The objective of the Center for International Private Enterprise (CIPE) in Afghanistan has been to advance democracy by building the infrastructure for informed and effective public-private dialogue. For the first time, the Afghan private sector gained a voice in the policymaking process through the development of the 2011 National Business Agenda (NBA), which included specific policy recommendations to improve the business climate, promote transparency, and create new jobs. CIPE worked with the Afghanistan Chamber of Commerce and Industry (ACCI), the national apex chamber, and a coalition of 10 other sectoral Afghan business associations, including two women’s business associations, to prepare and release the NBA. As a result, the private sector organized around reducing barriers to economic activity and the adoption and implementation of policy reforms.
The NBA process gave voice to Afghan businesses in policymaking and unified the private sector
A national business agenda (NBA) unifies the business community to advocate for market-oriented reform. NBAs improve the climate for business and investment and spur economic growth by identifying barriers to business, and offering concrete policy solutions. NBAs set the legislative and regulatory priorities of the private sector and clearly communicate these priorities to policymakers. Developing an NBA allows for coordinated advocacy to address shared concerns.
In 2009, CIPE organized a business attitude survey of 738 Afghan businesses, which identified three leading factors most adversely affecting private sector growth: a lack of security (78 percent of respondents), corruption (53 percent), and a lack of electricity (44 percent). The survey results were the foundation for the NBA.
The NBA, as noted, was developed in partnership between ACCI and a coalition of 10 other sectoral business associations. The associations represented the major sectors of the formal Afghan economy, and included women entrepreneurs. An Advisory Committee was established, chaired by ACCI, with representation from each of the other 10 participating associations. The Advisory Committee provided guidance for the NBA process, oversaw its work, and approved the final set of recommendations.
To ensure that the NBA reflected the views of the Afghan business community, the Advisory Committee hosted regional meetings in late 2010 in the country’s five largest cities, with a total attendance of 1,300 businesspeople. Participants were divided into sectoral committees reflecting the major commercial sectors of their regions. Each committee identified specific issues to address, and provided relevant policy recommendations. Based on the results of these regional NBA meetings, the Advisory Committee selected the final set of recommendations for inclusion in the NBA. Launched in March 2011, the NBA gave the Afghan private sector a voice in the policymaking process, and offered policy recommendations to improve the business enabling environment. The NBA identified three broad concerns: insecurity, corruption, and a lack of knowledge and skills among businesspeople.
Tax policy has been a major challenge for business, as determining actual tax liability in Afghanistan is extremely difficult. A common complaint is that the process of submitting balance statements to the tax authorities for the purposes of calculating tax liability is unclear, as there is little understanding of the actual tax rules. The private sector is also subject to multiple taxes, including up-front business receipt taxes to customs officials at the border, and numerous other legitimate and so called “unofficial taxes” throughout the year.
The business community recommended that Article 75 of the Tax Law, on balance statements, be revised to eliminate these requirements and be replaced with a system of fixed taxes for small businesses. The business community urged the government to re-establish a “tax holiday” for new companies, which exempts these businesses from tax liabilities during their first three to five years of operation.
The advocacy committee of the Afghan Cabinet amended Article 75, allowing small businesses to pay a fixed tax to the government, instead of an annual income tax based on net profits. The “tax holiday” recommendation for new businesses led to the institution of a tax exemption for craftsmen for a period of five years. Additionally, new investors are provided with land free of cost and enjoy a tax holiday for ten years.
The private sector view is that that tariff policy should support domestic industry and production, and should be determined by the Ministry of Commerce and Industry and the ACCI. The NBA recommends that sectoral associations work in tandem with ACCI to identify specific goods and materials that deserve review, and that tariffs be lowered on these items.
To support domestic industry, the government increased tariffs on carpets and furniture. Tariffs on machinery and raw materials were reduced to zero, to encourage the import of these goods. Additionally, a committee with representatives from the Customs Office, the Ministry of Finance, and ACCI was formed to review tariff policy on a regular basis.
Lack of Land and High Rent for Businesses
The legal ambiguity related to owning and leasing land can adversely affect businesses. One contentious issue in Afghanistan involved the lack of land required for establishing and conducting business, even in areas specifically set aside for commercial and industrial use. The NBA recommended that the government provide more land to industry, and do a better job of organizing industrial parks to meet business needs. Businesses identified unaffordable rents and short leases as impediments to the development of the economy. The authorities were urged to ensure that government land leases were of sufficient length to allow businesses stability and predictability.
The Ministry of Commerce and Industry implemented the NBA recommendation to extend the validity of business licenses from one year to three years. Furthermore, the amount of time required to obtain a business license was reduced from one month to two days. In response to the recommendation to ensure greater clarity on land-leasing, the government allowed the term of contracts for land leases to be extended without renewed bidding every three years, as long as any increase in price is adjusted to current market rates. Finally, the government is prioritizing investments in industrial parks and is making strides towards reclaiming government-owned land for business.
