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© Reuters  , 2009, with modifications by the author  

Issue 08/10 17 November 2010

 AFGHANISTAN

The Re-Tendering of Hajigak Mining Rights

Consolidating Lessons Learnt in Pursuit of Transparent Growth 

Steven A. Zyck Economic Development Knowledge Manager 

steve.zyck@cimicweb.org www.cimicweb.org 

This document discusses the tendering of mining rights to one of Afghanistan‟s largest mineral deposits, the Hajigak iron ore mine. Additional information is available at  www.cimicweb.org.1  Hyperlinks to source material are highlighted in blue and underlined in the text.  

Introduction: The Re-Tendering Process

On 29 September 2010, 

  Afghanistan‟s Ministry of Mines (MoM) relaunched the tenderingprocess for the rights to one of the country‟ s largest mineral concentrations, the Hajigak ironore deposit. Once extraction begins, the Afghan government expects to receive up to USD 300million per year in revenues from the mining operation. The launch of the tender has beencelebrated in editorials  published by several

  Afghan newspapers, which have uniformlyexpressed their hope that corruption will not

  jeopardise the potential rewards from theHajigak deposits. 

The previous tender for mining rights to Hajigak  – which is also spelled as “Hajji Gak” and “Haji

Gak” – had been cancelled in February 2010 bythen-newly-appointed Minister of Mines,Wahidullah Shahrani. A number of factorsplayed a role in the cancellation of the previoustender, including the onset of the globaleconomic crisis  and the associated decline in

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commodity prices, particularly for iron ore. Business Week notes that the MoM cancelled theprocess given the limited interest expressed by major mining companies. Seven bidders wereinvolved, only one of which, the China Metallurgical Group Corporation (known as MCC),visited the site in Bamian  province where the mine is located (see images, below ).2 Earlierreports by Business Week  had provided a different explanation, linking the previouscancellation with accusations that the former Minister of Mines, Mohammad Ibrahim Adel, hadaccepted a multi-million-dollar bribe  from China in connection with another mining contract.Replacing Minister Adel and cancelling the earlier tender for the rights to Hajigak was seen asan important step not only in combating corruption but also in ensuring that Afghanistanreceived the highest-possible financial offers from the most highly-qualified bidders.

While promising steps have thus far been taken by the MoM, it remains important for the Afghan government and international community to learn how to better manage and oversee

tender processes for Afghanistan‟s reportedly vast mineral resources, the value of which hasloosely been estimated at USD 1 trillion according to United States Geological Survey (USGS) reports summarised in the New York Times . 

 A Legacy of Problematic Mining Tender Processes

The country‟s first significant tender, which was for the rights to the Aynak copper deposit,has been widely regarded as problematic. In a briefing paper  which examines the Aynak tender and bidding process, Raymond Gilpin and Ashley Pandya of the United States Instituteof Peace (USIP) noted that the Afghan government, in addition to facing deep-seatedcorruption, „had neither the capacity nor the institutional or regulatory framework to overseethe process effectively‟. The USIP publication further identifies the following weaknesses in the

process:

  While overseen by an independent firm, the tender was considered highly „opaque‟ and „centralised‟ , thus raising suspicions that individuals involved, particularly Minister Adel,were engaged in corruption or other inappropriate activities in connection with the tender.

2 The other six bidders  were Essar Minerals Ltd. (India), Ispat Industies Ltd. (India), JSW Steel Ltd. (India),Rashtriya Ispat Nigam Ltd. (India), Sesa Goa Ltd. (India) and Tuwairqi Steel Mills Ltd. (Pakistan/Saudi Arabia). 

MoM officials and a delegation from China (left) visits Haijgak mine (right) in 2009. ©  Ministry of Mines  , 2009 

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  Regulations governing the bidding process were difficult to access and unclear. As a result,bidders were not operating on a “level playing field” . China‟s state-owned MCC, which wonthe mining rights, was criticised  for building offers of official development assistance(ODA) from the Chinese government into its bid, an unusual move which was neitherauthorised nor specifically prohibited by the MoM‟s regulations.3 

  The Afghan government lacked the capability to appropriately assess the qualifications andperformance records of the bidders, and selection committee members had little relevantexperience and were unaware of what factors to consider in selecting a firm.

Furthermore, in November 2009, the Washington Post  cited US government officials asreporting that then-Minister (of Mines) Adel had accepted a cash bribe of approximately USD30 million in exchange for awarding the Anyak contract to MCC. Minister Adel strongly denied 

these allegations. While the contract was awarded by a panel of 20 members, on whichMinister Adel was a member, an   American adviser  to the panel reports that the Ministerdisallowed criticism of the Chinese proposal or discussion of other proposals‟ strengths.4 

The Economic Potential of a Transparent Tender for Hajigak 

The re-tendering of the Hajigak deposit is important to Afghanistan for a number of reasons.Extracting the iron ore would create tens of thousands of jobs for Afghans in Bamian provinceand elsewhere at a time when livelihoods  are viewed as a powerful factor in combatingviolence, criminality and insurgency, according to a report by the Center for a New AmericanSecurity. Furthermore, the  „2009-2010 Afghan Business Survey‟  suggests a transparentselection process may have positive implications for Afghan citizens‟ and the private sector‟s

confidence in the integrity and capacity of the Afghan government. Most important, however,are the economic benefits. The iron ore industry has been booming for more than a decade,according to a market update produced by the world‟s largest mining company, BHP Billiton, as a result of infrastructure growth in China, India, Southeast Asia, Latin America andelsewhere. Construction requires steel, and steel requires iron ore to produce. The BHP Billitonupdate also indicates the market price of iron ore has consistently been on the rise (though itfell when the construction boom faded during the global economic crisis that began in 2008).

