Herat Provincial Business Agenda

Download the full report or read the executive summary below.

Introduction

What is a Business Agenda?

A Business Agenda (BA) is an advocacy tool created by the business community in a given country, province, or subnational region to improve the commercial environment in which businesses operate. They can address an individual industrial sector, or they can apply more broadly across multiple business sectors. The main purpose of a BA is to identify laws and regulations that hinder business activity and thwart economic growth and job creation, as well as highlighting other obstacles, challenges and deficiencies in the business climate that require some type of government action to rectify the situation. Most importantly, a BA must offer concrete, realistic and achievable policy recommendations and specific legislative or regulatory reforms to remove these barriers and to improve the business climate.

The key element of a BA is the active participation of the business community in formulating its contents and then advocating effectively for the implementation of its recommendations. The BA enables businesses from across the country to formulate and to articulate the challenges they face and their policy needs in a democratic way. It offers a mechanism that can be used to approach relevant officials and policy makers in line ministries, provincial government offices and parliament to inform them of the challenges facing the country’s businesses and to promote sensible reforms to remove those barriers. Because of the proactive outreach and consultative nature of the BA process, the recommendations contained therein have demonstrable and persuasive credibility with policy makers and other government officials.The National Business Agenda of 2011

In March 2011, the Afghanistan Chamber of Commerce and Industry (ACCI), the national apex chamber of commerce in the country, and a coalition of 10 other mostly sectoral Afghan business associations released a report entitled, the National Business Agenda for Afghanistan (NBA). The Center for International Private Enterprise (CIPE), a non-profit business advisory organization, provided financial and technical assistance in organizing and managing this initiative as well as in preparing the final NBA report. The business associations making up the NBA coalition represented the major sectors of the formal Afghan economy including women entrepreneurs. An Advisory Committee was established, chaired by ACCI, but with representation from each of the other 10 participating associations, and was charged with providing strategic guidance for the NBA process, with overseeing its work and with approving the set of recommendations contained in this final NBA report.

To ensure that this NBA reflected the views of common Afghan businesses, the Advisory Committee hosted five regional NBA meetings held between November 2 and December 28, 2010. These meetings were held in Herat, Kandahar, Kabul, Jalalabad, and Mazar-e-Sharif, with a total attendance of over 1,300 business people. All of the meetings were marked by vigorous discussion and debate among the participants. During each meeting, participants were divided into sectoral committees reflecting the major commercial sectors prevalent in that particular region. These sectoral committees were tasked with identifying specific issues that negatively affected the business enabling environment in their region and to provide specific policy recommendations that should be taken to remedy those issues.

Through the intensive advocacy efforts of the business community involved in the NBA initiative, a number of major reforms were enacted. The parliament passed a series of laws that were crucial to improving the business climate and strengthening democratic governance including a competition law, anti-monopoly law, mortgage law, norms and standards law, banking reform law, and land leasing reform law. As a result of the business community’s advocacy efforts on behalf of the NBA’s policy recommendations, some additional improvements in the business climate in Afghanistan were made in a number of areas including:

  • increase in supply of reliable and affordable electricity;
  • reduction in tariffs on essential raw materials and machinery for production;
  • reduction in cost for business licenses and licensing offices more readily available;
  • tax holiday for new businesses;
  • increased availability of land for entrepreneurs and reforms in leasing rules to improve predictability for business owners; and
  • increase in the number of industrial parks and improved infrastructure in existing parks.

As we shall see in the recommendations contained in this and subsequent Provincial Business Agenda reports, despite some improvements in the business climate in Afghanistan over the past several years, many issues remain serious obstacles to commercial growth and economic development, and new impediments are continually emerging that need to be addressed.

Why Provincial Business Agendas in 2014-15?

To build on the business community’s successful achievements during the 2011 National Business Agenda for Afghanistan (NBA) process, CIPE and its Afghan business community partners chose to replicate this NBA model at the provincial level through a series of Provincial Business Agendas (PBA) to be held in 2014-15.

With the massive reduction in foreign military troops across the country and the commensurate reduction in development spending by the international donor community, many of the provinces outside Kabul are experiencing significant economic contractions that are resulting in business closings, increased unemployment and reduced commerce and investment. Growth in the country’s overall gross domestic product has decreased significantly from almost 14.4 percent in 2012 to just 2 percent in 2014. Action on the part of the new National Unity Government is urgently needed in these communities to address the challenges that exist to economic development, commerce and business and job creation so that many of the gains in business creation and employment, as well as the higher standards of living, that had been created over the past thirteen years, are not lost. At the very least, the government should be acting to reduce the most severe impacts of the inevitable economic contractions that arise from the reduction in international troops and development assistance.

