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The Aynak Copper Tender:
James R. Yeager, BSc., MBA
Former Consultant to the Ministry of Mines and Industry during the Aynak Tender
Eng. M. Mir Ashan Sediq, former Minister of Mines and Industries, Afghanistan Mr. Ed Smith; former Head of the Afghanistan Reconstruction Group (ARG) at the US Embassy in Kabul, Afghanistan Mr. David Garner, former advisor to the Ministry of Mines and Industries, Kabul, Afghanistan Mr. M. Hassan Alief BSc., MSc., an Afghan-American geologist consultant to Hunter Dickenson Dr. Larry Snee, PhD., Geologist United States Geological Survey (USGS) (retired) Dr. Robert Shafer PhD., Vice-President of Business Development, Hunter Dickenson, Vancouver, BC Canada -and others-
Aynak Tender Writing Project Coordinator Hon. Don Ritter, Sc. D. Member of Congress 1979-1993 Business Developer, Afghanistan
© James R. Yeager, Skyline Laboratories and Assayers 1775 W. Shauaro Drive, Tucson, Arizona
Table of Contents
Preface ...........................................................................................................................v Executive Summary ....................................................................................................7 Copper, Afghanistan and Mining .............................................................................12 Copper in the World Market.........................................................................12 Mining in Afghanistan...................................................................................13 Donor Support to the Afghan Minerals Sector ........................................... 14 Aynak Copper................................................................................................ 16 Development of the Aynak Copper Deposit Project .................................. 17 Institutional, Legal and Regulatory Framework Supporting the Afghan Minerals Sector............................................................................................................................19 Minerals’ Legal Framework ...........................................................................21 Minerals’ Regulatory Framework................................................................. 22 Aynak Copper Deposit Tender Process .................................................................. 24 Identification of Aynak Copper Deposit as a Priority Tender................... 25 Tendering the Aynak Transaction Advisor Contract ................................26 Contracting the Transaction Advisor to Implement the Aynak Copper Tender31 Transaction Advisor Responsibilities .......................................................... 32 The Tender Plan and Process ................................................................................... 34 The Aynak Copper Bid Package................................................................... 37 Solicitation of Expressions of Interest to Bid for Aynak Copper Deposit Rights.............................................................................................................. 38 Pre-qualification of Bidders .......................................................................... 39 Due Diligence of the Bidders for the rights to the Aynak Copper Deposit43 Receipt of Submissions and Evaluation of the Bids ....................................44 Impact of China’s Dominance of Natural Resource Development in Afghanistan .......................................................................................................................................53 Findings and Recommendations .............................................................................. 56 Finding: Data and Information are Essential to Commence Viable Tender Activities ........................................................................................................56
Finding: Deficient and Uneven Donor Support to the Afghan Minerals Sector ..............................................................................................................58 Finding: Virtually no Government or Donor Oversight of the Tender Process ............................................................................................................60 Finding: Technical and Financial Guidelines for Proposals Need to be More Defined.................................................................................................64 Finding: Due Diligence of Bidders Must be Adequately Conducted.........65 Finding: Sector Governance and Contract Implementation Capacity are Necessary .......................................................................................................66 Finding: Ancillary Agreements Require Independent Review and Oversight........................................................................................................67 Finding: Appropriate Public Participation from Start to Finish should be Required..........................................................................................................69 Finding: Insufficiently Funded Transaction Advisor Consultancy...........70 Finding: Conflicted Transaction Advisor.................................................... 72 Finding: Western companies and Fully Private Firms are not Equipped or Able to Compete in this Environment......................................................... 73 Annex 1: Acronyms ...................................................................................................76 Annex 2: Definitions .................................................................................................77
The Aynak Copper Deposit located in Logar Province, Afghanistan, 35 km south of Kabul, remains as one of the world’s near surface, unexploited copper deposits. The tender process of this non-renewable and highly valued deposit commenced as early as 2003 and was ultimately awarded to the China Metallurgical Group Corporation (MCC) in December 2007. Final contract and licensing rights have been issued throughout 2008; additional ancillary works are being reviewed. The author of this Paper is James R. Yeager, a US geologist. The author lived and worked in Afghanistan and served as an Advisor to the Ministry of Mines of the Islamic Republic of Afghanistan during various phases of the Aynak Tender Process. Although not directly contracted to work on the Aynak tender, the author was requested to provide assistance at various times in the tender process of the deposit. From the data gathered, the author has concluded that the manner in which the Aynak tender process was conducted could not ensure that its investment outcome will: (1) generate the actual value of resource development and revenue return that it should; (2) capitalize on the financial and employment opportunities that the Deposit offers; (3) support good governance of how Aynak operations are actually conducted; and (4) provide a good model for current and future resource development in Afghanistan such as the Hajigak Iron Ore deposit, oil and gas, other copper deposits, various large coal deposits, marble, precious metals and gemstones, etc. This Paper is intended to provide objective observation and constructive insight into how the Aynak Tender Process was conducted and the implications of same. It has been prepared pro bono and is intended to provide insight of the on-the-ground experience.
James R. Yeager
This paper has been facilitated by the Honorable Don Ritter, businessman, investor and market economy builder who brought 30 years experience with Afghanistan to the writing project. Contributors and Peer Reviewers have included Eng. M. Mir Ashan Sediq, former Minister of Mines and Industries; Ed Smith; former Head of the Afghanistan Reconstruction Group (ARG) at the US Embassy; David Garner, advisor to the Ministry of Mines; Hassan Alief, an Afghan-American geologist and consultant to Hunter Dickenson; Dr. Larry Snee, geologist with the United States Geological Survey (retired); Dr. Robert Shafer, Vice-President of Business Development for the Canadian company, Hunter Dickenson. All comments may be directed to, firstname.lastname@example.org.
Understanding of the tendering of the Aynak Copper Deposit by the Government officials of Afghanistan and by the donors to Afghanistan is a key to establishing an Afghan minerals industry that will positively impact the country’s economic, social and political well-being. If changes are not made in future resource and minerals’ tendering by the Government in Afghanistan with support of the donor community to ensure significantly more transparent and market-based processes the integrity of Afghan mineral resources and optimal fiscal return to the national budget and social return to the national fabric will be forever lost. There are few countries in the world known for their (varied) copper reserves: The United States, Chile, Peru, and Indonesia have large low grade porphyry copper deposits. Canada is the type location for smaller higher grade massive sulfide deposits. The Democratic Republic of Congo, Zambia, Zimbabwe, and now Afghanistan are known for sedimentary hosted copper deposits. Copper ore deposits cannot be found anywhere; rather the minerals are formed in the earth’s crust and are deposited is in specific geologic environments. Total world production of copper in 2005 amounted to 15,100,000 metric tons. By 2008, that production grew to approximately 16,200,000 metric tons. With the demand for renewable energy resources like wind power and solar power, the demand will continue to increase. The Aynak Copper Deposit is noted to be the one of the largest unexploited copper deposits in the world. The copper at Aynak is highly accessible and surrounded by additional copper prospects. Aynak is a considered a world class ore body containing at least 240 million tons of material with copper content averaging 2.4% copper. These known reserves will produce at least 6 million tons of copper. Experts agree that in order to develop the deposit an initial investment of more than $1 billion over five years is required.
International experts estimate that Aynak royalty revenues could generate more than $200 million annually for Afghan budget funds over the next 30
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years. In a country where the national budget in 2008 was $650 million, this would have significant impact. Development of the deposit will require tremendous infrastructure including roads, electrical power, and training of the local workforce. Upwards of 1500 direct mine jobs are estimated to be generated out of the Aynak work; indirect employment that includes transport, mine product processing, production of spare parts, and community and mine services could be up to 30,000 new jobs depending on the amount of ancillary activity that are supported by the developing company. As early as 2003, World Bank experts assessed the opportunity that Aynak Copper presented and began to strongly encourage government to develop a tender plan for this deposit. The British Geological Survey in collaboration with Afghan Geological Survey experts conducted site visits, reconstituted Soviet data and prepared an impressive data package. A complicated array of Afghan Government procurement requirements and personalization of development priorities on the part of certain Afghan Government officials resulted in diminished opportunity to ensure that an internationally experienced Transaction Advisor would be in place to conduct the country’s first large market tender. As this paper relays, the overall manner in which the Aynak Copper tender process was conducted was flawed but short of the Transaction Advisor’s recanting the process, insufficient tangible evidence exists to void the tender. The first significant step to legitimately develop the mineral wealth of the country was finalized in December 2007 with the granting of the Aynak Copper Deposit rights to China Metallurgical Group Corporation (MCC). With an initial bid submission of $1.8 billion investment, as of this writing MCC has provided initial front end payment, higher than experts anticipated, of $800 million to be paid over 5 years. As part of the bid a number of ancillary terms were promised by MCC including: the construction of a power plant, community development infrastructure, roads and light rail that would transit north to south of the country. The fact that the Aynak Tender even happened in the current context of Afghanistan of a country in conflict is admirable. Other tenders will continue to take place exploiting the resources of Afghanistan to establish an
The Aynak Copper Tender
economic base for development. These tenders include the Hajigak Iron Ore deposit and oil and gas concessions in northern Afghanistan. These tenders, as was Aynak, are being conducted under the auspices of the Afghanistan Ministry of Mines.
Perfect Storm of Tender Events. The array of players and issues that impacted how the Aynak Tender process progressed contributed to the development of a murky and insufficient tender process. These included: A strong-willed Minister unrelenting in his preference to see this award through with Asian partners. A primary donor and embassies with parachuting presence were overwhelmed, unwilling or simply not attentive to the details of the tender events until it was too late. The Afghan Government was not prepared in any way to address the legal, fiscal or contractual aspects required for the breadth and depth of this project. The Transaction Advisor had never implemented a project of this scope, did not have the requisite team regularly engaged, lacked understanding of the Afghan Government setting and was itself conflicted as it simultaneously implemented contracts as a client to the Ministry of Mines. There was a set of certain bidders that were for the most part not sufficiently versed in how to do business in Afghanistan, had not necessarily done their homework on the setting in which they were bidding, and relied more on political intervention than the Afghan context. The consequences may ultimately be that a series of flawed processes have now taken root in the Afghan minerals sector that will continue to guide sector development until and unless more transparent and market-oriented principles are introduced. At no time, even following months of observing how unprepared and unaware the Ministry and Government staff were in mine tender processes and even the technical aspects of the Aynak deposit, did either the Transaction Advisor, the Government, the World Bank or any Embassy suggest that the tender might actually be too large under the current conditions and that perhaps a more gradual approach to tendering the deposit rights should have been considered. Premature Tender. The Aynak tender process progressed more quickly than did Afghan Government and institutional development needed to support
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the tender. In market terms, the minerals industry of Afghanistan is in an early phase of development. While hundreds of mine licenses have been issued by the Ministry of Mines, no major mines are in production and the market legitimacy of these licenses is vague. Certain presumptions that the Government was correctly implementing the process were baseless and failed to recognize approaches that were based on central planning, conducted behind closed doors, well outside market-parameters. Members of the Aynak Tender Evaluation Committee questioned their participation, not having acquired any skills to understand the tender process or to absorb what aspects of bid submissions were most essential. This tender was a first; Government agents could only employ the skills that they possessed, which were based on an historic legacy of central planning and to some extent, state capture. In addition, even for most of the international advisors on hand, this was a first time tender experience. To evaluate the greatest benefit for Afghanistan, the promises made by the winning bidder must be technically, financially and socially measured and independently verified by a credible body of experts; this was not the case for the Aynak Tender. Insufficient Governance Mechanisms in Place. The Ministry of Mines, specifically the Minister, firmly controlled the tender process for Aynak and continues to hold grasp as contract and investment requirements are being developed. Roles for other government agencies such as environment and finance, the local Logar community and ancillary business opportunities remain undefined. An historic lack of market orientation An leaves the Afghan mining sector without legal, accounting and project finance aptitude; mining is a high risk business that requires considerable capital investment and regularized scrutiny of inordinate environmental aspects that include toxic waste, water, land, and air pollution. The government was not prepared to implement the tender to ensure a transparent outcome or to monitor the outcome as the project is implemented. Insufficient Oversight of the Tender Process. Neither Afghan Government leadership nor its donor counterparts invested sufficient time or concern during the Aynak Tender process. There was a sense that once a Transaction Advisor had been contracted, that it would actually conduct all needed oversight – for a number of reasons explored herein, that was not the case.
The Aynak Copper Tender
Members of the Evaluation Committee had never been part of a tender process and were not clear as to what they should be looking for. While the Ministry of Mines attempted to meet certain legal requirements to conduct inter-ministerial forums around the tender, these were conducted behind closed doors, did not necessarily include the appropriate personnel and were so firmly controlled by the Minister himself that it was impossible for any divergence of opinion or approach. There were no mechanisms for reporting this skewed process. West cannot always meet East. A variety of less than transparent mine operations are underway throughout Afghanistan with some international engagement, although with limited Western country company involvement. The naïveté of the West to the potential for Afghan mining to develop economic growth will translate into open access to, and dominance of, less than transparent operations, illegitimate export of valuable non-renewable products and missed opportunity to build the coffers of the Afghan national budget through mine royalties and fees. Aynak provides the largest and current example of this missed opportunity. Where some companies, including MCC, are able to provide proposals that include an expansive array of non-mining funding with their home Government support, Western companies are not so structured. Had the tender documents more clearly recognized this nuance in global mining bids, more clear terms about bid parameters and funding mechanisms may have been put in place. This Paper is intended to provide disinterested observation and constructive insight into how the Aynak Tender Process was conducted and its implications. It should provide important information that will alert the Afghan Government and the international donors as to how an initial bidding process, if not professionally and consistently handled, rather than being purely dictated by non-technical bureaucrats concerned only with dollar amounts and geo-political preferences, an entire chain of events can emerge as detrimental to the entire outcome of an important tender activity.
