Executive Summary Regarding Tender Process of Aynak Copper

In 2007 the right to develop the Aynak copper deposit was to a consortium “MCC” composed of the china Metallurgical Group Corporation (MCG) and Jiangxi Copper Company Limited (JCCL). A principle mining contract was signed in May 2008, with ancillary agreements singed in late 2008/early 2009 for security –GoA commitments to secure the project are (b) power- permitting the project developer to build an ancillary 400 min per plant (c) water supply; and (p) “other minerals” to provide inputs to copper production. This unsolicited proposal that were seeking sole-source rights to one off the nation’s largest assets. It took nearly two years for the Government advisors and the late H.E Ministry Hakim Taniwal (originally under the Ministry of Mines and Industries) worked to build political support for an international competition auction and to address an opinion on a strategy for the nation’s resources. The Aynak tender methodology was designed and initiated principally under

• Ministry of Mines—Minister Hakim Taniwal (2003-2005), Minister Mir Sediq(2005-2006), and Minister Ibrahim Adel (2006-2009); and
• Ministry of Finance— (2004-2009).

As defined by the Minerals Law (2005 and 2009), the decision to tender, the methodology (process), and the selection of bidders resets with the inter-ministerial Committee, support by principally by the Minister of Mines and other sector ministries depending on the issue (i.e. water, transport, etc).

The Aynak tender ran concurrent with early implementation of a strategy (first drafted 2005) for the Ministry of Mines (MOM) to restructure and build capacity as a policy –maker, regulator, and enabler of the private sector, with the objective of increasing efficiency and competitiveness of the industries under its supervision. The risks to achieving the sector goals were assessed as “high” and included (a) the outlined in the government’s interim development strategy (I-ANDS, 2005), (C) possible political interference (“rent seeking”) and weak of these challenges and to bolster investor interest and confidence, the government took a first step in 2006 by committing to implementation of transparent professes through the Extractive Industry Transparency Initiative (EITI). On March 16, 2009 the Government of Afghanistan (GOA) announced its endorsement of the principles of EITI, which aims to promote transparent and through reporting of benefits streams received from the extractive industries; and was officially endorsed by the international EITI Board at its meeting in Oslo in February 2010 as a candidate country.

Technical assistance to the government was provided by a transaction Advisor, a team of legal, fiscal, and technical specialists; was procured by the government using funding made available from the Afghanistan Reconstruction Trust Fund (ARTF)-under the technical Feasibility Studies Unit (TAFSU) grant facility. The TA was awarded via a competitive quality cost Based Selection (QCBS) process in which two firms responded to the Request for Expressions of Interest and competed. The contract was awarded to a US firm_ Gustafson Associates. The Transaction Advisor in 2007 and assisted the government in the preparation of the bid package, attraction of investors, evaluation of bids, and selection of a preferred bidder. The transaction advisor did not participate in the selection of the winning bidder, which – as stipulated in the Mineral Law—remains.

The prerogative of government. The British Geological Survey provided data support through the compilation of information initially prepared by the Afghan Geological Survey and former Geological Survey of the Soviet Union.

The transaction Work Was Initiated with Preparation of an information memorandum, and a draft final bid package, which was approved by the Inter-Ministerial Committee and then issues as the Aynak Tender Request for Proposals (RFP). The (RFP) Contained the bid evaluation criteria which consisted of ( a ) proposed plan of work; ( b ) financial and technical capacity of the bidder; (c) evidence of previous mineral exploration and international mining experience in the copper mining industry; ( d ) evidence of commitment to environmental protection and sustainable development; ( e ) estimates of the expected socio-economic benefits that may accrue to Afghanistan; and ( 0 ) estimates of the expected financial benefits to Afghanistan.

The RFP attracted expressions of interest from thirteen global mining consortia of which nine were prequalified and invited to submit proposals on the basis of the adequate financial capacity and demonstrated, satisfactory experience in mine design, construction and operation including environmental, social performance. Central to the bid package was a model contract which covered tenure; parties’ obligation; financial terms; contractual terms; and community relations and sustainable development.

The bids opened on June, 2007. The proposals were received and evaluated by an evaluation Committee established for that purpose. An initial screening of the documents submitted by the nine prequalified bidders identified five bids that were considered responsive and in compliance with the tender documents, providing realistic and reasonable technical plans supported by appropriate financial plans. The five responsive bids were then evaluated, with the Technical and Financial Bids being considered simultaneously, by an “observer” during the process of selection of the bidder. Once the MOM had made its recommendation on the winner the recommendation was reviewed and eventually endorsed,-after long discussion, by Inter-Ministerial Committee (See Annex 1 – comparison of bids).

The evaluation process took four months with the selection in September 2007 of the preferred bidder, namely a consortium of China Metallurgical Construction Company (MCC) 75% and Jiangxi Copper Company Limited (JCCL) 25 %, whose bid included an up-front premium of US$808 million payable upon the approval of the bankable feasibility study; and (c) US$ 565.6 million payable upon commencement of the commercial production.

Negotiations commenced in December 2007. The RFP required the Parties to conduct negotiations within a sixty (60) day period with a sixty day extension period, if necessary. But largely due to constraints of the Government Team, it took five months to conclude negotiations and the mining contract was finally signed in May 2008. Ancillary agreements then needed to be negotiated, with the assistance of the Transaction Advisers, and these were signed in late 2008/early 2009 for security – GoA commitments to Secure the project area ( b ) power-permitting the project developer to build an ancillary 400 MW power plant ( c ) water supply and ( d ) “ other minerals “ to provide inputs to copper production. Agreement for a proposed regional shared – use rail- road is expected by mind- 2010.

Process
External expert advisors closely followed the methodology and process used by the government to tender the Aynak deposit and to reach a negotiated mineral development agreement. An external advisor believes that the process followed in the tender conforms to international practice. A similar conclusion was reached in an independent review conducted by integrity Watch Afghanistan in 2008.

Contract
In the view of external experts, the master agreement for the development of Aynak conforms to international practice and in some respects, exceeds expectation in favor of the government in terms of generous royalty and bonus payments as well as conformity with World Bank standards in terms of environment compliance. An International Advisory Council (IAC) was formed to enhance Sector governance as a condition of the Sustainable Development of Natural Resources Project (SDNRP). The IAC is composed of three eminent experts selected by the governance on a competitive basis to render an opinion on the Aynak contract. The IAC found no issuers related to the “fairness” of the contract. The IAC made some constructive suggestions to ensure contractual compliance across the construction and early production / the contract has since been reviewed by an independent consultant working for the Ministry of Finance, who has reported that the contract is both comprehensive and complete. Recognizing the importance of this matter. The SDNRP project is providing funding for experts and training for government counterparts to support contract monitoring and compliance, especially regarding environmental and revenue aspects.

Note: In 2009, there were some media reports of possible corruption in the form of bribes being taken for the award of the Aynak contract, although until now, any types of evidence in this regard has not been found but the position of the Government and the new management of the Ministry of Mines is that in case of any evidence found in this argument the government will seriously deal with the issue accordingly to country’s laws and other anti-corruption regulations.  

Annex1: Comparative Table of Bidding companies (Aynak)