due to the fact that many people have savings from
both the war and the post-war period that they use to build their house. Also, it is thought
that much illicit money is invested in these houses.

The limitation represented by the poor access to finance is circumvented in different ways:
through savings, through family especially thanks to relatives living abroad and their
remittances and friends. Indeed, none of the interviewees went to a bank to borrow
money: either they had the money or their friends (16%) and family (19%) helped them.
Building a house is an issue the whole family partakes in. As one interviewee mentioned, no
one in Afghanistan buys a house based only on salary. In addition, as mentioned earlier,
illicit trade probably represents an important source of financing. Finally, it appears that
there is a savings mentality, as people plan years in advance before getting their house.
This is probably, at least partially, a consequence of the lack of financial structures.

227
Altai Consulting / UNDP new home-owners survey, January February 2005
228
Ibid. The average amount is US $ 35,000. The median is preferred when talking about amount spent because
it is more representative than the average, which is upwardly skewed because of a few very large houses /
amounts spent. Indeed, the minimum amount spent is US $ 2,000 but the maximum amount is US $ 188,000.
229
Altai Consulting / UNDP new home-owners survey, January February 2005. The average amount is US $
9,000, with a minimum amount of US $ 1,900 and a maximum of US $ 36,000.
145

Figure VI-15: Amounts Paid for Construction and Renovation of Houses and Sources of
Financing (US $ and % of respondents), Kabul, February 2005
230

Financing construction, however, is not all solved through savings and connections. 55% of
respondents had to stop the construction at some point because of financial problems.

c. Requirements and Satisfaction Level

The survey underlines the fact that Afghan customers/ home-owners do not tend to trust
construction companies. They take control of the construction, by either doing the planning
for the house themselves or hiring an engineer to do it and then hiring both the skilled and
the unskilled labour, generally on a daily basis.

Afghan new home-owners expectations are ambivalent: on one hand, they are demanding
regarding certain issues (85% of them had clear preferences in terms of windows and doors)
but, on the other hand they seem to be easily satisfied: 76% of them claimed they were
happy with their new house. Given what has been mentioned previously about the lack of
skilled labour and the nearly inexistent construction standards in the country, this seems
surprising but it is largely explained by the price-sensitiveness of the market: for instance,
most (88%) interviewees bought the construction material themselves (rather than letting a
construction company do so) because they thought they could get a better price. The high
satisfaction level can also be explained by an attempt at positive reinforcement on the part
of the home-owners who are very much involved in the construction of their house.

Price is a recurring concern for the home-owners. Most people are not aware of the
existence of construction standards. This unawareness is compounded by the fact that most
people (85%) manage at least part of the construction, without having any relevant
experience (only 3% of interviewees were engineers) or training.

The demand thus appears on the whole to be unsophisticated and price sensitive. In
addition, its fragmentation is such that construction companies and workers have little
incentive to raise the quality of their work when instead they can go from project to project.

230

19%
16%
6%
59%
0%
25%
50%
75%
100%
Source of Financing
Savings Family Friends Other
$19 000
$6 900
$0
$10 000
$20 000
$30 000
$40 000
Building New Renovating
Median Average
$ 9 000
$ 35 000
146

d. Concentration of Buying the International Donor
Community

The profile of customers in the international donor community is very different: they consist
of a small, concentrated number of donors and NGOs (including among others, USAID,
different UN organisations, the American army and ISAF) who spend much higher amounts
of money and have very different concerns: price is not so much of an issue, quality is vital
and international generally American or European standards are to be followed during
the construction.

Projects are awarded following tenders that exclude many Afghan companies that either do
not know the system well enough (how to apply, when to apply) or do not have the capacity
to participate (insufficient level of English, ignorance of the required international standards,
small size). Several of the interviewed Afghan companies complained of the complicated
aspect of the tenders. This highlights inefficiencies in this part of the market, with possible
monopsony power from the large construction buyers.

2. Demand for Plumbers and Electricians

There are two very different types of demands for plumbers and electricians: private home-
owners, and construction companies.

a. Private Customers

Private customers tend to hire plumbers and electricians for basic work in their houses.
Electricians have to install plugs, sockets and light-bulbs while plumbers have to make a few
simple bathrooms. Generally, the quality of plumbing is very elementary as the houses are
not linked to a general water system and each has its own well and sceptic tank. Plumbers
are hired for very little time as, for instance, a bathroom can be built in one day. Plumbers
tend to be seen as less important than other workers, maybe because of the lack of
sophistication of plumbing in private homes: when asked about who they hired, owners
recall mostly hiring masons, electricians and painters (at approximately 25-27% of responses
each), whereas only 17% claim to have hired plumbers.

147
27%
17%
25% 25%
0%
10%
20%
30%
40%
Masons Plumbers Electricians Painters
Which workers did you hire to work on your house?

Figure VI-16: Workers Hired for the Construction of Houses,
(% of responses), Kabul, February 2005
231

b. International Donors and Companies

The demand from institutional players is much more sophisticated: they generally ask for
plumbers who are capable of installing integrated plumbing systems and modern heaters in
multilevel buildings. More and more, electricians have to be able to install elevators and
central heating and/or air conditioning. These demands are very hard not to say impossible
to meet currently, according to the interviewed construction companies.

3. Demand for Windows and Doors

In a similar way, the demand for windows and doors differs according to the type of client.

a. Private Clients

Doors and windows are some of the items that are of most importance to the private clients:
as mentioned above, 85% of the interviewees claimed to have preferences regarding doors
and windows. Most important to them are the material used (34%) and the price (27%).

The preferred material remains wood (50%) but, in the past few years, the market has
evolved, mainly pushed by importers of other materials. Increasingly and despite a higher
price, consumers are starting to ask for other materials: steel is the second most demanded
material with 23% of responses, followed by aluminium (18%) and finally PVC (9%).

The origin of the material is also important to home-owners. They tend to prefer Iranian
doors and windows (22%), followed by Afghan products (19%). Other countries that are
particularly appreciated are Germany and China, the former generally because of the quality
of its products and the latter because of low prices.

231
148
34%
27%
20%
16%
3%
0%
20%
40%
Material Price Origin Size Other
50%
23%
18%
9%
0%
25%
50%
75%
100%
Material
PVC
Aluminium
Steel
Wood
Which preferences do you have
regarding doors and windows?
Which material do you prefer?

Figure VI-17: New Home-Owners Preferences Regarding Doors and Windows
(% of responses), Kabul, February 2005
232

Despite the importance given to origin, many home-owners (82%) ask someone to make the
windows and doors for them rather than buying or importing them already made. The
reasons that they invoke for this are mainly that custom-made windows are of a better
quality (56%) and that they are cheaper (27%). Another important reason is that there
are no existing standard sizes for doors and windows, thus it is difficult to order or plan in
advance.

In terms of satisfaction, it is noticeable that doors and windows come first as the piece of
the construction that most satisfied and most dissatisfied new home-owners. While this
finding is hardly conclusive in one direction or another, it does signal that these items are
important to home-owners. This is accentuated by the fact that 68% of respondents would
be willing to pay more for good windows and 71% for better doors, compared to 50% for
better tiles.


The standards and requirements tend to be very different for international donor agencies
and for international companies. This demand is much more sophisticated and less price
sensitive.

These clients have strict time requirements and the constructions they order are much larger
than private units: they include hospitals or clinics and schools that are distributed across the
country.

232
Altai Consulting / UNDP new home-owners survey, January - February 2005
149
In one studied case, the donor ordered the building of 50 clinics across the country. It
required the clinics to be alike, thus the construction company had to order 800 identical
doors and 1,500 wood windows to be made in a few months. According to the interviewee,
in Afghanistan, this would have taken 2 years because there are no structures that are
industrialised enough to be able to handle this type of order. Thus, the windows and doors
were all imported from Thailand.

In other similar cases, international donors required higher quality aluminium or PVC
windows that, even in 2003, were hard to find in Afghanistan.

4. Demand for Tiles

a. Private Clients

Tiles are a relatively high-end good. They are used by 57% of respondents, and in 87% of
these cases, come from Iran. Both floor tiles and wall tiles are used. They are generally
glazed ceramic tiles.

Those respondents who do not use tiles think they are too expensive. They remain a bonus
type good that is mostly used in more modern houses. This is particularly the case in Kabul
with glazed tiles.

People who buy tiles generally prefer Iranian tiles (44%), probably because these are the
most available. Similarly to the doors and windows market, the tile market is largely
influenced by the supply, in the sense that people buy and use whatever they find, with a
strong preference for what is most available (i.e. Iranian tiles).

Because tiles are more of a luxury good and not essential, people are less willing to pay
more for better quality, as demonstrated by the surveys results
233
.


The demand for tiles for larger constructions is not extremely different. It is generally not
dictated by the buyer but decided by the construction companies. Tiles are particularly used
by these companies in hospitals and clinics and are bought in shops that specialize in tiles,
generally near the bazaar.

5. Opportunities in Demand

As was seen above, new home-owners are willing to pay more for better windows and doors.
In addition, they tend to especially like wood. Aluminium (next cheapest after wood) is three
times as expensive as wood. Even if lower income consumers are willing to pay more for
better quality, they are unlikely to be able to afford three times the price that they are
currently paying. However, they could pay more for better wood windows and doors, i.e.
wood windows and doors that would be made industrially instead of by hand, and therefore
would be more standardized, long-lasting, and solid.

233
Only 50% of interviewees are willing to pay more for tiles (as opposed to 68% for windows and 71% for
doors). Altai Consulting / UNDP new home-owners survey, January February 2005
150
Thus, there is an opportunity for the industrial/commercial production of wood windows and
doors. Indeed, there is an existing demand for better quality products and there are few
existing industrial wood door and window makers in Afghanistan. This would require
relatively little capital investment, including only machines to cut and shape the wood faster,
and it would require importing wood (rather than using the rare and expensive Kunar wood)
and treating/drying it better than is currently done.

Regarding plumbing and electricity, new home-owners are generally satisfied with the quality
of what they are getting, mainly because they know little about construction and because
they are not very well aware of the quality that they should and could expect. In this
context, and given the increasingly sophisticated market, there could be an opportunity for
construction services firms that would centralize skilled plumbers and electricians, and give
their clients (new home-owners and construction companies) the guarantee of hiring
qualified workers.

H. Vocational Training

Some of the highlighted issues in the construction sector are linked to the lack of training
and standards. This can, at least in part, be addressed via an efficient and broad vocational
training program, that does not only aim at giving basic training (for instance to illitreate
people who have not had the chance to get any education) but also at upgrading the
existing workforce.

1. The Government

Some ministries are known to offer vocational training. For instance, the Ministry of Higher
Education is responsible for three main post-high-school level institutes (up to grade 14) that
train electricians (Institute for Auto-mechanical Higher Education and the Technicom
Institute), and plumbers and electricians (Institute for Mechanical Higher Education). There
is also one high-school level (grade 12) institute that trains electricians, the Higher Technical
High-School. Approximately 100 students in total graduate from each of the above schools.
All of these institutions are in Kabul.

In addition, several ministries have training departments where they train students to
become plumbers or electricians. Graduated students generally go and work in the ministry
itself.

The Ministry of Labour and Social Affairs has a department that is in charge of vocational
training and gives training in several trades to uneducated Afghans. The courses are 4
months long and include plumbing and wiring. This department was founded in 1993 but
was mostly inactive until 2003. They have different types of class that are generally demand-
driven. The only criterion to enter these classes is to be between 16 and 35 years old.
Classes are formed as applications are received. The ministry also announces new classes on
local media to get new students. Until February 2005, 72 apprentices had been trained in
plumbing and 62 in wiring, 40 students were being trained in plumbing and 32 in wiring.

The ministry provides these classes mainly with GTZs support. Also, KOICA (Korea
International Cooperation Agency) has committed to building a training centre for teacher
151
training for the ministry. All these classes take place in Kabul but the ministry also has
departments in Mazar-e-Sharif and Kandahar where NGOs offer vocational training
234
.

Finally, several projects are being discussed to develop a national-level, unified training
program, including the design of a cohesive vocational training program.

2. NGOs and International Organisations

The main donors dealing with vocational training, particularly related to construction, are
GTZ and JICA. Several NGOs offer vocational training, especially as part of the DDR
program.

AGEF is one of the main players. Working with the two above donors, they have been
organizing programs for returnees in trades such as carpentry, masonry, plumbing and
steelwork. They initially hired German specialists to lead a one year and half training of
trainers who are now training other students. Within the scope of the DDR program, they
place ex-combatants in shops for 5 days a week to work and be trained and train them
formally for one day a week. This program has been implemented in 8 main provinces.

The subject of the training programs is generally decided based on labour market surveys
organised by AGEF and by asking people what they are interested in learning. Last year,
AGEF trained 6 carpenters, 16 masons, 10 metal workers and 9 plumbers.
235

Other significant players include the NGO HAFO (Helping Afghan Farmers Organisation), also
working on vocational training (including a few construction-related trades), for example in
Mazar-e-Sharif, as part of a DDR effort
236
.

234
Interviews at the Ministry of Education and the Ministry of Labour and Social Affairs, February 2005
235
Interviews, Kabul, February 2005
236
Interviews, Mazar-e-Sharif, November 2004
152
3. Private Players

Several private players also offer vocational training, generally for their staff.

Case Study #2: Contrack International Training Facility

Contrack International, a large American construction company has recently launched a
training facility that trains workers to reach pre-apprenticeship level in 6 main trades:
masonry, steel work, plumbing, electricity, carpentry and painting.

Contrack International mainly works with the US Army Corps of Engineers. They launched
the training facility in April 2004, initially to train their own workforce in order to reach a
standard level of work that would satisfy the minimum requirements imposed by the US
Army Corps of Engineers and USAID.

The training facility proved to be very successful and they opened it to the public: they
receive applicants once a week, and based on an interview, they accept or reject them as
future students.

The courses last for 30 days, from 7am
to 3:30pm, 7 days a week. The
students are paid US $ 3 per day
(mainly for food) along with a stipend
for transportation. They have both
theoretical and practical classes and
some on-the-job training, based on
Contracks needs. At the end, they are
tested and, if successful, given a
certificate. Each class (including the 6
trades) generally holds around 100
apprentices.

Since April 2004, 500 apprentices have
graduated. They generally find work
either at Contrack or with other
construction companies.

Figure VI-18: Plumbing Training at Contrack
Training Centre, Kabul, February 2005
Interestingly, this training facility has either sparked a new interest or identified an existing
demand on both the student side and the employer side: every week, 200 to 300 potential
students come to the centre to be interviewed. In addition, several construction companies
have approached Contrack to source their construction workers at the centre. Since its
launch, the training centre has also evolved into an information centre/employment centre
of sorts where students come back when they need help or when they are looking for work
and where companies come to find workers.

One of the key success factors of the training centre is the fact that it trains the apprentices
according to European and American construction standards. In addition, they have
developed a Masonry standards guide that is currently being used by several donors, thus
the trained apprentices gain skills that they can really use on construction sites and that
differentiate them from other workers.

The cost of the training facility is of approximately US $ 10,000 to 12,000 per month.
153
"I heard about the training centre from
one of my relatives. I want to become a
plumber because I think I will earn more
money. But I could not spend 4 years
being an apprentice in a shop. After this, I
hope to open my own plumbing shop.

- Plumber apprentice at the Contrack
Training Facility, Kabul
The Contrack experience shows that there is
indeed a demand for professional, standard-
oriented vocational training for a variety of
trades, from both the employee and the
employer level. It also underlines the
advantage of training people based on a set of
standards that are then applied in the actual
workplace, giving people the opportunity to
apply what they have learned while, at the
same time improving the quality of construction
in the country.

4. Main Issues with Vocational Training

There are several key issues with the way vocational training is currently done in
Afghanistan.

The first and main problem is quantity: if one was to add the number of students that
graduate from all the programs mentioned above (i.e. the technical high-schools, the
institutes, AGEF and the Contrack training centre) this would amount to approximately 300
to 400 plumbers and 500 to 600 electricians
237
trained to a relatively basic level per year and
only in the past few years (given that most of these programs either did not exist or were
inactive before the fall of the Taliban), which is not enough for the booming construction
market. The number of graduated plumbing students is especially low. In addition, it is to be
noted that many of the above-mentioned apprentices trained by the ministries then go to
work for the government, thus being lost to the private sector. Also, many of the trainings
mentioned above (the ones led by the government or Contrack) take place solely in Kabul,
leaving space for necessary trainings in the rest of the country.

Another issue is the quality of training. Given the fact that different players implement their
own programs and there is relatively little unification of vocational training across the
country and across players, the trainings are not standardized: trained people are far from
having the same level across the board (some are trained for one year, others for 30 days)
and they do not know how to work with the same construction standards. This is a problem
for a large company who wants to hire a group of people of different trades capable of
working in the same way. Linked to this issue is the fact that currently most vocational
trainings in Afghanistan focus on coaching uneducated people to give them basic skills, to
the detriment of already skilled people who badly need an upgrade: indeed, the existing
plumbers and electricians (and carpenters who make the wood windows and doors) do not
know how to work with anything more than the most elementary techniques and materials.
In addition, although several companies mentioned the Ministry of Labour and Social Affairs
training program, they tended to criticize the fact that it was said to be too theoretical.

The lack of standardization and certification in training has consequences on hiring and
prices that companies are willing to pay for trained workers. One international actor in the
vocational training arena complained of the fact that the international construction
companies do not find good people because they are not willing to pay a better price for a
well-trained person. They offer the new workers the lowest salary without even testing them

237
Interviews with the Ministry of Education and the Ministry of Labour and Social Affairs, February 2005, AGEF
and Contrack International
154
so they cannot know whether or not they are really good. Companies do not know what
diplomas /certificates to trust because they do not know what training they condone.

There seems to be an issue on the employee side where potential trainees are not aware of
the trades that are available to them and of the ones that are most demanded by employers:
in this way, future students will all want to be tailors but they will not tend to think about
becoming plumbers, not realizing that there are many more opportunities for plumbers in the
market.

Finally, there are no programs dealing or training in a number of important skills such as
budgeting, project management or management of a construction site that are also essential
in the construction sector.

5. Opportunities in Vocational Training

The Contrack experience shows that there is a demand from construction companies for
workers trained according to similar high standards, and from potential trainees for a training
that is recognized by employers.

There could be an opportunity to leverage this demand by training a group of workers and
acting like an employment agency that would respond to the construction companies needs
by placing its graduates with them for a fee. Its value proposition would include the
guarantee of international-level training and of speedy response to the construction
companies needs, thus accelerating the hiring process for them, sparing them the
interviewing of the workers and, finally allowing them to start their construction works faster.

For instance, with a cost structure of approximately US $ 12,000 per month, if such an
agency trained around 125 people per month and succeeded in placing 75% of them with
construction companies at an average salary of US $ 350 per month (i.e. US $ 14/day or the
average salary for a plumber in Kabul), and taking a 40% commission on each workers
salary for the first month
238
as payment from the construction company, the agency would
make a profit. Each worker would cost US $ 490 (or US $ 20 per day) to the construction
company for the first month, which would be much cheaper than paying for a foreign worker
(including accommodation and food). In addition, the agency could have other revenue
streams, including doing on-the-job training that would be paid for by clients, running
specialized trainings, focused on upgrading the skills of trained workers to new techniques
and materials or handling in-house training for construction companies.

238
Employment agencies in industrialized countries typically take the equivalent of 100% of the new recruits first
month of salary as payment from the employer.
155
I. Environment

Both the regulatory environment and the financial environment have a particularly strong
impact on the construction sector.

The regulatory environment affects construction mainly in the areas of quality regulation and
construction standards, property rights, and tax issues relating to construction itself and to
the trading of construction material and machinery.

1. Construction Standards

There is a clear lack of construction standards, relating to either construction materials,
required qualifications for workers or quality standards for the construction process itself.
This leads to low quality materials [] used in sub-standard construction by unqualified
people operating in an unsafe working environment
239
.

According to AISA and the ABA (Afghan Builders Association), such standards have existed
but they are currently not used. In addition, people (and in particular construction companies
and people who decide to build their own houses) do not know anything about standards or
what they mean.

This lack of standards is particularly critical
for several reasons.

First, Afghanistan tends to be a major
recipient of sub-standard construction
material exported at cheap prices from
Pakistan, Russia or China. One interviewee
heavily criticized Pakistan for sending very
poor quality cement that was branded for
export only and regretted the fact that there
was very little way of testing cement and
other materials in Afghanistan. A similar issue
rises with Russian steel. The consequences of
using second-rate or faulty construction
material can be particularly serious in
Afghanistan since it is situated in a region
prone to seismic activity.

In addition, even if there were to be
regulations, another problem is
implementation: for instance, there are few
if any laboratories capable of analyzing soil,
depth, materials and other key elements of
construction. At least one new company is
known to have started activities in these
fields, in January 2005, focusing on areas
such as topography and cartography.

239

Figure VI-19: Construction in Jalalabad,
December 2004
156

Different players are working on the development of construction quality standards. For
instance, an independent National Commission on Standards, Metrology and Quality has
been created in 2004 and is housed by the Ministry of Commerce. One of its main tasks is to
develop technical regulations, specially related to safety and construction material.

The ABA is also looking into construction regulation, with the intent to develop standards
that most construction companies would abide by during the construction process.

Finally, a few private players are trying to develop their own standards that they hope will be
used by the industry. For instance, Contrack has developed basic masonry standards that are
being used by USAID and the US Army Corps of Engineers in their projects in Afghanistan.

There is, however, a strong need for cooperation and coordination: there has been typically
very little information sharing in the development of standards until now. For instance,
certain interviewees at the Ministry of Commerce did not even know of the ABAs existence,
let alone of their desire to establish industry standards.

2. Property Rights

Another important issue is the unclear status of property rights. In the past 30 years, due to
the different regimes, wars and people fleeing their houses, property rights have become
increasingly unclear. There are many fake documents and often, it is uncertain whether
people are building on a land that is really owned by them. This gives little incentive to build
long-lasting, solid buildings when one can get quick money from renting the buildings to
the international community in Kabul in the short-term and there is a high risk of losing the
land in the medium or long-term.

On the positive front, property rights are in the limelight and several agencies and NGOs are
working on updating and clarifying them. Change has already become visible in the past
year. Indeed, since 2004, most house builders have had to register at the Kabul Municipality
to get building permit before starting to erect a new house.

3. Tax Regulation and Investment Procedures

Taxes, especially import taxes, used to be extremely complicated. They were varied and
often very high. In 2004, however, many taxes and import tariffs were harmonized.
Currently, most import tariffs range between 5% and 16%, including 5% for wood, tiles and
glass, 4 to 5% for most machinery and 16% for corrugated sheets.

Until recently, the import duty on construction equipment was 20% but this has been
reduced to between 4 and 7%
240
.

The main issues in trading and importing either construction materials or raw materials for
construction (for example, aluminium sheets to make aluminium windows) are not the taxes
themselves but rather all the other payments that must be made along the way to get the

240
Afghanistan Import Tariffs, December 2004 and Opportunities for Construction Sector Development and
Investment, American Embassy, Kabul, April 2003
157
product to its destination. All the paperwork, complicated transactions and even bribes tend
to have a larger impact on SMEs who have less means of working the system
241
.

Several construction companies still try to reduce their import duty payments by registering
as NGOs, as NGOs pay lower taxes on their imports.

There have been changes simplifying some of the more complicated procedures. For
instance, a trading company of a minimum investment of 3,500 Afs needs a trade license
from the Ministry of Commerce. Getting this license used to take approximately 41 steps
(and 4 to 8 weeks) but the procedure has been revised so that now it only takes 3 steps
(and 48 hours)
242
.

In addition, construction companies (and other companies who decide to invest in
Afghanistan, excluding traders) can register at AISA also in a few days.

Both the Ministry of Commerce and the AISA system are being replicated to the provinces
but are mostly only active in Kabul at this point.

4. Financial Environment

The financial environment which will be discussed in more depth in the Financial
Overview section of this report has a particular impact on construction. Because people
and construction companies have little, or no, access to finance, they change the building
process: for instance, they erect a building storey by storey rather than as a whole or they
buy poor quality material to save money. Thus, in this way, the poor financial environment
has a serious impact on the quality and safety of construction in Afghanistan.

J. Key Success Factors

Given the situation of the construction market in Afghanistan, there are real opportunities for
players who aim at increasing the quality of the services offered (training and employment
agency) and of the products (industrialised wood windows and doors factories). For this,
certain conditions must be put in place.

There is a clear need for government regulation that is clear, standardized,
harmonized and effectively communicated to the target audience (people who build
their own houses, construction companies and workers in the construction field).
Clients need to know the implications and dangers of building their own house. Also,
a healthier market is defined by a competition that is based on quality rather than
price. This can only be the case if customers are more aware of quality standards.

The training of workers in the construction industry must be improved, so as to be
able to deliver top quality construction work. Training must not only concentrate on
giving illitreate workers a chance but also on upgrading the existing workforce. It
must also extend to the whole country.

241
and Securing Afghanistans Future: Accomplishments and the Strategic Path Forward, TISA and International
Agencies, Jan 2004
242
Interviews at the Ministry of Commerce, December 2004
158

Access to finance must be enhanced in order to take the pressure off Afghan
companies and individual home-owners.

K. Players that could be Leveraged

Various SME projects (in the areas of vocational training, window and door production and
tile production) are appearing in different parts of Afghanistan aiming at targeting services
and materials linked to construction. The following selected projects will include only the
services and construction materials that were detailed in the rest of the report, thus, not
taking into account existing ventures that produce other types of construction material.

1. Windows and Doors

Jamal Construction, Jalalabad
Jamal Construction is based in Jalalabad. It was started with Pakistani investment
and mostly works in the area around Jalalabad. In order to satisfy their need for
wood doors, windows and furniture, they have decided to create a wood products
factory in which 50 people will work and that will have a large enough capacity to
build one house (i.e. enough doors and windows for an average house) per
month.

The Assadullah Wafa Plastic Window Frame Manufacturing Project, Kandahar
The Assadullah Wafa Company plans to produce plastic window frames in
Kandahar. The project requires US $ 500,000 to erect the building and install
production equipment in the factory. The project is currently still looking for
investors.

Aziz Ali Aluminium Doors and Windows Factory, Kabul
This factory, situated in Kabul (on Jalalabad Road) imports aluminium from the
UAE and assembles it in Kabul to make aluminium doors and windows in Kabul.
20 people work in the factory currently. The factory is looking for investors to
increase its production.

2. Tiles

Navin Mosaic, Mazar-e-Sharif
Navin Mosaic is one of the two companies that make cement tiles in Mazar-e-
Sharif. It has existed for 13 years, employs 16 people and produces 1500 tiles per
day. It is currently looking for investors to expand its production capacity.

Darlaman Tiles, Kabul
The Darlaman tile factory in Kabul produces traditional decorative tiles for export.
It manufactures approximately 10,000 tiles per month. They are sold in Europe
and America in high-end markets.

159
3. Vocational Training for Plumbers and Electricians

Ministry of Labour and Social Affairs
The Ministry of Labour and Social Affairs is one of the main governmental players
in the area of vocational training. It has a department dedicated to vocational
training, funded in part by GTZ and has expanded its activities to Mazar-e-Sharif
and Kandahar.

AGEF
AGEF is one of the more dynamic organisations in the areas of vocational training
and employment in Afghanistan. AGEF is present across the country and trains
workers in a variety of trades that they determine according to market demand as
well as potential trainees demand. The trades include carpentry, masonry,
plumbing and steelwork.

GTZ
GTZ is one of the major donors involved in vocational training. Economic
reconstruction and vocational training are part of its missions in Afghanistan. GTZ
implements vocational training programs with a variety of partners.

JICA
JICA has extensive vocational training activities. It is active in DDR assistance
and, as part of this effort, it started the Vocational Training Program for Ex-
Combatants in Afghanistan in 2004. It provides facilities, equipment and advice
on vocational training and works with a number of implementing NGOs.

HAFO
HAFO (Helping Afghan Farmers Organisation) is an Afghan NGO that works
extensively in the area of vocational training. For instance, in their Mazar-e-Sharif
centre, they offer a variety of training programs that depend on the participants
needs and generally include trades such as carpentry, welding, plumbing and
electricity. Over 200 apprentices have graduated from the training in one year.

Contrack International
Contrack International is an American construction company. It has created a
training facility in Kabul (on Jalalabad Road), where it trains approximately 100
people every 30 days in 6 different trades that are related to the construction
sector.

