 Good morning and welcome to this morning's discussion. Thank you for joining us. I'm Raymond Gilpin and I work on sustainable economies here at the United States Institute of Peace. I'm a special welcome to those joining us via live webcast. We hope you'll be able to participate in the question and answer session by sending in your questions or comments via email. And I'll give you an email address just before questions and answers start. As you know, the link between conflict and high-value resources like petroleum, mineral ores, and precious gems has attracted a lot of attention from policymakers, practitioners, and scholars. But one aspect of this relationship has received relatively little attention and that's contracting. And that's what we're here to discuss this morning. Weaknesses in contracting processes, contracting execution, and contracting monitoring, particularly in the extractive industry, could create and worsen flashpoints for conflict in resource-based countries. Understanding these dynamics is crucial not just for prosperity, but also for stability and peace. If these natural resources are to contribute to effective nation-building, contracts must be fair. The processes must be transparent, and the benefit should be directed towards the public good and not towards private gain. Afghanistan's mineral wealth has been in the news a lot lately. We have varied estimates exceeding $1 trillion for potentially lucrative deposits of mineral ores such as copper, lithium, and iron ore, just to name a few. Effective contracting is vital if Afghanistan is to avoid the resource curse in the coming years. Controversy surrounding the contract for the copper mines in Afghanistan's Loga province are not just informative, but they're very instructive. And we hope that lessons from that contracting experience would help not just inform us but guide some of our discussions this morning. We'd like to talk about issues such as has bad contracting introduced reputational risk in Afghanistan? What steps could we take to ensure transparency and equity? And how could Afghanistan ensure that its mining wealth does not foster a fuel conflict? I'm happy that I don't have to consider or answer or tackle all those questions. We have a very able panel with us. To my immediate left is Jim Yeager, a former advisor to the Afghanistan Ministry of Mines and author of the Aina Copper Tender, Implications for Afghanistan and the West. Jim Yeager is a geologist by training with over three decades' worth of experience in the United States, Europe, and Australia, and Latin America as well. He has, for the past 10 years, worked as a small business owner and a consultant geologist to the World Bank, the private sector, and I did mention the Afghan government. He is a member of a number of organizations, including the Society for Mining Engineers and the Afghan American Chamber of Commerce. I'm really happy he flew out from Denver to join us this morning and we look forward to his contribution. Next to him is Graciana del Castillo, senior research scholar at Columbia University and author of Rebuilding Warton States. She's an economist with a significant amount of experience, both in the private sector and in the multilateral sector. She was the first senior economist in the Cabinet of the UN Secretary General in the early 1990s and she was involved in operations in Central America, Asia, Europe, and Africa. She, in the past, she's been director at Standard and Pause. She's been a senior consultant to the Inter-American Development Bank and a visiting scholar at the OECD's Development Center. She's a widely published and recognized author and I just found out that she's one of the world's leading experts in military expenditure. That's a joke. On my far left is Scott Warden, our own senior rule of law advisor at the Institute. He joined USIP in 2007 and has worked on issues relating to the rule of law. But in 2009 he took a leave of absence from the Institute to serve as one of the United Nations appointed international commissioners on the Afghanistan Electoral Complaints Commission for the Presidential and Provincial Council Elections. He has worked and lived in Afghanistan and he has also served as an advisor to the UN mission in Afghanistan on human rights and elections issues. He has extensive experience, including a range of publications and has stayed as an advisor to the Cambodian government on drafting its anti-corruption law. This morning rather than having presentations and then Q&A, we're going to organize an event more in a discussion style and we'll pose questions to the panelists and they would respond and interact after about 45-50 minutes. We would invite your questions and also invite questions from those joining us by live webcast. Before we start I would ask kindly that we silence the cell phones and PDAs so that we could have an uninterrupted and electronically interference free event. My first question will be to Jim Yeager. Jim you were an advisor to the Ministry of Mines and you participated in discussions leading up to the INAC contract. We have read in a number of reports including yours that there were a number of problems with this contract that could potentially bode ill for stability and also for effective mining and business concerns in Afghanistan. Could you shed some light on this and tell us why we should be paying attention to this? When you start looking at the real issues when you start looking just on the contract phase of the INAC tender process is that there are a number of issues that were involved and some of the major things when you start looking at the tender is how do you judge five different companies and five different languages and five different philosophies with five different spreadsheets regarding the financial input. And then you complicate that issue where you have private companies that are accountable to stockholders and Western companies that work in a different standard versus Eastern companies that work in their own mode and part of those that are owned by the Chinese government. So one of the biggest problems is how do you level that playing field? It's impossible for the private sector to compete effectively against a state-owned enterprise. I think that's one of the real key issues that you have to look at as you tender these resources. And so how was this initial hurdle overcome? Or was it overcome? It wasn't overcome. That's the problem. Where you look at MCC, MCC is the Metallurgical Corporation of China. It's a consortium that eventually won the contract. That's correct. It's interesting as you read the literature is that when MCC goes into a country, they provide infrastructure development and it's been termed, interesting enough, the Chinese Marshall Plan where they directly tie resource development to infrastructure development and aid. And here the U.S. and the Canadians are providing troops and blood and treasure to try to provide stability but yet get no credit to that on the infrastructure development that we've done. And it was one of these things where the U.S. government and the private sector were all going through this for the first time. Nothing was coordinated. And that was a real serious issue of trying to get Western development in there. And the other thing is, mining is an extremely long-term event horizon. You have a mine life probably at INAC of at least 40 years, if not more. And so what you end up there with then is the sphere of influence that we're trying to provide stability and we're unable to do that essentially now because the Chinese are in there and they're going to have the sphere of influence in the region. Could you tell us a bit more about the contract itself? What did it provide and what red flag does it raise? I know that it was significantly lucrative, potentially lucrative in financial terms and there were a number of development add-ons you described as a Chinese Marshall Plan. For our audience, could you lay it out a bit more exactly what were the highlights and some of the... Most of the bids themselves were fairly competitive in that the only thing that really differed when you start looking at it is on the financial part of the bid, which is only supposed to be 25% of the overall bid. And that's where the Chinese have the advantage. They don't have to worry about, in that present value, they don't have to worry about the economic ramifications of the private mining sector having to be profitable. So they could provide an upfront payment of $808 million over five years. They could promise $1.8 billion in infrastructure development during