Environmental, supply and demand side constraints to investment

Building solid foundations for the future

There are plenty of Afghan businesses that want to invest. All they need is the right conditions, a business plan, and a ready supply of affordable finance.

And, hey presto, investment will happen.

Few people would argue with this chain of logic, and consequently much effort has been expended on improving the investment climate, making finance available, helping with business planning skills and/or providing financial incentives to investors.

But all too often, this effort has missed probably the most significant single obstacle to private sector investment in Afghanistan.

Rather than taking a long, hard look and devising structural solutions to the deep deficit of management expertise and experience in Afghanistan, the tendency has been to focus on the external and environmental constraints to growth.

Investment climate
A poor investment climate is frequently the first culprit to be blamed for low levels of investment. Laws and regulations, infrastructure, governance and corruption are said to determine levels of investment.

No doubt such factors do influence investment decisions, and a favourable investment climate is generally associated with greater investment. But I do question whether there is anything like a causal relationship between a good investment climate and increased levels of investment, and if there is, I would also ask which way the causality flows.

Put simply, moving up or down one or another league table in itself does not lead to more or less investment. The vast majority of investment in any emerging economy is domestic investment, and very often this money has nowhere else to go, so Afghanistan's position in a particular league table is largely irrelevant to an individual investment decision.

Access to finance
Typically, the next external weakness that is blamed for the low levels of investment is the lack of commercial finance. If only the banks would lend money, if only interest rates were lower. But the banks do lend money, just not to Afghan businesses, and interest rates on commercial lending are high for a very good reason.

The main reason for high interest rates in Afghanistan is that lending money to businesses is a very risky thing to do. There are two important contributory factors: first, most businesses are so poor at keeping accounts and so busy avoiding tax that they are unable to present anything like reliable financial records that show their history, and secondly, the typical Afghan business owner/manager struggles to construct a coherent business plan, a rational investment budget or a convincing financial projection.

My strong conviction is that access to finance problems are as much - if not more - on the demand side as they are on the supply side. There is room for supply side interventions, but these need to be carefully designed and implemented in close co-ordination with equivalent work with businesses to help them to become credible borrowers.

Wrong financial products
The whole issue of availability of Islamic financial products is very relevant to Afghanistan. Many business owners seek Islamic financial products because they have strong and sincerely held religious convictions. Without being too cynical, it is clear that others are more driven by their understanding that there is no interest charged on Islamic finance. Discovering that there are other charges can come as a bit of a surprise.

But whether we are talking about Islamic or conventional finance, lenders apply the same rigorous standards in lending decisions and the same obstacles to providing finance emerge.

Access to business development services

A fortune teller in the bazaar, about as much use to
predict the future as a typical business plan

This is another commonly quoted reason for low business investment. Whole multi-million dollar projects have been set up in Afghanistan to "help" businesses to write business plans (for which, read write them on their behalf).

As a result, the BDS market is dominated by inadequately qualified, sometimes downright incompetent, business consultants and service providers. Like mushrooms, these people have sprung up overnight to grab their share of the donor financed subsidies that are flying around.

And funnily enough, despite the SWOT analyses and the fancy diagrams, such business plans fail to secure the financing the business was looking for.

In all too many cases, these business plans are not worth the paper they are written on, let alone the fees that have been pocketed by the consultants who wrote them. Sadly, most businesses are no closer to having a bankable investment project with their business plan than they were beforehand.

Time to reflect
Despite all of this, many companies have managed to complete investment projects: often on a small scale and inefficiently, often without commercial finance, and frequently without a well developed notion of how things are going to work afterwards. And maybe this is how things should be for the time being. Until businesses manage to acquire the culture, practices, and skills that will allow them to borrow to invest, we should engage with them directly - from investment planning, through implementation to running the business afterwards.

And nine times out of ten, even with small, self-financed investment, the real problems are to do with the complexities of managing the business. Challenges such as securing supply chains, training and managing workers, achieving production quality and quantity targets, securing and managing working capital, developing distribution networks and marketing products effectively, all tend to be a much sterner test of the capacity of business owners and managers than building and commissioning a building, or buying and installing machinery.

So I would argue that the vast majority of business owners in Afghanistan need to take a long, hard look at themselves in the mirror and find the answers to two questions:

• How to make themselves and their investment plans realistically bankable? and 
• How to run a growing business? 