160

VII. Soap, Shampoo and
Laundry Detergents


Body Soap

Fast growing market with estimated market of US $ 13 25 Mn ( 5,000
10,000 MT)
Two brands (Lux and Imperial Leather) cover half the market (47% of the
value among the 2), while a number of Turkish brands take another 40%
of the market
Brand loyalty of Afghan consumers
Growing number of brands
Increasing sophistication of the market
No local production (despite a few attempts)

Shampoo

Fast growing market estimated at US $ 14 18 Mn (6,000 8,000 MT)
Importance of large packs (500 mL and 1,000 mL) and sachets (5-7 mL)
Seasonal market (consumption increases by more than 20% in summer)
58% of the market is covered by Iranian brands (Sehat has a 31% market
share, Gulan 10%)
In sachet, main brands are Emeron and Gulan
Outreach of current distribution
4 existing Afghan brands of shampoo, but very limited market share

Laundry Soap and Detergents

Sector divided in 60-65% laundry soaps and 35-40% laundry detergent /
powder
Laundry Soap: US $ 16 25 Mn (20,000 30,000 MT)
Laundry Powder: Fast growing market estimated at US $ 12 14 Mn
(16,600 20,200 MT)
Traditionally a laundry soap market
Increasing share of laundry powder: better reputation, greater variety of
usages
Laundry soaps come mainly from Iran and Russia
Laundry detergents come from Iran: 3 brands (Yekta, Pak and Darya), all
from Iran, covering over 90% of the market (in value)
Existing local laundry soap production across the country

161
B. Key Findings

The Afghan market for soap, shampoo and laundry detergents is estimated at approximately
US $ 55 to US $ 82 Mn, of which the Kabul market represents 50%.

It is largely a distribution-driven market with few powerful distributors who generally have
exclusivity agreements with international suppliers, and many small, opportunistic importers
who bring in, often by smuggling, smaller quantities of the same products, in spite of the
exclusivity agreements. Wholesalers tend to buy the cheaper brands or the brands of the
distributors/importers who give them the best payment conditions rather than buying
products to respond to a demand. Indeed, the demand is not very sophisticated: there are a
few very famous brands: the ones that have been present in the market for a long time.
These tend to be copied and smuggled extensively. A significant amount of copies come
from Peshawar or are sometimes produced in Afghanistan. Overall, there are many brands
but little recognition, partly because there is minimal advertising. This highlights an
opportunity in the fact that the landscape is still very much devoid of brand recognition. It
can therefore be relatively inexpensive to create a brand in Afghanistan.

Body Soap
The body soap market is estimated at US $ 13 to US $ 25 Mn, equivalent to 5,000 to 10,000
MT per year or 1 to 2 soaps per family per month, and growing. Consumption is seasonal,
increasing by approximately 25% in summer. There are many brands from all over the world
but only a limited number that actually sell well, highlighting the push (distribution-led)
aspect of this market as opposed to pull (demand-led). The main brands are Lux and
Imperial Leather: they cover around half the market and have both been present in the
country for several years. In addition, Turkish brands that have been present in Afghanistan
for less than 5 years have managed to gain a 40% market share in that time. There are
approximately 10-15 brands produced by 2-3 main Turkish companies, with almost identical,
relatively modern-looking packages and some of the lower prices in the market. These
brands have very little brand recognition despite their high market share.

Business opportunities in the body soap sector will largely depend on production costs,
notably the cost of importing soap noodles (the main raw material used in soap
production) and the cost of production itself. Opportunities in body soap production mainly
lie in the fact that the production process can be fairly similar to the laundry soap production
process. A body soap factory could initially be launched by importing semi-processed raw
material, i.e. soap noodles.

Shampoo
The shampoo market is estimated at US $ 14 to US $ 18 Mn. It is a price sensitive market,
characterized by the high sales of large packs (500mL and 1,000mL) and sachets, the latter
representing around 17% of the market. The shampoo market, like the body soap market, is
very seasonal, with higher sales in summer. In winter, people consume less shampoo and
tend to go to public baths more than in summer.

Brands are very different in the sachet and bottle sub-sectors. In sachet, the main brands
are Gulan and Emeron, an Indonesian brand that is barely present in bottle format.
Interestingly, Sunsilk (Unilever) apparently started selling sachets in Afghanistan around 3 to
4 years ago and has since gained a significant market share. In bottle format, the main
brands are two Iranian brands (Sehat and Gulan) and Sunsilk.

162
In total (both bottle and sachet), the leaders are Sehat with a 31% market share, Sunsilk
with 16% and Gulan with 10%. There are also four known Afghan shampoo brands, two of
them produced in Herat (Afshin and Naz), one in Kabul (Sadaf) and one in Jalalabad
(Ariana).

Little use is made of advertising and promotional activities, especially at the point of sale
(POS) level. The few brands that do advertise focus on broad-reaching media such as
billboards, TV and sometimes radio. There could be an opportunity to use marketing in a
more effective way to either launch a new brand or to boost an existing one.

Opportunities in the shampoo sector seem higher than in the body soap sector. Firstly, the
existence of Afghan production is encouraging. In addition, Iranian shampoo producers are
interested in investing in Afghanistan in order to overcome the high transportation costs,
wastage due to poor transportation conditions, and the higher labour costs in Iran. An
interesting possibility is the creation of a shampoo bottle-filling factory. This type of factory
could require an investment of US $ 200,000 to US $ 300,000 and be run with 10 to 20
people, well suited for SMEs.

Laundry Soap and Laundry Powder/Detergents
The laundry products sector is divided into laundry soap and laundry detergent. The laundry
soap market is estimated at US $ 16 to US $ 25 Mn, whereas the laundry powder market is
estimated at US $ 12 to US $ 14 Mn. The proportion is 60-65% of value in laundry soap
compared to 35-40% in laundry powder.

Laundry powder is a fairly new product but it is very popular for several reasons: people buy
it because it comes in larger packages that seem more economical, it has a reputation for
better quality than laundry soap and importantly, it can be used to wash other things than
clothes. The laundry powder market is dominated by Iranian brands, three of which (Yekta,
Pak and Darya) share approximately 95% of the market. The laundry soap market is mainly
divided in Iranian brands (60-75% of the volume) and Russian brands (25-40%) that are
heavily copied. A large portion of these copies is made in Afghanistan or Iran.

There are many small facilities that make laundry soap in Afghanistan and at least two active
factories (in Jalalabad and Kabul). The production is simple and requires few machines.
Some of the raw material, like the fat elements, can be found in Afghanistan. For instance,
the Jalalabad factory uses cotton oil and leftovers from cotton oil processing that would
otherwise be thrown away. However, it is to note that Afghan factories often function with
old, recycled equipment that does not allow them to improve the quality of their products.

There is a clear opportunity to develop laundry soap manufacturing in Afghanistan by both
leveraging existing players and investing in new structures. Key success factors in the
production of laundry soap are efficient sourcing of raw material and finding the right recipe
to establish the optimal trade-off between cost and desired quality.
163

C. Introduction

1. Definition of Sector

The Soap, Shampoo and Laundry Detergents sector is comprised of three sub-sectors:
1. Body soap
2. Shampoo
3. Laundry soap and laundry detergents

This sector was originally titled Low Value-Added Consumer Goods. The rationale behind
choosing this sector for further analysis is that given a significant internal demand, the low
technological requirements and the labour intensiveness of certain types of products,
Afghanistan would have a comparative advantage in producing its own low value-added
consumer goods.

Body soap, shampoo, laundry soaps and detergents were chosen as products to study
because they all represent a large market in Afghanistan (i.e. touching most of the
population), with an existing, broad and growing demand. In addition, their production can
be handled by relatively small, SME-like structures.

To best assess the tastes of the consumers, a survey was led in February 2005 with more
than 100 men and 50 women interviewed in Kabul and in Mazar-e-Sharif. It will be referred
to frequently in this section.

2. Sector Overview and Distribution Dynamics

There are common characteristics between the three sub-sectors defined above. In all sub-
sectors, the supply is fragmented, with a large number of brands (except in the case of
Laundry Detergents). In all cases, there is limited local production, at least of industrial
proportions (in the case of laundry soaps there is production but it tends to be very
atomized).

In all cases, distribution is key. Distribution is centralized in the hands of a few powerful
distributors who carry a large variety of products and brands in order to fill their containers
and to have a larger choice to fill points of sale. These distributors focus on the basic service
of transportation and on order-taking. Few of them actually have sales forces that do more
than taking orders from wholesalers. In addition, most of the companies that export to
Afghanistan do not support their sales in any way except for elemental and limited
advertising. Thus, there are few promotional activities.

Wholesalers and retailers have a very important role in
this market as the lack of pull from consumers gives
them significant control over which brands to carry.
Distributors, however, have even more power,
especially when they reach relatively isolated provinces
and cities, where shop owners have to wait for them to
come to deliver the product, thus having little say in
what product they accept.
We do not do any advertising.
Afghanistan is a wholesale
market

- Soap, Shampoo Distributor for
a Major International Company
164

In parallel to this organized distribution, there is a large amount of opportunistic
distribution with individual businessmen buying products in the neighbouring countries and
selling them at very low prices (below the official prices designed by the producers) in
Afghanistan. This comes in addition to the high number of fakes and imitations, especially
among shampoos.

Consumers are very price-sensitive, especially regarding laundry products. They generally
favour either the very large formats (500mL and 1,000mL bottles of shampoo, 480g packs of
laundry detergent instead of 200g bars of laundry soap) or the very small ones (sachets of
6-7 mL of shampoo, 75g bars of body soap) though they are increasingly interested in
brands.

All three sub-sectors have been growing rapidly in volumes, value and in sheer number of
brands in the past 3 years and have thus attracted foreign companies, including Iranians for
shampoo and laundry detergent and Turkish for soap. Multinational companies are present
through their brands (they are imported by official agents and at the same time also
smuggled from various countries) but not very proactive in the market where they leave
most of the power to large distributors.

D. Body Soap
SWOT Body Soap
Strengths
Most of the international brands are not sold
proactively (minimalist marketing strategy)
Outreach of current distribution networks
Low but growing consumption
Weaknesses
Established brands
Most of the raw material must be imported
A body soap factory is a considerable
investment and requires technical expertise
Power of large distributors
Price sensitivity of consumers
Opportunities
Loyalty of Afghan consumers
Little brand awareness of most existing
brands (many brands confused because of
similar packaging)
Little and unsophisticated existing
advertising: brand could be developed
inexpensively
Consumers are in favour of a soap "made in
Afghanistan" as long as it is of good quality
Threats
Market distorting activities, including dumping
to enter the market and smuggling
Copies and fakes

165

1. Sector Overview

a. Context

The market for body soap consists of imported brands that are brought into country via Iran
and Pakistan. There is an overabundance of brands in the market but the sales volumes are
concentrated in a handful of brands that have either been in the market for a long time
(Imperial Leather, Lux) or that have come in recently but are very economical and efficiently
distributed (the Turkish brands).

Sizes of soap bars vary from 75g to 125g, 135g and 150g. The main size consumed is the
150g format, which is the most economical.

Distribution dynamics are key in this market. Most foreign producers sign expensive
exclusivity agreements with large distributors, who cover the national market. However,
many opportunistic distributors import the products from other countries and sell them at
cheaper prices. According to players in the market, many fakes are being produced in
Pakistan and in Iran (although these include a great deal of me-toos).

Figure VII-1: Soap Wholesaler in Jalalabad, November 2004

Turkish
Brands
Imperial Leather: one of
the leaders in the Afghan
market
Turkish
Brands
Imperial Leather: one of
the leaders in the Afghan
market
166

The soap market is affected by seasonal variations, with an estimated 25% increase in
consumption in summer, when people take more showers.

52%
30%
13%
5%
36%
12% 12%
40%
0%
10%
20%
30%
40%
50%
60%
<50 Afs /
month
51-100 Afs /
month
101-150 Afs /
month
>151 Afs /
month
Winter Summer
How much money does your family spend on body
soap per month, in summer and in winter?
Soap
consumption
increases by
25% in summer

Figure VII-2: Soap Consumption per Family in Summer and Winter,
(% of respondents) Kabul, February 2005
243

There is a significant variation between washing habits in summer and winter. On average,
respondents of the consumer survey wash their body twice as often in summer as in winter.
This is due in part to the change in temperatures, the fact that often Afghan houses have
little heating and no hot water. In winter, people also tend to go to public baths more often
(rather than washing at home), which entails the additional cost of paying for each bath.

243
167
54%
3%
40%
58%
5%
38%
1%
1%
0%
25%
50%
75%
100%
Winter Summer
Once a day
Once every 2 days
Once a week
Less than once a
week
How many times a week do you fully wash
your body in ?
NB:
Declarative
In Urban Areas
Total Figure Could be
Lower
NB:
Declarative
In Urban Areas
Total Figure Could be
Lower

Figure VII-3: Number of Showers per Person, (% of respondents),
244

People tend to buy one bar of soap for the whole family, generally purchasing the larger
(150g) sizes as they are considered to be more economical.

2. The Market

a. Size of the Market

It is estimated that the body soap market represented US $ 13 Mn to US $ 25 Mn in
Afghanistan in 2004
245
. This is equivalent to approximately 5,000 MT to 10,000 MT of
imports per year, representing approximately 1 to 2 soaps per family per month
246
.

According to most importers and wholesalers, sales have been increasing over the past few
years and they seem to be largely push-driven (with distributors actively looking for new
brands to distribute and fill their containers). New brands regularly appear on the market.

b. Geographic Breakdown

According to most estimates, approximately 50% of the market is in and around Kabul
where over 60% of the countrys urban population lives
247
.

The rest of the consumption is largely distributed in the other four main cities, Mazar-e-
Sharif, Herat, Jalalabad, and Kandahar, where wholesalers from the other cities and rural
areas come to get their products.

244
Ibid
245
246
Main assumptions include average families of 8 people, a total population of 23 million people and an average
soap cake price of 16 Afs.
247
CSO 2003-2004
168

There are more or less significant differences in consumption patterns in the different cities.
For instance, in Herat, there is a clearer Iranian influence with more Iranian brands and also
more Turkish brands (that tend to be transported by land via Iran and through Herat). On
the contrary, in Jalalabad, many more brands are made in Pakistan (Unilever brands, for
example) or come from China. Brands in Jalalabad, tend to cater to the tastes of the many
Afghans who lived in Pakistan during the war and are familiar with the brands that are sold
in that country.

c. Main Products

There are three main types of body soap brands in the Afghan market:

Traditional brands: they consist of the brands that have been present in the market for a
long time and mainly include Lux and Imperial Leather, the best sellers by far.

Imperial Leather has been in the Afghan market
for over 20 years. It is the second best known
brand (27% of interviewees mentioned Imperial
Leather as a brand of body soap they knew
248
).
It is sold in two sizes: 75g and 125g. Imperial
Leather is generally imported from the UK via
Iran or Pakistan. An Iranian company
KAF/Darugar also produces Imperial Leather in
Iran but many customers in Afghanistan think
that this is a fake because the packaging is
different from the one they are used to (it is a
special gold package).

Lux is an extremely popular Unilever brand and
the best known brand in Afghanistan (31%
brand awareness
249
). One of Afghanistans
largest distributors claims to have an exclusivity
agreement with Unilever in Pakistan to distribute
Lux in Afghanistan. Many other distributors
import Lux from Indonesia, however, often at
cheaper prices than the official distributor. Lux is
characterized by an extensive presence in
wholesalers and retailers shops across the
country, both in cities and rural areas. It is
available mainly in 125g packs (generally from
Indonesia) and 135g packs (from Pakistan).

248
Altai Consulting / UNDP consumer survey, Kabul and Mazar-e-Sharif, February 2005 (brands were not
prompted)
249
Ibid
169
Turkish brands: Four main Turkish companies export soaps to
Afghanistan. In total they export over 16 brands that are all
very alike (similar packages, smells, and positioning). They
benefit from an extensive distribution and can be found in even
the most remote areas. They are often available in the more
popular, family-size, 150g packages. Prices of the Turkish
brands vary from the cheapest prices, 10 Afs per 125g bar up
to high prices at approximately 18 Afs per 150g (equivalent to
15 Afs per pack of 125g). Few of the wholesalers, retailers or
even end-customers remember any of the Turkish brands by
name, except for Ava. They are generally referred to as a
whole as the Turkish soaps.

The cheaper Turkish brands include Diana and Dalan (produced by the same
company) and Ella.

The average priced Turkish brands comprise Cindy and Ava.

Fabienne is one of the most expensive Turkish brands. This has a detrimental
consequence on its sales: in the consumer survey, none of the interviewees
remembered it or recalled buying it.

International brands: New international, and
expensive brands regularly penetrate the market,
either through push from their manufacturers (for
example, Dettol has entered the market in 2004,
pushed by Reckitt Benckiser) or due to
distributors efforts to enlarge their product range
by adding new brands to their portfolio. These
brands include Dove (which has a very good
image, despite its high price, and is heavily
copied, by brands called Rove or Dew) and
Camay (Procter & Gamble). Their prices are the
highest in the market.

Figure VII-4: Dove and Dew (made in
Pakistan), December 2004
Other types of brands include Lowest Price brands that offer the lowest prices in the
market, including Royal or many Iranian and Chinese brands.
Royal is an example of a brand that
has succeeded in penetrating the
market relatively quickly (in 2
years) through a combination of
good pricing, positioning and
efficient advertising. Royal was
started by Afghan entrepreneurs,
who produce it in Dubai and export
it to Afghanistan.

Figure VII-5: Royal 100% Halal
Billboard, Kabul, December 2004

170
d. Price Positioning

Prices range mainly from 10 Afs to 25 Afs, although very cheap (generally Chinese or
Pakistani imitations) soap bars can regularly be found below 10 Afs. A few expensive
international brands, generally directed at the high end of the market, can fetch more than
25 Afs.

The lowest prices include mainly small-sizes of products like Imperial Leather 75g (which can
generally be purchased at approximately 10 Afs) and the most inexpensive brands that come
from either China or Pakistan. Royal, from the UAE has also positioned itself towards the
bottom of the market in terms of price, along with several of the Turkish brands (Dalan and
Diana, both from the same company)

The Turkish brands generally cover the price range that ranks from 10 to 15 Afs per soap
bar.

In the middle, one can find the market leader, Lux, at 14 Afs for a 125g soap bar. Beyond
this price a number of premium brands are available, including Ava (one of the only Turkish
brands that fetches 15 Afs), and Imperial Leather, with an average price of 18 Afs per 125g
bar.

Finally, at the top end of the spectrum, the specialty brands, including Dettol, a medicinal
soap, cost approximately 25 Afs per bar.
10 10 10
12
13
14
15
17
18
25
0
10
20
30
Royal Diana Dalan Ella Cindy Lux Ava Dove Imperial
Leather
Dettol
Turkish
International
Premium
Specialty
"Lowest
Price"
Leader

Figure VII-6: Retail Prices of Selected Soap Brands, (Afs per 125g),
250

250
Interviews with retailers, Kabul, February 2005
171
e. Market Shares

The main brands are Lux and Imperial Leather. It is estimated that Lux has the largest
market share with approximately 30% of the market.
251
It is followed by Imperial Leather
with a 17% market share
252
.

Turkish brands share approximately 40% of the market with at least 16 different brands.
Around 3% of the market goes to a number of Iranian brands. The remaining 10% are
divided between an abundant number of brands that often have a non-negligible numeric
distribution but rare sales, such as the expensive international brands (Dove, Camay) or
brands that reach the market from time to time through the opportunistic efforts of small
distributors to import them in order to either launder money or make a quick profit (e.g.
Pakistani me-toos or Chinese brands and imitations).

Lux
30%
Iranian
Brands
3%
Other
10%
Turkish
Brands
40%
Imperial
Leather
17%

Figure VII-7: Body Soap Market Shares, Afghanistan, (in % of US $)
(Total: US $ 13 US $ 25 Mn)
253
, Nov 2004 Feb 2005

f. Brand Awareness

Brand awareness is significantly out of line with market shares in the case of the Turkish
brands. There are a number of explanations for this.

251
Market shares in value
252
Analysis from interviews with importers, wholesalers and retailers in Afghanistan, November 2004 February
2005
253
Analysis from interviews with importers, wholesalers and retailers in Afghanistan, November 2004 February
2005, market shares in value.
172
First and foremost, the majority of the Turkish brands have
a packaging that is very similar to Luxs packaging: the
brand is written in the western alphabet on the upper left-
hand corner of the package, there is a woman on the right-
hand side, the soap bars are always either 125g, 135g or
150g and there is a variety of colours for each brand.
Consequently, the packages are very similar and for
someone who cannot read well, and cannot read western
alphabet, they all look the same. Since Lux is the brand
with the oldest presence in the market and with the highest
recognition, many consumers assume that they are buying
Lux when they are buying a variety of Turkish brands. In
addition, the Turkish brands do not run any advertising or
promotional activities in Afghanistan. Consequently, Turkish
brands have low brand awareness scores with a maximum
of 4% for Ava while Lux attains 31%
254
.

On the contrary, Imperial Leather has a very distinctive
package that is harder to copy. In addition, it has been
present in the country for a long time and its brand awareness (27%) is higher than its
actual market share (17%).

Interestingly, brands that are not even officially present in the Afghan market, such as
Palmolive
255
have some degree of brand recognition (although it is low: 0.3%). This is largely
due to the fact that many Afghans have lived abroad and remember brands from the
countries where they lived and from access to cable TV.
2,1%
1,8%
1,2%
0,9%
0,6%
0,3% 0,3%
4% 4%
12%
27%
31%
0%
5%
10%
15%
20%
25%
30%
35%
What body soap brands do you know?
Lux Imperial
Leather
Dove Royal Nancy Mex Camay Duru Ava Diana Happy Palmolive
Lux
Turkish Brands
Other Brands

Figure VII-9: Soap Unprompted Brand Awareness, (% of responses),
256

254
All brand awareness scores are not prompted.
255
Interviews with distributors highlighted that some of them where in discussion with Colgate-Palmolive to start
importing Palmolive into the market. However, as this report was written, no agreement had been signed. The
little Palmolive that can be found in stores is generally imported from other countries informally.
256
Altai Consulting / UNDP consumer survey, Kabul and Mazar-e-Sharif, February 2005 ( brands were not
prompted)
Figure VII-8: Lux and Top
Turkish Soaps, Kabul,
December 2004
173

There is no body soap production in Afghanistan and Afghans are aware of it. When they are
asked if they would be willing to pay more for soap Made in Afghanistan, 71% answer
yes
257
. Therefore, it appears there could be an opportunity to develop an Afghan body soap
brand, produced in Afghanistan and supported with well-aimed marketing.

3. Supply and Distribution Channels

a. Map of Supply

West
South-West
North
South
North-East
East
West-Central
Imported soap via Iran
KABUL
~ 2,500 5,000 MT
MAZAR-E SHARIF
~ 800 1,600 MT
HERAT
~ 700 1,400 MT
KANDAHAR
~ 500 1,000 MT
JALALABAD
~ 500 1,000 MT
3,000 7,000 MT
2,000-3,000 MT
Imported soap via Pakistan

Figure VII-10: Supply Channels for Body Soap, Estimated Yearly Volumes,
(in MT), ( 5,000 10,000 MT), 2004
258

Body soap is imported from either Iran (70% of imports) or Pakistan (30% of imports).

Iran is the main route for soaps that come from Europe (Imperial Leather
from the UK, via Bander Abbas or Dove from Germany) and Turkey (Turkish
soaps are transported by land across Iran and enter Afghanistan via Islam
Qala and then Herat). In addition, many of the products that are imported
from Indonesia are brought to the port of Bander Abbas and then enter
Afghanistan through Herat.

Pakistan is the main source of Unilever and Reckitt Benckiser products that
are made in Pakistan. Also, many copies and me-toos are made in Pakistan,
either in Karachi or Peshawar and then exported to Afghanistan. Chinese
products enter Afghanistan through Torkham. Finally, Royal, made in the UAE,
is imported via Pakistan.

257
258
Based on interviews with importers, distributors, wholesalers and retailers
174
b. Distribution Channels

The Afghan consumer goods market is relatively unsophisticated in that it relies much more
on push factors (such as distribution) than on pull factors (such as consumer demand),
except for a few selected brands.

Distributors, with their capacity to reach geographically diverse areas, both urban and rural,
as well as wholesalers and retailers, play a crucial role in the value chain. Distributors
generally carry various brands and products, among other reasons, to be able to fill
containers and to have variety to offer wholesalers. Wholesalers also carry a large variety of
brands, generally pushed on them by distributors. This type of system has an impact on
retailers who then carry many brands, even when these do not sell. For instance, in Kabul, a
retailer carries on average between 5 and 10 brands, but 2 of them (Imperial Leather and
Lux) represent more than 50% of sales
259
.

Numeric distribution
260
has an important impact on sales. Unsurprisingly, the market leaders,
Lux and Imperial Leather have outstanding numeric distributions: 94% for Lux in Kabul and
84% for Imperial Leather. Both brands are distributed by powerful and far-reaching
distributors who have branches across the country. Luxs distributor, for example, has a sales
force that actively works with wholesalers. The brands sales are also backed by Unilever
who is one of the only major companies to have a representative in Afghanistan.

Figure VII-11: Soap Products Distribution Channels by Type of Soaps

Interestingly, the Turkish brands tend to have high numeric distributions, especially
compared to their very low brand recognition scores. For instance, in Kabul, Duru can be
found in 68% of shops and Ava in 52%. Thus, their market share can largely be attributed to
their presence in many stores. Turkish and Iranian brands are generally distributed by a
larger number of distributors some of whom have agreements with the producers and many

259
Interviews with retailers, Kabul, November 2004 - February 2005
260
Numeric Distribution is defined as: share of retailers where each brand of soap can be found.
175
others who go directly to Iran and buy products at the factories or at wholesalers and sell
them in Afghanistan for lower than the official prices.

The importance of push is felt more strongly
outside Kabul. Indeed, in Kabul, consumers are
more sophisticated and know brands more. In
Kabul, 75% of respondents to the consumer
survey claimed they always bought the same
brand, whereas in Mazar-e-Sharif, only 22%
claimed to buy the same brand. In this city, there
are few main distributors. Generally, retailers buy
from mobile salesmen, people who come regularly and offer an array of brands to them.
Therefore, end customers buy the brands that are available to them when they go to their
usual shop.

84%
68%
52%
45%
39%
35% 35% 35%
94%
0%
25%
50%
75%
100%
Lux Imperial
Leather
Duru Ava Royal Lervia Fabienne Miss
Paris
Nancy
Leading Brands
Turkish Brands

Figure VII-12: Numeric Distribution of Soap Brands,
(% of retailers), Kabul, February 2005
261

261
Interviews with retailers, Kabul, November 2004 - February 2005
When I run out of soap, I can
not call a distributor. I have to
wait for a businessman to come
to me and sell me whatever soap
he has
- Retailer in Mazar-e-Sharif
176
c. Advertising and Promotional Activities

Apart from mobile telephony, there is still little
advertising for consumer products in Afghanistan,
including body soap. The little advertising there is
takes the form of billboards, radio advertising and
TV advertising.

Lux, for instance, has 3 billboards in Kabul and 1
in Jalalabad. It does not advertise on TV in
Afghanistan but Afghans who have satellite
antennas see its TV commercials from Pakistan.

Imperial Leather advertises on RTA (Radio
Television Afghanistan). The distributor of Royal
also claims to have been advertising for two years
in Afghanistan, via billboards and TV. Although
this does not translate in high percentages of people having noticed its advertising, it must
have had an effect on Royal gaining a brand awareness of 4%
262
(the fourth highest of the
interviewed sample).
42%
28%
10%
11%
4%
3%
2%
0%
25%
50%
75%
100%
Other
Palmolive
Duru
Gulnar
Dove
Lux
Imperial
Leather
What brands of body soap have you seen or heard
advertising for?

Figure VII-14: Unprompted Consumer Perception of Advertising for Soap,
(% of responses), Kabul and Mazar-e-Sharif, February 2005
263

Promotional activities are seldom conducted and the Lux distributor (with Unilevers support
and marketing expertise) was one of the only distributors to mention the use of promotional
activities (i.e. gifts to wholesalers). The success of Lux can thus be attributed to a
combination of effective distribution, use of promotional materials, mid-end price positioning
and compelling modern image.

262
263
Ibid

Figure VII-13: Lux Billboard in
Jalalabad, December 2004

177
Although wholesalers are often unacquainted with the existence of promotional activities,
there is a growing awareness of the possibility to get freebies and wholesalers are slowly
starting to ask for them. Generally, these requests are not seen favourably by distributors
who regard them as a form of extortion rather than a chance to promote their brands and
products. Interestingly, although products from several large multinational companies
(Reckitt Benckiser, Colgate-Palmolive, Procter & Gamble) are sold in Afghanistan, there is
little interest from these companies in helping the promotion of the sales or of actively
participating in the market. These companies do not advertise or support their distributors.
One of these distributors complained that they mainly concentrate on trading. There is no
long-term strategy, no brand building.

In conclusion, there is a relative concentration in the number of companies that supply soap
in Afghanistan but little involvement from them, thus little power as they are not very
actively involved in the Afghan market.

