MMI Letter of Sector Development Policy Supported by SDNRP

Appendix 1: Letter of Sector Development Policy
(In this appendix the term “MMI” and “Ministry of Mines and Industries” refers to the now renamed “MoM” and “Ministry of Mines”)

 

AFGHANISTAN’S MINERALS SECTOR:
LETTER OF SECTOR DEVELOPMENT POLICY

Afghanistan Ministry of Mines and Industries
Revised February 27, 2006

 

The goal of the Ministry of Mines and Industries  is “…to provide a transparent and efficient regulatory environment for Afghanistan’s  mineral, oil, gas, and industrial development that enables private-sector led investments, facilitates sustained economic growth, and increases revenues to the government.”

The Afghanistan mineral sector consists of five major commodity groups: (i) hydrocarbons (principally gas), (ii) solid fossil fuels (principally coal), (iii) base, ferrous and precious metals, (iv) construction materials (principally crushed stone and cement), and (v) dimensional stone and gemstones. These industries were much more productive in the 1970s and 1980s than they are today. The civil wars of the 1980s and 1990s severely crippled production and exploration. Existing mineral production is now limited to some natural gas production in Sherbergan, small coal operations in Baghlan and Bamyan provinces, limestone for two operating cement plants, construction materials (sand, gravel, crushed rock) nationwide, and gemstones and dimensional stone from artisanal operations.

Even though development of a vibrant minerals sector has so far eluded Afghanistan, the resource base and undeveloped potential is substantial. Development of industrial mining could substantially increase government revenues and export earnings as well as create new job opportunities and downstream industries. Also, supply of essential commodities such as coal and industrial materials to local industries is critical. Attracting new investment to the sector is thus an essential element to help reduce poverty.

For the past several decades the Ministry of Mines and Industries (MMI), the government institution responsible for the mining sector, has been centered on extractive industries and associated heavy industries: (a) mining of minerals and construction materials, (b) petroleum exploration and production, and (c) the operation of downstream industries that utilize extractive industry outputs. Historically, MMI has operated as a vertically integrated extractive industry conglomerate with enterprises reporting to the center, but operating autonomously in terms of budget planning and revenues management. However, the government has made the strategic policy decision that MMI should transform itself into a regulatory body to facilitate private sector investment rather than own and operate mines, industries, or other state-owned enterprises. The obstacles facing MMI to make this transition have been summarized in the IDA document “Mining As A Source of Growth” (2004). The study concluded that MMI is not appropriately organized, staffed, and equipped to regulate the sector and stimulate new investment. With the addition of the light industries wing in early 2005, MMI added a cluster of 10 textile-based enterprises. At this time approximately 12,000 employees work for the Ministry and its various state-owned enterprises (SOEs), including about 7,000 employees who work with the oil, gas, and minerals sectors. This organizational structure does not reflect MMI’s pending role as mineral sector regulator, and concerted institutional strengthening and capacity building is needed. Moreover, due to the political turbulence of the past 30 years, MMI has lost much of its institutional capacity to supervise the sector. MMI will have to be significantly strengthened to meet the new challenges of developing the country’s mineral wealth.

To this end, MoM acknowledges that (a) future resource development must be guided by good governance policies, and (b) institutional strengthening and capacity building is needed to ensure that the sector meets national objectives and benefits the people of Afghanistan. This letter builds on MMI’s current Strategy for the Mineral Resources Sector of Afghanistan (April 28, 2005, Revised January 29, 2006).

Good Governance Policies

Within the Interim Afghanistan National Development Strategy (I-ANDS), a) security; b) governance, rule of law, and human rights, and c) economic and social development, are deemed essential to consolidating peace and stability, reducing poverty, and achieving prosperity through broad-based and equitable economic growth. Under the economic and social development pillar, the government commits to a five-year strategic benchmark to create an enabling regulatory environment and improved infrastructure for profitable extraction of Afghanistan’s mineral and natural resources.