After consulting with leaders of key business associations in the country, CIPE and its partners in the business community decided to focus attention on improving the local business climate in the four major regional economic “hubs” in Afghanistan outside of Kabul: the provinces of Nangarhar, Balkh, Herat and Kandahar. Each of these provinces serves as a key commercial trading corridor with Afghanistan’s neighbors – Pakistan to the south and east, Iran to the west, and the countries of Central Asia to the north. In addition, the economies in each of these four provinces are vital not only to their own well-being but also to the economies in the provinces adjacent to them. For example, when the PBA summit meeting was held in Balkh province in December 2014, business leaders from adjacent Kunduz, Samangan, Jawzjan and Faryab provinces participated. The same pattern existed in the other two PBA summits held this past year in Nangarhar and Herat.

The participation of the business communities in each of the three PBA summit meetings held this past year was tremendous. Over 400 people attended each of the PBA summits, including a number of key provincial political leaders. Each summit was organized by CIPE in partnership with a task force of local business association leaders. For each of the three summits held thus far the local task force for organizing the PBA meeting consisted of between12-18 local business associations, including at least two women’s associations, thus representing a broad cross-section of the major industrial sectors for each province. This strong display of interest in and commitment to strengthening the local economic and business climate demonstrates that the vast majority of the Afghan business community is dedicated to working together to communicate to the government what reforms and other actions are necessary to improve Afghanistan’s economy.

CIPE has prepared the final reports on the first three PBAs and will present them in public events to which government officials with authority over the issues contained in the reports will be invited and asked for their support in addressing and fixing the issues. Following the release of each of the reports, the business leaders from the various sectors involved in producing the report’s recommendations will engage in organized and sustained advocacy activities directed at relevant government officials and will work with those government officials in their jurisdictions to implement as many of the report recommendations as possible. Also, in coming months, the fourth PBA summit meeting will be held in Kandahar province, followed by a similar final report and advocacy effort.

While the principal responsibility for these advocacy efforts will fall on the business communities within each of the provinces featured in the PBA initiative, CIPE will continue to work with the advocacy task forces in each province to ensure that their advocacy efforts are organized, active and fruitful. As each of the PBA final reports is released, the respective advocacy task force for that PBA will formally present the report, with its findings and recommendations, to the respective provincial governor and provincial council as well as other relevant provincial and district level officials who have jurisdiction and authority over the subjects and recommendations listed in the report. CIPE will provide necessary training on effective advocacy strategies and tactics to the advocacy task forces, and help them develop advocacy plans for each respective PBA and to divide responsibilities across the task force and with their business association members to conduct the activities outlined in the advocacy plans.

Mechanics of the PBA in Herat Province

In Herat, CIPE convened a meeting of thirty business association heads and other prominent leaders in the business community at the Tejarat International Hotel, in Herat City, on October 21 of last year to begin preparations for the main PBA summit meeting of business leaders later in the same month. CIPE staff additionally met with provincial governor Fazlullah Wahidi to brief him on the initiative and request his support. Ultimately the task force for the Herat Provincial Business Agenda was comprised of the following individuals and organizations. We wish to recognize their leadership and commend them for their role in this vital and important initiative.

  • Saad Khateebi, Chairman, ACCI Herat
  • Khalil Ahmad Yarmand, CEO, ACCI Herat;
  • Hameedullah Khadem, Chairman, Industrialist Association;
  • Mohammad Rasool Fayeq, head of the Carpet Guild;
  • Obaidullah Remady, head of FACT Herat;
  • Eng. Basheer Ahmmad Rasheedi, Chairman, Saffron Producers Association;
  • Yaqoob Shuhrat, Chairman, Foodstuff Association;
  • Haji Bahauddin Rahimi, Chairman, Currency Exchangers Association;
  • Haji Naweed Ahmmad, Chairman, Oil Association;
  • Ahmad Wali, Deputy Chairman, Importers Association;
  • Haji Mohammad Usman Ansari, representative from the Exporters Association;
  • Abdul Qudos, Chairman, Private Schools Association;
  • Humayoon Sherzad, Deputy Chairman, Car Sellers Association;
  • Abdul Karim Sherzad, Chairman, Medicinal Services Association;
  • Nafas Gul Jami, Chairwoman, Industrialists Women Organization;
  • Maryam Jami, Chairwoman, Food Industry Firms;
  • Seema Ghoori, head of Nageen Saffron Firm;
  • Yunus Qazizada, Chairman, Liquid Petroleum Gas Association;
  • Sweeta Durrani, representative from the Hary Business Firm for Women;
  • Dr. Masoud Jowya, representative from the Private Universities Association.