4. Opportunities

There is currently no body soap production in Afghanistan but there could be an opportunity
to launch a soap production venture and develop an Afghan brand, assisted with support
and know-how from investors with experience in the sector.

On the demand side, there is room for a new brand. Indeed, few brands really have a high
level of awareness, and they tend to be the brands that have been present in the Afghan
market for a long time. In addition, new brands like Royal have managed to develop sales
efficiently, based on a capable and concentrated distribution network and some advertising.
Also, interviewed consumers were very receptive to the idea of an Afghan brand. All of this
indicates that there is room for the launch of new brands, if they are supported with the
necessary marketing and distribution networks, and if they can guarantee good quality.

On the supply side, interviews with foreign soap producers indicate that body soap
production is not very different then the production of laundry soap, at least
technologically
264
. The opportunity to start a soap factory could be studied, with production
based on imported soap noodles. These soap noodles could be imported from Indonesia or
Iran. Interviewees mentioned that a second-hand body soap production line (that allowed
the production of soap based on soap noodles) could cost approximately US $ 80,000 to
implement.


To make body soap in Afghanistan successfully, several key factors need to be taken into
consideration:

Production

The main ingredients for the production of body soap would have to be imported, including
soap noodles, colourings and fragrances, thus having an impact on production costs.
Aspiring soap producers would have to assess the cost of producing soap and the resulting

264
Interviews with soap manufacturers in Tehran, Iran, February 2005
178
price of the Afghan soap, compared to the imported soaps before deciding whether this can
be a profitable venture at all.

Marketing

Marketing has not been developed as much as it could be in Afghanistan but there are
growing signs of sophistication in the market: companies increasingly advertise on TV, radio,
and via billboards, and wholesalers are starting to ask for point of sale material.
In the Afghan consumer goods market, where the pull factor is not very developed,
distributors and wholesalers have significant power to decide which brands they will carry.
Thus, an effective marketing campaign would have to aim not only at the end consumers but
also at the wholesalers and retailers.

Distribution

Companies with fragmented distribution tend to lose control over their brand (lower prices,
worsened image, more fakes). A successful distribution strategy would need to involve a
concentrated distribution and strong partnerships with distributors (e.g. providing
distributors with support whenever needed). In addition, the chosen distribution network
would need to provide more than just basic distribution, with a sales force actively pushing
the product rather than only taking orders and transporting the goods.

6. Main Existing and Potential Players

Although no body soap production exists in Afghanistan, several laundry soap manufacturers
are active and could be leveraged in order to produce body soap. Certain Iranian
businessmen could also be interested in potential joint ventures with Afghan entrepreneurs
where they would bring their know-how, experience of the industry, and connections while
Afghan or other foreign investors could put up the financial investment.

Laundry Soap Producers that could be leveraged include:

Ahmad Soap Factory, Jalalabad
Ahmad Soap Factory in Jalalabad produces 2
kinds of laundry soap. They experimented
with body soap, producing a brand called
Zaitoon with olive oil from the Jalalabad
region. They had to stop their body soap
production because the procurement of olive
oil was too expensive but the experience
demonstrated that production was possible,
and they could be interested in re-starting
this activity.

Spinghar Oil and Laundry Soap Factory, Kabul
The Spinghar Factory in Kabul has recently started producing laundry soap, using
as a raw material the waste from the production of oil. In addition, they are
official distributors for Imperial Leather in Afghanistan and would be interested in
developing their experience in this sector.

Figure VII-15: Zaitoon soap,
product of Ahmad Soap Factory,
Jalalabad
179
Iranian Players who could bring their know-how to the Afghan market include:

KAF/Darugar, Tehran, Iran
KAF/Darugar is a leading cosmetics company in Iran. They manufacture a variety
of cosmetic products, including body soap and shampoo. They could be interested
in a joint venture with Afghan partners where they would bring their expertise in
body soap and shampoo production.

Other Player that could be leveraged:

Silk Route Beauty Products, producer of Royal, UAE, and Ashan National, importer
of Royal, Kabul
Silk Route Beauty Products produces Royal in the UAE and Ashan National
imports it. The owners of Silk Route are Afghans and could be interested in
bringing the production to Afghanistan.

180

E. Shampoo
SWOT Shampoo
Strengths
High transportation costs, large losses and
damages during transportation are a
significant hurdle for imported goods
Proximity to the market is key
Outreach of current distribution networks
Growing consumption
Weaknesses
Most of the raw material must be imported
Electricity shortages have impact on
production as very machine-based
Power of large distributors
Price sensitivity of the consumers
Opportunities
Strengthen collaboration with distributors
Launch bottling unit
Low labour costs
Low sophistication of the market: a small
investment in advertising and distribution can
go a long way
Threats
Strong existing brands and potential entrance
of major international players with large
marketing budgets
Market distorting activities: fakes, imitations
and dumping

1. Sector Overview

a. Context

The market for shampoo in Afghanistan is characterized by an overabundance of brands,
with only a small number (mainly Iranian brands or major international ones) that constitute
a significant portion of the market. Packs vary between large / family sizes (500mL and
1,000mL are very popular) and individual sachets, which are estimated to represent
approximately 17% of the market in value
265
. There is some limited Afghan production,
mainly in Herat, Kabul and Jalalabad.

The shampoo market is similar to the soap market in many aspects. The largest brands tend
to have a concentrated distribution system (as opposed to small, opportunistic businessmen
irregularly buying products at the factory), selling their goods through large distributors that
can reach most of the country. On the contrary, a large number of small businessmen import
trucks of products little by little and sell them at lower prices.

The shampoo market is plagued by fakes and imitations, mostly copying the best known
brands (like the Iranian Sehat).

265
Estimate based on interviews with wholesalers, importers/distributors, retailers and consumers, November
2004 February 2005
181

Similarly to the usage of soap, shampoo sales are seasonal. Afghans tend to take fewer
showers in winter, hence the consumption of shampoo drops by approximately 20 to 25% in
winter.

In addition, Afghans go to public baths much more often in winter than in summer: in
summer, 81% of interviewees wash themselves at home and only 7% in public baths vs
44% in winter
266
.

Contrary to what is generally believed few Afghans go to public baths and buy sachets there.
49% of public bath customers bring their own shampoo. The ones who do buy sachets tend
to buy them in the bazaar where they are cheaper (for instance, a sachet of Emeron costs 2
Afs at the bazaar vs. 3 Afs at the public baths in Kabul)
267
than in the public baths.

Most Afghans buy shampoo in bottles. The average purchase is relatively large in terms of
monetary value, with 68% of respondents in Kabul and Mazar-e-Sharif spending between 11
and 50 Afs each time they buy shampoo.
How much money do you spend each time you buy shampoo?
1%
6%
68%
19%
5%
0%
20%
40%
60%
80%
>5 Afs 6-10 Afs 11-50 Afs 51-100 Afs >101 Afs
Sachets
Average of 41
Afs / bottle

Figure VII-16: Money Spent on Shampoo per Purchase, (% of respondents),
268

266
Ibid
267
Interview with retailers, owners of public baths and Altai Consulting / UNDP consumer survey, Kabul and
Mazar-e-Sharif, February 2005
268
182
2. The Market

a. Size of the Market and Geographical Breakdown

The shampoo market in Afghanistan in 2004 was estimated at US $ 14 to US $ 18 Mn in
retail sales, i.e. 6,000 to 8,000 MT
269
. This amounts to approximately 18 to 25 Afs per family
per month, equivalent to one 500mL bottle of the most inexpensive shampoo (such as
Afshin, which costs 20 Afs) per family per month.

Although this can appear to be a low average, several factors must
be taken into consideration. A special type of mud commonly called
gil-e-sar shoi (which translates into head washing mud) is often
used to wash hair. Women typically use this mud in rural areas or for
special occasions, as it has a very good reputation. The use of mud
is decreasing in urban areas because it takes time to prepare. In
addition, many people use soap to wash their hair since it is cheaper
than shampoo.

The dynamics of the shampoo market are very similar to those of the
soap market, with an increase in the size of the market in the past 3 years according to the
distributors and a rapidly growing number of new brands.

Similarly to the soap market, more than 50% of the market is in Kabul, where many
wholesalers from all over the country come to get their products.

Since most of the shampoo in the market comes from either Iran (via Herat) or Pakistan (via
Jalalabad), local markets in these cities tend to be highly affected by these flows of imports
from the nearest borders. Markets in Kandahar and Mazar-e-Sharif, on the other hand, are
more influenced by the distributors who go to Kabul to buy their products.

b. Structure of the Market

One of the particularities of the Afghan market is the importance of
the sachet format. This format is estimated to represent 17% of
the market in value, although its high visibility would indicate an
even greater share of the business. Indeed, several distributors
estimated its share at 70% of the market (despite sometimes not
selling any). Its market share may be much higher in rural areas
where people have lower incomes than in cities.

The sachet is a small package that generally contains 5 to 7mL of
shampoo and that is used for individual uses. It is a particularly
popular format in South Asia and its share of shampoo sales is growing due to its
attractiveness (smallest possible disbursement) to poor people, usually in rural areas.

The sachet was introduced in Afghanistan in the 1990s by the exclusive distributor of the
Indonesian brand Emeron, who saw potential for this format in the country
270
. Emeron is still
the main sachet brand in Afghanistan but there is a growing number of competitors,
including Gulan, Head & Shoulders, and Pantene. In addition, several strong Iranian bottle

269
270
Interviews with distributors, November 2004 February 2005
Figure VII-17: gil-
e-sar shoi
Figure VII-18:
Shampoo Sachets,
December 2004
183
players plan to launch a sachet format in Afghanistan soon. The rationale they generally give
for doing so is the low Afghan income per capita which has an impact on the ability of
Afghans to pay a minimum of 20 Afs for a bottle of shampoo (as opposed to 2 Afs for a
sachet).

Visits to Public Baths

One of the main occasions of usage of sachets is a visit the to public baths, which typically
takes place in winter.

During this season, it takes more time to heat water at home with bukharis, therefore
Afghans go to public baths. However, these cost 15 to 30 Afs, depending on the city, the
neighbourhood and the quality of the facility, reducing consumers incentive to take showers.

36%
81%
44%
7%
20%
12%
0%
25%
50%
75%
100%
Winter Summer
Equally in Both
Public Bath
Home
Do you wash yourself mostly at home or in
public baths during ?

Figure VII-19: Chosen Bath Location According to the Season, (% of respondents),
271

Public baths offer a variety of shampoo sachets for prices ranging from 2 to 5 Afs. They
carry an average of 4 brands of sachets but generally 2 brands represent over 70% of their
sales: Gulan and Emeron.

Prices of sachets in the public baths are often more expensive than at the bazaar, creating
an incentive for people to buy their sachets at the bazaar before making their trip to the
baths.

271
Altai Consulting/ UNDP consumer survey, Kabul and Mazar-e-Sharif, February 2005
184
c. Main Products and Market Shares

Over 30 different brands of shampoo can be observed in the Afghan market. They come
from Iran, Indonesia, Pakistan, China, Europe and Afghanistan itself.

The market can be divided into three main types of brands: the Iranian brands which, in
total, cover approximately 60% of the market, the major international brands that capture
approximately 25% of the market and finally, the Afghan brands (with about 5% of the
market).
16%
5%
3%
9%
5%
4%
5%
4%
8%
10%
31%
58%
Iranian
Brands
Sehat
Gulan
Rokhsar
Darugar
Other
Other
Sunsilk
Head &
Shoulders
Other
International
Emeron
Afghan
Brands

Figure VII-20: Shampoo Market Shares, (% of US $)
(Yearly Market Estimated at US $ 14 US $ 18 Mn), 2004
272

Iranian brands: A variety of Iranian companies export their products to Afghanistan. These
include Gulrokh which exports Rokhsar, Sehat which exports its namesake Sehat, Glan which
exports a number of brands (including Gulan), KAF Darugar and a few others.

Sehat is the leader in the market with an estimated
31% market share. It is the only brand made by Sehat
company, although there are several versions of it (with
different scents: olive, henna, camomille). The original
Sehat is most common in Afghanistan, mostly in the
300mL format at a low price of 25 Afs per bottle.

Sehat suffers greatly from both fakes and imitations.
Two factories are supposedly producing fakes in
Afghanistan, recycling the used bottles, taking off the
label (a simple task since the bottle is printed on a
plastic film) and replacing it with a new one. The fakes
are sold at a significant discount in the bazaar.

272
Altai Consulting analysis from interviews with importers, wholesalers and retailers in Afghanistan, November
2004 - February 2005
185
Gulan is one of the other very popular shampoos from
Iran. Gulan has been in the Afghan market for 12 to 13
years. It has a total market share of approximately
10%, thanks to its large formats (mainly 500mL and
1,000mL) and its sachets (with a unique shape that
makes it very recognizable). Gulan caters to the lower
end of the market with one of the cheapest prices per
mL, in both bottle and sachet (the sachet sells for 1.5
to 2 Afs, compared to other sachets at 3 to 5 Afs). The
brand has the reputation of selling quality products.
Gulan has upgraded its bottle format in Iran but it is the
old format that is still demanded in Afghanistan,
apparently because it is cheaper
273
.

Rokhsar has been in the Afghan market for
approximately 8 years, and is mainly available in 250mL
bottles. It has an 8% market share. Rokhsar has
recently introduced a new, more modern bottle but
both the old and the new are still found in the Afghan
market.

International brands: These brands generally come from Pakistan (Sunsilk, produced by
Unilever), from Indonesia (Emeron) or from Europe (Pantene, imported from the U.K.,
among other places). These brands represent around one third of the market. They are
among the most known (especially by Afghans who lived at some point in Pakistan or
elsewhere) and also the most copied (with copies coming from China, Saudi Arabia, or even
Pakistan). Interestingly, retailers generally carry both the original and the fake (at half the
price of the original) and are completely aware of which bottles are fake and which are
genuine
274
.

Sunsilk is one of the leaders in the shampoo market
with high brand recognition and a 16% market share.
Like most of the international brands, it caters to the
upper end of the market with its bottle format (mainly
250mL) and offers the sachet for the more price-
sensitive segments at approximately 3 Afs. Like Sehat,
Sunsilk suffers from many copies and fakes as well as
smuggled goods. Indeed, one distributor has an
exclusivity agreement with Unilever in Pakistan to
import the shampoo into the country but a significant
amount of Sunsilk is also imported from Indonesia by
other opportunistic distributors.

Emeron has a 9% market share, mainly due to its sachet format, as its bottle
is scarcely found in the market.

273
Interviews with distributors, retailers, consumers and company officials, Afghanistan and Iran, November 2004
February 2005
274
Interviews with retailers, Afghanistan, November 2004 February 2005
186

Other international brands include Pantene and Head & Shoulders. The latter
is very popular because of its medicinal (anti-dandruff) positioning, and
Pantene is among the most high-end, expensive brands in the market. They
can both be found in bottle and sachet format. Head & Shoulders is sold at a
competitive 3 Afs per sachet while Pantene is again sold at the highest price
of 5 Afs per sachet.

Afghan brands: Four producers manufacture shampoo in Afghanistan.

Afshin is manufactured in Herat. It
is sold in 500mL and it is one of the
cheapest brands, at 20 Afs per
500mL bottle. Afshins distribution
goes beyond Herat and it can be
found in the bazaar in other cities
such as Kabul.
Figure VII-21: Afshin Bottles in a
Retailer Shop in Herat, February 2005
Sadaf shampoo is produced and mainly sold in Kabul. (Primarily in 500mL
bottles but to a lesser extent in 250mL bottles.)

Ariana is produced in Jalalabad and sold there. There are several kinds of
Ariana shampoo: anti-dandruff, hair loss preventative type and herbal
shampoo.

Naz is produced and commercialized in Herat but both its volumes and
quality are clearly inferior to the two other brands.

187
20
25 25 25
35
45
80 80
110
0
40
80
120
160
Afshin Chinai Sehat Rokhsar Gulan
(500mL)
Emeron Sunsilk H&S Pantene
36 64 80 110 17 20 14 8 10
Price per
200 mL
Low
Prices
Medium
Range
Lowest
Price
International
Brands

Figure VII-22: Shampoo Prices, (Afs per bottle and Afs/200mL),
275

d. Brand Preferences

75% of the interviewees declare having a favourite brand
276
. The preferred brands are
generally in line with the market shares, except for a few brands that have a higher score
than their market share. This is the case for Head & Shoulders and for Pantene, which are
liked by consumers but are generally too expensive for them to afford on a regular basis.
This indicates an appetite for brands and a high degree of brand loyalty, which is
encouraging when deciding to launch or develop a brand in the Afghan market.

275
Analysis based on interviews with importers, wholesalers and retailers in Afghanistan, November 2004 -
February 2005
276
Altai Consulting/ UNDP consumer survey, Kabul and Mazar-e-Sharif, February 2005
188
Sehat
23%
Head &
Shoulders
14%
Gulan
17%
Sunsilk
12%
Emeron
8%
Rokhsar
6%
Pantene
6%
Afshin
4%
Other
10%

Figure VII-23: Favourite Brands, (% of respondents),
277

3. Distribution Channels

a. Map of Supply
West
South-West
North
South
North-East
East
West-Central
Shampoo Imported via Iran
KABUL
~ 3,100 4,100 MT
MAZAR-E-SHARIF
~ 800 1,000 MT
HERAT
~ 900 1,200 MT
KANDAHAR
~ 500 700 MT
JALALABAD
~ 700 1,000 MT
3,500 4,500 MT
1,800-2,600 MT
Shampoo Imported via Pakistan
Shampoo Produced in Afghanistan
1,800-2,600 MT
3,500-4,500 MT
700-900 MT
400 - 500 MT 300-400 MT

Figure VII-24: Supply Channels for Shampoo, Estimated Yearly Volume, (in MT),
(6,000 8,000 MT), 2004
278,279

277
Ibid
278
Analysis based on interviews with producers, distributors/ importers and wholesalers
279
Ariana shampoo production quantities are not represented on the map as they are very small compared to the
rest of the market (5 8 MT per year)
189
The routes that shampoo takes to enter the country are very similar to the routes taken by
body soap: approximately 56% to 59% of the shampoo in Afghanistan enters the country
from Iran and 31% to 33% comes from Pakistan. In addition, as much as 11% of the
shampoo consumed in the country may be produced locally
280
.

The shampoo that comes from Iran includes Iranian shampoo, which
represents approximately 58% of the market in value. Most of the Indonesian
shampoo arrives at the Iranian port of Bander Abbas and enters Afghanistan
via Herat.

Pakistan is the preferred route for Unilever brands produced there, for a
variety of imitations and fakes, as well as for cheap Chinese brands.

b. Distribution Channels

Distribution dynamics in the shampoo and body soap markets are very similar, if only
because both products are generally distributed by the same distributors, who try to fill their
containers in the country in which they source their products: for example, the same
distributor carries Emeron (shampoo) and Lervia (body soap), imported from Indonesia.

Iranian brands tend to be more prominent near the western border, while Pakistani and
Chinese shampoos are more common around Jalalabad.

Numeric distribution remains crucial:

Sunsilk is represented by one distributor who has an exclusivity agreement
with Unilever Pakistan. The distributor is supported by Unilever with
marketing tools and techniques (e.g. customer segmentations) that have been
tested by the company in other parts of the world. In addition, Sunsilks
distributor is one of the few distributors to have a sales force that goes to the
point of sale regularly (as opposed to order takers).

Gulan has a concentrated distribution with a limited number of agents
specialised in one area of the country. The company has established a strong
relationship with these distributors and supports them when they need help.

Sehat, with a fragmented distribution network, is the exception. It has agents
for several cities and a number of clients who come directly to the factory to
get their products and bring them to Afghanistan. Although this helps Sehat
gain an exceptional numeric distribution (all of the interviewed retailers in
Kabul had it), it also deprives the company of any control over its brand.

Sehat has the highest numeric distribution with more than 95%, followed by Emerons
sachet with 68%, Rokhsar with 58%, Gulan with 52% and Sunsilk with 42%. Sunsilk
represents significantly less volume than Sehat but it compensates in revenue through higher
prices.

Although retailers carry a variety of brands (partly due to a push phenomenon from the
distributors), a limited number of brands represent most of the volumes.

280
Estimates for Afghan shampoo production include production of fake/imitation shampoo
190
c. Advertising and Promotional Activities

Advertising in the Afghan market is not very sophisticated and focuses on broad-reaching
media such as TV and radio. It is, however, increasingly used by the Iranian brands that
have started to consolidate their position of strength in the market through advertising.
Gulan advertises on Tolo TV, Rokhsar on local TV stations in Kabul, Herat and Kandahar, and
Sehat advertises on Radio Arman and Tolo TV and has billboards in Kabul, Herat and Mazar-
e-Sharif
281
.

These efforts bear fruits: Sehat and Gulan ads are the most remembered by consumers:
46% of interviewees remembered having seen or heard publicity for Sehat and 30%
remembered Gulan. The other brands follow at comparatively low scores of 1% to 5% and
include brands that do not advertise in Afghanistan like Head & Shoulders. This highlights
the importance of satellite TV and the fact that many people must have seen advertising for
such brands in Pakistan.
30%
6%
5%
4%
2%
1%
46%
0%
10%
20%
30%
40%
50%
Sehat Gulan Head &
Shoulders
Sunsilk Rokhsar Emeron Vitamine
Leading International Brands
Iranian Brands

Figure VII-25: Unprompted Awareness of Shampoo Brand Advertising, (% of responses),
282

4. Afghan Production

In addition to the several rumoured fake-shampoo producing factories, there are 4 shampoo
factories in Afghanistan, indicating an ability to produce in the country.

Sadaf Factory, Kabul
Sadaf produces dish-washing liquid and shampoo. They started in 2004 and
have a daily capacity of 1 MT of dish-washing liquid and 0.5 MT of shampoo.
Their shampoo is mostly sold in 500mL and 250mL bottles. 11 people work in
the factory and they also have a small sales force that distributes the products
in the bazaar in Kabul.

281
Interviews with shampoo producers in Iran, February 2005
282
191

Ariana Shampoo Factory, Jalalabad
Ariana shampoo factory started producing shampoo in 1997. 11 people work
in the factory and they produce 5 to 8 MT of shampoo per year. Production is
very small-scale and mostly done by hand. There are few machines, including
a bottle-making machine. The factory makes several types of shampoos which
are sold in Jalalabad.

Afshin Factory, Herat
Afshin factory started producing shampoo in 2004. They have built a
distribution network and Afshin is present in Kabul as well as in Herat.

Naz Shampoo, Herat
Naz shampoo is produced and sold in Herat.

5. Opportunities

There are opportunities to leverage existing players or to create shampoo producing or
bottling factories. Shampoo consumption, at present, is low (18 to 25 Afs per family per
month
283
) and holds significant potential for growth.

Iranian soap and shampoo manufacturers are, on the whole, much more interested in the
idea of investing in shampoo production than in soap production, largely because the
investment is smaller and the production lines are shorter and less complicated.

Given the low existing level of experience and know-how in Afghanistan, the least risky
investment would be to start with shampoo bottling, to later move on to shampoo
production. Several Iranian shampoo manufacturers were approached and showed interest
in either a shampoo-producing or bottle-filling factory in Afghanistan. One of these
companies was already actively looking into the opportunity with an Afghan partner in Herat.
There were several reasons behind their interest:

Reducing transportation costs: Transporting shampoo to Afghanistan is a
complicated, lengthy, and expensive process. In addition, the bad quality of
the roads causes significant damage to the shampoo bottles, and the lack of
storage facilities does not protect the products from extreme temperatures.

Reducing labour costs: by producing in Afghanistan rather than in Iran.

Simple production process: According to the interviewees, liquids are the
easiest to produce. They require short production lines (compared to soap)
and little equipment.

283
Equivalent to US $ 0.38 to 0.53 per family per month
192
Requirements for Shampoo Bottle-Filling Factory:

It is estimated that an investment of US $ 200,000 to US $ 300,000 would be required for a
small factory with a daily production capacity of 23,040 bottles of 250mL in 2 shifts of 8
hours each.

Average machine requirements would include
284
:

Filling Machine: US $ 50,000

- Can be bought in Iran
- 4 nozzle, semi-automatic filling machine with filling
capacity of 4x250mL bottles every 10 seconds

Bottle-Making Machine: US $ 35,000 - US $ 80,000

- In a first case, bottles could be made from pre-forms
imported from China or the UAE or directly from resin
(that could be imported from Iran). For this, the
cheaper machine (around US $ 35,000) would suffice.
- In a second case, the machine would be more
expensive (approximately US $ 80,000) and it could
make both pre-forms and bottles.
- This type of machine is currently found in Afghanistan,
imported from Iran or China.

Mixing Machine - This type of machine could also be bought in Iran.
- It is used to mix the raw materials that go into the
shampoo.

Heating Machine
Water Filter and Water
Pump

Concentrated shampoo could be imported to be mixed in Afghanistan. The process could
then evolve to include the actual production of the shampoo locally.

Although several potential investors were interested in this type of venture, their main
concerns and conditions for investing in Afghanistan must be taken into account: these
include a sound legal environment to protect their investment and the possibility to have a
majority of the shares if a company were to be set up. They were also interested in knowing
about tax regulation, property rights and the services that the government would offer or
help them with.

284
Estimates based on interviews with industry professionals in Iran and Afghanistan, February 2005
193

The Key Success Factors in launching either a new shampoo brand or the production of an
existing brand in Afghanistan are similar to those pertaining to body soap production: they
include mainly key success factors related to production, marketing and distribution.

Production:

If the production process is to use foreign machines, maintenance is a key success factor.
For this reason, it is important to buy machines with readily accessible spare parts at
relatively inexpensive prices. This could be an incentive for buying the machines in a country
that is geographically close, such as Iran. In addition, in the existing factories, there is
generally an engineer that is in charge of the maintenance of the machines. Often, that
engineer is foreign or has been trained in foreign countries.

Partnering with a foreign producer could be important as this partner could bring his
knowledge of the industry.

Marketing and Distribution:

As mentioned in the Body Soap section, marketing and distribution are key factors in such
a push driven market. Given the relative low level of sophistication of the market, small
investments can go a long way to build a brand across the country. Again, marketing
(including price positioning, promotional activities and advertising) should target the
wholesalers and retailers as well as the end consumers.


Existing players that currently produce shampoo in Afghanistan could be leveraged. In
addition, large distributors who already have distribution networks and know the dynamics of
the market could have an interest in investing in local production. Several of the Iranian
manufacturers who were approached were interested in investing in the type of plants
discussed above.

Existing Afghan Shampoo Producers

Sadaf Factory, Kabul
Sadaf has been producing shampoo since 2004. They are looking to expand their
production and the outreach of their distribution. They were present at the Kabul
International Trade Fair in October 2004 and were in search of potential partners.

Ariana Shampoo Factory, Jalalabad
Ariana shampoo factorys owner is thinking about including natural Afghan raw
material (such as Jalalabad olive oil or honey) in his shampoos and would like to
increase production and expand Arianas distribution across the country. He is
looking for investors to help him boost his production capacity.

194

Iranian Shampoo Producers

KAF/Darugar, Tehran, Iran
KAF/Darugar, a leading Iranian shampoo and soap producer, would potentially be
interested in a Joint Venture with Afghan entrepreneurs in order to start the type
of factory described above. KAF/Darugar representatives were present at the
Kabul International Trade Fair in October 2004, demonstrating their interest in
the Afghan market.

Glan Cosmetics and Hygienic Co., Tehran, Iran
Glan is a leading shampoo and cosmetics Iranian company. They export Gulan,
one of the major shampoo brands in the Afghan market. They have expressed an
interest in a shampoo bottling factory in Afghanistan.

195

F. Laundry Soap and Laundry Detergent
SWOT Laundry Soap and Laundry Detergent
Strengths
High transportation costs for foreign soaps
and detergents
Growing demand
Weaknesses
A significant part of raw material for laundry
soap must be imported
Laundry detergent is difficult and expensive
to produce
Concentrated distribution networks often
locked with exclusivity agreements
Opportunities
Tap the lower end of the market with cheap
laundry soap
Simple production process of laundry soap
(mostly manual)
Laundry soap factory represents low
investment
Threats
Large quantities of fakes and imitations
Growth of laundry detergent market
represents a threat to laundry soap market

1. Sector Overview

The market for laundry products is divided into two main types of products: laundry soaps
and laundry detergents (i.e. laundry powders). Laundry soap is a long-established product,
used traditionally in Afghanistan and still very common in rural areas, while laundry
detergent / powder has entered the market in the last 10 years and quickly gained a large
portion of the market, mainly because it is considered to wash better and because it is also
used to wash all sorts of other things (e.g. dishes, house-cleaning).
285

Laundry soap used to come mainly from Russia, but over the past few years an increasing
number of cheaper brands and imitations are being imported from Iran. There is some
production in Afghanistan and Pakistan, but Pakistani soap is seldom exported to
Afghanistan.