The MMI acknowledges that development of mineral resources will require investments in excess of government abilities and thus seeks to establish conditions and an enabling environment to attract and retain investment by both private local and international groups. As a first step, the ministry has undertaken preparation and passage of (i) the Minerals Law (July 2005) and (ii) the Hydrocarbons (Exploration and Production) Law (December 2005). To make these laws operational, MMI must now build institutional capacity to address institutional barriers and increase administrative efficiency.

To do so, MMI is developing a national minerals policy that reflects the strategic orientations of overall government policy as well as recognizing the complexities of issues and challenges facing the hydrocarbons and mineral industries. This policy includes the following main elements.

Good Governance of Afghanistan’s Mineral Resources. MMI will:

  1. be guided by principles of sustainability to define a national minerals development policy;
  2. exert central government sovereignty over mineral resources located throughout the national territory;
  3. stimulate and mobilize local and international private investment in minerals exploration and development;
  4. increase tax revenues to the central government from minerals production and ensure adequate disclosure thereof;
  5. strengthen government supervisory institutions to distinguish clearly between the roles and responsibilities of the regulator and SOEs;
  6. promote the transition of state-owned mineral resource enterprises to operate on a commercial basis;
  7. promote scientific and geological investigation into the nature and extent of Afghanistan’s mineral resources and to make such information available to the public and potential investors.

Ensuring that Afghans Benefit from Production of Resources. MMI will

  1. seek to ensure that communities benefit from extractive industries and, where possible, link local economic development (small to medium enterprises) to the project;
  2. seek to ascertain broad support of affected communities through informed consultation and capacity building at the local level;

Addressing Environmental and Social Issues. MMI will:

  1. ensure, in cooperation with the National Environment Protection Agency, that mining operations are conducted in an environmentally and socially sustainable manner through the enforcement of legislation and creation of an Environmental Protection Department, and that operators conduct proper environmental impact assessments and develop and implement environmental management plans;
  2. ensure adequate frameworks and capacity to implement mine closure/well rehabilitation and financial surety on project to do so;
  3. undertake a rolling update of technical guidelines using accepted best practices.
  4. begin to regularize small scale mining and provide for adequate institutional and technical support of these activities;
  5. apply internationally accepted policies to safeguard social protection associated with mineral production; and
  6. seek to implement globally recognized voluntary principles on the use of security forces.

Coordination between MMI, Other Government Ministries, and Donors. MMI will:

  1. coordinate donor programs and work with other government ministries in a manner consistent with the ministry’s policies and the broader objectives of the government;
  2. develop a program management unit (PMU) for this purpose.

Institutional Strengthening and Capacity Building

As detailed in I-ANDS, the Government of Afghanistan is putting into place a private-sector led economic development model, with the Government divesting itself of ownership of the means of production, and instead carrying out policy making and regulatory functions. Based on this model, the roles and responsibilities of MMI will fall into the following three main areas:

  • Setting Sector Policy. MMI will set and implement policies for the mining, hydrocarbon, and the industrial sectors. MMI will take the lead in formulating policies and drafting laws, regulations, standards, and model contracts.
  • Regulating natural resource production and industrial activities. MMI will take the lead in (i) negotiating and issuing licenses and contracts, and (ii) ensuring compliance with laws, regulations, licenses, contracts, and standards. Working closely with other ministries, MMI will also engage in economic regulation where there is a natural monopoly or little effective competition. Regulation requires that MMI be able to measure or verify production; calculate royalties, fees, and the Government’s petroleum production share; and inspect and make the necessary measurements to check compliance with health, safety, and environmental standards.
  • Moving to market- and private-finance based sectors. At present most activities in individual sectors are financed and managed by the Government. MMI is therefore both a regulator and an operator. In due course, the Government of Afghanistan plans to privatize or liquidate most SOEs. MMI will maintain an up-to-date database on natural resources and production, provide vital data and information (such as production, sale, exports, imports, prices paid) to private sector participants and promote the sectors to potential investors. Together with the Ministry of Finance (MoF), MMI will lead this transition from government-owned and controlled operations to private-sector run operations in mining, hydrocarbons, and industry.

