Investor Roadmap Full Report English

8/14/2019 Investor Roadmap Full Report English

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Islamic Republic of AfghanistanMinistry of Commerce and Industries

Initiative for Regulatory Reform to EnhancePrivate Sector Development in Afghanistan

An Investor Roadmap

October 2006


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Contents

A Introduction...................................................................................................................... 5

1 Initiative for regulatory reform to enhance PSD in Afghanistan ...............................51.1 The Afghanistan Compact and ANDS context.................................................................. 5

1.2 The Investor Roadmap approach ...................................................................................... 5

B The Regulatory Framework ............................................................................................ 7

1 Rationales for government regulation: Benefits and costs.......................................7

2 Impact of efficient, effective regulation...................................................................8

2.1 Regulation in Afghanistan ............................................................................................... 10

2.2 Best practice in regulatory reform ..................................................................................102.2.1 Lessons learned..................................................................................................14

C The Investor Roadmap Project.................................................................................... 171 Introduction..........................................................................................................17

2 Findings: Observations and policy initiatives based on the fieldwork and

questionnaires ...................................................................................................... 19

2.1 Issue 1: The locus of the regulatory reform initiative....................................................20

2.2 Issue 2: Information deficiencies ....................................................................................20

2.3 Issue 3: All investors must register as a legal entity as well as register either with theMoCI or with AISA ............................................................................................................22

2.4 Issue 4: Many sectors must also register with and obtain a license from a sectoralministry............................................................................................................................. 24

2.5 Issue 5: Cumbersome licensing processes .....................................................................262.5.1 External vs. internal movement of paperwork..................................................262.5.2 Entrance to the licensing process in each organisation...................................262.5.3 Cross-referencing/pre-conditions, cross checking and rechecking.................27

2.6 Issue 6: Most obstructive processes and licenses.......................................................... 282.6.1 Land acquisition and transfer............................................................................292.6.2 Zoning .................................................................................................................302.6.3 Building permits ................................................................................................. 31

D Next Steps....................................................................................................................... 32

1 Decision: Reform regulation now or continue as is? ..............................................32

2 Locus of reform ....................................................................................................32

3 Consider policy options, initiatives and priorities .................................................33

Annex 1: Roadmap process groups

Annex 2: Core processes

Annex 3: Investor Roadmap Master List


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Investor Roadmap

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Acronyms

AISA Afghan Investment Support Agency

ANDS Afghan National Development Strategy

ASI Adam Smith International

FIAS Foreign Investment Advisory Service

GDP Gross Domestic Product

GoA Government of Afghanistan

HCI High Commission on Investment

IPA Investment Promotion Agency

MoCI Ministry of Commerce and Industries

OECD Organisation for Economic Cooperation and Development

PSD Private Sector Development

PRR Priority Reform and Restructuring

SME Small and Medium Size Enterprise

TIN Tax Identification Number


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Executive SummaryInvestor Roadmap Project

MoCI-ASI

Under the Afghanistan Compact the Government of Afghanistan has committed that Alllegislation, regulations and procedures related to investment will be simplified and harmonisedby end-2006 and implemented by end-2007. Work is ongoing on legislation, but until now, fewpractical steps have been taken towards regulatory and procedural reform. This InvestorRoadmap report is the starting point for addressing commercial regulation, licensing andregulatory processes; for the first time there is a comprehensive and accurate summary oflicensing and regulated transaction processes in Afghanistan that can be used to identify reformneeds and priorities.

Regulatory and procedural reform will contribute towards achieving the Afghanistan Compactbenchmark, and the ANDS sector targets for Private Sector Development and Trade, particularly

formalisation (by removing unnecessary obstacles to operating in the formal economy), and isalso relevant to the cross-cutting themes of counter-narcotics (by creating a more favourableenvironment for legal business), regional co-operation (by encouraging regional investment andtrading opportunities), corruption (by simplifying and clarifying procedures that currentlyencourage rent-seeking), and gender (by addressing gender based power dynamics between stateofficials, who are predominantly male, and aspiring female entrepreneurs).

Developed by USAID and the World Banks Foreign Investment Advisory Service (FIAS), theInvestor Roadmap is a diagnostic tool that helps developing countries identify and understandthe regulatory and administrative constraints (red tape) that hinder commercial activity. It hasbeen used in more than 50 countries.

Andrew Natsios,Administrator of the US Agency for International Development (USAID,(2000-2005) wrote of Investor Roadmap initiatives, Harvard International Review, Vol. 26(3), Fall2005:

We apply the lessons from the work of Harvard Business School professor Michael

Porter, who contends that for trade agreements to translate into investment,developing countries must have a sound business climate. In much of the developing

world, however, it remains difficult to start and run a business. Therefore, USAID has

pioneered the investor roadmap, which examines impediments to investment and

business operations in a particular country. We have carried out more than 50 such

studies, which provide a basis for working with the host government and privatesector to address the most important problems. The roadmap has been hailed by the

World Bank as leading the way to the micro, or firm-level, reform that is

increasingly critical to the underdeveloped world.

ASI, in cooperation of a team from the MoCI, has undertaken Phase I of an Investor

Roadmap project for Afghanistan.1

The project identified fifty six licenses and proceduresrelated to investment and operations over time of investors. Each of the organizations that

administer these licenses and processes has signed off that the data we collected is accurate

and comprehensive: documentation required, time frame, costs, and step by step procedures.

1 Mr.Shir Hussain Sultani, Mr. Qasim Ali Behsoudi and Ms. Khalida Darwish from Internal Trade Directorate ofthe MoCI.


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Investor Roadmap

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The project report has been given to AISA to assist it in its endeavors to support investors in

Afghanistan; to BearingPoint, to assist it in its regulatory reform and WTO ascension

initiatives, to the Transit Trade Project at the MoCI, and the World Bank (Afghanistan).

Based on the data collected for the project several issues were identified:

1. There are significant information gaps between government regulators and investors:only a very few post any information about the licensing process so that investors do notknow what documents are required, how much to pay, what process steps to take or howlong the process should take. This information gap gives power to governmentbureaucrats and their allied expediters to extract processing fees from investors.

2. The steps in process of obtaining a license are all external, i.e., the investor must carry thepaperwork from office to office and wait outside each office for days and days whilethe application is being processed. Not only is this an inefficient use of investors time, italso is an invitation to corruption to expedite the paperwork.

3. In most organizations, the entry point of the process is at the top of the organization at

the minister or deputy minister level. These high level personnel review the application,sign it, and order the next level down in the organization to take appropriate action. Yetthis appropriate action is usually another review, signature, and an order for the next leveldown to take appropriate action. And so on for up to five levels of the organization untilsomething is actually done to assess the application. This procedure wastes both the timeof investors and these high-level ministry personnel to no apparent purpose. It alsoincreases the number of people who have to be "satisfied

4. Licenses are often cross referenced, such that to obtain one license requires havinganother or being in good standing with another organization. As examples, obtain a

water connection, the investor must have be registered with AISA or the MoCI, musthave a land transfer title certificate validated by the court, and have a building permit

validated by Kabul Municipality. To renew a trading license from the MoCI or an AISAlicense, the investor must provide documentation form the tax authorities that theprojects taxes are paid up to date. This system increases the power of each organization

whose permit is required to extract payments since, without their license, another vitallicense cannot be obtained.

5. A similar aspect of the system is that not only do some licensing procedures requireanother license to be obtained already, but, even if the investor has this license, he/shemust obtain a revalidation of the license in order to obtain another license. For example,to register with the Ministry of Urban Development as a construction company, theinvestor obtains letters from this Ministry to AISA, the Ministry of Finance, the Kabultax office, and the Ministry of the Interior all checking if in fact the clearances that the

investor already has are in fact authentic.6. Investors in twenty two sectors not only have to be registered with the Commercial

Court to be a legal entity, obtain an AISA license, they also have to obtain sectorallicenses.