the start-up phase and they could also provide a 3% greater royalty rate than the Western companies could. But that has a serious downside because as copper prices drop for the Western companies to compete on such a basis would mean that you would have to shut down earlier at a higher royalty rate when prices drop. So it's one of these catch-22s. Yes, they offer a greater royalty rate when prices are up, they'll do good. And if they don't have to have an internal rate of return and be accountable to shareholders, they can operate at a loss just to provide the commodity. I think companies can't do that. As I mentioned earlier, you are an advisor to the minister of mines. What advice did you give the minister? Because it sounds as if this contract was fraught with difficulty. The whole process was, and this goes back to all the players involved, including myself. It was really the first time I was involved in a major transaction like this. The transaction advisor that we hired, Gustafson Associates, was the first time they ever went through a complete transaction on this. And what ended up happening was we were pretty much forced to play the minister's game as opposed to providing a clear program and a plan to do the tender process. The other company that was involved in bidding against Gustafson to be a transaction advisor was Barry Dolbert. Their world-renowned and known for developing this tender process had at least gone through this eight times. And to me, one of the key errors was made was in the selection of the transaction advisor. You need a top-notch group that knows exactly what's going on in order to make everything transparent and to make sure that you have enough clout to provide a plan and a program that is going to be transparent. Let me bring you in, Graciana. We'll come back to Jim. It sounds as if we have a lucrative deposit, interested parties, advisors, and transaction advisors. Do these issues ring any bells for you? Is there anything you could tell us from your experience, either in Afghanistan or other countries? The first thing I just noticed is that the world development is missing from the title. I think it's very important when we discuss the issue of natural resources, where we stand and where is the interest that we have in this issue. Obviously, the interest of U.S. companies is going to be very different from the interest of the Afghan government. So we have to be very clear when we are listening to the opinion of one person or another where they stand. To give you an example, I think the reason why the exploitation and the management and the distribution of the gains from natural resources in Botswana has been so successful. And I think you have to go back to the kind of advices that the government had in setting up the framework for the exploitation of natural resources. And they had people advising them, I don't remember the names, but one that was very notorious at the time was a professor from Williams College. So it was somebody who did not have a stake in the economy, in the natural resources. We know what happened recently with Galbraith advising the Kurds on natural resources when he has an interest in those. So you cannot expect somebody who has an interest or an agenda to advise well the government on how to utilize and exploit their own natural resources. I think this is a very important issue. The other issue is that, when we look at the conflict and peace, the title of the conference, I'm convinced you cannot have peace in Afghanistan without development. We have seen that the U.S. has spent $330 billion in Afghanistan since the war started. Of that, 94% was allocated to the Department of Defense and only the rest was allocated to state, USAID and all that. This year the U.S. spent in the war $100 billion and only $3.5 billion went to economic and social programs. Afghanistan today runs at the bottom, according to the UNDP, at the bottom in terms of poverty, the poorest country in the world and the second worst in terms of human development. So here you have a country that has all these resources. The issue is how they can start exploring these resources to do something about the development of the country because you are not going to win the war militarily in Afghanistan. So you have to make sure that the country starts doing things that can improve the well-being of the population at large. Thank you. But still focusing on the contracting process, if you were an advisor and you have advised many governments, if you were an advisor in this instance, what sort of advice would you have given the minister and before the INA copper mine tender? There are many issues. I think the most important is an issue that we Latin Americans faced in the early 1990s with the issue of privatization. So you have economies that are in very bad shape. So you have an asset that potentially has value. So the issue is should we sell this asset or give it in a concession now? Or should we first stabilize the economy so this asset is potentially more valuable in the future? So this is the first trade-off. I think in the case of Afghanistan, the situation is not sustainable. The U.S. is financing this year of $10 billion that went into Afghanistan. Half of that was to finance the police and the military. So this is not sustainable. So they have to get revenue. At the present time, the government of Afghanistan collects in revenue 8% of GDP. The rest is foreign assistance. And of that foreign assistance, 75% is channeled outside the government budget. So the government cannot do anything to improve the well-being of the population with those resources. So I would advise the government of Afghanistan to start getting associations with firms that can help them develop these resources. So I have it very clear that a country that has less than 30% literate people, less than 30% of the population is literate, you are not going to get the best in terms of procurement, rules and everything else. So you might have some corruption, so be it. You have to start exploiting the resources of the country because the situation is explosive. And you have trade-offs, you will have trade-offs. I mean, if the U.S. government cannot rule out corruption in their own contractors, so to expect that Afghanistan will be able to do it is kind of silly. So I'm not worried about things that are going to go wrong. A lot of things are going to be going wrong. I would advise them, first of all, to get the best possible foreign investor. If the foreign investment comes with other things involved, that is very attractive. I mean, you cannot expect that a country can start exploiting these issues without some infrastructure. I mean, some infrastructure, and that's why the comparison with the Marshall Plan is so silly because the Marshall Plan took place in countries that are well-developed, they had the infrastructure, they had the macro and micro frameworks. Here, you have to have some basic infrastructure. The same as in Haiti, for instance. If you don't have the basic infrastructure, the investors are not going to come. And here is the same, if you don't have some basic. So you have to build up some basic infrastructure. Then, in the Marshall Plan, yes, the firms started producing and that gave the government higher revenue and the government utilized that revenue to improve the infrastructure. But that's not at all the case of a country like Afghanistan. So I think my advice would be start doing it as well as you can. You will have a lot of problems, but you need it desperately. Thank you. Scott, you've lived and worked in Afghanistan. Should we be worried about corruption? Yes, anything further? Yeah, of course, that's a concern. I mean, I think that as a basic statement it doesn't surprise anybody in the room that to hear that corruption is a key concern and to hear me say, I think, with a consensus view that the legal system and the administrative system in Afghanistan presently is not well equipped to handle a lot of issues, but particularly massive contracts and potentially massive revenue flows such as are implicated in the INAC mine and then also by the additional resources that have recently been talked about in terms of other minerals and so on. I don't know exactly what the numbers of the Afghan economy are, but I've seen the figures that this mine, the copper mine alone once it's running is potentially generating $200 million a year in revenue. And how does that compare with Afghanistan's own budget? I mean, it's a significant fraction. And then on the one hand, that presents a great opportunity to give the Afghan state