Laundry detergent is almost wholly imported from Iran, with only very few brands being
imported from Pakistan (Pakistani brands are generally more expensive and are directed
towards the upper end of the market).

Although Afghanistan is considered a very price-sensitive laundry soap market (as opposed
to a laundry detergent/powder market)
286
, our analysis based in Afghanistans two main

285
286
Interviews with laundry soap and laundry detergent producers and importers in Afghanistan and Iran,
November 2004 February 2005
196
cities shows a higher proportion of laundry powder use than expected. This can be
explained by the different consumption patterns that exist in the urban, marginally richer
areas compared to the rural zones. It also shows a trend that the rest of the country is likely
to follow in the long term.

Figure VII-26: Laundry Products Retailer in Jalalabad, December 2004

2. Demand Consumption Habits

The consumer survey highlights the fact that in Kabul and Mazar-e-Sharif, Afghans use
mostly laundry detergent/powder: 38% of the interviewees declare they use only laundry
detergent and, of the 51% who said they use both laundry detergent and laundry soap, 30%
use mostly laundry detergent
287
.
Laundry
Soap Only
11%
Mostly
Laundry
Soap
8%
Equally
Both 13%
Mostly
Laundry
Detergent
30%
Laundry
Detergent
Only
38%
Both
Laundry
Soap and
Detergent
51%

Figure VII-27: Preferred Product for Washing Clothes, (% of respondents),
288

287
288
Ibid
197
This consumption pattern can be explained
by the fact that many of the interviewees
own a washing machine. Regarding this, it
is important to note that the interviewed
sample is likely to own more washing
machines than the average population.
Thus, laundry soap consumption might be
under-estimated.

In addition, laundry detergent tends to
have a better reputation (it washes
clothes better than laundry soap) and,
most importantly, it can be used to wash
other things than clothes.

The interviewed families spend, on
average, from 13 to 34 Afs on laundry soap
per month. This is equivalent to 2 to 5
laundry soaps per month.

They also spend an average of 16 to 28 Afs
on laundry detergent, equivalent to 1 to 2
boxes of laundry detergent per month.

They generally always buy the same brand
of laundry soap (74% of the respondents)
and of laundry detergent (71%),
demonstrating great brand loyalty.

3. The Market

a. Size and Structure of the Market

It is estimated that the total market for laundry products represented approximately US $ 28
to US $ 39 Mn, which translates to about 36,600 to 50,200 MT in 2004
289
.

Laundry soap represents 60-65% of the market, with US $ 16 to US $ 25 Mn (i.e. 20,000 to
30,000 MT). It must be noted, however, that laundry soap could represent an even larger
share of the market, as it is very much used in rural areas and is often imported (or
smuggled) across the borders (from Iran, Turkmenistan or Uzbekistan). Several distributors
mentioned that copies of Russian laundry soaps were produced in very small production
units all over Afghanistan.

Laundry detergent/powder represented a 35-40% share of the market in 2004, with US $ 12
to US $ 14 Mn (i.e. 16,600 to 20,200 MT per year).

These figures are equivalent to 2 to 5 laundry soaps per family per month and 1 to 2 boxes
of laundry detergent per family per month.

289
Analysis based on interviews with producers, distributors/ importers, wholesalers, retailers and Altai Consulting
/ UNDP consumer survey, Kabul and Mazar-e-Sharif, February 2005
57%
22%
13%
8%
0%
25%
50%
75%
100%
Other Reasons
Is Cheapest
Can be Used to
Wash Other
Things
Washes Clothes
Best
Figure VII-28: Reasons for Preferring
Laundry Detergent / Powder,
(% of responses), Kabul and
Mazar-e-Sharif, February 2005

198
b. Map of Supply

West
South-West
North
South
North-East
East
West-Central
Imported Laundry Detergent
KABUL
LS: 7,900-11,500 MT
LD: 8,300-10,100 MT
purchased
HERAT
LS: 2,800-3,900 MT
LD: 2,400-3,000 MT
purchased
JALALABAD
LS: 2,400-3,200 MT
LD: 1,700-2100 MT
purchased
16,400 20,000MT
~200 MT
Imported Laundry Soap
Laundry Soap Made in Afghanistan 100-300 MT
19,900 - 29,700 MT
16,600 - 20,200 MT
4,800-11,500 MT
~ 100 MT
15,000-18,100 MT
KANDAHAR
LS: 2,200-2,900 MT
LD: 1,700-2,000 MT
purchased
MAZAR-E SHARIF
LS: 4,700-8,500 MT
LD: 2,500-3,000 MT
purchased

Figure VII-29: Map of Laundry Detergent and Laundry Soap Supply, Estimated Yearly
Volume (in MT), (36,600 50,200 MT), 2004
290,291

Laundry soap is mainly imported from Iran and Russia. Approximately 60% to 75% of the
volumes come from Iran via Herat and 25% to 40% come from Russia, via Mazar-e-Sharif.
Some negligible quantities are brought from Pakistan by small players who go back and forth
with small trucks. Some laundry soap is also produced in Afghanistan. The most sizeable
production facility can be found in Jalalabad (cf. Case Study Jalalabad Soap Factory) but
other production units are reported in Kandahar and Mazar-e-Sharif. Laundry detergent only
comes from Iran (except for very small quantities coming from Pakistan). There is no laundry
detergent production in Afghanistan.

Product origins and the paths they take to enter the country have an impact on the
geographic distribution of the market. As for other consumer goods, Kabul represents the
largest part of the market (it is estimated at approximately 40% of the volume). Mazar-e-
Sharif is the second largest market, with a particularly strong presence and preference for
Russian brands (the only highlighted laundry soaps in the consumer survey were Russian
72% and its copy, Iranian 72%). In Herat, on the other hand, Iranian brands of both
laundry soap and laundry detergent are omnipresent.

290
/ UNDP consumer survey, Kabul and Mazar-e-Sharif, February 2005
291
NB: Volumes of laundry soap made in Afghanistan (estimated to amount to 100 - 300 MT) are not represented
on the map as they are produced in a number of factories across the country.
199
c. Main Brands and Market Shares

Laundry Soaps
The laundry soaps are sold as is, without any form of packaging. They are recognizable by
signs that are moulded in the actual soap and that generally become the brand name.

72%: The main brand is called 72%. It is the original
Russian brand that was exported to Afghanistan. 72%
originally referred to the percentage of oil that went into
the making of the soap. Now, it has become a brand
name and people look for 72%. Russian soaps tend to
be larger than Iranian ones and of a more white hue. The
usual size of Russian 72% is 250g (compared to 180g
for Iranian soaps). Most of the real so-called Russian
72% comes from either Ukraine or Russia and is
handled by one very large distributor who is based in
Mazar-e-Sharif. 72% is heavily copied and can be found
in all kinds of different colours, sizes and qualities. These
copies are made in Russia, Iran, and even Afghanistan.
The original 72% sells at around 10 Afs per bar of soap
(which is considered expensive, compared to other
laundry soaps that sell at 5-7 Afs per bar).

65% is the lower quality version of 72% (65% oil). It
is also originally from Russia and has also been copied
significantly. The original 65% sells at around 8 Afs for
a 240g bar in Kabul.

Behkaf is an Iranian brand. It is mostly sold in Kabul. The consumer survey
did not indicate the presence of Behkaf in Mazar-e-Sharif but it is very strong
in Kabul292. Behkaf is distributed by an agent who claims to have an
exclusivity agreement with the producing company. It sells for approximately
7 Afs for a bar of 180g in Kabul.

A variety of other brands and imitations can be found in the market in different forms, many
of them with the 72% logo, or to a lesser extent, the 65% logo.

292
/ UNDP consumer survey, Kabul and Mazar-e-Sharif, February 2005, 30% of respondents who always bought the
same brand of laundry soap claimed to buy Behkaf.
200
Laundry Powders / Detergents:

Virtually all the laundry powder sold in
Afghanistan is Iranian and three main brands
comprise 95% of the market. They are sold
in similar packages (mostly 480g), look
extremely similar and are priced identically
(generally between 15-16 Afs per package).

Pak: Pak is produced by the Iranian company Pakwash. It
is considered to be the first laundry detergent brand to
have penetrated the Afghan market and, thus, has the
advantage of longevity. It has been losing market share
to the relative newcomer, Yekta.

Yekta: Yekta is produced by Paknam Company. It
officially started being distributed in Afghanistan only 2
years ago and has gained more than 30% market share
mainly through a combination of efficient distribution and
some advertising.

a. Distribution Dynamics

Distribution dynamics are fairly similar in the laundry soap and laundry detergent markets,
although the distributors are not the same: distributors tend to specialize in either one or the
other type of product. Generally, there is a combination of a few large distributors with
offices in the main cities and opportunistic distribution done by small players who cross the
border and fill a truck with consumer goods that they sell for a small profit in Afghanistan. In
addition, there is a substantial amount of fakes and imitations.

Large distributors sign exclusivity agreements to be the brands only distributor in
Afghanistan. Their level of service is generally low (order taking being much more frequent
than actual selling).

Figure VII-30: Estimated Laundry
Detergent Market Shares,
(in % of US $ ), 2004
Other
Brands
5%
Darya
26%
Pak
33%
Yekta
36%
201
Laundry Soap:

The main laundry soap distributors are generally
large, with offices in the major cities and their
own transportation capacities. For instance, the
main distributor of Russian soap has a main
office in Mazar-e-Sharif and four other offices in
the key cities.

In addition to these large distributors, many
small entrepreneurs sell their products to
wholesalers at lower prices than the official.

Laundry Powder / Detergent:

Dynamics are fairly similar to the ones described above but there exist different types of
approaches. For example, the Pakwash management (manufacturers of Pak) estimates that
they sell to 40-50 distributors who export to Afghanistan. In addition, private businessmen
can come to their factory and buy products in small quantities there.

On the contrary, Paknam (manufacturer of Yekta) has established relationships with its 4 to
5 distributors whom it assists and supports in a variety of ways. Paknam provides its
distributors with promotional material for themselves and for the points of sale.


There is no production of laundry detergent in Afghanistan. Indeed, this is a capital intensive
activity that also requires a high level of technological know-how. This industry has been
heavily developed in Iran, thus giving Iranian entrepreneurs the ability to produce at low
costs and in enough quantity to export to many countries, including Afghanistan.

Laundry soap production is very different. The production process is simple and the materials
basic: the main element needs to be some kind of fat like cotton oil or ghee. When
producers run out of these materials, they use anything they can find at the bazaar,
including expired cooking oil. Laundry soap is easily copied. It is currently produced in many
parts of Afghanistan.

Laundry Soap Production Process

Heating: The fat elements are heated in pans. The other
ingredients are progressively added.

Hasty mixes can lead to graining. Although this does not
affect the cleaning quality of the laundry soap, it gives it an
ugly appearance. Stirring is key during this process. Thus, it
is the only part that is worth mechanizing in general. This
phase lasts 4 to 5 hours.

I carry 4 main brands of laundry
soap, all from Iran. I have signed a
US $ 20,000 one-year exclusivity
agreement with the producer of one of
these brands, in order to be their only
distributor

- Laundry Soap distributor in Kabul
202
Cooling: The mixture is put in moulds where it cools down
during one day.

Cutting and packaging: The soap is then cut into an
appropriate shape and size, stamped and packed, ready for
sale.

Scraps are collected and reheated with new mixtures so that
waste is minimized.

The production of laundry soap does not present any major technical difficulty:

A few trained workers can do almost all the processing manually.

The main ingredients are sodium silicate, some kind of fat component (animal fat, oil
or ghee) and soda. Fragrance or colourings are used in very small quantities,
representing negligible costs.

Case Study: Ahmad Soap Factory, Jalalabad

The main activity of the company is the production of oil from cotton seeds. They decided to
start production of soaps to get some value from the by-products of their oil production.

The plant currently employs 34 people.

Machines were bought in Pakistan. The owner designed a heating system himself,
based on an electric generator.

The factory produces 2 MT of laundry soap in 200g bars per day in 2 shifts of 8 hours
each.

2 qualities of soaps are available:
o A white one from their own cotton oil or from fairly good quality oil they
purchase from the bazaar. This soap is generally sold in the city.

o A brown one, using waste cotton material that is a by-product of their cotton
oil production, considered of lower quality than the white one by the
consumers. Since they do not produce enough of this waste material, they
buy most of it on the bazaar. The brown soap is sold in the more price-
sensitive rural areas around Jalalabad.

203
The factory sources sodium silicate and caustic soda from Peshawar for US $ 0.57
and US $ 0.17 per kg respectively, including about US $ 0.06 per kg of taxes and
transportation.

Oil or animal fat is purchased locally. Fat elements cost about US $ 0.19 per kg for
brown soap production, and US $ 0.47 per kg for white soap production.

Production cost analysis (see Figure VII-31) shows that brown soap costs about 30% less to
produce than white soap.
$0,00
$0,10
$0,20
$0,30
$0,40
$0,50
Jalalabad
Brown soap
Jalalabad
White soap
HR
Power
Soda
Oil/Ghee
Silicate
US $ 0.39
US $ 0.28
0.06
0.16

Figure VII-31: Direct Production Cost Comparison between Brown and White Laundry
Soap Produced in Jalalabad (US $ per kg), December 2004

The owner was aware that the production of white soap (sold for US $ 0.34 to US $ 0.36)
was not profitable, compared to the production of brown soap (sold for US $ 0.30 to US $
0.32), primarily because the cost of oil was too high for white soap production, with the
proportions they were using.

204
There are two key elements for laundry soap production:

Ingredients: the quality of the final product highly depends on the ingredients. Thus
laundry soap producers always make a trade-off between the quality they want to
reach and the price of their raw material: waste oil, for instance can cost half as
much as standard oil.

Recipe: Proportions depend highly
on the expected quality of the final
product and on the selection of raw
materials. To make 100 kg of soap,
recipes range from:
o Sodium silicate: 55 to 70 kg
o Caustic soda: 4 to 10 kg
o Oil, ghee, animal fat: 25 to
35 kg

For a same set of raw material, the
proportions used in the recipe can
have major consequences on the
production cost of the laundry
soaps.

Figure VII-32 illustrates how
Jalalabads factory studied earlier
might reduce its production costs
by 15% by adopting the
proportions used in the factory of a
leading laundry soap manufacturer
based in Islamabad.

Jalalabad White
Soap Islamabad
Sodium silicate 0.57 0.71
Soda 0.08 0.04
Oil/Ghee 0.35 0.25
Total weight 1.00 1.00

$0,00
$0,10
$0,20
$0,30
$0,40
$0,50
Jalalabad
White soap
Jalalabad
Islamabad's
proportions
HR
Power
Soda
Oil/Ghee
Silicate
US $ 0.39
$ 0.31
US $ 0.33
$ 0.25

Figure VII-32: Production Cost Comparison
for two Different Recipes
(US $ per kg), Jalalabad
293

5. Opportunities

Laundry soap holds significant opportunities for import substitution in Afghanistan. Although
laundry powders share of the market is increasing and set to grow even more with the
extension of washing machines in Afghanistan, laundry soap remains an important market
(US $ 16 to US $ 25 Mn) where 99% of the products are imported, sometimes from places
as far as Russia or Ukraine. They could be manufactured in Afghanistan profitably. The
manufacturing process is simple, requiring relatively unskilled labour and a few inexpensive
machines.

Currently, the most popular laundry soap in Afghanistan is still the Russian 72%, which
people buy because of its perceived quality, despite its price premium. This brand is heavily
copied with poor quality soaps. There is an opportunity in the market for a high quality, well

293
Interview with soap factories in Jalalabad and Islamabad, December 2004
Recipes
(proportions for
1 kg of soap, in kg)
205
branded soap, or, on the opposite side of the consumption spectrum, for very low priced
soaps aimed at price sensitive consumers in rural areas.
On the other hand, laundry detergent/powder presents negligible opportunities for a variety
of reasons. Laundry detergent/powder is a highly capital intensive industry which also
requires fine chemical know-how. Iran has been producing laundry powder for a long time
and its three main brands are well entrenched and distributed in the Afghan market. For all
these reasons, this sub-sector does not represent opportunities for SME development in
Afghanistan.


The main challenges in laundry soap production lie in sourcing the ingredients and in
choosing an optimal recipe.

Thus, a laundry soap manufacturer could be successful with:

A well thought-out recipe,
A strong and far-reaching distribution network and,
A solid positioning that would correspond to the recipe: for instance, if a brand aims
at the most price sensitive consumers, it needs a very competitive price, therefore a
recipe based on cheap, easy to source raw materials, such as cotton waste.

The proportions would also have to be studied carefully as was shown above, since the used
recipe can have a significant impact on the cost breakdown.


Several small laundry soap factories were identified throughout the country. The following
are but a sample:

Ahmad Soap Factory, Jalalabad
It produces oil and two main kinds of laundry soap, one from their oil and the other,
of a lesser quality, from the cotton wastage from the oil production. They are actively
looking for investors to expand their operations and were present at the Kabul
International Trade Fair in October 2004.

Spinghar Oil and Laundry Soap Factory, Kabul
It produces cotton oil and has recently launched the production of laundry soap. They
also have a distribution agreement with Cussons in the UK for Imperial Leather in
Afghanistan. They are very interested in expanding their soap operations.

Human Dignity Society (HDS) Laundry Soap Factory, Kandahar
Human Dignity Society is an NGO that works with UNIFEM on developing vocational
training for women. Within this program, they started a laundry soap factory in
Kandahar in October 2003. It employs 30 women that make soap almost fully
manually.

206

VIII. Precious and Semi-
Precious Stones


Global market for precious and semi-precious coloured stones estimated at
US $ 320 Mn
Afghanistans current production over US $ 2.75 Mn (lowest estimate)
- Estimated potential production (with improved technology and
techniques) many times higher
Current extraction techniques well below international standards
Property rights at mines are not well defined
Almost all production transported unworked to Pakistan
- 80% of gems sold in Peshawar are Afghan in origin
- Very little value of gems stays in Afghanistan

B. Key Findings

Afghanistan is rich with deposits of precious and semi-precious stones. The country is
known to possess significant reserves of three precious stones: ruby, sapphire, and emerald,
and many semi-precious stones: aquamarine, kunzite, lapis lazuli and tourmaline. Some of
Afghanistans gems are competitive in size and quality with the worlds best stones.

Afghanistans most proven and promising gem deposits are located in four main areas: the
Panjshir Valley for emeralds, the Jegdalek area between Kabul and Jalalabad for rubies and
sapphire, the Nuristan region for tourmaline, kunzite, aquamarine, spodumene, and beryl,
and finally, the Kokcha Valley and surrounding area of Badakhshan for lapis lazuli. Some
sources place the annual value of gems currently mined in Afghanistan at US $ 2.75 Mn,
294

while industry insiders place the dollar amount of Afghan gem exports at many times more
than that amount.

Estimations for potential production also vary greatly, in large part because no exhaustive
analysis of the deposits has yet been possible. Estimations range from a total potential of US
$ 5 Mn in gems extracted per year if better techniques were employed at the existing mines,
to US $ 160 Mn if all deposits that are thought to exist but are currently not mined were
worked with the most modern technology. Nevertheless, it is clear that the mines are largely
under-exploited because of the primitive and limited means of extraction employed.

294
Transitional Islamic State of Afghanistan - Mining as a Source of Growth, World Bank, March 2004
207
Typically, members of the villages that surround the mines exploit the deposits. They dig ad-
hoc tunnels and extract the stones using guns, drills, or dynamite. This type of exploitation
has several significant and negative consequences: it is dangerous for the miners and
destroys the value of the stones by only unearthing low carat (i.e. smaller) gems. Such
techniques can render the mines unusable in time, due to collapses and structural problems,
long before the gem deposits are exhausted.

Almost all Afghan precious and semi-precious stones are transported illicitly to Peshawar,
Pakistan. In Peshawar they are sorted by quality: some low value stones are polished or cut
there, others are sold to international or Pakistani buyers, who then send the stones to
different locations around the globe for cutting and polishing. Thus, very little of the value
stays in Afghanistan, and stones passing through this distribution channel are often thought
to be Pakistani. Consequently, in the latter stages of the value chain, the international
markets tend not to know of the existence of Afghan gems.

International demand for precious and semi-precious coloured stones was estimated at US $
320 Mn in 2003,
295
led by such markets as India and Hong Kong. A latecomer in the world
trade of gems, Afghanistan has significant advantages: a large variety of good quality
stones, a world supply that is affected by the decrease in the deposits of several well known
international mines and a historical and geographical proximity to the worlds largest import
market, India.

The Afghan gem industry could be developed in such a way as to ensure the extraction of
better and bigger stones as well as to retain greater value inside the country. Investment in
more sophisticated machines and basic mining training would mean more secure mining
conditions for the miners and a higher value-added product. With increased government
control, smuggling could be reduced and mining could become a formalised activity, thus
giving the miners more power when selling the stones.

The legal and regulatory environment is a crucial consideration. By legitimising the industry,
the government can aid in the establishment of an internationally recognised gem market in
Kabul. For cutting and polishing, a capacity could be developed within the country in a
manner consistent with Thailands experience. This could be done by developing a cutting
and polishing academy/training centre and creating a marketplace where international
demand and Afghan firms could meet. This would require the development of quality
standards, backed by the government and by gemmologists, and of a targeted marketing
campaign that would publicize the quality and availability of Afghan stones.

This pattern of development would allow more of the value of Afghan gems to remain in the
country and benefit the often extremely poor miners, and would aid in the development of a
cutting and polishing capacity served by SMEs.

295
International Trade Centre calculations based on COMTRADE statistics. www.intracen.org
208
SWOT Afghan Gem Sector
Strengths
Variety of precious and semi-precious stones
High quality of certain varieties
Buyers not risk averse and will seek out
gems where they can be found
Many Afghans already established in the
industry and interested in legitimising the
trade within Afghanistan
Some foreign mines are decreasing in
production
Weaknesses
Local extraction, cutting, and polishing skills
are well below international standards
Mining regions are remote and lack basic
infrastructure,
Some areas may be contaminated with
mines and unexploded ordinances
Trust and reputation difficult to establish and
maintain in the gem industry
Poorly defined property rights at the mines
Opportunities
Invest in basic training, technology, and
surveying for gem extraction
Organise media campaign and gem trade
shows
Launch gem institute to provide quality
certification and build cutting and polishing
capacity
Investigate mining support services
Threats
Sector influenced by changes in tax regime
Resistance to legitimization efforts from local
political players
Crude mining techniques could render
existing mines unusable
Continued export of uncut stones will position
Afghanistan at the bottom of the value chain

C. Introduction

1. Definition of Sector

For the purposes of this market sector analysis, the gem sector will include precious and
semi-precious stones. There are only four stones recognized as precious: diamond, ruby,
sapphire, and emerald. All of the above except diamonds are found in Afghanistan.
Diamonds and coloured stones constitute distinct commodities, with different exploitation
methods, prices, demand, distribution networks, and cutting methods. Though a myriad of
stones are considered semi-precious, Afghanistan possesses aquamarine, kunzite, lapis
lazuli, and tourmaline in abundance. Due to this variety and bounty, Afghanistan is
considered one of the worlds richest countries in terms of precious and semi-precious gem
deposits. Uncut or unworked gems are stones that have received little or no augmentation
(cutting, polishing, or setting) following extraction. Worked gems are gems that have been
cut, polished, or set in jewellery.

2. Sector Overview

The gem industry of Afghanistan is largely informal. Local villagers exploit the current mines,
through rudimentary and unsophisticated methods with the most basic of tools. The export
and sale of the minerals overwhelmingly occurs beyond the reach of the national
government. Following the Soviet invasion of Afghanistan, many of the mines fell out of
209
government control, and into the hands of local commanders and mujaheddin, who used
profits from the gem extraction and sale to fund their military activities. International buyers
could no longer access Afghan gems through traditional trading channels, so the gems were
smuggled from the mines to Pakistan.

For this reason, Peshawar emerged as the major destination and trading centre for Afghan
stones. Almost all of Afghanistans stones are taken to Peshawar before any cutting,
polishing, or sorting is done. Some stones are cut or polished in Peshawar, but most gems of
medium or high quality are sold uncut in Peshawar to international buyers. The polishing and
cutting done in Peshawar is of low quality, and can damage much of the potential value of
the stones. Because Pakistan has considerable gem deposits of its own, many buyers do not
distinguish between gems of Afghan origin and Pakistani gems. Hence, many precious and
semi-precious stones considered Pakistani in official statistics are, in fact, Afghan.

These circumstances combine to create the present situation, wherein Afghanistan, despite
massive reserves of precious and semi-precious stones, is firmly positioned at the bottom of
the value chain. A few enterprising and well-connected players profit handsomely from the
gem trade, but practically no Afghans add significant value to the end product.

3. Context

Now, several years after the cessation of major conflict in the areas of the mines, the Afghan
government is slowly and cautiously asserting control over these rural areas. The political
situation is stabilizing, and local powers at the mines are anxious to come to a more formal
understanding with the government. The Ministry of Mines and Industry, for its part, does
not wish to wrest control of the mines from local interests, but rather accommodate the
existing power structure and formalize an informal industry. (The Afghan Governments
strategy regarding regulating and legitimising the mining sector will be discussed in greater
detail later in this section.)

The current legal and political situation in the mining zones is fluid and varies from locality to
locality. Most mining is opportunistic and ad-hoc, with local miners extracting stones from
personal stakes in the mountains that they have no legitimate claim to. In the larger, known
mines, there is no system of safety or quality control. This lack of monitoring makes
extraction both dangerous and wasteful. These problems are significant obstacles to the
development of a formal gem stone export sector within Afghanistan. It remains to be seen
how investment in gem extraction will be feasible until enforceable property rights are firmly
established at the mines.

Following two decades of smuggling to Peshawar, many gem buyers are unaware that
Afghanistan produces a wide variety of high-quality gems. This lack of recognition poses a
problem to efforts to capitalize on domestic deposits. These difficulties notwithstanding, the
Afghan gem sector is poised for a significant transformation, due to the likelihood of
legitimisation of the industry, improved prospects for investment, and a more secure political
environment.

210

4. Market

a. Size of the Market

Total world imports of both cut and uncut loose (gems not set in jewellery) amounted to
US $ 2 Bn in 2001.
296
The global import market for uncut, coloured precious and semi-
precious stones is estimated at US $ 320 Mn per year.
297
The traditional importers of these
stones are either countries with large internal markets for gems, or countries with cutting
and polishing industries. The main importers of uncut Afghan coloured stones are India,
Hong Kong, and Thailand. Once cut, coloured stones are usually destined to the United
States, Europe, and Japan.

24%
19%
12%
7%
7%
6%
5%
19%
World Shares of Gem Imports (2003)
1
The world market of unworked/rough
shaped stones (excluding diamonds)
represented $320 Mn in 2003
India is the largest importer with a
24% share of imports ($77 Mn)
The largest importers (India, Hong
Kong) are largely colored stones
markets, ie. ideal for Afghan
gemstones (mostly ruby and
emerald)
India
Hong Kong
Aruba
USA
China
Germany
Thailand
Other
Opportunities for Afghan Gems

Figure VIII-1: International Demand for Uncut Coloured Gems
(Percentages of Total Value),
298,299
2003

b. International Markets

The main international markets for gemstones are India, Europe, Israel, and recently
Thailand. India, with 24% of the worlds imports, has a large cutting and polishing industry
based around Jaipur. As evidenced by the above trade statistics, the Indian cutting industry
is dependent upon imported stones. The geographic proximity and traditional trade links
between Afghanistan and India indicate a potential target market for Afghan gems.

In addition, Dubai is emerging as a major gem-trading centre for the Middle Eastern
markets, though more for selling than actual cutting and polishing or other value-added

296
World Gems: Under the Table, Morgan Beard, Tucson, USA 2001
http://www.tucsonshowguide.com/stories/jan01/undertable.cfm
297
International Trade Centre calculations based on COMTRADE statistics, www.intracen.org
298
ITC calculations based on COMTRADE statistics (precious and semi-precious stones, excluding diamonds,
unworked/simply sawn/rough shaped)
299
Arubas status as an international tax haven makes it a trade centre for gems. Investors who hold gems as an
asset often keep them in such locations for tax purposes.
211
activity. Many Afghan businessmen have strong commercial links with Dubai, and some
Afghan gem traders maintain offices in the city.