This is not to suggest for one moment that Afghan business owners are stupid or lazy, it is because many simply don't have relevant personal experience or the supporting management structures that they need, or they don't know how/are unwilling to access outside expertise. Unless we all face up to these realities, successful investment will continue to be the exception rather than the norm.

Women as investors, professionals and workers in Afghanistan

Spinning wool yarn for carpet weaving

Women's economic empowerment is a frequently discussed topic in development circles. But, considering how much attention it receives, and how often it is emphasised in project documents, it is extraordinarily difficult to assess whether all this time and effort has achieved the intended results.

More girls are going to school than before - but what about the quality of the education they receive? And are families as willing to invest their hard earned money in a daughter's schooling as they are in a son's?

Women do work - in the professions and in skilled jobs - but such opportunities are largely restricted to urban centres and even then they are extremely limited, and there are strong cultural counter-currents. And are there any more women working today than when there were women bus-drivers in Kabul during the Soviet occupation? (I honestly don't know the answer to that question - maybe someone could shed some light?)

There are female investors and entrepreneurs, but still very few, and sadly (as with their male counterparts) some of those who have set up businesses owe more to their capacity to access donor subsidy than they do to their entrepreneurial skills.

Walking home from school - to a different future?

The painful reality is that despite all of the well-intentioned efforts and the "mainstreaming" of gender issues, very little change has been achieved in women's economic status in Afghanistan over the past decade. Or at least, that is how it looks on the ground. Some might say that things have even started to go backwards...

However, in this apparently bleak landscape, there are glimmers of hope that a woman can enjoy something like the same economic opportunities as a man. One of the professional satisfactions of working on the Afghanistan Business Innovation Fund has been to see the way that "our" investors have engaged women in their businesses. Not because we have subsidised them to do so, or because we have imposed quotas, but because it makes business sense for them to do so.

Women investors
We tried so hard to reach and attract female applicants to the competition for ABIF grants. We didn't expect that many, because statistically, there aren't many businesswomen in Afghanistan, but there were hardly any at all. Most of those who did apply came more from an NGO-type perspective, looking for handouts, rather than a business background with the makings of a commercially viable plan.

Out of 500 applications, that led to 23 grant awards, only one of the successful applicants was a woman. We made no concessions during the selection process. This application was submitted to scrutiny that was as rigorous as all of the others, and the grant was won in fair competition. And now, the investment project is largely complete and the business (delivery of primary healthcare in rural communities) has made a good start and looks to have a very promising future.

For sure, one of the lessons learned from the ABIF experience, is that we need to do even more to open the competition to female applicants. For example, we should probably look again at our selection criteria, that disadvantaged start up businesses. This bias probably had the unwitting effect of excluding women entrepreneurs.

Women in the professions

Preparing samples for examination

Another of our projects, also in the healthcare services sector, has created new opportunities for female doctors and medical students. A small private histopathology laboratory in Mazar, focuses on testing samples for breast cancer.

The service allows patients to access quick and cheap diagnosis of suspected tumours, avoiding expensive foreign travel. In turn this means earlier diagnosis and much improved treatment options.

Because of this focus on the diagnosis of breast cancer, it makes sense for Milli Medical to employ a female doctor to examine patients. But more is being done, and the centre is currently providing on-the-job training to two female medical students, and Dr Rokai - the director - is planning to set up a dedicated pathology training centre for male and female students from the local medical university.

Jobs for women
Pretty much all of the ABIF grantees have created some jobs for women. But there are clear gender demarcation lines - some jobs are for men and others are for women - and there is only one occasion that I can remember having seen men and women working alongside one another doing the same task. And women's jobs tend to be in unskilled or low-skilled roles.

One example of significant skilled job creation for women is a company called Sahib Zarman, based in Kabul. With ABIF support, this company has started to manufacture cotton and wool yarn for the carpet weaving industry, and is now looking to diversify, developing the skills necessary to spin cashmere yarn. They already employ 300 women, most of whom work from home, to hand-spin wool yarn. This is a pilot phase, and based on the commercial success to date, the plan is to scale up significantly in the coming months.

For young women, with homes and children to look after, working from home is the preferred option. Some older women, and those women whose landlords object to them working, travel to the small facility set up by Sahib Zarman. But whether working from home or not, the opportunity to earn a few dollars each day is very welcome for families that are often living in fairly desperate conditions.

Sorting cashmere in Herat

Meanwhile, in Herat, a cashmere sorting centre (one of four that supplies another ABIF grantee, CFI) employs 50 women to separate the different colours of raw cashmere before it is sent for processing.

