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Transitional Islamic State of Afghanistan Mining As a Source of Growth Report No. 28231-AF Report No. 28231-AF Transitional Islamic State of Afghanistan Mining as a Source of Growth March 2004 South Asia Region Transitional Islamic State of Transitional Afghanistan Mining as a Sour ce of Growth Document of the World Bank Currency Equivalents US Dollars are used throughout the report (except as otherwise indicated) Weights and Measures Metric System Fiscal Year January 1 - December 3 1 Report Manaprement South Asia Region Vice President: Praful Pate1 Afghanistan Country Director: Alastair McKechnie Sector Manger: Peter van der Veen Task Team Leader: Craig Andrews, Principal Mining Specialist Task Team Members: Leo Maraboli, Principal Mining Specialist Michael Stanley, Senior Mining Specialist Tony Greenish, Economic Geology and Geoscience Henri Maire, Mining Policy and Artisanal Mining Ernest Chung, Mining Attorney Bob Parsons, Mining Taxation and Fiscal Regime The Task Team expresses its appreciation to the government and, in particular, to the counterparts in the Ministry of Mines and Industries, for their invaluable contributions to the preparation of this report. 11 Abbreviatioiis and Acronyms ADB Asian Development Bank AGS Afghanistan Geological Survey BGS British Geological Survey cow Contract ofWork EIA Environmental Impact Assessment EIS Environmental Impact Statement EMP Environmental Management Plan ESCAP Economic and Social Commission Asia Pacific ESIA Environmental and Social Impact Assessment IRR Internal Rate ofReturn IBRD International Bank for Reconstruction and Development IDA International Development Association LOM Life ofMine MMI Ministry of Mines and Industries NPV Net Present Value NSR Net Smelter Return PDAC Prospectors and Developers Association of Canada TISA Islamic Transitional State of Afghanistan UNDP United Nations Development Programme uxo Unexploded Ordinance VAT Value Added Tax ... 111 TABLE OF CONTENTS Table of Contents. 1. SUMMARY CTOR STRATEGY...................... Background and Recent Developments ............................ Mining as a Source of Growth.................. ........................................... 3 Reforms to the Legal, Taxation and Institutional Regimes ........................................... 7 Specific Action Steps for the next two years ................................................................ 7 Time Frame ................................................................................................................. 8 Additional World Bank Recommended Action Steps for the Next Two Years 2. MININGAS A SOURCE OF ECONOMIC GROWTH.......... Projected Mining Development and............... Economic Contribution (next five years) ......................................... What Investors Want and the Lessons of Mining Sector Reform ............................... 18 Geological Exploration and the Role of Geo-Science ................................................ 20 Why Is Geo-Science Importa ....................................................................... 23 4. LEGISLATIVE AND REG RY ENVIRONMENT Successful legal and regulatory regimes in Mining 5. MINING TAXATION AND FISCAL CONDIT Current status of tax and royalty laws ..................... Designing a mining tax regime that will attract inv International Standards And Best Practices.,.............................................................. 3 6 Tax Administration And Collection.. ............. 6. INSTITUTIONAL ARRANGEMENTS ......... Background ........................................................ A Proposed New Structure for MMI .......................................................................... 44 ADDITIONAL ACTION STEPS FOR SECTOR RECOVERY OVER THE NEXT TWO YEARS ........................................................................................................... 53 ANNEX 3 ... IMMEDIATE ASSISTANCE STRATEGY TO THE COAL. SECTOR ............ ANNEX 4 ..................................................................................................................... 60 ASSISTANCE TO THE CONSTRUCTION MATERIALS SECTOR OVER THE NEXT TWO YEARS .... ............................................................... 60 ANNEX 5 .................... ............................................................................... 62 ASSISTANCE TO THE GEM AND ORNAMENTAL STONE INDUSTRY OVER THE NEXT TWO YEARS........................................................................................ 62 ANNEX 6: .......................................................................... 64 A STRATEGY TO IMPROVE UNDERSTANDING OF RESOURCE POTENTIAL .............................................. 64 ANNEX 7 ..................................................................................................................... 