Public Disclosure Authorized AFGHANISTAN RESOURCE CORRIDOR PRIVATE SECTOR DEVELOPMENT Local Capacity Assessment – Company Profiles Progress Report #2 Public Disclosure Authorized 23th May, 2012 Public Disclosure Authorized www.altaiconsulting.com Copyright 2012 Public Disclosure Authorized AGENDA 1. Executive Summary 2. Selection of priority categories from the procurement plan 3. Assessment of local capabilities Data collected Key findings 4. Next steps 5. Appendixes : Company profiles Services Manufactured Products Raw Materials Steel products 2 1. EXECUTIVE SUMMARY (1/2) An assessment of Afghan companies in various sectors was conducted based on the potential procurement plan designed during the 1st phase of the project • The assessment of local capacity was conducting in several stages: – After designing a procurement plan during the first phase of the project, we selected the most important procurement opportunities that could be seized by the Afghan economy. – Based on that selected list of goods and services, we defined priority sectors of the Afghan economy that we should assess: » Services » Manufactured products (particularly those to be used in construction or life-support) » Raw Materials » Steel Fabrication – A tool specifically designed for each sector was used to conduct the assessment. – Altai Consulting selected a number of Afghan companies with enough experience of big projects, that could become suppliers for the Chinese investors at Mes Aynak and Amu Darya. – The findings from our 50+ interviews with local companies were verified using several methods: » Interviews with suppliers, customers and other market actors » Verifications using Altai’s knowledge and databases » Verifications using external databases such as USACE-blacklisted companies or Building Markets (PDT). 3 1. EXECUTIVE SUMMARY (2/2) General findings about Afghan companies ability to participate in procurement activities for the extractive industries sector can be summarized as follows: • Many companies are eager to participate in mining, seen as the next growth driver in the Afghan economy • Larger enterprises have strong networks in many areas of the Afghan economy and among government officials, and are more likely to invest in mining procurement. • Quality of work in services is usually good, but overall, management of Afghan companies is not up to international standards. Of the exceptions, usually the companies employ foreign managers. • Raw materials for construction are readily available in Afghanistan at reasonable prices. This can be explained by the geography of Afghanistan and the boom in the construction sector in the last decade. • Products manufactured in Afghanistan are usually of poor quality, and nearly always require imported raw materials or components. However, companies can procure a wide range of products for construction, assembled or transformed in Afghanistan. • Steel fabrication taking place in Afghanistan is very far from covering the demand, and usually of very low quality. Most high quality steel products are imported from Uzbekistan, Russia, or Iran, and transformed in Afghanistan. • External funding is usually found through partnerships with other companies or private investors rather than using bank loans. As a consequence, very few of the assessed companies have debts. Managers reported a willingness to work on big projects provided they find the right partners, with whom they would share profits and losses. 4 AGENDA 1. Executive Summary 2. Selection of priority categories from the procurement plan Aynak Amu Darya 3. Assessment of local capabilities Data collected Key findings 4. Next steps 5. Appendixes : Company profiles Services Manufactured Products Raw Materials Steel products 5 CLASSIFICATION OF ASSESSED COMPANIES IN CAT.I AND CAT.II A clear classification of assessed companies in Cat.I and Cat.II is not always possible due to the differences in the maturity of goods and services on the local market • Many companies we assessed can provide multiple services or goods. However, it became clear during the assessment that those types of integrated companies have an historical business that can be classified as Cat.I, while newer activities could be classified as Cat.II – Some construction companies built aggregate plants and supply construction materials or procurement services. They can be classified as Cat.I for engineering and construction, but Cat.II for aggregate production, because their capacity only covers some of their projects. – Afghan Cement LLC is the historical provider of cement in Afghanistan, and the products provided are of good quality. Nevertheless, that company would require investment to upgrade its production capacity in order to deliver the cement in the volumes needed during the construction phase at Amu Darya or Aynak. • Companies providing HR or consultancy services have the capability to hire and manage teams of workers or administrators. However, they have no experience in large scale mining or oil extraction. They are then classified as Cat.II on some procurement items, as their staff would require training to be able to operate in Amu Darya and Aynak projects. • Some companies have the know-how to build and provide construction material or goods. However, their production capacity appears limited in the event of procuring a project as important as Aynak. 