Nation & World

Delay in mine project shadows hopes for Afghan economy

The giant copper mine that the Afghan government has made the centerpiece of its plans for building an economy nearly from scratch is at least five years behind schedule and the state-owned Chinese company that won the bidding has missed key deadlines in its still-secret contract with the Afghan government and is trying to renegotiate the deal, according to several officials and observers inside and outside the Mining Ministry.

The Mes Aynak mine in Logar province, about 25 miles south of Kabul, was celebrated as the biggest investment in Afghan history when it was announced in 2007. China Metallurgical Group Corp., a Beijing-based conglomerate, signed a deal valued at about $3 billion for 30-year rights to mine the site, which is thought to contain the second-richest unexploited copper deposit in the world, an amount equal to more than one-third of the copper reserves in all of China.

China Metallurgical Group was supposed to begin mining this year, but it’s done hardly any of the preliminary work required, including basic planning and a major feasibility study that’s now overdue, said several people familiar with the contract, who spoke only on the condition of anonymity because of the delicate politics surrounding the mine.

With the construction of required infrastructure awaiting the approval of those studies and other paperwork, mining is at least five years in the future, and probably much farther off, mining experts say.

China Metallurgical Group’s failure to proceed with developing the mine is a major blow to Afghan and U.S. hopes that Afghanistan can become a self-sustaining nation once the U.S. and other international militaries have departed. Afghanistan produces huge amounts of opium, but it has almost no legal economy of its own, beyond donations from other countries.

Two years ago, a U.S. Senate Foreign Relations Committee report, citing a World Bank estimate, said that 97 percent of Afghanistan's gross domestic product was derived from spending related to the presence of the NATO-led foreign troops and international donors. A report April 30 by the U.S. Special Inspector General for Afghanistan Reconstruction added to that, finding that the Afghan government can raise enough money on its own to cover only 10 percent of its public spending.

All this means that if foreign contributions dry up before Afghanistan can create a sustainable economy, it will struggle to operate its government properly and to field the 350,000 members of its national security forces, who are supposed to keep the Taliban insurgency at bay.

Javed Noorani, an expert on mining issues with the Kabul-based watchdog group Integrity Watch Afghanistan, said he thought the Chinese now wanted a five-year deferment on the requirement to begin mining by later this year. That would formalize the delays, and mean it would be at least eight years before the mine will produce enough to begin generating serious revenue for the Afghan government, he said.

Estimates of the royalty payments to the government when production hits its stride range from $250 million to more than $500 million a year. That would be a significant addition to the government’s income, which was about $2 billion in 2011.

For years, the Afghan government has touted the nation’s mineral wealth as the heart of its economic plans. U.S. officials have estimated the value of mineral deposits at perhaps $1 trillion, and the Afghan government has claimed they’re worth $3 trillion, but no one really knows. It’s clear, though, that the resources are significant, and include additional deposits of copper, as well as iron, gold, lithium, chromite and gems. There also are reserves of oil and gas.

The frustrating delays and potential changes in the contract by the Chinese also may create political problems for the minister of mining and petroleum, Wahidullah Shahrani, and the Karzai government generally. The deal is so large and symbolic and was so widely publicized that they risk a backlash if it falls apart or they’re forced to retool with major concessions to China Metallurgical Group.

The deal has been controversial from the beginning. Shahrani’s predecessor, Mohammad Ibrahim Adel, left under a cloud after being accused of taking a $30 million bribe to give China Metallurgical Group the contract, something Adel repeatedly denied.

The group’s bid was worth $1 billion more than that of any of its rivals, and it included significantly more infrastructure improvements.

Both sides in the Mes Aynak deal are reluctant to talk about it. China Metallurgical Group didn’t respond to emails seeking comment. Several officials at the Mining Ministry turned down requests for interviews, and the ministry’s chief of staff, Assad Zamir, didn’t respond to an email seeking comment on the mine’s status.

China Metallurgical Group is citing a number of issues as cause for changing the terms, several people familiar with the discussions said. One is the sprawling set of ancient ruins on the site now being documented and excavated by a team of archaeologists and more than 400 local laborers, paid for by $8 million from the World Bank, making it one of the larges archaeological projects in the world.

China Metallurgical Group claims the dig has slowed progress. It’s also claiming that clearing land mines from the site, laid during the Soviet occupation, has been a hindrance and that no proper deposit of phosphates has been found. Phosphates are used in the smelting process.

Noorani and others say these are mainly excuses, though the issue with phosphates is real. Geologists are still looking for them.

It’s unclear when the Afghan government will come to any new terms with China Metallurgical Group. In response to a question during an April 17 meeting of a group created to ensure transparency in Afghanistan’s mineral and oil industry, Shahrani said the option of canceling the contract was on the table, according to minutes of the meeting.

Under the terms of the contract, according to several people who’ve seen it, the Chinese were supposed to build a railroad, a 400-megawatt power plant to run the mine’s machinery and provide power for use by others, a smelter and a coal mine to fuel the power plant.

But now, citing "technical issues" such as the lack of phosphates, the company wants several concessions, including dropping the requirements for the power plant, smelter and coal mine. So far, the ministry has agreed only to allow China Metallurgical Group to delay the power station, smelter and coal mine.

An official in the ministry who spoke only on the condition of anonymity because of the sensitivity of the subject said canceling the contract wasn’t likely, but that the ministry might not cave in easily on the various demands. It’s already played hardball with the Chinese on some issues, such as forcing it to accept a location different from the one it wanted for dumping "tailings," the waste material from digging, because the location China Metallurgical Group wanted was atop porous limestone, which could have polluted a nearby river.

The delays have had one positive effect: They’ve given foreign donors more time to bring Afghanistan’s approach to governing its mining sector up to higher standards.

The international community is eager for Mes Aynak – and mining generally – to work here. The World Bank has given $92 million in grants for projects to support a sustainable mining industry here, and the U.S. Agency for International Development has just started a four-year $87 million program called Mining Investment and Development for Afghan Sustainability aimed at helping the Afghan government strengthen its mining sector.

Two foreign mining experts, who asked not to be identified because of the sensitivity of the subject, said the delay had allowed them to work on programs that would ensure that the Mining Ministry could handle such megadeals properly. One of the experts said that while Mes Aynak was large and symbolic, there were a host of other projects coming, including nearly half a dozen that were imminent and perhaps a dozen more in the next few years.

"If you just talk to the geologists, they can’t believe all the stuff that’s here," he said.

Another clear winner from the delay are the archaeologists who’ve been working to document and remove hundreds of statues of the Buddha and other figures that date to the era more than 1,000 years ago when miners using crude methods dug Aynak’s ore and a small city sprang up nearby.

The delays mean the archaeologists have the time to finish their work. They count the mining project as a blessing. Without it, there would have been no funding for the work, and without the delay they wouldn’t have had the time to complete the work, leaving the statues and ruins to be looted by robbers and destroyed by weather.

Clarification: An earlier version of this story provided an incomplete citation for the assertion that 97 percent of the Afghanistan economy is derived from foreign military spending and international aid. The claim was made in a 2011 Senate Foreign Relations Committee report, citing information from the World Bank.

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