Insurance

Banking

Foreign exchange dealer

University and higher education

Hospital/clinic

Telecommunications

Radio and TV

Travel agency

Real estate agency

Animal clinic


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Drugstore/pharmacy

Security

Pharmaceutical production

Transportation

Aviation

Construction

Printing press

Film production

Oil pipeline

Natural resources: iron, copper,

coal, cement Hotels

Restaurants

While licenses in some of these sectors have the potential for creating economic value, inmany others there would not seem to be any economic rationale for mandating them.

The MoCI is in a strong position to advocate regulatory reform since it has already

accomplished reform under a BearingPoint/TSG Investor roadmap project in 2004. This

project reduced the number of signatures needed to obtain a Business License from 53 to 5

and the time to obtain a license from six to eight weeks to five to seven days.

To address the regulatory problems identified in the MoCI/ASI Investor Road project we

recommend that:

1. The Ministry of Commerce and Industry and Minister Dr. Farhang take the Investor

Roadmap Project as a ministry initiative.2. The Minister take the Investor Roadmap to the High Commission on Investment for

adoption as a priority project to undertake Phase II: reform of the licensing and the

processes identified in the report.

3. AISA serve as a secretariat for the project.

We further recommend that:

1. The information gathered for each license and process be posted on the MoCI and AISAwebsites for the use of investors.

2. All organizations that administer these licenses and processes that have websites alsopost them.

3. This information be posted in the relevant offices in the organizations.4. The reform process be composed of:

a. reduction in the number of sectoral licenses.

b. reexamination of the AISA and MoCI licenses.c. streamlining of the licensing process within organizations by moving the entry point of

the process further down in the organization and reducing the cross referencing andcross checking of one license with another.

d. assisting in other TA initiatives to reduce the regulatory burden of several licenses andprocess, such as land transfer, building permits, customs, and tax administration from aninvestor point of view.


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Investor Roadmap

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Introduction

1 Initiative for regulatory reform to enhance PSD in Afghanistan

1.1 The Afghanistan Compact and ANDS context

Under the Afghanistan Compact the Government of Afghanistan has committed thatAll legislation, regulations and procedures related to investment will be simplifiedand harmonised by end-2006 and implemented by end-2007. Work is ongoing onlegislation, but until now, few practical steps have been taken towards regulatory andprocedural reform. This Investor Roadmap report is the starting point for addressingcommercial regulation, licensing and regulatory processes; for the first time there is acomprehensive and accurate summary of licensing and regulated transactionprocesses in Afghanistan that can be used to identify reform needs and priorities.

Regulatory and procedural reform will contribute towards achieving the AfghanistanCompact benchmark, and the ANDS sector targets for Private Sector Developmentand Trade, particularly formalisation (by removing unnecessary obstacles to operatingin the formal economy), and is also relevant to the cross-cutting themes of counter-narcotics (by creating a more favourable environment for legal business), regional co-operation (by encouraging regional investment and trading opportunities), corruption(by simplifying and clarifying procedures that currently encourage rent-seeking), andgender (by addressing gender based power dynamics between state officials, who arepredominantly male, and aspiring female entrepreneurs).

1.2 The Investor Roadmap approach

Developed by USAID and the World Banks Foreign Investment Advisory Service (FIAS),

the Investor Roadmap is a diagnostic tool that helps developing countries identify andunderstand the regulatory and administrative constraints (red tape) that hinder commercialactivity. It has been used in more than 50 countries,

Andrew Natsios, Administrator of the US Agency for International Development (USAID,(2000-2005) wrote of Investor Roadmap initiatives, Harvard International Review, Vol. 26(3),Fall 2005:

We apply the lessons from the work of Harvard Business School professor

Michael Porter, who contends that for trade agreements to translate intoinvestment, developing countries must have a sound business climate. In

much of the developing world, however, it remains difficult to start and run a

business. Therefore, USAID has pioneered the investor roadmap, whichexamines impediments to investment and business operations in a particular

country. We have carried out more than 50 such studies, which provide abasis for working with the host government and private sector to address the

most important problems. The roadmap has been hailed by the World Bank

as leading the way to the micro, or firm-level, reform that is increasinglycritical to the underdeveloped world.

Governments regulate the private sector to increase the efficiency of the economy, todistribute the benefits of a market economy more widely among all the stakeholdersin private sector development, to protect the environment, and to protect consumers

and workers health and safety. Based on the findings of this Investor Roadmapproject at the Ministry of Commerce and Industries (MoCI), regulation in


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Afghanistan, however, instead of accomplishing these objectives adds to the costs ofdoing business and reduces the competitiveness of Afghanistans investors againstimports in the domestic market and with products abroad in its export markets.Regulation in Afghanistan also fails to increase consumer or worker health and safetyor increase economic efficiency.

The Investor Roadmap project, carried out with staff from the MoCI and AdamSmith International (ASI), gathered data on over fifty licenses and procedures with

which different investors must comply. The study found that many of these licensesare not necessary in that they added no value to the economy or any of itsstakeholders; rather they imposed significant costs on investors. Licensingprocedures are time consuming and complicated. Yet investors are not providedinformation on the correct procedures to obtain these licenses or how to comply

with their requirements, imposing additional burdens on investors in terms of timeand costs of obtaining a license. The licensing and regulatory also allows, evenfosters, widespread abuse by government personnel.

If the Government of Afghanistan (GoA) is to achieve its goal of providing aninvestor-friendly environment for business to foster the development of a market-based economy, as it has stipulated in the Afghanistan Compact and the AfghanNational Development Strategy (ANDS), it will need to undertake a major reform ofthe system by which it licenses business to invest and to operate. At the same time,GoA will need to create a major behavioural change among its personnel who atpresent see government as a regulator, not a facilitator or promoter of investors inthe private sector.

The report is divided into 3 main parts:

The Regulatory Framework which outlines the rationale for government

regulation, assesses the impact of effective and efficient regulation, comparesregulation in Afghanistan with best practice regulation, and identifies lessonslearned from around the world.

The Investor Roadmap Project which introduces the goals of the InvestorRoadmap and the work undertaken by MoCI and ASI, identifies issues thatconstrain investment, and provides recommendations for policy initiatives.

Next Steps which raises several questions around the regulatory reform andpolicy making process in Afghanistan that need to be addressed before animplementation programme is undertaken.


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Investor Roadmap

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B The Regulatory Framework

1 Rationales for government regulation: Benefits and costs

One of the overarching objectives of the ANDS is to lift Afghanistans population

out of poverty in order to improve the living standards and quality of life of all itspeople. To achieve this objective will require rapid growth of the economy over thecoming decades. In turn, to achieve and sustain rapid growth the ANDS concludesthat Afghanistan must move toward a competitive, free, market-oriented economy.

For the GoA to foster the development of a free, market-oriented economy,however, does not imply that government regulation will not play a role. Quite thecontrary, government regulation has a major role to play in the economy, not just themacro-economy (exchange rate, inflation rate, interest rates), but also at the firm-level, micro-economy in order to ensure that the free market works efficiently andeffectively to achieve GoAs public policy goals. Competitive, free markets can

fail to achieve optimal economic outcomes in cases of market failure orinstitutional failure.