These women work full time, in fairly basic conditions, but according to those we interviewed (admittedly not a scientific sample) they can earn considerably more money than their husbands or sons.

And remember, neither of these examples is a subsidised job creation scheme, we did not insist on jobs for women, or in any way interfere with the commercial operations of the company. These are real, sustainable jobs, providing real incomes.

What next?

Relying on handouts - survival strategy, but
lacking dignity

It is not the purpose of private business to achieve social change. For small enterprises already struggling against the odds, survival depends on making a profit, and so decisions tend to be primarily driven by cold, commercial logic.

But this does not mean that private business cannot be an agent of social change. So long as the gender agenda takes account of the environment and goes with the commercial flow.

The examples above demonstrate that women can participate in the economy - outside of the home - and there are small openings that can be widened.

But my view is that this will best be achieved if the development community really engages with the private sector, understanding the incremental nature of change in a conservative society, and without imposing values (rather than value) driven conditionalities to their offered assistance.

BBC coverage of investment in Afghanistan

Under a somewhat depressing headline, the 786 Pharmacy chain, which is actually a very successful investment project that we have supported through the Afghanistan Business Innovation Fund, was recently featured in a BBC piece on investing in Afghanistan.

This fantastic business, owned and managed by my good friend Zabih, is beginning to change the face of pharmacy retailing in Afghanistan. He already has 6 shops opened, and is now entering an expansion phase. The competitive advantage is simple - the chain only sells genuine medicines. TV adverts aired on local television have raised awareness and 786 is building a loyal customer base.

Over the past couple of years, Zabih has encountered and overcome regulatory obstacles that could easily have blown the project off course. His determination has helped to bring the business to the point of breakeven, and built the foundations for future growth. His efforts have even attracted interest from international investors.

In a country where counterfeits are common, this is a major step forward. A report just published by the Independent Joint Anti-Corruption Monitoring and Evaluation Committee, a joint body set up by the Afghan government and international community, has found serious problems with the sector. But thanks to 786, people now have a brand that they can trust.

Risk appetite

Traditional processes, low capital intensity,
but high value added and surprisingly
competitive

What level of risk appetite does an investor need to invest in Afghanistan? The immediate answer is something like "quite considerable".

It is hard for most western commentators and investors to understand how a country that has had so much support and guidance from the outside, languishes so low in pretty much all of the league tables. And all too easy for such people to feel like giving up and going home.

While Afghanistan is a risky location - and probably not where you would choose to put the whole of your investment fund - it would be very wrong to write it off.

If you are looking for a country that is modeled on World Bank templates of what is a "good" investment climate, then Afghanistan is not the place for you. A decade of western assistance has been countered by a decade of Afghan indifference or passive, but pretty effective, resistance to reform.

But opportunities are out there, investments have been made and business does go on. Check out the frenetic bazaars of Kabul and any major town or city if you want evidence.

A Darwinian style analysis helps to understand the situation. The investors and the businesses who are succeeding are those who can understand and adapt to the local investment climate. They find creative work-arounds, rather than wringing their hands. The ones who never make it in the first place, or have failed along the way, are those who devote energy to complaining, who lack evolutionary flexibility and instead expect the environment to transform into something more familiar and benign.

And of course, there are the parasites, made large and fat by successfully feeding off the millions of dollars of aid money that have poured into the country. But let's put such people to one side, however rich and self-important these people have become, they are not the future.

The true survivors are typically those men and women who have grown up and somehow done business in the country through war, civil war, invasion, regime change and so on. They have had to learn to keep their heads down on occasions, but also to grab opportunities when they come along. And they have consistently worked hard and learned to overcome all sorts of obstacles along the way. They typically make money in relatively simple ways by doing surprisingly simple things. They find niches that play on the natural assets and strengths of the country, rather than trying to force a new model into an unwelcoming terrain.

These are the business people who have managed to grow small businesses that turn over millions, employ tens or even hundreds of people, and (in some cases) provide livelihoods for thousands of others. They are the people contributing to the incremental change that is there to be seen by anyone who has watched the country over the past decade.

I have started this blog because I want to counter some of the negative perceptions of Afghanistan as an investment location that have grown up, and share my experiences of working with courageous people in very difficult circumstances. I have worked with successful (and not so successful) Afghan and international investors over the past years, and their stories point the way towards a more positive future than the league tables might suggest.