some of the resources that you were talking about that it needs, but on the other hand, without strong controls and I think in the present environment of weak administration and high corruption, you can't imagine that much of that $200 million will actually be generated down through to the people or to government programs that are beneficial. You know, I think that in terms of analyzing this particular deal and then looking forward to future deals on major resource contracts, you kind of have to separate into three different categories and effects. And I think each of them are slightly different. They're all problematic, but it helps to kind of break down what we're talking about in terms of improving governance, rule of law, corruption issues related to these contracts. You know, the first is the conduct of the tender itself. And I think Jim spoke well about some of the problems associated with that. It could be more transparent. You could have a better transaction advisor perhaps. Overall, I'm actually, you know, based on other rule of law issues that I worked on in Afghanistan, relatively pleased that there was an independent external advisor in this process, that there was some oversight, and despite certain inequalities or disparities in the bids, I haven't heard anybody say that the Chinese bid in this deal was far worse, let's say, than the other competitors. So, you know, on the one hand, that represents, I think, a significant achievement relative to other development sectors in Afghanistan. But that's just to say, you know, more can be done by looking to future contracts that's $1 trillion of potential reserves that's been quoted. You know, how can we improve the tender process? How can we make it more transparent is a real opportunity and a key question. I think the second category is of kind of concern that it's just generally out there is over the recipient of the award. It's not just that, well, there were some differences in the contracting process. It was, it's China, and they are pursuing a political strategy through their economic development and is that good or bad for Afghanistan? Another thread of this argument that has been mentioned is accusing China of free-riding on largely American, but really Western, security guarantees. You can't develop a copper mine or any other major infrastructure project without security, without having the railroad that's built or the power plant that's built protected. As of now, we're providing that security and the Chinese haven't militarily contributed to this. That's one element of the process. It's also, you know, should China be gaining these resources? Does it get a political advantage in Afghanistan to pursue its interests at the expense of our own? These are all potential concerns. And I think that, you know, the way that you look to that is partly through the tender process, making sure that it's more equitable for their style of bid versus the Western companies. But, you know, I think also you can look to, you know, ways outside of the Afghan government that the international community can support Western bidders. I think that there are some other examples. I had some experience with one in Laos where there's a major hydroelectric development that's ongoing there. Also hundreds of millions of dollars of potential revenue in a very poor country. There's a competition in that case between Chinese investors who wanted to buy the power from Laos and the Western consortium that would send the power to Thailand. You know, the details are unimportant, but ultimately what happened was the World Bank came in with some loan guarantees and I think Western governments got behind their own investors so that a Western consortium wound up having competitive bid terms and the Laos government would satisfy with them. This has a political impact. So what the Western consortium and World Bank guarantees will bring in terms of environmental controls in terms of financial controls are significantly different from what I think the Chinese government would expect from its state-owned enterprise. So if that is a political concern and I'm suggesting that it should be, I think there are more things that can be done externally to the bidding process in Afghanistan to make it more competitive and therefore at the tail end of this have the contract be managed more responsibly. And then just quickly, the final point is, you know, are we concerned about the use, a third concern is the use of the revenue and its impact within Afghanistan. And this alludes to my earlier point, you know, $200 million in revenue or whatever it winds up being from other investments is a huge amount of money. As it's, I think, structured right now, the Afghan government so often winds up having large revenue sources of whatever means going to, you know, political friends rather in a non-transparent process. So this means that, you know, there's potentially good benefit in terms of development dollars for Afghanistan winds up going into private hands. And this is your point, you know, that development should be part of the concern and if you have the current corrupt environment, you know, it's probably, it could potentially, let's say, be worse to have $200 million coming from new mines going to fuel warlords or political cronies at the expense of other factions of the country causing instability. So in that regard, you know, who wins the contract and what external controls from financiers or project companies affects how the money is spent. But I think also, you know, there's an opportunity here to think less in terms of personalities and more in terms of systems. Mines are a long-term development prospect. Future mines are further down the road. We actually have the time to work systematically to say, okay, well, how can we put checks and balances within the Afghan finance system, which I know people are working on now. But rather than think in terms of 12 months or 18 months or five years when we'll have an active presence, let's say in Afghanistan, let's think about how we can put things in place long-term balancing interests within Afghanistan so that a system exists in 10 or 15 years when this revenue realistically will come online. So I would kind of analyze the current problems in those lenses. Thank you very much, Scott. You raised three important points. And I think we're going to spend a bit of time discussing the development-related issues. But before we do that, I have one more process question for Jim. On the horizon, there are a number of other potential bids. Ionore, some say marble. The Ionore deposits in Ajikaka are pretty, pretty high quality, 45 to 72 percent ore content, which should hypothetically attract some of the majors. If we hold security constant, do you think INAC has introduced a reputational risk that would impact contracting in the outer months and years? What you see in Ajikaka specifically is that one of the issues there is the data set for INAC, you had a drilled-out deposit. You had over 400 drill holes in it so that you had a resource and a reserve that you could actually bid on. At Ajikaka, you only have two drill holes in it. So there really is no reserve estimate that can be given to a bank for a feasibility study. So that's part of the issue with Ajikaka. And I think as you look at the other, this grandiose trillion dollars of resources that's been announced by the USGS, that's been known since the Russian times. It's not new information. And the mining law in Afghanistan allows for the acquisition of exploration concessions that would automatically translate into exploitation concessions so that you don't have to go through the tender process on every deposit. And that's a key point because unfortunately the way the regulations have been written and how it's been interpreted is that if you spend risk capital on exploration and find something, the way the government interprets it right now is that you have to turn that back to the government and then they'll put the exploitation concession out to bid. Nobody in the West is going to play that game. I want to make a comment on corruption. First I don't want to go on record as promoting corruption. But what I'm saying is that if I country like Afghanistan waits to have the perfect institutional legal procurement oversight framework in place, they will never do anything. So if the corruption is 30 million, that's what everybody estimates, in a three billion dollar deal, it seems pretty reasonable to me. So that's a first. The other thing I want to mention is that I am fed up of the newspapers talking about corruption in the