The PBA Task force convened the PBA summit meeting of business people in Herat on October 29, 2014, with CIPE’s support. The summit meeting was attended by over 450 individuals. Representatives from all major business associations and sectors in Herat provinces were in attendance, as well as business leaders from neighboring Farah and Baghdis provinces. A number of prominent local and national government officials, and other key local, national, and international stakeholders were also present, including Governor Wahidi, as well as representatives from the Afghan Chamber of Commerce and Industry (ACCI), Afghan Investment Support Agency, and USAID.

The Task Force subsequently compiled the concerns and recommendations proposed by the summit meeting participants into this comprehensive report, outlined by sector.

Executive Summary

This executive summary will cover the general subjects and issues that were frequently raised by a large number of the business sectors who participated in the Herat PBA summit meeting. Following the executive summary, the PBA report will list the specific issues identified by each of the business sectors represented at the Herat summit meeting, along with the specific policy reform or government action requested by the relevant business sector in order to remedy the obstacle in the local business climate.

Corruption & Lack of Transparency

Corrupt government practices and lack of transparency were the most widely cited concerns by the Herat business community, reflecting similar results found during the PBA initiative in Nangarhar, and the 2011 National Business Agenda. Transparency International’s 2014 Corruption Perceptions Index ranked Afghanistan 172 out of 175 countries surveyed, below Iraq, Syria, and Yemen, and above only Somalia, Sudan, and North Korea. Corruption and an overall lack of transparency in business policies and dealings permeates nearly every aspect of business and commercial life in Afghanistan and has had a hugely corrosive effect on the business climate.

After last year’s election, President Ghani made combatting public and private sector corruption a major priority of his governing agenda. On his second day in office, he challenged the Afghan private sector to clean up its act and end corrupt business practices or risk having assets frozen and licenses confiscated. While his objectives and strategy are admirable and extremely vital to economic development prospects, the business community, both in Herat province and across Afghanistan, have seen limited signs of progress in curbing the daily predatory actions of corrupt actors in either the private or public sectors.

The Mastofiyat, or Ministry of Finance, was singled out by several associations, as complicated bureaucratic and administrative procedures for tax assessment and collection provide numerous opportunities for both businesspeople and government officials to manipulate the system and engage in corrupt practices. Bribery and other instances of corruption were also identified to be prevalent in several of the customs offices at key border crossings both in Herat and in neighboring provinces.

The lack of transparency in government policies and procedures is also closely tied in with corrupt practices. As is the case with many other regions of the country, construction companies in Herat have raised issues with procurement procedures and the awarding of contracts. Nepotism and bribery have been cited as playing a key role in determining awardees, and the process is generally perceived to be unfair and biased towards a specific group of companies.

Improving transparency in contractual and procurement procedures, as well as in customs policies, would have a huge effect on reducing opportunities for officials and businesspeople to engage in bribery, nepotism and other corrupt practices. Streamlining and decentralizing many required procedures would also improve efficiency and both reduce the incentive to engage in corrupt business practices, and limit opportunities to do so. Eliminating corruption from Herat province and Afghanistan as a whole is a monumental task, but it must be addressed in order for effective and sustainable commercial and economic development to take place.

Security

Herat province has had relatively reduced levels of insurgent activity when compared to the rest of the country. Nevertheless, heightened levels of violence and insecurity have been cited as a major concern by a number of business associations in the province.

Representatives from neighboring Farah province have drawn attention to reports of increased insurgent activity. The lack of capacity of local security forces to provide protection to businesses is leading many business owners to relocate, taking their capital out of the province. While, as stated, insurgent activity is comparatively limited in Herat province, instability in neighboring provinces will eventually spill over if not addressed, and can still have a detrimental impact on regional economic and commercial development.