Reuters reports that recent economic recovery, particularly in emerging markets, has allowedthe price of iron ore to begin regaining value lost during the global economic crisis. Accordingto the article, the Hajigak deposits are worth far more at present than they would have been

3 The consideration of such contributions is increasingly questioned given the limited progress thus far made byMCC and the Chinese government in actually delivering the development projects promised in its Aynak bid. Forinstance, Politics Daily  reported a lack of progress  on major Chinese-pledged reconstruction projects, includingroads, power plants and a major railway which were linked to the country‟s successful Aynak mine bid. 4 Minister Adel had already been suspected of misuse of power surrounding his decision to award the state-ownedGhori cement factory to an investment group headed by President Karzai‟s brother, Mahmoud Karzai, according tothe Washington Post . This Washington Post article further describes how, during the tender process Minister Adeladded an unplanned hurdle whereby bidders were required to deliver USD 25 million in cash to the MoM in orderfor their proposals to be considered. 

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in February 2009, when the „request for expression of interest‟ in the Hajigak deposit was firstissued. Finally, according to a special report  in the Financial Times  the mining industry hasbenefited from the transition in late 2008 and early 2009 from annual, fixed-price contracts foriron ore to quarterly pricing schemes which allow mining firms to adjust prices as the marketvalue of ore fluctuates to maximise profits. This change in pricing procedures led to the recentincreases in iron ore‟s market price (see Figure 1). 

Figure 1. Five-Year Trend in Iron Ore Market Price, 2005-2010 

Source: International Monetary Fund ( IMF  ) data, as compiled by  Index Mundi  , 2010  

Towards a Transparent and Profitable Tender Process

Following the formal launch of the tender on 29 September, the Minister of Mines and Ministerof Finance both travelled to New York in order to present the Hajigak mine  to potentialinvestors. In addition, the Minister of Mines has spoken with representatives of relevantcompanies, including mining giant Rio Tinto and leading steelmaker  ArcelorMittal, the latter of which recently announced its intent to invest USD 4 billion  in obtaining new sources of ironore, according to Business Week . Such presentations and meetings have aimed to build theprivate sector‟s confidence  in the Hajigak tender process and in the MoM. Still, further steps

may also be taken. Below are a series of recommendations which have been suggested byleading experts to enhance the contracting of high-value natural resources in Afghanistan.

    According to the previously discussed report by Gilpin and Pandya, clear regulations andprocedures which address the weaknesses in the Aynak tender process must be developedand made freely available to all interested companies as well as to members of theinternational community. These regulations must particularly disallow bidders, even state-owned enterprises, from offering governmental foreign aid  within their bids. Such a

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prohibition did not come through clearly in recent comments made by Afghanistan‟sMinister of Finance, who told Bloomberg  that the Afghan government „expected‟ bidders tobuild infrastructure in order to be considered.

    As noted in a recent report by the Chr. Michelsen Institute (CMI), developing Afghantechnical expertise  is integral in allowing the government in Kabul to develop necessarylaws and provide adequate oversight of extractive industries in the country.5 Yet, as theaforementioned report from USIP  suggests, it may be necessary for the internationalcommunity to provide short-term technical assistance from outside of Afghanistan,particularly during the tender process and early stages of implementation, „whiledeveloping a cadre of qualified and motivated Afghans over the longer term‟. 

  Social responsibility  in a number of forms should be encouraged, according to the USIP

and CMI. Gilpin and Pandya note that compensation for seized or affected land should beprovided fairly and should be addressed from the very beginning of the tender process.Furthermore, conflicts over land, employment and mining-related revenues should beresolved in a manner which strengthens local governance and social cohesion. As the USIP report  notes, the National Solidarity Programme (NSP), which has established elected,development-focused community councils, might provide a ready-made mechanism for thegovernment and mining firms to involve local communities. 

  Finally and on a related point, CMI notes that all future natural resource management in Afghanistan should adhere to the Extractive Industries Transparency Initiative (EITI). TheEITI is a coalition which promotes good governance of oil, gas and minerals to ensure thatthey do not contribute to poverty, conflict or corruption. The Afghan government

announced its intent  to join the EITI in 2009 and in early 2010 was accepted as acandidate. The country‟s mining sector is obligated to become EITI-compliant by 2012, according to the EITI.

These recommendations are expected to help ensure that Afghanistan‟s resources serve as aforce for stability, accountable governance and equitable growth rather than a source of division, corruption and inequality.

For more information visit the CFC‟s Economic Development web portal at  www.cimicweb.org . 

The Civil Military Fusion Centre (CFC) is an Information and Knowledge Management organisation focused on improving

civil-military interaction, facilitating information sharing and enhancing situational awareness through the web portal,CimicWeb. CFC products are developed with open-source information from governmental organisations, non-governmental 

organisations, international organisations, academic institutions, media sources and military organisations. By design, CFC 

 products or links to open sourced and independently produced articles do not necessarily represent the opinions, views or 

official positions of any other organisation.

5 The CMI report, it should be noted, is focused upon hydrocarbons rather than upon metals or other naturalresources. However, the report‟s authors were closely involved with relevant institutions such as the MoM.