Copper, Afghanistan and Mining
Copper in the World Market
Copper1 is a unique material for manufacturing. It is an essential commodity primarily used for electric wire casing, power turbines – including solar and wind turbines, power plants, machinery production, housing, and transportation. In addition, because copper is a malleable metal that has very unique heat transfer and electrical properties, it is a staple in the building industry. It is used for copper tubing for all mechanical components in housing including plumbing, heating, air conditioning, electrical wiring and telecommunication infrastructure. For the foreseeable future, copper has a secure market. By 2003, copper prices had risen from a low of $0.60 per pound to $1.50 per pound, the projected long term price for copper. Prices continued to rise to bullish levels of up to $4.00 per pound in 2006 and 2008 during the Aynak tender process and then collapsed as the worldwide recession spread. Even today, China and India are stockpiling copper for future infrastructure development. Such demand has kept copper prices above $2.00 per pound. As the United States focuses on clean energy alternatives, the demand for copper will increase and be used in wind turbines, solar installations and hybrid cars. Smart electrical grids will also require significant amounts of copper. Table 1 below shows world copper production in 2005. Had the Aynak Copper Mine been in full production in 2005, Afghanistan would have ranked within the top 15 world copper producers at the proposed production rate of 200,000 tons of copper per year, Aynak would supply 1.3 % of the total world production. The challenge of the copper mining industry is that to meet world demand every year the copper industry needs to replace the exploited material on an ever increasing basis.
There are few substitutes for copper. Aluminum was used as substitute for copper in house wiring in the 1970’s. It failed because the aluminum oxidized and would melt at moderate temperature. Different types of plastics were used in plumbing, many of which failed over time.
The Aynak Copper Tender
This task requires that at least one deposit, the size of Aynak, would have to be found on an annual basis.
Table 1: World Copper Production
Copper Production Rank Country 2,001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Chile United States Indonesia Peru: Australia: China: Russia Canada Poland Zambia Mexico Kazakhstan Iran Papua Guinea Other Grand total New 218,000 1,166,909 211,311 1,156,908 190,200 1,188,723 173,400 1,259,707 193,000 1,387,369 4,739,000 1,340,000 1,081,040 722,305 871,000 605,000 600,000 633,531 474,000 312,000 371,123 470,100 133,000 Metric Tons 2,003 2,004 4,904,200 1,120,000 1,005,831 831,223 830,000 620,000 675,000 557,082 495,000 349,000 355,653 485,000 142,000 5,412,500 1,160,000 840,318 1,035,574 854,100 752,000 675,000 566,491 531,000 426,900 405,540 461,000 162,000
2,002 4,581,000 1,140,000 1,171,726 843,215 883,000 593,000 695,000 603,498 502,800 330,000 329,874 490,000 133,000
2,005 5,320,500 1,140,000 1,065,000 1,009,898 927,000 755,000 700,000 566,500 523,000 436,000 425,000 402,000 200,000 197,000
Afghanistan Aynak proposed production
13,700,000 13,700,000 13,700,000 14,700,000 15,100,000
Mining in Afghanistan
Afghanistan is home to some of the world’s most viable and least exploited mineral resources; it hosts abundant mineral wealth potentially providing the world with copper, iron, gemstones, and precious metals2. According to the United Nations Economic and Social Commission for Asia and Pacific (UN-
Peters et al, Preliminary Non-Fuel Mineral Resource Assessment of Afghanistan 2007, USGS Open-file report2007-1214.
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ESCAP) report,3 there are more than 800 mineral occurrences including coal, zinc, and gold, throughout the country. These occurrences are spread amongst various regions of Afghanistan, holding great potential for economic development (See Text Box4). Many of these products are presently mined in the absence of a transparent Examples of Mineral Resources in framework for operations resulting in Afghanistan Coal little to no economic return to Base Metals – copper, lead, zinc, nickel, Government. cobalt Considerable mapping and assessment of Afghanistan’s mineral resources was conducted during the 1980s under Soviet rule. Many Afghan engineers and geologists received mine education in Rostov, St. Petersburg and the Urals in Russia as well as worked in Donetsk, Ukraine and other leading technical institutes in the region. The Soviets carefully established Afghan government agencies for mining including the Afghanistan Geological Survey. They provided training for the Afghans based on Soviet ideology and an approach that relied on central planning and production-based government operations. This approach dominates the attitude and thought processes of the Afghan Ministry of Mines leadership and staff today.
Ferrous Metals - Iron ore, Chromium Precious Metals – gold, silver, platinum Gemstones –emeralds, sapphires, rubies, spinel, amethyst, peridot, garnet, aquamarine Ornamental Stones – lapis lazuli, amber, marble, turquoise, jade, malachite, petrified wood Construction materials – crushed stone, dolomite, limestone, gravel, sand Industrial materials – barite, bentonite, borates, dimension stone, kaolin, mica, phosphate
Donor Support to the Afghan Minerals Sector
Other than the World Bank, the international community has been slow to commit to the legitimatization of Afghan mine operations and development
Geology and Mineral Resources of Afghanistan Atlas of Mineral Resources of the ESCAP Region, Vol.11, 1995, 85 pages with four atlas maps at scale 1:2,000,000 and 1:2,500,000. 4 M.L. Vitelli, Energy and Mine Strategy of Afghanistan, Asian Development Bank 2007-2008
The Aynak Copper Tender
of improved mining capacity throughout the country. Some of the assessment and assistance efforts that have been conducted are: In 2008, the U.S. Geological Survey completed an aerial survey of mineral resources in Afghanistan, paid for by the Government of Afghanistan, an estimated $9 million although $17 million was budgeted by USGS; In 2003-2007, British Geological Survey staff based at the Afghanistan Geological Survey provided technical assistance, developed mapping systems, geo-science data facilities and ordered existing data; In 2007, under a USAID contract, Bearing Point implemented a Mine Sector Strategy as part of the Afghanistan National Development Strategy (ANDS) process; In 2007, under a U.S. Trade & Development Agency contract, the US Geological Survey implemented an “Assessment of oil and gas reserves in the Amu Darya Basin of northern Afghanistan;” In 2007, USAID implemented a 3 month study through Sibley International, entitled “Review of Economic Opportunities for Mining in Afghanistan”5 as part of small and medium size business program; In May 2006, the World Bank provided a $30 million grant for the Sustainable Development of Natural Resources Project (SDNRP) for Afghanistan; In 2006, the Asian Development Bank financed a Feasibility Study of the TAPI (Turkmenistan-Afghanistan-Pakistan-India) natural gas pipeline project; In 2005, the Asian Development Bank supported a “Natural Gas Strategy for Afghanistan;” In 2005, the World Bank financed an Assessment of Oil and Gas Operations in Afghanistan;
As a follow on to this work a USAID contractor has attempted to develop more information on mine opportunities as part of a small and medium size business portfolio commencing in 2007; USAID funding only supported a brief assessment; results have not been achieved.
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In March 2004, the World Bank published “Mining as a Source of Growth”, a seminal document that alerted Government and donors of the economic and development value that Afghan mining posed. As part of these efforts, the British Geological Survey (BGS) and the United States Geological Survey (USGS) have been working in Afghanistan since 2002. The BGS prepared the Aynak Data Information and Geological Maps. Both the BGS and the USGS provided technical assistance to rebuild the Afghanistan Geological Survey (AGS) included the compilation of all the known technical data and the generation of new maps and airborne geophysical surveys. The BGS maintained full time staff in Kabul while USGS staff was based in the United States and made periodic visits to Afghanistan, primarily limited to Kabul for security reasons. No donor assistance has been provided to support mine infrastructure development.
The Aynak copper deposit is strategically located at the north end of Logar Province 30 kilometers south-southeast of Kabul. At its closest point, the deposit’s distance to Pakistan is approximately 65 km to the southeast. Access from Kabul is provided by driving approximately 15 miles (25 km) south on the Khost highway and then 10 miles (17 km) on unimproved dirt roads, for a total of an hour’s drive. The property can be accessed year round although snow can accumulate to result in interrupted access during spring runoff. The property’s elevation ranges from 7,300 to 8,500 feet (2,200 to 2,600 meters). The high, dry desert climate with limited rainfall provides sparse vegetation and abundant rock exposures. Electrical power is not available at the property. Because of the remote location, communication is by satellite phone although it is expected that cell phone communication could become readily available. Archived data defines the Aynak copper deposit as a “mineable reserve” of 240 million metric tons of material containing 2.34% copper (240 MT at 2.34%), which is considered a relatively high-grade deposit. During Soviet-era field work, a camp and series of buildings for the storage of the core (mineralized rock samples from the bore holes) were constructed. Bulk samples were taken at that time by driving exploration drifts or tunnels for
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more than 1,000 feet (300 meters) into the Aynak copper deposit. The tunnels remain accessible today but the buildings do not. According to Abdul Wasai, the late Director of the Afghanistan Geological Survey, the Soviet camp had also served as a training ground for Osama Bin Laden and the camp was destroyed by a U.S. air attack in 2002. There remain a number of bomb craters, live and spent munitions on the property and the area continues to provide a safe haven for Taliban and anti-government forces.6
Development of the Aynak Copper Deposit Project
Starting in late 2001, the World Bank7 working in partnership with the Transitional Government of the Islamic Republic of Afghanistan helped to develop an important series of foundation papers targeting key economic sector of the Afghan economy. These documents were prepared under a project framework entitled “Securing Afghanistan’s Future.” Mining was included as one of the framework documents and reference to Aynak Copper along with the Hajigak Iron Ore deposits was given. Following this work, World Bank consultants over the course of 18 months conducted an assessment of the Afghan minerals sector resulting in the publication of the document “Mining as a Source of Growth.”8 This document firmly pointed to Aynak as a primary target for the Afghan Government to pursue. It also emphasized the absolute lack of institutional, legal and regulatory frameworks in which any mining was being conducted and that these were essential aspects to be developed before sound mine development could be pursued. The document is commendable but was unfortunately not translated into either Dari or Pashtu, the primary languages in Afghanistan. In September 2005, the legal advisor to the Ministry of Mines prepared the initial tender documents that would be required by the Government to contract a Transaction Advisor to implement the Aynak Tender Process.
In late 2008, a New York Times journalist scheduled to interview local Taliban in Logar Province was kidnapped and as of this writing has not been returned; it is rumored – and not unlikely - that he has been moved to a border territory in Pakistan. 7 The World Bank was established post-World War II to provide financial assistance for restructuring and reform of developing governments and to facilitate private sector investment in transition economies in accordance with market principles 8 March 2004.
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The Minister of Mines at that time was unfamiliar with mining and with procurement. In May 2006 the Government of Afghanistan entered into an agreement with the World Bank for a $30 million grant to implement the Sustainable Development of Natural Resources program (SDNRP). The project was primarily designed to develop regulatory and commercial capacity at the Ministry of Mines. The actual flow of project funds that funded a few international advisors did not commence until August 2006; to date much of the work to be conducted under this grant has either been stalled by the sitting Minister9, delayed by World Bank procurement or for other reasons has not been mobilized.
Since 2008, where technically qualified experts World Bank consultants have been identified and were based full-
time at the Ministry of Mines, the Minister has not supported their contract renewal.
Institutional, Legal and Regulatory Supporting the Afghan Minerals Sector
The institutional, regulatory and legal framework and its implementation under which Afghanistan’s minerals’ sector currently functions are insufficient if to support market operations. In the absence of these frameworks virtually every aspect of minerals’ sector operations – including tender processes - is vulnerable to corrupt practices. Institutional oversight of the Afghan minerals sector – including Aynak Copper - is highly centralized within the Ministry of Mines and relies on established relations and geographic preference. Despite donor documentation and Government statements, few of the ministry departments actually operate in accordance with officially defined roles and publicized strategic scopes of work. In fact, the governance arrangements in place to support the Afghan minerals’ sector support entrenched practices and natural monopolies where no legal framework functions practically exist. There is a sense that commercial mine functions, i.e., licensing, contracting, are being conducted as if “going through the motions” in order to fulfill some expectation of market standards, and that the reality is considerable deal-making and personal relations are essential to securing mine rights in Afghanistan. Mine operators complain of having to pay increasing fees to the Ministry of Mines and that they are closely watched and even micro-managed by the Ministry. Business is therefore short lived and the focus is to make the deal while you can. The result is little valuable mid to long term investment, significant damage to less valuable deposits destroyed and while removing the best and significant products, damage to the environment and loss of economic opportunity.
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In this context, minerals operations are highly centralized despite the issuance of mine licenses and use of tender processes. There is an inconsistency in the application of policy and law as well as inadequate public information about legal rights and responsibilities that has resulted in an increasing public distrust of how minerals’ operations are being conducted. In addition to Institutions defined under Ministry operations, national the Minerals Law reform programs such as the Afghanistan National Ministry of Mines is the state Development Strategy (ANDS) authority responsible and and Priority Reform and administrator for the state property in Restructuring program (PRR), the minerals sector. Inter-ministerial Committee –is to be national investment promotion established to include the Ministry of through the Afghanistan Mines as Chair, the Ministry of Investment Support Agency Finance as Deputy Chair and other ministries as Members including the (AISA), procurement oversight Ministries of Economy, Commerce, by the Afghanistan Foreign Affairs as well as the National Agency for Environmental Protection Reconstruction Trust Fund (NEPA) and any other members as (ARTF), various chambers of needed. The Committee has an important legal function in mine commerce as well as international tenders. embassy staff have intermittently Mine Cadastre – to receive and sought to influence sector approve applications for mineral rights; maintain registry books, survey developments, including Aynak. mapping on mineral rights. Mine This array of changing actors has Inspectorate -financial and technical effectively contributed to a inspections and evaluations; inspect sights, health and safety review, confusion of roles, facilities, books and records; order responsibilities, sector strategy penalties and fines. Environmental Protection Department and priorities for development – issue regulations for and monitor and has resulted in an absence of environmental compliance in sector. an institutional framework in Geological Survey – research, mapping of mineral resources. which a system of “checks and balances” is supported. As a consequence, the Minister of Mines has taken on a very centralized and singular leadership role in the sector.
The Aynak Copper Tender
Minerals’ Legal Framework
The Constitution of Afghanistan provides the legal foundation from which the country’s resources can develop. The Minerals Law of the Islamic Republic of Afghanistan was enacted by the Cabinet in July 2005. The Dari version of the draft bill was enacted into law and the English translation of the new law was completed in December 2005. Parliament came to office in early 2006 and has since reviewed various sections of the Minerals Law although final approval of the law has not been published. The Minerals Law provides for the public tender of minerals in Afghanistan. The provisions are drafted using internationally accepted industry standards; the tender of Aynak Copper was the first time the Government of Afghanistan has implemented the portion of the Legal Entitlements under the Afghan Minerals Law regarding the competitive tender process on 2005 Minerals Law the international world mining Minerals License for exploration stage. Minerals license for exploitation All tax and custom regimes applicable in Afghanistan apply to mine operations. Royalties are applied to exploitation contracts based on a determination by Ministry of Mines’ officials. A welldeveloped and specific “Royalties Chart” designed by World Bank consultants in consultation with Ministry of Mine officials was not adopted as part of the Afghan Minerals Law which means that each set of mine license terms will require negotiation per license. The development of a royalty regime/ policy has been recommended by many advisors to provide predictability to potential investors in minerals development.10 Commercial legislation is developing in Afghanistan that will impact minerals
Authorization for quarry exploration Authorization for quarry exploitation Authorization for permanent quarry exploitation Authorization for tailings exploitation Authorization for artisanal exploitation Authorization for treatment, processing, transformation, transportation or trading of minerals
Most mine contracts currently in place call for a flat rate based on the gross value of the commodity produced no matter what the price of the commodity. A sliding scale royalty increases the tax take for the government as the commodity price increases and insures profitability of the operator as the commodity prices decrease.