Although some very high-end consumers will always demand products cut or set in a location
known for technological sophistication such as Israel or Germany, labour is scarce and
expensive in these markets. For this reason, different cutting and polishing markets
specialize in various qualities of stones. Lowest quality Afghan stones generally stay in
Pakistan, and middle to low quality stones are worked in India. Middle to high quality stones
may be cut in Bangkok or Hong Kong, and the exceptional specimens will be cut and set in
Europe or Israel.

c. International Players on the Demand Side
Concentration of Demand

The end consumers of precious and semi-precious stones are mainly the high-income
countries of North America, Europe, East Asia, and the Middle East. The Middle East and East
Asia, in particular, have a high demand for coloured stones of the varieties that Afghanistan
possesses in abundance. The Chinese market is also expanding quickly, and Hong Kong has
become a major import and trading centre.

Large, high-end retailers such as Cartier sometimes employ in-house buyers who travel to
the source of the gems to negotiate the best prices and secure the best quality stones. Other
dealers prefer to buy precious and semi-precious stones where the suppliers congregate, in
places such as Peshawar, or in international trade shows in Hong Kong, Tokyo, Germany, or
Tucson, Arizona. Buyers of uncut stones may work for retailers, large and small, or operate
independently, selling to gem cutters, or simply outsourcing the cutting as a service and
selling the finished stones to retailers. For large retailers such as the French supermarket
chain Carrefour, a reliable supply of stones is more important than exceptional quality or
size. Other buyers may be more concerned with special characteristics or exceptional quality
of the stones.

d. Opportunities on the Demand Side

Opportunities for the Afghan gem industry lie in the particularities of the global gem market.

Buyers are not risk averse. They are willing to travel and take risks to get good quality
products. As the security situation in Afghanistan improves, international buyers who travel
to Peshawar will have little reason not to consider buying in Kabul if quality products are
available there. Buyers are risk averse in terms of quality, however, which makes established
contacts an important component of the trade. The gem industry is trust-based, and relies
on long standing relationships between suppliers and buyers. As many gem dealers in
Peshawar are Afghan, existing relationships can be leveraged in the promotion of Afghan
gems.

Despite the variety and quality of Afghan gems, most gem retailers are unaware that
Afghanistan produces large amounts of precious and semi-precious stones. Targeted
advertising at trade fairs and expositions could raise the profile of Afghanistan as a gem
producer, driving the existing demand towards Afghan products.

212
5. Supply

a. World Production / Market Shares

Emeralds
There are several distinct classifications of
emeralds (yellow-green from Africa, blue-
green from South America). Colombia
controls 64% of the worlds supply in
terms of value, followed by Zambia (15%)
and Brazil (12%).
301
Russia and Zimbabwe
combine for another 7 %, leaving
Afghanistan and Pakistan with 2 % of the
total. Most of these 2 % can be assumed
to be Afghan emeralds. Furthermore,
because of their geological characteristics,
Colombian producers, who do not wish to
advertise the existence of an alternate
source of high quality emeralds, are
reported to sometimes market the highest
value Afghan emeralds as Colombian.
302

Rubies
At present, Myanmar is the largest producer of rubies in the world, followed by Thailand, Sri
Lanka, and Vietnam. Brazil also produces some rubies, as do a variety of African countries.
Myanmar ruby production went from a production of 7.24 Mn carats in 1996-1997, to 1.42
Mn carats in 2002-2003,
303
indicating a declining production that is unlikely to be off-set by
smaller discoveries made recently in Vietnam and elsewhere.

Lapis Lazuli
Lapis lazuli is the gemstone most often associated with Afghanistan. Badakhshan Province is
thought to contain the largest reserve of lapis lazuli in the world by a significant margin.
Chile, China, Russia, and the United States all possess some smaller quantities. Because of
the complete lack of statistics on this stone, Afghanistans total market share is unknown.
Nevertheless, Peshawar is considered the only concentrated wholesale market for lapis lazuli
in the world and virtually all the lapis sold in Peshawar is Afghan.

Other Gems
Afghanistans other precious and semi-precious stones do not possess significant
market shares at present. Most international dealers based in Europe generally do
not know of the existence of Afghan sapphire and are only vaguely aware of Afghan
tourmaline and aquamarine.
304

300
Can the Organisation of the Emerald Market be improved in Colombia?, Luis Rodriguez, Dundee, Scotland,
2002. http://www.dundee.ac.uk/cepmlp/car/assets/images/LuisErnestoRodriguez-Emerald.pdf
301
Ibid
302
Gem Scoops, Thai Gems, September, 2003. http://www.thaigem.com/gemscoop127.html
303
Long wait on for value add players to enter gem market, Moe Miynt. The Myanmar Times, May 16, 2004.
http://www.myanmar.gov.mm/myanmartimes/no215/MyanmarTimes11-215/g12.htm
304
Interviews with gem dealers and jewelers in Paris, Altai Consulting, December 2004

Figure VIII-2: World Production of Emeralds
by Country (in Value), 2002
300

Zambia
15%
Colombia
64%
Russia
4%
Zimbabwe
3%
Afghanistan
/Pakistan
2%
Brazil
12%
213

Figure VIII-3: Gem Producing Regions of Afghanistan
305

b. Production in Afghanistan

The total area of known gem deposits in Afghanistan is said to be approximately 150 square
miles, which represents twice the area known in 1985
306
. There is a significant variety of
precious and semi-precious stones being mined in four main areas. Current production
represents around US $ 2.5 Mn per year, but by all estimates, this can be increased, since
the current production is limited by its small scale, and lack of resources and investment.
Estimates for the potential increase in production vary greatly: from a potential of US $ 5
Mn
307
to US $ 300-400 Mn by Afghan gem specialist Gary W. Bowersox.

Panjshir Valley
The emerald deposits of the Panjshir Valley, by all professional estimates, are the largest
gem deposits in Afghanistan. The deposits were first discovered in the 1970s and have been
mined for the last two decades. The mines are located at altitudes often in excess of 4,000
meters above sea level, and each mine is usually associated with the nearest village. Major
emerald mining villages in the valley include Khenj, Darkheni, Mikeni, Butak, Buzmal, Bakhi,
and Duran. Teams of five or six men work individual mines and are not paid wages but share
the profits of the sale of their emeralds. The extraction is done with dynamite, diesel drills,
and hand tools. The miners rent equipment such as drills and dynamite from local
businessmen and allot these men shares in proceeds of their discoveries in lieu of cash
payment.
308
Though the extraction methods are crude and often result in lower carat

305
Overview of Metallic and Gem Mineral Deposits in Afghanistan, Gary Clifton, 2002, http://www.gems-
afghan.com/8-symposium/results.htm
306
8
th
Draft Proposal The Massoud Memorial Mining Institute, Afghanistan, Gary W. Bowersox, December,
2002.
307
308
Emeralds of the Panjshir Valley, Afghanistan, Gary W. Bowersox, Spring 1991.
214
emeralds, the quality of the stones themselves is said to be comparable to the quality of the
esteemed emeralds of the Muzo mine in Colombia.

Estimates of current emerald production in Panjshir is speculative, but during the period after
the Soviets left Afghanistan, before the country descended into civil war, Panjshiri military
commander Ahmed Shah Massoud put the yearly production in the US $8-10 Mn range, with
5,000 locals employed in the mining and trading of the stones.
309

Jegdalek
The mines of the Jegdalek region are
relatively accessible by Afghan standards.
Situated about 70 kilometres from Kabul in
the direction of Jalalabad, the Jegdalek
mines are known mainly for rubies, but also
produce fancy coloured sapphire and blue
sapphire. The ruby crystals range from a
light purple-red to a deep pigeons blood
red,
311
and are frequently compared to
Burmese and Thai rubies.

The mine has yielded good quality stones in
the five-carat range. Like in other mining
areas of Afghanistan, the extraction is
performed with hammers, dynamite,
pneumatic drills, and even crowbars.
Jegdalek has twenty named mines, and
many small, unnamed, digging locations.

Around 400 local miners work the area, usually in small groups of five to six for the smaller
sites, and fifteen to twenty miners for the larger mines. Mineshaft entrances are sometimes
built into vertical cliff faces, requiring the miners to use simple pulleys to transport the
stones from the mines to where they can be sorted and examined. In the year 2000, total
gem production was estimated at US $ 500,000, but most sources indicate the potential
production to be much higher, with the mines capable of producing rubies and sapphires
year round.

Nuristan
The Nuristan region east of Kabul and north of Jalalabad has the distinction of producing
semi-precious stones such as tourmaline, kunzite, aquamarine, spodumene, and beryl. Its
mines, however, are Afghanistans most inaccessible. Nuristan is culturally insular and has
little in the way of infrastructure. Consequently, little is known about the current methods of
extraction or potential yield of the area. The villages of Mawi, Surai, Nilaw and Korgal are
thought to produce a variety of semi-precious stones, which are extracted from ten to
twenty meters below the surface of the ground. As with other Afghan gems, the Nuristani
stones are transported across the border to neighbouring Pakistan.

Badakhshan
The lapis lazuli of Badakhshan is by far the most recognized of all the gem exports of
Afghanistan. Not only has the region been associated with lapis lazuli for millennia, but also

309
Ibid
310
Ruby and Sapphire from Jegdalek, Afghanistan, Gary W. Bowersox, Spring 2000
311

Figure VIII-4: Breakdown of Jegdalek
Production (Quantity in Carats),
310
2000
Ruby
15%
Blue or Red-
to-Pink
Corundum
5%
Blue
Sapphire
5%
Pink
Sapphire
75%
215
very few other countries possess lapis lazuli reserves of any size.
312
The region to the south
of Faizabad and Ishkasim is rich in lapis lazuli, though the rugged terrain and harsh winters
limit extraction and export to a few months in the summer.

Estimates of Badakshans current production of lapis lazuli vary from between US $ 500,000
to US $ 2 Mn, with a sizeable portion of the stone coming from known locations such as the
Sar-e-Sang mine a days drive south of Faizabad. But because lapis extraction is relatively
simple, and the mountains of Badakhshan are littered with pockets of lapis lazuli, many
locals mine independently, further confusing the statistics. Lapis lazuli is much less valuable
in terms of weight than other semi-precious Afghan stones, but is found in much greater
abundance. Lapis is extracted in large chunks, measured in kilograms rather than carats. In
contrast to other Afghan stones and gems, which are generally made into jewellery pieces to
be worn, lapis lazuli is frequently made into ornamental objects of art, such as chessboards
and figurines. The polishing of lapis requires less expertise and less expensive machinery
than for other Afghan precious and semi-precious stones.

After extraction, the heavy stones are loaded onto donkeys and transported over mountain
passes to Chitral, Pakistan before shipment on to Peshawar. The Afghan government has an
interest in stopping this smuggling and has set up a network of local agents to control the
trade. Much like the mining season, transport across the border is restricted by snowfall and
limited to a few months of the year. Setting checkpoints on known routes might deter
smuggling, but legitimising the industry would provide an alternative to the arduous and
risky trip to Pakistan, and ultimately prove a better deterrent to smuggling than border
monitoring.

312
China, the United States, Russia, Pakistan, and Chile all possess limited quantities of lapis lazuli of varying
quality. Lapis Lazuli from Afghanistan, Peter Bancroft, 1984 http://www.palagems.com/lapis_lazuli_bancroft.htm
216
c. Value Chain Analysis of Afghan Gems

Mines Village Peshawar Export
Local
Pakistani
consumption
International
Buyers
5-6 miners
per mine
Live in
nearby
villages,
share costs
and profits
Gems are
auctioned and
"tax'" is paid in
village
Village
businessmen
buy stones
from miners
Village
businessmen
sell to agents
of exporters
who transport
stones to
Peshawar
Trade fairs and
established
contacts attract
buyers to
Peshawar to
purchase stones
India via
Kabul and
Dubai
A limited but growing
quantity
Trend will contine if
industry becomes
legitimate
Low value
stones are
worked in
Peshawar
and sold in
Pakistan
Jaipur,
Hong Kong,
Bangkok,
Germany,
Israel
Gem traders
outsource gem
cutting and
polishing or sell
to cutters and
polishers in the
above locations
Import and
Jewellry
Manufacture
Gem cutters sell or
send gems back to
dealers, who import
them to key
markets for setting
the stones in
jewellery
Western
Europe,
North
America,
Japan
Jewellers sell in
retail stores or set
stones for retail
clients
Consumers buy
rings, necklaces in
jewellery stores

Figure VIII-5: Distribution Channels of Afghan Gems

Afghan gems travel around the globe before they reach their ultimate consumers. They are
processed and traded many times over, and their value multiplies exponentially along the
way. This value is captured mainly beyond the borders of Afghanistan. The jewellery
manufacture and gem cutting and polishing, in particular, are stages that add high amounts
of value to the stones, but these steps are almost never done in Afghanistan.

The extraction and exploitation of Afghan gems is exclusively small scale and technologically
rudimentary. Miners are local villagers who either gather stones independently (as
sometimes occurs with lapis lazuli in Badakhshan), or work the mines in small groups of five
to six men in charge of a particular shaft. Potential deposits are broken away from the rock
wall by dynamite charges, hammers, drills, and even firearms.

The distribution channels of gems vary somewhat from region to region. Production of
emeralds in Panjshir is concentrated around certain trading villages, and lapis lazuli
extraction in Badakhshan follows a similar model, with miners and buyers congregating
around known mines. Distribution from Nuristan is thought to involve less formal trading
places around certain producing villages, where exporters have Nuristani agents to buy local
production and transport it to Peshawar. In Jegdalek, the methods of distribution are less
concentrated than in Panjshir, and miners have different methods of accessing buyers. But
217
as in Panjshir, the most common method involves profit sharing among miners and
equipment suppliers, and sales to agents of exporters based in Peshawar.
313

In the Panjshir Valley, each local village will
have scheduled meetings in which the
miners can auction their stones to local
businessmen. The miners share the profit of
their labour among themselves and the
dynamite and equipment purveyors and
typically do not work under contract for
anyone. Agents for gem dealers based in
Peshawar will periodically visit the villages to
purchase stones. Either at the purchase of
the gems at village auction, or upon sale of
the gems to gem dealers agents, the local
businessmen sometimes pay a local tax of
around 10% to the regional commander.
314

Typically, such an agent for a gem exporter is a resident of the area in which he buys the
stones. These agents must be able to accurately assess the value of the gems at the source,
without the aid of sophisticated equipment. After purchase, agents transport the stones
across the border to Peshawar themselves, or arrange transport to their employer in
Pakistan. Alternately, some middlemen may come to the villages to buy gems and then sell
them to dealers in Pakistan. Because the industry is based on local contacts and
relationships, it is unlikely that opportunistic buyers unconnected to the trade would seek to
enter this market.

It is reported, however, that some European, Pakistani, and Chinese buyers have been
known to purchase stones directly at the source: the mining villages.
315
For foreigners
unfamiliar with the local landscape, bringing large amounts of cash into remote areas of
Afghanistan poses a variety of risks, both financial and personal. For this reason, trading
centres such as Peshawar serve to aggregate gem production from regions as geographically
distant as Kashmir, the Northwest Frontier Provinces of Pakistan, and north-eastern
Afghanistan. Industry experts maintain that at least 80% of all stones sold in Peshawar are
Afghan in origin.
316

In Peshawar, gem traders, many of whom are Afghans originating from the regions of the
mines, maintain stores for retail sales of some jewellery. For tax purposes,
317
most such
shops in Peshawar are small, with modest displays of jewels in the store itself. When buyers
from abroad contact the dealers, they are shown the higher quality stones in backroom deals
or, during one of the major gem trading exhibitions, in a hotel room. Often stones are sold
to local Pakistani businessmen engaged in the same trade. A gem purchased, for example, in

313
Ruby and Sapphire from Jegdalek, Afghanistan, Gary W. Bowersox, Spring 1991
314
Interviews with gem traders and government sources indicated that the local tax is not universally applied,
and may become a relic of the civil war era as regional commanders are replaced or begin to cooperate more
closely with the national government. Altai Consulting, January 2005
315
Interviews with Afghan gem dealers. Altai Consulting, Kabul, February 2005
316
Gem Scoops, Thai Gems, September 2003. http://www.thaigem.com/gemscoop127.html
317
Pakistani officials stated that such shops can be taxed on the value of their in-store merchandise, hence high
value wares are often out of site and undeclared. Altai Consulting, February 2005

Figure VIII-6: Afghan Lapis Lazuli in an
Istanbul Boutique, January 2005
218
the Panjshir Valley by an agent of a dealer based in Peshawar can be sold at a profit of
between 20 to 100%, not including the cost of transportation. Sometimes such stones bring
no profit or even a loss: Success depends largely on the ability of the agent to assess the
value of a stone at the source, anticipating what price it might bring after closer inspection in
Peshawar.

The quality of the stone will determine where it is to be sent. The lowest quality stones are
kept in Peshawar, where cutting and polishing is rudimentary but extremely cheap. Lapis
lazuli can be worked with basic grinders and lathes, but the same machines are not readily
adapted to other semi-precious and precious stones. Nevertheless, a great quantity of low
value jewellery pieces is manufactured in Peshawar, and to a lesser extent, Karachi. These
jewels are destined primarily for the domestic Pakistani market; such goods are staples of
wedding celebrations
318
and holiday gifts.

Indian buyers dominate the lower mid-range of the market for Afghan coloured precious and
semi-precious stones for cutting and polishing in the Jaipur region of India. Lapis lazuli is
also worked in India, but a higher percentage of lapis lazuli stays in Pakistan for polishing
than other Afghan gems.

Bangkok has recently emerged as a major destination for uncut coloured gem stones. It is
thought that 80% of the worlds ruby supply passes through Bangkok or the nearby cutting
centre of Chanthaburi.
319
Benefiting from a cheap but technologically advanced workforce
and a tradition of gem exploitation, Thailand has earned a solid reputation for cutting middle
to upper quality gems. Afghan gems cut in Thailand are sometimes sold as finished goods in
South East Asia, or re-exported as jewellery or cut stones to other trading locations such as
Hong Kong.

Hong Kong hosts several huge gem and jewellery shows a year, attracting buyers and sellers
from all over the world. Due to its geographic proximity to the established and emerging
East Asian markets, Hong Kong is a trading centre for all types of precious and semi-precious
stones in various stages of processing. Afghan gems can be sent to Hong Kong as either
uncut stones, bought directly from Peshawar dealers, or as finished jewellery set in Pakistan,
India, or Thailand. As finished goods, the gems may be sold in retail stores in Asia. As uncut
stones, they are cut and polished locally or traded to another location.

The highest quality precious and semi-precious Afghan stones are purchased in Peshawar
and taken directly to the gem cutting centres in Germany and Israel. From there, the stones
are set in gold jewellery pieces by master craftsmen, typically in Europe. The most expensive
retail brands demand precisely cut jewels, and are willing to pay a premium for a piece
manufactured by well-known artisans. These pieces end up in display cases in retail stores in
Europe, Japan, and North America.

After leaving the mine area, gems are normally subject to huge mark-ups at each stage of
the distribution chain. The key success factor seems to be the ability to make an accurate
value assessment at each stage, which makes established networks of trustworthy
colleagues indispensable for players in the industry. Like the Afghan exporter who can earn
100% profit on a high quality precious stone sold to an international buyer in Peshawar, that
buyer can then double or triple the value of stone by having it cut. The importer who brings

318
According to the Export Promotion Bureau of Pakistan, gold jewellery has higher consumption rates in rural
than urban areas of the Indian sub-continent, often with the jewellery garnished with precious or semi-precious
stones. Export News: No 19, 2004, Export Promotion Bureau of Pakistan, Islamabad, Pakistan, 2004
319
Where Rubies are Born, http://www.jewellers.net/ruby.htm
219
the cut stone into the country where the gem will be set and most likely sold can also expect
a margin of 100-200% on his transaction.
320

Like the rampant smuggling that characterises much of the global gem trade, another
irregularity of the trade is the tendency to dramatically underestimate import values to avoid
tariffs on otherwise legitimate transactions. Industry insiders estimate that even in developed
countries, the official import statistics for gems imports are undervalued by two thirds.
321

Some worked gem importers even divide higher carat stones into smaller carat stones to
avoid the scrutiny that customs officials reserve for larger gems.
322

+19%
+32%
+33%
+33%
+180%
+76%
+100%
$0
$200
$400
$600
$800
$1 000
$1 200
$1 400
$1 600
$1 800
Miners Village
Businessman
Exporter /
Agent
International
Buyer
Cutter /
Polisher
Importer Jewellers Retail

Figure VIII-7: Example of Value Chain for One Carat of Mid-Quality Afghan Emerald,
(Percentages of Increases in Price), 2004
323

d. Control of Supply

The supply of Afghan precious and semi-precious stones is concentrated in a limited number
of areas. The mining itself is a fragmented industry. Hundreds, if not thousands, of miners
operate in small groups, normally independent of one another. The supply then becomes

320
World Gems: Under the Table, Morgan Beard, Tucson, USA 2001
http://www.tucsonshowguide.com/stories/jan01/undertable.cfm
321
Ibid.
322
Interview with gem purchasers in France, Altai Consulting, December 2004
323
This graph is a representation of one carat of mid-quality emerald, from Afghanistan to a European jewel
retailer. In practice, each emerald varies widely in price, and often the true value cannot be assessed until cutting
or examination is done by the next player in the chain. This causes the values depicted above to differ from stone
to stone. This graph does not reflect the price of the base metal used in the jewellery making stage. This metal
usually only reflects a small percentage of the final cost in comparison to the gem.
220
more concentrated at the village level, as all gems generally pass through the hands of local
businessmen. At this stage, the power of regional commanders is not to be under-estimated.
Though they rarely own or make claim to the gems outright, the commanders traditionally
used the proceeds of gem taxes to finance the maintenance of militias and private armies.
This situation is likely to improve with time, but such political considerations could pose a
threat to efforts to establish a market in Kabul if local powers were to disrupt supply or
encourage smuggling to Pakistan.

e. Main Distribution Channels

Afghan gem dealers interviewed placed the number of dealers involved in exporting Afghan
gems at around 100. Many of these businessmen are originally from the production areas,
but now reside in Peshawar. Most of these traders specialize in the export of the gemstones
from the area of their origin. Three or four Afghan gem dealers are now major players in the
gem trade in Asia and deal in all varieties of stones and maintain offices in Kabul, Peshawar,
Karachi, and Dubai. To profit from the export of Afghan gems, traders need well-placed
agents at the source, the means to transport the stones, and a network of potential buyers.
Creating a market for gems in Kabul would democratise the distribution channels, as
transportation would no longer be such a challenge, and buyers would come to Afghanistan
directly.

f. Other Distribution Channels

Between 3 to 5% of Afghan precious stones, typically of lower quality, bypass Peshawar and
are taken directly to India via Kabul and Dubai.
324
Many stones return as worked stones to
Dubai, which now serves as a large distribution and retail centre for jewels and gems in the
Middle East. Finished jewels are either sold locally or distributed to other cities in the region.
Because Dubai, like Hong Kong, imports both cut and uncut stones, Afghanistan could profit
from increasing its direct trade in gems to Dubai, rather than passing them through
Peshawar and then on to other cutting centres. This model is likely to grow in significance as
more and more gem dealers relocate to Kabul. As the Kabul market develops, its export
destinations should diversify to include direct links with Hong Kong, Bangkok, and Europe.

6. The Myanmar and Thailand Examples

Both Myanmar and Thailand once faced similar dilemmas in developing a formal gem
industry. The two respective countries have developed two very different approaches to
capitalising on their gem deposits.

a. Myanmar

All the mines in Myanmar are fully owned and controlled by the national government.
325

Miners are government employees and are obliged to turn over the gems they discover to
the government mining authorities. The best of the production is gathered by government
authorities and sold uncut to international buyers. Of the lower quality gems, most are sent
to Bangkok for cutting, polishing, and setting, and returned to Myanmar for sale in official

324
Figure based on interviews with gem exporters in Kabul. Altai Consulting, January 2004.
325
Le March des Pierres Prcieuses en Thalande et en Birmanie Production et Commercialisation, Jean-
Christopher Berthod for LVMH Group, 2000
221
government stores. A significant portion of the stones are smuggled illegally from the mines
by the miners, and sold in local markets around Myanmar.

The priority of the Myanmar government is to control directly all extraction and sale of the
gems. Consequently, salaried miners have low incentives to increase productivity and are
tempted to steal stones. The government is concerned with earning revenue and foreign
exchange from the gem exploitation, and has no interest in fostering the development of a
cutting and polishing industry to complement the mining sector. Little cutting and polishing
is done in Myanmar itself, and the countrys precious and semi-precious stone resources
contribute little in the way of job creation and economic development.

More ominously, this strategy is entirely dependent upon continued, indeed indefinite,
production from the mines. Though Myanmar is, by all accounts, rich in rubies and other
gemstones, there are indications that some varieties of rubies and sapphires are becoming
increasingly rare. When the prices for these stones began to rise, the Burmese government
instituted new measures to crack down on smuggling and now requires all loose stones for
export to be sealed and signed by customs officials at the airport. Dealers then pay an
additional tax when the gems are sealed.
326

Mines
Government/
Official Trade
Miners
Best gems
Other gems
International
Buyers (in
the mines)
Jewelers
Bangkok
Rangoon
Official
Stores
International
Buyers
Jewelers
International
Buyers (in the
mines)
Local
Markets
Bangkok
International
Buyers
Jewelers
Jewelers
Domestic
Buyers
International
Buyers
Heavy government
control and loss of value
for the country

Figure VIII-8: Value Chain of Rubies in Myanmar

b. Thailand

In contrast to Myanmars approach, Thailands strategy was designed to develop a cutting
capacity, based on the then-abundant local production. Where Myanmar has nationalised the
mining and export of precious and semi-precious gems, Thailand has created a gem industry
with a worldwide reputation.

326
Gemstone Forecaster Vol. 16, No. 2, Part Two, www.preciousgemstones.com/gfsum98two.html
222
Benefiting from a stable supply of domestically sourced stones, primarily rubies, the Thai
government created a framework conducive to the creation of a sustainable cutting industry.
Local gem industry leaders worked together with the government to develop local gem
cutting and polishing know-how through investment in technology and training. Thailand is
now home to several respected gemmology institutes that draw students from around Asia,
and a gem cutting industry specializing in coloured stones, dominated by small to medium
sized enterprises. The gem trade is trust based and good reputations are difficult to establish
and maintain. By promoting the gems through a government certificate of authenticity,
buyers gained confidence in the quality and reliability of Thai traded and cut stones.

Because Thailand is a major destination for international tourists, Thailand can sell finished
jewels to a large captive market of holidaymakers. But beyond this obvious advantage,
Thailand has diversified to become a major sales venue for cut stones destined for all
corners of the globe. The Thai cutting industry was initially based on domestic production,
but is now fed by stones from neighbouring Myanmar as well as Sri Lanka, Pakistan, and
Afghanistan. As the overall production of Thailands ruby mines dwindles,
327
the Thai gem
industry continues to thrive due to its solid reputation as a cutting and trading centre.
Mines
Official Trade
(owners of
mining
concessions)
Miners
International
Buyers (in
the mines)
Jewelers
Bangkok
International
Buyers
Jewelers
International
Buyers (in the
mines)
Local
Markets
International
Buyers
Jewelers
"Mainstream"
Buyers
Trade remains in the
country until a later stage
in the value chain
Figure VIII-9: Value Chain of Rubies in Thailand

c. Conclusions from Myanmar and Thai Models

Both Thailand and Myanmar have been able to organize their precious and semi-precious
stone industries in a manner that suits government objectives. By nationalizing and strictly
controlling extraction and export of gem stones, the government of Myanmar earns cash and
maintains a near monopoly on Burmese gem sales. This approach, however, creates no
positive externalities such as job creation, support industries, or technological advancement.
Thailand, however, successfully moved from a purely extraction and export gem industry by

327
Ibid
223
investing in training, technology, and quality guarantees. The gem industry in Thailand now
occupies a much higher place on the value chain, generating economic growth at the SME
level.
Mines exclusively exploited by the
government
Most stones sold in government
stores or directly at the mines by
government officials
No (or little) cutting and polishing
capacity developed
- Stones are sent to Thailand to be cut
and polished, then sent back to
Myanmar
Most of the value from the
exploitation is centralized by the
government
Heavy Government Intervention
Myanmar
In the past 20 years, Bangkok has
become one of the world's leading
colored stone market places
Thailand's gem market development
has been based on a national
production and a series of measures,
including:
- Creation of a quality standard to avoid
fakes etc.
Know-how has been developed and
the benefits from the exploitation of
the country's natural resources reach
a broader public
Development of Know-How
Thailand

Figure VIII-10: Divergent Gem Industry Development Paths

7. Environment

The precious and semi-precious stone industry of Afghanistan operates beyond the confines
of what constitutes a normal or regular business environment.