Markets can fail when a firm has monopoly power or when firms engage in anti-competitive behaviour. In these instances, Government can regulate prices orenforce competition laws. When investment projects have externalities, such aspollution, the Government may consider devising and enforcing laws and regulationsto protect the environment. When there are positive externalities and spill-overs(in such areas as education and training programmes) the Government may considerproviding funding for these activities. When there are public goods, such a countryimage, Made in Afghanistan, for carpets, for example, the Government mayregulate to enforce quality standards.2 And when producers or sellers have more

information than buyers and consumers, the Government should regulate to addressthese information gaps. Again, there may be a role for Government to regulate theeconomy when the free market system does not lead to achievement of thegovernments wider goals, such as poverty alleviation or greater participation of

women in the economy.3

When there is market failure, in theory, there is a potential for government regulationto increase the efficiency of markets, to improve economic performance, and toenhance consumer welfare. Conversely, when there is no market failure, thengovernment regulation of the micro-economy destroys value. Even in instances in

which there is the potential for government regulation to enhance welfare, inpractice, however, government regulation often imposes costsin terms ofcompliance costs to investors and the costs of government operationson theeconomy that can more than offset the potential benefits of government regulationeven when there is market failure. When this happens, government regulation is aconstraint to growth. Compliance costs for investors include both the costs ofensuring that their operations conform with regulatory standards, but also the costsof demonstrating to government that this is in fact the case and that they shouldreceive the appropriate set of licenses to invest and operate. Compliance costs forGovernment involve the costs of setting regulatory standards and procedures,

2A brand name, such as Made in Afghanistan, is a public good, since, once established, it can be used by oneproducer without decreasing its supply to other producers; a producer cannot be excluded from using it; and it

does not pay any one producer to contribute to its creation3As shown below, however, in Afghanistan, regulation tends to discriminate againstthe poor and against womenwho desire to enter the private enterprise system.


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evaluating investors relative to those standards at the time of investment andmonitoring investor compliance over time.

In summary, in order to facilitate growth, government regulation must be effectivelydesigned to address situations in which the competitive market fails and it must beadministered effectively. Regulation in most countries falls well short of these goalsand impedes the effectiveness of the market system.4 This surprising fact has beenthe basis of regulatory reform in both high-income and low-income countries aroundthe world. In these countries, the Government has had two regulatory reform goals:

1. To regulate effectively in instances in which government regulation iswarranted.

2. To move from a regulator of investors (by reducing regulation to aminimum), to be a facilitator of investment projects (by improving thebusiness environment).

Regulatory reform can lead to more regulations being able to achieve their objects,increased entry by new investors, and transition by investors from the informaleconomy to the formal economy. When regulation imposes costs on investors,investors can escape these costs by operating outside government regulation andgovernment corruption in the informal economy. The higher the regulatory costs,the more investors will choose to operate in the informal economy and the fewerbenefits from investment activity will be captured by Government in the form oftaxes on investment projects and worker income. If investors remain in the informalsector, fewer benefits of investment will go to workers in terms of receiving at leastminimum wages and benefits and working in healthy and safe conditions. Productsmade by investors in the informal sector usually also have lower quality and safety tothe detriment of consumers. The Government then has a high stake in developingan investment environment that is conducive to investment in the formal sector. Aninvestor-friendly regulatory environment is one means to this end.

The objective for consideration by GoA is therefore not to eliminate regulationentirely, but only to have regulations that address market failure and, when thisoccurs and regulation is needed, to have effective and efficient regulation. Such aninitiative will not only stimulate economic growth, but it will also encourage investorsto enter the formal economy with positive impacts on labour (pay, insurance,

working conditions), consumers (product quality), and on competition.

2 Impact of efficient, effective regulation

The positive impact of regulatory reform is not just a theoretical construct or anotherplea by the private sector for reduced government involvement in the economy.There is a strong link between the number of steps required to start a business andthe level of informal economic activity as investors choose to avoid the costs ofgovernment regulation by operating in the informal sector.5 There is also a stronglink between the number of steps, the time and the costs of regulatory complianceand government corruption and the strength of government institutions.

4This includes the high income countries of the Organisation for Economic Cooperation and Development(OECD) as well as developing countries, and particularly in transition economies that are moving from a highly

regulated, centrally planned to a market-oriented economy5 Liliana de Spa, Business Registration Start-Up: a Concept Note, Washington, D.C.: International FinanceCorporation, mimeo, October 27, 2005.


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Investor Roadmap

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The positive impact of regulatory reform can be seen in data from countries aroundthe world. World Bank data from 155 countries show that there is a correlationbetween the numbers of SMEs per capita in a country and the costs of business startup.6 This statistical relationship does not mean that if the costs of starting a newbusiness decline there will automatically be more SMEs in the formal sector.

Entrepreneurs will examine all the regulatory costs, labour costs, and tax costs andpossible government incentives for joining the formal sector before making thisdecision. Nonetheless, World Bank data show the strong relationship betweenreducing the costs and time of starting a business and increased business investmentand registration in the formal sector.

Another World Bank study using the same data shows that the quality of governmentregulation has a strong influence on a countrys growth rate. If a country could movefrom the bottom 25% of regulatory quality to the top 25%, its growth rate wouldincrease by 2.3%. By way of comparison, if a countrys primary education quality

was improved from the bottom 25% to the top 25%, the impact on growth wasfound to be 0.9%.7 Similarly, improving the quality of secondary education, reducing

inflation rates, and increasing government consumption were found to have muchsmaller impacts on growth than was the case for improving regulatory quality. Aninitiative to improve the quality of the educational system would be very expensive,investment would have to continue over the long term, and the impact of thisinvestment would only be felt decades later. As another example, tradeliberalization/reform in moving from a repressed trade regime toward free trade canstimulate growth, but only in the short run as the economy moves from one level ofGDP to a higher one.8 By way of comparison with the costs and benefits of otherreforms, the costs of regulatory reform are relatively low, need only be incurred once,and the positive impact of regulatory reform is immediate, large and sustained overtime. As discussed below, however, regulatory reform may require strong political

will to overcome entrenched interests whose jobs and standard of living is contingentof preserving the regulatorystatus quo.

Conversely, the costs of not reforming the regulatory system fall disproportionatelyon the poor, women, young people, SMEs, and foreign investors who are notfamiliar with the countrys regulatory practices and do not have relationship ties togovernment regulators. Yet, if Afghanistan is to achieve its growth goals, SMEs mustbe encouraged (or at the very least allowed) to flourish and, over time, inflows offoreign capital, management expertise, technology, and access to markets mustreplace donor funding and technical assistance projects. Women also need to be ableto access the mainstream of private sector development. A more streamlined

regulatory and licensing process reduces the disadvantages faced by womenentrepreneurs dealing with (male) regulatory personnel. As well, the benefits of amarket-oriented approach to development must be realized by the poor, women, andyouths if the Government is to achieve its overarching objectives.

Reforming regulation via this Investor Roadmap will have another positive impact. To the extent that it is successful in reducing the time and costs of regulatorycompliance, it will encourage investors to move from the informal to the formal

6Jacques Morisset and Olivier Lumenga Neso, Administrative Barriers to Foreign Investment in DevelopingCountries, Washington, D.C. World Bank and International Finance Corporation, mimeo, May 2002.7 Simeon Djankov, Caralee McLiesh, Rita Ramalho, Regulation and Growth, Washington, D.C.: World Bank,

mimeo, March 17, 2006.8 Moving to free trade typically leads to gains of about 0.25% to 0.75% of GDP. These gains are repeated eachyear as long as the free trade regime remains in place. Hence, for example, if a country with a GDP of $1,000


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sector. Formalization of the economy is an important goal of the government ofAfghanistan and this project can contribute to achieving it.

2.1 Regulation in Afghanistan

Afghanistan is in transition from a centrally planned economy to a market-basedeconomy. As well, its economy has been destroyed: in 2002, industrial production inreal terms was less than 10% of its 1978 level; by 2005, despite three years of rapidgrowth, industrial output was still less than 15% of its 1978 level.9 Yet, despite thesesignificant differences, much of the Governments regulatory apparatus (ministrystaff and regulations) are largely intact and unchanged, even though they weredesigned for a much different economic system and a much larger economy than theone that exists in 2006.

The GoA, led by the MoCI, has already undertaken a major initiative in regulatoryreform. In 2004, the MoCI reformed the process of business registration, reducingthe number of signatures required for a firm to obtain a business license from over

50 to just 5 and the amount of time required from 6 to 8 weeks to less than a week.Doing Business 2006 shows that among 155 countries, the time required to register abusiness ranges from 2 to 203 days, and the number of steps required to registerranges from 1 to 19. After the reforms, if an investor is registering with the MoCI,there are only five steps (application at the MoCI, acquiring a Tax IdentificationNumber, registering as a legal entity with the Commercial Court, a criminalbackground check, and payment of fees), and only one step if the investor registers

with AISA: filling out the AISA application form (AISA staff performs the rest of theprocess on the investors behalf). These dramatic reforms have vaulted Afghanistanfrom near the bottom to near the top of countries in terms of the efficiency andspeed of their business registration procedures.