Karzai government because the way you interpret it, especially if you are a taxpayer, is that we are sending money to Karzai's government and that's corrupt the way it is being spent. And that's not the case at all. In fact, if you look at the budget, the Afghan budget, it has two trust funds and the two trust funds, so all the U.S. money that goes to Karzai's government through the budget, it's administered by the World Bank with the best practices in the world. And in fact, the problem is that because of all this procurement and best practices and everything, it takes forever to disperse. So there is no corruption there whatsoever. The problem is that the U.S. government and other governments channel 75% of their money outside the government budget. And therefore what happens is that Karzai with 8% revenue and with only 25% of the aid going through his own budget, they cannot raise the salaries of the civil servants. So everybody charges bribes for everything else on those 75% of the funds that are channeled outside the budget. So this is the first thing to keep in mind that if donors channel through the budget, it will go through either of these two trust funds, one for economic and social issues, the other one for the rule of law, and there wouldn't be that much corruption. Now the other source of corruption is the drug thing. And the third source of corruption, which is perhaps the most important, is that because all the financing to the warlords to fight the Soviets and later to fight the Taliban, these warlords have become very important. And the customs, which is the main source of tax revenue, is collected at the border provinces. And therefore it goes to the warlords who are not very keen on sharing with the government. So what can Karzai do about that? So I think it's very important when we talk about corruption to know that it has to do with the customs collection and it has to do with the drug issue, but not with the money that it's channeled through the government of Afghanistan. Yes. Just quickly on that. I largely agree with that. I think that the two points that I would be concerned with is in reference to the alleged $30 million bribe that the minister who was awarding this contract received. That should only be a concern if we're... Well, it should be a concern, but in the grand scheme of things, if we're concerned about who gets the contract, then that becomes... does become a focus, which is to say, if we, the West or we, the U.S., are concerned that China is winning this contract, then we would want to highly scrutinize any corruption, because that even between two relatively good offers if a $30 million bribe goes to somebody with a lot of influence in the selection, then you tip the balance in favor of one of them at the expense of the other, and if we care greatly about that outcome, then we should scrutinize the process. That's where the concern would come in in that instance. I think that you're absolutely right. Having funds go through a trust fund that's administered by the World Bank has its own problems in terms of time, but that's a good solution, that's a good outcome. The question, the thing to watch then, would be once you get an agreement, whether it's INAC or others, and this goes to the Laos Project that I alluded to earlier, I will be very surprised under the current state of play if the Afghan government agrees for the revenues from that mine to go into a trust fund that is independently managed by the World Bank or anybody else, or by independent auditors. I think that's where you'll see a lot of games being played to say, oh, this is a national resource and this is part of our sovereign right, but in fact this should go right to the Treasury, no foreign eyes need to look at it. So that's how the larger corruption that I think gets into the development issues occurs. If it can go into a trust fund, that's fantastic and we should work toward that. I think as a practical side on this, on the resource side of it, one of the real problems is the fact that there are no royalty rates that are published in Afghanistan. Each time you get a contract or a tender offer, you have to negotiate those individually with the government and that leads to no place but corruption. I have some friends of mine that are trying to get a gold property started in there and they've been at this process for four years and initial, the royalty rate started out at 16 percent and it just kept escalating and escalating until it was a demand of 30 percent and they backed out real simple. You're not going to be held for ransom. That's an important point. In about 5-10 minutes, we're going to open the microphones for your questions and your comments and contributions and those joining us by live webcast, you could email your questions directly to me, rgilpin, g-i-l-p-i-n, at usip.org and I'll post them to the panelists. Before we open for questions and grassy earnest comment, I just wanted to ask each of the panelists what they thought about the fact that Afghanistan became a candidate for the Extractive Industries Transparency Initiative in February this year and it has two years to put in place a range of reforms that would shed light on some of the issues such as the royalty issue and is likely to have verification in February 2012. Do you think that this is useful, helpful or just a box that's being checked to say we are on the right path? I'll give Graciana the first go. I prefer to choose that because I'm not... Okay, Scott, you want to... I want to talk about something else related but not specifically. Why don't you go first, Graciana? I think in terms of Afghanistan I think a good model to think of is comparing a very different model but relevant to Afghanistan is Vietnam because Vietnam started the reconstruction with an income per capita the same as Afghanistan at that time, which is $200. So it was very poor country. But at the same time, the big difference was that a mixture of confusionism and communism, everybody was educated, everybody was literate, boys and girls, no difference. So why is it that Vietnam managed? It's a very corrupt... If you look at Vietnam in the corruption index it's also a corrupt country. So why is it that it managed so well to exploit all these natural resources for the benefit of the country and its people? And for me, the big difference and I think this is the challenge for the international community is that they utilize the local people because they had the skills. So for me, the challenge for Afghanistan is how the international community can help them develop the skills so that they can utilize local people. I mean, the Chinese have learned because for many years they were in infrastructure in Africa and they brought three shifts of Chinese people and they built the road very fast but they didn't create a single job. Now, in this contract, they have requirements. The contract in Kinshasa, for instance, is half Chinese, half Congolese. So I think it's very important to employ local labor both in the exploitation of the natural resources and in the construction of the infrastructure. And I think this is something that has been lacking. I don't see why after nine years of the international involvement in Afghanistan they still don't have any kind of skills for this type of thing, which I agree with you that this has been known for years and years and there is nothing new except the announcement of the Pentagon. Scott, EITI, does it make a difference? Well, to be honest, I'm not familiar with the exact details of the EITI. I mean, I think that, let me speak more generally about what conditions I would look to or what indicators for, whether that or any other international standards regime actually has an impact on the ground. And I think that I would be skeptical about its impact until you see a few things happen. I mean, so far the pattern really has been that implementation of any kind of administrative or regulatory regime depends in large part on the strength and the integrity of the minister who's in charge of the portfolio that it falls under. And so the game that's been played for many years now is, okay, well, you know, because we don't have some of the, you know, a strong middle class represented through civil society or an educated workforce that we can call upon, those are all long-term development issues. Let's just find a really good minister that we can get into power and then get that person to solve the problem. Right now, I mean, from all indications with how the past tender was done, you know, the mining sector is one where we should have concerns about