Issue 5/10

10 June 2010 AFGHANISTAN Developments in Economics Stabilization and Infrastructure May 2010 Matthew Hall Economic Stabilization and Infrastructure KM (matthew.hall@cimicweb.org) (www.cimicweb.org)

This document is intended to provide a brief examination of Chinese involvement in Afghanistan development efforts. More comprehensive information is available on the Civil-Military Overview (CMO) at www.cimicweb.org.1 Hyperlinks to original source material are highlighted in blue and underlined in the embedded text. Several articles are linked more than once.
TO RATE OR COMMENT ON THIS PUBLICATION, CLICK HERE ON, CLICK HERE Chinese Involvement in Afghan Development From 2001 to 2008 Chinese involvement in Afghan development was modest. Trade with Afghanistan makes up only one-tenth of one percent of all Chinese trade. According to Pragati of India, China provided Afghanistan with CNY 30 million (approx. USD 4 million) worth of humanitarian aid in 2001 and in January 2002, at the Tokyo Conference, China pledged an additional USD 1 million towards reconstruction, which was followed by a promise of USD 150 million in aid. China has taken part in an irrigation project in Parwan province as well as the reconstruction of hospitals in both Kabul and Kandahar. In addition, two Chinese companies (ZTE and Huawei) implemented 200,000 digital subscriber lines in 2003. China has also agreed to build a railway line from Mazar-e Sharif to Jalalabad, according to Afghan Minister of Finance Omar Zakhilwal, which he claims would substantially increase Afghan economic development. According to former Minister of Transport and Civil Aviation, Hamidullah Farooqi, talks between the two countries have taken place regarding a possible rail line between Afghanistan and western China via Tajikistan. Chinese involvement in Afghan economic development and reconstruction has received greater attention since May 2008 when a state-owned Chinese company China Metallurgical Group (CMG) won a bid to develop the Aynak copper deposit in Logar province. According to MSNBC, the Aynak copper mine is believed to contain the worlds second-largest untapped copper deposits; the full exploitation of the Aynak deposit could propel Afghanistan into the ranks of the worlds top 15 copper producers. The bid was for USD 3.5 billion, making it the largest infrastructure investment in Afghanistan to date. Under the contract, CMG has the rights
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to develop the site over the next 30 years; so far, CMG has invested more than USD 4 billion in the project. However, the Aynak bid being awarded to the Chinese company has proven to be rather controversial. The bidding process was alleged by some to be corrupt. According to The News of Pakistan, the former Minister of Finance Mohammad Ibrahim Adel lost his position as a result of these charges. Adel was accused of taking a USD 30 million bribe for the contract, a charge he has vigorously denied, going so far as to threaten to sue two separate news sources for publishing the charges against him. The Aynak copper deposit represents a potential windfall in revenue for the Afghan government. The deposit is suspected to be worth as much as USD 88 billion. According to the Asia Times, as part of the contract, China will pay Afghanistan USD 400 million a year with half the profits from the mine going to the Afghan government. They will also provide the salaries of 1,000 Afghan policemen to ensure the security of the site; anywhere from 20,000 to 40,000 jobs will be created by the project, which could facilitate ongoing efforts to reduce Afghan unemployment. All related infrastructure at and around the complex will be developed by CMG and it has been agreed that surplus power will be supplied to Kabul residents. An initial USD 800 million was disbursed by China for the exploitation rights and it is expected that it will cost the company USD 3.5 billion to develop the mine in its entirety; not including the estimated USD 2 billion in taxes and royalties the former Afghan Minister of Mines Mohammad Ibrahim Adel estimated Afghans total mineral deposits could bring in by the year 2013. According to MSNBC, production is expected to begin by the end of 2011 with output starting at about 180,000 tonnes of copper per year and eventually growing to about 320,000. This massive project demands a large quantity of accompanying infrastructure, which was written into the agreement with the Chinese firm. According to a Foreign Affairs article, the added infrastructure includes a 400-megawatt coal-fired power plant and a freight railway running from the one of Chinas western provinces through Tajikistan to Afghanistan. According to the article, the Chinese have also builta 350-bed hospital and a mosque. However, according to an April report from Pajhwok Afghan News, this state-run hospital in Kabul is still only treating 120 patients due to insufficient funding and staff. The renovation of the hospital took place in 2004 by the Chinese government at a cost of USD 25 million. According to a spokesman of the Ministry of Public Health (MoPH), USD 4 million in funding and 300 additional staff is still required to accommodate the additional patients if the hospital were to run at full capacity. This situation highlights the complicated, ongoing obstacles experienced by a variety of actors that play a role in development work. The Aynak bidding process has come under some scrutiny since the agreement was signed in 2008 with a number of details being revealed pointing to possible corruption. It was initially criticized because the company planned to use its own Chinese sub-contractors, thereby greatly reducing the number of jobs available to local Afghans. According to the China Post, the same company that won the Aynak contract is favored to win the rights to iron deposits at Hajigak later this year, which would, like the Aynak contract, require the construction of roads, railways, and processing plants in areas that are currently insecure. 2