This reform leads to several conclusions:

dramatic reform of the regulatory system is possible in Afghanistan;

entrenched interests in the Government bureaucracy can be dislodged if there isthe political will to do so in order to improve the regulatory system; and

those who benefited personally from the past system can be persuaded to acceptthe reform process.10

In part based on this achievement and its salutary effects on the investmentenvironment, in the ANDS, the Afghan Government has both accepted the need forregulatory reform and has set a firm timetable for this reform.

2.2 Best practice in regulatory reform

As mentioned above, poor regulatory practices have been found to be universalamong countries and conversely, all countries can benefit from or have benefitedfrom administrative reform of the regulatory process. This observation raises thequestion of why universally there are so many problems with government regulationof business. It is important to address this question, since, if there is nounderstanding of why a problem occurs, there is little hope of successfully correctingit and keeping it corrected over the longer term.

9 National Statistics Organisation, National Statistics yearbook, 2005, Kabul, Afghanistan: 2005.10The reform process at the MoCI took eighteen months as part of a BearingPoint Project.


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Investor Roadmap

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Three reasons have been identified for the problems of regulation11:

1. Unlike spending through fiscal budgets, there is no accounting systemavailable to the Government that can show the sizeable costs to the investorand ultimately to the economy of going through these administrative andregulatory procedures in order to obtain licenses. These costs are usuallyhidden, outside the accounting framework of either government or business.

Therefore Government tends not to recognize the costs to business and tothe economy of responding to government demands and of waiting fordecisions.

2. The most common cause of governance failure is lack of coordination acrossmultiple government institutions each with its own jurisdiction for someaspect of the economy. Such an issue of government structure in this caseleads to excessive and overlapping demands on business.

3. In government regulation, the benefits are concentrated among a fewstakeholders-government staff, facilitators, lawyers, and existing

producersand the costs are widely dispersed among many new investors isdifficult to reverse. Administrative regulations generated rents for manyinterests-lawyers who sell services to businesses to deal with regulations;facilitators who have expertise in the regulatory maze; civil servants who sellfavours, such as faster processing; and incumbent producers who want toreduce entry or make it costly for new entrants. Hence, regulatory barriersare often fiercely guarded by stakeholders and, in fighting them, in the shortrun, politicians may have to expend significant political capital to realise thepolitical gain from an improved investment environment only in the longrun.

These problems are exceedingly difficult to address in a sustainable way because

developing countries, such as Afghanistan, face a legacy of:

numerous interventions into business decisions from previous state-led growthmodels;

government staff who genuinely believe that Government must regulate andcontrol the economy via strict regulation of the private sector now as they did viastate ownership and central command in the past;

similarly, government staff who cannot envisage a ministry that does not regulateand ask the question, But what would we do if we do not have the X License toadminister? They cannot envision a government ministry whose major role is tofacilitate investment by the private sector, not regulate it;

inadequate understanding or appreciation of the private sector as the engine ofeconomic growth, and the benefits that accrue from an effective and efficientregulatory environment;

poorly paid civil servants who rely on the proceeds from regulation for theirlivelihoods;

poor communication skills, and limited appreciation of the value of transparentinformation sharing;

11 Scott Jacobs and Jacqueline Coolidge, Reducing Administrative Barriers to Investment, Washington, D.C.: foreignInvestment Advisory Service, Occassional Paper #17, 2006 and Scott Jacobs, The Importance of Institutions inDetermining the Investment Environment, Washington, D.C.: FIAS, mimeo, 2003.


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government staff, especially senior staff, can make phone calls to other ministriesto expedite personal paperwork to obtain licenses; private investors, especiallySMEs and foreign investors do not have these power and relationship networksin place; and

lack of public sector capacity to cope with the administration of an effectiveregulatory system.

As is dramatically illustrated in the step-by-step procedures that are required formany of the licenses in Afghanistan (see Annex 3), the resulting regulatory system iscomplex, non-transparent, often arbitrary, and highly interventionist. Theseregulations make it almost impossible to create a transparent, predictable businessenvironment. Government regulation in Afghanistan not only lowers the return toinvestors, but it also increases their risk of doing business in Afghanistan.

Studies have shown a close statistical relationship between the total administrativecost per license divided by Gross Domestic Product (GDP) for both foreign anddomestic investors and:

the countrys level of corruption;

the quality of governance of both private firms and government organisations;

the openness of government; and

the wage level of civil servants.

In other words, the reforms of the regulatory system are bound up in morefundamental reforms of government as a whole.12 To address regulatory reform

without addressing these other issues may be difficult or ineffective. Unless the GoAoperationalises its commitment under the Afghan Compact and ANDS to wide-ranging reforms to create an investor-friendly environment to foster the developmentof a market-based economy, then regulatory reform measures will, at the very best,be piecemeal and largely ineffective. If the GoA is indeed committed todevelopment of competitive market systems, then regulatory reform can be acentrepiece of the governments comprehensive reform measures. The Governmenthas shown its commitment to better governance through such initiatives as the PRR(Priority Reform and Structuring). It must now undertake the more difficult task ofcomprehensive regulatory reform.

Even in the most optimistic scenario, the reform process will be a long and difficultone. Government activities to discuss, design, and implement reforms should beseen as the force behind economic development and poverty reduction via private

sector development. In the most adverse conditions, the GoA has been remarkablysuccessful in developing and managing the macro-economy-exchange rate, inflationrate, interest rates, and the growth rate-to make them investor friendly. The nextstep is to do the same with the micro-economy at the level of the investor. Thisinitiative will require an inter-ministerial coalition, whereas macroeconomic reforms

were lodged largely within the Ministry of Finance.

Reforms in regulatory and administrative barriers can stimulate growth in the privatesector in terms of more companies being created and more companies moving fromthe informal to the formal sectors. They can also overcome bottlenecks, such as theability of insider groups to block economic reform and progress. The reform process

12 See Djankov et al, op. cit.


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Investor Roadmap

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must be seen not just as a means to an end but is itself a part of the process ofchanging reform capacities and the Government as a whole. As examples:

reforms can start a process of dialogue and negotiations between Governmentand other stakeholders, especially the private sector;

reforms can change the political balance by bringing objective parties to balanceor referee vested interests;

the reform process can transfer knowledge throughout the policy structure; infact it can develop the structure itself; and

the reform process can change the attitudes of political actors and influencedomestic debate about reform policies on other issues.

Experience with regulatory and administrative reform in many countries over timehas led to the observation of a number of similarities among successful andunsuccessful reform efforts. These are presented in Table 1 overleaf.


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Table 1: Similarities among successful and unsuccessful reform efforts

Successful regulatory reform

efforts

Unsuccessful regulatory reform

efforts

The reform agenda should besupported at the ministerial level(for reforms within a ministry) orcabinet level (for cross-ministerialreforms)

New institutions are created tomanage reform or a high-levelexisting organisation is given a newmandate to pursue reforms.

Inter-ministerial cooperation was

developed and/or enhanced duringthe reform process.

The private sector was brought intothe reform dialogue and even intothe policy design process;

The effort often begin as pilots,focusing on either a limited numberof formal requirements, or a limitedgeographical area, the purpose beingto instil dedication in people to

implement more widespreadreforms in the future, and to show

various (sceptical) audiences thatchange is possible and beneficial.

Weak political will in addressing theissues of corruption and vested interests(both in government and in the privatesector) and reducing protection of

vested interests.

Strong resistance to change withingovernment organisations that is able topreserve discretionary power and theopportunity for corruption.