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operations;11 still, throughout 2008 and into early 2009, the Afghan Parliament has demonstrated a particular resistance to supporting new commercial legislation and in effect has stalled these important developments. The Minerals Law provides a mechanism for the Government to attract investment by tendering know mineral occurrences such as Aynak. There are very specific guidelines established to encourage transparency and insure that all government stakeholders are involved in the process. In the tender process for Aynak, the law was fresh off the press and had not been tested. The tender of Aynak was the first time the Government of Afghanistan has implemented the portion of the mining law regarding the competitive tender process on the international world mining stage.
Minerals’ Regulatory Framework12
It is important to note that not all mines are on the grand scale of Aynak Copper and that large-scale mine operations such as Aynak require a different, if not more rigorous, regulatory environment than artisanal or small mine operations. For large operations, mine companies will have diverse skill sets with many experts to insure the compliance with the regulators. These operations need to be held to a higher standard than artisanal (small scale) gemstone miners that tend to be, at least in Afghanistan, family operations. Regulators involved with the small mines will need to provide technical assistance toward supporting maximization of production and for small operators to maintain a safe working environment with minimal environmental degradation.
In addition to commercial legislation, the standard provisions of other laws of Afghanistan apply to the Minerals Legal framework; these include but are not limited to: labor and environmental laws, Rights of Way requirements, Use of International Accounting Standards (IAS) required, Use of Project Infrastructure (with payment of reasonable fee) permitted, Requirement to submit and apply Health & Safety plans, Explosive/blasting requirements/norms noted, Preservation of cultural heritage requirements, Dispute resolution using administrative procedures, and where necessary, criminal law applies
Initial regulatory framework documents for natural gas were prepared with funding by the Asian Development Bank (ADB) by Energy Markets, Ltd. of the United Kingdom through 2007; that regulatory work is not part of this White Paper review.
The Aynak Copper Tender
The Ministry of Mines maintains a Cadastre and Inspectorate office as well as the Afghan Geological Survey. While these departments play a role in how minerals and Aynak operations in specific will be registered, mapped, reported on and tracked, they remain firmly controlled by the Office of the Minister and work closely with the Department of Mines at the Ministry. The World Bank program has supported some capacity building at the Cadastre and Inspectorate and it had been anticipated that the program would also support the drafting of at least fundamental regulations needed to implement the Minerals Law. These drafts were to be in place by August 2008; while some draft regulations have been prepared by international advisors, they have not been sufficiently developed or adopted. Drafting is somewhat underway at the time of this writing but staff on the ground anticipates considerably more time is required, notably in light of the Ministry of Justice involvement that may follow to review new regulations. Before any meaningful movement on the regulatory front, Aynak exploration activities are already underway. Building market capacity in this area is essential. Aside from regulatory drafts being in English and requiring translation into the Dari language, some regularized training is required for Afghan counterparts to absorb the full intent and consequence of these detailed procedures. From there, the Ministry of Justice will be required to review the regulations and even Parliament review and approval will be required. Past experience (i.e., some earlier attempts to draft oil and gas regulations) has demonstrated that these processes can take up to two years if the process is even concluded at all and that timing is when at least one international advisor and an interested Ministry leadership are consistently backing the process. Experience has also demonstrated that intended content can be wildly changed during this process to ultimately not reflect initially intended content13.
This was the case with the Afghan Hydrocarbons Law where at least seven fundamental legal clauses where in the Dari translation of the law, were so completely diluted or modified as to negate the intended effect.
Aynak Copper Deposit Tender Process
The Ministry of Mines is the Government agency responsible for the oversight and development of the Afghan minerals sector. Since 2002, there have been five ministers that in effect have resulted in five strategic plans for the Afghan minerals’ sector. The current minister, Mohammad Ibrahim Adel, who earlier served as Deputy Minister of Mines, is a mine engineer and has been in office since March 2006. An objective observation is that this Minister has been the least amenable to international assistance. His training in the Soviet system where the state should own and exploit mineral deposits based on the state plan, is counter intuitive to the private sector process of a profit motive for the investor. The first post-conflict Minister appointed in 2001 was Juma Muhammad Muhammadi, an Afghan-American, U.S. citizen and former World Bank staff member. Minister Muhammadi was highly respected amongst the new Afghan government officials and although not a mine expert was familiar with donor processes and possessed a strategic aptitude for economic development. The Minister was responsible for putting in motion the World Bank-supported effort to draft Afghanistan’s first Hydrocarbons Law and Minerals Law as well as to conduct an assessment of the oil and gas sector, to develop a natural gas strategy and to examine opportunities to divest government of its mine assets. Minister Muhammadi seemed to possess all the qualities needed to reconstruction and optimization of the Afghan minerals sector. In February 2003, Minister Mohammadi was killed in a plane crash in Pakistan.14
The Cessna 402 was on a mission to inspect copper mines in southeastern Pakistan. The cause of the accident remains undetermined. Also killed in the crash was the Deputy Minister and three other Afghan officials, two crew members and Sun Changshen, the Pakistan representative of the China Metallurgical Construction Company which operated the Sandaik copper mines in Baluchistan, Pakistan.
The Aynak Copper Tender
Subsequent to this unexpected tragedy, President Karzai appointed Dr. Mehfooz Nedai,15 a former school teacher. During his relatively brief tenure at the ministry, Minister Nedai placed much emphasis on the development of the Afghan industrial sector. Following Dr. Nedai as Minister was Mohammad Hakim Tuniwal, whose strategic emphasis was on the development of the cement sector. Since Tuniwal16 was unfamiliar with both mining and procurement, World Bank advisors took the lead to generate momentum around the tender of Aynak copper. Upon Minister Tuniwal’s departure, an Acting Minister was in place until at the end of 2005, President Karzai appointed Afghan-American Mir M. Ashan Sediq who remained in office until March 2006 when he was appointed by President Karzai to serve as the Deputy Minister for Energy and Water. Minister Adel took office in March 2006, implementing a highly centralized approach to ministry operations. He surrounded himself with staffer that were not necessarily technically qualified, and seemed to put into place a series of measures that ensured a closed-door process around the Aynak Copper Deposit tender. In his defense, the Minister had been given a task that no one in the country had ever attempted; his own lack of market training and basis of knowledge in technical aspects and Soviet industrial approaches could not have provided him the requisite foundation to conduct a fair open market tender.
Identification of Aynak Copper Deposit as a Priority Tender
As early as 2002, as part of the reconstruction effort commencing in Afghanistan, World Bank experts recommended to Government that the development of the Aynak Copper Deposit should be considered as a sector priority. Based on the March 2004, World Bank publication, “Mining as a Source of Growth”, which highlighted the potential for Afghan minerals’ resources to be soundly developed, the Aynak Copper Deposit was definitively identified as a primary economic development target for the Afghan Government to pursue. It was agreed that the tender of the Aynak copper deposit would consist of an Exploitation License and an Exploration
Dr. Nedai went on to an unsuccessful bid for President in an election that included Hamid Karzai as a candidate in 2005. 16 Minister Tuniwal was appointed as Governor in Patika Province and was assassinated there in September of 2006.
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License. The Exploitation License consists of approximately 28 km2 and surrounds the economic, proven reserve of the Aynak Copper Deposit. This area encloses two sub-economic copper resources, referred to as Darband17 and Jawhar.18 From an exploration perspective, the existence of Darban and Jawhar which contain copper mineralization in the same rocks as Aynak indicate the possibility of additional copper resources in the area. Additional exploration work will be needed to test this observation. In September 2005, a World Bank legal advisor and consultant to the Ministry of Mines prepared the initial pre-tender documents that would be required by the Government to contract a Transaction Advisor to prepare and implement the Aynak tender. The funding for this work would be from the Afghanistan Reconstruction Trust Fund (ARTF) while the World Bank would fund some advisors through the SDNRP grant funds starting in August 2007.
Tendering the Aynak Transaction Advisor Contract
The process required to fund the Aynak Transaction Advisor Contract required that the Ministry of Mines appeal to the Afghanistan Reconstruction Trust Fund (ARTF) which was implemented at the time in 2007 through the newly formed Ministry of Economy. Partnering with ARTF was another Government agent, ostensibly responsible for ensuring strategic procurement and optimizing the use of Government funds, the Afghanistan Reconstruction and Development Strategy group (ARDS); for a number of reasons including the personalization of relationships, ARDS
The Darband Copper Prospect is located 7 km east of the Aynak copper deposit. Geologically, the prospects are hosted in the same rock formations as Aynak and may contain additional copper. Exploration work to date has defined an uneconomic resource 665.7 thousand tons of material with a grade of 5.7% copper. This resource will require additional work to turn the resource into a reserve. 18 The story goes that the Soviets, using the Russian language, were unable to pronounce “Jawhar” which means “jewel” in the Afghan Dari language. Instead the Soviets employed the term, “Dzhavkhar”. The Jawhar copper prospect is located 5 km north of Aynak. ; Exploration on the property defined a resource of nearly 80,000 tons of material with an average grade of 0.74% Cu. Additional exploration work needs to be accomplished to determine the economic viability of this prospect.
The Aynak Copper Tender
firmly controlled how ARTF worked at that time and which tenders would and would not be implemented by Government.19 Heavy handed input from ARDS which described itself to Ministry of Mine leaders as the Government’s “strategic economic experts” resulted in highly personalized dealings, non-technical handling of important technical content and a general arrogance about which types of tenders would be supported and at what funding level by Government with virtual disregard of World Bank, Ministry and other funder priorities for development in Afghanistan. Two tenders would be conducted relevant to Aynak: one for a Transaction Advisor to implement the Aynak Tender Process; and a second for a Company to conduct the exploration and exploitation rights of the Aynak Copper Deposit. The first draft of the Aynak Tender sought a consultant to conduct the Copper Deposit Tender – the Transaction Advisor – was completed in October 2005, following the traditional tender template prepared by the World Bank as agreed by the Government and the ARTF. The document totaled more than 100 pages. The document was submitted by the Ministry of Mines, according to protocol, to the ARDS staff for review; despite several requests, for more than four months, no response was received from ARDS. The then newly appointed Minister, Mir Ashan Sediq, came to the Ministry in early 2005 and immediately inquired of ARDS and ARTF as to what the hold up in their response had been. From early 2005 through May 2005 a “back and forth” of letters and approaches was
In theory the establishment of the ARTF made sense. Willing donors would place their assistance funds in this trust fund and the Government, working with an international consulting firm, would conduct tenders and procurements in a transparent and efficient manner, optimizing use of Government funds and building Government capacity to procure. However, the lack of competency to conduct procurement at the Afghan government level was alarming. The initial consultant to ARTF was the British firm, Crowne Agents which, by all accounts had done an impressive job to establish and implement sound and practical procurement protocols, trained staff and provided easy access to its offices and expertise for non-procurement experts. However, in 2004-2005 when it came time for the renewal of the ARTF implementing contractor, Government, with strong World Bank input, determined that a much less expensive consultancy other than Crown Agents should be considered. A lesser cost consultancy had in fact bid for the work to run the ARTF and the award to manage the ARTF processes went to an Indian firm with experience as the procurement advisor to the railways in India.
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exchanged between the ARDS Afghan-American staff member who served as the Deputy to ARDS, and the Ministry of Mines. This exchange could never have been contemplated; it is incomprehensible that the Aynak tender, recognized as a fundamental to Afghan development went through such exorbitant micro-management by an ARDS procurement facilitator that resulted in devastating tender modification, specifically its level of funding. While World Bank staff estimated that between $600,000 and $800,000 was required to sufficiently fund a Transaction Advisor, following months of exchanges, the ARDS declared that he would not accept funding beyond $400,000. The ARDS individual had no technical basis for using this amount except that he had to manage a lot of Government funds and, based on his discretion, did not believe that the Ministry of Mines could manage more than this amount. Under mounting pressure from the highest levels of Government to pursue the Aynak Tender Process, neither the Ministry of Mines nor World Bank fought the funding level. The following point of dispute between ARDS and the Ministry of Mines was where the Notice Seeking Expressions of Interest for the tender notice would be published. The ARDS official would not accept a suggestive shortlist of mine journals and other international journals prepared with World Bank inputs from the Ministry of Mines. ARDS instead suggested Afghan Embassies around the world, and the Kabul Weekly and Kabul Outlook newspapers, circulated only in Kabul; the first issuance of the tender only went to the ARDS-preferred scope of publications. Later intervention by new ARTF leadership expanded the publication to include the suggestive list of mining and related journals which likely tender candidates would be reading. Seven firms submitted Expressions of Interest (EOIs) including those directly contacted by the World Bank to bid on the Transaction Advisor tender. Once these EOIs were received, however, as of the due date of January 30, 2006, only two of these firms actually submitted. The two bids were: Behre Dolbear (BDB), Denver, Colorado. One of the oldest, continually operating, mineral industry consulting firms in the world, which has a large staff of geologists, engineers, financial analysts, environmental
The Aynak Copper Tender
scientists and social scientists with ten offices throughout the world. The bid amounted to approximately $1 million. Gustavson Associates, Boulder, Colorado, a 26 person office that focuses on oil and gas appraisals and reserves evaluations and qualifying reports for the mining industry. Gustavson Associates completed some short-term work on oil and gas assessments in Afghanistan in 20032006 and work in Central Asia and the FSU. Gustavson Associates bid amount was approximately $400,000. An Evaluation Committee consisting of an ARTF representative, a World Bank consultant, and approximately 8 individuals from the Ministry of Mines was formed to evaluate the technical proposals. ARTF assisted by the evaluation committee evaluated the financial proposals. The selection criteria developed by the World Bank and Ministry of Mines with ARDS and ARTF acknowledgement and agreement that the Aynak Transaction Advisor would not only be selected based on price. The bid consisted of a technical proposal and financial proposal. Each set of documents was evaluated separately. The technical evaluation was completed prior to the evaluation of the financial proposal. The tender document included a clear evaluation formula where the technical proposal held a much greater weight than the financial proposal. Now public information, in the analysis of the technical proposals completed by the evaluation group, Behre Dolbear received a score of 94% while Gustavson Associates received a technical score in the 60% range. Nonetheless, once the overall evaluation formula was applied, Gustavson Associates received the bid since their financial proposal of $400,000 was less than half of the BDB financial proposal. Of the 10 references supplied by Behre Dolbear, five projects were cited as ones that BDB brought to successful conclusion with the privatization of state owned mine enterprises. Of particular interest were the results of a sixth project, the tender of gold properties in Nigeria. BDB had won but pulled out of that project due to corruption in the process. More importantly for this tender than that of BDB’s technical understanding and experience with copper mining worldwide
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was its lengthy experience in preparing and conducting mine tenders throughout many countries including Jordan, Russia, the Philippines, Mongolia, Chile, Australia, Brazil and China. Of the 10 references supplied by Gustavson Associates, the company brought two projects to a successful conclusion resulting in the privatization of state-owned enterprises. However, in those two projects, the company was not involved in all the tasks as required in the terms of reference as required under the Aynak transaction advisor tender. Gustavson Associates had never conducted a complete mine tender. Gustavson Associates was awarded the contract to serve as the Transaction Advisor to implement the Aynak Copper Tender based on least cost.