This successful bid marked a turning point in how Chinese involvement in Afghanistan is viewed by some. Since winning this bid, China has considered a number of other mineral development schemes, including the Hajigak iron deposit, the bidding for which is scheduled to be complete sometime this year. With this increased activity comes increased scrutiny and criticism. There are critics who view Chinese involvement in Afghanistan as unfair while NATO nations sacrifice resources for the betterment of Afghanistan, Chinese state-owned companies are profiting from targeted, limited investments. As Robert Kaplan put it in a New York Times OpEd: China has its eyes on some of worlds last untapped deposits of copper, iron, gold, uranium and precious gems, and is willing to take big risks in one of the most violent countries to secure them... The problem is that while America is sacrificing its blood and treasure, the Chinese will reap the benefits. The whole direction of Americas military and diplomatic effort is toward an exit strategy, whereas the Chinese hope to stay and profit. Others consider Chinese aid to Afghanistan to be positive, viewing Chinese firms as uniquely capable of financing and implementing large projects because they are backed by the government, which has a history of successful internal development and considers the significant cost of subsidizing these projects a small price to pay for increased regional security. In fact, as reported by the Financial Times, the Obama administration in November 2009 put pressure on the Chinese to become more involved in humanitarian assistance in Afghanistan. More recently, on 04 May, US officials reiterated this request. Some suggest that the Chinese will become more involved in the near future. The Chinese government understands that as US forces withdraw beginning in 2011, as promised by President Obama, China will be forced to play a pivotal role in Afghanistans security and that of the whole region. However, the Chinese may become more cautious toward further investment since the Taliban kidnapped two Chinese engineers and 4 Afghans from the northern province of Faryab in January of this year. The engineers, who were rescued in April along with the two Afghan drivers and two guards, were working on a Chinese-funded road construction project. Chinese investment is spurred by a number of related factors. First, their booming economy requires extensive resources, which can potentially be partially met by Afghanistans significant mineral resources, especially copper and iron. Second, China seeks to develop its western provinces for security reasons so these resources can feed that development directly. China also has a number of security concerns regarding Afghanistan. According to the China Post: Islamist extremism spreading to China's Muslim region of Xinjiang, the long-term presence of U.S. and NATO forces on its borders, cross-border drug smuggling, and the deepening involvement of India, with which China shares a disputed border and a sharpening rivalry.

China wants a secure Afghanistan; as such, they want to assist the post-Taliban government in creating stability. Finally, China requires energy and sees Afghanistan as a viable transport route. One of Chinas goals is to gain access to the Indian Ocean. Therefore, they are planning to construct a port in Gwadar, Pakistan on the Mekran Coast; Afghanistan would be strategically located to host part of the pipeline. At this stage, however, it appears the future of Chinese development aid will be conditional on creating and maintaining a more secure environment. In March, The BBC reported that Afghan President Hamid Karzai and Chinese President Hu Jintao signed three separate agreements intended to increase trade and cooperation between the two countries (including provisions regarding economic cooperation, technical training, and preferential tariffs for Afghan exports) during Karzais 23-25 March visit to China. Total trade between China and Afghanistan in 2008 amounted to USD 155 million. China is also seeking to invest in natural gas and iron ore extraction in Afghanistan but, apparently, no agreements were reached during Karzais recent visit. Hu did however pledge continued support for Afghan reconstruction efforts. Please visit our Economic Stabilization and Infrastructure discussion boards.

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