Legally, all mines are, at present, considered property of the national government.
Practically, this has not been the case for two decades. Likewise, the export of stones from
Afghanistan officially requires coordination with the Customs department and, up until very
recently, the payment of a 10% tax. In reality, all export is undeclared. The government is
positioning itself to assume a greater role in the near future, but at the moment has no
control over either extraction or sale of the countrys mineral resources. The lack of
infrastructure in rural areas of Afghanistan, particularly Badakhshan and Nuristan, makes
smuggling to Pakistan almost as easy as transport to Kabul, though it does entail
considerable risks. Border monitoring is lax, and is in any case more focused on opium and
heroin smuggling than on intercepting mule trains in the mountains or envelopes full of
uncut emeralds.

The Ministry of Mines and Industry is addressing the lack of institutional structures to
promote and legitimise the industry (see following section). In a recent agreement, the
Indian Ministry of Coal and Mines offered to send a team of experts to Afghanistan to help
develop the mining and extractive industries together with the Afghan government. At the
request of the Afghan Ministry of Mines and Industry, the Indian team will mainly focus on
coal mining and cement manufacture.
328
This relationship, however, could be quite useful for

328
India to assist Afghanistan in mining, Huma Siddiqui, February 2005
http://www.financialexpress.com/fe_full_story.php?content_id=83532
224
the development of a value added gem cutting and polishing industry. While the Indians are
no longer large producers of unworked gemstones, the Indian gem cutting expertise could
be a useful resource for any training and capacity building initiatives.

The Afghan International Chamber of Commerce (AICC) and the Afghan Chamber of
Commerce and Industry (ACCI) could play a role as well. The AICC is forming an affiliated
Association of Afghan Gem Dealers to increase coordination with the government and help
shape policy in the gem sector.
329

The financial environment of the Afghan gem industry is not favourable to those workers and
traders on the lower end of the value chain. Specifically, miners have no access to capital
beyond the proceeds of their sales. Hence they cannot invest in better machinery or tools to
extract gems of larger sizes. In the absence of clear property rights, or enforceable leasing
agreements, it seems unlikely that private investors would invest in improving the
productivity of a particular area or mine. Miners with no regular salary are forced to sell
stones for low prices to finance the consumption of household goods and mining supplies,
and are in little position to negotiate with buyers. The situation is much the same in the
latter stages of the gem supply. Smaller players with little access to finance must sell stones
to finance the purchase of other stones, rather than saving choice pieces for buyers willing
to pay a premium for their products.

8. Reforms and International Support

a. Legal Reform and Industry Legitimisation

Currently, the gem industry in Afghanistan functions outside the bounds of government
regulation or legal oversight. This situation is changing rapidly as the government and
international organisations work towards establishing a functioning framework for the
industry. The outcome of such efforts will have a major effect on the industry.

Though hampered by its lack of resources to implement policy, the Afghan government
grasps the potential of the gem industry for both tax revenue and private sector economic
opportunity. The government has indicated that reform in the area of natural resource
exploitation will be addressed in the near future. A mixture of initiatives will be implemented
to effect change in the precious and semi-precious stone sector.

The Ministry of Mines and Industry intends to establish offices, or at least an official
presence, in all mining areas within the next few years, ostensibly to monitor the safety and
quality of extraction. Clearly, this step must involve the participation of local political forces,
who have reason to believe a government presence will be a prelude to taxation and
redistribution of mining rights. Unless the current players involved in extraction and trading
at the village level are incorporated into any transformation of the supply chain, such efforts
are likely to be met with resistance.

The government will attempt to control the smuggling of stones through the porous border
to Pakistan and instead direct the traffic through Kabul. Given the nature of the transport
methods and the relative size of gemstones, stopping smuggling through interdiction seems
unlikely. An increased presence in the mining region can at least serve as a reminder to the

329
Interview with a prominent Afghan gem dealer and AICC member, February, 2005
225
exporters that the activity is not entirely legal, though it may be common. This is a necessary
first step to convince traders that legitimate alternatives may be worth considering.

Additionally, legislation will be introduced to legitimise land usage and encourage
investment. Legal and regulatory reform is now a top priority for the Ministry of Mines and
Industry. Though the current focus of the proposed legislation is more in the area of natural
gas and hydrocarbon resources, any broad reinterpretation of the relationship between the
national government and the extractive industries will necessarily include the gem sector.
The Ministry of Mines and Industry envisions a time frame of under six months to pass a
Mining law which will address land rights issues and some form of privatisation. Villager
miners, businessmen, and commanders will probably not welcome any effort to privatise
what they consider to be theirs already, hence the need to include existing players in the
reforms.

One option under consideration is to grant titles to existing extractors and to charge a
revenue tax in the neighbourhood of 5%. Another option is to lease access to the mines and
charge royalties. Alternately, the government appears open to the idea of a public/private
partnership in gem exploration. Because much foreign capital and expertise is needed to
develop the extraction of gems, the expectation is that foreign firms would be allowed to
participate in whatever privatisation or leasing process is adopted. The Ministry of Mines and
Industry indicated that foreign companies would enjoy special tax status if they partnered
with Afghan companies in any venture. Such a strategy would have obvious political
advantages as well.

International advisors from the World Bank are consulting on draft legislation for
hydrocarbon extraction. These laws could serve as templates for precious and semi-precious
stone legislation in the future. The proposed hydrocarbon law has provisions concerning local
sourcing of inputs where applicable, training for Afghans to bring about a transfer of
technology in the industry, tax waivers for imports of machinery, and a corporate income tax
with a deduction for government royalties. It is unknown if these provisions will be included
in whatever bill eventually comes under consideration, or in any legislation dealing
specifically with gemstones.

At present, cross border trafficking occurs for two main reasons: to avoid border duties
(whether official or otherwise), and to reach the primary market of Peshawar. Hence,
removing these two motivations will leave traders with little inducement to smuggle. By
abolishing export tariffs and attracting buyers to Kabul, the government can encourage
legitimate gem export activities. Smuggling constitutes a business risk for gem traders:
couriers can be robbed, stones can be damaged, donkeys fall off of cliffs, and weather can
delay transport for weeks. Furthermore, most major Afghan gem traders with operations in
Peshawar also have other, more mainstream business operations. Many own homes in Kabul
and are part of the emerging business elite in Afghanistan. It is in their interest to legitimise
all of their commercial activities if the government will be expanding authority and reach.
Furthermore, if they wish to participate in any ventures with foreign investors in Afghanistan,
they will be subject to stricter scrutiny. Efforts to organise as the Afghan Association of Gem
Dealers indicate a willingness to bring gem dealing into the mainstream of the Afghan
economy.

If enacted, these proposed reforms could seriously impact the pattern of the precious and
semi-precious gems sector in Afghanistan, and create opportunity for new and existing
players. Clear-cut, enforceable ownership of the mines would encourage investment in new
drilling techniques and technology. Miners working on salary or commission would earn a
226
more reliable income than the irregular cash they earn from occasional stone sales. Village
businessmen may be cut out of the supply chain, unless they can lease or own the mines, or
go into the extraction business themselves. It is conceivable that regional commanders might
still have enough power to charge local taxes after reforms are made. This would constitute
a threat to investment in the region, and another incentive to avoid additional government
taxation.

b. Assistance from the International Community

In addition to the work of the World Bank on legal reform and mining and to the cooperation
agreement with the Indian Ministry of Coal and Mining, donor countries have taken an
interest in the natural resources of Afghanistan as a future source of economic growth. No
one has preformed an extensive geologic survey of the gemmological resources of
Afghanistan since the 1970s. The Ministry of Mines and Industry has announced its intention
to work with the United States Geological Survey (USGS) and The British Geologic Survey
(BGS) in conducting new studies. The USGS began an assessment of the oil and gas sector
in August 2003 at a cost of US $ 2 Mn for a two-year project.
330
In early 2004, USAID
allocated US $ 5 Mn for a general geologic study, including earthquake resources, geospatial
infrastructure development, mineral, coal, and water resources, and training.
331
The BGS has
agreed to help rehabilitate the Afghanistan Geological Society (a research division of the
Ministry of Mines and Industry) to build capacity and collect and organize data that can be
used to assist investment in all sectors of the mining industry.
332
Both the BGS and the USGS
plan to maintain permanent representation in Kabul.

As confidence in the security situation improves, the Ministry of Mines and Industry hopes to
expand cooperation into the area of actual field surveys, eventually including the gem
producing regions. Modern geological surveying in the mining areas could be an important
catalyst for private investment in extraction and would help assist in establishing market
prices for the sale or leasing of mining rights.

9. Industry Transformation

The methods by which Afghan precious and semi-precious stones are mined, and the
channels through which they pass to the international market, will undergo significant
revision in the future. Formalisation of the industry will help shift the main trading centre
from Peshawar to Kabul, and a small cutting and polishing industry will take root in
Afghanistan. Eventually, investment will reach the mines, as titling and leasing practices
become established.

330
Afghanistan Redux: Better Late than Never, John F. Shroder, GeoTimes, October 2004
http://www.geotimes.org/oct04/feature_afghan.html
331
Ibid
332
Geoscience at the BA: A New Survey for a New Nation, Ted Nield, September 10, 2004
http://www.geolsoc.org.uk/template.cfm?name=BA200406
227
In the short run, little is likely to change on
the extraction end of the Afghan gem
industry. Government reforms will take time
to implement, investment in mining will only
follow clearer definitions of property and
property usage laws, and the benefits of that
investment in technology and training will
not be immediately manifest in the quality
and quantity of the stones extracted. The
current pattern of extraction and supply, therefore, is unlikely to change in the next few
years.

Gem exporters are bound to Peshawar
because international buyers are
accustomed to visiting the city. With an
established international market in
Peshawar, gem traders are unlikely to
decamp permanently to Kabul in the
immediate future. As the exporters are
aware of, transporting gems to Peshawar
implies considerable risk and cost, and
ultimately moving the regional gem-trading
centre from Peshawar to Kabul is in the best
interest of the Afghan government and
exporters alike. Affluent and established
Afghan gem traders often have operations
in Dubai and global networks of clients. With
these connections, some exporters are
already exporting uncut gems to Dubai directly, where they are sold to local traders, or sent
to cutting centres such as Jaipur or Bangkok. Gem exporters often engage in many
businesses, and as they grow their Kabul-based commercial operations in areas like
construction and imports of consumer goods, they are likely to shift their gem export
activities to Kabul as well. Provided the governments efforts to legitimise the export of gems
are seen as reasonable by the exporters, not only are direct exports from Afghanistan likely
to grow, but also international buyers will seek Afghan gems in Kabul as well as in Peshawar.

It does seem probable that the distribution channels will change in the near future. Already,
fewer gemstones are destined for Peshawar, as some Afghans move businesses operations
to Kabul. In particular, the manufacturers of lapis lazuli and semi precious gem jewellery in
Peshawar have seen a key sales market evaporate recently. During the Taliban rule in Kabul,
and during the preceding years of strife in Afghanistan, many international aid and relief
agencies based their operations in Peshawar. This community was a major consumer of cut
and polished Afghan gems such as lapis lazuli, tourmaline, and aquamarine. With this market
gone in Peshawar
333
and now established in Kabul, maintaining a shop in Peshawar makes
less economic sense. While much of the lower end jewellery is destined for the internal
Pakistani market, the cutting and polishing machinery can be relocated to Kabul easily by
returning Afghans. This trend applies mainly to retail shops with small cutting and polishing
capacities. Uncut lapis lazuli can now be bought in Kabul as well, providing raw material for
polishing and cutting. For now, most of these businesses continue to cut and polish stones,

333
One Peshawar shop owner estimated his daily revenue from sales in Peshawar fell from 10,000 (US $ 170)
Pakistani rupees to 1,000 (US $ 17) rupees over the last three years. Altai Consulting, Peshawar, Pakistan,
December 2005

Figure VIII-11: The Gem and Jewellery
District of Peshawar, December 2004

Business is too slow in Peshawar now. I
will close my shop here and move back to
Afghanistan. Some relatives will stay in
Pakistan, but I will take my family to
Kabul. My sons can polish stones and
make jewellery there as easily as here.
-Jewellery shop owner and gem cutter and
polisher, Peshawar, Pakistan.
228
mainly lapis lazuli, in Peshawar and ship the finished jewels to Kabul. Interviews with shop
owners in Peshawar and Kabul indicated that many such shop owners maintain stores in
both cities, and are shifting their focus to Afghanistan, while maintaining contacts and
distribution networks in Pakistan.
334

It is quite conceivable that within several years, a gem trading and gem cutting industry akin
to Peshawars will emerge in Kabul. If this occurs it will represent only a partial capitalization
on Afghanistans immense gem resources. Moving basic cutting and polishing capacity to
Kabul would provide some economic opportunity for SME growth, and regulated gem exports
would contribute to the local economy, but the potential for value added activity is much
greater. The true opportunities for capturing more value within Afghanistan begin with
extracting higher quality stones and then developing a more sophisticated cutting and
polishing industry.

D. Afghan Gem Mining, Cutting and Polishing
Opportunities

1. Mining Ventures

Due to the current uncertainty over mining rights and land ownership in the mining regions,
investment in extraction would require a thorough knowledge of both geology and Afghan
politics. Nevertheless, exploration and mining hold tremendous promise for investors not
averse to risk. Given the potential emerald reserves of an area like the Panjshir Valley,
proper geologic survey work, combined with modern drilling and blasting technology could
lead to the discovery of new reserves, or at the least, higher value stones in existing mines.

In countries with more developed gem mining industries, large-scale precious and semi-
precious stone extraction is not usually considered a SME activity. Nevertheless Afghanistan
presents an opportunity to independent entrepreneurs not averse to risk for two main
reasons: First, with practically no investment in technology or modern, scientific techniques,
Afghan miners manage to pull millions of dollars worth of rubies, emeralds, sapphires,
tourmaline, lapis lazuli from the mountains. Secondly, with no commercial mining concerns
active in the country, there is a window of opportunity for a first mover in the sector to
follow on the heels of the coming legal restructuring and legitimisation of the industry to
establish him or herself as a player in the expanding gem mining industry.

For such a venture, various practical requirements should be met. First, any interested party
should liase with the Ministry of Mines and Industry to better understand what legal and
regulatory framework is currently in place. Any potential investors will be assisted in an ad-
hoc basis, as there is currently no organized commercial investment in mining, foreign or
domestic. A successful venture will need to incorporate Afghan investors and local partners.
Afghan gem exporters with family origins in the mining areas would be particularly useful
partners for navigating the local political landscape. Even if an investment concern buys or
leases mining concessions directly from the government, the involvement of local
businessmen at the mines would also be necessary components of the project. Village
organisations and local businessmen will be key to organising the recruitment and training of
miners. The miners themselves would need to be convinced of the advantages of contract

334
Interviews with jewellery store owners in Peshawar and Kabul. Altai Consulting, December 2005
229
employment rather than free-lance prospecting. Even with a profit sharing arrangement,
tight supervision would be needed to prevent smuggling from the mines.

Surveys and resources provided by the BGS, USGS, and now the Afghanistan Geological
Survey will be key to identifying new gem deposits. In the known mining areas, soil and rock
analysis could help better target precious and semi-precious deposits. Basic improvements in
technology and training could lead to significant increases in the yield of Afghan mines.
Miners could be trained to use less dynamite in a more targeted manner, to cause less
damage to the stones and the mine tunnels. Miners can be taught to differentiate between
the hardness of various stones, and to vary blasting intensity accordingly. More advanced
pneumatic drills, jackhammers, and compressors will increase the productivity of miners
many times over, and improve safety as well. A full set of this machinery, capable of working
medium sized Panjshir mines with teams of 7-10, can be obtained in India in the range of US
$ 100,000.
335

2. Mining Support Services

The rental of mining equipment at the mine sites is an existing support industry that could
be upgraded and expanded. Presently, the machinery could be leased or loaned to
independent groups of miners, who would not be able to pay cash for the more expensive
and sophisticated rental machinery. In the short run, technologically advanced machinery
would yield little increase in productivity unless miners are well trained to use the new
technologies. Hence, in the next few years, rental companies should focus on upgrading
existing drills and compressors, and replacing hand tools like picks and crowbars with
jackhammers and stone sorters. Electric jackhammers cost several hundred US dollars, can
run on small generators, and are not complicated to operate. Gas powered jackhammers are
more expensive, in the range of one thousand US dollars. These simple machines require
little complicated maintenance and can be transported up to the mines by pack animals.

Renting machinery to informal mining groups presents formidable obstacles. Primarily, the
revenue stream from profit sharing agreements would be erratic and far from guaranteed.
This would make meeting financing obligations for the purchase of such machinery difficult.
Additionally, without insurance or access to repair services, a broken piece of equipment
would constitute a total financial loss. Add to these difficulties the potential problem of
enforcing the profit sharing agreement. This last problem illustrates the utility of teaming
with a local partner, preferably one already with an existing business of this type.

In the future, if miners and investors become organized as legitimate commercial entities,
entrepreneurs could rent the machinery on a contract rather than a profit sharing basis. This
would open the door for the introduction of more sophisticated machinery, as rental
contracts would help businessmen access formal financing channels, if not in Afghanistan,
then in the country where the machinery is procured.

335
Estimate from the Afghan Ministry of Mines and Industry. Interviews with gem dealers in Kabul produced
similar estimates.
230
3. Cutting and Polishing Centres

Exploratory mining ventures and related support industries hold tremendous promise due to
the untapped potential of Afghanistans gem reserves. Entrepreneurs can profit from greater
access to the mines and higher yields through applied technology. Rental and leasing
services can tap into the future growth of the industry. Both of these strategies, however,
imply considerable risk, due to political factors and the unpredictable nature of gem
exploration.

Gem cutting and polishing, however, is a low risk business sector with considerable
opportunity for SME development. The precision cutting and skilled polishing of gemstones
can increase the value of the material by a factor of 100 in some cases.
336
Furthermore, new
cutting techniques have greatly widened the price differential between unworked stones and
cut and polished gems in the last decade.
337
Gem cutting and polishing is favourable for
SMEs because the primary input is skilled labour, rather than capital. Cutters and polishers
need machinery and access to uncut stones, but the business does not involve high
operating costs or overhead, and does not rely heavily on inputs that are in short supply in
Afghanistan, such as water or electricity.

Afghanistan has considerable advantages in the development of this sector. Namely,
Afghanistan is blessed with many precious and semi-precious stones, including lapis lazuli,
which is considered an easy stone to shape, and does not require expensive equipment to
polish. Many Afghans already have experience in this field from their time as refugees in
Pakistan, and are familiar with the dynamics of the industry. A small cutting and polishing
industry is already established in Kabul, and could be expanded and improved with proper
incentives, providing a springboard for SME growth.

a. Peshawar Scenario

The gem industry in Pakistan
developed in response to an influx of
Afghan gems in the 1980s. Little
investment was made in cutting and
polishing skills, and most gems still
pass through Peshawar unworked, on
their way to other destinations.
Consequently, Peshawar captures little
value from the sector, despite the
prominence of the city as a trading
centre.

Gem deposits were mostly unknown in
Pakistan until the 1950s, at which point
rubies and semi-precious stones were
discovered and traded in the far
northern provinces of Jammu and
Kashmir.
338
Eventually stones were
discovered in the Northwest Frontier Province, but Peshawar did not become a major gem-

336
Strategy on Mining, Cutting, Polishing, and Marketing of Gemstones in Pakistan, Government of Pakistan
Ministry of Petroleum and Natural Resources, Islamabad, Pakistan 2003.
337
Ibid
338
Ibid

Figure VIII-12: Lapis Lazuli Polishing Workshop
in Peshawar, Pakistan,December 2004
231
trading centre until the 1980s, when the war in Afghanistan caused a major influx of gems
into the town. With little government guidance, the city emerged as a hub for gem activity,
complete with exhibitions and trade shows and international networks of buyers.

To cope with the twin phenomena of an influx of both Afghan refugees and gemstones into
Pakistan, the Pakistani government seized on the idea of promoting the nascent cutting and
polishing industry as a source of income for refugees.
339
Polishing of stones, particularly lapis
lazuli, was intended as a home-based trade that would provide supplemental cash to the
very poor. To this end, many very simple rotor tools were distributed in the area. Little was
done in the way of training, though a gemmology institute was established. Some Afghans
and Pakistanis in the business profited and thrived on entrepreneurial skills and innate
ability, but most cutters and polishers were too poor to reinvest in better machinery and
training. Consequently, Pakistan remained a producer of low quality cut and polished gems,
even as the industry expanded.

As of 2003, there were an
estimated 500 gem cutting and
polishing units in Pakistan, with as
many as 30,000 people employed in
the precious and semi-precious
stone sector.
340
The cutting and
polishing units are heavily
concentrated around Peshawar, but
some can be found in Karachi and
Lahore. Most cutting and polishing
units are also small retail stores or
distributors of finished jewellery.
Generally, the shops also serve as
workshops, with 3-10 employees,
often family members, working in a
backroom workshop.
341
These
shops deal predominantly with lapis
lazuli, as it is the cheapest and
softest stone. They sometimes work
Afghan tourmaline, aquamarine, and lower value emeralds and rubies, though often with
very poor results.

Lapis lazuli for jewellery is not cut; rather workers sand it against a grinder. The machine is
much like a rotary lathe, except with a wheel of sandpaper-like material to shape the stone.
The friction grinds a fine powder off of the stone, and smoothes and shapes the remaining
rock. Once the stone is the desired shape, it is often covered with a wax to seal any nicks
and prevent dulling. At this stage the lapis lazuli stone is either set in gold or silver for
necklaces, earrings, bracelets, or rings, or sold to other jewellers, most often Pakistani.

Larger chunks of lapis lazuli are often used for the manufacture of decorative items like
tabletops, vases, chessboards, and figurines. The manufacture of these items involves fitting

339
Interview with a former employee of SMEDA (Small Medium Enterprise Development Association of Pakistan),
Kabul, January 2004
340
Ibid. The figure of 30,000 people includes players in the gem trade and jewellery manufacture sub-sectors as
well. Hence, the average number of employees per cutting and polishing unit would be significantly less than 60,
or 30,000 people / 500 units.
341
Information from field visits to the jewellery district of Peshawar, Pakistan. Altai Consulting, December 2004

Figure VIII-13: Cutting and Polishing of Semi-
Precious Stones in Peshawar, Pakistan,
December 2004
232
many pieces of lapis of exact dimensions together, or whittling large blocks into smaller
items. In this manner, much raw material is wasted during this phase. For example, to make
a 1.25 kg lapis lazuli ashtray, approximately 4 kg of raw stone is needed.
342
For this reason,
prices of finished pieces are calculated according to the weight of the raw material plus
labour rather than the weight of the finished good.

Peshawar gem cutters and polishers have attempted to adapt machinery appropriate for
polishing lapis lazuli to cutting other precious and semi-precious stones. Machines similar to
rotary sanders, but with diamond dust disks, are sometimes used to shape rough emeralds,
rubies, and semi-precious stones. This process often leaves the stones misshapen and
scratched. Like with lapis lazuli, a good deal of the potential value of the stone is wasted or
destroyed.

For all these reasons, the quality of cutting and polishing in Pakistan is well below
international standards. The vast majority of precious and semi-precious stones that
originate in, or pass through, Pakistan, are worked somewhere else. Pakistani worked gems
are generally sold to the domestic market, or exported as cheap, low-end jewellery to
neighbouring countries such as India or the Gulf States. Pakistan occupies the lowest end of
the spectrum of gem cutting technical capacity, and will remain there unless the gem
workers are better trained in precision cutting and polishing and new machinery and
techniques are adopted.

Peshawar Jaipur Hong Kong Bangkok Europe and Israel
Generally
only the
lowest quality
stones cut in
Pakistan
Lapis Lazuli
is the most
commonly
worked stone
in Peshawar,
followed by
other semi-
precious
stones such
as tourmaline
Low quality
emeralds are
occasionally
cut in
Peshawar
Well known
destination for
middle quality
gemstones,
though many
semi-precious
stones are
worked here
for the Indian
market
Jaipur was
once known
primarily for
diamonds, has
now expanded
into coloured
stones
Bangkok is
now firmly
established
as the major
cutting
destination for
medium to
high quality
coloured
gemstones
Both worked
and unworked
stones are
traded in
Bangkok
Germany, and
recently Israel, are
the primary
destinations for
coloured
gemstones of
exceptional quality
Some exceptional
quality lapis lazuli
is worked in Italy
Both the
manpower and
technology
employed are
extremely
expensive, hence
only the best
jewels are worked
in Israel or Europe
Hong Kong
hosts large
gem trade
fairs where
cut and uncut
stones are
sold
Hong Kong is
not a major
cutting centre
for gems, but
does work
many
varieties of
stones,
including lapis
lazuli
Quality and Reputation of Cutting Centres for Afghan Gems
High Low

Figure VIII-14: Common Cutting Centres for Afghan Gems, 2004

342
Interviews with gem cutters and polishers in Peshawar. Altai Consulting, December 2004
233
b. Improving upon Peshawar

The gem cutting and polishing experience in Peshawar was a success in that jobs were
created and incomes were raised. Yet very little of the value of the stones that passed
through Peshawar stayed there, and Pakistan never developed the skill sets necessary to
work stones above the low value categories. Furthermore, Peshawars cutting industry is
dependent upon a steady supply of Afghan gems, and to a lesser extent, a captive market of
the international community. Both have, or will, relocate to Kabul.

As the gem trading and cutting and polishing industry shifts from Peshawar to Kabul, the
SME opportunities lie in improving upon existing skills and knowledge and creating the
conditions for business owners to take a step up in terms of quality. High-end emerald and
ruby cutting is complicated and requires specialized machinery capable of precisely calibrated
cleavages. Technicians need years of training to produce gems of recognized standards.
Hence it is unrealistic to push for Kabul to leapfrog mid-range cutting centres and become a
destination for high-end cutting on par with Europe or Israel. It is entirely possible, however,
that the experience of Kabuls returning gem cutters and polishers could be built into an
industry on par with Jaipurs in terms of quality.

The key to this quality upgrade is training and technology. Without more expensive
equipment and the skills to use it, Afghanistan will not capture more value of its gemstones,
but simply produce more low quality goods. To realize this transformation, institutional
agreements could be made between either the Ministry of Mines and Industry or the Afghan
International Chamber of Commerces soon to be formed Afghan Association of Gem
Dealers, and lapidary experts from India and Thailand. An institute can be established to
upgrade and expand skills, as well as to certify the quality and origin of Afghan gems.

Pakistan took several steps to facilitate the enhancement of the cutting and polishing
industry, as well as to encourage a jewellery setting sub-sector. Government restrictions on
imported machinery were eased, and jewellers were exempted from tariffs on inputs such as
gold.
343
Unfortunately for the Pakistani, these initiatives were enacted only a few years
before the market in Peshawar started to dwindle, and few businessmen seem to have used
the incentives to import better machinery or inputs.
344

Simple tax breaks will not suffice to launch an overhaul of the gem-cutting sector. Afghan
gem polishers and cutters do not have the capital to import calibrated cutting and polishing
machines. One solution to this dilemma would be to have the gem cutting institute import
such machinery, at first with donor funds, and then lease the equipment to graduates of the
training programs.

Training, proper equipment, and a ready supply of gems is enough to guarantee the
manufacture of higher quality cut gemstones in Kabul. Quality certifications, marketing and
promotion, and existing relationships between Afghans and international gemstone traders
can all aid in the creation of demand for Afghan cut stones on the world market.

343
Pakistani Federal Government Notification No. S.R.O. 592 (I)/97, Islamabad, Pakistan 1997.
344
This is evidenced by the fact that the Ministry of Petroleum and Natural Resources of Pakistan was calling for
similar measures in 2003, seven years after their initial introductions. Strategy on Mining, Cutting, Polishing, and
Marketing of Gemstones in Pakistan, Government of Pakistan Ministry of Petroleum and Natural Resources,
Islamabad, Pakistan 2003.
234
4. Branding and Marketing Opportunities

In western countries, and in tourist destinations in Asia, low-end lapis lazuli jewellery is often
available in flea markets and from sidewalk vendors. Because of the low relative price of
lapis lazuli and the rudimentary nature of the polishing employed for this variety of jewellery,
lapis lazuli suffers from an association with low quality trinkets. Raising the standard of the
cutting and polishing could improve the image of lapis lazuli as a semi-precious gemstone,
pushing new demand for all ends of the quality spectrum. Furthermore, well polished Afghan
lapis could be marketed as a distinctly Afghan product, capitalizing on international interest
in Afghanistan. A Made in Afghanistan label could generate attention in retail markets.

Interviews with jewellers and gem importers in Europe indicated that the quality of precious
stones such as emeralds and rubies was much more important than the place of origin. But
because of the special characteristics of gems from some areas, there is a certain brand
awareness of gems from especially highly regarded mines. The emeralds of Muzo mine in
Colombia or the rubies of Mogok area in Burma are two examples of this phenomenon. A
similar opportunity exists for Afghan gems if the highest quality gems are marketed as
unique or separate from normal production. For example, a village name like Khenj in the
Panjshir could become synonymous with exceptional and rare emeralds if marketed properly.