Weak leadership and poor coordination

of the reform process between differentinitiatives for reforming the regulatoryprocess.

Lack of implementation even when lawsand regulations have been changed.

Action plans contain no performancemeasures to ensure that the changeslead to the desired results.

Although there is improvement onsome regulatory measures, there is

deterioration on others, such that theinvestor experiences no net change.

Ongoing corruption damages thecredibility of Government and its policyreforms among investors.

Other uncoordinated reformsundermine progress.

2.2.1 Lessons learned

The observations indicate in Table 1 above have enabled practitioners of regulatoryreforms to formulate a number oflessons learned:13

1. Adopt a multi-year time horizon for implementation, not just in reforming oneregulation, but for the entire regulatory reform process. Significant results fromregulatory reform only appear over the years; they are not immediate. Inparticular, in year two of the process, political attention may wander to otherissues and bureaucratic interests take control of the reform process.

2. Give reform oversight and management authority to a body that cuts across thewhole of Government. This structure requires the presence of a high-levelofficial at the centre of government who is responsible for the reform process or

13 See Jacobs and Coolidge, op cit.


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a high-level committee accountable to the centre of government. For example,the High Commission on Investment and its Chairman would meet these criteria.

3. The high-level committee should actively manage and obtain resources for thereform process. The committee should have a dedicated and accountablesecretariat, backed by active political oversight over time.

4. The high-level committee should ensure that the reform process actively involvesthe responsible ministries and organisations.

5. During the process there should be an active business-government dialogue, bothto obtain inputs on what needs to be reformed and how, but also to providebusiness with information of the reforms that are being implemented so that thereforms gain the support of a broad cross-section of the business community.

6. The monitoring and dissemination of results should be institutionalisedandgovernment civil servants rewarded based on these results. If governmentbureaucrats know that there will be on-going monitoring of results and that these

results are part of their performance appraisals (as envisioned under PRR), theywill be more interested in and responsive to reform initiatives over time.

7. Work with international organisations, such as the Foreign Investment AdvisoryService (FIAS) of the World Bank. Such agencies can benchmark change, giveexamples of best practice, and generally validate the process. Afghans may atfirst be sceptical of the possibility of significant reform. External agents canshow that other countries have faced these challenges-and met them.

8. The reforms should be implemented in manageable quantities-so that initialbuy-in can be secured to build support for more widespread reform in the future.

Several unsuccessful approachesshould also be mentioned:

1. Simply adopting an action plan without establishing the appropriate high-level,central institutional arrangements to implement it.

2. Assuming the rationale for the reform is known and accepted. Often, it is notmade clear what the problem is and why a situation needs to change.

3. Creating ad hoc committees or other groups with responsibility for implementingreforms that are outside the bureaucratic mainstream.

4. Finding and appointing a champion, often a strong minister, of the reformprocess. Ministers can change and the power of ministers can change over time.Regulatory reform must be institutionalised at the highest level independent of

personalities.5. Using an Investment Promotion Agency (IPA), as the focal point of regulatory

change. IPAs should develop strong relationships with business and a knowledgeof the regulatory problems facing business, but should engage with the policyprocess in an advisory capacity. An IPA could however have a vital role in thefollow up process by providing the secretariat of the high-level body is charged

with administrative reform.


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C The Investor Roadmap Project

As the first step in regulatory reform, with the approval of the Minister of Commerceand Industries, staff of the MoCI and ASI undertook an Investor Roadmap project.

This project was staffed by one international expert, a member of ASIs Afghan team

and three staff members from the MoCI, and with cooperation from AISA.

1 Introduction

The Investor Roadmap, an in-depth study of the steps required of an investor tobecome legally established in Afghanistan, addresses the procedural andadministrative barriers to investment and operations. This focus is appropriate at thecurrent time given that Afghanistan, like many of its neighbouring countries, hasprogressed in recent years to liberalize trade and investment policies at themacroeconomic level, and is grappling with the issues of public sector reform and theappropriate role for government in facilitating private sector development.

The Private Investment Law covers domestic and foreign investment in Afghanistan. This law gives some clarity to investors concerning their rights and obligations in Afghanistan. Nevertheless, despite marked improvement in some aspects of theregulatory environment for private business, most notably in business registrationand licensing, many aspects of business investment, operations and expansion remainproblematic. Many of the reforms to date have been on highly visible matters suchas taxes, tariffs, and monetary and exchange rate policies. The importance of thesereforms should not be underestimated.

Afghanistans past performance in regulatory reform at the macroeconomic level,however, now highlights the need for further second-tier regulatory and policy

reforms beyond the initial investor registration and licensing. These reforms lie atthe heart of understanding how GoA may be encouraging or impeding investmentand economic activity by the laws, regulations and procedures that have beenestablished by successive governments over time.

Despite the remarkable efforts of AISA under the oversight of the MoCI, the overalllogistical and administrative environment for new business in Afghanistan still fallsshort of what many investors expect, and of what will facilitate high levels of foreignand domestic private investment. Some of the constraints-when examinedindividually-may appear to be annoyances rather than binding constraints.However, when grouped together as a whole, these constraints appear to be asignificant deterrent to private sector investment and operations in the country.

Table 2: The 3 Goals of the Investor Roadmap

1. To develop a comprehensive investment guide, detailing step-by-step allthe requirements an investor must fulfil to invest, become fully operational,and continue operations over time.

2. To identify the many remainingbottlenecks and inefficiencies (and theirrelative magnitude) and make recommendations on how best tostreamline them, i.e., through eliminating regulations, reducing the numberand amount of supporting paperwork to comply with regulations, and by

making approvals more automatic and transparent and less discretionary.3. To analyse other factors impacting the investor that result from the


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2 Findings: Observations and policy initiatives based on the fieldwork

and questionnaires

The Investor Roadmap team gave questionnaires in structured interviews concerning46 licenses at 38 organisations. (We also received information on two licenses

transfer of private lands and transfer of public lands from the USAID fundedEmerging Markets Group project and from AISA on the AISA licensing process.)

We then translated these questionnaires into English and reviewed them forcompleteness and clarity; in many instances this process required going back to theorganisations responsible for the license with supplementary questions and requestsfor clarification. These changes were then translated back into Dari. The correctedquestionnaires were then taken back once again to the organisations thatadministered them with a request to check the data on them once again, makecorrections, and ultimately to sign and stamp the questionnaire to certify that the data

was correct. We then interviewed investors for their input on such issues as thetimeframe of obtaining the license and the actual out of pocket costs involved.

The questionnaires asked data on:

the name of the organisation;

the ministry under which it operated;

the license administered;

the law under which it was administered;

the documentation required to obtain the license;

the timeframe for obtaining the license;

the cost of the license and other fees;

the step-by-step procedure for obtaining the license;

a description of any administrative reforms that had been undertaken over thepast two years and their results; and

the respondents opinion as to additional reforms that might be useful.

These findings are based on the responses to these questionnaires. The findingsare, in general, for the licensing process as a whole rather than for reforms in any onelicense. This approach was taken since the Investor Roadmap project has notdeployed any experts in specific licenses to examine them relative to internationalbest practice. In this regard, Phase I of the Investor Roadmap project (as is commonin all such projects) has examined the licensing process from the perspective of theinvestor:

documents required;

fees;

time frame for obtaining the license; and

procedural steps required to obtain the license.

It has not attempted to determine if any given licensing process is effective inachieving its goals, e.g., are extant environment regulations effective in protecting theenvironment? Are extent building codes effective in preventing building collapseduring an earthquake, and so on?


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None of the project team members are experts in the specific fields of licensingactivities, e.g., building permits, environmental control, customs clearance, hiring andfiring procedures and social security. Hence, detailed recommendations as to bestpractices for any given license and changes in the detailed procedures will have toawait the decision of Government on which licenses are to be addressed in detail. At

that time, experts in each of the licensing processes can be used to address theseprocedural issues.

2.1 Issue 1: The locus of the regulatory reform initiative

The first, and most fundamental, decision for the GoA to make at thebeginning of the regulatory reform initiative is the locus of the reform effort.