6 2.1. CLASSIFICATION OF AYNAK PROCUREMENT PLAN CATEGORIES - CAPEX Aynak will quickly represent an opportunity for local procurement during the investment phase; an important share of operating expenditures could be sourced locally in the medium term. Non-RecurringNon Costs Recuring (CAPEX) ($m) Opportunities for afghan companies (CAPEX) ($m) 1,100-1,600 55% 500-700 400-700 60 35 25% 20% 64% 36% Cat. I Cat. II Cat. III Cat. I Cat. II # of sub-cat. (27) (14) (39) # of sub-cat. (10) (3) (Approximation) 500-700 400-700 1,100-1,600 60 35 100% 16% Services / Labor 10% 31% Services / Labor 48% 14% 45% Equipment 100% Equipment 40% 71% 69% Construction Construction 45% Material Material 12% Cat. I Cat. II Cat. III Cat. I Cat. II 7 2.1. PRIORITY NON-RECURRING CATEGORIES – AYNAK Focusing on 10 priority Category 1 items and 3 priority Category 2 items, we cover more than 50% of “actionable” Capex Non-Recurring Subcategories (CAPEX) Companies interviewed Capable companies $m; based on lower range estimates 1. Construction equipment (all sites) ~$165m 1. 11 companies assessed 11 Cat.I 2. Civil works & concrete labour (all sites) ~$95m 2. 11 companies assessed 11 Cat.I 3. Transportation & hauling ~$50m 3. 6 companies assessed 6 Cat.I 4. Construction Labour – road & building ~$30m 4. 11 companies assessed 11 Cat.I 5. Concrete ~$20m 5. 2 companies assessed 2 Cat.II Cat.1 6. Painting ~$10m 6. 11 companies assessed 11 Cat.I 7. Electric board ~$5m 7. 3 companies assessed 3 Cat.I 8. Pumps for plants operation ~$5m 8. 11 companies assessed 11 Cat.I 9. Sand / stone ~$5m 9. 6 companies assessed 6 Cat.I 10. Bitumen ~$5m 10. 5 companies assessed 2 Cat.II ~$390m 75% coverage 1. Metallic piping $70m 1. 8 companies assessed 3 Cat.II Cat.2 2. Steel structure $60m 2. 8 companies assessed 5 Cat.II 3. Electric cable $50m 3. 4 companies assessed 2 Cat.I ~$180m 45% coverage 8 2.1. CLASSIFICATION OF AYNAK PROCUREMENT PLAN CATEGORIES - OPEX Aynak will quickly represent an opportunity for local procurement during the investment phase; an important share of operating expenditures could be sourced locally in the medium term. RecurringRecuring Costs (OPEX) ($m) Opportunities for Afghan companies (OPEX) ($m) 150-350 150-250 100-150 55% 60 35 23% 41% 36% 27% 64% 35% 18% Cat. I Cat. II Cat. III Cat. I Cat. II # of sub-cat. (15) (12) (16) # of sub-cat. (7) (2) (Approximation) 100-150 150-350 150-250 60 35 100% Services / Labor 6% Services / Labor 12% 27% 43% 93% 75% Consumables Consumables 93% 67% 57% Maintenance Consumables 13% 4% Cat. I Cat. II Cat. III Cat. I Cat. II 9 2.1. PRIORITY RECURRING CATEGORIES – AYNAK Focusing on 10 priority Category 1 items and 2 priority Category 2 items, we cover more than 45% of “actionable” Opex Recurring Subcategories (OPEX) Companies interviewed Capable companies $m; based on lower range estimates 1. 4 companies assessed 4 Cat.I 1. Fuel $50m 2. 7 companies assessed 7 Cat.I 2. Spares for light vehicles $3m 3. 6 companies assessed 3 Cat.I 3. Limestone $3m 4. 7 companies assessed 7 Cat.I Cat.1 4. Medical products $2m 5. 7 companies assessed 7 Cat.I 5. Protection equipment $1m 6. 10 companies assessed 10 Cat.I 6. Clothes, food and appliances $1m 7. 7 companies assessed 7 Cat.I 7. Supplies (valve, piping, etc.) $1m ~$60m 60% coverage 1. Ammonium nitrate/explosives $20m 1. 1 company assessed 1 Cat.II Cat.2 2. Wear parts (foundry) $15m 2. 8 companies assessed 0 Cat.II ~$35m 30% coverage 10 2.1. INSIGHTS ON LOCAL CAPABILITIES ON PRIORITY CATEGORIES - AYNAK Based on the assessment of local companies, insights on their capabilities for each of the priority categories are as follows • Regarding procurement plan Cat.I items needed during the development phase of Aynak, Afghan companies are fully capable of providing the following sub-categories of the procurement plan selected as priority opportunities: – Construction equipment and material (Cement, concrete, sand, stone, etc.) – Civil works and labour – Road & Building labour • Cat.II procurement plan items can be supplied by Afghan companies, but the exact specifications would be needed to ensure they can procure the exact quality and construction materials needed. The following sub-categories are mainly imported into the country, and transformed in the country based on the clients needs: – Metallic piping – Steel Structure – Electric cable • Regarding items needed during the operating phase of Aynak, Afghan companies are able to supply most of the consumables needed during mining operations: – Fuel – Spares for light vehicles – Clothes, food and appliances – Explosives (Ammonium nitrate), etc. • However, it should be noted that Afghan companies are able to provide the consumables needed, but almost none of it is fully produced in Afghanistan.