Contracting the Transaction Advisor to Implement the Aynak Copper Tender
One of the first actions conducted by Minister Adel as he took office in March 2006, was to sign the World Bank $30 million SDNRP grant that would be channeled to his Ministry toward strengthening institutional arrangements in the sector. These funds could have been used to support a more transparent and robust tender processes for Aynak copper – but were not. The second major action required by the new Minister was to negotiate the Aynak Copper Transaction Advisor Contract with a US firm, Gustavson Associates. The negotiations commenced in April 2006 in a format where Minister Adel dominated the talks as lead negotiator along with 18 members of his staff. At this time, the Minister told the Transaction Advisor representatives to return home and to return in two weeks; the World Bank advisor to the MoM reviewed the contract line by line and attempted to explain its contents to the MoM staff. The tone of these negotiations in which an author of this Paper was present, was extremely adversarial on the part of the Minister. He did not hide his dissatisfaction with earlier oil and gas work that Gustavson Associates conducted or that he lacked confidence in the firm’s ability to effectively work in Afghanistan. In addition, new commercial tax laws were not sufficiently understood by either the Ministry or Gustavson Associates; no one could define how taxes would be collected from the firm which resulted in prolonged negotiations. Negotiations were completed in June 2006 and the Transaction Advisor work commenced in August 2006. The original term of the contract was for 7 months which was ultimately extended.
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Transaction Advisor Responsibilities
The work of the Transaction Advisor was defined as a seven part process. 1. Develop a Tender Plan for the Aynak Copper Deposit; the Plan to be approved by the Minister and Inter Ministerial Committee, 2. Prepare the Aynak bid documents including a model contract, 3. Solicit Expressions of Interest, 4. Evaluate and Pre-Qualify Bidders, 5. Conduct Due Diligence of the bidding firms including the opportunity for bidders to visit Aynak and gather information from the Government, 6. Receive and evaluate the Bids with the use a pre-approved process, and 7. Negotiate and Award the Aynak Copper Mineral Rights. Observations. This work was to have been carried out by a team from Gustavson Associates that included geologists, mining engineers, financial specialists, environmental specialists, and legal support. While many individuals were promised to implement this activity as Transaction Advisor, in fact, only one regular representative participated – a geologist. He was never fully based in Kabul during the contract and did not have colleagues as part of the Transaction Advisor Team as promised in the Gustavson Associates proposal. Legal Counsel hired as a consultant to Gustavson Associates participated to a much lesser extent. The funding for the Transaction Advisor Contract was estimated by World Bank experts to require approximately $800,000 but that the amount could be as high as $1 million. Through the Afghan Government procurement agency, the sum made available to support this contract was $400,000, a substantially diminished funding level than should have been available. As a result only 2 companies submitted bids to conduct his work. It must be noted that during its time serving as the MoM Transaction Advisor for the Aynak Tender, Gustavson Associates was also providing advisory to MoM on identifying potential gas markets as part of an Asian Development Bank contract
The Aynak Copper Tender
as well as working with US Agency for International Development (USAID) funding to assess gas production opportunities in northern Afghanistan. The World Bank and ADB work required direct reporting to and approval by Minister Adel; USAID work did not. Whether attributed to heavy handed decision-making by the Ministry of Mines, lack of oversight by the World Bank and ARTF or general neglect of the sector by the Afghan Government and international community, to select a Transaction Advisor for a project defined to be the largest, most economic and socially influential in the history of the country “on the cheap” resulted in irreversible lost economic and social opportunity.
The Tender Plan and Process
The Contract terms for the Transaction Advisor, based on the Request for Proposal (RFP) prepared by World Bank consultants, provided an overall framework for what the details of the tender plan should look like. As a starting point, the Transaction Advisor was directed to (1) conduct due diligence of the fiscal and regulatory regime of the Aynak Copper Deposit as a potential tender property and to (2) consult with the British Geological Survey (BGS) on geologic data support in order to define a Tender Plan. The Tender Plan would then outline the preferred course of actions across the proposed five-month program to likely include: Preparation of a tender methodology and evaluation criteria by which bidding companies would be pre-qualified and by which final bid submissions would be scored. Development of guarantees and bond posting requirements and corresponding procedures for same. Determination of which individuals would actually participate in the evaluation and evaluate bid submissions as well as the development of rules for evaluation including actions for how consultants to the process would support the evaluation phase. Development of required inputs/outputs of selected Afghan Government agencies throughout the Aynak Copper Deposit tender process Observations. An essential but poorly defined guideline set out in the Transaction Advisor Terms of Reference was that, in addition to close collaboration with MoM it should interact with other Executive Branch offices of the Government. The earlier determined underlying need for this interaction was to ensure that relevant branches of the Government were consistently part of the tender process, gained a reasonably detailed
The Aynak Copper Tender
understanding of the impact of the Tender and could contribute to the process as it progressed ensuring that various Government agency and ministry concerns would be addressed in the evaluation of the bids. The Transaction Advisor did not reach out to other branches of Government and in fact was ordered by the Minister not to extend its reach. Ironically, a credible array of Afghan public and private sector representatives have expressed concerns to the effect that if more government bodies had actually had more participation in the process, as legally prescribed, opportunities for corrupt practices would have increased. While this may be the case and presents a valid concern related to how the Afghan government is operating, it does not allay concerns that the Aynak tender was closed and firmly controlled by one government agency with virtually no oversight. In implementing the legal requirement to include other government agencies, four fatal flaws emerged: 1-The Transaction Advisor had only ever worked with the Ministry of Mines and was not familiar with other Government agencies or ministries or even the overall structure of the Afghan Government relevant to the Aynak Copper Tender activities. The Minister assured the Transaction Advisor that he was regularly meeting with other government agencies and that it was not the concern of the Transaction Advisor. 2-The Transaction Advisor relied heavily on mine engineers and technical staff with virtually no consistent legal advisory, project finance or government relations staff that would ordinarily be well-versed in this approach to tender processes, notably in a nascent market, to reach beyond the Ministry of Mines. 3-The Minister of Mines in office by the time the Transaction Advisor took on its role had no meaningful interest or intent to engage other government offices. The Minister began to meet with Ministry representatives behind closed doors in early 2008 on an irregular basis. The other government representatives were low and mid-level; not until pressure to increase government participation emerged in June 2008 were higher government officials invited into the process.
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4-The Transaction Advisor relied on the Minister’s control of this requirement in what appears to have been an inexperienced and ignorant approach to doing business in Afghanistan. And so, the Tender Plan that the Transaction Advisor, Gustavson Associates, submitted to the Ministry of Mines, per its contract requirements, was subsequently approved by the Minister of Mines. The plan did indicate the need for interactions with the other Ministers. However, implementation of same was fully conducted by the Minister who took a heavy-handed approach as to which Government agencies he would invite to meetings and which level of representation from the various agencies would be invited – generally mid to lower level officials. During its initial information gathering trip in August 2006, Gustavson Associates’ representatives did attempt to set up meetings with the government agencies that comprise the Inter-Ministerial Committee. The input of the other ministers that have a vested interest in mineral development include the Minister of Finance, Minister of Economy, Head of the National Agency for Environmental Protection, Minister of Foreign Affairs, and the Minister of Commerce. The Minister strongly informed the Transaction Advisor that it had no need to meet these individuals this directive was the first of many to come from the Minister that served to reduce the transparency of the Aynak Copper Deposit tender process. Minister Adel states that regular meetings of the Committee were conducted and, in fact, they were. Over the course of approximately five months, committee meetings were conducted when he called them and were not regularly scheduled; they were conducted in his office at the Ministry of Mines behind closed doors with no Transaction Advisor participation and with no note-taking or minutes; they were conducted with him stating the agenda and providing his view of and preferences for the transaction details20. It was only toward the very end of the tender process, when increasing publicity was being given to the Aynak Tender, that a few higher level
Various participants reflected on the meetings as “very interesting” but did not convey that they were actual participants in the tender, rather, that they were being updated by the Minister.
The Aynak Copper Tender
meetings of various ministers were called. Neither the Transaction Advisor or World Bank consultants were invited – or permitted – to be present on the topic on which they had been actively engaged. No Afghans who were part of the Tender Process were permitted to speak in the meetings, other than the Minister. Not one Minister opposed the process, likely for lack of full understanding of the process, but more likely encouraged by the fact, as suggested by President Karzai, that Afghanistan was now entering the world of international tenders and world class bidding. In effect, heads were turned and Minister Adel emerged as more of a hero than a manipulator of the process.
The Aynak Copper Bid Package21
The Bid Package prepared by the Transaction Advisor and approved by the MoM included: 1. Instructions to Bidders describing in detail the bidding procedure, the content required to submit a bid, the evaluation criteria for bid review and the overall process for bid submission including the exact date, time and place to submit the bids. 2. Rules for Negotiation detailing the process by which the Government would negotiate with the successful bidder including time limitations and extenuating factors that might either delay or cancel the negotiation. 3. A draft Model Contract prepared by Gustavson Associates that included broad terms and conditions under which the successful bidder would negotiate. 4. Summary of fiscal and regulatory regime aspects taken from relevant overarching instruments including the 2005 Minerals Law, Extractive Industries Tax Provisions from the draft Tax Code, Investment Law, Environment Law, and Customs Law provisions that were in various stages of development.
Proprietary information is not included in this review, nor are conversations directly conducted during the Evaluation Process, also deemed to be proprietary and confidential in a tender setting.
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5. Technical Data. All relevant technical data on the Aynak Copper Deposit.
As for technical data to be included in the Bid Package, the British Geological Survey (BGS), for almost three years, had been working with the Afghanistan Geological Survey (AGS) to develop data bases on key deposits, including Aynak. In collaboration with the World Bank as early as 2004, the BGS worked to gather relevant Aynak materials and in 2006 established a web site with all the pertinent materials. All the information was provided to the bidders in electronic format on portable hard disks. Unlike the advertising for the Aynak Copper Transaction Advisor consultancy, the advertising of the actual Aynak Copper Deposit bid was able to be conducted by the Ministry of Mines – not the ARTF. Both the initial Request for Expressions of Interest (EOIs) and the final Request for Tender were published by the Ministry of Mines in major international mining publications such as the Mining Journal. From these postings, interested parties learned about how they could view the detailed information at the BGS website. The Transaction Advisor used “PR Wire” which is a wire service that distributes press releases.
Solicitation of Expressions of Interest to Bid for Aynak Copper Deposit Rights
As part of the Transaction Advisor contract terms, a dedicated Interministerial Committee was to approve the Bid Package. This approval would trigger the Transaction Advisor’s preparation, designing, launching and managing of the overall tender process. All tender processes were to be based on “international open-bidding process” standards. The Transaction Advisor published the Expression of Interest (EOI) in major international mining publications. Thirteen companies submitted Expressions of Interest. Observations. Receipt of the Expressions of Interest was conducted by the Ministry of Mines although the original tender plan called for the Transaction Advisor to receive the EOIs. Once received, the Minister took control of the documents, locking them in his office. The Minister assumed complete control over the documents and the release of the documents. This created
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major transparency problems as the facilitators were not allowed to become familiar with the material before presenting the information to the evaluation committee. Originally, there were no constraints regarding the size of the companies submitting bids. However, as later indicated, during the evaluation process, it was determined by the Minister of Mines that the smaller companies would be dismissed as he believed that they lacked the financial and technical capacity to bring the project to completion.
Pre-qualification of Bidders
In order to conduct a pre-qualification review of bidders, Minister Adel appointed 14 members that included Ministry of Mines’ staff that encompassed the Afghanistan Geological Survey, Deputy Ministers, and other ministry staff (see box). By all observations, the members were subservient to not only the Ministry of Mines but to the Minister himself. In addition, a German trained geologist and mine sector advisor to President Karzai was selected by Minister Adel Companies that Submitted EOIs for and agreed to by the international Aynak Copper advisors to work on the project. Bahana Consortium, Australia Non-voting members of the group China Metallurgical Group, China who acted as facilitators to the tender General Minerals Corporation, USA process included an economic Green Mountain Mine Management Company, Iran geologist with the BGS, an economic Hindalco Industries, Ltd., India geologist with Gustavson Associates Hunter Dickenson, Canada and an economic geologist and the Kazinvest Minerals, Kazakhstan K Kares Co., Ltd, South Korea World Bank Technical Advisor to Phelps-Dodge Corporation,* USA the Ministry of Mines. On October 28, 2006, 13 Expressions of Interest (EOI) were received by the Ministry of Mines from companies interested in developing the Aynak copper deposit. In order to show no favoritism on the order of the evaluation the minister suggested a random draw where each package was given a number. Members of the evaluation group drew the numbers and the EOIs were set in the queue. Minister Adel ordered that, instead of opening
SK Mining Invest and Development, South Korea Strikeforce, Ltd., Russia Tyzhpromexport, Russia Zijin Mining Group, China
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all EOIs at the same time, they would be opened in accordance with a draw to determine evaluation order. The Transaction Advisor developed a scoring matrix to assess the EOIs based on 100% total score which consisted of three categories: 1. technical capacity (45%) – broken down to an evaluation of technical staff and corporate history; 2. financial capacity (45%) – broken down to market capitalization or demonstrated ability to raise capital and experience/history of financing large mine operations; history of financing large copper development; and, 3. work in the region (10%). Each subcategory of the technical and financial category was given a weight and was scored from 1 to 5 where 1 indicated poor and 5 indicated excellent. Each of the 14 Evaluation Committee members scored each company individually. The evaluation of the companies started on October 29, 2006 and continued through November 7, 2006. The Evaluation Committee met daily from 9am to 5pm with a 1 hour lunch break in the first floor main conference room of the MoM building in Kabul. The first two days of the Evaluation Committee work consisted of a refining the scoring methodology, training the evaluators and conducting mock evaluations – “evaluation training on the job” .The actual scoring of the EOIs began on November 1 and continued through November 6. The Evaluation Committee was generally able to evaluate two EOI submissions per day. No names were used when the data was presented to the evaluators. On November 7, the Evaluation Committee members’ began to tabulate the results. Tabulation
Figure 1: Analysis of EOIs
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consisted of a dual data entry system. Both the Transaction Advisor representative and World Bank consultant maintained the summary spread sheets who would also address discrepancies as they arose. Each individual evaluator would bring his “ballot” to the “polling booth.” At each polling booth which consisted of two computer stations in the ministry conference room, an outside observer would assist and observe the entry of the scores from the evaluators. The individual evaluator would read his score and the data was entered into a spreadsheet. Once all data was entered, the international advisors began the calculation of scoring and final analysis. The companies fell into three categories based on size, which for the Evaluation Committee members became known as the “big fish”, the “medium fish”, and the “little fish”. The five large companies scored between 98 and 82, the medium sized companies scored between 45 and 60, the smaller companies scored between 0 and 20. The Committee found that, based on its established criteria for evaluation, “it was obvious that the four companies did not qualify. These companies included: General Minerals
Corporation, USA; Green Mountain Mine Management Company, Iran; K Kares Co., Ltd, South Korea; and, SK Mining Invest and Development, South Korea.