the minister. I'm not speaking about the particular one right now, but, you know, with a lucrative revenue base at stake, you know, if it's really the Ministry of Mine's job to implement such a regime, you know, I would have real concerns unless you wind up having an independent commission or body that calls from different cabinet posts and has some outside evaluation internationally at first and can civil society base at second. Unless you have that kind of external monitoring and reinforcement, you know, I would really doubt that it could be implemented on its own. Jim, any comments? And also, would you like some in-country sources reveal that the MCC, the Chinese Consortium, were absent from the first multi-stakeholder meeting of the EITI initiative in Afghanistan. Do you read anything into that? Well, this is another ratio of western development versus eastern development. The Extractive Industries Transparency Initiative is valid. It provides third-party oversight, which is something that's needed. Western companies also, companies like Freeport and Hunter Dickinson, who are both betters on the projects, subscribe to another internal industry standard, which is the International Commission on Mines and Minerals. It's based out of Oslo, Norway, supported by the mining industry, so that you do get third-party oversight independently of the mining companies, even though they're sponsored by the mining companies. And that, in terms of western development, provides the social insurance of environmental standards and social standards. And I don't know if anybody's seen recent pictures of INAC, where they have the barbed wire fence and the trailers for the employees, but the people in the trailers are not from Afghanistan. And part of the contract was that they had to employ the local people, and that really, according to the people I've talked with in the local province, hasn't happened. And this is where the contrast comes between how a western company would develop a process and how the Chinese do it. One of the concepts by Hunter Dickinson was to provide a junior college in Little Gar Province, so that you would provide the training. You would provide the local staff. They wouldn't bring in outside people. They would hire and do everything locally. One of my colleagues, Sonny Leif, who's an African-American, was going to be the one that would lead this. And I know exactly what his thinking was on it and how to develop it. And that's where the real problem is. How do you maximize this resource? And it's just not money up front. The more important aspects are the social development aspects and sustainable development aspects of resource development. In a sense, I think there is an aspect of western business practices versus Chinese at this instance. But are they not contractually obligated to provide these things? Is it not an issue of contract oversight and enforceability? Is an execution oversight issue and not just a western versus Chinese? Or am I missing something here? As far as the enforcement of the contract, that's up to the Afghan government. I mean, there is no, from my knowledge, there is no third-party oversight into how the property is being developed. I may be wrong, but the Extractive Indices Transparency Initiative would provide some of that, but there is no clear third-party oversight on what's happening on the development of the property. Okay. The microphones are open. Please introduce yourself. We have one microphone on this side and another on this side. Please line up behind the microphones. Introduce yourselves. Yes, I think the mics are live. Thank you. I'm Michael Hedari. I right now am based in Baghdad, Iraq, working on USA Tattweer, which is a national capacity development program for central government of Iraq. But in 2007, I was in Afghanistan. I developed the mineral sector strategy, mining sector strategy for Afghanistan national development, part of Afghanistan national development strategy. And I addressed all these different issues that were mentioned today, the EITI, the royalty that Jim mentioned, the infrastructure and corruption and environmental and all the other issues. And of course, as Jim said, this is not new, the one trillion dollars were known from the Russian times more than 30 years ago. And the point I want to make is that, again, emphasize that one trillion dollars of resources, whatever that figure is, doesn't mean anything if it's not developed. And we have gone through all these issues and mineral economics over and over in different countries. And as far as I'm concerned, if there is a savior for Afghanistan, it's not the palm grenade, it's not the sumac, high cost, it's not any of these alternative development plans that are being developed and so on with all due respect to DOD, DOS, USAID. I do work on a USAID contract by the way. But for Afghanistan, the savior would be the minerals and mining development. I know also more about the neighboring country. My father was one of the first mining engineers in Iran. I'm an Iranian-American by the way. I'm a mining engineer and a mineral economist from the Colorado School of Mines, Jim. Thanks for good, good to have you here. So I know a little bit about the region and the mining and so on. The point is that we need, we Afghanistan government, other countries, we need to promote development of mining industry. And as far as the issue of infrastructure, importance of having the infrastructure and then mining, I think mining would bring infrastructure. Jim, I'm sorry I missed your first presentation, but I know that as part of INAC was the development of 400 megawatt power plant and the coal mine and the railroad and everything else that comes with it, the hospitals and the schools, hopefully that, as you said, the Canadian company was supposed to develop and so on. So the infrastructure will come with these multi-billion-dollar projects. And again, as Graciana said, $30 million out of 3 billion, that's 1%. I wish we only had 1% corruption in many other countries that you mentioned or we know of, I mean, in the scheme of the things. So we have to keep these in perspective. One, quickly, one model that is happening right now, even though it's a different country, it's not minerals, it's petroleum. If you follow what has been happening over the last year in Iraq, a dozen contracts have been awarded by the Ministry of Oil in Iraq to international oil companies. And I followed those very closely. It's wonderful. It's in terms of how favorable they are to the Iraqi government and not international oil companies. As a matter of fact, the first round, June 30, 2009, out of the 26 companies, only BP and their Chinese partner accepted to the offer of the government, Mr. Kharistani, because it was so low in terms of the profit of the companies, you know, between $1.5 and $2 a barrel. But then, you know, he stood his ground, Mr. Kharistani and all the companies kept coming back, you know, and by the way, out of the 12 companies, for those who say that, you know, U.S. is a major role in terms of the, you know, profiting from the industry, Exxon Mobil is the only one, by the way, U.S. company. BP is their shell. The Chinese, the Malaysian, the Angolan companies, and there's only one U.S. company. Thank you very much. Thank you. Could we have... We'll take three questions and then I'll pose the panel. Two on this side and the gentleman on this side. My name is Abdullah Nadi and I worked in Afghanistan for the last eight years going back and forth involved with the construction industry. When I come in these seminars, I get more confused than I came first because I think the basic reason is lack of real information in your part. It is a typical problem that I saw. I came about a month ago and I'm on my way back to Afghanistan. It's a typical problem that lack of relationship in a society that is everything is based on relation. The U.S. and the Allied they sit in the armored car and they have no relationship with the people. They don't know what's going on. I think it seems to me that everybody is trying to defend corruption from Karzai administration to 30 million dollars that the minister of mine took. I think if we pay attention in any organization if the management is corrupt then that creates the culture of corruption. So in Afghanistan right now a hands full of people believe that they consider this situation as a caching cow to just cash the money and if you trace down all the big contracts from 50 million, 100 million half of it, more than half of it is overhead fill it out of the country I have a very good example of I don't want