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.