Following some discussion, the Committee selected the top nine companies as opposed to the top three companies as proposed by the Tender Plan. Although such a large selection of companies to compile the short list would require considerable work for the Evaluation Committee, it was agreed that this approach would provide greater exposure of Afghanistan to the international mining community. The companies selected to submit bids for Aynak included (Listed alphabetically by company): Bahana Consortium (Australia) Metallurgical Corporation of China (MCC) (China) Hindalco Industries, Ltd. (India) Hunter Dickenson (Canada) Kazinvest Minerals (Kazakhstan) Phelps-Dodge Corporation* (USA) Strikeforce, Ltd (Russia) Tyzhpromexport (Russia)
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Zijin Mining Group (China) Nine of the companies that submitted an EOI were invited through the use e-mail to continue the tender process and to submit a bid for the rights to the Aynak Copper Deposit. Three companies withdrew from the bidding. They included Hidalco Industries of India, Tyzahpromexport of Russia and Zinjin mining of China.22 Observations Despite having a legal advisor and available financial advisors to assist with the evaluation process, the Minister did not want this participation and the Transaction Advisor did not push for it; thus, and this is a critical point, no commercial experts participated in the evaluation of EOIs. This approach continued into the latter phase of bid evaluation and would subsequently have lasting impact on the contract development as most bidders included non-core terms beyond technical aspects of copper, i.e., financial guarantees, community development projects, transport projects, power and heatgeneration projects. The Committee membership did not technically represent the breadth of the Aynak Copper tender proposals. In addition, as most proposals had significant tender inclusions on power development, rail and other transport and community development, it would have been expected that some technical expertise on these topics would also have been included in the Committee, but that was not the case. With respect to weighted average scoring method, it appears that neither the Minister or Committee members fully understood the method. Although each of the 14 members individually scored each company, Minister Adel sought to review each Evaluation Committee member’s evaluation sheets. The facilitators vigorously opposed the request and insisted that all evaluations remain individual ballots and no undue pressure be put on the
Hindalco Industries was in the process of developing other mines and made a corporate decision not to pursue the Aynak. Tyzahpromexport would not return calls and never indicated why they withdrew. .Zijin, the company indicated that the Government of China did not want them to participate since they would be in competition with MCC.
The Aynak Copper Tender
evaluators to reconsider their scores. After some lengthy discussion, the Minister agreed.
Due Diligence of the Bidders for the rights to the Aynak Copper Deposit
The expectation of the “due diligence” phase of the Tender Process was that several things would simultaneously transpire: (1) that the Transaction Advisor, working with the Ministry of Mines, would conduct due diligence on each of the six companies that indicated that they would bid for the deposit rights; (2) that the British Geological Survey (BGS) had prepared all relevant geo-science data and a data room in Kabul located at the Afghanistan Geological Survey (AGS) where bidders were invited to visit and review materials, speak with the BGS and AGS representatives, etc. and (3) that the bidders would conduct their due diligence by visiting Afghanistan, the Ministry of Mines, the Aynak site and inquiring on various levels among government, other international firms and various agencies facilitating private sector investment in Afghanistan. In order to distribute the data concerning the Aynak Copper Deposit, each Bidder was provided a portable hard drive with more than 80 gigabytes of data. This disk was shipped to each company by courier from Kabul in early January 2007. This disk not only contained all relevant technical data, but applicable laws, and logistical information about travel visas, security, lodging, and entertainment in Kabul, and a site visit; the Tender Plan originally called for the companies to visit Kabul in January of 2007. The visit dates were pushed back to April because of the likelihood of adverse winter weather and the inability to provide the tender package on schedule. In order to assist the company representatives, at least one staff member from the MoM was assigned to each company as assigned by the minister. The companies were divided into groups of three. The schedules were prepared by the Technical Mining Advisor and approved by the Minister and the Transaction Advisor. The objective of the visit was to provide each company the opportunity to make a site visit at Aynak and to talk with each Ministry represented in the Inter-ministerial Committee and to collect sample and first-hand information about the deposit. The late Director of AGS, Abdul Wasai, who had worked at the Aynak site during the 1980s, led
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each excursion. Each company was escorted to various ministries to addresses issues including: taxes, security, environmental constraints, social development and other factors that were to be included in their bid. Observations The fact that due diligence was not conducted on bidders and that actual track records of bidders, as opposed to their own informational materials, were not known to the evaluators substantially reduced the credibility of the process. No independent evaluation of the bidders’ past performance was considered. In addition, the rapidity with which the actual tender work was happening left Ministry and donor representative officials to recognize and appreciate the more than four years of work that the BGS staff in Kabul had undertaken to reconstitute important geo-science and other technical data that was essential in the preparation of the Aynak Data Packages. The BGS prepared this information while training AGS staff which consisted of all the archived Russian data and was provided in user-friendly electronic format. For the Transaction Advisor to have suggested January travel to Afghanistan seems to have been shortsighted and reflected either a lack of understanding of the country’s annual climate conditions or an oversight in an attempt to meet rapid tender timing that ultimately delayed the tender process for a solid four months.
Receipt of Submissions and Evaluation of the Bids
The due date for Final Bid Submissions for the Aynak Copper Deposit rights was May 28, 2007. Five Bid Submissions were received. The Bahana Consortium from Australia opted out of the bidding. After their due diligence visit, the group determined they did not have the capacity to develop the infrastructure that would be required to bring the project on line in the timeframe required. The other five companies had financial resources to complete the project and infrastructure. This is especially true of MCC which is 44% owned by the Chinese government. On May 29, 2007, the five bid submissions were received at the Ministry of Mines. The Minister decided that the earlier Evaluation Committee membership of 14 members should be expanded to 20. And so, on the same day the bids were received, 40 Afghans from the Ministry of Mines were
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presented to the World Bank consultants for a three day training course on how to conduct bid evaluations. Some of the members who worked on the EOIs were retained; some were let go and replaced by new members. Minister Adel expressed that this way anyone who was possibly “corrupted” was replaced – by him. The new committee was appointed by Minister Adel. Missing from the new Evaluation Committee were any representatives from other ministries of the Inter-ministerial Committee. The reason given by Minister Adel for this more narrow composition of the Committee, now predominantly MoM staff was that he had personally been given full authority from President Karzai to conduct the Aynak Copper Deposit bid evaluation as he – the Minister – saw fit. According to the Transaction Advisor’s Terms of Reference, included as part of its contract terms (i.e., to which MoM agreed), all documents related to the bid submissions were to be controlled and held by the Transaction Advisor. The agreed upon intent of this process was to ensure that a third party would be in charge of the documents and their security and that the Transaction Advisor would be responsible for any breach of that security. However, immediately upon receipt of the Bid Submissions, counter to what had been previously agreed, the Minister took complete control of all Bid Submissions, locking them in what he described as “a secure file cabinet” to which he alone had the key. One can only speculate why this was done but these actions served to shock officials working outside of the Ministry as well as his own staff and donor observers. At the very least, there exists the possibility by appearance that the Minister or his staff could have tampered with the bids; but more indications suggest that highly confidential information presented by some bidders may have been passed to certain other bidders. Gustavson Associates had prepared an evaluation matrix to score the Bid Submissions. As with World Bank procurement guidelines, the procedure was to first evaluate the Technical aspects of the proposal (75%) followed by the evaluation of Financial aspects of the proposal (25%). Each component had “sub-components”. The technical proposals consisted of the technology employed by the companies, the environmental protection program, the social/economic development program, and proposed infrastructure
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development. The weight carried by each of the technical components and the financial component as decided by the IMC and was as follows: Technical Mine Development Program 20% Environmental Program 20% Social/Economic Development Program 25% Infrastructure Development Program 10% Financial Benefits to Afghanistan 25% The bid evaluation process was conducted over the course of four weeks and was conducted in the MoM main conference room on the first floor. Minister Adel set the ground rules that (1) no work could be done outside the MoM conference room and when any work was done and that (2) Minister Adel would have to be present at all times during evaluation work. The timeline to complete the evaluation was somewhat fixed by the Tender Plan. The plan called for 30 days time frame to complete the evaluation of the bid submissions. Originally the Tender Plan called for the top-scored 3 companies during the EOI phase to be invited to actually submit bids for the rights to the Aynak Copper Deposit. As earlier indicated, nine companies were invited to submit Bids and five companies actually submitted Bids. Because of contractual constraints, the timeframe for evaluation of the five bids – rather than the intended three – remained the same at 30 days. While this would require additional preparation time by the facilitators, it was not deemed by them to be impossible. Because of the Minister’s schedule where he had other duties including weekly Cabinet meetings, conducted on Mondays and the half-day work schedule of the Afghan Government on Thursdays and no work on Fridays, no more than five working days per week could be utilized for bid evaluation. Added to this, on a daily basis, when the Minister would be called to an unexpected meeting or to take a phone call, all evaluation discussions would stop. Moreover, not all Evaluation Committee members could be present at all meetings at all times. This created additional lost days, again, within the 30 day timeframe. There is no record of actually how much down time there was, but one international facilitator noted that “it was substantial.” Evaluators rarely
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commented on any points made. When they did try to express an opinion, they were verbally cut off by the Minister and prevented from speaking. On a daily basis, the main dialogue was conducted amongst Minister Adel his three Deputy Ministers. On one occasion, the Minister of Finance sent over two western observers to attend the meeting. The Minister turned them away. Bid Submission Content. The Evaluation Committee members found that on the whole, submissions were very comprehensive containing between 150 to 300 pages of detailed documentation. No page limit was set and each company prepared their documents as they saw fit. Each proposal was required to have an Executive Summary in Dari that would summarize the main points of the Bid. As a result, each member of the Evaluation Committee could obtain an overall understanding of document. The Bid documents were to be in English so that the Transaction Advisor and those assisting could read the proposals in detail. The proposals were also required to be presented in Adobe Acrobat format, they could be searched and different parts of the proposal could be presented to the evaluators. Financial Proposals. One task required of the Transaction Advisor was to analyze each company’s financial data in order to determine if mining costs were in line with international standards. In Gustavson Associates’ original Tender Plan, their financial team member was to be in Kabul to assist in the financial review. Because of general security concerns in Afghanistan at the time and the added cost to Gustavson Associates, the financial analyst was not present for the evaluation. Therefore, in order to accomplish the financial review, the Transaction Advisor planned to provide the financial data to their analyst via the internet since all data was provided in an electronic format. However, Minister Adel, not a computer user, refused to allow transmission of that data to the financial team member. Without the Minister’s approval, the Transaction Advisor nonetheless managed to obtain the financial proposals and forwarded the information to its financial analyst. The analysis of the financial proposals was part of the due diligence process. It was essential to determine if mining costs were in line with international standards; if the royalty stream of payments was accurate; and that the price of copper in all
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proposals was the same so the royalty stream and financial benefits would be consistent Observations 1. Increase and Change in the Evaluation Committee membership. It appears that there was virtually little planning from the commencement of the tender process as to which individuals would serve on the Evaluation Committees, how and whether they would be trained and how their work would be monitored and evaluated – beyond the Minister’s discretion. This should have been a clearly resolved issue from the beginning of the process over which the Transaction Advisor should have taken the lead. While there might be some merit to increasing the number of evaluators, a serious problem with this approach was that the new bid evaluation team members did not understand the social, economic, technical, financial or environmental issues involved with a project as complex as Aynak. Minister Adel’s assertion that he had President Karzai’s authority to appoint whomever he thought best to serve on the Evaluation Committee was an entirely false one. This became apparent when the final decision for the tender was made by the Cabinet as a full extension of the Inter-Ministerial Committee. The Transaction Advisor nonetheless failed to raise any meaningful level of awareness to Government, donors or legal authorities when on its face, this discretion goes against the international tender standards for which the Transaction Advisor was retained. This approach also directly contravenes the approved 2005 Minerals Law. The Transaction Advisor failed to fully research or to understand the legal framework in which this tender process was being conducted, namely that due to the size and scope of Aynak, as is the case with most large projects under tender in Afghanistan to date, the Cabinet will have the final vote on whether a tender process should move forward or not. In fact, considerable power rests within the Cabinet and as part of that the High Council of Economic Affairs which consists of the key economic ministers, including the Minister of Mines. It would have been consistent for the Transaction Advisor to work with Cabinet members that would ultimately be engaged in this tender process. Because the Transaction Advisor did not understand the institutional framework of the tender, it failed to fully brief the Cabinet, leaving that
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work to the Minister who was adept and able to present his side of the process, himself not an expert in world class market-based tenders. As stated above, the assertion that Minister Adel had full authority make the decision to award the mineral license for Aynak was false because the final decision was made by the Cabinet after it was provided with the inconsistencies of the evaluation. Observers from the IMC were present during the evaluation proceedings, but had no say or vote in the proceedings. This was in direct contradiction to the Minerals Law. It is at this point where decisions were made, that made the process less than transparent and the concept of “apparency” – which can be defined as going through the process saying the right things, but knowing the outcome has been predetermined – shadowed the proceedings. 2. Minister Adel as Chair of the Evaluation Committee. By acting as chairman, the Minister effectively squelched any open discussion of competing proposals; summarized each day’s discussion with his own view; and, finally, restricted the preparation and discussion time. As the evaluation process progressed, considerable criticism was given by the MoM Deputy Ministers participating on the Evaluation Committee of the Western companies and the Russian Companies. At one point one of the Deputy Ministers suggested that the Phelps Dodge bid should be rejected because he was aware that the company had undergone a change in ownership structure and had become Freeport-MacMoRan23. While Minister Adel did not assign points to the various categories or “score”, he served as a constant presence during scoring and all evaluation processes and as one international participant described as “a forceful Chairman of the Evaluation Committee”. The international facilitators were advised by Minister Adel that they were not to raise any negative aspects with respect to the MCC (China) bid submissions. At the same time, the Minister spent hours identifying negative aspects of the bid submissions from Western nations. 3. Public-Private Partnerships Will Have the Advantage. A major observation of how the Tender for Aynak copper rights progressed was that purely private firms working along strict market operating principles were not as well positioned as those firms that could offer benefits that generally amass when
Phelps Dodge became part of Freeport MacMoRan in March 2006.