Business owners and entrepreneurs in Herat have also expressed concerns about rising levels of criminal activity. Prior to the October 2014 summit meeting, the Goldsmiths’ Association in Herat City reported that two of their members had been kidnapped, and while they had immediately notified the relevant authorities and followed all procedures, no progress had been made at the time. Industrialist associations also have drawn attention to the lack of appropriate security measures within the city limits, specifically in industrial parks. In addition to pointing out the security agencies’ limited capacity to respond to threats, industrialists have also stated their concerns regarding issues with receiving the necessary licenses to properly employ and equip security guards. Other associations have also raised the issue of insecurity and criminal activity taking place along highways and other major transportation routes, which is a pressing concern to sectors who largely operate outside of the city limits, such as mining companies.

Outside of the city limits, the primary security-related concern is the persistence of smuggling and illicit trade along the border. Herat is one of the largest provinces in Afghanistan geographically, and as such shares a border with both Iran and Turkmenistan. Smuggling, of course, plays a huge role in fueling the illicit economy and can severely limit opportunities for legitimate companies to gain revenue and grow. Companies selling medical equipment and supplies have reported difficulties in maintaining and growing their businesses, as they frequently have to compete with illicit smuggling networks.

Even though the business community cannot dictate specific security policy changes to the Afghan government or ANSF officials, the members of the Herat PBA task force and the participants of the October 2014 summit meeting identified increased levels of violence and insecurity as major impediments to commercial and economic growth and development in Herat, neighboring provinces, and Afghanistan as a whole.

Economic growth, commercial development, and business and job creation play a key role in the development process and are vital to prospects for political stability and peace as well. Herat, as Afghanistan’s third largest city and the principal trading and commercial hub for the western part of the country, plays a prominent economic role. Improving security conditions in Herat and in neighboring provinces will be vital for economic development prospects at both the provincial and national levels.

Lack of Credit and Banking Reforms

More than 17 banks with approximately 300 branches have been established in Afghanistan, with more than $3.5 billion in deposits. However, the country continues to face a number of problems regarding the availability of banking credit on reasonable terms. In Herat, after the ever-present issues of insecurity and corruption, the lack of credit and financial capital was the most frequently cited concern and impediment to commercial growth by business owners.

Most Afghan business owners are unable to afford to take out a loan under the current system due to high interest rates and the collateral requirements imposed by most of the banks. However, even if rates were lowered many businesspeople would refuse to consider a loan because charging interest violates Islamic principles. In CIPE’s Afghan Business Survey in 2010, 73 percent of the 738 businesses surveyed said they had not sought to borrow funds to start or expand a business in the previous year. Out of that 73 percent, 26 percent stated the reason they did not attempt to borrow money was because charging interest is prohibited in Islam and there were not sufficient other opportunities for pursuing loans through Islamic banks.

This was reflected in the October 2014 Herat PBA summit meeting, when almost every major sectoral association, including the industrialists, saffron producers, and mining companies requested that the banking system be reformed to reflect Islamic banking policies, and have financial transactions be conducted without interest. Revamping the financial system is an arduous process, and one that must be taken on a national, rather than a provincial, level. However, policymakers within the Herat government should sit down with stakeholders in both the banking and business communities to develop policies and enact reforms that can more effectively induce commercial growth.

Tax Rates & Tariffs

A large percentage of the business community within Herat province and across Afghanistan believe the taxation system is excessive, unpredictable, and exceedingly difficult to navigate as a business owner. A number of business associations in Herat and neighboring provinces have expressed concerns that high tax rates provide little incentive for commercial growth and complicated procedures and lack of transparency encourage corruption, embezzlement, and fraud.

Many sectoral associations have raised issues with multiple taxes being required at separate junctures throughout the year. Businesspeople have had to pay a series of taxes, including registration or licensing taxes, municipal taxes, customs taxes, and other official or unofficial taxes at several points throughout the year. Many believe that the overall required tax burden is excessively high and is a significant barrier to investment and commercial development. Furthermore, the exporters and importers associations, along with others who engage in cross-border trade, have complained about lengthy customs procedures and high tariff rates. The delays often result in lost business opportunities and provide numerous opportunities for corrupt practices to occur. The pervasiveness of these issues has a devastating impact on business and commerce in Herat as well as across all of Afghanistan.

Another major concern is related tariff policies, procedures and rates, which is particularly relevant given the major role Herat plays in cross-border trade with Iran and Turkmenistan. Traditionally, tariff policy has sparked considerable debate among the business community in Afghanistan, with some sectors concerned with protecting domestic industry while other sectors are more focused on promoting the country as a regional trade and transit hub. Among the Herat business community, the general consensus is that tariff rates should be kept low, as many businesses deal with exports and imports from Iran and Turkmenistan, and others are dependent on cross-border trade for equipment, raw materials, and other goods necessary to sustain business growth and activity. However, many sectors, including industrialists and craftsmen, advocate for tariffs to protect domestic Afghan products. This is a particularly prominent issue in Herat province, as Iran has historically sought to flood the Afghan market with cheap, Iranian-made goods. Just this past April, a sharp drop in the price of Iranian-made iron goods and equipment put severe pressure on the Afghan iron industry, with many factories being threatened with closure, according to the ACCI.

