Investor Roadmap Project

ASI - MoCI

17 October 2006

EXECUTIVE SUMMARY

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

Regulatory and procedural reform will contribute towards achieving the Afghanistan Compact benchmark, and the ANDS sector targets for Private Sector Development and Trade, particularly formalisation (by removing unnecessary obstacles to operating in 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), and gender (by addressing gender based power dynamics between state officials, who are predominantly male, and aspiring female entrepreneurs).

Developed by USAID and the World Bank's Foreign Investment Advisory Service (FIAS), the Investor Roadmap is a diagnostic tool that helps developing countries identify and understand the regulatory and administrative constraints (red tape) that hinder commercial activity. 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 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 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 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 procedures related 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.

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 not know what documents are required, how much to pay, what process steps to take or how long the process should take. This information gap gives power to government bureaucrats 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 the paperwork from office to office - and wait outside each office for days and days while the application is being processed. Not only is this an inefficient use of investors' time, it also 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. Yet this appropriate action is usually another review, signature, and an order for the next level down to take appropriate action. And so on for up to five levels of the organization until something is actually done to assess the application. This procedure wastes both the time of investors and these high-level ministry personnel to no apparent purpose. It also increases the number of people who have to be "satisfied".
    

4. Licenses are often cross referenced, such that to obtain one license requires having another 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, must have 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 AISA license, the investor must provide documentation form the tax authorities that the project's 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 vital license cannot be obtained.
    

5. A similar aspect of the system is that not only do some licensing procedures require another license to be obtained already, but, even if the investor has this license, he/she must 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, the investor obtains letters from this Ministry to AISA, the Ministry of Finance, the Kabul tax office, and the Ministry of the Interior all checking if in fact the clearances that the investor already has are in fact authentic.
    

6. Foreign investors (and in most of these sectors domestic investors as well) 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 sectoral licenses.
    

While licenses in some of these sectors have the potential for creating economic value, in many 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 AISA websites for the use of investors.
2. All organizations that administer these licenses and processes that have websites also post them.
3. This information be posted in the relevant offices in the organizations.
4. The reform process be composed of:

1. reduction in the number of sectoral licenses.
2. reexamination of the AISA and MoCI licenses.
3. 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" and "cross checking" of one license with another.
4. assisting in other TA initiatives to reduce the regulatory burden of several licenses and process, such as land transfer, building permits, customs, and tax administration from an investor point of view.

 Investor Roadmap Master List