As described above in lessons learned, this locus should be at the upper levels ofthe GoA, should involve high-level members from the major economic ministries,

and should based on a general consensus that reform is both necessary andachievable, rather than on the initiative of one champion of reform.

The High Commission on Investment would seem to fulfil all these requirements.Using the High Commission on Investment, whose clear mandate is to improve theinvestment environment, would have a clearer focus on and interest in theseregulatory issues. The High Commission on Investment already exists, but as yet ithas not undertaken an on-going, serious initiative to reform the investmentenvironment.

Policy Initiative #1

The High Commission on Investment could be chosen as the locus of this

regulatory reform initiative. AISA could serve as the secretariat for thisinitiative.

2.2 Issue 2: Information deficiencies

In most organisations a description of the procedures, documents required,fees, or timeframe are not posted, available for distribution, or on theorganisations website.

The MoCI staff who administered the questionnaires for this project repeatedlyencountered instances in which the information supplied by government staff aboutthe licensing procedure was incomplete, inaccurate or out of date and had to besupplemented by repeated meetings and phone calls. In some instances, informationsupplied by one government staff member was completely contradicted by another inthe same department of the same ministry. In several instances, a departmentdirector was at the meeting in which his superior, the director of a directorate,outlined the licensing procedure. Later in his office, the department directorinformed the researcher that the data supplied by his director was incorrect. In themost extreme case, one licensing department completely revised the step by stepprocedures for obtaining the license three times before they were able to agree thatthe procedure on our questionnaire was correct.


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Lack of information and inconsistent information can be major deterrents toinvestors to initiate the process of licenses their investments and to enter the formalsector. It is especially costly for SMEs, new investors, and foreign investors,including those of the Afghan Diaspora, who have little experience with regulation in

Afghanistan and do not have high-level contacts in Government to facilitate

obtaining the requisite information.14

These information problems:

allow staff to delay the licensing process to insulate incumbent producers fromnew entry;

allow staff to provide the investor with incorrect information that, if acted upon,will further delay the licensing process;

allow staff to extract money to expedite the process;

allow staff to increase fees for services above those authorised by the regulatoryorganisation;

enhance the central role of fixers who are indeed knowledgeable in theprocesses, and who may or may not be agents of government staff;

make knowledge of licenseswhat to do, how to do it, who to do it with, andhow much to paya prime competitive strength, i.e., it rewards unproductive,even anti-productive behaviour; and

increases the ease with which entrenched firms can block new entrants.

Increases the costs of moving from the informal sector to the formal sector, i.e.,impeded formalization of the private sector, a major objective of theGovernment.

For an investor, this disagreement among regulators as to the correct procedures canbe a significant barrier. It may lead to the situation in which the investor goesthrough one procedure only to find that the procedure that he/she has followed isincorrect. This situation also places enormous power in the hands of governmentstaff who may, at their discretion, move paperwork through the process even if it isnot correct. Conversely, this situation allows staff to arbitrarily reject paperwork asincomplete or incorrect with the investor having no recourse but to follow these newdemands.

If the Investor Roadmap team had difficulty in reaching agreement with the licensing

organisation on the data on the questionnaires, imagine the difficulty of investors indiscovering what documentation is needed to obtain each license and what are thecorrect procedures to follow.

Despite the considerable care that has been taken by both Investor Roadmap teamand the license granting organisations to ensure that the data contained on thequestionnaires is correct, inevitably there will be some residual mistakes and, overtime, as procedures are changed, unless the descriptions of the step-by-by stepprocedures are changed as well, their errors will increase.

14 Ironically, one of the components of the business licensing/registration process, the criminal backgroundcheck, is designed to reduce the uncertainty of all those dealing with a licensed investor. It provides information

to workers, suppliers, and customers that the investor has no criminal background and that there are no courtcases currently pending against the investor. Yet the licensing authorities (except for AISA and the MoCI)withhold information from the investor about the process itself of obtaining a business license.


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Even with these errors, the Investor Roadmap would still be useful to investors,since, if nothing else, it gives a starting point and an overall guide against whichactual procedures can be identified as exceptions.


Undertake an initiative to commit to clearer and more transparent use ofinformation to explain the regulatory process. As one component of thisinitiative, to have each regulatory organisation post the informationcollected via this Investor Roadmap Project on the Bulletin Board of theorganisation, prepare handouts for investors, also post the information onthe organisations website, if one exists, and train the staff of theorganisation so that they can explain the procedures clearly andconsistently.

Although this initiative seems not only an obvious one to follow but a simple oneto implement, it might meet significant resistance, since it would clarify therequirements and the costs of each license and hence reduce the latitude for

payments to both government bureaucrats and facilitators. Despite thesepotential obstacles, this initiative would be relatively easy to accomplish comparedto many of the others described below. After all, who could argue against it? On

what basis? This Initiative could also give reform a fast victory to show theinvestor community, aiding in overcoming their initial scepticism and cynicismabout the Governments desire to reform the regulatory system in order to assistthe private sector.

2.3 Issue 3: All investors must register as a legal entity as well as register

either with the MoCI or with AISA

In order to operate legally, an investor must register as a legal entity at theCommercial Court of the Ministry of Justice. This process is comprised on threesteps:

obtaining a police clearance;

obtaining a tax identification number; and

advertising in the official gazette giving the basic information of the proposedfirm: name, business, ownership, and so on.

If the investor is a trader and hence registering with the MoCI, the investor mustundertake this process by him/herself as part of the process of also obtaining alicense from the MoCI. If the investor proposes to operate in all other sectors, itmust register with AISA. In this case, AISA itself undertakes this process ofregistering the investment project as a legal entity-and charges a substantial fee forthese services. Although Afghanistan ranks in the top ten countries in the world interms of having the fewest steps for an investor to register and the time it takes toaccomplish these steps, for its level of income, the costs of registering an investmentproject in Afghanistan are relatively high15.

This structure of the licensing process allows AISA to present itself as a one-stopshop for investment: AISA staff register the investor as a legal entity with the

15Afghanistan ranks high on the list of countries ranked on the basis of th e amount of money an investor mustpay to register divided by Gross National Income per capita.


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Commercial Court (as well as obtain the investors TIN and handle the investorsobligations of reporting to the Central Statistics Office). These activities give AISAthe rationale for the fees it charges, i.e., since AISA is a one stop shop for businessregistration as well as licensing by AISA for the investor, it maintains that its chargesare reasonable for services rendered.

In every country an investor must register the investment project in some manner with the Government, most often with the Ministry of Justice or one of itssubordinate organisations. This registration is needed so that the investment project:

conforms to one of the legal forms of business operation so that it is a legalentity with rights and responsibilities under the law;

has a legally constituted ownership structure;

has a legally constituted board of directors; and

complies with provisions in the Business/Commercial Law/Code on goodgovernance.

As part of this procedure, depending on the country, prior to receiving this license,the investor must also register with the tax authorities and with the national statisticsoffice, so that the investment project pays the legally mandated taxes (and contributesto the national treasury) and so that the Government can monitor and regulate themacro and the micro economy based on the statistics provided to it by investmentprojects. As well, in some countries the investor is required to obtain policeclearance to ensure that he/she has no criminal record and that there are no courtcases outstanding at that moment so as to assure the other stakeholders in the project(workers, suppliers, lenders, customers) that the investor has no criminal record.

For all these reasons, this registration process adds value by correcting for market

failure. This procedure is absolutely necessary so that the investment projectbecomes a juridical entity that can enter into contracts, sue and be sued, and so on.

This registration process adds significant value, and must be retained.

Beyond this fundamental business registration, however, it is less clear why requiringinvestment projects in general to obtain an additional license in order to operatebeyond the one that makes them legal entities adds value. As outlined above, therationale for government regulation is based around some form of market (or morebroadly institutional) failure that the regulation reduces or corrects entirely. Thesecond AISA license does not correct for any market failure and hence does not add

value to the economy. Instead it destroys value by imposing additional costs oninvestors.