to waste your time for that and everybody knows that. It's a, to me it's a warlord it's a powerlord it's a group of good old boy network that controls everything and keeps the good people away from the Americans or any other organization or the international donors. One of the things that is important that we should tie with the contracts first of all I don't understand prime contractors through Afghanistan they never been effective and they never been responsible they hire subcontractor and then flip the contract and then it goes to when things goes wrong then you can't find the prime contract they're not responsible for subcontractor my way of thinking instead of keeping five people that do has relationship with big companies here happy I think you should split the contract instead of 100 million, 10 million dollars and manage it by another third party that is the real issue and I think based on what I what I know about which I don't want to bore you about particulars because I know many many contracts that exactly how they who were involved in how did it happen but all I can say unless you have I agree with you with 10, 15 years plan to create a government through a political party that his ideology is parallel to the United States and Western allies and also the region and the African people I think I don't know why we have to be ashamed of promoting capitalism and promoting democracy thank you very much unless you do that all this investment go down the drain thank you there was one more question here could you make your question my question will be short my name is Alvid I'm an international student from Afghanistan as a young Afghan my concern is that how can we avoid exploitation of such minerals in Afghanistan and I'm afraid that these minerals would turn out to be black diamonds of Afghanistan so how can we because we're talking about the contracting out of all these stuff and giving up all these two private sectors it's a good way of thinking but there's no good institution there's no good governance in order to avoid these minerals becoming black diamond of Afghanistan thank you very much I think the gentleman in front was first I have a very brief question if you were to send a one page memo to the president of the United States and Afghanistan what do we need to do now practically in terms of policy on this mining and by the way I have no interest my name is Larry Press I'm a former senator I'm just a private citizen and I'm not a lobbyist but what practically could we do in an old fashioned Eisenhower one page memo what should we do now? alright we'll take those three questions and then we'll have the next two as concisely as possible I think as concisely as possible I think I'll have the three of you starting with Jim I think the one thing I would say is couple interesting things 30 years ago Chile was and also ran in terms of copper production 30 years later they're the world's leading producer of copper what happened? real simple they had an environment that promoted resource development they had an extremely strong leader whether you like Pinochet or not he was an extremely strong leader and you need that strong governance a strong sense of governance you need to have an investment climate where the mining sector is welcome and where they can provide the development not only the infrastructure but also the mine itself and make sure you develop the social and economic the social environmental issues that are associated with mining it has to be western development not eastern development and if you were to contribute to the one page memo what would be your bullet point? what should we do now? I think the first thing the practical things are is to make sure the mining law is implemented as written that you can go from exploration concessions to exploitation concessions transparently have the royalty rates published so that you can in fact know what your risk is have social and environmental constraints that are in place that are observed by a third party and to make sure that the royalties and the economic wealth gets into the government and is actually observed by third party initiatives to prevent the corruption Graciana how could we avoid it? the first question to the US president I think that he has to change the strategy of peace through military because it's not going to work the strategy of peace through the military alone it's not going to work unless the Afghans have a stake in the peace process and that can only come through development each time they are going to be joined in an insurgency a President Bush like to say how many kilometers of roads were built and how many schools were built this year 1.3 million Afghans graduated and they don't have a job so they are going either to join the drug business or the insurgency or they are going to leave the country so you have to do something about the development of the country because otherwise there is not going to be peace I want to mention the issue of Chile which I know very well and I think Chile the issue of the resource fund and I'm going to mention a very poor country like Afghanistan which is Timoleste so Timoleste the international community the IMF the World Bank they come and they say look at the Norwegian resource fund this is what you should do so they set up this fund with the oil and gas revenue and they save for a rainy day when in fact it's pouring in Timoleste so basically they are saving for the future because yes natural resources intergenerational responsibility but I would have invested those funds in physical and human infrastructure and the future generations are going to be much better than with the fund invested in the financial crisis even now so I think that's something that Afghanistan has to do and that's the question to you I mean this money from whatever they develop it has to be put back into the economy to make sure that you build up Afghanistan is one of the least educated countries in the world they have rates of malnutrition and other rates which are twice as large as countries in South Sahara Africa so I mean everything that they get from the natural resources should be put into developing these resources human and physical infrastructure with the issue of capitalism I think that's the this is what we should be creating in these countries and we have failed miserably and this has to change and it has to change so that these countries building up entrepreneurship they can build up small enterprises and they can create employment unless we do that these countries are not going to move into any kind of peace Scott on the first set of issues that were raised I would like to underscore the importance and the difficulty of opaque contracts in Afghanistan especially for Afghans and particularly outsiders to know who they're really dealing with I think that kind of lies at the heart of the recent discussion about U.S. contracts eventually going to fund the Taliban through various means you might be dealing with one company where you think you know who you're working with but in fact what you don't understand is who actually is behind that company who owns it and so on and so forth and so forth and I think that's a very important scenario even if the labor provisions of the of the INAC concession are adhered to are enforced and scrutinized they'll say okay well we do have 80% of our labor force or whatever the requirement is coming from Lugar province it turns out that it's through You can even have on paper something that looks like a check and balance, but in fact, it's really going to one pocket and maybe fueling one side of conflict or another. What's the solution to that? I mean, I think there again we have an opportunity through the long-term nature of this process to chip away at the problem by enforcing company registration laws, coming up with ways to get people from different regions of Afghanistan. First of all, Afghans, obviously, who know really what's going on behind the scenes. You get people from different regions of Afghanistan to check each other, so it's not just the power structure in Logar agreeing to divide spoils amongst itself. You get outsiders viewing the process and saying no, no, no. We know that's your brother or your cousin or what have you, and we need to enforce this. So registration and enforcement by Afghans who are knowledgeable of the local situation is one thing. Another thing that can be done is media training. And I think Afghanistan is a very vibrant media sector, and it's quite independent at the moment. I heard one anecdote when I was working in 2009 in Afghanistan where I