Improvement of the Afghan gem industry begins in the mines. As the regulatory
environment improves, investors could take advantage of opportunities in investing in better
machinery and training to garner larger and higher quality stones. No miners have been
properly trained in extraction, so a minimal investment in training could yield immediate
results. Better blasting techniques and more sophisticated drills and tools for digging are
relatively low cost measures that would yield immediate results.

For Afghanistans mineral resources to generate sustainable economic development, a
greater portion of the value of the end product must be retained in Afghanistan. SMEs profit
from opportunities in the industry as it emerges from the informal sector and establishes
itself as a legitimate business in Afghanistan. Better infrastructure, border control, titling of
the mines, and a favourable tax regime will create incentives for the formalization of the
extraction and export market. Selling to a formal market place in Kabul would then outweigh
the risk, difficulty, and expense involved in smuggling to Pakistan.

In an improved regulatory environment, exploratory ventures could partner with local
interests to prospect with better surveying and mining methods. The market for Afghan
precious and semi-precious stones gradually can be relocated from Peshawar to Kabul,
allowing companies to market the stones in a legitimate venue. The profile of Afghanistans
gems can be raised through trade fairs held in Kabul, and in gem exhibitions around the
world. Establishing a credible and trustworthy quality standard backed by the government
and certified gemmologists would go a long way to assuring international buyers that
Afghanistan has a future as a gem trading centre.

For Afghanistan to move beyond trading, a cutting and polishing capacity must be
encouraged. Cutting and polishing businesses are SME friendly, and because of their labour
requirements, could serve as a catalyst for job and income generation. Though it is unlikely
that Afghanistan could develop the technical skills for high-end gem cutting in the short to
medium run, a cutting and polishing industry of a higher quality than Peshawars can be
235
established with donor aid. A training centre or gemmology institute could help Afghanistan
capitalize on domestic production, and spawn significant SME activity.

6. Existing Players

The Ministry of Mines and Industry is an excellent resource for information on the
current state of the mining industry in Afghanistan, and is ready to help investors
navigate potential regulatory and political obstacles. The Ministry can provide
letters of introduction for interested parties to meet gem traders and visit mining
areas. The Ministry wishes to be involved in assisting with promotional activities
and trade fairs to attract buyers, and has expressed an interest in developing the
cutting and polishing industry as well.

Because Afghanistan is rich in mineral resources, foreign donor governments are
interested in developing the sector to aid in economic development. To this end,
the British and American governments have already allocated funds towards
rehabilitating the mining sector. Although the interests of the USGS and the BGS
lie primarily in energy resources like coal and natural gas, their surveying
activities could create excellent externalities for the gemstone industry.

Many gem exporters hope to move their trading operations to Kabul soon, and
will be instrumental in promoting Afghan precious and semi-precious stones
through their networks of buyers. Many have other business operations and are
members of the chambers of commerce. Prominent members of these
organisations have offered to lend their experience and expertise in the creation
of a gemmology institute, as they have extensive contacts in the cutting industry
in Bangkok and Jaipur.

India possesses a plethora of gem cutting institutes, both private and state
sponsored, that could provide trainers and certification in cutting, polishing, and
grading of coloured stones. The Afghan Ministry of Mines and Industry has a
working relationship with its Indian counterpart. This partnership could be
leveraged for the development of the cutting and polishing industry.

Geovision, Inc. an American gem exploration and sales firm, has expressed
interest in establishing a training institute in the past, and is considered a leading
resource on the existing gem deposits of Afghanistan. Likewise, the Aga Khan
Development Fund is currently sending small groups of workers to Peshawar to
study gem cutting, and would be a useful partner in setting up a training facility.

236

IX. Summary of Financial
Support for SMEs in
Afghanistan

A. Key Findings

The current financial environment in Afghanistan is not structured in a manner that is
accessible or useful to most SMEs. Afghan SMEs have very few options for financing the
founding, expansion, or survival of their operations. The current financial architecture in
Afghanistan is geared towards large projects and micro loans; SMEs fall in between these
two categories and have little access to formal financial channels. The entrance of new
banks and lenders into the Afghan market is a welcome development. At present, however,
most of these banks exist purely to channel aid money from abroad, finance the import
industry, and offer short-term loans to construction projects. Much of the revenue for these
banks comes from services such as check clearing and cash transfer services. Banks
represent potential for Afghan SMEs, but the obstacles to lending are considerable.

Beyond the passage of enforceable banking legislation, institutions need to be built to
establish a system of property rights that will allow for recognizable collateral and default
and dispute settlement. Some form of insurance for SMEs and physical assets would also
allow better diversification of risk and make loaning more appealing for profit-seeking
financial institutions.

Afghan SMEs need to build capacity in areas such as book-keeping, administration, and
financial management. In the absence of these skills, credit decisions can only be made on
personal connections, depriving many worthy entrepreneurs the opportunity to launch a
business. The development community can play a significant role in this area.

There are some bright spots though. Innovative programs like RAMPs ALP partnership with
Afghan International Bank can be expanded, and other private banks are eager to implement
similar programs with international organisations. Such arrangements allow for greater risk
sharing and facilitate the building of relationships between the SMEs and the formal financial
sector. New programs in this area should be open to consider proposals and applications
from all sectors of the economy.

B. Introduction

While the formal financial sector in Afghanistan is in its infancy, a number of institutions
have emerged to serve certain sectors of the Afghan reconstruction effort. Large institutional
lenders such as the World Bank, Asian Development Bank, and OPIC are willing and able to
finance large infrastructure projects, and private sector investors are willing to explore
expensive ventures in sectors such as construction, telecommunications, and hotels. Many
micro finance organisations currently operate in Afghanistan, offering very small cash loans
to individuals, family farms, and small businesses. For businesses and investment ventures
237
My four brothers and I pooled our
savings to start this plant. During the
Najibullah era, we expanded with a
loan from the state bank, but now our
only way to access cash to keep
operating is to sell one of our houses.
Plastic shoe manufacturer, Mazar-e-
Sharif.
that fall between micro finance and multi-million dollar projects, there is practically no access
to formal financing.

Because of the significance of SMEs on employment and economic growth, the financing gap
is a serious impediment to the formation of a viable private sector in Afghanistan. Most
private banks do not lend to SMEs, public development banks are only re-starting their
operations, and private investors generally prefer to funnel funds into larger projects. By one
estimate, there are between 250,000 750,000 non-farm SMEs operating in Afghanistan at
present.
345
Much work has been done to
overhaul the investment procedures and
regulations to start a business, but these
businesses represent under-utilised, and indeed
restrained, potential. Without access to reliable
financing channels, these SMEs cannot expand
activities, or stay afloat during times of distress.
In a survey conducted in November among 500
heads of SMEs nationwide, 70% percent of
business people interviewed stated that it was
difficult to borrow money in Afghanistan, yet 45% of respondents said they took out a loan
to start a business, and 59% declared that they would need additional credit to keep their
businesses going. With the demand for credit high, and few formal channels available, 83%
of those who borrowed money to start businesses did so with funds borrowed from
relatives.
346
Obviously, a system that forces such reliance on the resources of relatives has
serious limitations.

Much of the SME business activity in Afghanistan is part of the informal economy, though
admittedly the delineation between informal and formal is difficult to ascertain in a business
environment with little tax collection or functioning regulatory bodies.
347
There are major
obstacles for a formal financial system to service an informal business sector. The difficulties
encountered by for-profit banks seeking to lend to SMEs in this environment are the same as
in many developing countries: lack of an acceptable legal framework to enforce property
rights and contracts, absence of bankruptcy laws, lack of reliable credit information, and
absence of managerial capacity.
348

Not surprisingly, an informal credit system serves the informal SME sectors. It is neither
efficient in the long run, nor capable of meeting the demand of Afghanistans growing
economy. Though Afghans rarely borrow from private banks, there exists no widespread
cultural aversion to financial institutions that charge interest among the urban business class.
In localities and situations where such interest is contrary to cultural practices, lenders often
structure loans in ways that avoid direct interest payments on principal, or simply charge
interest but refer to it with other terminology.
349

At present, financing options for Afghan SMEs are extremely limited. There is, however, a
growing recognition of this problem in both the international donor community and in the

345
Estimate by Altai Consulting.
346
USAID Strategy Private Sector Needs Assessment, Altai Consulting, November 2004
347
The World Bank places the percentage of all economic activity in the informal sector in Afghanistan at
between 80-90%. Steve Rasmussen, Rural Finance in Afghanistan: The Challenge of the Opium Economy, World
Bank, December, 2005
348
Unleashing Entrepreneurship, Commission on the Private Sector and Development, UN, March 2004
349
238
private banking sector. The following section discusses the existing landscape of lenders and
potential lenders to SMEs in Afghanistan.
Large Projects ($1 Million +)
- IFC, OPIC, ADB, World Bank, MIGA, AIB,
Afghanistan Investment Partners, AKFED,
DFID, AFD, USAID
SME Loans and Grants ($1,000 - $1 Million)
- AIB Commercial Lending, ACAP, CNFA,
RAMP: ARF, AIB/ALP, AFC
Micro Finance ($100 - $1,000)
- MISFA (12 orgs), First MicroFinance Bank,
Punjab Bank
Reasons for SME Financing
Gap
Sectoral limitations : preference
for Agriculture
Lack of Insurance
Lack of business planning and
book-keeping ability
Administrative costs of smaller
loans
Inadequate legal framework for
investor protection
Lack of acceptable collateral
Currency risk if loans in dollars
and revenue in Afghanis

Figure IX-1: Sources of Financing by Size of Loan, February 2005

239
C. Existing and Potential Financial Support for
SMEs
350

Entity Name
Sector of
Lending
Loans /
Leases
Funds Available /
Loans Outstanding
Loan Min / Max
(Average size of Loan
or Investment)
Interest Rate Ownership
Hawallah All Loans unk
US $ 10,000 / US $
1,000,000
n/a Private
Afghan Finance Corporation (AFC)
Agricultural
Equipment
Loans and
Leases
unk
US $ 10,000 - US $
250,000 (unk)
n/a
RAMP-USAID/
ARC
Afghan International Bank (AIB)
Construction,
Export/Import,
Bridge Loans,
Fuel - Energy
Loans US $ 10,000,000 / unk
US $ 50,000 / $
4,000,000 (unk)
Around 10%
ADB/Afghan
Investors
Afghan International Bank (ALP/RAMP)
Agricultural and
Agriculture
Related
Loans
US $ 1,200,000 / US
$800,000
US $ 50,000 / US $
500,000 (US $
200,000)
9% - 13% RAMP-USAID
First MicroFinance Bank All Loans unk / US $ 2,000,000
US $ 300 - US $ 3,000
(unk)
10-14%
Aga Khan
Development
Fund
MISFA Agricultural, Other MicroLoans unk US $ 50- US $ 3000
30-50% (effective
annual interest
rate)
RAMP-USAID
Entity Name
Sector of
Lending
Loans /
Leases
Funds Available /
Loans Outstanding
Loan Min / Max
or Investment)
Kabul Bank All Loans unk / US $ 8,750,000
Around US $ 400,000
on average
15 - 25% Afghan Investors
National Bank of Pakistan Trading Loans
US $ 25,000,000 / US
$130,000
US $ 10,000 - US $
30,000
8-15%
Government of
Pakistan
Punjabi Bank Trading/transport Loans unk/ > US $ 70,000 US $ 1,000 - US $ 5,000 10%
Government of
India
Millie Bank All Loans unk/ US $ 10,000,000
US $ 5,000 and up (US
$ 10,000)
10 - 16.5%
Government of
Afghanistan
Pashtuny Bank Trading Loans
unk/ > US $
10,000,000
US $ 5,000 and up (US
$ 15,000)
10 - 16.5%
Government of
Afghanistan
Entity Name
Sector of
Lending
Loans /
Leases
Funds Available /
Loans Outstanding
Loan Min / Max
or Investment)
Afghan Capital Partners (ACAP)
(1st sem 2005)
Construction,
Warehouse -
Distribution,
Agriculture
Debt
Financing and
Equity
Investment
Target Funds: US $ 30
- US $50 million
US $ 500,000 / US $
5,000,000 (none to
date)
Equity investment
- dependent on
project.
RAMP-USAID
(ARF)/ Private
Investment
Funds
Aryan Bank
(1st sem 2005)
Export/Import,
Agriculture
Loans US $ 10,000,000 unk unk
Sadarat Bank
(Iran) / Millie
Bank of Iran
BRAC Enterprise Bank Small Businesses Loans n/a
US $ 9,000 (Average in
Bangladesh)
unk NGO
Active
Few Loans
Potential Future Sources

350
Data gathered from interviews with financial professionals in Afghanistan, as well as secondary resources cited
elsewhere in this report. The above table is meant to be illustrative of the financial landscape at the time of this
reports publication, and should not be considered comprehensive. The data is specific to the period in which the
research was conducted and will vary with time.
240

D. Micro Finance

Many micro finance organisations operate in Afghanistan, but very few of them offer loans
large enough to be of any interest to businesses beyond the small farm or family level. Most
micro finance operations issue loans in the range of hundreds of dollars or less, and often for
terms of less than one year. Some micro credit schemes, however, allow qualified borrowers
to borrow between US $ 1,000 - US $ 5,000. Several of the most active lenders in this
category are First MicroFinance Bank, and some of the organisations under the umbrella
group known as MISFA (Microfinance Investment Support Facility for Afghanistan).
Interestingly, Punjab Bank of India, a commercial bank, has started a micro loan pilot
program that lends up to US $ 5,000 to SMEs.

In addition to the obvious limitations that come from loaning such small amounts, micro-
finance operations often have a preferred sector of lending, such as womens handicrafts or
alternative livelihood crops, which can limit access for other potential borrowers.

E. Private Banks

Private banks are the primary financial intermediary in most developed economies. The entry
of many new private banks into the Afghan market gives hope that these new players wish
to assume this role in Afghanistan as well. Indeed, interviews with managers of these banks
in Kabul indicated a widespread interest in tapping the hunger for credit from small and
medium enterprises in Afghanistan. Local banks like the Afghan International Bank (AIB) and
Kabul Bank, and foreign banks such as the National Bank of Pakistan, Aryan Bank of Iran,
and Punjabi Bank of India seem keen to explore SME lending, and indeed AIB has some SME
sized loans outstanding to Afghan businessmen. Unfortunately, almost all such banks are
unwilling to assume the risks of lending to Afghan SMEs.

These banks cite numerous problems that prevent them from loaning to Afghan SMEs.
Principal among the issues mentioned by heads of private banks in Afghanistan was a
concern for lack of enforceability for loan agreements and lack of acceptable collateral. Even
when collateral in the form of land or property is offered, the systems of deeds and property
rights enforcement makes it difficult to know if a property can be considered to be legally
owned. Banks have little recourse to challenge non-payment of loans and no practical way to
recover and dispose of assets in the event of a default. Another problem cited is lack of
insurance, which makes loaning for purchase of machinery and equipment particularly risky.
Also, the bankers mentioned the lack of administrative capacity of the SMEs. SMEs in
Afghanistan often lack the know-how to keep acceptable financial records and present
properly prepared business plans to potential investors. For this reason, the bankers
responded much more positively to the idea of Afghan SME proposals that featured an
international partner to assert some managerial control over the project and offer
guarantees and collateral in their home countries.

In the absence of credit analysis, loan decisions are made on local reputation and
connections. Remarked one banker; The system is much like we loaned money forty years
ago in Europe and the United States; on recommendation and character reference rather
than risk management principles.

241
Yet another obstacle to SME lending in Afghanistan is the limited capacity of banks to
analyse business plans. In the event an Afghan entrepreneur would present a well-
formulated business plan to a bank, most banks lack the resources to properly assess the
merits of the proposed investment. To maintain a staff trained and equipped to evaluate
business plans constitutes an unjustifiable cost at this stage of financial sector development
in Afghanistan.

Another reason why private banks typically do not lend to Afghan SMEs is that they do not
need to from a profit standpoint. Rather than funding new ventures, the banks can fund
known activities like construction projects, the cross-border trade of basic consumer goods,
fuel, or construction supplies. Furthermore, many banks in Afghanistan earn the majority of
their revenue from services such as remittances, international transfers, and checking.

F. Leasing Companies, Development Investment
Funds, and Grants

To address the SME financing gap, several, leasing companies, investment funds, and grant
funds have been established by development organisations, NGOs, and private sources. The
following are some examples of current initiatives in this area: CNFA, a non-profit
organisation operating with funding from the United States Department of Agriculture, offers
matching grants from US $ 500 - US $ 100,000 for agricultural producing, processing, and
marketing ventures. Relief International, an NGO, offers matching grants in the range of US
$ 4,000 dollars to cooperatives in Nangahar. ACAP is an investment fund that seeks to
finance projects in excess of US $ 500,000 through equity investment. The USAID-funded
RAMP program has several programs targeted to SME size projects: ALP, a credit line for
loans in excess of US $ 50,000 administered by the Afghan International Bank; AFC, an
equipment leasing company with lease ranges from US $ 10,000 US $ 250,000; and ARF,
an Islamic-lending compliant investment fund for investments in the range of US $ 500,000
up to US $ 5,000,000 to be managed by ACAP.

The AIB/ALP program is already functioning, and represents an innovative partnership
between a development institution and a private financial services provider. The partnership
allows RAMP/USAID to utilize the administrative capacity and financial experience of the
Afghanistan International Bank to offer loans to Afghan SMEs. AIB, in turn, can build
relationships with SMEs clients while incurring minimal risk to its balance sheet. While the
capital for such a program may be provided by a development institution, the lending
institution has an interest in choosing credit worthy clients and lending according to market-
oriented, profit-maximizing principles. Not only do Afghan SMEs benefit directly from access
to formal bank loans, but also the SME sector as a whole benefits, as a precedent for formal
bank lending to SMEs is established.

The capital and financial mediation these funds bring are vitally important, but most of the
above organisations are restricted to, or focused on, lending to the agricultural sector. This
can be particularly frustrating for credit-worthy SMEs involved in other sectors. Based on
interviews with financial professionals in Afghanistan, there is ample interest in establishing
programs similar to the AIB/ALP RAMP/USAID program, particularly on the part of the
foreign private banks. In the absence of a sound legal and regulatory environment to
assuage fears about the risks of SME lending, more programs and partnerships between
private banks and development agencies are needed to serve as an intermediary step while
242
the legal and regulatory environment improves. Any future initiatives in this area would
prove particularly constructive if they do not restrict lending to any one particular sector.

G. State-Owned Development Banks

Currently, Afghanistans state banks play very little role in the financial system of
Afghanistan. The management of Pashtuny and Millie Bank, two state-owned development
banks, has expressed an interest in resuming lending, but these institutions will require
further rehabilitation in terms of managerial and technical capacity and cleaning up balance
sheets burdened with non-performing loans acquired years or decades ago. The Da
Afghanistan Bank (the Central Bank) is the most active of government financial institutions in
the reform process.

H. Informal Finance and Islamic Lending
Considerations

Much like the cultural and physical landscape of Afghanistan, attitudes towards finance and
credit vary widely across the country. Urban entrepreneurs in cities such as Mazar-e-Sharif
and Kabul express little or no aversion to standard interest-based loans. Business leaders in
some areas expressed more concern that interest was contrary to Islam.
351
In general,
however, the prevailing attitude towards conventional finance is welcoming, as the primary
concern is access to credit on reasonable terms.
352
Informal loan mechanisms often are
structured in a way to avoid direct interest payments, but can be quite expensive when
viewed in terms of an effective annualised interest rate.

Borrowing money from relatives is by far the most common method of accessing credit for
small businesses in Afghanistan. Less than 2% of the general public uses bank credit, and
similarly small percentages borrow from NGOs.
353
Funds available from immediate relatives
and extended families are often quite limited, leading borrowers to turn to other informal
methods of lending. One method is to borrow on credit for raw materials; meaning raw
materials are given to an entrepreneur, and are paid for in time with additional fees. Often
farmers will ask for seeds from a wealthy village merchant, and will repay the loan with a
portion of the harvest. In other commercial ventures, a profit sharing arrangement is worked
out between a wealthy individual and an entrepreneur wherein the business provides credit
for a portion of the profits of the venture.
354
Shopkeepers and businessmen often work as
moneylenders, but employ the more informal methods described above. For instance,
traders often lend for inputs in a system of cost-plus-mark-up known as murahaba. Though
this system can be considered compliant with Islamic lending principles, the mark-up can run
from 10-50% of the original cost.
355

Additionally, the hawala system can provide some banking-like services, primarily the
international transfer of cash. Hawaladars (hawala dealers) will sometimes loan cash based

351
Survey of Afghanistans Leadership: Mental Models and Business Environment, OTF Group, February, 2005
352
Roles and Opportunities for Rural Credit Initiatives in Afghanistans Opium Economy, Karri Goeldner,
December, 2004
353
USAID Strategy Private Sector Needs Assessment, Altai Consulting, November, 2004
354
Ibid.
355
Roles and Opportunities for Rural Credit Initiatives in Afghanistans Opium Economy, Karri Goeldner,
December, 2004
243
on personal connections and relationships, though their reach in Afghanistan is limited to
areas with concentrated commercial activity. Hawaladars that do such lending typically only
loan for the short term and at rates as high as 50-60%.
356
In addition, some hawaladars
provide short-term bridge loans (sometimes in the hundreds of thousands of dollars range)
to international organisations and NGOs for a small fee, though the fee will depend on the
amount borrowed and the negotiating skill of the borrower.
357
Now, however, the capability
and willingness of hawaladars to lend is much reduced. According to the Banking Law of
September 2003, hawaladars are not allowed to take deposits, make loans, or trade
currency.
358
It is difficult to tell what affect the legislation has had on hawala lending services
thus far, but expanded regulatory control in the banking and financial services sector will
obviously limit this type of transaction.

I. Legal Environment

As elaborated above, private banks are unwilling to lend to SMEs for a variety of reasons,
many relating to the inadequate and uncertain legal and regulatory environment. This is not
to suggest that little or no reform has been launched in the sector. It should be noted that
the Afghan financial system is being rebuilt practically from scratch, and the improvements
to date are considerable.
359
Principal among them was the enactment of a Banking Law in
September 2003. This law has allowed for the licensing and re-licensing of private banks,
paving the way for the entry of more foreign and local banks. Subsequent legislation has
guaranteed the autonomy of the Da Afghanistan Bank. The Da Afghanistan Banks capacity
to regulate and perform basic functions is improving, though other state banks remain
basically non-operational.

Licensing and regulations such as basic capital requirements, as spelled out in the Banking
Law, are necessary first steps, but questions of property rights, bankruptcy, and foreclosure
are even larger obstacles that now need to be addressed. Until an acceptable precedent has
been established in these areas, banks will not accept collateral with questionable title, nor
will they have a mechanism to recover losses resulting from default or contract dispute.
Consequently, banks will avoid lending to SMEs in favour of large, foreign backed projects
and cross-border trade.

J. Pakistan Parallel

A brief examination of the SME sector in Pakistan and its relation to formal financial channels
is illustrative of the significance of the sector and the challenges that neighbouring
economies face in this area. According to the public SME Bank Ltd. of Pakistan, SMEs in
Pakistan provide employment to up to 80% of the labour force, contribute to more than 50%
of the Pakistan GDP and over 50% of export earnings. Because of their variety and
geographic reach Pakistani SMEs have a much higher capacity for job creation than do the
big businesses.
360

356
Ibid. Interest rates are per year
357
The Challenges of Regulating and Supervising the Hawaladars of Kabul, Samuel Munzele Maimbo, World Bank,
November, 2004
358
Ibid.
359
The Challenges of Regulating and Supervising the Hawaladars of Kabul, November, 2004, by Samuel Munzele
Maimbo of the World Bank is a valuable resource on the difficulties faced by Afghan and international policy
makers in reforming and regulating the Afghan financial sector.
360
http://www.smebank.org/SME%20Sector.htm#7
244

Pakistan, however, shares many of the same problems with Afghanistan in terms of SME
financing. Primarily, SMEs lack proper book-keeping and accounting skills, creating the
impression that they are unworthy of formal credit. Only 14% of Pakistans SMEs seek bank
loans, and most do not possess the skills to construct presentable business plans to potential
investors. As in Afghanistan, many SMEs do not possess acceptable collateral for loans.

The Pakistani government recognizes the restrained potential of its SMEs, and has developed
a series of initiatives to aid the sector. In addition to the recently established SME Bank,
Pakistan established SMEDA, a government development agency concentrating on growing
and supporting the SME sector. SMEDA provides research and support services in a wide
variety of SME sectors. Public and private institutions experiment with interest-free Islamic
lending programs to overcome cultural aversions to borrowing. SMEDA has called for the
creation of credit guarantees and insurance funds for SMEs, particularly in the manufacturing
sector.
361
Such guarantees, if recognized and accepted, would allow for greater risk
diversification and open up new channels of formal financing to SMEs.

The Afghan government lacks both the resources and bureaucratic capacity to implement
such a multi-layered SME development strategy, but instead could concentrate resources on
strengthening property rights, commercial courts, and contract enforcement. In the place of
government initiatives, existing international organisations and NGOs can be leveraged to
promote SME development through capacity building in areas such as bookkeeping and
business plan development. Credit guarantees and insurance for capital investments would
be particularly welcome as well.

361
http://www.jang.com.pk/thenews/feb2005-daily/04-02-2005/business/b12.htm

245

X. Legal and Regulatory
Environment

A. Overview

The Afghan government and the international donor community have put considerable
efforts into promoting domestic and foreign investment in the country, and in formalising the
economy. Despite the significant progress made in the reconstruction of institutional
capacity, there is still confusion in the Afghan business community concerning government
regulation and the general legal framework for commercial activity.

Businesses are typically not subject to strict legal requirements for two main reasons: few
new laws and regulations have been enacted since the fall of the Taliban, and the national
government lacks the capacity to enforce many laws already on the books. SMEs, in
particular, are unsure how current changes will affect their operations.

Most entrepreneurs are eager to cooperate with the government, and to formalise and
streamline interaction with the public sector. Afghan businessmen generally favour a strong
role for the government in creating and implementing economic policy.
362
Perhaps a remnant
of the Soviet inspired command economy model of the 1980s, many businessmen favour
state ownership of certain industries, protection from imports, and government intervention
in the prices of certain goods.
363
This level of state control is beyond the capacity of the new
government, but many new laws concerning investment and business operations are
currently being drafted.

Because most economic activity in Afghanistan is informal, the relationship between the
private and public sectors is also largely informal. In response to the current ambiguity
concerning law and regulation, most SME owners simply go about their activities with little
government interference or assistance. Some sectors may require closer cooperation with
government agencies. Import businesses, for example, need to clear bureaucratic hurdles at
the borders, pay import tariffs, and obtain certain licenses.

Interestingly, studies have demonstrated that the Afghan business community is willing to
pay higher taxes in exchange for better public utilities, education, healthcare and other
government assistance.
364
And despite the lack of a consolidated tax system, 68% of private
sector interviewees in a recent poll reported that they pay taxes. This high rate of payment
is likely explained by the habit of people including small daily fees and bribes in their
definition of taxes.
365

Also confusing are the overlapping layers of laws passed by successive regimes. Some
legislation dating back to the pre-Soviet era invasion is still recognized, as are some laws of
subsequent administrations.
366

362
Survey of Afghanistans Leadership: Mental Models and Business Environment, OTF Group, February 2005.
363
Ibid.
364
Private Sector Needs Assessment, USAID Strategy. Altai Consulting, November 2004.
365
Ibid.
366
Information from interviews with rule of law and judicial reform experts at USAID, Kabul, February 2005
246

Though SME managers would benefit from clarification concerning regulation specific to their
respective industries, the more fundamental problems involve unclear property rights (and
the ensuing difficulties of using property as collateral), illegal taxation or fees, particularly
during transportation of goods, uncertainty over which taxes and fees are in fact valid, and
confusion over business registration procedures.

B. Laws and Regulations affecting SMEs

1. Current and Future Laws and Regulations

a. Registration and Investment Law

All businesses are required to register with the government before beginning commercial
activities. This registration puts businesses officially on file and assigns each business a tax
identification number (TIN) from the Ministry of Finance. Part of the confusion about this
process stems from the fact that two separate entities, the Ministry of Commerce and the
Afghan Investment Support Agency (AISA), both issue licenses. Both procedures have
recently been streamlined and take less than a week. Registration costs between US $ 80
and US $ 1,000, depending on the size of the investment.
367
While AISA offers investment
licenses, and provides investment advice and resources, the Ministry of Commerce issues
business licenses. Most business owners seem unaware of this distinction and simply register
with whichever agency they know, if in fact they are aware of the licensing procedures at all.
Furthermore, it is unclear how common registration of any kind is for businesses outside of
Kabul.