Lack of Credit and Banking Reform
A lack of credit on reasonable terms prevents many businesses from getting loans; additionally, high interest rates and collateral requirements are impediments to business. In CIPE’s 2010 Afghanistan Business Survey, 73 percent of the 738 businesses surveyed said that they had not sought in the past year to borrow funds to launch, start, or expand a business. Proposed banking reforms included reforming bank guarantee requirements to lessen the financial burden on companies seeking to expand.
The Afghan Central Bank drafted a new Islamic banking law and an industrial banking law. To address concerns over the difficulty of obtaining loans, the Central Bank amended the collateral registry to accept moveable property as a guarantee for establishing credit. Five banks in Afghanistan have signed agreements with ACCI stipulating that they will provide low-interest loans to small and medium-sized enterprises (SMEs) at two to six percent interest, while ACCI will act as a guarantor on behalf of the businesses receiving loans. ACCI will also provide these SMEs with assistance in preparing business plans and facilitate the required procedures for obtaining a loan.
Trade facilitation refers to the simplification and modernization of trade laws, procedures, and infrastructure, with the aim of reducing transaction costs and delays in international trade, especially those borne by businesses. The NBA recommended building modern infrastructure at border crossing points, including storage facilities, and laboratories for the purpose of testing product safety. Businesses reported paying multiple custom duties on imported goods. The NBA recommended the elimination of duplicative customs charges assessed on the movement of goods to new jurisdictions, and that the payment of customs duties at the first border crossing should be valid for the entire country.
Afghanistan has established the Afghan National Customs Academy, which trains customs officials on management skills and the use of new technologies. The office has increased the efficiency of customs and somewhat reduced corruption, reflected in a 3 percent revenue increase, despite an overall reduction in trade. The most significant improvement is enhanced infrastructure at border crossings, such as warehouses, where goods can be safeguarded, and laboratories for ensuring product safety. The government has built oil laboratories at seven border crossings and secured funding for building four more laboratories for quality checks on construction materials. The modernization of customs processes is underway, with the design of an electronic payment system, which will ensure greater transparency and quicker processing of transactions; for instance, the customs office in Jalalabad is now computerized.
Burdensome Laws, Regulations an Administration
The NBA identified burdensome laws, regulations, and administration as impediments to business and proposed the extension of the validity of business licenses from one year to three or five years. The Ministry of Commerce and Industry extended the validity of such licenses from one year to three years. The processing time for business licenses was reduced from one month to two days and the procedure was shortened from thirty-two steps to eight steps. Similarly, the procedure for issuing export licenses was simplified, and the required signatures were reduced from forty-five to six.
Lack of Infrastructure
The absence of reliable water and electricity is a major impediment to doing business in Afghanistan. Industrial parks lack basic infrastructure, such as paved roads, running water, power, sewage systems, and health facilities.
In accordance with the NBA recommendations, the government improved electricity supply and other necessary infrastructure at six existing industrial parks, and announced the creation of seven new industrial parks around the country. The government is spending $17 million on the development of Sarshahi Park in Nangarhar province and another $6 million was allocated for the construction of industrial parks in Logar and Maidan Wardak provinces. A new industrial park was constructed in Mazar and 180 hectares of land were allocated for an industrial park in Herat province. The Afghanistan Investment Support Agency (AISA) equipped the Juma Mohammadi industrial park in Kabul with reliable electricity and allocated $10 million for the construction of a paved road to the park.
To improve security, AISA allocated $1 million for the construction of protection walls around the industrial parks in five provinces. To increase the supply of reliable and affordable electricity, the Ministry of Power and Water decreased the price of electricity for industrial parks from nine to six Afghanis per kilowatt-hour.
The management of industrial parks has improved and become more efficient. Previously, the Ministry of Commerce and Industry and AISA managed the country’s industrial parks. The two administrative units merged, streamlining the decision-making process for land distribution and infrastructure improvements. Finally, AISA allocated $ 1 million for maintaining the infrastructure of industrial parks in Kabul.
While many international donors work in Afghanistan, CIPE and its partners have brought a unique element to the reform effort by focusing on improving the business environment in partnership with local private sector leaders. CIPE’s partners represent the authentic voice of the Afghan business community. The most significant improvements in the business climate achieved by CIPE’s partners focused on the governance, infrastructure, and security of industrial parks; reducing the cost for business licenses; reforming and modernizing the customs regime; and reducing tariffs on essential raw materials and machinery for production. CIPE’s contribution transcends the actual reforms enacted and extends to establishing a process and mechanism for policy reform, and boosting the capacity of the business community. CIPE and its partners have improved the business climate and strengthened democratic governance by helping build a more open, transparent, diversified, and prosperous economy in Afghanistan.
This case study was published in CIPE’s “Strategies for Policy Reform Volume 3: Case Studies in Achieving Democracy That Delivers Through Better Governance,” click through to download and read more.