can't remember actually, I think it was a resource-oriented contract of a much smaller scale. But a journalist had actually an investigative journalist and a brave one at that, had actually tracked the deal to Dubai and found out that the contract of the state concession was actually signed in Dubai. And according to Afghan law, as I understand, that is invalid. You can't issue a state contract or maybe any contract outside of the country. He exposed this. It became an issue in parliament. I think the journalist was threatened and had to leave the country, but the deal was rescinded, as it was reported to me. One small example of how greater scrutiny by media can involve the Afghan people to enforce their own contracts. You don't have it just captured by one small elite that's kind of dominating things now. Another third solution that can chip away this problem is the increased use of banking, and particularly electronic banking that has records and you can track finances, because right now, you can't really investigate any of this corruption if it's just suitcases of cash that aren't recorded and reported. As to what can be done now, I'm not going to dispute any of Jim's claims. That sounds like a very good program. I would just add to that, get a seat at the table. I think that the way that you can enforce these things is rather than as a, we have so many demands on the Afghan government, and you should do this, you should do that, and so on. Yeah, we try to condition it to development aid, which only goes so far. If you get a seat at the table through Western companies and it doesn't have to be US companies, this underscores why I am leaning towards saying there should be a way to level the playing field, as Jim suggested. If you get a seat at the table, if you involve the contract under, say, New York law or international arbitration standards in Geneva, you have a real tool that holds captive hundreds of millions of dollars of resources that are going through the private sector through these contracts to an independent arbitrator if it's violated. So get a seat at the table so it doesn't get handled at an embassy if there's a dispute on the contract. It gets handled in a court and preferably outside of Afghanistan. Thank you. I think we have time for one last set of questions. We'll take the three on this side and then the two on this side, and then we'll have the panel respond. He just answered mine, so I'm all good. Thank you. OK, so full. Good job. I never had it. Ariana Monti with the US Department of Commerce, Afghanistan Task Force, and thank you all for addressing today's topic, first of all. And then looking back, recognizing the example set with INAC tender and the current regulatory environment, have any of you had, probably most specifically, Jim, had any actual or do you anticipate any reaction from the US or international mining or risk capital firms regarding their interest in the market, regarding there being a more or less favorable perspective on the market? And then to any of you, any feedback along those same lines related to the recent London Road Show and presentations from Minister Sharani, thank you. Thank you. It signifies the full and then we'll come back to you. Don, please. First of all, I want to thank Ray and the USIP for this very excellent panel, and I want to associate myself with many of the remarks that were made. I'm Don Ritter. I'm a former US Congressman. I've been involved in Afghanistan for 30 years. I was the facilitator and organizer of the INAC copper tender report, Impact on Afghanistan in the West. And Jim was the lead author. Was involved in that. Also, the former minister, the recent former minister of mines, the head of the Afghan Reservat Group, Hassan Ali, top, top, Larry Asneen, top, top people, some 10 contributors to that report. And it does stand as a kind of basis for going forward intelligently, and I think recognized by Minister Sharani at the moment. I want to make a brief comment on Grasiana's approach. I think she's right on target. But I would say, Grasiana, to minimize, and I want to hear associate myself truly with Scott's remarks, your approach, I think, is right on target. But to minimize a $30 million bribe, just because it's 30 million out of 3 billion, it's not relevant. It's not relevant. What's relevant is what happened in the tender process, how to avoid that in the future. And how to get a mining industry, which can dominate the Afghan economy, going in a direction that's positive for all of the things that we're fighting for and standing for. And to that extent, I think Scott is right on target when he says, who gets this and how they get it is really quite important. And you can't minimize that. I heard at a previous meeting here that somebody else from French guy said the same thing. And I think that's a tremendous mistake. I want to point out one other thing for the tender. Jim is so knowledgeable about this. But there was not allowed due diligence on the track records of the bidders. Now just think about it. You have the biggest event ever in the history of economic, private sector, economic event in the history of Afghanistan going on. And you can't evaluate the companies. The previous minister, who is gone because of the INAC competent report, I might add, the previous minister did not allow due diligence on the track records. So to this day, we have very, very little knowledge about the track record of the winner of the bid. Yet we knew everything because these are public companies. About the track record of the other Western companies, report Mac Moran, Phelps Dodge was merging with them. They kind of dropped some balls here and there. But Hunter Dickinson was right on target. And Scott's point and also Jim's point about the packaging of foreign aid in with a bid on a tender. How can you package? How can you have any kind of competitive bidding situation if foreign aid to the tune of $1.5 billion is packaged into a bid? Of course, they're going to win on the financial score. Yet we may have a lot of military assistance going in there. But our domestic foreign assistance, just the United States alone, is in the tens of billions of dollars over the eight years. We've gotten no credit. So this is being addressed, by the way, by the current minister of minds. I might add that I also serve as the president of the African-American Chamber of Commerce, been involved in Afghanistan for 30 years, and I'm a former US congressman. Thank you. Thank you very much, Adam. Is your hand? And we'll finish this side and go that side. OK. I'm Suja Nawaz. I'm the director of the South Asia Center at the Atlantic Council. I first want to raise the point of Western versus Eastern. I think that is kind of stereotypes the issue. Corruption is corruption and it's endemic worldwide, as Graciana said. My point is, to what extent can the Western donor countries, in particular, stand behind their companies when they bid? For instance, CanXIM, Bank, and other entities like OPIC, help support some of the activities of the United States companies that are bidding there? Is there any evidence that this is happening from the US side or from the European sides? Would that help level the playing field, as Jim was suggesting? Thank you. Thank you so much for being so patient. No problem. John Rothenberg, I work for USAID on a PRT in Pectica. I've been involved with Afghanistan since 88 and just so happened to have a bachelor's in mineralogy. Which I don't do anything with mineralogy anymore. But I don't know if this is still the case, but the original plans for the railroad make no sense unless the Chinese get a bunch of other mineral, a bunch of other mining rights. I would like some comment on that, because it just seems to me that it's already planned out, maybe. Thank you very much for those questions. I think we'll start with you this time, Scott. Do you have any comments on the questions? Not in particular. Maybe just briefly. I think it is a good question, an excellent question, in terms of, well, what can Western governments do, or international community, as an entity, do to support bids more constructively, without knowing the specific details of the tender? Maybe Jim is better to answer that. But certainly spending political attention and political capital to get a transparent process and get a fair hearing and packaging that, loan guarantees are one way that I know frequently infrastructure projects in risky countries are supported for private companies. They can't get the financial capital without them making that available, which is through multilateral lending