One noteworthy achievement was the passage of the Law on Foreign and Domestic Private
Investment of 2002. This law was passed to provide some framework and authorization for
legitimate investments projects. In addition to stipulating certain tax waivers for new
investments, the law specifically authorizes 100% foreign ownership of commercial ventures.
This law will likely be replaced by a new version, due to be signed as an Executive Order.

b. Banking

One of the few pieces of legislation passed since the fall of the Taliban is the Banking Law,
signed into law in 2003 by President Karzai. The original law passed was only available in
English, creating some confusion about its legality, but these concerns have been resolved.
The law lays out basic definitions of financial institutions, and stipulates registration and
monitoring procedures for banks. General administrative requirements are covered as well.
The law is a positive development, but its passage leaves open the larger questions of
enforcement and judicial interpretation of the law.

367
Information compiled through interviews with businessmen, independent license facilitators, and AISA and
Ministry of Commerce functionaries. Altai Consulting, December 2004
247
c. Land Titling

The system of land and property titling in Afghanistan presents an obstacle for investment.
Property disputes can lead to complicated adjudication that can stretch on for years, or even
confiscation by more powerful parties. The hazard associated with starting a store, plant,
farm, or processing facility on land of unclear ownership is an obvious impediment to
entrepreneurship. To address this situation, the government and the international
community have now made property rights, titling, and land use planning a priority.

The Ministry of Agriculture is currently involved with drafting and defining the scope of the
Land Ownership Law. A Land Titling and Property Registration Law has also been discussed
by the government, but there is no consensus on which government body should author
such a bill.
368

d. Import Tariffs

Importers now report greater standardisation of import duties than in past years, but many
are unsure which fees are official and which are not. Paperwork and fee collection breeds
corruption, which businessmen frequently cite as a major obstacle to economic growth.
369

The Ministry of Finance, which controls the Customs Department, is currently working on
upgrading and standardising border crossing facilities and procedures.

e. Corporate Taxes

At present, few companies pay any kind of official national tax on sales, revenue, or profit
from business activities, though many report paying some form of fee or tax to local
governments. The Ministry of Finance, together with the IMF and GTZ, have begun to draft a
comprehensive revenue bill to include property rental taxes, individual and corporate income
taxes, business establishment taxes, and service taxes. The timeframe for publication of this
proposed law is unknown.

2. Sector Specific Regulations

The construction and the semi-precious and precious stones sectors featured in our market
sector analysis are, or will be, particularly influenced by changes in the legal and regulatory
environment.

a. Construction

The construction sector in Afghanistan is plagued by sub-standard building materials and a
lack of quality standards. There are no governmental regulations regarding the sale or use of
low-quality materials in Afghanistan. The National Commission on Standards, Metrology,
and Quality is housed at the Ministry of Commerce but is an independent body. Its main
task is to develop technical regulations regarding safety and construction material, but other
organisations such as large private contractors and the Afghan Builders Association are
enforcing their own specifications and standards. Perhaps the main official interaction
between the sector and the government is at the city municipalities, where builders obtain
construction permits.

368
Information obtained from USAID, February 2005.
369
Survey of Afghanistans Leadership: Mental Models and Business Environment, OTF Group, February, 2005
248
b. Gems

The gem sector has operated outside the bounds of the formal economy for at least two
decades. Efforts to privatise the mines and legitimise the export of gems have the potential
to boost investment, create SME opportunities, and capture greater value within Afghanistan.
The Ministry of Mines and Industry envisions a six-month time horizon for passing a bill
concerning mineral extraction and commercial mining rights. Taxes on profits from the sale
of stones will be addressed as well, though it remains to be seen if gem-trading taxation will
fall under a broader revenue package or a specific Ministry of Mines and Industry sponsored
legislation.

3. Law and Regulation Progress Table

The data presented below
370
are examples of laws, either enacted or in various draft stages.
In Afghanistan, a ministry may decide to research and draft a bill dealing with a specific
issue. Often different ministries address the same issue, leading to overlapping and a
proliferation of similar draft laws. The Ministries usually work in tandem with international
agencies or organisations such as the IMF, World Bank, or USAID in a working group. The
working group researches the issues and drafts laws. After internal review, the law is
submitted to a Ministry of Justice agency known as the Taqnin. The Taqnin is not a policy
making body, but serves as a legal clearinghouse for draft laws, ensuring that the technical
language is appropriate and does not allow for misinterpretation due to poor translation or
vague wording. From the Taqnin, the President can choose to sign a decree making the
document law. The law is then published in a newspaper and becomes Afghan law.

370
The following table is a selected excerpt from a larger table compiled by legal and judicial reform experts at
Management Systems International (MSI) working on behalf of USAID. The table is current as of February 2005,
but should not be considered comprehensive, as each ministry pursues its own legislative agenda at its own pace.
Any clarifications or inquiries should be

directed to the appropriate ministry or to MSI.
Laws Ministry Involved First draft by:
Working Group
Members
Draft Research
started:
First Draft
completed:
Draft Reviewed by
working group:
Gazetted : Comments
Partnership
Law
MoC ABA/CIME
ABA/CIME, AGLR,
AEGP, JRC, MoJ,
MoC, MoF, MoFA
Yes Yes Yes
Corporate
Law
MoC ABA/CIME
ABA/CIME, AGLR,
AEGP, JRC, MoJ,
MoC, MoF, MoFA
Yes Yes Yes
Commercial
Arbitration
Law
MoC ABA/CIME
ABA/CIME, AGLR,
AEGP, JRC, MoJ,
MoC, MoF, MoFA,
AISA
Yes Yes Yes
MoFA has approved
Afghanistan's
accession to the
1958 NY Convention
on the Enforcement
of Arbitral Awards.
Bankruptcy
Law
MoC/MoF ABA/CIME
ABA/CIME, AGLR,
AEGP, JRC, MoJ,
MoC, MoF
Yes Yes No
Banking Law MoF Yes Yes Yes
The Banking Law
was signed into law
in 2003 by Pres.
Karzai in English.
The Taqnin later
translated it to Dari &
Pashto
Da
Afghanistan
Central Bank
Law
MoF IMF AEGP, IMF, MOF Yes Yes Yes Jan-05
Revenue
Package
MoF IMF MoF, IMF, GTZ Yes Yes Yes
Close to completion,
but as of February
2005, they have not
been gazetted.
Industrial
Parks Decree
MoF Yes Yes Yes
Law on
Foreign and
Domestic
Private
Investment of
2002
MoF MoF, GTZ
MoF, GTZ,
Others?
Yes Yes Yes Oct.2002
This Law is likely to
be repealed by the
Investment Law
listed below.
Law on
Foreign and
Domestic
Private
Investment
MoF, MoC ABA/CIME
ABA/CIME, GTZ,
AEGP, AGLR, MoC,
MoFA, MoJ, AISA,
ARG
Yes Yes Yes
Should be ready for
Executive Order
Customs Law MoF
AEGP, MOF,
others
Yes Yes Yes
Mining Law MoMI MoMI/ABA Yes Yes Yes
Land Titling
and Property
Registration
Law
None assigned
yet.
Noted as a priority
by many ministries
but no worked has
yet begun.
Land
Ownership
Law
MoA
Request for Taqnin
to draft this law was
submitted by
Ministry of
Agriculture.
Legal and Regulatory Initiatives as of February 2005
249

Legend
MoC Ministry of Commerce
MoF Ministry of Finance
MoFA Ministry of Foreign Affairs
MoJ Ministry of Justice
MoMI Ministry of Mines and Industries
MoE Ministry of the Economy
MoA Ministry of Agriculture
ABA/CIME American Bar Association/Centre for International Management Education
ADB Asian Development Bank
AEGP Afghan Economic Governance Project
AGLR Afghan Governance and Legal Reform Project (USAID)
AIHRC Afghan Independent Human Rights Commission
AISA Afghanistan Investment Support Agency
ARG Afghanistan Reconstruction Group (US Embassy)
DOJ US Department of Justice
GoA Government of Afghanistan
GTZ German Development Agency
IBA International Bar Association
IMF International Monetary Fund
JRC Judicial Reform Commission
OMC-A Office of Military Coordination - Afghanistan
SC Supreme Court
UNHCR United Nations High Commissioner for Refugees
USAID United States Agency for International Development
WB World Bank

250
XI. Bibliography

A. Poultry

1. Market

National Livestock Census, FAO, 2003
Afghanistan Poultry Sub-Sector Assessment, RAMP, April 2004
Livestock and Poultry: World Market and Trade, USDA, November 2004
Pahwa Poultry and Dairy Production Project, US Trade and Development Agency,
June 2003
Overview of the World Broiler Situation, Foreign Agricultural Service, December 2001
Afghan Livestock Production, CSO, 2002
Pakistan Agricultural Census, Government of Pakistan Statistics Division, May 2003

2. Farming

Layer Farm, SMEDA, April 2002
Broiler Farm, SMEDA, April 2002

B. Cumin and Saffron

1. Global Spice Markets

Spices and Herbs - EU Market Survey, CBI, 2002
Organic Food Products - EU Market Survey, CBI, 2004
Food Ingredients for Industrial Use EU Market Survey, CBI, 2004
Global Spice Markets Imports 1998-2002, ITC, January 2004
Balkan Herb Sector, IFC, 2001
SEED Summary report - Export potential of Balkan Herbs to the European Union, IFC,
2003
New Profit Opportunities in Ingredients and Flavours: Future Outlook for Product
Innovation and Consumer Influencers, Reuters Business Insight, 2003
Marketing Manual and Web Directory for Organic Spices, Herbs and Essential Oils,
ITC, October 2004
Organic Food Products - EU Market Survey, CBI, 2004

2. Cumin

Horticultural Market Survey, UC Davis, October 2003
Opportunities for a Multi-stakeholder Programme in Afghanistan on Natural
Ingredients for Food, Cosmetics and Pharmaceuticals, NOVIB, August 2003
251
Natural Ingredients for Pharmaceuticals, Cosmetics and Food in Afghanistan, Novib,
AKF, CHA, Swisspeace, June 2004
A Review of the Horticultural Marketing and Post-Harvest Conditions in Afghanistan,
FAO, June 2003
The Market for Coriander and Cumin Seed in the EU, ITC, 2001
Clean Spices A Guidebook for Shippers of Products to the US Spice Trade, ITC,
October 2000

3. Saffron

Saffron Industry Recovering, Iran Daily, December 2004
Growing Saffron The Worlds Most Expensive Spice, New Zealand Institute for Crop
& Food Research Ltd, August 2003

C. Wheat-Based Products

1. Wheat

Agriculture and Food Production in Post-War Afghanistan, Winter survey, FAO, Hector
Maletta and Raphy Favre, August 2003
National Crop Output Assessment 2003, MAAH/MRRD/FAO/WFP, Raphy Favre,
Anthony Fitzherbert and Javier Escobedo, July 2003

2. Flour

Survey Conducted to Evaluate the Structure of the Wheat Trade Industry in
Afghanistan, Mercy Corps for the World Bank, August 2004
Kunduz Flour Mill Business Plan, CNFA, September 2004

3. Biscuits and Bakery

Biscuits Factory Business Plan, CNFA, September 2004
Bakery and confectionery, SMEDA, July 2004
Industrial Development Opportunity Study, Naseeb Bakery Co, Italian Cooperation
Technical Assistance Program, 2003

D. Cashmere

Cashmere Wool Washing and Spinning Project, US Trade and Development Agency,
June 2003
Impact of Institutional and Trade Policy Reforms: Analysis of Mongolias Cashmere
Sector, World Bank, March 2003
The Role and Size of the Livestock Sector in Afghanistan, World Bank 2000.
National Livestock Census, FAO, 2003
252
Harvesting of Animal Textile Fibres, A. J. Petrie, Rome, 1995.
Cashmere Development Program for Afghanistan, John Napoleoni, 2004.
Combing at Josephine Cashmere's mill in Mazamet, Inteletex, April 2004
Cashmere traders look forward to the elimination of textile quotas, Inteletex,
December 2004
Globalization of the Cashmere Industry in Mongolia, Gretchen Warner, November
2000.
Textiles Industry Advisory Committee Proposal to Revoke the Anthax Prevention
order of 1971, United Kingdom, 2002

E. Services Related to Construction and Small
Construction Material

A Case Study of the Market in Construction Materials, AREU, 2004
Natural Stone and Natural Stone Products EU Market Survey, CBI, 2004
Sanitary Ware and Ceramic Tiles EU Market Survey, CBI, 2004
The Afghan Construction Sector: Opportunities and Obstacles, US Embassy in Kabul,
April 2003
Basic Industrial Production Project, US Trade and Development Agency, June 2003
Plastic Window Frame Manufacturing Project, US Trade and Development Agency,
June 2003
PVC Pipe Production and Plumbing Supplies Project, US Trade and Development
Agency, June 2003
Kandahar Cement Factory Project, US Trade and Development Agency, June 2003
Kabul Plastics Factory Rehabilitation, US Trade and Development Agency, June 2003
Rebuilding Afghanistan, Export America, May 2003
Building Afghan Democracy, Afghanistan Reborn, USAID, October 2004
Afghanistan State Building, Sustaining Growth, and Reducing Poverty - Country
Economic Report, World Bank, September 2004
Securing Afghanistans Future: Accomplishments and the Strategic Path Forward,
TISA and International Agencies, Jan 2004
Afghan Operation, UNHCR, June 2004
Afghan Refugee Statistics, UNHCR, February 2005
Global Tiles Exports and Imports 2003, ITC, January 2004
Investing in Afghanistan (PowerPoint Presentation), AISA, 2004
Another 1 million Afghan refugees are likely to return home by 2006, UNHCR,
February 2005
Afghanistan: It's Boom Time for Pakistani Construction Workers, Inter Press Service
News Agency, December 2004

F. Gems

Emeralds of the Panjshir Valley, Afghanistan, Gary Bowersox, Lawrence Snee, Eugene
Foord, Robert Seal, 1991
Ruby and Sapphire from Jegdalek, Gary Bowersox, Eugene Foord, Brendan Laurs,
James Shigley, Christopher Smith, 2000
Jewellery EU Market Survey, CBI, 2004
Precious and Semi-Precious Stones EU Market Survey, CBI, 2002
Gems & Jewelry Sector Brief, SMEDA, July 2002
253
Export News, Export Promotion Bureau of Pakistan, May 2004
The Massoud Memorial Mining Institute: Draft Proposal, Geovision Inc., December
2002
Strategy on Mining, Cutting, Polishing and Marketing of Gemstones in Pakistan,
Export Promotion Bureau of Pakistan, 2003
Information and Source Material on Gemstone Identification, DFID Knowledge and
Research Project, Sri Lanka, July 2003
Le March des Pierres Prcieuses en Thailande et en Birmanie Production et
Commercialisation, Jean-Christophe Berthod for LVMH, 2000
Transitional Islamic State of Afghanistan - Mining as a Source of Growth, World Bank,
March 2004

G. Financial Overview

Rural Finance in Afghanistan: The Challenge of the Opium Economy, World Bank,
December 2005
Unleashing Entrepreneurship, Commission on the Private Sector and Development,
UN, March 2004
Survey of Afghanistans Leadership: Mental Models and Business Environment, OTF
Group, February 2005
Roles and Opportunities for Rural Credit Initiatives in Afghanistans Opium Economy,
Karri Goeldner, December 2004
The Challenges of Regulating and Supervising the Hawaladars of Kabul, Samuel
Munzele Maimbo, World Bank, November, 2004

H. Discarded Sectors

1. Dairy

Dairy Farm, SMEDA, March 2002
Dairy, SMEDA, 1997

2. Pharmaceutical Industry

Natural Ingredients for Pharmaceuticals - EU Market Survey, CBI, 2004

3. Plants and Cut Flowers

Plants and Young Plant Material - EU Market Survey, CBI, 2004
Cut Flowers and Foliage EU Market Survey, CBI, 2004

254
4. Cotton

Spinzar Corporation An Economic Analysis of the Spinzar Cotton Gin in Kunduz
Province, Afghanistan, CADG, 2004
Golbahar Textile Factory Rehabilitation, US Trade and Development Agency, June
2003
Cotton and Ginning, SMEDA, 1999

5. Carpets and Handicraft

A Case Study of Carpets and the Andkhoy Carpet Market, AREU, 2004

6. Leather

Leather Goods EU Market Survey, CBI, 2003

255
XII. Table of Figures

Figure II-1: Frozen Chicken Retailer, Kandahar,................................................................18
Figure II-2: Import Shares by Type of Chicken Meat (MT), 2003-2004...............................19
Figure II-3: Retail Price Comparison between Various Types of .........................................20
Figure II-4: Favourite Chicken Part of Interviewees, February 2005...................................21
Figure II-5: Readiness to Pay More for Afghan Chicken, February 2005 .............................21
Figure II-6: Readiness to Pay More for Frozen Chicken Produced ......................................22
Figure II-7: Readiness to Pay More for Frozen Chicken, February 2005..............................22
Figure II-8: Import Channels of Chicken Meat, Estimated Yearly Volumes, (in MT), 2004....23
Figure II-9: Quantities of Chicken Meat Commercialised in Major Cities (in MT), 2004.........24
Figure II-10: Live Chicken Retailer, Kabul, November 2004 ...............................................24
Figure II-11: Overview of the World Trade of Frozen Chicken ...........................................27
Figure II-12: Value Chain of Frozen Leg Quarters in Kabul (US $ per MT), .........................28
Figure II-13: Value Chain of Pakistani Breeders in Kabul (US $ per MT), ............................29
Figure II-14: Value chain of Pakistani Broilers in Jalalabad (US $ per MT), .........................30
Figure II-15: Cost Comparison between Afghan,...............................................................31
Figure II-16: Picking the right egg, Jabal-e-Saraj, November 2004 ....................................34
Figure II-17: Egg Import Channels, Estimated Yearly Volumes, (in Mn Eggs), 2004 ............35
Figure II-18: Value Chain Comparisons between Imported White and Brown Eggs .............36
Figure II-19: Production Cost Comparison between of Layer Hens.....................................37
Figure II-20: Internal View of an Electric Hatchery, ..........................................................39
Figure II-21: Feed Mill, Badam Bagh Farm, Kabul, November 2004....................................39
Figure II-22: Cost Structure of Locally Produced Broiler Feed ............................................40
Figure III-1: White Cumin Flower, Balkh, May 2003..........................................................46
Figure III-2: Global Export Shares of Cumin.....................................................................48
Figure III-3: Global Import Shares of Cumin by Importing Country in Volume ....................49
Figure III-4: Global Export Shares of Caraway by Exporting Country in Volume..................49
Figure III-5: Global Import Shares of Caraway by Importing Country in Volume.................49
Figure III-6: Exports Volumes of .....................................................................................50
Figure III-7: Afghan Cumins Export Channels, Estimated Yearly Volumes, (in MT), 2003....51
Figure III-8: Lunch Break in Kandahars Cumin Wholesale Market, December 2004 ............52
Figure III-9: Indian Imports of Cumin in Volume (Total : 2,600 MT), 2003........................53
Figure III-10: 11 AM in the Internal Courtyard of a...........................................................54
Figure III-11: Value Chain of Afghan White Cumin in Peshawar (US $ /MT) .......................55
Figure III-12: Grades of Iranian saffron (www.saffron.com).............................................59
Figure III-13: Example of Value Chain of Exported Iranian Saffron (US $ /kg),...................60
Figure III-14: Iranian Exports of Saffron by Destination Country (MT), 2003......................61
Figure IV-1: Income Analysis for Flour Production in Pakistan ...........................................70
Figure IV-2: Flour and Wheat Supplies in Afghanistan, Estimated Yearly Volumes,..............71
Figure IV-3: Truck Loading Bags of Flour for Afghanistan, Peshawar, December 2004 ........72
Figure IV-4: Value Chain of Special quality Flour in Kabul (US $ per MT), February 2005 ....73
Figure IV-5: Impact of the Pakistani Export Tax Increase on the Value Chain of .................74
Figure IV-6: Wheat Retail Prices for Selected Origins (US $ per MT), .................................76
Figure IV-7: Flour Mill under Construction, Mazar-e-Sharif,................................................76
Figure IV-8: Number of Households Baking their Own Bread / Satisfied with the Bread they
Buy (Income in US $ per Month and per Person),......................................................79
Figure IV-9: Breakdown of Quality-Driven Market in Kabul, August 2004............................81
Figure IV-10: Consumers and Buyers of Various Types of Cookies in Kabul and Mazar-e-
Sharif (Number of Answers in the Survey), February 2005.........................................83
Figure IV-11: Reasons for Buying Traditional Cookies, Kabul and Mazar-e-Sharif, ...............83
256
Figure IV-12: Favourite Cookie Types, Kabul and Mazar-e-Sharif, February 2005................84
Figure IV-13: Favourite Cookie Flavours, Kabul and Mazar-e-Sharif, February 2005 ............84
Figure IV-14: Retail Prices in Kabul for Selected Products, February 2005 ..........................86
Figure IV-15: Cookie and Snack Cake Market Shares, Kabul ..............................................86
Figure IV-16: Panel of Pakistani Biscuits, Peshawar, .........................................................87
Figure IV-17: Kabul and Mazar-e-Sharif, February 2005....................................................88
Figure IV-18: Cookie and Snack Cake Supply Channels in Afghanistan, Estimated Yearly
Volumes, (in MT), 2004 ...........................................................................................89
Figure IV-19: Value Chain Comparisons between Biscuits and Snack Cakes,.......................90
Figure IV-20: Production Costs for Afghan Snack Cakes (% of US $) .................................91
Figure IV-21: Production Costs for Afghan Snack Cakes, (% of US $), ...............................92
Figure V-1: Cashmere Goat Herder, Korukh Region, Herat Province, January 2005 .............98
Figure V-2: World Production of Cashmere,......................................................................99
Figure V-3: Price Differentiation Between Cleaned, Dehaired Cashmere of Different
Geographic Origin (Prices in US $ per kg) ............................................................... 100
Figure V-4: Commercial Distribution of Afghan Cashmere................................................ 102
Figure V-5: Cashmere Weight Reduction during Processing Phases.................................. 105
Figure V-6: Cashmere Sorters in Herat,.......................................................................... 106
Figure V-7: Historical Cashmere Price Fluctuations: Price Index for Cleaned, Dehaired
Cashmere. ............................................................................................................ 107
Figure V-8: A Customer Examines Cashmere Shawls in a European Boutique, .................. 109
Figure V-9: Value Chain of Afghan Cashmere: ................................................................ 110
Figure VI-1: Office Building in Kabul, ............................................................................. 125
Figure VI-2: Modern House in Kabul, ............................................................................. 126
Figure VI-3: Construction a Fragmented Process ......................................................... 127
Figure VI-4: Building Erected Storey by Storey, Kabul, February 2005........................... 128
Figure VI-5: Day Construction Workers Waiting to be Hired, Kabul, February 2005........... 129
Figure VI-6: Construction Definition of Scope ............................................................. 130
Figure VI-7: Map of Afghan Construction Market Segments and Supply
,
.......................... 131
Figure VI-8: Daily Wages of Plumbers in Afghanistan and Pakistan (US $ /day), ............... 134
Figure VI-9: Plumber Shop in Kabul, .............................................................................. 135
Figure VI-10: Plumbers Wages in 5 Main Cities, (US $ per day), February 2005............... 136
Figure VI-11: Electricians Wages in Four Main Cities, (US $ per day), February 2005 ....... 137
Figure VI-12: Prices of Doors and Windows, (US $ / sq meter), Kabul, February 2005 ...... 138
Figure VI-13: Carpenter Shop in Jalalabad, December 2004 ............................................ 139
Figure VI-14: Tile Market, Kabul, February 2005............................................................. 141
Figure VI-15: Amounts Paid for Construction and Renovation of Houses and Sources of
Financing (US $ and % of respondents), Kabul, February 2005................................ 145
Figure VI-16: Workers Hired for the Construction of Houses,........................................... 147
Figure VI-17: New Home-Owners Preferences Regarding Doors and Windows................. 148
Figure VI-18: Plumbing Training at Contrack Training Centre, Kabul, February 2005......... 152
Figure VI-19: Construction in Jalalabad, December 2004................................................. 155
Figure VII-1: Soap Wholesaler in Jalalabad, November 2004........................................... 165
Figure VII-2: Soap Consumption per Family in Summer and Winter, ................................ 166
Figure VII-3: Number of Showers per Person, (% of respondents), ................................. 167
Figure VII-4: Dove and Dew (made in Pakistan), December 2004.................................... 169
Figure VII-5: Royal 100% Halal Billboard, Kabul, December 2004 ................................. 169
Figure VII-6: Retail Prices of Selected Soap Brands, (Afs per 125g), ................................ 170
Figure VII-7: Body Soap Market Shares, Afghanistan, (in % of US $)............................... 171
Figure VII-8: Lux and Top Turkish Soaps, Kabul, December 2004.................................... 172
Figure VII-9: Soap Unprompted Brand Awareness, (% of responses),.............................. 172
Figure VII-10: Supply Channels for Body Soap, Estimated Yearly Volumes, ...................... 173
257
Figure VII-11: Soap Products Distribution Channels by Type of Soaps........................... 174
Figure VII-12: Numeric Distribution of Soap Brands, ....................................................... 175
Figure VII-13: Lux Billboard in Jalalabad, December 2004............................................... 176
Figure VII-14: Unprompted Consumer Perception of Advertising for Soap, ....................... 176
Figure VII-15: Zaitoon soap, product of Ahmad Soap Factory, Jalalabad .......................... 178
Figure VII-16: Money Spent on Shampoo per Purchase, (% of respondents),................... 181
Figure VII-17: gil-e-sar shoi........................................................................................ 182
Figure VII-18: Shampoo Sachets, .................................................................................. 182
Figure VII-19: Chosen Bath Location According to the Season, (% of respondents), ......... 183
Figure VII-20: Shampoo Market Shares, (% of US $)...................................................... 184
Figure VII-21: Afshin Bottles in a Retailer Shop in Herat, February 2005.......................... 186
Figure VII-22: Shampoo Prices, (Afs per bottle and Afs/200mL), ..................................... 187
Figure VII-23: Favourite Brands, (% of respondents),..................................................... 188
Figure VII-24: Supply Channels for Shampoo, Estimated Yearly Volume, (in MT),............. 188
Figure VII-25: Unprompted Awareness of Shampoo Brand Advertising, (% of responses), 190
Figure VII-26: Laundry Products Retailer in Jalalabad, December 2004............................ 196
Figure VII-27: Preferred Product for Washing Clothes, (% of respondents), ..................... 196
Figure VII-28: Reasons for Preferring Laundry Detergent / Powder,................................. 197
Figure VII-29: Map of Laundry Detergent and Laundry Soap Supply, Estimated Yearly
Volume (in MT), (36,600 50,200 MT), 2004
,
......................................................... 198
Figure VII-30: Estimated Laundry Detergent Market Shares, ........................................... 200
Figure VII-31: Direct Production Cost Comparison between Brown and White Laundry Soap
Produced in Jalalabad (US $ per kg), December 2004.............................................. 203
Figure VII-32: Production Cost Comparison for two Different Recipes .............................. 204
Figure VIII-1: International Demand for Uncut Coloured Gems........................................ 210
Figure VIII-2: World Production of Emeralds by Country (in Value), 2002 ........................ 212
Figure VIII-3: Gem Producing Regions of Afghanistan..................................................... 213
Figure VIII-4: Breakdown of Jegdalek Production (Quantity in Carats), 2000.................... 214
Figure VIII-5: Distribution Channels of Afghan Gems ...................................................... 216
Figure VIII-6: Afghan Lapis Lazuli in an Istanbul Boutique, January 2005......................... 217
Figure VIII-7: Example of Value Chain for One Carat of Mid-Quality Afghan Emerald, ....... 219
Figure VIII-8: Value Chain of Rubies in Myanmar ........................................................... 221
Figure VIII-9: Value Chain of Rubies in Thailand............................................................. 222
Figure VIII-10: Divergent Gem Industry Development Paths ........................................... 223
Figure VIII-11: The Gem and Jewellery District of Peshawar, December 2004.................. 227
Figure VIII-12: Lapis Lazuli Polishing Workshop in Peshawar, Pakistan,December 2004 .... 230
Figure VIII-13: Cutting and Polishing of Semi-Precious Stones in Peshawar, Pakistan, ...... 231
Figure VIII-14: Common Cutting Centres for Afghan Gems, 2004.................................... 232
Figure IX-1: Sources of Financing by Size of Loan, February 2005 ................................... 238

Final Report MSA SME Altai Cons July 14th 2005

Transféré par

Informations du document

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Final Report MSA SME Altai Cons July 14th 2005

Transféré par

Droits d'auteur :

Formats disponibles

Market Sector Assessments

Vous aimerez peut-être aussi