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partnered with government or state affiliates. Here, a noticeable division between how bidders from “the West” fared against bidders from “the East.” The companies coming out of the East displayed a more acute understanding of the Aynak deposit, knew its history – many had actually explored the site in the early 2000s, and were able to provide as part of their tender, additional development assistance that would be funded either by their sister-companies or their governments. For infrastructure development, the winning bidder, MCC, offered the construction of power generation, rail and roads and community development. As a state company, it was able to include Chinese Government Assistance funds as part of its proposal, almost as if a “Marshall Plan” for Logar. Western private firms did not have this opportunity. Western companies recognized the need for the development of additional power, but took the position that they would study the problem and provide the required power either financed by debt or through donor programs. They could not provide an absolute figure since that figure didn’t exist. Importantly, despite all of the media attention to the MCC proposal to support infrastructure development, no more than 10% of the overall bid values covered this. All bidders except one company of Asian origin provided similar information indicating the standard methods of providing Environmental Impact Assessments. One of the Eastern companies failed to adequately address the issue in their proposal. Only two basic paragraphs covered the statement saying that the firm would comply with environmental standards. Another Eastern Company went into great detail quoting acceptable EPA limits of toxic elements such as mercury, selenium, cadmium, etc. – even though those trace elements are not present in the host rocks. All of the Eastern Companies scored higher on the environmental portion of the proposals than the Western companies. On the social/economic development portion, Western companies focused on strengthening the educational system, working with Logar Province to meet their needs, and building infrastructure as necessary utilizing their own funds or perhaps working with the IFC and other donors. One of the more progressive approaches by a Western company was to develop a Technical Institute for mining patterned after and partnered with the British Columbia
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School of Technology. This would instantly have infused today’s knowledge and approach to mineral development into the Afghan society. One of the Eastern companies proposed building 3 mosques, providing 5 scholarships per year for engineers and geologists to study in its home country and a number of other specific programs. One of the more interesting discussions led by the Minister at the Evaluation Committee was whether 3 mosques was enough. 4. No Standard Financial Proposal Formats Required. As part of the Transaction Advisor’s Terms of Reference no standard format for providing information on operating costs, mine life, production rates, and other factors that define the financial viability of the proposals was included. Each company identified a copper price that it believed was feasible or would sell the best for the evaluation. For example, one company selected a high price of copper so their 18% straight line royalty payment would look feasible, providing a very high revenue stream to Afghanistan. Because of the lack of required format for financial information, the content of the financial proposals submitted by each company was so varied that it was impossible for the financial analyst to make any comparable analysis amongst the proposals. As a result, no critical consistent evaluation of mining costs was possible to carry out. To fill this gap, a sliding scale royalty rate was a very progressive concept put forth by World Bank. High royalty when commodity prices are low can cause projects to become uneconomic. Whereas, when commodity prices are high, low royalty rates mean that the Government fails to gain a fair share of the value produced from the deposit. A sliding scale royalty was proposed. . A sliding scale royalty provides a higher royalty rate when metal prices are high and a lower royalty rate when prices are low. This insures that the tax take for the government remains at a constant rate despite metal prices and insures that the operations are profitable when metal prices are low.
5. Anomalies in the final scoring. All bids were completed in a very professional manner. All proposals had advantages and disadvantages in the development of Aynak. No one individual company showed an advantage in every evaluation category. Yet, in the final scoring, MCC received a total score greater than 90% while the other companies clustered in the 70 percent range. This was caused by a number of individual evaluators who gave MCC a
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perfect score in all categories. This anomaly does not coincide with a critical evaluation of the proposals as shown in figure 2.
Scatter Plot - Evaluators
Hunter Dickinson Kazakhmys MCC Phelps Dodge Strikeforce
0.0% 0 5 10 Evaluator 15 20 25
In June 2007, a group of tribal leaders from Logar Province visited Kabul and stood in front of the Parliament Building, met with the President and the Minister of Mines to protest the possible award of the Aynak Copper Deposit rights to a Chinese firm. The Leaders made clear that they sought to safeguard this precious resource, the surrounding environment and community residents. They also indicated that should such an award be made, that they could not guarantee security for the workers of the company.
Impact of China’s Dominance of Natural Resource Development in Afghanistan
When MCC was awarded the contract to develop Aynak, the ties between the Asian neighbors was intertwined for the future. China will have greater influence in the region with the development of the transportation corridor between the two nations. China’s influence will dominate Logar Province and the surrounding region. However, such dominance comes with certain implications. Salutary aspects of the relationship: China produces much of the consumer products used by the Afghan people. While most Westerners would scoff at the often miserable levels of quality, for millions of Afghans living at subsistence levels, having the pot, pan, space heater or stove is what counts. Thousands of these Chinese products flood the Afghan stores and markets providing inexpensive and affordable goods for most of the Afghan population. Also, Afghan businesspeople are in China doing trade and developing business relationships at higher levels as well, extending from agribusiness to electronics and telecommunications. China produces the necessities that Afghans can afford. This is the highly advantageous side to the broad economic relationship between Afghanistan and China. Also, this side is part and parcel of the legitimate, free and open market economy in Afghanistan. As long as the market economy holds sway, both countries benefit from the exchange. The economic and political dimension: When the relationship ceases to be market economy-driven and a government becomes involved as investor, business partner and even final arbiter, an uneasy confusion between the economics and politics of this essential geopolitical relationship emerges that can create longer-term negatives for Afghanistan’s development. The big industrial Chinese companies are closely connected to the Chinese government and so do not always operate within the fiscal or operational discipline of the open
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marketplace. This is true for the mines and minerals sector as proven in the Aynak copper rights’ competition. Chinese companies are not subject to a Chinese version of the U.S. Foreign Corrupt Practices Act (FCPA); China is in a position to dominate the future development of the Afghan mining and natural resources sector because Chinese firms can package their tenders to include what Western countries refer to as “foreign aid” – President Karzai and many in the Cabinet understood this when they initially and clearly stated that the award should go to the companies whose people and governments were making vast sacrifices in blood and treasure for the Afghan people. But this signal policy pronouncement was overwhelmed by the modus operandi of tender process implementation by the Minister of Mines and the incapacity of the Western governments to focus on the impact of the tender as it relates to the overall political economy of Afghanistan. If the foreign aid of the Western countries was in any way, shape or form incorporated into the bids of their home companies, formally or informally, they would win the competition, hands down. That’s because, in addition to winning financially, the past performance, the track record – something assiduously prohibited by the Minister of Mines from entering into the Aynak bid evaluation process – of the Western companies on pivotal social, environmental, training/employment and political issues, is so far superior to the Chinese record that Western companies would be much more competitive. Such would be the case for the major U.S. and Canadian mining companies. Still, this is not a tender approach that should be supported if to facilitate transparent market-based operations. The Political Economy Envisioned for Afghanistan: Donor nations, understanding the debilitating effects of corruption are spending substantial resources to create a polity for Afghanistan that is based on rule of law and engagement of the Afghan people in defining their destiny. Donors understand that to fight the insurgency, the support of the people will be necessary and that support will not be forthcoming in conditions of runaway corruption, perceived or otherwise. The Chinese model of doing business does not support the kind of open and transparent, democratic capitalism that the international
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community has agreed is essential to building Afghan institutions that tend to engage the support of the people. Thus, Chinese or “Eastern” dominance of mines and minerals development has the potential to limit and constrain the very governance reforms essential to fighting the insurgency. The amount of potential wealth in the exploitation of Afghanistan’s natural resources will allow those controlling that wealth to put their particular brand on an Afghan body politic that is already amenable to engaging with those entities who would purchase rather than compete for favor. Conclusions: In sum, there remains, even after Aynak, a stunning lack of focus, capacity and strength of purpose in policy-making quarters of the Government of Afghanistan and relevant Western governments regarding natural resource development in Afghanistan. The World Bank, while bringing expertise to tenders, simply does not have the political clout – or mandate – to either define the ground rules for what constitutes financial contributions to a tender process or to discipline the process once it is underway. Tendering natural resources in Afghanistan, rightly or wrongly, presents as a make or break feature of the future economic landscape with broad implications for the rest of Afghan society. It is highly recommended that economic policy capacity-building take place immediately within major Donors, particularly in the realm of natural resource development and that such capacity be promoted and engaged in the Afghan governing circles as well. If the goal of the Donors is to stabilize Afghanistan then the third leg, the economic leg (in addition to the political and the military) to the three legged stool that constitutes foreign policy must be strengthened. There is no better place to start than in the mines and minerals/natural resource sector.
Findings and Recommendations
The purpose of the analysis is to provide a forward looking perspective to insure that tenders of mineral wealth are truly transparent and that the benefit of such development is maximized for the host country. It is necessary that the donor community learn from each experience and critically evaluate the tender process for the international mineral deposits.
Finding: Data and Information are Essential to Commence Viable Tender Activities
At some point during the tender process, most bidders expressed gratitude for the information provided as part of the Aynak Data Package. This technical information was prepared by the British Geological Survey (BGS) funded by the Government of the United Kingdom, with guided inputs from Afghan colleagues at the Afghanistan Geological Survey (AGS). The preparation of the package itself was conducted in such a way by the BGS as to build local Afghan capacity to understand what information is included for bidder review and what information is proprietary. The entire process was conducted over almost four years and relied on information collected during the Soviet era with informational updates contributed by the BGS personnel. However, a finding of this assessment is that information systems and data retrieval protocols put in place have basically been closed down. In late 2007, it was determined by the British Government agency that oversees BGS operations – the National Environmental Research Council (NERC) – that they could no longer work in Afghanistan due to security concerns24. BGS
The initial BGS work was funded by the Department for International Development (DfID) which is part of the United Kingdom Government’s Foreign and Commonwealth Office but the latter work would have required submitting a bid to the World Bank for funding. DfID staff did not anticipate and were reportedly not pleased with the NERC decision.
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representatives on the ground fought to carry on their work but were forced to leave the country. Minister Adel subsequently ordered the AGS staff to shut down the server at the AGS office on which BGS had stored detailed and carefully developed mineral resource information. He ordered that the server room be locked as well as the library and record room. Consequently, all technical data which the BGS, and AGS had reconstituted, and where necessary, translated from Russian into English and all data archived on a searchable data base was taken out of the public domain. This single act of the Minister has meant that the unprecedented and commendable work conducted by the BGS, conducted for more than four years, now sits locked in a Kabul office building instead of having been integrated as part of a market-based ministry operation that could facilitate increased sector transparency, accuracy of data and investor interest. The assistance approach implemented by the BGS has proven, as compared to other donors attempting to engage in the sector, to be the most resultsoriented and technically beneficial for the long-term benefit of the Afghan minerals sector. Full time expatriate staff based in Kabul with considerably more scope to travel and provide ongoing capacity building than could the USGS, meant that the BGS work built on existing Afghan expertise while introducing modern technology and approaches to ensure the sound development and safeguarding of geo-science data. By including Russian speaking BGS staff, existing Afghan minerals data, most of which was in the Russian language, could be reconstituted in English or at least assessed by technical experts. Finally, unlike the USGS, all BGS data and findings was stored in Kabul at the AGS offices, not outside the country. This important step provided important ownership to Afghanistan. Of course the issue now is that the sitting Minister has chosen to no longer access or build on the data bank, still, this is an Afghan Government decision as it should be. Recommendations Ensure Good Data. Information is power. As the international community begins to recognize the economic value and development importance of the Afghan minerals sector for the country, targeted assistance to realize the benefits of the BGS work and to build on that
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is recommended. This will include close collaboration with the AGS to provide ongoing IT training, preparation of data packages and overall storage and information safeguard training. Re-start the Server. The donor community should work with Minister Adel to understand the rationale behind closing down the data server and explore options to restore the system. Call back BGS. Future geo-science support programs should look to the BGS model and staff to provide a comprehensive and consistent assistance approach.
Finding: Deficient and Uneven Donor Support to the Afghan Minerals Sector
Since 2001 the donor community, and increasingly Afghan Government officials, have called for market-oriented development of the country’s resources, including mineral resources. Afghan and international leaders, especially the US Embassy, have constantly called for private sector investment and market entry for non-government funds to promote economic growth, create jobs and to diversify the economy. These calls however, have not translated into meaningful development assistance or legitimate engagement of private investment in the minerals sector. At a time when the donor community had ample opportunity to hone in on key economic areas of growth for Afghanistan, i.e., mining, it appears that the donor community (1) did not want to engage in mining; (2) did not understand the nexus of Afghan mining and Afghanistan’s economic development; and (3) opted to focus on other areas of development. While donors were shoveling funds to support free elections, create micro-finance programs, to build schools and clinics and to develop programs to support women’s’ rights, they chose to spend virtually nothing on developing a traditionally important and proven revenue generating sector of the nation’s failing economy that could ultimately provide tens of thousands of jobs for men and women and triple the nation’s national budget in the form of taxes and royalty payments. One only has to look at the history of Afghanistan during the Russian occupation in the 1980s when Northern Alliance resistance operations were effectively funded by the sale of Afghan gems.