AISA does perform a valuable function in assisting investors in obtaining a TINnumber, criminal clearance from the police (Ministry of the Interior), advertising theinvestment project in the Official Gazette, and ultimately registering their investmentprojects with the Ministry of Justice. In this sense, it is a true one stop shop forinvestors. It also collects additional information (such as a business plan) frominvestors beyond that needed for these other activities and issues them an AISAinvestment license. As with the licenses issued by the MoCI, it is difficult to discernthe value of this additional AISA license, beyond that derived from the basic businessregistration.

Essentially the AISA license serves as a fund raising device for AISA. There is a long

history of discussion on the various means of funding Investment Promotion Agencies, such as AISA. Essentially charging all investors for a license is one of


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them. If in fact the services that AISA provides to investors via its one stop shop areof value to investors, then it could allow investors to undertake these processes bythemselves or, if they chose, AISA could do them itself and charge for servicesdelivered.

At one time, when Afghanistan had a controlled (repressed) trade system in whichthe Government attempted to regulate imports and exports, licensing traders waspart of the control process, a process that the Government believed yielded neteconomic benefits to the economy. At present, however, Afghanistan has removedall these restrictive measures and its policy is to foster the development of an open,liberalized, market-based trade regime.

This policy situation raises the issue of the value of the traders licenses issued by theMoCI for various types of trading activity. In 2004, the procedures for obtaining thelicenses administered by the MoCI were streamlined, such that the number ofsignatures required was reduced from 53 to 5 and the length of time needed toacquire on was reduced from 6 to 8 weeks to about five days. Hence this licensing

process is faster and more efficient than the equivalent one in most of the countriesin the world.

With the removal of trade restrictions, however, the value of the MoCI tradinglicense would seem to have been eliminated as well. The next step in administrativereform at the MoCI would seem to be the removal of the licensing requirement fortraders.


Despite its low cost in terms of time, fees, and other expenses, theusefulness of the trading license administered by the MoCI and AISAslicense for investors in other sectors should be re-examined.

In the MoCI this initiative might be undertaken as part of the PriorityReform and Restructuring (PRR) process. In AISA it could be undertakenas part of AISAs evolution into a true investment support and facilitationagency.16

If the MoCI were to initiate these two reforms, in addition to improving theinvestment environment and reducing investment costs, this initiative would havetwo other important effects:

It would give the moral high ground to the Minister of Commerce andIndustries and would allow the Minister to advocate regulatory reform inother ministries which are members of the High Commission on Investment.

It would also send a strong signal to the business community that theGovernment was indeed serious about regulatory reform in order to create abetter investment environment.

2.4 Issue 4: In addition to the AISA license investors in many sectors must

also register with and obtain a license from a sectoral ministry

In many industry sectors, a foreign investor (and for most of these sectors a domesticinvestor) must also obtain a license from the line ministry responsible for the

16The assessment that AISA offers limited support to investors despite its name is the conclusion of GTZ, notthis Investor Roadmap project.


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industry in which it plans to operate. This procedure is necessary in a wide range ofindustries:

Insurance

Banking

Foreign exchange dealer

University and higher education

Hospital/clinic

Drugstore/pharmacy

Security

Pharmaceutical production

Transportation

Aviation

Construction

Telecommunications

Radio and TV

Travel agency

Real estate agency

Animal clinic

Printing press

Film production

Oil pipeline

Natural resources: iron, copper,coal, cement

Hotels and restaurants

Often, however, depending on the procedures of the line ministry involved, investorsmust obtain their license from the line ministry before they have registered as a legalentity or with AISA. For other ministries, investors must register with AISA beforeseeking to obtain a license form the ministry.

The rationale for many of these licenses is clear: government regulators are in a betterposition than are potential customers to assess whether the investor has the technicalcapabilities to operate the investment project safely. For example, the Ministry ofHealth can assess the qualifications of the investor and the staff of a pharmacy todispense medicines safely better than can a customer with a medical problem.

Similarly, the government can assess the financial expertise and solvency of banks toprotect depositors; of insurance companies for those they insure, for pharmaceuticalcompanies for the quality and the purity of the drugs they produce, and so on. In allthese instances, there is a clear market failure that government regulation can, at leastin theory, address. Whether this regulation is effective or not is not the issue here.Unlike for the MoCI or AISA licenses analyzed above, many of these licenses havethe potential for yielding added value to the economy. If they are designed andadministered effectively so that their potential value is realized in practice, theyshould be retained.

Several of these industry-specific licenses do not have even the potential to yield net

benefits to the economylicenses for travel agencies, real estate agencies, printingpresses, film production, transportation and security firms. For companies in theseindustries, a simple business registration (as is already required of them) wouldsuffice.

Such an initiative would place Afghanistan among the many countries in the worldthat have moved to limit industry-specific licenses to investment projects withimplications for public health, national security, and the environment, and for allother activities put in place a simple registration system that does not require any sortof government approval whatsoever.


The GoA may consider abolishing the industry-specific licenses for many ofthe industry sectors listed above. In addition, it should also consider the


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licenses required from the Ministry of Mines that investors must obtain inorder to bid for leases on mining projects. Instead of requiring the licenses prior to bidding, the qualifications of the bidding companies could beassessed as part of the bidding process.

2.5 Issue 5: Cumbersome licensing processes

2.5.1 External vs. internal movement of paperwork

Most licensing organisations, except for AISA, almost all of the paperwork is movedexternally by the investor, i.e., the investor takes the various forms from office tooffice during the application/approval procedure, rather than the organisation havingthe paper flow move internally.

In most high-income countries, the paperwork for regulation flows within the

organisation. The investor deposits the required documentation at office orreception area and, if it is satisfactory, the investor picks up the license at anotheroffice. In Afghanistan, however, the investor, or the investors representative mustphysically carry the paperwork from desk to desk and from office to office. Theinvestor waits in the outer office while the bureaucrat works down the stack onhis/her desk to the investors application, processes it, signs it, and gives it back tothe investor to take to the next step in the process to obtain the next signature.

This procedural system increases the cost to the investor in terms of time and delayin obtaining a license. As well, this procedure is an invitation for corruption, sincestaff can delay procedures until they are satisfied by the investor or the investorsrepresentative or facilitator. Small investors and poor investors who cannot easily

pay these bribes go to the end of the line at each position in the process. Large or wealthy investors can jump the line and/or delay, disrupt, or prevent competitorsfrom being licensed. Hence these investors might want to continue a system thatallows them to save time and effort in exchange for a small expediting fee. Itshould be borne in mind, however, that for each license that is expedited, perforce allthe others in the stack awaiting processing are delayed.


MoCI could encourage each license issuing institution to redesign thepaperwork flow so that it is largely internal rather than external.

Some opponents of this process might allege that this is an integral part of theAfghan bureaucratic system and hence cannot be changed. At AISA, however, thepaperwork flow is internal. Perhaps not coincidently at AISA staff are paid aliving wage. Based on interviews with investors, the expediting fees to obtain alicense are often roughly equal to the legitimate fees charged by the regulatoryauthority. At the MoCI, when the number of steps required to obtain a license

were reduced by 90%, perforce the expediting fees were reduced by an equivalentamount. These two examples of reform illustrate how despite historicbureaucratic processes and attitudes, reform can be implemented successfully.

2.5.2 Entrance to the licensing process in each organisation

The starting point of the licensing process in each license-granting organisation istypically at the top of the organisationat the minister or deputy ministerial levels


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(or equivalent). The review, signature and order of this high-level person is neededbefore the license application can move downward until it eventually reaches thelevel at which concrete evaluation is actually performed by lower-level staff in theimplementing departments/directorates. It is difficult to ascertain the value added ofthese high-level reviews. In addition, gaining access to the person at the top of the

pyramid may prove difficult, frustrating, time-consuming and expensive. Investorsoften have to identify and form a relationship with someone with access to the top orfind an expediter to gain this access. Finding the right expediter and determiningthe correct fee for services is in itself a problem for first-time investors and,conversely, a competitive advantage to experienced investors and those already in theindustry. This process is also a disproportionately high barrier to entry to SMEs,

women and the poor. Starting the entry process at the top of the organisation wouldseem to waste the time and resources of both the investor and of these high-levelofficials for no purpose.