The transformation of MMI to this regulatory role will require a number of actions. These include:

  • Creating a Modern Legal and Regulatory Framework. The MMI has prepared new Minerals and Hydrocarbon (Exploration and Production) Laws, and both laws have now been passed by the Cabinet. They reflect international standards, apply to all investors local and foreign, and provide the basis for transparent allocation of mineral and hydrocarbon rights to private entities. Terms of reference have now been prepared to engage legal experts to help the Government draft mining regulations and a model contract.
  • Implementing an Internationally Competitive Fiscal and Mining Taxation Package. The Income Tax Law of 2005 provides internationally competitive fiscal terms for qualified extractive industry taxpayers. These provisions cover depreciation, amortization, loss carried forward, and stability.
  • Building Strategic Planning and Technical Capacity. As an organization, MMI traditionally has had limited experience in formulating sector strategies and policies for private sector growth, or in interacting with the public. MMI is organized differently from most Afghan ministries, because it has had limited direct contact with the public. Instead, its services were directed to the Government and to support of its SOEs. Today, formulating strategies for the new MMI will require a better understanding of factors that make sectors economic and efficient. It will also be important to understand the optimal sectoral structures and appropriate legal and contractual frameworks. Strategic planning also requires knowing how best to handle SOEs. The IDA and the Asian Development Bank are both working to build strategic planning and sectoral capacity within MMI. Further, the British Geological Survey and the US Geological Survey have important programs targeted towards professional development within MMI, principally within Afghan Geological Survey.
  • SOE Reform. The Ministry of Finance is responsible for overseeing SOE reform. Its SOE department has already developed an approach to SOE reform and a preliminary classification of SOEs. By recent Cabinet decision, privatization decisions now require joint actions by both a line ministry and MoF. The MMI is working with MoF on these issues to ensure that strategic considerations - such as the need to retain production of certain essential commodities in the short term given the lack of private sector investment and technical sectoral expertise - are fully taken into account in the privatization strategy and its implementation.
  • Regularizing the Informal Sector. This is needed to effectively regulate informal operations and to enforce legal, environmental, and social compliance.

To achieve the above goals, MMI needs extensive capacity building and institutional strengthening.

  • Emphasis will be placed on professional development of personnel through training and exposure to best international practices in the mineral industries.
  • Administrative units/departments will be given clear and consistent mandates and procedures will be established to enhance communication and coordination between them.
  • Regional offices will be strengthened in order to reinforce links between the center and the outlying areas.
  • Emphasis will be placed on transparency and good governance and specific procedures will be established in this respect.
  • Establish and, if necessary re-organize, departments to handle policy and administration, cadastre services, mines inspection, health and safety issues, environmental matters, commodity certification and quality control, and geological survey and laboratory services. Develop programs for promotion of the mining sector to local and foreign investors.
  • Competitively tender mineral deposits internationally for which the government has detailed and complete geological information.
  • Develop and implement plans for the rehabilitation and eventual liquidation/ commercialization/privatization of SOEs.
  • Establish a department to support small scale mining.

From Policy to Action

MMI seeks to build minerals sector governance to stimulate economic and social development, bring stability to rural areas, fight poverty, and bring prosperity through broad-based and equitable economic growth. Strategic investments are needed through a coordinated multi-donor assistance program across several years. MMI invites the international community, donors, bilateral agencies, and civil society to take a stake in the process and ensure that the nation moves forward building upon a strong minerals sector. This letter is our commitment to actions that will sustain the government and the people for years to come.

 

 

____________________________
Eng. Mir Mohammed Ashan Sediq
Minister of Mines and Industries
Government of Afghanistan
February 27, 2006