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U.S. assistance has been provided to generate a body of commercial legislation that should be applied to minerals operations. However, no linkages between the effort and the mine sector have been made. There is virtually no understanding in the Afghan minerals sector as to what and how commercial legislation applies to minerals contracts. The Minerals Law, an impressive feat facilitated by the World Bank in 2002-2005 provides international standards and unprecedented legal guidance for mine contracts. Unfortunately the law is supported with limited and inadequately prepared legal staff, regulations or an overall understanding of minerals and commercial law at the government level. As a result, there exists considerable opportunity for corrupt practices and for ministry leaders to interpret the legal framework with virtually no oversight. At a time when Ministry leadership was in transition, insufficient technical understanding of Aynak Copper’s wealth for Afghanistan and what amounts to procurement malfeasance by ARDS, it is tragic that the World Bank and donor community did not take a stronger line against the ARDS heavyhanded approach to using Government funds for such a uniquely important project. The lack of exposure of the Evaluation Committee Ministry of Mine members to world class mine practices, costing and even what the role of a Transaction Advisor was, was immense. The uneven donor support and lack of donor strategy in providing assistance to Afghanistan’s minerals sector has resulted in the emergence of serious market gaps that are reflected in how the market presently operates, that is, based on a system of ad hoc approaches, geographic preferences and considerable “payments and fees” to the Ministry of Mines, conducted outside requirements of the Minerals Law. Recommendations Comprehensive Donor Minerals’ Tender Process Support. The donor community should immediately offer and provide tender support as the Hajigak Iron Ore deposit is being tendered. It appears that the initial oil and gas tender process may already be near completion. The World Bank Kabul-based consultant/advisors available to support the process as part of their overall work have been shut out of the process
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to the point that the Minister has refused to renew certain of their contracts. Build Afghan Market-based Legal and Financial Capacity. Should the donor community opt to support the Afghan minerals sector, its assistance to build legal and financial capacity in line with the Minerals and Commercial Laws of the country would be timely. Preparation of market-based contract terms, contract negotiations, conducting due diligence and oversight of contract requirements are all areas requiring capacity.
Finding: Virtually no Government or Donor Oversight of the Tender Process
While the World Bank spearheaded the effort to educate officials and to build Afghan Government support for the tender of the Aynak copper rights, as an institution, it did not provide any actual oversight of the tender process, instead leaving that oversight to the Government. While World Bank staff visited Kabul to check on the grant program and would assess the status of the Aynak tender process, it did not take on or instigate an actual oversight role for the Aynak tender process. In that the World Bank initially formulated the tender process concept to which the Afghan Government agreed and funded the Transaction Advisor Contract as part of the World Bank/Afghan Government procurement office, this absence of an oversight role by the World Bank is an area to explore for future World Bank and donor participation in the sector. The “hands off” role of the World Bank resulted in the Government’s leaving oversight to a Government with no experience in conducting this scope of international market tender which then delegated oversight responsibility first to the ARDS and then to a single Minister. Aynak presented a known situation where donors and Government agree that a particular tender is an essential and critical aspect of the economic development and wealth creation in Afghanistan and from the get go it was nickel and dimed by non-technical bureaucrats seeking to have control over Ministry and donor actions. This was short sighted. The heavy handedness
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of the ARDS staff member in the design and costing for the Transaction Advisor set the entire Tender process off on an initially flawed path. Minister Adel retained great control over this process. One task under the Transaction Advisor’s Terms of Reference that was not accomplished was to provide the Evaluation Committee members with a profile of each of the six Bidders. Minister Adel indicated to the Transaction Advisor that this was not necessary. Unfortunately, the Transaction Advisor did not resist this decision or raise this absolutely critical issue to higher levels of Government. It would have seemed that the Transaction Advisor, at a minimum, could have prepared due diligence materials that could have been presented to the Evaluation Committee as well as to the Inter-ministerial Committee. In effect, all members had to review was the information provided directly by the companies themselves with no neutral due diligence information provided. This failure of the Ministry to critically evaluate the bidders has emerged as a critical flaw in transparency and validity of the selection process. The Minister of Mines, also without any market tender experience, was known in the Afghan mining community to have strong and stated notions of which countries he would work with, the levels and types of investments he sought and which areas of mining he would support for development; these notions did not necessarily align with best national economy. The Inter-ministerial Committee that was legally required to be a part of the tender process was constrained on several fronts: (1) limited information provided by the Ministry as to the status of the tender; (2) virtually no understanding of how a market-based tender process is to be conducted; (3) virtually no knowledge of the Aynak property, its value in the world market, it’s potential role to contribute to the national economy. The IMCs role served as one of affirmation for the Minister of Mines. Rather than oversight of the tender process, because of the way it was managed, and information that it received about the tender, the IMC ultimately provided no more than a stamp of approval over the tender processes based on the Minister’s word that the tender process was properly being conducted. The Transaction Advisor contracted to facilitate the tender
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was consistently beholden to the Minister and itself had insufficient and ineffective oversight of the Aynak transaction. The absence of independent oversight, especially conducted by the Government or a donor, especially in the nascent market infrastructure of the Afghan economy, resulted in a flawed tender process that was conducted in an absence of transparency. The process provides no assurance of contract oversight. Recommendations The international community needs to pay attention. In a post-conflict nation, new to market principles, a tender of the scope and precious resource of Aynak copper must be treated with consistent and comprehensive oversight. From start to finish, the Aynak copper tender processes were conducted in an ad hoc manner with intermittent international advisors and occasional Afghan government participation. The only consistent player was the Minister of Mines. In future, donors and interested embassies must pay considerably more attention to the tender processes employed to license such vast and valuable resources. This may be achieved by providing early-on advisory services to the government, supporting improved commercial skills and improving public information surrounding the tender activities both in and out of the country. Finish what you start. In this case, the World Bank but other donors may be faulted as well for instigated powerful government action to support certain activities and then, in effect, removing themselves as donors from the process. While in theory the Government would then be deemed to be conducting these tender processes, in reality, the Government of Afghanistan was not in any way prepared or sufficiently experienced to take on this daunting copper tender and in fact, there was an important oversight role for the donor to play. Where the donors start the process they must be better at ensuring sound completion. Establish Independent Oversight. The establishment of an actual Oversight Committee that is independent of the line ministry and
The Aynak Copper Tender
responsible for regular monitoring of the tender process should be in place at the start of the tender process. Committee members must be sufficiently educated on what a tender process entails and a system for published reporting of the process must be in place. Members must be independent of the Ministry of Mines and accountable to the donor. Clarify the full extent of the Role of the Transaction Advisor. The role of the Transaction Advisor, while not to oversee the tender process but rather, to implement same, should have included a more firm commitment to reporting exactly how the tender process was progressing and to identify areas for immediate improvement of the process. There are no less than five areas where ordinarily a Transaction Advisor would have called for more attention from donor and higher levels of Government, i.e., o Minister stored all tender documents in his personal office; o Minister selected all Evaluation Committee members that only included his staff and no outside ministry or independent expert staff: o Evaluation Committee members had no experience in conducting a large international minerals tender; o The Transaction Advisor was told by the Minister of Mines that it could not meet with ministry officials outside the Ministry of Mines despite the legal requirement and its TOR requirements that it effect the operations of the IMC; o Credible reports that certain bidders either saw or had copies of parts of other bidders’ tender documents. Full agreement on a Tender Plan. A realistic tender plan must be agreed to at the outset of the tender process. The plan must be agreed to not only by the Ministry and Government officials but also the donors supporting or facilitating the tender in order to ensure that the form and format of the tender clearly revealed to bidders and adhered to throughout the tender process.
James R. Yeager
Finding: Technical and Financial Guidelines for Proposals Need to be More Defined
For as many compliments that the Aynak Data Package received, just as many questions and concerns were expressed by bidders as to the lack of definiteness of information as to what the Afghan Government required be submitted in support of bidders’ technical and financial proposals. General parameters for submission were developed by the Transaction Advisor. These parameters were fundamental and basic items that did not sufficiently distinguish the level of detail or full content expected for evaluation. It was clear early on in the process that certain bidders had already received considerable information from the Ministry as to what the ministry leadership was anticipating in terms of technical development and its investment and costs – either at the time of this tender or as early as 2001. These indications reflect either a lack of market sophistication leaving ministry officials to share its expectations with potential bidders or more likely, the savvy of ministry leadership to “put the word out” as to what it sought in the Aynak submissions. Recommendations Ensure full tender submission requirements. For an international tender the size and scope of Aynak, a detailed set of standard parameters should be provided to potential bidders with respect to what content and detail is required of their technical and financial submissions. Establish independent tender oversight body. Higher levels of the Afghan Government need to be engaged in tenders of this nature. An independent body that serves as the point of contact for tenders of this size can be expected to provide significantly more transparent tender processes than enclosing the tender process solely within one line ministry. Financial bid format. Financial bid requirements should be submitted according to a strict format that will ensure that all financial bids can be consistently and critically evaluated by a third party. A key role of the Transaction Advisor is to affirm that statements made by the bidder make financial sense. The Transaction Advisor must also
The Aynak Copper Tender
provide a comprehensive evaluation of the financial information in future bids – more comprehensive than was provided for the Aynak tender.
Finding: Due Diligence of Bidders Must be Adequately Conducted.
The Aynak Tender Plan called for a due diligence process. Just as the bidders had the opportunity to evaluate the data and information about the Aynak deposit; it is imperative that the Government has the opportunity to conduct a critical analysis of the bidders and their submissions. Due diligence was inadequately conducted throughout the Aynak tender process. It is important that the evaluation committee and key decision makers have the opportunity to understand the track history of the bidders as well as an understanding of the corporate culture and the constraints that guide different companies. For example, where western companies are generally guided by the Equator Principles and self imposed reporting to independent third party watch groups (i.e., International Council on Mining and Metals (ICMM)), other companies may not operate in this manner. While no company track record will be without flaws, sufficient independently collected background information needs to be provided to decision makers. Recommendations The Transaction Advisor must conduct Due Diligence of Bidding Firms. The Transaction Advisor must implement the Minerals Law which requires that the Government perform an analysis of the bidders. The analysis should consist of an independent review of the bidders’ international operations. Ideally the research should permit the Government to talk with regulators of other governments who host or have hosted the bidding companies in their work in other regions. Research on ongoing operations by the bidders should include analysis of the major aspects of the bid submission. The information should be gathered to include follow through on financial commitments, jobs created, social responsibility of operations, technology employed, and the environmental track record of the bidding firm. This analysis
James R. Yeager
should be conducted by an independent third party with no interest in the outcome of the tender.
Finding: Sector Governance and Contract Implementation Capacity are Necessary
Now that the Aynak Copper Rights have been awarded, it has become increasingly clear that neither the Afghan or expatriate advisors are wellpositioned to ensure that the contract rights are comprehensively in place or well-monitored. The first example is the fact that the Government has issued a mine license for the Aynak rights to MCC without having agreed to final terms on the various “deal-makers” included as part of the MCC bid. These included: (1) minimum 400MW electricity; (2) rail line from Hairton (on the Uzbek Border) through the country and into Pakistan; (3) smelter operations; (4) community development and job creation. In a country where established laws and mining operation norms are in place, moving quickly forward with the Aynak Copper license would not have been extraordinary. However, in Afghanistan where this unprecedented tender was conducted to solicit sound investment for this unique resource, it is foolhardy to expect that the full content of the proposal will be implemented absent firm agreement between the Government of Afghanistan and MCC. Agreement should have been in place to at least support the fundamental proposal elements provided as part of the MCC bid which in the end, set the MCC bid apart from the other bid submissions. It remains very unclear as to why the Transaction Advisor abandoned the work of negotiating and implementing the final Aynak Contract Terms. While the Transaction Advisor provided a general minerals rights contract template, there was little engagement on its parts with the day to day negotiating of terms or attempt to protect the interests of the Afghan Government. This work was included as part of the Transaction Advisors’ scope of work. Because there is not a lawyer at the Ministry of Mines or in the Government able to or called upon to implement the Aynak copper deal terms, a combination of Ministry of Mines and World Bank advisors –all of whom were mine engineers or geologists – were brought to the table to review legal
The Aynak Copper Tender
content. This approach was irresponsible on the part of the World Bank advisors and inept on the part of the Afghan Government, nonetheless, the deal terms moved quickly forward and by all accounts, MCC remains well in the drivers’ seat of the Aynak deal. As for contract monitoring, while “Inspectorate” and “Cadastre” offices are located at the Ministry of Mines, they are not sufficiently experienced in market contracting and have never been trained to implement the scope and content of the Aynak contract. These offices remain firmly beholden to the Office of the Minister. Recommendations Re-engage on Aynak. In the near term, the World Bank should reengage on the Aynak copper contract issues whether by re-inserting legal advisory to the Ministry of Mines or more likely, legal advisory to the Ministry of Finance and Office of the President. In addition, specific contract monitoring capacity building for the Inspectorate and Cadastre with respect to Aynak, Hajigak and other large mineral licenses is recommended. Transaction Advisor Contracts must be regularly monitored and assessed for performance to ensure full completion of obligations; where contract negotiation is not included, another advisory firm may be contracted but assistance in this area is essential to ensure contract terms that are fair and appropriate for the counterpart government. Secure the Government’s legal rights. The Government of Afghanistan needs to hire an international law firm to conduct its major transaction business.
Finding: Ancillary Agreements Require Independent Review and Oversight
The scope of the ancillary promises set forth in the MCC proposal are such that they in and of themselves are major infrastructure projects. In a country such as Afghanistan where infrastructure has been neglected or never even constructed, to suggest as part of a copper tender that new power facilities,
James R. Yeager
new rail lines, new roads and new community assets will be developed calls for a technical and financial level of scrutiny that has been absent. Who will construct these major infrastructure projects? Will Afghan jobs be created or will the contractors employ their own staff? What kind of investments are required and where will those investment funds be coming from? Who will conduct the due diligence of the firms responsible for implementing these major infrastructure projects? What is the sequencing for developing these projects with the Aynak copper deposit development timeline? Recommendations Government – beyond the Ministry of Mines - needs to take over the Aynak Copper Contract Oversight. The work at Aynak may continue for up to 30 years; Government needs to be engaged beyond the Ministry of Mines at least as this new market develops. Whether a special Ombudsman’s Office, likely based at the Ministry of Finance, or another non-Ministry of Mines overseer, it is clear that some vigorous checks and balances are absent but needed. Slow down. The Ministry of Mines urgent appeal to Government to move forward with formally awarding the Aynak Copper rights resulted in expatriate non-legal staff hurriedly agreeing to facilitate the licensing process without fair and necessary consideration of how the entire bid proposal promises would be integrated for the benefit of Afghanistan. For a nation that has been at war for more than two decades, there was absolutely no justification for the rapid awarding of Aynak copper rights – as there is no justification for rapid award of Hajigak, Oil and Gas or other mineral resources. It is suggested that Government develop a realistic timeline for minerals’ development that includes due diligence, fair and open tender processes and marketbased contract negotiations.