71 TERMS OF REFERENCE FOR TASKS AND PROFESSIONALS NEEDED TO SUPPORT SECTOR RECOVERY (SUPPLEMENT TO ANNEX 5).. .................. APPENDIX A : MINERAL POLICY SPECIALIST ............................................. APPENDIX B: INTERIM TECHNICAL ASSISTANCE TO COAL MINES ............75 APPENDIX C: FEASIBILITY STUDY FOR AN ARTISAN CRAFTS FACILITY AND ARTISAN CRAFTS EXCHANGE .................................................................. 78 APPENDIX D: DEVELOPMENT OF A QUARRY EXTENSION SERVICE IN AFGHANISTA APPENDIX E: D EXTENSION SERVICE.. .............................................. APPENDIX F: PRE-TENDER PROGRAM, AYNAK COPPER DEPOSIT,. APPENDIX G: ESTABLISHMENT OF A MINES CADASTRE OFFICE.. , . , APPENDIX H: A CORPORATIZATION PROGRAM FOR MINING ASSETS ......94 ANNEX 8 .................................................................. 96 CURRENT MINERAL PRODUCTION ...... .......................... 96 Potential Mineral Deposits ...................... ......................................... 103 ANNEX 9: .......................................................................................... TENDERING OF MINERAL PROPERTIES ................................ ANNEX 1 ............................................................ IMPRO List of publications on the geology and Quality of Geo-Information and “Gaps” ..................................................... 114 Promoting Mineral Resources ....................................................... ANNEX 11 : MINERALS PRODUCTION AND PRICES , . , . , . , . , . , . , . , ANNEX 12: ESTIMATES OF ECONOMIC CONTRIBUTION NEXT FIVE YEARS .............................................................. Notes to Table on Economic Contribution .............................. 123 ANNEX 13: Maps ............................................ ...................125 1. SUMMARY AND MINING SECTOR STRATEGY This Note examines the mining sector as a potential source ofgrowth for the Afghanistan economy. It assesses the existing minerals production and potential for development in terms of actual or possible benefits streams for the economy. It addresses the challenges the government faces to put into place an enabling environment which will regularize existing production and stimulate new investment. Finally, assuming that conditions in the sector do improve, the Note asks what would be the possible economic impacts over a five year time horizon and, more speculatively, 10 - 12 years into future. BACKGROUNDAND RECENT DEVELOPMENTS Historically, Afghanistan's solid minerals production was about 1% of GDP, consisting primarily of coal, quarry materials, marble and dimension stone, industrial minerals, some metals, and semi-precious stones. The existing production facilities have suffered dramatically during the political difficulties and (officially declared) production has fallen. At present, while minerals - coal, quarry materials, gemstones - are produced, the production is largely outside of the direct knowledge or control of the central government. Reliable statistics on minerals production and activities are virtually non- existent. The government does not receive any royalties or other taxes on this exploitation of non-renewable resources. However, there has been a marked increase in demand for minerals and quarry materials to supply the needs of the road building program and booming general construction industry. There is thus considerable scope in the immediate term to improve the existing production and, over the longer term, to stimulate new investment in the sector. MLNINGAS A SOURCE OF GROWTH Mining represents a source of economic growth in Afghanistan, offering employment, taxes in the form of royalties and taxes, materials to re-build the nation, and strong foreign exchange earnings and/or savings. If reform measures described herein are undertaken, this Note estimates that the gross annual market value of solid minerals produced could increase from the estimated US$ 60 million currently to US$ 253 million per annum by 2008 (four-five year time horizon). For this to occur, public sector investment of U$ 100 million and private sector investment of US$ 360 million will be required. The sector could generate: 0 value added ofUS$ 108 million yearly 0 royalties and other taxes ofUS$ 18 million yearly Summary and Mining Sector Strategy Page 1 nearly 7,500 new jobs e a positive export balance ofUS$ 66 million Source: World Bank staff estimates This five-year growth scenario will be achieved by emphasizing two critical paths. First, the formalization of existing quarry materials and gemstone production, together with immediate assistance to existing coal mines. Much economic value added and tax revenues can be captured from these operations if they are brought under government hegemony. Modest investment in up-grading some of
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