During the reform process in the MoCI regarding trading licenses, the starting pointof the process was move two levels downward in the ministry. Such an initiative

might be undertaken in licensing organisations in general without a detailedexamination of their overall licensing process.


The government may consider undertaking an initiative to move thestarting point in the licensing process further down in all the organisationsadministering licenses to investors. This could be done without a detailedexamination of the individual processes themselves.

2.5.3 Cross-referencing/pre-conditions, cross checking and rechecking

The procedures for acquiring many licenses often have more steps than would seemto be necessary. As one example of the number of unnecessary steps in the licensingprocess, recall that the reform of the trading licenses obtained from the MoCIreduced the number of signatures needed from over fifty to five. These lengthyprocedures are due to several reasons.

As described above, upper-level ministry staff are often involved at the beginning ofthe licensing process as an entrance way to the licensing process. Thisphenomenon has been observed in many developing countries, but is especiallyprevalent in countries with a past of Russian central planning: upper level staff ashigh as the Minister are unwilling to delegate their authority to lower level staff who

have the technical expertise evaluate the license application.Many licenses have preconditions that the investor holds other licenses/registrations.For example, in order to obtain a trading license from the MoCI, the investor mustfirst register the company with the Commercial Court, obtain a TIN, and obtainclearance from the police that he/she has no criminal record. In order to renew thetraders license, the investor must have received a tax clearance from the Mustofiat.If the investor has had problems with the Mustofiat (or the Mustofiat is overworkedand cannot issue tax clearances quickly) the investor will not be able to renew the

AISA or MoCI license and hence will not be able to import inputs or final goodsand, at worst the operation comes to a halt.

Another approach is to isolate the requirements for obtaining one license so that theydo not contain conditions of having already obtained another license, i.e., to reducepre-conditions for obtaining a license so that they do not include possession of other


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licenses or approvals. As an example, to register a vehicle requires the owner toshow that customs duties had been paid when the vehicle was imported. Thisprecondition was imposed to try to reduce the incentives to smuggle vehicles into thecountry without paying duty.

In spite of the heavy paperwork requirements to obtain a license, one ministry maynot be willing to accept another ministrys certification that an investor has indeedmet the requirements for obtaining a license. In order to obtain one license, thelicensing authority may not only require that the investor have another license, but it

will examine if the issuing authority for that license should have issued the license inthe first place. For obtaining a water connection, the Water Department may notonly require that the investor shows his/her land title to the property but theDepartment may review whether this land title is valid or not.

A licensing organisation may not accept certifications/licenses made in the past fromother organisations or even its own past licenses. To renew a vehicle registration,the Kabul Traffic Department requires that the owner obtain a new certification

from the department of Customs that duties had been paid; it will not accept theoriginal one. As well, it will not accept its own vehicle registration as evidence thatcustoms duties had to have been paid or else the original registration would havebeen issued. If a driver loses his/her drivers license, the driver must go through theentire licensing process again (including drivers instruction and training), eventhough the department has the records and documentation from when the originallicense had been issued.


The licensing procedures of organisations could be reviewed with a view toremoving cross referencing/pre-conditions to the licensing requirements

and steps that check the validity of previously issued licenses or licensesgranted by other organisations.

2.6 Issue 6: Most obstructive processes and licenses

According to investors, the most difficult, time consuming, and expensive processesin the investment and start-up of a project in Afghanistan were:

land acquisition/transfer;

building permits;

licenses from some line ministries, such as mining and telecommunications; and

customs.

The 6 economy-wide issues most often raised by FIAS (Foreign Investor AdvisoryService of the World Bank)17 as posing barriers to investors in developing countrieshave been:

business registration;

site development/building permits;

customs;

17 Scott Jacobs and Jacqueline Coolidge, Reducing Administrative Barriers to Investment, Occasional Paper #17, FIAS: Washington, D.C. 2006.


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access to land;

employment procedures; and

tax administration.

Note that the GoA has already been very successful in addressing the most

problematic barrier for investors worldwideinvestment registration and licensing-for all investors who do not need industry-specific investment licenses: forinvestment registration through AISA (and to a slightly lesser extent through theMoCI) Afghanistan leads the world in the high speed and fewest number of steps inits investment licensing.18 This fact should be borne in mind by all those who saythat administrative and regulatory reform are impossible in Afghanistan and thatinstead investors should understand the Afghanistan situation.

The other licenses that have been identified by FIAS as causing problems in otherdeveloping countries do not do so in Afghanistan to that degree. As yet, taxinspection is in its infancy and tax inspectors have not yet gained the power to

terrorize investors as they have in other countries, particularly countries in which theSoviet Union at one time played a major role. There has been extensive reform incustoms clearance and in the licensing process for imports and exports. No importlicenses are needed for most products and for standard products, e.g., consumerelectronics, personal care items, clothing, and so on, customs clearance can beaccomplished in a matter of hours.

2.6.1 Land acquisition and transfer

In Afghanistan by far the most costly, time consuming and risk process that aninvestor faces is the acquisition of land. This conclusion about the investmentprocess is not a new one; the problems associated with land acquisition are frequently

raised by investors to the Government and in the position papers of investorsassociations. At base, the major cause, but not the only cause, of this problem is theland titling problem: in Afghanistan, the majority of the private land has no clear titleand, even for land that does have a clear title, it is difficult to establish that the title isindeed clear. This problem is being addressed by a major USAID-funded projectfocused on land titling. Land title transfer is another component of this project, butnot its major focus.

The land title problem is complex and is likely to take many years to resolve. Overthe years, different central governments have often rewarded the leaders of theirsupporters by assigning land to them; these leaders in turn have given this land totheir followers. As well, traditional titles have tended to be inexact in specifying thelocation and the dimensions of the property they describe. Records of land titleshave also been trashed, destroyed, and stolen over these turbulent years. The landcourts and the judges in those courts who are in charge of the land titling andtransfer process are said to be among the most corrupt in Afghanistan. The lengthyand elaborate process of transferring land title was designed to increase the securityof the land titles and their transfer via this process; instead the process is the sourceof much of the risk and expense for the investor and land owner.

All-in-all, the land transfer process in Afghanistan requires the seller to accomplish34 steps; it takes about six months; the legal fees are almost 10% of the sales price

18 See World Bank, Doing Business in 2006: creating jobs, Washington, D.C. World Bank and International FinanceCorporation, 2006.


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and the bribes needed to accomplish the process range between 10% and 20% of thesales price of the land for small transactions.

Additional resources in more areas need to be devoted to this problem. It has aseverely negative impact not only on investors but on Afghans as a whole. Atpresent, whereas Afghanistan ranks among the best ten countries in terms of thenumber of procedures and the amount of time needed to register a business, it ranksin the worst ten countries in terms of the number of procedures and among the

worst twenty countries in terms of the amount of time it takes to register land.

Policy Initiative 8

The GoA may consider a request for more aid resources to be devoted tothe land title problem. At the same time, the issue of land title transfershould be given more prominence in these initiatives.

AISA has addressed the land ownership problem in another way: with donorfunding it has created one industrial park and has three more in various stages of

completion. The finished park, just outside Kabul is full; as soon as each park isopened to bidding, the number of investors who register to bid is usually doublethe number of plots of land available. This shows the pent up demand for land

with clear title. These industrial parks are not suitable for many investors whoneed land in specific places and areas (hotel and restaurants, for example), or alongroads (traders and transportation companies).


The GoA might consider restructuring AISA such that development andmanagement of industrial parks is split off into

Documents

Investor Roadmap Full Report English