The Aynak Copper Tender
Finding: Appropriate Public Participation from Start to Finish should be Required
By the accounts of Logar Province community members, they have not been sufficiently informed as to the tender process or development plans for the Aynak copper deposit. The leaders from Logar Province were at no time part of the tender process or dialogue surrounding the tender. While Minister Adel would put aside such claims, the leaders of Logar have firmly indicated that they were not sufficiently aware or participant to the overall process and that all they knew was either from media or what they would learn when World Bank and company representatives would visit the site, making inquiries about the deposit. Considerable rumor has circulated throughout the tender process but no consistent engagement of the local community, including its leadership, was instigated by Government or its delegate, the Ministry of Mines. The Minister of Mines refused to instigate formal public information and outreach program or to contract a firm to promote relations amongst key stakeholders to the Aynak copper development. As a result, he single-handedly orchestrated the type of information that would be disseminated, to whom and when. Recommendations Establish a Public Information Program. Especially in an emerging economy where communities have not been exposed to resource tenders or market development, building public participation is especially important if to ensure community “buy-in”. It is not too late to establish an Aynak Public Affairs Office, i.e., at the Ministry of Mines but it is essential that the information not be controlled by one of a few officials, and rather, that it generate information exchange among Government, the Ministry of Mines, MCC and the local community members. Transaction Advisor Information Role. The Transaction Advisor should play a vibrant part of information and outreach processes throughout the tender process. Short of this, the Advisor may recommend that the outreach function be outsourced to a contractor but to work alongside the Transaction Advisor. This did not take place during the Aynak tender process.
James R. Yeager
Build a Cadre of Outreach and Media Specialists. Government and its expatriate advisors should promote job creation in the form of outreach and media specialists that would engage with the public and media as well as Parliament to provide information on the tender process as well as to solicit concerns. This is a standard procedure for minerals’ tenders and most international firms employ a staff of outreach specialists.
Finding: Insufficiently Funded Transaction Advisor Consultancy
From the start, the Aynak tender process may have been doomed. Aside from Afghan officials never having implemented any level of minerals’ market tender and government institutions not being in place to support market operations, the Transaction Advisor was selected based on its willingness to conduct the work at more than half its competitor and half the expert-agreed requirement to get the job done. It is astounding that no “red flags” were waved either by the World Bank or the Transaction Advisor winner itself as to the insufficiency of funding provided to achieve the expected outcomes. There appeared an unforgiveable institutional gap in how the World Bank engaged with the Government at the time of the Aynak Transaction Advisor award. The Government relied on its ARTF office to conduct the procurement but the ARTF relied on the decision-making of one ARDS advisor (now Deputy Minister of Commerce and Industries) who had no technical or financial experience in the minerals sector. This individual was wholly responsible, if not entitled, to determine the level of funding that Government would allocate for the Aynak Transaction Advisor contract. Despite the World Bank expert recommendations as well as World Bank funded advisor international experience on how much a transaction effort would cost under these conditions, the ARDS severed costs to such an extent that it would be impossible for a full and fair tender process to be conducted by an internationally experienced firm. Recommendations Sufficiently fund key contracts. If the international community seriously wants to help Afghanistan get back on its feet, it cannot take the nickel
The Aynak Copper Tender
and dime approach that it consistently has to support the minerals -and other key economic sectors. Either fund the anticipated work to ensure an appropriate level of quality or do not support the effort at all – the half-funded effort of the Aynak Tender has not generated the results it should have, virtually no capacity building has occurred, public trust is lost as is tremendous economic opportunity for the country. One individual should not control procurement decisions. It was no secret to World Bank staff or Government that one individual at ARDS was controlling cost and content of the Aynak tender contract. At some point, leadership on the part of the donor or the Government was needed and did not occur. At no time did the US or other Embassies become engaged despite their knowledge of events. It is recommended that an independent donor and government group work together in future to ensure that this under-funding and individually controlled contracting not occur again. Delay contracts when the pieces don’t fit together. The fact that only two international firms even submitted bids to serve as the Aynak Transaction Advisor should have caused concern amongst Government and World Bank staff where ordinarily three bidders are expected to ensure best quality and competitive bidding. Where one bidder submitted costs at more than $1 million and the other was satisfied at $400,000, another red flag should have been acknowledged. When the Minister of Mines sought to rapidly implement the tender process, concern should have been expressed and at some point, the Transaction Advisor should have suggested that the tender be voided or delayed. It is recommended that the Transaction Advisor needs an independent venue where it can go to express concern on a regular basis without jeopardizing its role in the process. It is also suggested that the Transaction Advisor must take a more certain stand as during the tender process where flaws are apparent in how the process is progressing.
James R. Yeager
Finding: Conflicted Transaction Advisor
The fact that the Transaction Advisor selected to conduct the Aynak Tender Process was simultaneously implementing two other contracts for the Ministry of Mines requires careful consideration, understanding and assessment. At the very least, the scenario conjured serious perception problems but more assuredly, crossed fiduciary boundaries that led to a lack of independence and judgment on the part of the Transaction Advisor. The Advisor is a technically competent, small U.S.-based firm that had earlier implemented short term Oil and Gas assessment work under World Bank/USTDA funding in Afghanistan. Following this it was implementing – at the same time as the Aynak Tender Process – (1) a short-term natural gas market assessment funded by the ADB and (2) a short term natural gas assessment work funded by USAID. While these pieces of work were not copper-specific, they required that the firm work directly with and report to the Minister of Mines and the same staff that was handling the Aynak Tender. The Transaction Advisor Contract reads: 3.2. Conflict of Interests. The Consultant shall hold the Client’s interests paramount, without any consideration for future work, and strictly avoid conflict with other assignments or their own corporate interests. The fact that the firm had more than one contract ongoing with the Ministry as its counterpart is not solely a reason for it not to serve as Transaction Advisor. However, there is ample evidence that because of these other relations and contractual commitments that required Ministerial liaison, the firm was under pressure to perform in accordance with the Minster’s demands. The firm did not take a stance on many issues involving the Aynak tender as it ordinarily should have. The firm’s lack of stance may be attributed to inexperience, poor judgment or fear of diminished relations with the Ministry – none of these reasons is acceptable. Perhaps the greatest example of what could be perceived as a benefit of the conflict is the fact that without tender, the Transaction Advisor selected to conduct the Aynak tender, has since been awarded the sole source award to implement Afghanistan’s Hajigak Iron Ore Deposit tender. Despite all the difficulties expressed by the Transaction Advisor firm representatives with
The Aynak Copper Tender
respect to working with the Minister of Mines, it did not refuse the sole source contract.25 Recommendations Conduct due diligence. It appears that while the selected Transaction Advisor firm indicated “past experience” with the Ministry of Mines, counterparts and the World Bank did not fully comprehend the extent to which the firm was still going to be closely engaged with and report to the Ministry on other contracts. Improved due diligence of the bidding firms would have revealed this information and at that time some serious decisions could have been made as to whether these other commitments presented conflict or provided opportunity to discuss how the firm contracts would be best managed. Assign different reporting counterparts. Because of the way in which the Ministry of Mines is managed, all decisions are made by the Minister of Mines; all contract negotiations and contract oversight is conducted by the Minister. The recommendation is that more delegation of contract oversight is essential in a country where it is likely that a lesser number of qualified firms may be available to implement project work.
Finding: Western companies and Fully Private Firms are not Equipped or Able to Compete in this Environment
Partially because there were no limits placed on the technical and financial proposal content and partially because of the nature of the firms that bid for the Aynak Copper Rights, Western companies appear to have the odds against them when trying to emerge as best-placed to bid on Afghan minerals rights. The vast foreign aid package included as part of the MCC and other Eastern firm bid packages are designed to give the Eastern resource development companies a competitive advantage over other private sector development of
According to dgMarket.com, the sole source, 6 month contract was awarded to Gustavson at a lump sum of $564,890.04. http://secure-in.dgmarket.com/tenders/npnotice.do~3705030.
James R. Yeager
resources. Aid packages intertwined with the development of resources create a competitive advantage for the state-owned companies such as MCC. In the bid for Aynak, aid projects such as the development of power plants, roads and railroads – described if not disguised as infrastructure development – provided MCC and other state owned enterprises a strategic competitive advantage in any tender process for mineral development. The reality is that the bid submissions, while not illegal, did result in the creation of an uneven playing field as evaluators assessed bids submitted by the private sector and those of state or quasi-state enterprises. When it became clear that the Eastern firms, notably MCC of China, were including broad assistance packages as part of their technical copper bids, western companies – primarily U.S. and Canadian –sought to engage their embassies at the last minute in the tender process. These particular embassies had already lost their informational opportunity. Having avoided full engagement on the process for years up until then, they held no credibility with the Ministry of Mines with whom they had developed virtually no relations – unlike their Eastern country embassy counterparts. The Aynak experience requires Western governments who provide far greater aid (apart from the tender) to Afghanistan and respective Western companies to rethink how their bids are packaged lest Chinese state-owned and related companies totally dominate the Afghan minerals and other natural resources sector. The vast amount of money and the sheer size of these projects with respect to Afghanistan’s GDP along with the Chinese model of doing business has the potential to swamp the economy and counteract Western attempts to limit corruption and build a healthy market economy. Aynak thus has enormous implications for the social and political future of Afghanistan. Recommendations More Definite Tender Submission Requirements. If the Government wants to distinguish between technically qualified firms and those firms that can offer the largest most comprehensive investments, it will need to better define the rules of engagement during the tender process. This will ensure that each bidder submits the same level of technical and
The Aynak Copper Tender
financial information and that ancillary information may be evaluated a part from the core submissions. Western companies need to get serious. If Western companies actually seek to work in the Afghan minerals sector, they need to be on the ground with a presence and understanding of the market. Eastern firms maintain Kabul offices, are frequent visitors to the Ministry of Mines and are well-versed in the existing geo-science data. Western firms need the support of their Western governments. Donor nation Embassy and Assistance Agencies Role. If Western companies do opt to engage in the investment opportunities that will continue to emerge out of Afghanistan, their embassies and assistance agencies need to be much better informed, consistently engaged and enthused about the opportunities. They need to better understand the linkages between economic, political and social development and the investments that these Western firms could bring to the nation. They need to understand the influence that vast monies, operating under an “Eastern business model” framework can conflict with many important Donor and enlightened Afghan goals for Afghanistan. Finally, ways to incorporate some degree of credit for the far greater Western donor assistance funding must be developed so as to upgrade the competitiveness of the bid packages offered by Western companies to accommodate those State-related Eastern companies which package foreign aid into their bids. Importantly, the value to nation-building of Western principles of market operations, local job training and creation as opposed to large-scale importation of workers, environmental protection and creating legitimate frameworks in which to sustain sector operations, need to be better appreciated by all sides to a tender, private and public.
Annex 1: Acronyms
ADB AGS AISA ARDS ARTF BGS Cu DFID EOI EPA GOA IMC MCC MoF MoM Mt/y MW NEPA RFP SDNRP TAPI TOR UN ESCAP USAID USGS Asian Development Bank Afghanistan Geological Survey Afghanistan Investment Support Agency Afghanistan Reconstruction and Development Strategy Afghanistan Reconstruction Trust Fund British Geological Survey Chemical Symbol for Copper Department for International Development (United Kingdom) Expression of Interest Environmental Protection Agency Government of Afghanistan Inter-Ministerial Committee China Metallurgical Group Corporation Ministry of Finance Ministry of Mines Metric tons per year Mega Watt National Environmental Protection Agency Request for Proposal Sustainable Development of Natural Resources Project Turkmenistan Afghanistan Pakistan India natural gas pipeline Terms of Reference United Nations Economic and Social Commission for Asia and Pacific United States Agency for International Development United States Geological Survey
Annex 2: Definitions
Bid Package Concession Exploitation Exploration The term used to describe the various documents that any interested company will receive to review before submitting a proposal (bid). A lease form that conveys specified national or state permission to a lessee to explore for or produce minerals from specified properties. The process of winning or producing from the Earth the oil, gas, minerals, or rocks that have been found as the result of exploration. The search for coal, mineral, or ore by (1) geological surveys; (2) geophysical prospecting (may be ground, aerial, or both); (3) boreholes and trial pits; or (4) surface or underground headings, drifts, or tunnels. Exploration aims at locating the presence of economic deposits and establishing their nature, shape, and grade,. A national or federal institution employed to maintain the geological inventory and advance the knowledge of geosciences for the benefit of the wealth and health of the nation. The scientific study of the origin, history, and structure of the earth Sulfide Polymetalic ore bodies consisting of massive solid amounts of metal bearing sulfide minerals such as chalcopyrite, sphalerite, and galena. They are deposited on the ancient seafloor near sub-aqueous volcanic vents. The time in which, through the employment of the available capital, the ore reserves--or such reasonable extension of the ore reserves as conservative geological analysis may justify--will be extracted. The naturally occurring material from which a mineral or minerals of economic value can be extracted profitably or to satisfy social or political objectives. The term is generally but not always used to refer to metalliferous material (material containing metal), and is often modified by the names of the valuable constituent; e.g., iron ore.; ore mineral. A natural accumulation of a metal, gemstone or other valuable mineral substance, sufficiently rich in concentration to be profitably mined. Physical geography: the study of physical features of the earth's surface
Geological Survey Geology Massive Deposits
Ore Deposit Physiography
Porphyry Copper Copper ore bodies which are associated with intrusive rocks where Deposit copper is deposited as disseminations along a stockwork of veins and fractures. Average copper grade is between 0.4% and 1% Cu . They can be very large up to 1.2 billion tons of material
James R. Yeager
An area that is a potential site of mineral deposits, based on preliminary exploration. The quantity of mineral that is calculated to lie within given boundaries. It is described as total (or gross), workable, or probable working, depending on the application of certain arbitrary limits in respect of deposit thickness, depth, quality, geological conditions, and contemporary economic factors. Proved, probable, and possible reserves are other terms used in general mining practice. A concentration of naturally occurring solid, liquid, or gaseous material in or on the Earth's crust in such form and amount that economic extraction of a commodity from the concentration is currently or potentially feasible.
Sedimentary A sedimentary hosted copper deposit is defined as ore bodies hosted and Hosted Copper deposited is layered rock units Deposit
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