Therefore, an effective balance between protecting key Afghan industries and encouraging cross-border trade will be necessary in Herat province. The business community calls on the relevant ministries within the national and provincial governments to engage business leaders from affected sectors to develop an economic development strategy that assesses the immediate needs of the Afghan business community without jeopardizing the ultimate goal of creating an economic system that can simultaneously support the Afghan people with jobs and quality goods and participate and compete in the global economy.

Lack of Infrastructure

Reportedly, over $2 billion has been invested in the Afghan energy sector over the past ten years to improve the availability, reliability, and affordability of electricity. However, almost every major business or sectoral association in Herat province brought up the issue of limited access to electricity.

The predominant complaints in Herat province are in regards to the high rates being charged and the lengthy bureaucratic procedures needed to acquire electricity transformers and maintain power flow. Business associations whose members largely operate outside of major urban centers, such as the mining association, have also raised issues about the general lack of access to electricity supply.

In addition to the availability and affordability of electricity, a large number of business associations raised concerns about the legal and logistical difficulties in procuring land for commercial purposes, which is a well-documented issue across Afghanistan. This has been raised predominantly by the industrialist and craftsmen associations, who need to obtain land to develop industrial parks and other facilities, but also by agricultural associations, medical service providers, and many other sectoral associations.

Many of the sectoral associations operating in rural environments, including the mining associations, saffron farmers’ association, and representatives from neighboring Farah and Baghdis provinces, have raised the issue of poorly maintained roads and other basic transportation infrastructure or, in some cases, the complete lack thereof. These neighboring provinces rely on goods and supplies from Herat vendors as well as the markets in Herat to sell their own wares. The poor transportation infrastructure only serves to further isolate the businesses in these neighboring provinces and complicates their ability to sustain their business operations.

The Herat government should therefore make addressing the lack of infrastructure a top priority, as infrastructure ranks among some of the basic prerequisites for commercial and economic development.

Burdensome Bureaucracy & Administration

Inefficient and lengthy bureaucratic and administrative policies and procedures have contributed to economic stagnation and encouraged public and private sector corruption across Afghanistan. Almost all of the business and sectoral associations present at the Herat PBA summit meeting expressed their concerns and frustrations with navigating the reportedly intricate and convoluted web of procedures for procuring equipment, bidding on contracts, or simply registering their respective businesses.

Many of these bureaucratic difficulties and delays limit the business community’s ability to address other key impediments to commercial growth. Several associations, including the industrialist association and the exporters and importers associations, have stated their frustration with obtaining permission to hire armed security guards to protect industrial parks and other business locales. Several businesses reported paying large bribes to speed up the process as well. If bureaucratic inefficiencies are not addressed, the cycle of corruption and economic and commercial stagnation is bound to continue.

Several sectoral associations raised complaints regarding the business registration process. Business registration has traditionally been a very centralized process in Afghanistan. The duration of business licenses has commonly been just one year, meaning that business owners have had to renew their licenses with both the Ministry of Commerce and Industry and the Afghanistan Investment Support Agency (AISA) on an annual basis. This process has been singled out repeatedly by the Afghan business community as being particularly inefficient and burdensome – including at the NBA meetings in 2011. The short licensure period has had an adverse impact on commercial stability, by further adding to already severe levels of business uncertainty as well as imposing unnecessary administrative burden on business owners who already face innumerable challenges in sustaining their businesses in the prevailing environment.

Both the Ministry of Commerce and Industry and AISA have made the decision to reform the registration process by increasing the licensure period to three years. However, this has yet to be implemented in many areas outside the capital region, including in Herat. The business registration process has also been historically linked with the annual submission of balance statements of businesses to the Mastofiyat, and there have been concerns by Finance Ministry officials that a longer licensing period could result in discrepancies in annual tax payments by businesses. However, the business community of Herat strongly feels that reforms to business registration procedures and laws need to be implemented, in order to limit corrupt business practices and facilitate future economic and commercial growth.

To read the full report, download the PDF.

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