agencies, is certainly an added benefit. I can't say whether that would specifically have helped in this case. I also, I guess, just to reinforce the questioners rather than answer them, I am skeptical about the ability of the Chinese or anybody else to get in place major infrastructure projects in the current security environment. And this is why I think the claim of $1 trillion is rather illusory, and I think that's been pointed out a few different times. To build a power line to come from, was it Tajikistan or Uzbekistan, to come down through the Salang Pass. I mean, when I was living there from 2005 to 2006, I drive up there all the time, and you see these empty towers, and it wasn't until 2009 that they actually put wires on them. Now, that is a very simple process compared to building a railroad over essentially the same territory. I mean, it might follow a different route, but how in the world is that going to get built? How in the world are you going to transport heavy metals through the winding road through to Pakistan? These are real questions that I have, and I think it kind of speaks to stability as being a prerequisite, not necessarily infrastructure being a prerequisite. If you build it, they will come maybe, but you need stability for all of this to happen, and it really underscores, I guess, the difficulties of solving the political problem and the security problem before you can realize any of this investment from copper for other resources. Thank you. Graciana. Let me address first the issue of the Western and Eastern investment. I think there are many things that we could be doing to help Afghanistan, and Opik was mentioned, of course. I mean, the political risk is very important, and Miga can contribute, but I think... Miga, that's the most lateral insurance-guarantee agency of the World Bank. I mean, all these things can help make the investment less risky, but the most important thing for me in which the West can help Afghanistan is to develop the right foreign direct investment framework, and I think it's very important because what you want, you don't want to create enclaves in the country. You want to link whatever you are doing, you want to link it to the rest of the economy, and have a spillover effect. So I like to think in terms of reconstruction areas around the mines or whatever that start growing over time. If you have an enclave by definition, it's not going to create links, and I think that depends on the right foreign direct investment framework. I agree with you that, you know, we shouldn't underestimate that the amount is irrelevant, that you should try to fight corruption as much. I mean, I've been doing that for many years in terms of helping countries to set up the right fiscal framework to avoid corruption and all that. I mean, I'm very much aware of that, but you cannot ask a country like Afghanistan to not to have corruption. I mean, it's out of the question, and probably because I've worked so much in Iraq that, you know, that I saw the billions of dollars that disappeared, for instance, from the CPA and all the corruption associated with contractors. I mean, if the U.S. government cannot stop that and the volumes were horrendous in comparison with Afghanistan, so how can we expect Afghanistan to do it? The other thing that I think makes the Chinese attractive to a country like Afghanistan. I mean, I'm just speculating, but it's the fact that China is doing very well in the world economy, and the U.S. is not doing so well, and the fact that the technology in China is much more adaptable to a country like Afghanistan in many areas because they use technology with a lot of unskilled labor and so forth. So I think that's a factor that makes it attractive in a way to a country like Afghanistan or to other countries in Africa, for instance. So the issue for me in competing, I mean, I agree that if you put a package that it's very different. But, you know, I, going back to the memo to President Obama, I would tell President Obama, you know, why don't you package something more attractive than putting a hundred billion dollars into the military in Afghanistan? So I think, you know, this imbalance that the U.S. government has had, I think it's not helping, and it's not going to help U.S. firms. So I think in part of them, in the memo, I should add that he should try to make it more attractive for U.S. companies to compete there. Thank you. Jim? Like I'll, I enjoyed the first question of what I thought of the road show and how it went. I don't really have any direct contact with any of the companies, but I know the companies that I've, I work as a consultant, so I talk to quite a number of companies and they always ask me about Afghanistan. And the way the United States or the way U.S. companies, rather, look at investment is to have a geologic database is only one issue. Yeah, there may be a trillion dollars worth of resources, you know, a fine number. But more importantly, if you look at the decision-making process, there's at least 11 areas that you look at. You look at, you know, uncertainty involving the regulations. That's a key factor in decision-making. What are the environmental regulations in Afghanistan? They have some, they've never been enforced, it's an unknown. The tax regime, I've discussed this one briefly, is there are no published royalties. Too high of a risk for companies to really sit down and invest in. You look at infrastructure, but it's really interesting. In Nevada, which is 30 years ago when I started my career in Nevada, there was no gold produced in Nevada. It was basically an also round. Today, Nevada is the third largest producer of gold in the world. And there was no infrastructure. You didn't have the power lines. You didn't have the power, but companies like Barrick and Newmont, they built power plants. I mean, this is nothing unusual in the mining sector to go out and provide the infrastructure needed to develop resources. Political stability is another issue. That is something that we can talk about, but the political stability of Afghanistan is not up to a place that I would want to invest in. You have labor issues. You have an untrained workforce. That's a problem that can be overcome by the mining companies. And corruption and security, we've talked that one to death. Suffice it to say people are not intrigued going into Afghanistan. They have to constantly renegotiate royalty rates and pay up front costs. We're not going to play that game. So those are the issues that you look at to say, how the road shall go. I'd love to hear what the company's had to say, but I don't know. But the people I've talked with are not encouraged to spend risk capital in Afghanistan at the current time. Any comments on the railroad and its feasibility? On the railroad, it's one of those issues that they have the coal deposits to develop the power plant at. Where is that coal going to go? It goes right along the railroad line. So you can draw your own conclusions for that one. If you also put on the railroad line, if you take a look at the location of Hajigak relative to the coal deposits relative to the railroad line, where is that going to go? Was this all a grandiose scheme to start with? I don't know. You can draw your own conclusions. Thank you very much to the panel. And thank you for your participation. I think it's fair to say that contracting is crucial. There is a need to shine the spotlight or transparency on the contracts. There is a need to ensure that the process is transparent. We've agreed that we have to ensure that the playing field is level. And there are many different dimensions of leveling the playing field. And I think that that would go a long way in ensuring that the contracts that are actually signed in Afghanistan, if they ever are signed, will be not just for the private good but for the public good. We talked a lot about strengthening institutions and building capacity. And the point about that I think you made, Scott, about involving the media and civil society is crucial. Because we do know that the state, either central or provincial, does not have the will or the capacity to project its authority at the community level. And having the communities and the media more involved in this would be very important. But this would only happen if there is transparency in the bidding process and the negotiating process. And so I think this is a discussion that we've started and will hopefully continue. And I'd ask you and the folk who have been with us of our live webcasts to join me in thanking our excellent panel for their contributions. Welcome.